-----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, JzQt4LnwFiFCI+aj/5nHWgESNPAIdcZh0KLSoQ7QlWjJaQh1kd6cpGadUX3DXAjQ i+3R3SfWP2MFzNn8FtCgzg== 0001047469-99-014941.txt : 19990416 0001047469-99-014941.hdr.sgml : 19990416 ACCESSION NUMBER: 0001047469-99-014941 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 14 FILED AS OF DATE: 19990415 FILER: COMPANY DATA: COMPANY CONFORMED NAME: UNITY FIRST ACQUISITION CORP CENTRAL INDEX KEY: 0001021435 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PREPACKAGED SOFTWARE [7372] IRS NUMBER: 133899021 STATE OF INCORPORATION: DE FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: S-4 SEC ACT: SEC FILE NUMBER: 333-76333 FILM NUMBER: 99594151 BUSINESS ADDRESS: STREET 1: 245 FIFTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10016 BUSINESS PHONE: 2126964282 MAIL ADDRESS: STREET 1: 245 FIFTH AVENUE CITY: NEW YORK STATE: NY ZIP: 10016 S-4 1 FORM S-4 AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 15, 1999 REGISTRATION NO. 333- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ------------------------ FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 -------------------------- UNITY FIRST ACQUISITION CORP. (Exact name of registrant as specified in its charter) DELAWARE 6770 13-3899021 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer incorporation or organization) Classification Code Number) Identification Number)
------------------------ 245 FIFTH AVENUE, SUITE 1500 NEW YORK, NEW YORK 10016 (212) 696-4282 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ------------------------------ LAWRENCE BURSTEIN, PRESIDENT UNITY FIRST ACQUISITION CORP. 245 FIFTH AVENUE, SUITE 1500 NEW YORK, NEW YORK 10016 (212) 696-4282 (Name, address, including zip code, and telephone number, including area code, of agent for service) ------------------------------ COPIES TO: IRA I. ROXLAND, ESQ. CURTIS L. MO, ESQ. JOSEPH H. SCHMITT, ESQ. MICHAEL F. CYRAN, ESQ. COOPERMAN LEVITT WINIKOFF PAUL L. SIEBEN, ESQ. LESTER & NEWMAN, P.C. BROBECK, PHLEGER & HARRISON LLP 800 THIRD AVENUE TWO EMBARCADERO PLACE NEW YORK, NEW YORK 10022 2200 GENG ROAD (212) 688-7000 PALO ALTO, CALIFORNIA 94303 FAX: (212) 755-2839 (650) 424-0160 FAX: (650) 496-2885 (SEE CALCULATION TABLE ON NEXT PAGE) APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as practicable after the effective date of this registration statement and the effective time of the merger of GraphOn with and into the registrant. If any of the securities being registered on this form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. / / If this form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / If this form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. / / -------------------------- THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SEC, ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE. PURSUANT TO RULE 429, PROMULGATED UNDER THE SECURITIES ACT OF 1933, THE PROSPECTUS FORMING A PART OF THIS REGISTRATION STATEMENT ALSO RELATES TO (I)(A) 1,250,000 SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF 1,250,000 CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANTS AND (B) 1,250,000 SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF 1,250,000 CLASS B REDEEMABLE COMMON STOCK PURCHASE WARRANTS (COLLECTIVELY, THE "IPO SECURITIES"), (II)(A) 125,000 SHARES OF COMMON STOCK, (B) 125,000 SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF 125,000 CLASS A COMMON STOCK PURCHASE WARRANTS AND (C) 125,000 SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF 125,000 CLASS B COMMON STOCK PURCHASE WARRANTS ALL ISSUABLE TO THE MANAGING UNDERWRITERS OF THE IPO SECURITIES UPON THE EXERCISE OF THE UNDERWRITERS' UNIT PURCHASE OPTION, AND (III)(A) 200,000 SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF 200,000 CLASS A COMMON STOCK PURCHASE WARRANTS AND (B) 200,000 SHARES OF COMMON STOCK ISSUABLE UPON THE EXERCISE OF 200,000 CLASS B COMMON STOCK PURCHASE WARRANTS ISSUED TO CERTAIN OFFICERS AND DIRECTORS OF REGISTRANT, ALL INITIALLY INCLUDED IN THE REGISTRANT'S REGISTRATION STATEMENT ON FORM S-1 (FILE NO. 333-11165) DECLARED EFFECTIVE ON DECEMBER 12, 1996. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CALCULATION OF REGISTRATION FEE
PROPOSED MAXIMUM PROPOSED MAXIMUM TITLE OF EACH CLASS OF SECURITIES AMOUNT TO BE OFFERING PRICE AGGREGATE TO BE REGISTERED REGISTERED PER SHARE OFFERING PRICE Common Stock, $.0001 par value.................. 9,124,543 shares(1) N/A $6,513,070(2) Common Stock, $.0001 par value.................. 876,790 shares(3) $ 1.79 $1,569,454 Class A Warrants, each to purchase one share of Common Stock......................... 250,000 warrants(4) -- -- Common Stock, $.0001 par value.................. 250,000 shares(6) $ 5.50 $1,375,000 Total....................................... N/A $9,457,524 TITLE OF EACH CLASS OF SECURITIES AMOUNT OF TO BE REGISTERED REGISTRATION FEE Common Stock, $.0001 par value.................. $1,810.64 Common Stock, $.0001 par value.................. $ 436.31 Class A Warrants, each to purchase one share of Common Stock......................... (5) Common Stock, $.0001 par value.................. $ 382.25 Total....................................... $2,629.20
(1) Reflects the maximum number of shares of registrant's common stock to be issued pursuant to the merger in exchange for GraphOn's common stock on the basis of 0.5576 shares of registrant's common stock for each share of GraphOn's common stock. (2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(f)(2). Since there is no current market for GraphOn's common stock, market value was based on the book value per share of GraphOn's common stock at December 31, 1998 multiplied by 16,363,959, the number of shares of GraphOn's common stock being acquired by registrant. (3) Reflects the maximum number of shares of registrant's common stock issuable upon exercise of GraphOn's warrants that will be assumed by registrant pursuant to the merger on the basis of 0.5576 shares of registrant's common stock for each share of GraphOn's common stock. (4) Reflects 250,000 Class A redeemable common stock purchase warrants exercisable for an aggregate of up to 250,000 shares of Unity common stock. (5) No fee pursuant to Rule 457(g). (6) Reflects 250,000 shares of Unity common stock issuable upon exercise of the Class A redeemable common stock purchase warrants. UNITY FIRST ACQUISITION CORP. 245 FIFTH AVENUE NEW YORK, NEW YORK 10016 (212) 696-4282 May , 1999 Dear Stockholder: Your board of directors cordially invites you to attend a special meeting of stockholders of Unity First Acquisition Corp. to be held at 10:00 A.M., local time, on May , 1999, at 800 Third Avenue, 30th Floor, New York, New York. Our certificate of incorporation presently contains a provision that requires us to be liquidated as a consequence of our failure to have completed a merger with an operating business by November 12, 1998. At the meeting, you will be asked to approve an amendment to our certificate of incorporation to defer such liquidation pending the outcome of a vote, also to be taken at the meeting, to approve our merger with GraphOn Corporation. The proposal to consider the merger with GraphOn Corporation will not be considered at the meeting unless the holders of a majority of our outstanding common stock approve the amendment to our certificate of incorporation. If such amendment is not approved, we will be liquidated and our net assets of approximately $5.28 per share will be promptly paid to our public stockholders. In determining whether or not you should approve the proposed amendment to our certificate of incorporation, you should be aware that for more than two years we had unsuccessfully attempted to effect a merger with several other business concerns, the most recent of these attempts having been rejected by our public stockholders on October 29, 1998. We have elected to proceed with the GraphOn merger, notwithstanding the provision contained in our certificate of incorporation that required our liquidation to have been completed by January 10, 1999, based upon our belief that GraphOn's significant growth potential, although by no means assured, outweighed the liquidation alternative. If the merger with GraphOn is not approved and completed by June 30, 1999, we will be promptly liquidated. YOUR BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED BOTH THE AMENDMENT TO OUR CERTIFICATE OF INCORPORATION AND THE MERGER AGREEMENT AND RECOMMENDS THAT YOU VOTE "FOR" EACH OF SUCH PROPOSALS. Your participation at the meeting, in person or by proxy, is especially important. Whether or not you plan to attend the meeting, I urge you to complete, date, sign and promptly return your proxy card in the enclosed pre-paid envelope to ensure that your shares will be represented in the meeting. Lawrence Burstein President UNITY FIRST ACQUISITION CORP. 245 FIFTH AVENUE NEW YORK, NEW YORK 10016 ------------------------ NOTICE OF SPECIAL MEETING OF STOCKHOLDERS TO BE HELD ON MAY , 1999 ------------------------ NOTICE IS HEREBY GIVEN that a special meeting of stockholders of Unity First Acquisition Corp., a Delaware corporation, will be held on May , 1999, commencing at 10:00 A.M., local time, at 800 Third Avenue, 30th Floor, New York, New York, for the following purposes: 1. To consider and vote upon, as a single proposal, the following amendments to Unity's certificate of incorporation: - To delete provisions in the certificate of incorporation that prevent the amendment of certain other provisions prior to consummation of a merger or similar business combination; - To delete the provision which called for the liquidation of Unity and the distribution of its net assets to stockholders by January 11, 1999 if Unity had not consummated a merger or other business combination by November 12, 1998; and - To add a provision that, in the event Unity does not consummate the merger with GraphOn Corporation by June 30, 1999, Unity will be liquidated and its net assets distributed to its public stockholders by August 29, 1999. 2. To consider and vote upon a proposal to approve and adopt an agreement and plan of merger and reorganization, dated as of February 1, 1999, between Unity and GraphOn, a California corporation, providing for, among other things, the merger of GraphOn with and into Unity, and the issuance by Unity of approximately 9,124,543 shares of its common stock to GraphOn's shareholders, all upon the terms and conditions described in the merger agreement. A vote in favor of the merger of GraphOn into Unity will also constitute approval of Unity's assumption of the GraphOn 1998 Stock Option/Stock Issuance Plan and all of the outstanding options issued under such plan. 3. To approve an adjournment or postponement of the special meeting, if necessary, to permit further solicitation of proxies in the event there are not sufficient votes at the special meeting to approve proposals 1 and 2, above. 4. To transact any other business incidental to the special meeting that may properly come before such meeting or any adjournment or postponement thereof. Copies of the proposed amendment to Unity's certificate of incorporation and the merger agreement are attached as Exhibits A and B to the accompanying joint proxy statement/prospectus. STOCKHOLDER APPROVAL AND ADOPTION OF THE MERGER AGREEMENT AND THE ISSUANCE OF UNITY COMMON STOCK WILL RESULT IN A CHANGE OF THE MAJORITY EQUITY OWNERSHIP, THE BUSINESS AND THE MANAGEMENT OF UNITY. April , 1999 is the record date for the determination of stockholders entitled to notice of and to vote at the special meeting. The affirmative vote of the holders of a majority of all outstanding shares of Unity common stock entitled to vote at the special meeting is necessary to approve and adopt the merger agreement. HOLDERS OF UNITY COMMON STOCK ARE ENTITLED TO APPRAISAL RIGHTS UNDER DELAWARE LAW IN CONNECTION WITH THE MERGER. HOLDERS OF UNITY COMMON STOCK ARE ALSO ENTITLED TO CERTAIN CASH CONVERSION RIGHTS PURSUANT TO UNITY'S CERTIFICATE OF INCORPORATION. If 20% or more of the shares of Unity common stock are offered to Unity for conversion into cash and the holders of such shares vote against the approval and adoption of the merger agreement, the merger will not be consummated. Whether or not you plan to attend the special meeting, please complete, date and sign the accompanying proxy card and mail it promptly in the enclosed pre-addressed envelope, which requires no postage if mailed in the United States. The proxy card may be revoked at any time prior to the vote at the special meeting by following the procedures set forth in this joint proxy statement/prospectus. Norman Leben SECRETARY May , 1999 GRAPHON CORPORATION 150 HARRISON AVENUE CAMPBELL, CALIFORNIA 95008 (408) 370-4080 May , 1999 Dear Shareholder: The board of directors cordially invites you to attend a special meeting of shareholders of GraphOn Corporation to be held at 10:00 a.m., local time, on May , 1999, at 150 Harrison Avenue, Campbell, California. At the meeting, you will vote on a proposal to approve a merger between Unity First Acquisition Corp. and GraphOn. If the merger is completed, you and your fellow GraphOn shareholders will own approximately 65.4% of the combined company on a fully diluted basis, which will retain the "GraphOn" name. I will be President of this company. THE GRAPHON BOARD OF DIRECTORS HAS UNANIMOUSLY DETERMINED THAT THE MERGER IS IN THE BEST INTERESTS OF GRAPHON AND ITS SHAREHOLDERS. THE GRAPHON BOARD HAS APPROVED THE MERGER AND RECOMMENDS THAT YOU VOTE "FOR" THE MERGER AT THE MEETING. Whether or not you plan to attend the meeting, I urge you to complete, date, sign and promptly return your proxy card in the enclosed pre-paid envelope to ensure that your shares will be represented in the special meeting. Walter Keller PRESIDENT GRAPHON CORPORATION 150 HARRISON AVENUE CAMPBELL, CALIFORNIA 95008 (408) 370-4080 ------------------------ NOTICE OF SPECIAL MEETING OF SHAREHOLDERS TO BE HELD ON MAY , 1999 ------------------------ NOTICE IS HEREBY GIVEN that a special meeting of shareholders of GraphOn Corporation, a California corporation, will be held on May , 1999, commencing at 10:00 A.M., local time, at 150 Harrison Avenue, Campbell, California, for the following purposes: 1. To consider and vote upon a proposal to approve and adopt an agreement and plan of merger and reorganization, dated as of February 1, 1999, between Unity First Acquisition Corp., a Delaware corporation, and GraphOn, providing for, among other things, the merger of GraphOn with and into Unity upon the terms and conditions described in the merger agreement. A vote in favor of the merger of GraphOn with and into Unity also will constitute approval of Unity's assumption of the GraphOn 1998 Stock Option/Stock Issuance Plan and all of the outstanding options issued under such plan. 2. To approve an adjournment or postponement of the special meeting, if necessary, to permit further solicitation of proxies in the event there are not sufficient votes at the special meeting to approve proposal 1, above. 3. To transact any other business incidental to the special meeting that may properly come before such meeting or any adjournment or postponement thereof. A copy of the merger agreement is attached as Exhibit B to the accompanying joint proxy statement/ prospectus. Shareholder approval and adoption of the merger agreement means that GraphOn will cease to exist and all of its shareholders will become stockholders of Unity, Unity will change its name to "GraphOn Corporation" and its business, management and will be identical to those of GraphOn prior to the merger, and Lawrence Burstein will be added to the board of directors of the surviving corporation. GraphOn has determined that the merger will constitute an "initial public offering" within the meaning of certain contracts by and between GraphOn and certain of its shareholders. Accordingly, if the merger is completed, such shareholders of GraphOn no longer will be entitled to certain preemptive and information rights. See "Description of GraphOn's Securities--Preemptive Rights" and "--Information Rights." May , 1999 is the record date for the determination of shareholders entitled to notice of and to vote at the special meeting. The affirmative vote of the holders of a majority of all outstanding shares of GraphOn common stock entitled to vote at the special meeting is necessary to approve and adopt the merger agreement. Holders of GraphOn common stock are entitled to dissenters' rights under California law in connection with the merger. Whether or not you plan to attend the special meeting, please complete, date and sign the accompanying proxy card and mail it promptly in the enclosed pre-addressed envelope, which requires no postage if mailed in the United States. The proxy card may be revoked at any time prior to the vote at the special meeting by following the procedures set forth in this joint proxy statement/prospectus. Thomas A. Bevilacqua SECRETARY May , 1999 UNITY FIRST ACQUISITION CORP. AND GRAPHON CORPORATION JOINT PROXY STATEMENT ------------------------ UNITY FIRST ACQUISITION CORP. PROSPECTUS ------------------------ This joint proxy statement/prospectus is furnished by Unity First Acquisition Corp., a Delaware corporation, to the holders of common stock of Unity, and by GraphOn Corporation, a California corporation, to the holders of common stock of GraphOn in connection with the respective solicitation of proxies by the boards of directors of Unity and GraphOn for use at the special meeting of stockholders of Unity and the special meeting of shareholders of GraphOn, each to be held on May , 1999. At each of the meetings, the stockholders of Unity and GraphOn will consider and vote upon a proposal to approve and adopt that certain agreement and plan of merger and reorganization, dated as of February 1, 1999, between Unity and GraphOn (the "merger agreement") providing for, among other things, the merger of GraphOn with and into Unity (the "merger"). A vote in favor of the merger of GraphOn with and into Unity also will constitute approval of Unity's assumption of the GraphOn 1998 Stock Option/Stock Issuance Plan and all of the outstanding options issued under such plan. Prior to considering the vote upon the proposal to approve and adopt the merger agreement, the Unity stockholders will consider and vote upon a proposal to amend Unity's certificate of incorporation to delete certain of its provisions which would otherwise require Unity to be liquidated and to defer such liquidation pending the outcome of the merger agreement vote (the "charter amendment"). Copies of the charter amendment and of the merger agreement are attached to this joint proxy statement/ prospectus as Exhibits A and B, respectively. The merger is expected to be completed as soon as possible after the Unity and GraphOn special meetings. THE UNITY BOARD OF DIRECTORS RECOMMENDS THAT THE UNITY STOCKHOLDERS VOTE TO APPROVE THE CHARTER AMENDMENT AND THE MERGER AGREEMENT AND THE TRANSACTIONS CONTEMPLATED THEREBY. THE GRAPHON BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS OF GRAPHON VOTE TO APPROVE THE MERGER AGREEMENT. This joint proxy statement/prospectus also constitutes a prospectus of Unity with respect to a maximum of 9,124,543 shares of Unity common stock to be issued in exchange for the GraphOn common stock, a maximum of 876,790 shares of Unity common stock issuable upon the exercise of GraphOn's warrants that will be assumed by Unity pursuant to the merger agreement and 250,000 Class A redeemable common stock purchase warrants exercisable for an aggregate of up to 250,000 shares of Unity common stock and the shares underlying the warrant. This joint proxy statement/prospectus and the enclosed proxy card are first being mailed to the respective stockholders of Unity and GraphOn on or about May , 1999. Unity common stock is quoted on the OTC Bulletin Board under the symbol UFAC. The closing bid price of Unity common stock on the OTC Bulletin Board on May , 1999 was $ . ------------------------ SEE "RISK FACTORS" BEGINNING ON PAGE XIV FOR CERTAIN MATTERS YOU SHOULD CONSIDER. ------------------------ NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THE SECURITIES TO BE ISSUED PURSUANT TO THIS JOINT PROXY STATEMENT/PROSPECTUS OR DETERMINED IF THIS JOINT PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. ------------------------ The date of this joint proxy statement/prospectus is May , 1999. TABLE OF CONTENTS
PAGE --------- WHERE YOU CAN FIND MORE INFORMATION........................................................................ I TRADEMARKS................................................................................................. I CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS.................................................. II JOINT PROXY STATEMENT/PROSPECTUS SUMMARY................................................................... III The Companies............................................................................................ iii The Special Meetings..................................................................................... iv Record Dates for Voting.................................................................................. iv Voting................................................................................................... iv The Charter Amendment.................................................................................... v What You Will Receive in the Merger...................................................................... v Board Recommendations.................................................................................... v Interests of Certain Persons in the Merger............................................................... vi Certain Possible Disadvantages of the Merger............................................................. vi Directors and Management of Unity Following the Merger................................................... vii Assumption of GraphOn Stock Option/Stock Issuance Plan................................................... vii Conditions to the Merger................................................................................. vii Termination of the Merger Agreement...................................................................... vii Regulatory Approval...................................................................................... viii Appraisal Rights......................................................................................... viii Tax Consequences of the Merger........................................................................... viii Accounting Treatment..................................................................................... viii Exchange of Stock Certificates........................................................................... viii SUMMARY HISTORICAL FINANCIAL INFORMATION................................................................... IX SUMMARY PRO FORMA FINANCIAL INFORMATION.................................................................... XI COMPARATIVE PER SHARE INFORMATION.......................................................................... XII RISK FACTORS............................................................................................... XIV DILUTION................................................................................................... XXII INTRODUCTION............................................................................................... 1 SOLICITATION OF PROXIES.................................................................................... 1 THE UNITY SPECIAL MEETING.................................................................................. 1 Purposes of Meeting...................................................................................... 1 Date, Time and Place; Record Date........................................................................ 2 Voting Rights............................................................................................ 2 THE GRAPHON SPECIAL MEETING................................................................................ 3 Purposes of Meeting...................................................................................... 3 Date, Time and Place; Record Date........................................................................ 3 Voting Rights............................................................................................ 3 THE CHARTER AMENDMENT...................................................................................... 4 THE MERGER................................................................................................. 5 General.................................................................................................. 5 Exchange Ratio........................................................................................... 6 Unity Exchange Options................................................................................... 6 Unity Merger Warrants.................................................................................... 6 Class A Redeemable Common Stock Purchase Warrant......................................................... 6 Closing; Effective Time.................................................................................. 7 Exchange of Stock Certificates........................................................................... 7 No Fractional Shares..................................................................................... 7 Background of the Merger................................................................................. 7 Recommendations of the Boards of Directors and Reasons for the Merger.................................... 12
PAGE --------- Interests of Certain Persons in the Merger............................................................... 13 Certain Tax Consequences of the Merger................................................................... 14 The Merger Agreement..................................................................................... 14 Absence of Certain Regulatory Filings and Approvals...................................................... 19 Restrictions on Sales by Affiliates and Other Shareholders............................................... 19 Accounting Treatment..................................................................................... 19 Expenses................................................................................................. 19 Conversion Rights........................................................................................ 19 Appraisal Rights......................................................................................... 21 Operations after the Merger.............................................................................. 25 PRICE RANGES OF SECURITIES................................................................................. 26 Unity.................................................................................................... 26 GraphOn.................................................................................................. 26 SELECTED HISTORICAL FINANCIAL DATA OF GRAPHON.............................................................. 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF GRAPHON........... 28 Overview................................................................................................. 28 Year Ended December 31, 1998 Versus Year Ended December 31, 1997......................................... 29 Year Ended December 31, 1997 Versus Year Ended December 31, 1996......................................... 30 Liquidity and Capital Resources.......................................................................... 31 Year 2000................................................................................................ 31 Quantitative and Qualitative Disclosures about Market Risk of GraphOn.................................... 32 Adoption of New Accounting Pronouncements................................................................ 32 Recently Issued Accounting Standards and Pronouncements Not Yet Adopted.................................. 32 SELECTED HISTORICAL FINANCIAL DATA OF UNITY................................................................ 34 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF UNITY............. 35 GRAPHON AND UNITY PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)............................................... 36 GRAPHON AND UNITY PRO FORMA BALANCE SHEETS-ASSETS AS OF DECEMBER 31, 1998 (GRAPHON) AND JANUARY 31, 1999 (UNITY) (UNAUDITED)...................................................................................... 37 GRAPHON AND UNITY PRO FORMA STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 (GRAPHON) AND JANUARY 31, 1999 (UNITY) (UNAUDITED)..................................................................... 38 NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED)........................................................ 39 BUSINESS OF GRAPHON........................................................................................ 41 GraphOn.................................................................................................. 41 Industry Background...................................................................................... 41 The GraphOn Approach..................................................................................... 42 Products................................................................................................. 44 Target Markets........................................................................................... 44 Strategic Relationships.................................................................................. 45 Sales, Marketing and Support............................................................................. 46 Research and Development................................................................................. 47 Operations............................................................................................... 47 Competition.............................................................................................. 47 Proprietary Technology................................................................................... 48 Employees and Facilities................................................................................. 48 Legal Proceedings........................................................................................ 49 MANAGEMENT OF GRAPHON...................................................................................... 50 GraphOn Board............................................................................................ 52 Executive Compensation and Employment Agreements......................................................... 53 1998 Stock Option/Stock Issuance Plan.................................................................... 54 CERTAIN RELATIONSHIPS AND TRANSACTIONS..................................................................... 56
PAGE --------- PRINCIPAL SHAREHOLDERS OF GRAPHON.......................................................................... 58 DESCRIPTION OF GRAPHON'S SECURITIES........................................................................ 60 General.................................................................................................. 60 Common Stock............................................................................................. 60 Preferred Stock.......................................................................................... 60 Dividends................................................................................................ 60 Preemptive Rights........................................................................................ 60 Spencer Trask Warrants and Similar Warrants.............................................................. 61 Corel Warrant and Similar Warrant........................................................................ 61 Registration Rights...................................................................................... 62 Shares Eligible for Future Sale.......................................................................... 63 Information Rights....................................................................................... 64 Transfer Agent........................................................................................... 64 BUSINESS OF UNITY.......................................................................................... 64 MANAGEMENT OF UNITY........................................................................................ 65 Prior to the Merger...................................................................................... 65 Stock Option Plan........................................................................................ 66 After the Merger......................................................................................... 67 PRINCIPAL STOCKHOLDERS OF UNITY............................................................................ 68 DESCRIPTION OF UNITY'S SECURITIES.......................................................................... 70 General.................................................................................................. 70 Common Stock............................................................................................. 70 Preferred Stock.......................................................................................... 70 Dividends................................................................................................ 70 Transfer Agent........................................................................................... 70 IPO Warrants............................................................................................. 71 Underwriters' IPO Securities............................................................................. 72 Directors' Warrants...................................................................................... 72 COMPARISON OF RIGHTS OF HOLDERS OF UNITY COMMON STOCK AND GRAPHON COMMON STOCK............................. 73 Application of the General Corporation Law of California to Delaware Corporations........................ 80 Comparison of Certificate of Incorporation and Bylaws of Unity and Articles of Incorporation and Bylaws of GraphOn............................................................................................. 80 LEGAL MATTERS.............................................................................................. 81 EXPERTS.................................................................................................... 82 INDEX TO FINANCIAL STATEMENTS.............................................................................. F-1 EXHIBITS Excerpts from Restated Certificate of Incorporation of Unity First Acquisition Corp...................... A-1 Agreement and Plan of Merger and Reorganization.......................................................... B-1 Section 262 of the Delaware General Corporation Law...................................................... C-1 Sections 1300-1312 of the California Corporations Code................................................... D-1
No person has been authorized by Unity or GraphOn to give any information or to make any representation not contained in this joint proxy statement/prospectus in connection with the solicitation of proxies or the offering of securities made hereby and, if given or made, such information or representation must not be relied upon as having been authorized by Unity or GraphOn. This joint proxy statement/ prospectus does not constitute an offer to sell or a solicitation of an offer to buy the securities offered by this joint proxy statement/prospectus or a solicitation of a proxy in any jurisdiction where, or to any person to whom, it would be unlawful to make such an offer or solicitation. Neither the delivery of this joint proxy statement/prospectus nor any distribution of the securities to which this joint proxy statement/prospectus relates shall, under any circumstances, create an implication that there has been no change in the information contained herein since the date hereof. WHERE YOU CAN FIND MORE INFORMATION Unity files annual, quarterly and current reports, proxy statements and other information with the SEC. You may read and copy any reports, statements or other information on file at the SEC's public reference rooms in Washington, D.C., New York, New York and Chicago, Illinois. Please call the SEC at (800) SEC-0330 for further information on the public reference rooms. Unity's public filings also are available to the public from commercial document retrieval services and at the Internet site maintained by the SEC at "http://www.sec.gov." Reports, proxy statements and other information concerning Unity also may be inspected at the offices of The Nasdaq Stock Market, 9801 Washingtonian Boulevard, Rockville, Maryland 20878. Unity has filed with the SEC a registration statement on Form S-4 to register the shares of Unity common stock to be issued to GraphOn's shareholders in connection with the merger, certain other shares and warrants. This joint proxy statement/prospectus is a part of that registration statement and constitutes a prospectus of Unity as well as a proxy statement of Unity and GraphOn for the meetings. Although this joint proxy statement/prospectus contains all material information that you can find in the registration statement, parts of the registration statement have been omitted from this joint proxy statement/prospectus as permitted by the rules and regulations of the SEC. Copies of the registration statement, including the exhibits to the registration statement and other material that is not included in this joint proxy statement/prospectus, may be inspected, without charge, at the offices of the SEC referred to above, or obtained at prescribed rates from the public reference section of the SEC at the address set forth above. GraphOn has supplied all information contained in this joint proxy statement/prospectus relating to GraphOn, and Unity has supplied all information contained herein relating to Unity. TRADEMARKS This joint proxy statement/prospectus contains trademarks of GraphOn and may contain trademarks of others. Such trademarks of GraphOn include the following: - jBridge-TM- - GO-Between-TM- - GO-Global-TM- - GO-Joe-TM- i CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS The following statements are or may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 (the "PSLRA"): (1) Certain statements, including possible or assumed future results of operations of Unity, GraphOn and the combined company, which will be called "GraphOn Corporation," contained in "Risk Factors," "The Merger," "Management's Discussion and Analysis of Financial Condition and Results of Operations of GraphOn," "Management's Discussion and Analysis of Financial Condition and Results of Operations of Unity," "Business of GraphOn" and "Business of Unity," including any forecasts, projections and descriptions of post-merger synergies referred to therein and any statements contained herein regarding the development of possible or assumed future results of operations of post-merger GraphOn's business, post-merger GraphOn's competitive position or the scope and enforceability of post-merger GraphOn's intellectual property rights; (2) Any statements preceded by, followed by or that include the words "believes," "expects," "anticipates," "plans," "intends" or similar expressions; and other statements contained or incorporated by reference herein regarding matters that are not historical facts. These forward-looking statements are not historical facts but rather are based on current expectations, estimates and projections about our industry, our beliefs and assumptions. These statements are not guarantees of future performance and are subject to risks and uncertainties, some of which are beyond our control, are difficult to predict and could cause actual results to differ materially from those expressed or implied by such forward-looking statements. Factors that could cause actual results to differ materially include, but are not limited to, those discussed under "Risk Factors." Unity and GraphOn shareholders are cautioned not to place undue reliance on such statements, which speak only as of the date thereof. The independent public accountants for Unity and GraphOn have not examined or compiled the accompanying forward-looking statements or any forecasts or other projections referred to herein and, accordingly, do not provide any assurance with respect to such statements. The cautionary statements contained or referred to in this section should be considered in connection with any subsequent written or oral forward-looking statements that may be issued by Unity or GraphOn or persons acting on its or their behalf. Neither Unity nor GraphOn undertakes any obligation to release publicly any revisions to any forward-looking statements to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. ii JOINT PROXY STATEMENT/PROSPECTUS SUMMARY This summary highlights selected information from this document and may not contain all of the information that is important to you. To understand the amendments to the certificate of incorporation of Unity fully, you should carefully read the text of such amendments and the detailed description thereof we have referred you to. To understand the proposed charter amendment and merger fully and for a more complete description of their legal terms, you should carefully read this entire document and the documents we have referred you to. See "Where You Can Find More Information." The charter amendment and the merger agreement are attached as Exhibits A and B to this joint proxy statement/ prospectus. We encourage you to read these attachments. They are the legal documents that govern the merger. THE COMPANIES UNITY FIRST ACQUISITION CORP. 245 Fifth Avenue New York, New York 10016 (212) 696-4282 Unity was formed in May 1996 to serve as a vehicle to merge with an operating business which Unity believes has significant growth potential. In November 1996, Unity successfully completed a public offering of units, each consisting of one share of common stock and two common stock purchase warrants. Approximately 93.8% of such offering proceeds, including interest, is presently held in a trust account awaiting the result of the vote that you are being asked to cast upon the proposed charter amendment. If you approve the charter amendment and the merger, these funds will be released to Unity once the merger is completed. The balance of such offering proceeds, now virtually exhausted, comprise Unity's day to day working capital. One of the conditions to the completion of Unity's public offering was Unity's agreement with the underwriters of such offering that if Unity was unable to complete a merger with a business concern by November 12, 1998, Unity would be liquidated. Unity's board of directors has determined that the merger is more advantageous to the Unity stockholders than liquidation, and is seeking your approval to proceed with the merger. If Unity had been liquidated within 60 days of November 12, 1998, as provided in Unity's certificate of incorporation, you would have received a cash distribution of approximately $5.28 per share. GRAPHON CORPORATION 150 Harrison Avenue Campbell, California 95008 (408) 370-4080 GraphOn develops, markets, sells and supports server-based software for the enterprise computing environment. "Server-based computing", sometimes referred to as thin-client computing, is a computing model where traditional desktop software applications are relocated to run entirely on a server or host computer. GraphOn's technology uses a small software program at each desktop, which allows the user to interface with an application as if it were running on the user's desktop computer. This centralized deployment and management of applications reduces the complexity and total costs associated with enterprise computing. In addition, by accessing such applications over the Internet, new operational models and sales channels are emerging. GraphOn provides the technology to access applications over the Internet. GraphOn's server-based technology works on today's most powerful personal computer or low-end network computer, without application rewrites or changes to the corporate computing infrastructure. iii GraphOn has established strategic alliances with technology leaders such as IBM, Sun Microsystems and Corel, who have licensed GraphOn's technology. Using GraphOn technology, Sun Microsystems and IBM provide their network computers access to UNIX applications. Corel currently plans to use GraphOn's technology to provide access to certain of its applications, such as WordPerfect-TM-, over the Internet. GraphOn is headquartered in Campbell, California with offices in Bellevue, Washington and Concord, New Hampshire. THE SPECIAL MEETINGS UNITY STOCKHOLDERS There will be a special meeting of Unity stockholders at 800 Third Avenue, 30th Floor, New York, New York on May , 1999, at 10:00 A.M., local time. At this meeting, Unity stockholders will be asked to approve both the charter amendment and the merger agreement. GRAPHON SHAREHOLDERS There will be a special meeting of GraphOn shareholders at 150 Harrison Avenue, Campbell, California on May , 1999, at 10:00 A.M., local time. At this meeting, GraphOn shareholders will be asked to approve the merger agreement. RECORD DATES FOR VOTING UNITY STOCKHOLDERS The close of business on May , 1999 was the record date for determining which holders of Unity common stock are entitled to vote at the Unity special meeting. At the record date, there were 1,875,000 shares of Unity common stock entitled to vote at the Unity special meeting. GRAPHON SHAREHOLDERS The close of business on May , 1999 was the record date for determining which holders of GraphOn common stock are entitled to vote at the GraphOn special meeting. At the record date, there were 16,363,959 shares of GraphOn common stock entitled to vote at the GraphOn special meeting. VOTING UNITY STOCKHOLDERS You will have one vote for each share of Unity common stock that you owned on the record date. An affirmative vote of a majority of the outstanding shares of Unity common stock is required to approve each of the charter amendment and the merger. Unity stockholders who acquired Unity common stock prior to Unity's initial public offering in November 1996 have agreed to vote such common stock, representing approximately 33.3% of the outstanding Unity common stock, in the same manner as the majority of those Unity stockholders who acquired their Unity shares either in such initial public offering or at any time thereafter. GRAPHON SHAREHOLDERS You will have one vote for each share of GraphOn common stock that you owned on the record date. An affirmative vote of a majority of the outstanding shares of GraphOn common stock is required to approve the merger. iv As of the record date, GraphOn's directors, executive officers and their affiliates hold an aggregate of approximately 28.6% of the outstanding shares of GraphOn common stock. THE CHARTER AMENDMENT The proposed charter amendment (i) deletes certain provisions of Unity's certificate of incorporation which, if not so deleted, would require Unity's liquidation and (ii) defers any such liquidation until the result of the vote on the merger. If the charter amendment is not approved, Unity will be liquidated. If the charter amendment is approved but you do not approve the merger, Unity also will be liquidated. In either such event, you would each receive a cash distribution of approximately $5.28 per share. WHAT YOU WILL RECEIVE IN THE MERGER UNITY STOCKHOLDERS Upon completion of the merger, each share of Unity common stock that you own will remain outstanding and will represent one share of the combined company, which will be called "GraphOn Corporation." Unity's certificate of incorporation provides that should you object to the merger, you may request Unity to convert your shares of Unity common stock into cash. The amount of cash you would be entitled to receive, approximately $5.28 per share, will be payable to you only if you vote against the merger and the merger is completed. The steps that you must take to receive such payment are set out in full in "The Merger-Conversion Rights." GRAPHON SHAREHOLDERS Upon completion of the merger, each share of GraphOn common stock that you own will be cancelled. In exchange, you will receive for each such share .5576 of a share of Unity common stock. You will not receive fractional shares of Unity common stock. Instead, you will be paid cash equal to the market value on the merger date of any fractional shares of Unity common stock you otherwise would have received. The total number of shares of Unity common stock to be issued in the merger will be approximately 9,124,543, which would represent approximately 83.0% of the outstanding shares of Unity common stock immediately after the completion of the merger. However, warrants and options exercisable for up to 4,598,901 shares of Unity common stock also will be outstanding. Thus, on a fully-diluted basis, current GraphOn shareholders would hold shares representing only 65.4% of post-merger GraphOn. BOARD RECOMMENDATIONS UNITY The Unity board believes that a merger with GraphOn is a better alternative than the liquidation of Unity and the distribution of its net assets (estimated at $5.28 per common share) to public stockholders of Unity. The Unity board also took note of the fact that GraphOn satisfied, or could be expected to satisfy prior to or upon completion of the merger, nearly all of Unity's acquisition criteria, discussed elsewhere in this joint proxy statement/ prospectus. The Unity board unanimously has determined that each of the proposed charter amendment and the merger is in the best interests of Unity and its stockholders and has approved both the amendment to Unity's certificate of incorporation implementing the charter amendment and the merger agreement. The Unity board unanimously recommends that Unity stockholders vote "FOR" both the charter amendment and the merger. v GRAPHON GraphOn's board of directors believes that the merger will enable GraphOn to access at least $6,000,000, net of a fee of up to $575,000 payable to Spencer Trask Securities, Inc. ("Spencer Trask") upon consummation of the merger, of Unity's pre-merger cash assets (assuming no conversions of Unity common stock into cash) without the costs and market uncertainties that would be inherent in any attempt by GraphOn to conduct a public offering of like magnitude of its own securities. The GraphOn board unanimously has determined that the merger is in the best interests of GraphOn and its shareholders and recommends that the GraphOn shareholders vote "FOR" the merger. INTERESTS OF CERTAIN PERSONS IN THE MERGER In considering the recommendation of the GraphOn board to approve the merger, you should be aware that of GraphOn's officers and directors will become post-merger officers and directors of Unity. CERTAIN POSSIBLE DISADVANTAGES OF THE MERGER In determining whether to vote for the merger, you should understand that there are numerous risks and uncertainties relating to the present and proposed operations of GraphOn which may directly impact its prospects following completion of the merger, including: - GraphOn has a short operating history and may not be profitable in the future; - GraphOn's operating results are likely to fluctuate significantly and may fail to meet or exceed the expectations of securities analysts or investors; - GraphOn's failure to adequately protect its proprietary rights may adversely affect us; - GraphOn's business significantly benefits from the existence of certain strategic relationships and there can be no assurance that such relationships will continue into the future; - Because GraphOn's market is new and emerging, GraphOn cannot accurately predict its future growth rate or its ultimate size, and widespread acceptance of its product is uncertain; - GraphOn may need additional capital in the future and may not be able to secure adequate funds on terms acceptable to it; - GraphOn relies on indirect distribution channels for its products and needs to continue to develop reseller relationships; - GraphOn's future success will depend in part upon its ability to enhance its existing products and to develop and introduce, on a timely basis, new products and features that meet changing customer requirements and emerging industry standards; - GraphOn faces certain risks related to its 1991 bankruptcy; - GraphOn's failure to manage expanding operations could adversely affect it; - The market in which GraphOn participates is highly competitive and has more-established competitors; - GraphOn's failure to be year 2000 compliant would negatively impact its business; and - The trading market for the post-merger common stock may not be active. There can be no assurance that Unity common stock, after the merger, will trade at price levels in excess of the estimated $5.28 per share payable to Unity stockholders upon liquidation of Unity if the merger were not effected. vi DIRECTORS AND MANAGEMENT OF UNITY FOLLOWING THE MERGER In accordance with the merger agreement, three of the four current members of the Unity board will resign immediately prior to the effective time of the merger (the "effective time"). Immediately following the merger, one of the current directors of Unity and the current directors of GraphOn will become the sole members of the Unity board. Walter Keller, who presently is President of GraphOn, will be President of Unity after the merger is completed. Additionally, all of GraphOn's other officers will continue in a like capacity with Unity after the merger is completed. ASSUMPTION OF GRAPHON STOCK OPTION/STOCK ISSUANCE PLAN As part of the merger, Unity will assume the GraphOn 1998 Stock Option/Stock Issuance Plan and all outstanding options under that plan. As a result, the 1,236,132 shares of GraphOn common stock currently reserved for issuance under the plan will be converted into a reserve of 689,267 shares of Unity common stock available for issuance after the merger, and the outstanding options for approximately 353,500 shares of GraphOn common stock (as of the record date) will be converted into options to purchase approximately 197,111 shares of the Unity common stock reserve at exercise prices ranging from $0.13 to $1.52 per share. CONDITIONS TO THE MERGER The merger will not be completed unless a number of conditions are satisfied or waived. These include, but are not limited to: - approval of the proposed charter amendment and the merger by the shareholders of Unity; - approval of the merger by the stockholders of GraphOn; - the absence of any injunction prohibiting the merger; - the absence of any material adverse change with respect to GraphOn; and - the absence of any material adverse change with respect to Unity. TERMINATION OF THE MERGER AGREEMENT Unity and GraphOn can mutually agree to terminate the merger agreement at any time. Either of Unity or GraphOn can terminate the merger agreement if: - the merger is not completed by June 30, 1999; or - a governmental authority, such as a court, permanently prohibits the merger or refuses to grant an approval that is required. Unity can terminate the merger agreement if there is a material breach by GraphOn of its representations or warranties in the merger agreement or GraphOn fails to comply with or satisfy any material condition. GraphOn can terminate the merger agreement if there is a material breach by Unity of its representations or warranties in the merger agreement or Unity fails to comply with or satisfy any material condition. Unity is required to terminate the merger prior to the Unity special meeting if Unity stockholders, owning 20% or more of Unity's outstanding common stock prior to the merger, request conversion of their shares into cash. vii REGULATORY APPROVAL No submissions to the Antitrust Division of the Department of Justice and the Federal Trade Commission are required of either of Unity or GraphOn pursuant to the Hart-Scott-Rodino Act. APPRAISAL RIGHTS UNITY STOCKHOLDERS You have the right to demand appraisal of your shares and to receive an amount that the Delaware Court of Chancery decides is the "fair value" of your Unity shares. This amount may be more or less than the cash conversion value of your shares. This right is known as an "appraisal right". If you wish to exercise your appraisal right, you must not vote in favor of the merger and must take certain steps, which are set out in full in Exhibit C to this joint proxy statement/prospectus. If you exercise your appraisal right, you will be obliged to bear your own expenses, including attorneys' fees. GRAPHON SHAREHOLDERS You have the right to demand appraisal of your shares and to receive an amount that the California Superior Court decides is the "fair value" of your GraphOn shares. This amount may be more or less than the value of the Unity shares you would receive pursuant to the merger agreement. This right is known as your "dissenter's right". If you wish to exercise your dissenter's right, you must not vote in favor of the merger and must take certain steps which are set out in full in Exhibit D to this Joint Proxy Statement/Prospectus. If you exercise your dissenter's right, you will be obliged to bear your own expenses, including attorneys' fees, if a court determines that you did not act in good faith in demanding payment of the fair value of your shares TAX CONSEQUENCES OF THE MERGER The merger has been structured so that neither Unity nor GraphOn nor our shareholders will recognize any gain or loss for Federal income tax purposes in the merger, except for tax payable because of cash received instead of fractional shares by GraphOn shareholders. The merger has been conditioned on receipt of legal opinions that such is the case. ACCOUNTING TREATMENT Unity and GraphOn expect that the merger will be accounted for as a capital transaction equivalent to the issuance of stock by GraphOn for Unity's net monetary assets of approximately $6,000,000, net of a fee of up to $575,000 payable to Spencer Trask upon consummation of the merger. See "Certain Relationships and Transactions." EXCHANGE OF STOCK CERTIFICATES UNITY STOCKHOLDERS After the merger is completed, you may but will not be required to exchange your current Unity stock certificates for new Unity stock certificates. GRAPHON SHAREHOLDERS After the merger is completed, you will be sent written instructions for exchanging your GraphOn stock certificates for new Unity stock certificates. viii SUMMARY HISTORICAL FINANCIAL INFORMATION The following tables show financial results actually achieved by each of GraphOn and Unity (the "historical" figures). GraphOn's historical figures as of and for the years ended December 31, 1998, 1997 and 1996 have been derived from GraphOn financial statements audited by BDO Seidman, LLP and Unity's historical figures as of and for the fiscal years ended July 31, 1998 and 1997 and the period from May 30, 1996 (inception) to July 31, 1996, have been derived from Unity financial statements audited by Arthur Andersen LLP. Unity's historical figures as of and for the six months ended January 31, 1999 and 1998 are unaudited, but Unity believes that its figures reflect all normal recurring adjustments necessary for a fair presentation of its financial position and results of operations for those periods. You should not assume that results for a portion of the fiscal year ending July 31, 1999 will be repeated in later periods. GRAPHON
FOR THE YEAR ENDED DECEMBER 31, --------------------------- 1998 1997 1996(1) 1995(1) 1994(1) ------------- ------------ ---------- ---------- ------------ (UNAUDITED) STATEMENT OF OPERATIONS DATA: Revenues.................................... $ 2,124,200 $ 1,926,100 $ 594,800 $ 588,117 $ 1,096,910 Costs of Revenues........................... 344,200 463,300 335,600 213,502 349,693 ------------- ------------ ---------- ---------- ------------ Gross Profit................................ 1,780,000 1,462,800 259,200 374,615 747,217 Operating Expenses: Selling and marketing..................... 1,440,300 827,300 192,700 -- -- General and administrative................ 1,208,900 324,700 218,900 388,637 646,656 Research and development.................. 840,200 190,500 41,700 58,979 67,150 ------------- ------------ ---------- ---------- ------------ Total Operating Expenses.............. 3,489,400 1,342,500 453,300 447,616 713,806 ------------- ------------ ---------- ---------- ------------ (Loss) Income from Operations............... (1,709,400) 120,300 (194,100) (73,001) 33,411 Other Income (Expense): Interest and other income................. 9,800 7,200 6,400 -- -- Interest expense.......................... (46,900) (2,100) -- -- -- Other expense............................. (16,500) -- -- -- -- ------------- ------------ ---------- ---------- ------------ (Loss) Income before Provision for Income Taxes..................................... (1,763,000) 125,400 (187,700) (73,001) 33,411 Provision for Income Taxes.................. 800 900 800 -- 15,369 ------------- ------------ ---------- ---------- ------------ Net (Loss) Income........................... $ (1,763,800) $ 124,500 $ (188,500) $ (73,001) $ 18,042 ------------- ------------ ---------- ---------- ------------ ------------- ------------ ---------- ---------- ------------ Pro forma (Loss) Income per share (2)....... $ (0.26) $ 0.02 $ (0.03) $ (0.01) $ -- ------------- ------------ ---------- ---------- ------------ ------------- ------------ ---------- ---------- ------------ Weighted average common shares.............. 6,762,667 6,000,000 6,000,000 6,000,000 6,000,000 ------------- ------------ ---------- ---------- ------------ ------------- ------------ ---------- ---------- ------------
ix
DECEMBER 31, 1998 DECEMBER 31, 1997 ----------------- ----------------- BALANCE SHEET DATA: Total Assets............................................................... $ 6,544,500 $ 733,300 Total Liabilities.......................................................... 1,202,200 615,100 Working Capital............................................................ 1,193,000 22,700 Shareholders' Equity....................................................... 5,342,300 118,200
- ------------------------ (1) During the years ended December 31, 1996, 1995 and 1994, GraphOn was engaged in the business of manufacturing, marketing and selling computer terminal hardware in an industry significantly different from that in which it presently does business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of GraphOn--Overview." (2) Pro forma (Loss) Income per share is reflected as if GraphOn had been a public company since inception. UNITY
SIX MONTHS ENDED JANUARY 31, PERIOD FROM -------------------------- YEAR ENDED JULY 31, MAY 30, 1996 (UNAUDITED) (UNAUDITED) -------------------------- (INCEPTION)(1) TO 1999 1998 1998 1997(1) JULY 31, 1996 ------------ ------------ ------------ ------------ ------------------- STATEMENT OF OPERATIONS DATA: Revenues............................ $ -- $ -- $ -- $ -- $ -- ------------ ------------ ------------ ------------ -------- ------------ ------------ ------------ ------------ -------- Net (loss) income................... $ (239,035) $ 30,526 $ (315,991) $ 6,637 $ (15,000) ------------ ------------ ------------ ------------ -------- ------------ ------------ ------------ ------------ -------- (Loss) income per common share (basic and diluted)............... $ (0.13) $ 0.02 $ (0.17) $ -- $ (0.02) ------------ ------------ ------------ ------------ -------- ------------ ------------ ------------ ------------ -------- Weighted average common shares...... 1,875,000 1,875,000 1,875,000 1,515,000 625,000 ------------ ------------ ------------ ------------ -------- ------------ ------------ ------------ ------------ --------
JANUARY 31, JULY 31, JULY 31, JULY 31, 1999 1998 1997 1996 --------------- ------------ ------------ ------------ (UNAUDITED) BALANCE SHEET DATA: Total Assets......................................... $ 6,605,885 $6,489,903 $6,465,021 $ 250,563 Total Liabilities.................................... $ 767,099 $ 412,082 $ 71,209 $ 265,500 Stockholders' equity(2).............................. $ 4,518,461 $4,780,520 $5,154,432 $ (14,937)
- ------------------------ (1) Unity was inactive during the period May 30, 1996 (inception) through November 19, 1996. (2) Does not include shares subject to possible conversion at conversion value at January 31, 1999 and July 31, 1998. x SUMMARY PRO FORMA FINANCIAL INFORMATION The following tables show results as if the companies had been combined for the periods shown (the "pro forma combined" figures) under the following circumstances: (1) that no public Unity stockholders exercised their right to have their shares converted into cash upon consummation of the merger and (2) that 19.99% of interest in Unity common stock held by public Unity stockholders elected to have their shares converted into cash upon consummation of the merger at the conversion value of $5.28 per share, based on the amount held in the Unity trust account, inclusive of interest income to date thereon, at January 31, 1999, with an adjustment to the pro forma statement of operations to reflect a corresponding reduction of interest income for the period. The pro forma statement of operations presented below assumes the merger occurred on the first day of the fiscal years presented. The pro forma balance sheet presented below assumes the merger occurred as of the balance sheet date presented. You should not assume that GraphOn and Unity would have achieved the combined pro forma results if they had actually been combined during the periods shown. PRO FORMA COMBINED STATEMENT OF OPERATIONS DATA:
(ASSUMING NO CASH CONVERSION) (ASSUMING 19.99% CASH CONVERSION) --------------------------------------- --------------------------------------- YEARS ENDED DECEMBER 31, 1998 (GRAPHON) YEARS ENDED DECEMBER 31, 1998 (GRAPHON) AND JANUARY 31, 1999 (UNITY) AND JANUARY 31, 1999 (UNITY) --------------------------------------- --------------------------------------- Total revenues................. $ 2,124,200 $ 2,124,200 Operating expenses............. 4,294,439 4,294,439 Operating loss................. (2,170,239) (2,170,239) Other expense.................. (138,922) (99,289) Net loss....................... (2,026,724) (2,066,357) Net loss per weighted average common share (basic and diluted)..................... $ (0.18) $ (0.19) Weighted average common shares outstanding(1)............... 10,999,543 10,749,668
- ------------------------ (1) Gives effect to the issuance of approximately 9,124,543 shares of Unity Common Stock to the GraphOn shareholders in connection with the merger. PRO FORMA COMBINED BALANCE SHEET DATA:
(ASSUMING NO CASH CONVERSION) (ASSUMING 19.99% CASH CONVERSION) ------------------------------------- ------------------------------------- AS OF DECEMBER 31, 1998 (GRAPHON) AND AS OF DECEMBER 31, 1998 (GRAPHON) AND JANUARY 31, 1999 (UNITY) JANUARY 31, 1999 (UNITY) ------------------------------------- ------------------------------------- Working Capital..................... $ 7,560,457 $ 6,372,165 Current Assets...................... 9,054,756 7,866,464 Total Assets........................ 13,204,056 12,015,764 Current Liabilities................. 1,494,299 1,494,299 Total Liabilities................... 1,494,299 1,494,299 Stockholders' equity................ 11,709,757 10,521,465
xi COMPARATIVE PER SHARE INFORMATION The following table sets forth unaudited data concerning the net loss, dividends and book value per share for GraphOn and Unity on a pro forma basis after giving effect to the merger.
(ASSUMING NO CONVERSION) (ASSUMING 19.99% CONVERSION) --------------------------------------------- --------------------------------------------- YEARS ENDED DECEMBER 31, 1998 (GRAPHON) AND YEARS ENDED DECEMBER 31, 1998 (GRAPHON) AND JANUARY 31, 1999 (UNITY) JANUARY 31, 1999 (UNITY) --------------------------------------------- --------------------------------------------- Net loss per share (basic and diluted)............. $ (0.18) $ (0.19) Dividends declared per share................ -- -- Book value per share at end of period........ $ 1.06 $ 0.97
The following tables set forth data concerning the historical net (loss) income, dividends and book value per share for GraphOn and Unity: GRAPHON:
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------- 1998 1997 1996(1) 1995(1) 1994(2) --------- --------- --------- --------- ----------- HISTORICAL PER SHARE DATA (1): Net (loss) income per share (basic and diluted)..................... $ (0.26) $ 0.02 $ (0.03) $ (0.01) $ -- Dividends declared per share........................................ -- -- -- -- -- Book value per share at end of period(2)............................ $ 0.40 $ 0.02 $ -- $ 0.03 $ 0.04
- ------------------------ (1) Per share information is based upon the respective shares outstanding at the end of the period, which have been obtained from historical data previously presented. (2) Per share information for 1994 is unaudited.
FOR THE YEAR ENDED DECEMBER 31, ------------------------------------------------------- 1998 1997 1996(1) 1995(1) 1994(2) --------- --------- --------- --------- ----------- EQUIVALENT PER SHARE DATA (1): Net income per share (basic and diluted)............................ $ (0.47) $ 0.04 $ (0.05) $ (0.02) $ (0.01) Dividends declared per share........................................ -- -- -- -- -- Book value per share at end of period............................... $ 0.72 $ 0.04 $ -- $ 0.05 $ 0.07
- ------------------------ (1) Per share information is based upon the application of the exchange ratio to the number of shares actually outstanding for each period. (2) Per share information for 1994 is unaudited. xii UNITY:
FOR THE SIX MONTHS PERIOD FROM YEAR ENDED MAY 30, 1996 ENDED JANUARY 31, JULY 31, (INCEPTION) -------------------- ---------------------- TO JULY 31, 1999 1998 1998 1997(1) 1996(1) --------- --------- --------- ----------- ------------- HISTORICAL PER SHARE DATA: Net (loss) income per share................................... $ (0.13) $ 0.02 $ (0.17) -- $ (0.02) Dividends declared per share.................................. -- -- -- -- -- Book value per share at end of period......................... $ 3.11 $ 3.43 $ 3.24 $ 3.41 $ (0.02)
- ------------------------ (1) Unity was inactive during the period May 30, 1996 (inception) through November 19, 1996. xiii RISK FACTORS In addition to the other information contained in this joint proxy statement/prospectus, shareholders of each of Unity and GraphOn should carefully review the following factors in deciding whether to vote in favor of approval of the merger and the transactions contemplated thereby, and whether to execute and return a proxy card. You may lose all or part of your investment. The risks and uncertainties described below are not the only ones facing our company. RISKS RELATING TO GRAPHON WE RECENTLY CHANGED OUR CORPORATE STRATEGY AND HAVE A LIMITED HISTORY OPERATING UNDER OUR CURRENT BUSINESS MODEL Although GraphOn was founded in 1982, we have a relatively brief operating history as a provider of server-based software. We changed our strategic focus in early 1996 from manufacturing and selling computer terminal hardware to developing server-based software. This change in strategic focus required us to make changes to our business processes and to make a number of significant personnel changes, including changes and additions to our engineering and management teams. As a result of our relatively brief operating history as a provider of server-based software, you must consider the risks and difficulties frequently encountered by early stage companies in new and rapidly evolving markets. These risks include our: - substantial dependence on products with only limited market acceptance; - need to expand our sales and support organizations; - competition with established and emerging companies; - need to manage changing operations; - reliance upon strategic relationships; and - dependence upon key personnel. We also depend to a significant degree on the continued growing use of the Internet for commerce and communication. We cannot be certain that our business strategy will be successful or that we will successfully address these risks. GRAPHON HAS A HISTORY OF OPERATING LOSSES AND EXPECTS THESE LOSSES TO CONTINUE AND INCREASE, AT LEAST FOR THE NEAR FUTURE GraphOn has experienced significant losses since it began operations. It expects to continue to incur significant losses for the foreseeable future. GraphOn incurred net losses of approximately $1,763,800 for the year ended December 31, 1998. GraphOn expects its expenses to increase as it expands its business but cannot assure you that its revenues will increase as a result of increased spending. If revenues grow more slowly than anticipated, or if operating expenses exceed expectations, GraphOn may not become profitable. Even if it becomes profitable, it may be unable to sustain profitability. OUR OPERATING RESULTS IN ONE OR MORE FUTURE PERIODS ARE LIKELY TO FLUCTUATE SIGNIFICANTLY AND MAY FAIL TO MEET OR EXCEED THE EXPECTATIONS OF SECURITIES ANALYSTS OR INVESTORS Our operating results are likely to fluctuate significantly in the future on a quarterly and an annual basis due to a number of factors, many of which are outside our control. Factors that could cause our revenues to fluctuate include the following: - the degree of success of our recently introduced products; - variations in the timing of and shipments of our products; xiv - variations in the size of orders by our customers; - increased competition; - the proportion of overall revenues derived from different sales channels such as distributors, OEMs and others; - changes in our pricing policies or those of our competitors; - the financial stability of major customers; - new product introductions or enhancements by us or by competitors; - delays in the introduction of products or product enhancements by us or by competitors; - the degree of success of new products; - any changes in operating expenses; and - general economic conditions and economic conditions specific to the software industry. In addition, our royalty and license revenues are impacted by fluctuations in OEM licensing activity from quarter to quarter which may involve one-time royalty payments and license fees. Our expense levels are based, in part, on expected future orders and sales. Therefore, if orders and sales levels are below expectations, our operating results are likely to be materially adversely affected. Additionally, because a significant portion of our expenses are fixed, a reduction in sales levels may disproportionately affect our net income. Also, we may reduce prices or increase spending in response to competition or to pursue new market opportunities. Because of these factors, our operating results in one or more future periods may fail to meet or exceed the expectations of securities analysts or investors. In that event, the trading price of our common stock would likely decline. OUR FAILURE TO ADEQUATELY PROTECT OUR PROPRIETARY RIGHTS MAY ADVERSELY AFFECT US Our commercial success is dependent, in large part, upon our ability to protect our proprietary rights. We rely on a combination of patent, copyright and trademark laws, and on trade secrets and confidentiality provisions and other contractual provisions to protect our proprietary rights. These measures afford only limited protection. We cannot assure you that measures we have taken will be adequate to protect us from misappropriation or infringement of our intellectual property. We license essential components of our core technology from three different parties to whom we pay royalties, although we hold an option (exercisable in the year 2001) to purchase the technology under such licenses. These licenses may be terminated upon material breach of the agreements, and if they are terminated our business will be harmed. Despite our efforts to protect proprietary rights, it may be possible for unauthorized third parties to copy aspects of our products or obtain and use information that we regard as proprietary. See "Business of GraphOn-Legal Proceedings." In addition, the laws of some foreign countries do not protect our intellectual property rights as fully as do the laws of the United States. Furthermore, we cannot assure you that the existence of any proprietary rights will prevent the development of competitive products. The infringement upon or loss of any proprietary rights could have a material adverse effect on our business. WE FACE RISKS OF CLAIMS FROM THIRD PARTIES FOR INTELLECTUAL PROPERTY INFRINGEMENT THAT COULD ADVERSELY AFFECT OUR BUSINESS We could be faced with infringement claims. At any time, we may receive communications from third parties asserting that certain features or content of our products may infringe upon their intellectual property rights. Any such claims, with or without merit, and regardless of their outcome, may be time consuming and costly to defend. We may not have sufficient resources to defend such claims and they xv could divert management's attention and resources, cause product shipment delays or require us to enter into new royalty or licensing agreements. New royalty or licensing agreements may not be available on beneficial terms, and may not be available at all. If a successful infringement claim is brought against us and we fail to license the infringed or similar technology, our business could be materially adversely affected. WE DEPEND ON STRATEGIC RELATIONSHIPS Our business and strategy relies to a significant extent on our strategic relationships with other companies. These relationships may not be successful because we may not be able to continue to maintain, develop or replace them in the event any of these relationships are terminated. In addition, any failure to renew or extend any licenses between us and any third party may adversely affect our business. BECAUSE OUR MARKET IS NEW AND EMERGING, WE CANNOT ACCURATELY PREDICT ITS FUTURE GROWTH RATE OR ITS ULTIMATE SIZE, AND WIDESPREAD ACCEPTANCE OF OUR PRODUCT IS UNCERTAIN The market for server-based software (i.e., software that enables programs to be accessed and run with minimal memory resident on a desktop computer or remote user device) still is emerging, and we cannot assure you that our products will receive broad-based market acceptance or that this market will continue to grow. Additionally, we cannot accurately predict our market's future growth rate or its ultimate size. Even if server-based software products achieve market acceptance and the market for these products grows, we cannot assure you that we will have a significant share of that market. If we fail to achieve a significant share of the server-based software market or if such market does not grow as anticipated, our business, results of operations and financial condition may be adversely affected. WE MAY NEED ADDITIONAL CAPITAL IN THE FUTURE AND MAY NOT BE ABLE TO SECURE ADEQUATE FUNDS ON TERMS ACCEPTABLE TO US In the future, we may need to raise additional funds to meet our obligations, cover operating expenses, pursue business strategies, respond to financial, technological or marketing hurdles or take advantage of new opportunities. However, we cannot assure you that any additional funds required will be available at the time or times needed, or available on terms acceptable to us. If adequate funds are not available, or are not available on acceptable terms, we may not be able to meet our obligations, pursue business strategies, take advantage of market opportunities, develop new products or otherwise respond to competitive pressures. Such inability could have a material adverse effect on our business, financial condition and results of operations. WE RELY ON INDIRECT DISTRIBUTION CHANNELS FOR OUR PRODUCTS AND NEED TO CONTINUE TO DEVELOP RESELLER RELATIONSHIPS Our products primarily are sold through several distribution channels. An integral part of our strategy is to strengthen our relationships with resellers such as value-added resellers, distributors, OEMs, systems integrators and other vendors to encourage these parties to recommend or distribute our products and to add resellers both domestically and internationally. We currently invest in and intend to continue to invest significant resources to expand our sales and marketing capabilities. We cannot assure you that we will be able to attract and/or retain resellers to market our products effectively. Our inability to attract resellers or the loss of any current reseller relationships could have a material adverse effect on our business, results of operations and financial condition. Additionally, we cannot assure you that resellers will devote enough resources to provide effective sales and marketing support to our products. xvi OUR FUTURE SUCCESS WILL DEPEND IN PART UPON OUR ABILITY TO ENHANCE OUR EXISTING PRODUCTS AND TO DEVELOP AND INTRODUCE, ON A TIMELY BASIS, NEW PRODUCTS AND FEATURES THAT MEET CHANGING CUSTOMER REQUIREMENTS AND EMERGING INDUSTRY STANDARDS The server-based software market still is emerging and characterized by rapid technological change, evolving industry standards, changes in end-user requirements and frequent new product introductions and enhancements. The introduction of new technological products and the emergence of new industry standards could render our products obsolete and unmarketable. From time to time, we may develop new products, capabilities or technologies that have the potential to replace or shorten the life cycle of our existing products. Additionally, we cannot assure you that announcements of currently planned or newly introduced product offerings will not cause customers to defer purchasing our existing products. In addition, we cannot assure you that we will be able to develop products that keep pace with new technology, or that new technology will not obviate the need for our products. If any new or enhanced technology gains widespread acceptance and we fail to develop and provide compatible products on a timely basis, our competitive position, business, results of operations and financial condition could be adversely affected. Our future success depends in large part upon: - our ability to enhance our current products; - our ability to develop and successfully introduce new products that keep pace with technological developments; and - our ability to respond to evolving end-user requirements We cannot assure you that we will successfully develop and market new products or product enhancements on a timely basis, or that new products or product enhancements we develop will achieve market acceptance. WE FILED FOR BANKRUPTCY ON NOVEMBER 15, 1991 On November 15, 1991, we filed for reorganization under Chapter 11 of the United States Bankruptcy Code and, later, submitted a Debtor's Proposed Amended Plan of Reorganization (the "Reorganization Plan"). The Reorganization Plan was confirmed by order of the bankruptcy court on July 11, 1994 and the court established a plan of payment for the benefit of certain of our creditors. Under the bankruptcy court order, we established a disbursement account into which 50% of the ongoing terminal royalties we receive from certain OEMs (as more fully described in "Business of GraphOn-Corporate History") must be deposited to pay certain named creditors. For all but one unsecured creditor, payments from the disbursement account were ordered to continue up to the earlier of: (i) the limit of our liability to each unsecured creditor or (ii) through the year 2000. However, the largest unsecured creditor's claim, which currently totals approximately $964,000, must be paid from available funds, if any, in the disbursement account until such amount is fully paid. Our total remaining liability under the bankruptcy, as of March 26, 1999, is limited to the lesser of (i) approximately $2,230,000 or (ii) 50% of future ongoing terminal royalties we receive from certain OEMs. To date, only royalties received pursuant to certain license agreements existing at the time of the bankruptcy have been deposited into the disbursement account, and we have not deposited into such account or paid creditors out of royalties received or currently received on our subsequently developed and licensed server-based technology. We believe that our royalty payment obligations under the bankruptcy court order relate only to licenses in place as of July 11, 1994, and no payments to creditors have been made since November 14, 1997. We cannot assure you that a court will not interpret our obligation to include payments to the disbursement account from royalties earned from subsequent licenses of the server-based technology or licenses that we secure in the future, or that our current technology will not be deemed derivative of our technology existing at July 11, 1994. Consequently, we cannot assure you that we will not be required to repay creditors referenced in the bankruptcy proceedings the full amount of our liability (approximately $2,230,000). In addition, we cannot guarantee xvii you that a creditor will not assert a claim for payment out of the royalties from subsequent licenses of the server-based technology. Such claims could be costly and time-consuming for us. If any of these events takes place, it could have a material adverse effect on our business, financial condition and results of operations. See Note 6 to the GraphOn Financial Statements. OUR FAILURE TO MANAGE EXPANDING OPERATIONS COULD ADVERSELY AFFECT US To exploit the emerging server-based software market, we must rapidly execute our business strategy and further develop products while managing our anticipated growth in operations. To manage our growth, we must: - continue to implement and improve our operational, financial and management information systems; - hire and train additional qualified personnel; - continue to expand and upgrade core technologies; and - effectively manage multiple relationships with various licensees, consultants, strategic and technological partners and other third parties. We cannot assure you that our systems, procedures, personnel or controls will be adequate to support our operations or that management will be able to execute strategies rapidly enough to exploit the market for our products and services. Our failure to manage growth effectively or execute strategies rapidly could have a material adverse effect on our business, financial condition and results of operations. COMPETITION FOR KEY MANAGEMENT AND OTHER PERSONNEL IN OUR INDUSTRY IS INTENSE, AND WE MAY NOT BE SUCCESSFUL IN ATTRACTING AND RETAINING THESE PERSONNEL Our success and business strategy is dependent in large part on our ability to attract and retain key management and other personnel. Such individuals are in high demand and often have competing employment offers. In particular, our success depends on our ability to retain the services of Mr. Walter Keller, our President and Chairman of the Board and Ms. Robin Ford, our Executive Vice President of Marketing and Sales. We have entered into employment agreements with these individuals that each contain non-competition and confidentiality covenants. We currently anticipate the need to attract additional sales, marketing, financial and software engineer personnel in the near future. Competition for such personnel in the computer software and services industry is intense, therefore, we cannot assure you we will be able to attract and retain such personnel. The loss of the services of one or more members of our management group or the inability to hire additional personnel as needed may have a material adverse effect on our business. WE ARE SUBJECT TO RISKS ASSOCIATED WITH INTERNATIONAL MARKETS As part of our long term strategy we intend to address the global needs of our customers and expand our business to commit resources to international market expansion. In order to execute this strategy, we will need to hire and train additional personnel and recruit additional international resellers to successfully expand our international sales. We cannot assure you that we will be able to increase or maintain international sales of our products or that international reseller channels will be able to adequately service and support our products. Our international operations will be subject to a number of risks including: - difficulties in staffing and managing foreign operations; - variability of foreign economic conditions and changing restrictions imposed by United States export laws; - unexpected changes in regulatory requirements; xviii - tariffs and other trade barriers; - lack of acceptance of products in foreign countries; and - the burdens of complying with a wide variety of foreign laws. We cannot assure you that such factors will not have a material adverse effect on our future international sales and, consequently, our business, results of operations and financial condition. THE MARKET IN WHICH WE PARTICIPATE IS HIGHLY COMPETITIVE AND HAS MORE ESTABLISHED COMPETITORS The market we participate in is intensely competitive, rapidly evolving and subject to technological changes. We expect competition to increase as other companies introduce additional competitive products. In order to compete effectively, we must continually develop and market new and enhanced products and market those products at competitive prices. As markets for our products continue to develop, additional companies, including companies in the computer hardware, software and networking industries with significant market presence, may enter the markets in which we compete and further intensify competition. A number of our current and potential competitors have longer operating histories, greater name recognition and significantly greater financial, sales, technical, marketing and other resources than we do. We cannot assure you that our competitors will not develop and market competitive products that will offer superior price or performance features or that new competitors will not enter our markets and offer such products. We believe that we will need to invest increasing financial resources in research and development to remain competitive in the future. We cannot assure you that we will be able to establish and maintain a significant market position in the face of our competition and our failure to do so would adversely affect our business. WE ARE SUBJECT TO RISK OF UNDETECTED ERRORS Our complex software products may contain undetected errors or failures when first introduced or as new versions are released. We cannot assure you that errors will not be found in our products after commencement of commercial shipments. In addition, third-party products that our products depend upon, including current and future versions of operating systems and application programs provided by companies such as Sun Microsystems, IBM and Microsoft, may contain defects which could reduce the performance of our products or render them useless. Because we do not develop our own application programs and depend upon third party applications, errors in any application utilized by our customers could adversely impact the marketability of our products. Similarly, we cannot assure you that errors or defects in our products will not be discovered, causing delays in product introductions and shipments or requiring design modifications that could adversely affect our competitive position, business, results of operations and financial condition. GRAPHON IS CONTROLLED BY MANAGEMENT Following the consummation of the merger, our executive officers, directors and their affiliates will own or have voting control over approximately 28.6% of the outstanding shares of common stock. As a result, if they act as a group, the executive officers and directors may exercise significant influence over such matters as amendments to our charter and fundamental corporate transactions such as mergers, asset sales and the sale of post-merger GraphOn. In addition, they will be able to influence the direction of our business and the election of members to the board of directors. WE HAVE AGREED TO CONTRACTUAL PROVISIONS THAT COULD DISCOURAGE ACQUISITION BIDS A number of our agreements contain express provisions that do not allow us to assign them without written consent. These provisions could deter third parties from making bids to acquire us. These provisions could also limit the price future investors are willing to pay for shares of our common stock. xix OUR FAILURE TO BE YEAR 2000 COMPLIANT WOULD NEGATIVELY IMPACT OUR BUSINESS Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field and therefore are not designed to handle any dates beyond the year 1999. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in a relatively short time, computer systems and/or software used by many companies may need to be upgraded to comply with such "year 2000" requirements to remain functional. Significant uncertainty exists in the software industry concerning the potential effects associated with such compliance. Although GraphOn currently offers software products that are designed and, in certain circumstances, are warranted to be year 2000 compliant, there can be no assurance that GraphOn's software products contain all necessary date code changes. In addition, there may be a significant amount of litigation arising out of year 2000 compliance issues. Because of the unprecedented nature of such litigation, it is uncertain whether or to what extent GraphOn may be affected by it. GraphOn believes that the purchasing patterns of customers and potential customers may be affected by year 2000 issues in a variety of ways. Many companies are expending significant resources to purchase new software or correct their current software systems for year 2000 compliance. These expenditures may result in reduced funds available to purchase GraphOn's products. In addition, many potential customers may choose to defer purchasing year 2000 compliant products until they believe it is absolutely necessary, thus resulting in potentially stalled market sales within the server-based software industry. Conversely, year 2000 issues may cause other companies to accelerate purchases, thereby causing an increase in short-term demand and a consequent decrease in long-term demand for GraphOn's year 2000 compliant products. There can be no assurance that year 2000 issues will not affect GraphOn in one or more of a number of possible ways, and will not result in a material adverse effect on GraphOn's business, operating results and financial condition. RISKS RELATING TO UNITY SUBSEQUENT TO THE MERGER POTENTIAL PUBLIC SALES OF A SIGNIFICANT NUMBER OF SHARES OF THE UNITY COMMON STOCK COULD REDUCE THE MARKET PRICE OF UNITY COMMON STOCK If Unity stockholders sell substantial amounts of Unity common stock, including shares issuable upon the exercise of outstanding options and warrants (an aggregate of 4,848,901 shares), in the public market following the merger, then the market price of the Unity common stock could fall. Restrictions under the securities laws and certain lock-up agreements limit the number of shares of our common stock that will be available for sale in the public market. Upon consummation of the merger, the holders of 9,529,525 shares, or approximately 86.6% of the shares of Unity common stock that will be outstanding after the merger, will have agreed not to sell any such shares for at least 180 days after the effective date of the merger. Following the completion of the merger, Unity intends to file a registration statement to register all shares of common stock issuable under Unity's stock option plans, including GraphOn's stock option plan that is being assumed by Unity. After such registration statement becomes effective, shares issued upon exercise of stock options will be eligible for resale in the public market without restriction. Such sales could adversely affect the price of Unity's common stock. NO DIVIDENDS WILL BE PAID IN THE FORESEEABLE FUTURE Neither GraphOn nor Unity has ever paid cash dividends on its common stock. Following the merger, Unity does not anticipate paying cash dividends for the foreseeable future. Unity intends to reinvest any funds that might otherwise be available for the payment of dividends in further development of its business following the merger. xx THE PRICE OF UNITY'S SECURITIES MAY FLUCTUATE The market price of Unity's securities is likely to be highly volatile as the stock market in general, and the market for technology companies in particular, has been highly volatile. Stockholders may have difficulty selling their Unity common stock following periods of volatility because of the market's adverse reaction to such volatility. Factors which could cause such volatility may include, among others: - conditions or trends in the computer software industry; - changes in the market valuations of other computer software companies; - actual or anticipated variations in quarterly operating results; - announcements of technological innovations; - capital commitments and expenditures; - departures of key employees; and - announcements by Unity or its competitors of strategic alliances, joint ventures and significant acquisitions. Many of these factors are beyond Unity's control and may materially adversely affect the market price of Unity's common stock, regardless of Unity's future operating results. The trading prices of many technology companies' stocks have reached historical highs within the last 12 months and have reflected valuations substantially above historical levels. During the same period, such companies' stocks have also been highly volatile and have recorded lows well below such historical highs. We cannot assure you that Unity's securities will trade at the same levels of other technology companies or that technology stocks in general will sustain their current levels. LIMITATIONS UPON WARRANT EXERCISES Holders of warrants issued by Unity in its initial public offering cannot exercise such warrants and then sell the underlying shares of Unity common stock in the absence of an effective registration statement. The warrants are not exercisable unless, at the time of exercise, Unity has a current prospectus covering the shares of Unity common stock issuable upon exercise of the warrants, and the shares have been registered, qualified or are deemed to be exempt from registration under the securities laws of the state of residency of the warrantholder. Although Unity has agreed with the underwriter of its initial public offering to use its best efforts to keep a registration statement covering the shares underlying such warrants effective for the life of the warrants, if Unity fails to do so, the warrants may be deprived of their value. UNITY'S CERTIFICATE OF INCORPORATION MAY ENTRENCH MANAGEMENT Unity's certificate of incorporation provides that the Unity board may issue preferred stock without stockholder approval. Unity's post-merger certificate of incorporation also will provide for a classified board, with each board member serving a staggered three year term. The classification of the board has the effect of requiring at least two annual stockholder meetings, instead of one, to replace a majority of members of the board. The issuance of preferred stock and the existence of a classified board could make it more difficult for a third party to oust Unity's post-merger management or to acquire Unity. UNITY COMMON STOCK MAY NOT HAVE AN ACTIVE TRADING MARKET There has been a sporadic and at times relatively illiquid public market for the Unity securities. We cannot predict the extent to which a trading market will develop or how liquid that market will be after the completion of the merger. xxi DILUTION The net tangible book value of Unity at January 31, 1999 was $5,838,786, or $3.11 for each of the 1,875,000 outstanding shares of Unity common stock. Net tangible book value per share represents the amount of total tangible assets of Unity less total liabilities, divided by the number of shares of Unity common stock outstanding. After giving effect to the merger, the pro forma net tangible book value of Unity at January 31, 1999 would have been $8,064,357 or $0.73 per share of Unity common stock ($6,876,065, or $0.64 per share of Unity common stock, assuming the conversion into cash of 19.99% in interest of the Unity common stock held by public stockholders (as hereinafter defined)). This represents an immediate dilution in net tangible book value of $2.35 per share of Unity common stock ($2.45 per share assuming 19.99% conversion) to the Unity stockholders prior to the merger. The following table illustrates the dilution in net tangible book value per share of Unity common stock to the Unity stockholders prior to the merger.
TANGIBLE BOOK SHARES OF TANGIBLE BOOK VALUE VALUE OF UNITY PER SHARE OF UNITY UNITY COMMON STOCK COMMON STOCK ------------- -------------- ------------------- BEFORE MERGER................................................. $ 5,838,786 1,875,000 $ 3.11 AFTER MERGER TRANSACTION: ASSUMING NO CONVERSION Pro forma as of January 31, 1999 giving effect to the Merger(1)............................................... $ 8,064,357 10,999,543 $ 0.73 ASSUMING 19.99% CONVERSION Pro forma as of January 31, 1999 giving effect to the Merger(1)............................................... $ 6,876,065 10,749,668 $ 0.64
- ------------------------ (1) Does not give effect to the possible exercise subsequent to the effective time of options and warrants to purchase a maximum of approximately 4,598,901 shares of Unity common stock. xxii INTRODUCTION This joint proxy statement/prospectus is being furnished by Unity to holders of its shares of common stock and by GraphOn to holders of its shares of common stock in connection with the solicitation of proxies by the respective boards of directors of Unity and GraphOn for use at the special meeting of Unity stockholders and at the special meeting of GraphOn shareholders. The special meeting will be held at the times and places and for the purposes set forth in the accompanying notices of special meeting of Unity stockholders and GraphOn shareholders, respectively, or any adjournments or postponements. At the meetings, the Unity stockholders and the GraphOn shareholders, respectively, will consider and vote upon a proposal to approve and adopt an agreement and plan of merger and reorganization, dated as of February 1, 1999, between Unity and GraphOn, pursuant to which, among other matters, GraphOn will merge with and into Unity. At the Unity meeting, Unity stockholders will first consider and vote upon a proposal to amend Unity's certificate of incorporation to delete a provision that required Unity to have been liquidated, and its net assets (estimated at $5.28 per common share) distributed to public Unity stockholders by January 11, 1999 as a consequence of Unity's failure to have effected a merger or other business combination by November 12, 1998. The deleted provision will be replaced with a provision that Unity will be liquidated, and its net assets distributed to public Unity stockholders, if the proposed merger with GraphOn is not approved by Unity stockholders or, alternatively, if such merger is approved but not completed by June 30, 1999. At the effective time of the merger, Unity will issue approximately 9,124,543 shares of its common stock to the GraphOn shareholders in exchange for all of the then issued and outstanding shares of common stock of GraphOn. Unity also will assume certain GraphOn warrants exercisable for up to 876,790 shares of Unity common stock and issue 250,000 warrants exercisable for an aggregate of up to 250,000 shares of Unity common stock. As a result of the merger and the transactions contemplated by the merger agreement, GraphOn will be merged with and into Unity, Unity's name will be changed to "GraphOn Corporation," the GraphOn shareholders will collectively own approximately 83.0% of the then outstanding Unity common stock and the present directors of GraphOn will constitute all but one of the initial members of Unity's post-merger board of directors. One of the present directors of Unity will continue as a director following the merger. The current Unity stockholders, collectively, will continue to own approximately 17.0% of the outstanding Unity common stock following the merger. SOLICITATION OF PROXIES The costs of solicitation of Unity stockholder proxies and GraphOn shareholder proxies will be borne by Unity and GraphOn, respectively. Unity and GraphOn will reimburse the respective brokers, fiduciaries, custodians and other nominees for reasonable out-of-pocket expenses incurred in sending this joint proxy statement/prospectus and other proxy materials to, and obtaining instructions relating to such materials from, the respective beneficial owners of Unity common stock and GraphOn common stock. Unity and GraphOn shareholder proxies may be solicited by directors, executive officers or regular employees of, respectively, Unity and GraphOn, in person, by letter, telephone or telegram. THE UNITY SPECIAL MEETING PURPOSES OF MEETING At the Unity meeting, Unity stockholders who are eligible to vote will be asked to consider and vote upon a proposal to amend Unity's certificate of incorporation. If adopted, the amendment will delay Unity's liquidation pending the outcome of the vote by Unity stockholders to approve the merger. This amendment further provides that if the merger with GraphOn is approved by Unity stockholders but is not completed by June 30, 1999, Unity will be liquidated and its net assets distributed to public Unity stockholders. A copy of the text of the charter amendment is attached as Exhibit A to this joint proxy statement/prospectus. See "--The Charter Amendment." 1 If the charter amendment is not approved at the Unity meeting, Unity stockholders will not consider and vote upon the proposal to approve the merger and Unity will be liquidated. At the Unity meeting, eligible Unity stockholders also will be asked to consider and vote upon a proposal to approve the merger, including the merger agreement. A vote in favor of the merger of GraphOn into Unity also will constitute approval of Unity's assumption of the GraphOn 1998 Stock Option/Stock Issuance Plan and all of the outstanding options issued under such plan. A copy of the merger agreement is attached as Exhibit B to this Joint Proxy Statement/Prospectus. THE UNITY BOARD, WITHOUT DISSENT, HAS APPROVED THE CHARTER AMENDMENT AND THE MERGER AND RECOMMENDS THAT THE UNITY STOCKHOLDERS VOTE "FOR" THE PROPOSALS TO APPROVE AND ADOPT THE CHARTER AMENDMENT AND THE MERGER, INCLUDING THE MERGER AGREEMENT. See "The Merger--Recommendations of the Boards of Directors and Reasons for the Merger--Unity." DATE, TIME AND PLACE; RECORD DATE The Unity meeting is scheduled to be held at 10:00 A.M., local time, on May , 1999, at 800 Third Avenue, 30th Floor, New York, New York. The Unity board has fixed the close of business on May , 1999 as the record date for the determination of holders of Unity common stock eligible to receive notice of and to vote at the Unity meeting. On the Unity record date, there were 1,875,000 shares of Unity common stock, held of record by 37 persons, outstanding and entitled to vote. Each share of Unity common stock is entitled to one vote. VOTING RIGHTS Holders of record of Unity common stock on the Unity record date are entitled to vote on the proposals to be presented to the Unity stockholders at the Unity meeting. The presence, either in person or by proxy, of the holders of a majority of the outstanding shares of Unity common stock eligible to vote at the Unity meeting is necessary to constitute a quorum at the Unity meeting. Abstentions and broker non-votes are counted for purposes of determining the presence or absence of a quorum for the transaction of business. Pursuant to Delaware law, the affirmative vote of the holders of at least a majority of Unity common stock is required to approve and adopt the charter amendment and the merger, including the merger agreement. A condition precedent to the completion of the merger requires that no more than 20% of the outstanding Unity common stock held by shareholders who acquired such common stock in Unity's initial public offering or thereafter (the "public Unity stockholders") vote against approval of the merger and thereafter offer their shares to Unity for conversion into cash. Unity stockholders who acquired such common stock prior to the IPO (the "non-public Unity stockholders") have agreed to vote such Unity common stock (collectively, an aggregate of approximately 33.3% of the currently outstanding shares of Unity common stock) with respect to the proposals to approve the charter amendment and the merger in accordance with the vote of the majority of all public Unity stockholders. Consequently, if a majority of outstanding Unity common stock held and voted by public Unity stockholders is voted in favor of the charter amendment, the non-public Unity stockholders will vote their shares of Unity common stock in favor of the charter amendment. The vote upon whether to approve the merger will be governed in a like manner. If a Unity stockholder attends the Unity meeting, he or she may vote by ballot. However, many of the Unity stockholders may be unable to attend the Unity meeting. Therefore, the Unity board is soliciting proxies so that each holder of Unity common stock on the Unity record date has the opportunity to vote on the proposals to be considered at the Unity meeting. When a proxy card is returned properly signed and dated, the shares represented thereby will be voted in accordance with the instructions on the proxy card. If a Unity stockholder does not return a signed proxy card, his or her shares will not be voted. Unity stockholders are urged to mark the box on the proxy card to indicate how their shares are to be voted. If a Unity stockholder (other than a broker which holds shares in street name for its customers) returns a 2 signed proxy card, but does not indicate how his or her shares are to be voted, the shares represented by the proxy card will be voted FOR approval and adoption of each of the charter amendment and the merger. If a signed proxy card is returned by a Unity stockholder and expressly reflects an abstention upon any proposal or if a signed proxy card is returned by a broker with no indication of how shares are to be voted, the shares evidenced thereby will be counted towards the quorum necessary to convene the Unity meeting, noted in the immediately preceding paragraph, but will not be counted towards the requisite affirmative vote upon such proposal as mandated by applicable Delaware law. The proxy card also confers discretionary authority on the individuals appointed by the Unity board and named on the proxy card to vote the shares represented thereby on any other matter incidental to the Unity meeting that is properly presented for action at such meeting. Any Unity stockholder who executes and returns a proxy card may revoke such proxy at any time before it is voted by (i) notifying in writing the Secretary of Unity, at 245 Fifth Avenue, New York, New York 10016, (ii) granting a subsequent proxy or (iii) appearing in person and voting at the Unity meeting. Attendance at the Unity meeting will not in and of itself constitute revocation of a proxy. IF THE MERGER IS NOT APPROVED BY THE REQUISITE VOTE IMPOSED BY APPLICABLE DELAWARE LAW OR, EVEN IF SO APPROVED BUT 20% OR MORE IN INTEREST OF ALL PUBLIC UNITY STOCKHOLDERS ACTUALLY VOTE AGAINST APPROVAL OF THE MERGER AND AFFIRMATIVELY REQUEST CONVERSION OF THEIR SHARES OF UNITY COMMON STOCK INTO CASH, THE MERGER AGREEMENT WILL BE TERMINATED AND THE MERGER ABANDONED. THE GRAPHON SPECIAL MEETING PURPOSES OF MEETING At the GraphOn meeting, GraphOn shareholders eligible to vote thereat will be asked to consider and vote upon a proposal to approve and adopt the merger, including the merger agreement. THE GRAPHON BOARD, WITHOUT DISSENT, HAS APPROVED THE MERGER AND RECOMMENDS THAT THE GRAPHON SHAREHOLDERS VOTE "FOR" THE PROPOSAL TO APPROVE AND ADOPT THE MERGER, INCLUDING THE MERGER AGREEMENT. See "The Merger--Recommendations of the Boards of Directors and Reasons for the Merger-- GraphOn." DATE, TIME AND PLACE; RECORD DATE The GraphOn meeting is scheduled to be held at 10:00 A.M., local time, on May , 1999, at 150 Harrison Avenue, Campbell, California. The GraphOn board has fixed the close of business on May , 1999 as the record date for the determination of holders of GraphOn common stock eligible to receive notice of and to vote at the GraphOn meeting. On the GraphOn record date, there were 16,363,959 shares of GraphOn common stock, held of record by approximately 195 persons, outstanding and entitled to vote. Each share of GraphOn common stock is entitled to one vote. VOTING RIGHTS Holders of record of GraphOn common stock on the GraphOn record date are entitled to vote on the proposals to be presented to the GraphOn shareholders at the GraphOn meeting. The presence, either in person or by proxy, of the holders of a majority of the outstanding shares of GraphOn common stock eligible to vote at the GraphOn meeting is necessary to constitute a quorum at the GraphOn meeting. Abstentions and broker non-votes are counted for purposes of determining the presence or absence of a quorum for the transaction of business. However, pursuant to California law, the affirmative vote of the holders of at least a majority of GraphOn common stock eligible to vote at the GraphOn meeting is required to approve and adopt the merger, including the merger agreement. If a GraphOn shareholder attends the GraphOn meeting, he or she may vote by ballot. However, many of the GraphOn shareholders may be unable to attend the GraphOn meeting. Therefore, the 3 GraphOn board is soliciting proxies so that each holder of GraphOn common stock on the GraphOn record date has the opportunity to vote on the proposals to be considered at the GraphOn meeting. When a proxy card is returned properly signed and dated, the shares represented thereby will be voted in accordance with the instructions on the proxy card. If a GraphOn shareholder does not return a signed proxy card, his or her shares will not be voted. GraphOn shareholders are urged to mark the box on the proxy card to indicate how their shares are to be voted. If a GraphOn shareholder (other than a broker which holds shares in street name for its customers) returns a signed proxy card, but does not indicate how his or her shares are to be voted, the shares represented by the proxy card will be voted FOR approval and adoption of the merger. If a signed proxy card is returned by a GraphOn shareholder and expressly reflects an abstention upon any proposal, the shares evidenced thereby will be counted towards the quorum necessary to convene the GraphOn meeting, but will not be counted towards the requisite affirmative vote upon such proposal as mandated by applicable California law. The proxy card also confers discretionary authority on the individuals appointed by the GraphOn board and named on the proxy card to vote the shares represented thereby on any other matter incidental to the GraphOn meeting that is properly presented for action at such meeting. Any GraphOn shareholder who executes and returns a proxy card may revoke such proxy at any time before it is voted by (i) notifying in writing the Secretary of GraphOn, at Brobeck, Phleger & Harrison LLP, Two Embarcadero Place, 2200 Geng Road, Palo Alto, California 94303, Attn.: Curtis L. Mo, Esq., (ii) granting a subsequent proxy or (iii) appearing in person and voting at the GraphOn meeting. Attendance at the GraphOn meeting will not in and of itself constitute revocation of a proxy. THE CHARTER AMENDMENT The charter amendment, to be presented to the Unity stockholders as a single integral proposal, consists of three separate but inter-related amendments to the Unity certificate of incorporation, as follows: 1. The deletion of portions of Articles SEVENTH and NINTH that preclude any amendment of Article SEVENTH prior to the consummation of a merger; 2. The deletion of the provision set forth in paragraph (c) of Article SEVENTH that required Unity to be liquidated, and its net assets distributed to public Unity stockholders, by January 10, 1999 if Unity had not effected a merger by November 12, 1998; and 3. The replacement of such deletion with a provision that would require Unity to be liquidated, and its net assets distributed to public Unity stockholders, if Unity does not complete the merger by June 30, 1999. The charter amendment is being submitted for consideration and approval by the Unity stockholders in order to defer Unity's liquidation pending the result of a vote by Unity stockholders upon the proposal to approve the merger. The complete text of those portions of Unity's certificate of incorporation to be effected by the charter amendment is attached to this joint proxy statement/prospectus as Exhibit A. Unity has obtained from its special counsel, Richards, Layton & Finger, P.A., of Wilmington, Delaware, an opinion to the effect that those provisions of Unity's certificate of incorporation which purport to prohibit the amendment of paragraph (c) of Article SEVENTH of the certificate of incorporation during the period commencing upon consummation of the Company's initial public offering and prior to the consummation of a Business Combination (as defined) are contrary to Delaware law because they eliminate the rights granted to a corporation and its shareholders by the Delaware General Corporation Law ("DGCL") to amend the corporation's certificate of incorporation if certain procedures are followed. The opinion of Richards, Layton & Finger, P.A. notes, however, that there is no Delaware case directly on point and that its conclusion is based on reasoning from decisions which are not on point. 4 If the charter amendment and the merger are each approved by Unity stockholders, Unity will take all steps reasonably necessary to effect the merger in accordance with the terms of the merger agreement, as soon as practical. If the charter amendment is not approved by Unity stockholders, the merger will not be voted upon by Unity stockholders and Unity's board will take steps to promptly effect a liquidation of Unity and a distribution of its net assets to public Unity stockholders. If the charter amendment is approved and the merger is not approved by Unity stockholders or, if approved but not completed on or prior to June 30, 1999, the Unity board will take steps to promptly effect a liquidation of Unity and a distribution of its net assets to public Unity stockholders. In adopting the charter amendment, the Unity board believed it was beneficial for Unity stockholders to have the opportunity to consider the merger with GraphOn. The Unity board also believed that if Unity stockholders did not approve the merger with GraphOn, its efforts at seeking to find a suitable candidate for a merger or other business combination should cease with finality and the Unity board would then proceed to effect a prompt liquidation of Unity. THE MERGER GENERAL The following is a brief summary of the material features of the merger. This summary does not purport to be complete and is qualified in its entirety by reference to the merger agreement, which is attached to this joint proxy statement/prospectus as Exhibit B. At the effective time of the merger, GraphOn will be merged with and into Unity, and the Unity certificate of incorporation will be amended to change Unity's name to "GraphOn Corporation." The following table identifies those persons or groups of persons who will derive significant equity interests in Unity following completion of the merger:
EQUITY INTEREST IN UNITY UPON BASIS FOR ACQUISITION OF EQUITY NAME OF GROUP CONSUMMATION OF MERGER INTEREST - ------------------------------------ ------------------------------------ ------------------------------------ Executive officers and directors of 2,777,231 shares of Unity common In exchange for 4,980,688 shares of GraphOn stock GraphOn common stock held prior to the merger Principal shareholders of GraphOn 4,846,602 shares of Unity common In exchange for 8,691,899 shares of (excluding Spencer Trask) stock GraphOn common stock held prior to the merger Investors in GraphOn's private 2,878,815 shares of Unity common In exchange for 5,162,868 shares of equity financing between October stock GraphOn common stock held prior to 28, 1998 and January 27, 1999 the merger Spencer Trask 1,263,677 shares of Unity Common In exchange for 2,266,279 shares of Stock, 250,000 Class A redeemable GraphOn common stock held prior to common stock purchase warrants the merger and in consideration for exercisable for an aggregate of up consulting services performed in to 250,000 shares of Unity Common connection with the merger. Stock and up to $575,000.
5 EXCHANGE RATIO At the effective time, each then outstanding share of GraphOn common stock will be converted into the right to receive approximately .5576 of a share of Unity common stock (the "exchange ratio"), or an approximate aggregate of 9,124,543 shares of Unity common stock (the "Unity merger stock"). No fractional shares of Unity common stock will be issued in the merger, and GraphOn shareholders whose shares are converted in the merger will be entitled to a cash payment in lieu of such fractional shares. The exchange ratio was established through arms-length negotiations between Unity and GraphOn. UNITY EXCHANGE OPTIONS At the effective time, the GraphOn 1998 Stock Option/Stock Issuance Plan and all outstanding options under the plan will be assumed by Unity. A total of 1,236,132 shares of GraphOn common stock are reserved for issuance under the plan. Currently options are outstanding under the plan to purchase approximately 353,500 shares of GraphOn common stock at exercise prices ranging from $0.075 to $0.85 per share. The number of shares reserved for issuance under the plan, together with the number of shares subject to outstanding options and the exercise prices in effect under those options, will be adjusted to reflect the exchange ratio. Accordingly, after conversion, a total of 689,267 shares of Unity common stock will be reserved for issuance under the plan and options to purchase approximately 197,111 shares of Unity common stock at exercise prices ranging from approximately $0.13 to $1.52 per share (the "Unity exchange options") will be outstanding under the plan. The shares reserved under the plan, and all outstanding options, will be registered on a separate registration statement under the Securities Act. Unity will use its best efforts subsequent to the effective time to maintain the registered status of such shares up to and through the expiration date of the Unity exchange options and to maintain a current prospectus covering such shares. UNITY MERGER WARRANTS At the effective time, warrants to purchase 1,572,437 shares of GraphOn common stock at an exercise price of $1.00 per share will be assumed by Unity and converted at the exchange ratio into warrants to purchase 876,790 shares of Unity common stock at an exercise price of approximately $1.79 per share (the "Unity merger warrants"). The shares of Unity common stock issuable upon exercise of the Unity merger warrants are being registered under the Securities Act contemporaneously with the date of this joint proxy statement/ prospectus. Unity will use its best efforts subsequent to the effective time to have such shares of Unity common stock so registered or qualified at all times up to and through the respective expiration dates of the Unity merger warrants and to maintain a current prospectus covering their underlying shares. CLASS A REDEEMABLE COMMON STOCK PURCHASE WARRANT At the effective time, Unity will issue to Spencer Trask 250,000 Class A redeemable common stock purchase warrants exercisable for an aggregate of up to 250,000 shares of Unity common stock at an exercise price of $5.50 per share. Both the warrant and the shares of Unity common stock issuable upon exercise of the warrant are being registered under the Securities Act contemporaneously with the date of this joint proxy statement/prospectus. Unity will use its best efforts subsequent to the effective time to have the warrant and the shares of Unity common stock underlying the warrant so registered or qualified at all times up to and through the expiration date of the warrant and to maintain a current prospectus covering the warrant and the underlying shares. This warrant is to be issued to Spencer Trask in consideration for consulting services performed in connection with the merger. 6 CLOSING; EFFECTIVE TIME The closing of the transactions contemplated by the merger agreement will take place as soon as practicable immediately following the date on which the last of the conditions set forth in the merger agreement is satisfied or waived, or at such other time as Unity and GraphOn agree. The merger will become effective at such time as a certificate of merger and an agreement of merger reflecting the merger shall be accepted for filing by the Secretary of State of the State of Delaware, and by the Secretary of State of the State of California, respectively. Such filings will be made simultaneously with or as soon as practicable after the closing. EXCHANGE OF STOCK CERTIFICATES At the effective time, the GraphOn shareholders will exchange certificates representing all of the GraphOn common stock for the Unity merger stock. No fractional shares of Unity common stock will be issued. Unity stockholders may but will not be required to surrender certificates evidencing shares of Unity common stock following the approval and adoption of the merger agreement and the subsequent implementation of the merger. NO FRACTIONAL SHARES No certificates or scrip for fractional shares of Unity common stock will be issued upon the surrender for exchange of GraphOn certificates in the merger. No dividend, stock split or interest will be paid with respect to any fractional share of Unity common stock, and such fractional interests will not entitle the owner thereof to vote or to any of the other rights of a holder of Unity common stock. Instead, each GraphOn shareholder who would otherwise have been entitled to a fraction of a share of Unity common stock upon surrender of GraphOn certificates for exchange will be entitled to receive a cash payment equal to such fraction multiplied by the closing price per share of Unity common stock as reported by the OTC Bulletin Board on the day preceding the effective time. BACKGROUND OF THE MERGER As discussed under "Business of Unity" elsewhere in this joint proxy statement/prospectus, Unity was formed to serve as a vehicle to effect a merger with an operating business which the Unity board believed had significant growth potential. One of the conditions to the completion of the Unity IPO was Unity's agreement with the underwriters of the IPO, placed into Unity's certificate of incorporation at their request, to the effect that if Unity was unable to enter into a letter of intent to effect a merger by May 12, 1998, Unity would be liquidated and its net assets distributed to the public Unity stockholders. However, if Unity entered into such a letter of intent on or prior to such date, Unity would then be accorded an additional six month period to complete such merger, failing which Unity was to be liquidated. Unity's certificate of incorporation further provides that this liquidation requirement cannot be deleted prior to the completion of a merger by means of an amendment to Unity's certificate of incorporation. At the time of the Unity IPO, the Unity board adopted a policy that Unity would not effect a merger with any operating business unless the fair market value of such company, as determined by the Unity board based upon standards generally accepted by the financial community, such as actual and potential sales, earnings, cash flow and book value, would be at least 80% of the net assets of Unity at the time of such merger (the "fair market value requirement"). If the Unity board could not determine that an operating business had sufficient fair market value, the Unity board's policy dictated that Unity would have to obtain an opinion from an independent investment banking firm to such effect, absent which Unity 7 could not proceed with the proposed merger. However, no such opinion would be required if the Unity board were to determine that the potential operating business prospective had sufficient fair market value. Following the consummation of Unity's IPO in November 1996, Unity's executive officers commenced an active search for an operating business. Approximately 90% of such net proceeds were placed in escrow immediately following the IPO, to be released either upon consummation of a merger or if required to facilitate a merger, as applicable. Excluding Worlds, Inc., a privately held company that was engaged in the business of developing applications for its three dimensional Internet technology, with particular emphasis on producing music-oriented websites in conjunction with record companies, and with which Unity previously entered into a now lapsed merger agreement, and GraphOn, during the period from November 1996 through May 1998 Unity's executive officers evaluated approximately 15 potential operating businesses in diverse industries. Serious consideration was given to effecting a merger with four of such potential operating businesses engaged in, respectively, the communications equipment, specialty chemical, computer systems and optical fiber industries. Unity conducted exploratory discussions with each of these four potential operating businesses, but did not enter into a definitive merger agreement with any of such concerns. In evaluating each potential operating business, Unity's executive officers and the Unity board first considered whether or not such operating business met the fair market valuation requirement and, having determined such requirement had been satisfied, then considered all or a majority of the following factors (collectively, "acquisition criteria"): - costs associated with effecting the merger; - equity interest in and opportunity for control of the operating business; - growth potential of the operating business and the industry in which it operates; - experience and skill of management and availability of additional necessary personnel of the operating business; - capital requirements of the operating business; - competitive position of the operating business; - stage of development of the product, process or service of the operating business; - degree of current or potential market acceptance of the product, process or service of the operating business; - proprietary features and degree of intellectual property or other protection of the product, process or service of the operating business; and - regulatory environment of the industry in which the operating business operates. 8 All of the prospective operating businesses were rejected prior to execution of a definitive merger agreement. The primary basis or bases of rejection were as follows:
PROSPECTIVE ACQUIRED BUSINESS UNSATISFIED ACQUISITION CRITERIA - -------------------------------------------------------- -------------------------------------------------------- Communications equipment (wireless telephone headsets) Absence of demonstrable evidence of market acceptance of products; inability to recruit and retain experienced sales personnel and greater than projected capital requirements (4th, 5th, 7th and 8th acquisition criteria). Specialty chemicals (industrial enzymes) Principal owner and operator of target was unwilling to personally represent target's past and present compliance with applicable environmental laws and regulations (3rd, 5th and 10th acquisition criteria). Computer systems (voter registration information Inability to recruit chief financial officer and management systems for public sector use) shortfall in target's projected revenues which, when combined with Unity's capital resources, were believed by Unity's executive officers to be insufficient to assure future profitability (3rd, 4th, 5th and 6th acquisition criteria). Optical fibers (plastic optical fiber cables for in- Absence of demonstrable evidence of market acceptance of office server/computer/ peripherals interface) products; significant additional capital requirements; extremely early state of product development (5th, 7th and 8th acquisition criteria)
The last potential operating business to be evaluated by Unity prior to its negotiation of its agreement to merge with Worlds was Boston Optical Fiber, Inc. ("BOF"), a privately held company engaged in the development of plastic optical fiber for use in the interface of computer networks and local access communications. On or about April 13, 1998, after approximately six weeks of intermittent discussions between an independent consultant retained by Unity to evaluate both the technological feasibility and commercial viability of BOF's second generation products, such consultant informed Lawrence Burstein, Unity's President, that he felt it would take no less than one year and possibly as long as 18 months to two years to establish such feasibility. He further stated that he was not in a position to express a firm opinion as to commercial viability until technological feasibility was established. He specifically called Mr. Burstein's attention to the fact that fiber optic technology was rapidly changing and there existed a strong possibility that existing manufacturers of both copper and glass cable would expend significant revenues during the next several years to enhance the performance and reduce the cost of their respective interface cabling products in an effort to maintain their dominant market share, to the possible detriment of plastic optical fiber cable usage. He indicated that should this occur, he questioned whether BOF would be in a position to effectively compete with such concerns. On April 24, 1998, cognizant of the fact that if the Unity board elected not to proceed with a merger with BOF Unity would have until May 12, 1998 to enter into a letter of intent for an alternative merger or undergo liquidation, Mr. Burstein initiated a meeting with Thomas Kidrin, Worlds' President, and Steven Greenberg, a principal stockholder of and consultant to Worlds, to explore the feasibility of a possible merger between Unity and Worlds. Mr. Burstein was familiar with Worlds and its then current and 9 proposed business operations by reason of his status as a principal of Unity Venture Capital Associates Ltd. ("Unity VCA"), a private investment banking firm which had become a minor shareholder in Worlds as a consequence of a previous merger between Worlds and Academic Computer Systems, Inc. ("ACS"), a dormant "blank check" company controlled by Unity VCA. On April 27, 1998, a meeting was held at Mr. Greenberg's office in New York City, at which time Messrs. Kidrin and Greenberg presented a comprehensive review of the progress made by Worlds in developing both its 3-D Internet technology and its potential applications. On April 29, 1998, Mr. Burstein telephoned each of the members of the Unity board and explained in detail his concerns over proceeding with a merger with BOF. In particular, Mr. Burstein observed that perhaps that as much as two years could elapse before the technological feasibility of BOF's second generation products could be established, with no assurance at this time as to outcome, and that even if such products were technologically feasible and they lent themselves to patent or other proprietary protection, several additional years could elapse before they could be brought to market. Each of the members of the Unity board, contacted individually by Mr. Burstein on April 29, 1998, advised Mr. Burstein that Unity should not proceed with a merger with BOF. On the afternoon of April 29, 1998, Mr. Burstein convened a telephonic meeting of the Unity board to apprise its members of the results of his conversations with Messrs. Kidrin and Greenberg on April 27, 1998. Like Mr. Burstein, the other members of the Unity board were generally familiar with Worlds, having been briefed from time to time by Mr. Burstein in individual conversations given the fact that each was a shareholder of Worlds by virtue of their prior equity interests in ACS. After reflecting upon Mr. Burstein's recounting of his April 27, 1998 briefing by Messrs. Kidrin and Greenberg, reviewing the several Acquisition Criteria, being also apprised by Mr. Burstein of Mr. Greenberg's apparent relationships in the pre-recorded music and entertainment industries, and noting the absence of any other operating business as a potential merger partner for Unity, the Unity board unanimously concluded that Mr. Burstein should immediately enter into the negotiation of merger terms between Unity and Worlds. Several meetings and telephonic discussions were held during the next several days between Mr. Burstein and persons affiliated with Worlds in an effort to negotiate the terms of a merger. On May 6, 1998, an agreement was reached between the parties and a definitive letter of intent executed. A definitive merger agreement was executed on June 25, 1998, and announced by each of Unity and Worlds on June 26, 1998. On July 24, 1998, a registration statement was filed by Unity with the SEC covering the Unity securities to be issued in the proposed merger with Worlds. The registration statement was declared effective by the SEC on September 14, 1998. Meetings of the respective stockholders of Unity and Worlds were held on October 29, 1998 to consider the proposed merger between Worlds and Unity. Unity stockholders voted against the proposed merger with Worlds at their October 29, 1998 meeting. Following the October 29, 1998 meeting of Unity stockholders, Mr. Burstein was contacted by a number of persons who expressed varying degrees of interest in locating a suitable candidate for a potential merger with Unity. Mr. Burstein initially informed each of such persons that Unity, under the terms of its certificate of incorporation, planned to liquidate and distribute its net assets to public Unity stockholders by January 11, 1999. Mr. Burstein also advised each of these persons that he would be willing to listen to their respective presentations and review any written materials they had because if a proposed merger candidate offered the potential of significant appreciation and benefit to Unity stockholders, he would request Unity's counsel to explore Unity's ability to amend its certificate of incorporation to defer liquidation until such time as the Unity stockholders could vote upon any such merger proposal. On November 25, 1998, Mr. Burstein was introduced by a minority shareholder of Unity VCA to William Dioguardi of Spencer Trask Securities Incorporated, who informed Mr. Burstein that Spencer 10 Trask was acting as a financial advisor and placement agent to GraphOn in a private placement of GraphOn common stock. Mr. Dioguardi informed Mr. Burstein of recent developments in GraphOn's business. Mr. Dioguardi expressed his belief that a merger between Unity and GraphOn, which would afford GraphOn access to Unity's cash reserves in addition to the anticipated proceeds of GraphOn's own private placement, could position GraphOn to achieve significant growth and profitability. Following these discussions, Mr. Burstein requested Unity's counsel to evaluate the feasibility of seeking Unity shareholder approval of an amendment to Unity's certificate of incorporation which would permit the Unity board to defer Unity's liquidation until the Unity shareholders could evaluate and vote upon a new merger transaction. Counsel considered this issue, reaching a preliminary conclusion that such an amendment should be permissible. Counsel then discussed its conclusion with Richards Layton & Finger, a Delaware law firm. On November 30, 1998, Richards, Layton & Finger, P.A. verbally advised Unity's counsel that such firm was of the preliminary opinion that Unity's certificate of incorporation could be amended to achieve the result desired by Mr. Burstein. Following receipt of this advice, telephone discussions were held between Mr. Burstein and other members of the Unity board, during the course of which Mr. Burstein informed the other board members of the preliminary opinion expressed by Richards, Layton & Finger, P.A. and of his desire to open discussions with GraphOn with a view towards negotiating a merger between GraphOn and Unity. On December 2, 1998, Unity's counsel prepared and circulated for review to GraphOn and GraphOn's counsel a draft letter of intent calling for a merger between Unity and GraphOn. On December 8, 1998, Mr. Burstein met in New York City with Walt Keller, GraphOn's president and chief executive officer, to discuss the proposed merger terms. Mr. Dioguardi was present at this meeting as were other representatives of Spencer Trask. Following this meeting, Unity's counsel prepared and circulated a revised letter of intent. On December 9, 1998, Mr. Burstein, accompanied by Norman Leben, one of Unity's directors, again met with Mr. Keller in New York City to discuss the contents of the revised letter of intent. Mr. Dioguardi and Robin Ford, GraphOn's executive vice president, also participated in these discussions. An agreement was reached that afternoon on the financial terms of a merger between Unity and GraphOn, following which Unity's counsel prepared and circulated a definitive letter of intent, which was signed late in the afternoon on December 10, 1998 and announced by a press release on the following day. On December 22, 1998, Unity's counsel distributed a proposed merger agreement to GraphOn and its counsel. On January 6, 1999, Mr. Burstein, accompanied by counsel, met with Mr. Keller and his counsel in Palo Alto, California to discuss the draft merger agreement and to commence a customary "due diligence" investigation. On January 13, 1999, Richards, Layton & Finger, P.A. delivered its written opinion to Unity to the effect that the provisions in Unity's certificate of incorporation which purport to prohibit the amendment of Article SEVENTH of the certificate of incorporation are contrary to Delaware law because they eliminated the rights granted to the corporation and its shareholders by the DGCL to amend the corporation's certificate of incorporation if certain procedures are followed. On January 15, 1999, Unity's counsel distributed a revised merger agreement to GraphOn and its counsel. On January 27, 1999, Unity's counsel distributed a further revised merger agreement to GraphOn and its counsel, reflecting comments received from GraphOn's counsel on January 26, 1999 upon the prior draft. Following negotiations between Unity's and GraphOn's respective counsel on January 28, 1999 and 11 again on January 29, 1999, a definitive merger agreement was signed by Unity and GraphOn on February 1, 1999 and announced by press release on the following day. RECOMMENDATIONS OF THE BOARDS OF DIRECTORS AND REASONS FOR THE MERGER UNITY. In considering whether or not to approve the merger, the Unity board first concluded that GraphOn satisfied, or by the passage of time prior to the merger or upon its consummation would satisfy, the fair market value requirement and, further, would also satisfy all of the acquisition criteria, as set forth in the sixth paragraph under "--Background of Merger" above, excluding only the opportunity for acquiring operating control of GraphOn in view of the unwillingness of GraphOn's management to relinquish such control and the Unity board's lack of expertise in the software industry. The Unity board, however, did not find it practicable to, and did not, quantify or otherwise attempt to assign relative weight to each of the several acquisition criteria considered in reaching its determination. The Unity board took note of the financial condition of GraphOn as set forth in its financial statements and related notes included elsewhere in this joint proxy statement/prospectus and the "going concern assumptions" discussed in such notes. The Unity board was cognizant of GraphOn's need for additional financing as expressed in such assumptions but, following discussions with GraphOn's management and with Spencer Trask, concluded that, in addition to the approximate $4,406,000 that would be made available to GraphOn through its projected private placement, Unity's cash resources of approximately $5,400,000, which would become accessible to GraphOn upon completion of the merger, would satisfy GraphOn's capital needs for at least two years thereafter. The Unity board also took note of the fact that, if the proposed merger with GraphOn was not completed, Unity would be liquidated and its net assets (estimated at $5.28 per common share) distributed to public Unity stockholders. For the reasons set forth above, the Unity board has determined that the merger is in the best interests of Unity and the Unity stockholders. Consequently, the Unity board has unanimously approved and adopted the merger agreement and recommends that the Unity stockholders vote FOR approval and adoption of the merger agreement and the merger which it contemplates. The Unity board determined not to secure an opinion from a recognized investment banking firm to the effect that the terms of the merger transaction are fair from a financial point of view to the public Unity stockholders. The Unity board does not believe that the terms of the merger give rise to any inherent conflict of interest between Unity's executive officers and directors and the public Unity stockholders, given the fact that such executive officers and directors will receive no benefit from the merger that would not otherwise be available to the public Unity stockholders as a whole. Further, the Unity board noted that none of Unity's current executive officers or directors were to become salaried employees of Unity subsequent to the completion of the merger and, in any event, the merger could be effected only if approved by a vote of a majority in interest of all public Unity stockholders. GRAPHON. In considering the merger, the GraphOn board noted that the merger would afford GraphOn access to approximately $5,400,000 in cash through its acquisition, by virtue of the merger, of Unity's net assets, without the anticipated cost and uncertainties attendant to GraphOn's own public offering of securities and the possibility that any such offering might not be successfully consummated in view of then prevailing market conditions or, alternatively, the negotiation and uncertain consummation of commercial lending arrangements. The GraphOn board also took into account the overhang on the market of the outstanding but unexercised Unity warrants issued in the Unity IPO and the potentially depressive effect of such overhang on the market price of the Unity common stock subsequent to the completion of the merger. The GraphOn board concluded that the possibility that the Unity IPO warrants would be exercised at some time prior to their scheduled expiration in November 2002, resulting in gross proceeds from such exercises 12 of approximately $16,250,000, offset the risk of such market overhang. In making such determination, the GraphOn board took note in these regards of the fact that the respective exercise prices of the Unity IPO warrants were in excess of the price paid by many of the GraphOn shareholders for their respective interests in GraphOn and, as such, were anti-dilutive to these GraphOn shareholders. In addition, the GraphOn board also noted that the current public market for Unity common stock would afford potential liquidity for the Unity common stock to be acquired by the GraphOn shareholders in exchange for the GraphOn common stock in the merger. After careful consideration, the GraphOn board determined not to secure an opinion of an independent investment banker or other financial advisor to the effect that the merger would be fair, from a financial point of view, to the GraphOn shareholders due, in part, to the fact that the GraphOn board does not believe that the terms of the merger give rise to any inherent conflict of interest between GraphOn's executive officers, directors and principal shareholders and GraphOn shareholders other than as described in "--Interests of Certain Persons in the Merger." The GraphOn board has determined that the merger is in the best interests of GraphOn and the GraphOn shareholders. Consequently, the GraphOn board, unanimously has approved and adopted the merger agreement and recommends that the GraphOn shareholders vote FOR approval and adoption of the merger agreement and the merger which it contemplates. INTERESTS OF CERTAIN PERSONS IN THE MERGER As contemplated by the merger agreement, John Cattier, Barry Ridings and Norman Leben, each presently a member of the Unity board, will resign immediately prior to the effective time. Lawrence Burstein, presently a member of the Unity board, will continue as a director of Unity. Immediately following the merger, Unity has agreed to cause Walter Keller, Thomas A. Bevilacqua, [ ] each currently a member of the GraphOn board (such persons being hereinafter referred to as the "designated directors"), to be elected to the Unity board. The designated directors, together with Mr. Burstein, will comprise the members of the Unity board subsequent to the effective time and, consequently, will then control the business and affairs of Unity. The designated directors hold in the aggregate 2,930,688 shares of GraphOn common stock and warrants to purchase GraphOn common stock, which will be exchanged for an aggregate of 1,634,151 shares of Unity merger stock and warrants to purchase Unity common stock. See "Principal Shareholders of GraphOn." 13 CERTAIN TAX CONSEQUENCES OF THE MERGER The merger is intended to be a "reorganization" within the meaning of Section 368(a) of the Internal Revenue Code of 1986. As a consequence, (i) neither Unity nor GraphOn will recognize any gain or loss in the merger and (ii) neither the Unity stockholders nor the GraphOn shareholders will recognize any gain or loss in the merger, except for tax payable by GraphOn shareholders because of cash received instead of fractional shares of Unity common stock. Cooperman Levitt Winikoff Lester & Newman, P.C., as counsel to Unity, has rendered to Unity an opinion dated as of the date of this joint proxy statement/prospectus to the effect that the merger will be treated, for federal income tax purposes, as a "reorganization" within the meaning of Section 368(a) of the code. Brobeck, Phleger & Harrison LLP, as counsel to GraphOn, has rendered to GraphOn an opinion dated as of the date of this joint proxy statement/prospectus to the effect that the merger will be treated, for federal income tax purposes, as a "reorganization" within the meaning of Section 368(a) of the code. THE TAX DISCUSSION SET FORTH ABOVE IS INCLUDED FOR GENERAL INFORMATION ONLY AND IS BASED UPON PRESENT LAW. EACH UNITY AND GRAPHON SHAREHOLDER SHOULD CONSULT HIS OR HER TAX ADVISOR AS TO THE SPECIFIC TAX CONSEQUENCES OF THE MERGER TO HIM OR HER, INCLUDING THE APPLICATION AND EFFECT OF FEDERAL, STATE, LOCAL AND OTHER TAX LAWS AND THE POSSIBLE EFFECTS OF CHANGES IN FEDERAL LAW OR OTHER TAX LAWS. THE MERGER AGREEMENT GENERAL. The merger agreement provides that, at the effective time, each then outstanding share of GraphOn common stock will be converted into the right to immediately receive approximately .5576 of a share of Unity Common stock, or an aggregate of approximately 9,124,543 shares of Unity common stock. The exchange ratio was established through arms-length negotiations between Unity and GraphOn. The merger agreement further provides that, at the effective time, GraphOn will be merged with and into Unity. The certificate of incorporation of Unity, as the surviving corporation, will be amended at the effective time to change Unity's name to "GraphOn Corporation." Upon completion of the merger and assuming none of the GraphOn shareholders exercise their appraisal rights, the GraphOn shareholders will own approximately 83.0% of the then outstanding shares of Unity common stock. Giving effect to the exercise of all Unity exchange options, Unity merger warrants, Unity IPO warrants, Unity directors' warrants, the Unity Underwriters' IPO securities, and the Class A redeemable common stock purchase warrant to be issued to Spencer Trask, a maximum of an additional 4,598,901 shares of Unity common stock will be issuable upon completion of the merger. On such a fully diluted basis, the GraphOn shareholders would collectively own a maximum of approximately 65.4% of the then outstanding Unity common stock. None of the shares of Unity common stock will be converted or otherwise modified in the merger and all of such shares will continue to be outstanding capital stock of Unity after the effective time. REPRESENTATIONS AND WARRANTIES. The merger agreement contains various representations and warranties of GraphOn and Unity relating to, among other things: - each of Unity's and GraphOn's organization and similar corporate matters; - each of Unity's and GraphOn's capital structure; - the authorization, execution, delivery, performance and enforceability of the merger agreement and related documentation; - the absence of any governmental or regulatory authorization, consent or approval to complete the merger; 14 - the documents and reports filed by Unity with the SEC and the accuracy of the information contained in such documents or reports; - the absence of certain liabilities; - the absence of certain material events or changes; - litigation; - in the case of GraphOn, rights to use of its intellectual property and the functional compliance of its computer software; - the accuracy of the information provided by GraphOn and Unity with respect to the registration statement to be filed by Unity in connection with resales of shares of Unity merger stock by GraphOn shareholders subsequent to the merger and this joint proxy statement/prospectus; - compliance with laws and material agreements; - taxes; - retirement and other employee benefit plans and matters relating to the Employee Retirement Income Security Act of 1974, as amended; - certain accounting matters; - financial statements; and - the absence of certain labor controversies. CERTAIN COVENANTS. Pursuant to the merger agreement, GraphOn and Unity have agreed with the other that, during the period from the date of the merger agreement until the effective time, except as permitted by the merger agreement (including those provisions set forth or described in this joint proxy statement/prospectus) or as consented to in writing by the other, each will: - conduct its business in the ordinary and usual course and consistent with past practice; - not split, combine or reclassify its outstanding capital stock or declare any dividend or distribution; - not issue, sell, pledge or dispose of any additional shares, or any options or rights to acquire additional shares, of capital stock, other than - in connection with the exercise of outstanding options or warrants, and - in the case of GraphOn it may - grant options to acquire shares of GraphOn common stock to both present and future employees under GraphOn's 1998 stock option/stock issuance plan; - offer and sell shares of GraphOn common stock in one or more private transactions at a price of not less than $1.00 per share to an aggregate maximum of $4,175,000 and may issue warrants to acquire shares of GraphOn common stock in customary amounts to placement agents who facilitate such sales; - issue shares of GraphOn common stock as well as warrants to purchase shares of GraphOn common stock to non-affiliated persons and entities for the purposes of purchasing or licensing technology which, in the reasonable judgment of GraphOn's board, is necessary or desirable for GraphOn's growth and development; and - issue up to an aggregate maximum of 100,000 shares of GraphOn common stock to entities which currently provide services to GraphOn for services rendered; - not redeem any shares of capital stock except as permitted by the terms of such securities; 15 - not acquire or dispose of any material assets or properties other than in the ordinary course of business; - preserve the goodwill and business relationships with its suppliers, distributors, customers and others; - confer on a regular basis with the other on material operational matters; - in the case of Unity, file with the SEC all forms, statements, reports and documents required to be filed pursuant to the Exchange Act; and - prior to the effective time, afford each other reasonable access during normal business hours to its properties, books, contracts, commitments and records. NO SOLICITATION OF OTHER TRANSACTIONS. The merger agreement provides that GraphOn and its officers, directors, representatives and agents will not solicit any proposal or offer to acquire all or any substantial part of the business or capital stock of GraphOn from any person other than Unity. In this regard, GraphOn has agreed that any person inquiring as to the availability of the business or shares of capital stock of either GraphOn or any of its subsidiaries or making an offer therefor will be told that GraphOn is bound by the provisions of the merger agreement. Each of GraphOn and its officers, directors, representatives and agents further agreed to advise Unity promptly of any such inquiry or offer. The merger agreement also provides for similar restrictions on Unity and its officers, directors, representatives and agents. NO INDEMNIFICATION. The merger agreement does not provide for any indemnification to either GraphOn or Unity for any costs or expenses, judgments, fines, losses, claims, damages, liabilities and amounts paid in settlement arising out of, relating to or in connection with any misrepresentation or breach of representations, warranties or covenants contained in the merger agreement. CONDITIONS TO THE MERGER. The respective obligations of Unity and of GraphOn to complete the merger are subject to a number of conditions, including, but not limited to: - the merger agreement shall have been approved and adopted by the Unity stockholders, and the holders of no more than 19.99% in interest of the Unity common stock held by public Unity stockholders shall have voted against the merger and affirmatively requested conversion of their shares of Unity common stock into cash; - the merger shall have been approved and adopted by the GraphOn shareholders; - the charter amendment shall have been approved and adopted by the Unity stockholders; - the registration statement shall have become effective and no stop order suspending such effectiveness shall have been issued and remain in effect; - no preliminary or permanent injunction or other order or decree by any federal or state court or any action by any state or federal governmental agency preventing the completion of the merger shall have been issued or taken and remain in effect; and - all consents, orders and approvals legally required shall have been obtained and be in effect at the effective time. In addition to the conditions set forth above, the obligations of Unity to complete the merger are subject to the following conditions: - GraphOn shall have performed in all material respects its agreements contained in the merger agreement and all representations and warranties of GraphOn contained in the merger agreement shall be true and correct in all material respects on and as of the date made and the closing date; 16 - the receipt of written opinions from counsel to and independent public accountants of GraphOn and counsel to Unity as to certain matters; - the absence of material adverse changes in the business, operations, properties, assets, condition (financial or other), results of operations or prospects of GraphOn; - GraphOn's outstanding securities shall be unchanged in amount except as contemplated by the merger agreement; - the officers, directors and principal shareholders of GraphOn ("GraphOn principals") shall have executed agreements pursuant to which they will agree for a period of six months following the effective date not to sell, transfer or otherwise dispose of any shares of Unity common stock acquired in the merger other than for dispositions to family members who consent to the same restrictions (the "lock-up"); - each of the holders of the private placement shares shall be subject to the lock-up; - the GraphOn principals shall have executed an agreement pursuant to which, for a period of three years following the effective date, they agree to vote their shares of Unity common stock in favor of a slate of directors of Unity which includes one designee of the current Unity board, and the remaining nominees being designees of the GraphOn principals (the "voting agreement"); and - the holders of no greater than 10% in the aggregate in interest of GraphOn common stock shall have perfected their statutory dissenters' rights with respect to the merger. In addition, the obligations of GraphOn to effect the merger are subject to the following conditions: - Unity shall have performed in all material respects its agreements contained in the merger agreement and the representations and warranties of Unity contained in the merger agreement shall be true and correct in all material respects on and as of the date made and the closing date; - the receipt of written opinions from counsel to and independent public accountants of Unity and counsel to GraphOn as to certain matters; - the absence of material adverse changes in the business, operations, properties, assets, condition or prospects of Unity and Unity shall have engaged in no business activity since its IPO other than seeking to effect a merger; - Unity shall have at the closing date at least an aggregate of $6,000,000 in cash or cash equivalents after giving effect to the payment on the closing date of all expenses incurred by Unity attendant to the transactions contemplated by the merger agreement (including, but not limited to, the fees and expenses of Unity's attorneys and accountants) and before giving effect to any payments required to be paid to Unity stockholders exercising their conversion rights under Unity's certificate of incorporation; - Unity's outstanding securities shall be unchanged in amount except as contemplated by the merger agreement; - the officers, directors and principal stockholders of Unity ("Unity principals") shall be subject to the lock-up; - the Unity principals shall have executed the voting agreement whereby they will agree to vote their shares in favor of the election of an agreed-upon slate of directors for a period of three years; - the holders of no greater than 19.99% in the aggregate in interest of the Unity common stock held by Unity's public stockholders shall have exercised their conversion rights under Unity's certificate of incorporation; 17 - the officers and directors of Unity shall have resigned their respective positions as officers and directors of Unity (except that Lawrence Burstein shall resign only as an officer of Unity); and - the holders of no greater than 10% in the aggregate in interest of Unity common stock shall have perfected their statutory dissenters' rights with respect to the merger. TERMINATION. The merger agreement may be terminated prior to the closing date: - at any time by mutual consent of the boards of Unity and of GraphOn; - by either GraphOn or Unity after June 30, 1999, if the merger shall not have been consummated on or before such date (so long as the party terminating has not breached its obligations under the merger agreement); - unilaterally by Unity - if GraphOn materially breaches any material representation or warranty of GraphOn set forth in the merger agreement, - upon GraphOn's willful failure to comply with or satisfy any material covenant or condition of GraphOn contained in the merger agreement, - upon the occurrence of an event having a material adverse effect on the business, properties, assets, condition or results of operations of GraphOn or on its ability to consummate the merger or - if GraphOn shareholders fail to approve the merger agreement at the GraphOn meeting; or - unilaterally by GraphOn - if Unity materially breaches any material representation or warranty of Unity set forth in the merger agreement, - upon Unity's willful failure to comply with or satisfy any material covenant or condition of Unity contained in the merger agreement, - upon the occurrence of an event having a material adverse effect on the business, properties, assets, condition or results of operations of Unity or on its ability to consummate the merger or - if Unity stockholders fail to approve the merger at the Unity meeting. In the event of termination of the merger agreement by either GraphOn or Unity as provided above, the merger agreement shall become void and there will be no further obligation on the part of any of GraphOn or Unity, other than preserving the confidentiality of confidential information of the other provided in connection with the merger. AMENDMENT AND WAIVER. At any time prior to the effective time, GraphOn or Unity may - extend the time for the performance of any of the obligations or other acts to be performed by the other pursuant to the merger agreement; - waive any inaccuracies in the representations and warranties by the other contained in the merger agreement or in any other document delivered pursuant to the merger agreement; and - waive compliance with any of the agreements of the other or conditions precedent to their respective obligations contained in the merger agreement. Subject to applicable law, the merger agreement may be amended at any time before or after its approval by the Unity stockholders or the GraphOn shareholders by the written agreement of GraphOn and Unity. Under applicable law, neither GraphOn nor Unity may amend the merger agreement subsequent to obtaining approval of their respective shareholders if such amendments would 18 - alter or change the amount or kind of shares, securities, cash, property and/or rights to be received in exchange for shares of such corporation; - alter or change any term of the certificate of incorporation of Unity following the merger; or - alter or change any of the terms and conditions of the merger agreement if such alteration or change would adversely affect the Unity stockholders or the GraphOn shareholders. ABSENCE OF CERTAIN REGULATORY FILINGS AND APPROVALS The merger is not subject to the requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, and the rules and regulations thereunder, which provide that certain merger transactions may not be consummated until required information and materials have been furnished to the Antitrust Division of the Department of Justice and the Federal Trade Commission and certain waiting periods have expired or been terminated. RESTRICTIONS ON SALES BY AFFILIATES AND OTHER SHAREHOLDERS The 9,124,543 shares of Unity common stock and the Class A redeemable common stock purchase warrants to be issued in the merger as well as the shares underlying the GraphOn warrants are expected to be registered under the Securities Act as of the effective time. In such event, all of these securities will be freely transferable under the Securities Act. However, the merger agreement provides that all of the current officers and directors of GraphOn, the GraphOn principal shareholders and their respective affiliates, as well as the holders of the private placement shares, will enter into an agreement not to sell, pledge, transfer or otherwise dispose of any of their respective shares of Unity merger stock for a period of six months from the effective time. Thereafter, each such person may sell the balance, if any, of his, her or its Unity merger stock at any time, subject to any restrictions imposed by law. The executive officers and directors of Unity and the Unity principals and their respective affiliates have agreed to identical restrictions. ACCOUNTING TREATMENT The merger will be treated as a capital transaction equivalent to the issuance of stock by GraphOn for Unity's net monetary assets of approximately $6,000,000, net of a fee of up to $575,000 payable to Spencer Trask upon consummation of the merger. EXPENSES The merger agreement provides that, whether or not the merger is completed, all expenses incurred in connection with the merger agreement and the merger which it contemplates will be paid by the party incurring such expenses. CONVERSION RIGHTS A condition to the completion of Unity's IPO, imposed upon Unity by the IPO underwriters, was a requirement that Unity not proceed with any merger with an operating business if 20% or more in interest of Unity common stock held by public Unity stockholders request conversion of their respective shares into cash and also vote against such merger. Consequently, each public Unity stockholder as of the Unity record date will have the right until May , 1999 (the "conversion notification date") to offer his or her shares of Unity common stock to Unity for conversion to cash at an amount equal to approximately $5.28 per share (the "conversion value"). Any such request for conversion, once made, may be withdrawn at any time up to and through the conversion notification date. The conversion value is equal to the amount held in a trust account (inclusive of any interest thereon) divided by the number of shares of Unity common stock held by all public Unity stockholders, as determined by Unity and audited by its independent public 19 accountants, calculated as of the Unity record date. If less than 20% in interest of Unity common stock held by public Unity stockholders who vote against approval of the merger also elect to have their shares of Unity common stock converted into cash, and the merger is completed, Unity will convert into cash shares of Unity common stock at the conversion value from those public Unity stockholders who affirmatively requested such conversion and who actually voted against approval of the merger. If 20% or more in interest of Unity common stock held by public Unity stockholders actually vote against approval of the merger and affirmatively request conversion of their shares of Unity common stock, Unity will not proceed with the merger and will not convert such shares into cash. In such event, Unity's certificate of incorporation requires that Unity be liquidated. A public Unity stockholder wishing to exercise his or her conversion rights: - must deliver to Unity, prior to or on but in no event later than the conversion notification date, a written objection to the merger (the "notice of election"), which shall include a notice of his or her election to convert into cash his or her Unity common stock, his or her name and residence address, the number of shares of Unity common stock which he or she owns and demand for payment of the conversion value of his or her shares of Unity common stock which notice of election must be in addition to and separate from any proxy or vote against the merger and - must vote against the merger. A vote against the merger, in person or by proxy, will in and of itself not constitute a written objection to the merger satisfying the requirements for exercise of the conversion rights. In addition, a proxy directing such vote for an abstention, even if accompanied by a notice of election, will not meet the requirements for exercise of the conversion rights. A public Unity stockholder who elects to convert into cash his or her shares of Unity common stock may not convert less than all of the shares of Unity common stock beneficially owned by such shareholder as of the Unity record date. Public Unity stockholders who timely file a notice of election and who vote their Unity common stock against the merger are hereinafter referred to as "converting shareholders." ALL NOTICES OF ELECTION SHOULD BE ADDRESSED TO UNITY FIRST ACQUISITION CORP., 245 FIFTH AVENUE, NEW YORK, NEW YORK 10016; ATTN.: LAWRENCE BURSTEIN, PRESIDENT. Any public Unity stockholder whose shares are held in street name may exercise his or her conversion rights by instructing his or her broker to prepare and deliver a notice of election to Unity within the time frame and containing the information set forth in the second paragraph above, except that in lieu of setting forth the name and residence address of the public Unity stockholder, it should recite the name and address of the applicable brokerage firm and a statement to the effect that the notice of election is being submitted on behalf of a customer whose shares are held in street name (without identifying the customer). In addition, such public Unity stockholder should instruct the broker to vote his or her street name shares against the merger. At the effective time, each converting shareholder will cease to have any of the rights of a Unity stockholder, except the right to be paid the conversion value for his or her shares of Unity common stock. To maintain his or her position as a converting shareholder, a public Unity stockholder (or his or her broker in the case of shares held in street name) must submit the certificate representing his or her shares of Unity common stock to Unity or its transfer agent as noted below. A notice of election may be withdrawn by a public Unity stockholder (or his or her broker), with the written consent of Unity, prior to 20 days following the effective time. Within ten days after the date on which Unity stockholders approve the merger, Unity will send written notice of such approval ("notice of approval of merger"), including the per share conversion value, by certified or registered mail to each shareholder of Unity who filed a notice of election and who voted his or her shares against adoption of the merger. 20 Within 20 days following the date of mailing of the notice of approval of merger, converting stockholders must submit certificates representing their shares of Unity common stock to Unity or its transfer agent. Within 30 days following the date of mailing of the notice of approval of merger, Unity will pay each converting stockholder who has submitted the certificates representing his or her shares of Unity common stock to Unity or its transfer agent the conversion value for such shares. ANY CONVERTING STOCKHOLDER WHO FAILS TO SUBMIT HIS OR HER CERTIFICATES REPRESENTING UNITY COMMON STOCK WITHIN 20 DAYS FOLLOWING THE DATE OF MAILING OF THE NOTICE OF APPROVAL OF MERGER SHALL LOSE HIS OR HER CONVERSION RIGHTS. APPRAISAL RIGHTS UNITY Pursuant to Section 262 of the DGCL, the holder of record of any shares of Unity common stock who does not vote such holder's shares in favor of adoption and approval of the merger may assert appraisal rights and elect to have the "fair value" of such holder's shares of Unity common stock determined and paid to such holder, provided that such holder complies with the requirements of section 262 of the DGCL, summarized below. All references to and summaries of the rights of the dissenting shareholders are qualified in their entirety by reference to the text of section 262 of the DGCL which is attached to this joint proxy statement/prospectus as Exhibit C. Any stockholder entitled to vote on the merger who desires that Unity purchase shares of Unity common stock held by such stockholder (the "dissenting shares") must not vote in favor of adoption and approval of the merger. Shares of Unity common stock voted in favor of adoption and approval of the merger will be disqualified as dissenting shares. Stockholders whose shares are not voted in favor of adoption and approval of the merger and who, in all other respects, follow the procedures specified in section 262, will be entitled to have their Unity common stock appraised by the Delaware Court of Chancery and to receive payment of the "fair value" of such shares, exclusive of any element of value arising from the accomplishment or expectation of the merger, as determined by the Court. The procedures set forth in section 262 must be strictly complied with. Failure to follow any such procedures will result in a termination or waiver of appraisal rights under section 262. Under section 262, a holder of Unity common stock electing to exercise appraisal rights must: (1) Deliver to Unity, before taking of the vote on the merger, a written demand for appraisal of such holder's Unity common stock which reasonably informs Unity of the identity of the stockholder of record and that such record stockholder intends thereby to demand appraisal of such holder's shares. Such written demand is in addition to and separate from any proxy or vote with respect to the merger. Neither a vote against or abstention from voting with respect to the merger nor a proxy directing such vote will satisfy the requirement that a written demand for appraisal be delivered to Unity before the vote on the merger. Such written demand for appraisal should be delivered either in person to the Secretary of Unity at the Unity meeting on or before the vote on the merger or in person or by mail to the Secretary, prior to the Unity meeting, at 245 Fifth Avenue, New York, New York 10016. (2) Not vote in favor of, or consent in writing to, the merger. A failure to vote against the merger will not constitute a waiver of appraisal rights. However, a stockholder who signs and returns a proxy without expressly directing (by checking the applicable box on the proxy card enclosed herewith) that such stockholder's shares be voted against the merger or that an abstention be registered with respect to such shares of Unity common stock in connection with such merger will effectively have waived his or her appraisal rights as to those shares because, in the absence of express contrary instructions, such shares will be voted in favor of the merger. Accordingly, a stockholder who desires to perfect appraisal rights with respect to any shares must, as one of the procedural steps involved in such perfection, 21 either (i) refrain from executing and returning the enclosed proxy card or voting in person in favor of Proposal No. 2 on such card, or (ii) check either the "Against" or the "Abstain" boxes next to such proposal on such card or vote in person against the merger or register in person an abstention with respect to such proposal. The written demand for appraisal must be made by or for the holder of record of shares of Unity common stock. Accordingly, such demand must be executed by or for such stockholder of record, fully and correctly, as such stockholder's name appears on the stock certificates representing the shares. If the applicable shares are owned of record in a fiduciary capacity, such as by a trustee, guardian or custodian, execution of the demand should be made in such capacity, and if the applicable shares are owned of record by more than one person, as in a joint tenancy or tenancy in common, such demand should be executed by or for all joint owners. An authorized agent, including one of two or more joint owners, may execute the demand for appraisal for a stockholder of record. However, the agent must identify the record owner(s) and expressly disclose the fact that, in executing the demand, the agent is acting as agent for the record owner(s). A record owner, such as a broker, who holds shares as nominee for other persons may exercise appraisal rights with respect to the shares held for all or less than all of such other persons. In such case, the written demand should set forth the number of shares covered by it. Where no number of shares expressly is mentioned, the demand will be presumed to cover all shares standing in the name of such record owner. Within 10 days after the effective time, Unity is required to, and will, notify each stockholder who has satisfied the foregoing conditions of the date on which the effective time occurred and that appraisal rights are available with respect to shares for which a demand has been submitted. Within 120 days after the effective time, Unity, or any such stockholder who has satisfied the foregoing conditions and otherwise is entitled to appraisal rights under section 262, may file a petition in the Court demanding a determination of the value of the shares held by all stockholders entitled to appraisal rights. If no such petition is filed, appraisal rights will be lost for all stockholders who previously had demanded appraisal of their shares. Stockholders of Unity seeking to exercise appraisal rights should not assume that Unity will file a petition with respect to the appraisal of the value of their shares or that Unity will initiate any negotiations with respect to the "fair value" of such shares. Accordingly, such stockholders should regard it as their obligation to take all steps necessary to perfect their appraisal rights in the manner prescribed in section 262. Within 120 days after the date of the effective time, any stockholder who has complied with the applicable provisions of section 262 will be entitled, upon written request, to receive from Unity a statement setting forth the aggregate number of shares not voted in favor of the merger and with respect to which demands for appraisal were received by Unity, and the number of holders of such shares. Such statement must be mailed within ten days after the written request therefor has been received by Unity or within ten days after expiration of the period for delivery of demands for appraisal, whichever is later. If a petition for an appraisal is timely filed, at the hearing on such petition the Court will determine the stockholders of Unity entitled to appraisal rights. After determining the stockholders entitled to an appraisal, the Court will appraise the value of the shares of Unity common stock owned by such stockholders, determining the "fair value" thereof exclusive of any element of value arising from the accomplishment or expectation of the merger. The Court will direct payment by Unity of the fair value of such shares together with a fair rate of interest, if any, on such fair value to stockholders entitled thereto upon surrender to Unity of Unity stock certificates. The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a stockholder, the Court may, in its discretion, order that all or a portion of the expenses incurred by any 22 stockholder in connection with an appraisal proceeding, including, without limitation, reasonable attorneys' fees and fees and expenses of experts, be charged pro rata against the value of all the shares entitled to appraisal. Although Unity believes that the merger is fair, no representation is made as to the outcome of the appraisal of fair value as determined by the Court and stockholders should recognize that such appraisal could result in a determination of a value higher or lower than, or the same as, the conversion value. Moreover, Unity does not presently anticipate offering more than the conversion value to any stockholder exercising appraisal rights and reserves the right to assert, in any appraisal proceeding, that, for purposes of section 262, the "fair value" of a share of Unity common stock is less than the conversion value. In determining the "fair value" of shares of Unity common stock, the Court is required to take into account all relevant factors. Therefore, such determination could be based upon considerations other than, or in addition to, the price paid for shares of Unity common stock, including, without limitation, the market value of shares and the asset values and earning capacity of Unity. In WEINBERGER V. UOP, INC., ET AL., 457 A.2d 701,713 (Del. 1983), the Delaware Supreme Court stated, among other things, that "proof of value by any techniques or methods which are generally considered acceptable in the financial community and otherwise admissible in court" should be considered in an appraisal proceeding. Section 262 provides that "fair value" is to be "exclusive of any element of value arising from the accomplishment or expectation of the merger." In WEINBERGER, the Delaware Supreme Court held that "elements of future value, including the nature of the enterprise, which are known or susceptible of proof as of the date of the merger and not the product of speculation, may be considered." Id. Any holder of shares of Unity common stock who has demanded an appraisal in compliance with section 262 will not, after the effective time, be entitled to vote such holder's shares for any purpose nor be entitled to the payment of dividends or other distributions on such shares (other than those payable to stockholders of record as of a date prior to the effective time). If (i) no petition for an appraisal is filed within 120 days after the date of the effective time or (ii) a holder of shares delivers to Unity a written withdrawal of such holder's demand for an appraisal and an acceptance of the merger, either within 60 days after the effective time or with the written approval of Unity thereafter (which Unity reserves the right to give or withhold, in its sole discretion), then the right of such stockholder to an appraisal will cease and such stockholder will remain a stockholder of Unity. No appraisal proceeding in the Court will be dismissed as to any stockholder without the approval of the Court, which approval may be conditioned on such terms as the Court deems just. Also see "--Conversion Rights" above. GRAPHON If the merger agreement is approved by the required consent or vote of GraphOn shareholders and is not abandoned or terminated, GraphOn shareholders who did not consent to or vote in favor of the merger may, by complying with Chapter 13 of the California Corporations Code (the "CCC"), be entitled to dissenters' rights as described therein. The record holders of the shares of GraphOn common stock that elect to exercise their dissenters' rights with respect to the merger are referred to herein as "GraphOn dissenting shareholders," and the shares of GraphOn common stock with respect to which they exercise dissenters' rights are referred to herein as "GraphOn dissenting shares." If a GraphOn shareholder has a beneficial interest in shares of GraphOn common stock that are held of record in the name of another person, such as a broker or nominee, and such GraphOn shareholder desires to perfect whatever dissenters' rights such beneficial GraphOn shareholder may have, such beneficial GraphOn shareholder must act promptly to cause the holder of record timely and properly to follow the steps summarized below. A VOTE IN FAVOR OF THE MERGER BY A GRAPHON SHAREHOLDER WILL RESULT IN A WAIVER OF SUCH HOLDER'S RIGHT TO DISSENTERS' RIGHTS. 23 The following discussion is not a complete statement of the CCC relating to dissenters' rights, and is qualified in its entirety by reference to Chapter 13 of the CCC attached to this joint proxy statement/ prospectus as Exhibit D and incorporated herein by reference. This discussion and Chapter 13 of the CCC should be reviewed carefully by any holder who wishes to exercise statutory dissenters' rights or wishes to preserve the right to do so, since failure to comply with the required procedures in a timely manner will result in the loss of such rights. A GraphOn shareholder who wishes to become a GraphOn dissenting shareholder must: - not vote any of the shares he or she wishes to qualify as GraphOn dissenting shares in favor of the merger; - make written demand upon GraphOn, not later than 30 days after the date on which the notice of approval by the outstanding shares described below was mailed, setting forth in his or her demand the number and class of shares of which he or she demands that GraphOn purchase and a statement by such shareholder as to what he or she believes the fair market value of such shares to have been as of the day before the announcement of the merger; and - submit for endorsement, within 30 days after the date on which the notice of approval of the merger by the GraphOn shareholders described below was mailed to such shareholder, at the principal office of GraphOn, the certificates representing any shares for which demand for purchase is being made with a statement specifying that such shares are dissenting shares. Neither a vote against approval of the merger nor the giving of a proxy directing a negative vote will be sufficient to constitute the demand described in clause (ii) above. Written demands, notices or other communications which a GraphOn shareholder wishes to send to GraphOn concerning the exercise of dissenters' rights should be addressed to: GraphOn Corporation 150 Harrison Avenue Campbell, CA 95008 Attention: Walt Keller Within ten days after the date of the approval of the merger, GraphOn shall mail a notice of the approval of the merger to each GraphOn shareholder who has not voted to approve the merger, together with a brief description of the procedure to be followed if the shareholder wishes to exercise his or her dissenters' rights and a statement of the price determined to represent the fair market value of the dissenting shares. If the GraphOn dissenting shareholder and GraphOn agree upon the price and that the shares qualify as GraphOn dissenting shares, the GraphOn dissenting shareholder will be entitled to the agreed upon price plus the legal rate of interest on judgments from the date of such agreement, subject to surrender, by the GraphOn dissenting shareholder, of his or her certificates representing the GraphOn dissenting shares to GraphOn. If the dissenting shareholder and GraphOn fail to agree upon the fair market value of the GraphOn dissenting shares or whether the shares qualify as GraphOn dissenting shares, the GraphOn dissenting shareholder may file a complaint with the California Superior Court within six months after the date on which notice of the approval of the merger is mailed to shareholders requesting that the court determine the fair market value of the GraphOn dissenting shares and/or whether the shares qualify as GraphOn dissenting shares. Under the provisions of Section 500 et seq. and Section 1306 of the CCC, a California corporation is legally prohibited from purchasing shares of stock through the payment of cash or other property, even if all dissenters rights conditions are fulfilled, unless the corporation satisfies certain financial conditions. Due to these legal restrictions, GraphOn may not be legally able to repurchase all or any GraphOn dissenting shares of the dissenting shareholders for cash following the merger. 24 To the extent that the above-mentioned provisions of the CCC prohibit cash payments to holders of GraphOn dissenting shares who exercise and perfect their dissenters' rights, such GraphOn dissenting shareholders will become creditors of GraphOn for an amount equal to the fair market value of their shares as to which the dissenters' rights are perfected plus interest accrued thereon at the legal rate on judgments until the date of payment. The rights of such GraphOn dissenting shareholders, however, will be subordinate to the rights of all other creditors of GraphOn in any liquidation proceeding. GraphOn dissenting shareholders considering seeking appraisal should be aware that the fair value of their shares of GraphOn common stock, as determined under Chapter 13 of the CCC, could be more than, the same as or less than the amount that would be paid to them pursuant to the merger agreement. The costs and expenses of the appraisal proceeding will be determined by the court and assessed against GraphOn unless the court determines that the GraphOn dissenting shareholder did not act in good faith in demanding payment of the fair value of his shares, in which case such costs and expenses may be assessed against the GraphOn dissenting shareholder. OPERATIONS AFTER THE MERGER DIRECTORS AND EXECUTIVE OFFICERS. In accordance with the merger agreement, three of the four current members of the Unity board will resign immediately prior to the effective time. Immediately following the merger, one of the current directors of Unity and current directors of GraphOn will become the sole members of the Unity board. In addition, all of Unity's executive officers will resign as of the effective time, to be replaced by GraphOn's current executive officers. The members of the post-merger Unity board will be classified into three classes, one of which is elected at each annual meeting of stockholders to hold office for a three-year term and until successors of such class have been elected and qualified. The respective members of each class of the post-merger Unity board are set forth below. - Class I: Walter Keller and Thomas A. Bevilacqua (3 year initial term); - Class II: and (2 year initial term); and - Class III: , and Lawrence Burstein (1 year initial term). Each of such persons is currently a director of GraphOn, except Mr. Burstein, who is currently a director of Unity. DIVIDENDS. Unity does not presently intend to pay any cash dividends as all available cash will be utilized to further the growth of Unity's business subsequent to the effective time for the proximate future thereafter. The payment of any subsequent cash dividends will be in the discretion of the Unity board and will be dependent upon Unity's results of operations, financial condition and other factors deemed relevant by the Unity board. 25 PRICE RANGES OF SECURITIES UNITY Unity's common stock, Class A redeemable warrants and Class B redeemable warrants are each quoted on the OTC Bulletin Board under the symbols UFAC, UFACW and UFACZ, respectively.(1) The following table sets forth the range of the high and low bid quotations of such securities on the OTC Bulletin Board for the periods indicated:
CLASS A REDEEMABLE COMMON STOCK WARRANTS ----------------- -------------------- THREE MONTHS ENDED HIGH LOW HIGH - ----------------------------------------------------------------- ------ ------ ------ January 31, 1997................................................. $4 3/4 $ 4 3/8 $ 1 1/4 April 30, 1997................................................... 4 13/16 4 3/8 1 1/8 July 31, 1997.................................................... 4 7/8 4 7/16 1 1/4 October 31, 1997................................................. 4 29/32 4 5/8 13/16 January 31, 1998................................................. 5 1/2 5 1 April 30, 1998................................................... 5 3/16 4 7/8 1 July 31, 1998.................................................... 5 5/16 4 7/8 1 1/4 October 31, 1998................................................. 5 1/16 4 3/4 1 January 31, 1999................................................. 5 9/32 4 23/32 7/8 April 30, 1999 (through April 9)................................. 5 5/16 5 7/32 1 7/16 CLASS B REDEEMABLE WARRANTS --------------- THREE MONTHS ENDED LOW HIGH LOW - ----------------------------------------------------------------- --- ------ --- January 31, 1997................................................. $ 7/8 $1 1/4 $ 3/4 April 30, 1997................................................... 3/8 7/8 1/4 July 31, 1997.................................................... 5/16 7/8 1/4 October 31, 1997................................................. 1/4 7/16 1/8 January 31, 1998................................................. 3/8 9/16 1/4 April 30, 1998................................................... 5/8 1/2 1/4 July 31, 1998.................................................... 1/2 7/16 3/8 October 31, 1998................................................. 1/32 13/32 1/16 January 31, 1999................................................. 3/64 1/2 1/8 April 30, 1999 (through April 9)................................. 7/8 3/4 1/2
- ------------------------ (1) Unity's securities began separate trading on November 21, 1996. The above quotations represent prices between dealers and do not include retail markup, markdown or commission. They do not necessarily represent actual transactions. On February 1, 1999 (the last trading day prior to the public announcement of the execution of the merger agreement), the last reported closing bid prices of Unity common stock, Class A redeemable warrants and Class B redeemable warrants were $5 13/64, $ 7/8 and $ 1/2, respectively. On that date, there were 37 recordholders of Unity common stock, although Unity believes that there are other persons who are beneficial owners of shares of Unity common stock held in street name. GRAPHON There is not presently, nor has there been in the past, any trading market for GraphOn common stock. On May , 1999, there were approximately 195 recordholders of GraphOn common stock. 26 SELECTED HISTORICAL FINANCIAL DATA OF GRAPHON GRAPHON
FOR THE YEAR ENDED DECEMBER 31, --------------------------- STATEMENT OF OPERATIONS DATA: 1998 1997 1996(1) 1995(1) 1994(1) - ------------------------------------------- ------------- ------------ ----------- ------------ ------------ (UNAUDITED) Revenues................................... $ 2,124,200 $ 1,926,100 $ 594,800 $ 588,117 $ 1,096,910 Costs of Revenues.......................... 344,200 463,300 335,600 213,502 349,693 ------------- ------------ ----------- ------------ ------------ Gross Profit............................... 1,780,000 1,462,800 259,200 374,615 747,217 Operating Expenses: Selling and marketing.................. 1,440,300 827,300 192,700 -- -- General and administrative............. 1,208,900 324,700 218,900 388,637 646,656 Research and development............... 840,200 190,500 41,700 58,979 67,150 ------------- ------------ ----------- ------------ ------------ Total Operating Expenses........... 3,489,400 1,342,500 453,300 447,616 713,806 ------------- ------------ ----------- ------------ ------------ (Loss) Income from Operations.............. (1,709,400) 120,300 (194,100) (73,001) 33,411 Other Income (Expense): Interest and other income.............. 9,800 7,200 6,400 -- -- Interest and other expense............. (46,900) (2,100) -- -- -- Other expense.......................... (16,500) -- -- -- -- ------------- ------------ ----------- ------------ ------------ (Loss) Income before Provision for Income Taxes.................................... (1,763,000) 125,400 (187,700) (73,001) 33,411 ------------- ------------ ----------- ------------ ------------ Provision for Income Taxes................. 800 900 800 -- 15,369 ------------- ------------ ----------- ------------ ------------ Net (Loss) Income.......................... $ (1,763,800) $ 124,500 $ (188,500) $ (73,001) $ 18,042 ------------- ------------ ----------- ------------ ------------ ------------- ------------ ----------- ------------ ------------ Pro forma (Loss) Income per share (2)...... $ (0.26) $ 0.02 $ (0.03) $ (0.01) $ -- ------------- ------------ ----------- ------------ ------------ ------------- ------------ ----------- ------------ ------------ Weighted average common shares............. 6,762,667 6,000,000 6,000,000 6,000,000 6,000,000 ------------- ------------ ----------- ------------ ------------ ------------- ------------ ----------- ------------ ------------
BALANCE SHEET DATA: DECEMBER 31, 1998 DECEMBER 31, 1997 - --------------------------------------------------------------------------- ----------------- ----------------- Total Assets............................................................... $ 6,544,500 $ 733,300 Total Liabilities.......................................................... 1,202,200 615,100 Shareholders' Equity....................................................... 5,342,300 118,200
- ------------------------ (1) During the years ended December 31, 1996, 1995 and 1994, GraphOn was engaged in the business of manufacturing, marketing and selling computer terminal hardware in an industry significantly different from that in which it presently does business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations of GraphOn--Overview." (2) Pro forma (Loss) Income per share is reflected as if GraphOn had been a public company since inception. 27 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF GRAPHON The following description of GraphOn's financial condition and results of operations should be read in conjunction with the information included in this joint proxy statement/prospectus. The description contains certain forward-looking statements that involve risks and uncertainties. GraphOn's actual results could differ significantly from the results discussed in the forward-looking statements as a result of certain of the risk factors set forth below and elsewhere in this joint proxy statement/prospectus. OVERVIEW GraphOn develops, markets, sells and supports server-based software that is designed to enable a diverse range of desktop computers to access server-based Windows and UNIX applications from any location, over fast or slow Internet connections. GraphOn was incorporated in May 1982 and engaged in the development and manufacture of hardware computer terminals. In 1995, GraphOn started to transition from a hardware to a software manufacturer by working with three independent software developers, with whom it entered into exclusive license agreements calling for royalties aggregating 16.4%, 9.7%, 4.8% and 2.9% of net revenues from sales of software products which contain the licensed technology for the years 1997, 1998, 1999 and 2000, respectively. After December 31, 2000, GraphOn has the option, under certain circumstances, to purchase the licensed technology or exclusive rights to it. GraphOn and each software developer tentatively have agreed to amend each of these agreements. Under the terms of such proposed amendments, GraphOn will purchase the licensed technology for aggregate payments of $172,231 and $348,000 payable in 1999 and 2000, respectively. Before October 1996, while GraphOn was developing its server-based software products, GraphOn's revenue was derived principally from the sale and repair of hardware computer terminals. GraphOn discontinued selling hardware products in 1996 and now provides only return-to-factory repair for the installed customer base. Software licensing revenue in 1996 was $72,900, representing only 12.3% of GraphOn's revenue. Software revenue consists of licensing fees for products sold and royalty payments from OEM agreements relating to GraphOn's software products called GO-Global, GO-Joe and GO-Between, in addition to fees for training and software maintenance. Consequently, GraphOn management does not consider comparisons between 1997 and 1996 fiscal performance to be meaningful. In October 1996, Sun Microsystems licensed GO-Joe for distribution with its network computers, GraphOn's server software for distribution with its UNIX operating systems and GO-Global for use by its employees. GO-Global was released for sale to customers other than Sun Microsystems in March 1997. In April 1998, IBM licensed GO-Joe for distribution with its network computers and GraphOn's server software for distribution with computers using its UNIX operating systems. GO-Joe was released for sale to customers other than IBM in July 1998. In December 1998, Corel licensed certain GraphOn software for distribution with its WordPerfect Office Suite products. During 1997 and part of 1998, GraphOn concentrated its efforts on OEM opportunities and strategic alliances to establish product acceptance. OEM licensing revenue from the Sun Microsystems agreement accounted for approximately 70.0% of revenue in 1997 and royalty revenue from the Sun Microsystems, IBM and Corel agreements accounted for approximately 18.8%, 16.5% and 20.6% of revenues, respectively, in 1998. GraphOn intends to continue to commit significant financial and other resources toward its objective of expanding its strategic OEM relationships and developing reseller channels. In pursuit of this objective, in August 1998, GraphOn hired a Vice President of Sales and two sales directors to create and develop GraphOn's reseller channel. In May 1998, GraphOn hired eight software engineers based in Bellevue, Washington and in December 1998 added eight engineers in Concord, New Hampshire in connection with the acquisition of Corel's jBridge technology. In February 1999, GraphOn hired a Chief Financial Officer. GraphOn has 28 more than tripled its headcount from 12 at December 31, 1997 to 43 at February 28, 1999. It is expected that the number of employees will increase following the completion of the merger. Product license revenues are recognized upon shipment only if no significant GraphOn obligations remain and collection of the resulting receivable is deemed probable. When product licenses require product engineering development by GraphOn, recognition of revenue is after delivery and customer acceptance of contract milestones. Revenues for training are recognized when the services are performed. Revenue from customer yearly maintenance fees, for ongoing customer support and product updates are recognized equally over the term of the contract, which typically is 12 months. GraphOn's limited operating history as a software developer and manufacturer makes the prediction of future operating results difficult and unreliable. Future operating results may fluctuate due to many factors, including GraphOn's ability to attract and retain strategic partners, the degree and rate of growth of the markets in which GraphOn competes and accompanying demand for GraphOn's products, the level of product and price competition, and the ability of GraphOn to establish and build its software product reseller channels. YEAR ENDED DECEMBER 31, 1998 VERSUS YEAR ENDED DECEMBER 31, 1997 REVENUES. Total revenues for the year ended December 31, 1998 were $2,124,200, an increase of 10.3% over the same period in 1997. The most important contributing factor was a 10.4% increase in software-related revenues to $1,971,000 in 1998 as compared to $1,785,000 in 1997. GraphOn's software revenues have been derived primarily from two sources: GO-Global product sales and OEM royalty payments for GO-Joe, GO-Global and GraphOn's server software. Revenues from the Sun Microsystems OEM agreement represented 70.0% of total revenue in 1997 and from OEM agreements with Sun Microsystems, IBM and Corel, collectively, represented 67.0% of revenues in 1998. Revenues also include service fees from maintenance contracts and training services. The maintenance program was started in June 1997 to provide product updates and support from the time of purchase. It is expected that many of the maintenance programs will be renewed by customers to assure continued product updates and support. Service revenue was $116,000 in 1998, or 5.5% of revenue, as compared to a nominal amount of revenue in 1997. COST OF GOODS SOLD. Cost of goods sold consists primarily of royalties, materials (manuals, media, packaging), expenses associated with product maintenance and enhancements (software corrections and updates), and amortization of capitalized researched and development expenses. Research and development costs for new product development, after technological feasibility is established, are treated as "capitalized software" on GraphOn's balance sheet and subsequently expensed as cost of goods sold over the shorter of three years or the remaining estimated life of the products, whichever produces the higher expense for the period. Cost of goods sold was reduced to 16.2% of revenue in 1998, as compared to 24.1% in 1997. This primarily is attributed to the reduction in the royalty rate paid to outside software developers under GraphOn's exclusive licensing agreements. SALES AND MARKETING EXPENSES. Sales and marketing expenses primarily consist of salaries, sales commissions, travel expenses, trade show related activities and promotional costs. Sales and marketing expenses increased 74.1% to $1,440,300, or 67.8% of revenue, in 1998 from $827,300, or 43.0% of revenue, in 1997. This increase primarily is attributable to the addition of sales and marketing personnel and a substantial increase in trade show, promotional and public relations activities. GraphOn expects that sales and marketing expenses will continue to increase in dollar amounts, but decline as a percentage of total revenues, as it continues to hire additional sales and marketing personnel, establish reseller channels and expand promotional activities. 29 GENERAL AND ADMINISTRATIVE. General and administrative expenses primarily consist of salaries and legal and professional services. In addition, GraphOn's rent, utilities and administrative employee benefits are included in general and administrative expenses. General and administrative expenses increased 272.3% to $1,208,900, or 56.9% of revenue, in 1998, from $324,700, or 16.9% of revenue, in 1997. This increase primarily is attributed to legal services, hiring additional administrative personnel and increased rent, utilities and benefit expenses necessary to support expanding operations. RESEARCH AND DEVELOPMENT. Research and development expenses consist primarily of salaries and benefits to software engineers, supplies and payments to contract programmers. Research and development expenses increased by 341.1% to $840,200, or 39.6% of revenue, in 1998, from $190,500, or 9.9% of revenue, in 1997. GraphOn believes that a significant level of investment for research and development is required to remain competitive and that such expenses are expected to continue to increase over the foreseeable future. PROVISION FOR INCOME TAXES. At December 31, 1998, GraphOn had approximately $2.8 million in federal net operating loss carryforwards. The federal net operating loss carryforwards will expire through 2018, if not utilized. In addition, the Tax Reform Act of 1986 contains certain provisions that may limit the net operating loss carryforwards available for use in any given period upon the occurrence of certain events, including a significant change in ownership interests. In 1998, GraphOn experienced a "change of ownership" as defined by the provisions of the Tax Reform Act of 1986. As such, GraphOn's utilization of its net operating loss carryforwards will be limited to approximately $400,000 per year until such carryforwards are fully utilized. To date, GraphOn has utilized a portion of its net operating loss carryforwards to reduce its overall income tax liability. YEAR ENDED DECEMBER 31, 1997 VERSUS YEAR ENDED DECEMBER 31, 1996 Before October 1996, while GraphOn was developing its server-based software products, GraphOn's revenue was derived principally from the sale and repair of hardware computer terminals. GraphOn discontinued selling hardware products in 1996 and now provides only return-to-factory repair for the installed customer base. Software licensing revenue in 1996 was $72,900, representing only 12.3% of revenue as compared to 92.7% in 1997. Accordingly, the comparison of the year ended December 31, 1997 to the year ended December 31, 1996 is considered not meaningful by management. REVENUES. Total revenues for the year ended December 31, 1997 were $1,926,100, an increase of 223.8% over the same period in 1996. GraphOn believes the most important contributing factor was a $1,712,000 increase in software-related revenues to $1,785,000 in 1997 versus $72,900 in 1996 due to GraphOn's change from selling hardware products in 1996 to software products in 1997. COST OF GOODS SOLD. Cost of goods sold was reduced to 24.1% of revenue in 1997, versus 50.4% in 1996. This reduction primarily is attributable to GraphOn's change in products from hardware to software as discussed above. SALES AND MARKETING EXPENSES. Sales and marketing expenses increased 329.3% to $827,300, or 43.0% of revenue, in 1997 from $192,700, or 32.4% of revenue, in 1996. This increase primarily is attributable to the addition of sales and marketing personnel and a substantial increase in trade show, promotional and public relations activities. GENERAL AND ADMINISTRATIVE. General and administrative expenses increased by 48.4% to $324,700, or 16.9% of revenue, in 1997 from $218,900, or 36.8% of revenue, in 1996. This increase primarily is attributed to hiring additional administrative personnel, legal services and benefit expenses necessary to support expanding operations. 30 RESEARCH AND DEVELOPMENT. Research and development expenses increased by 356.8% to $190,500, or 9.9% of revenue, in 1997 from $41,700, or 7.0% of revenue, in 1996 due to the change in GraphOn's products as discussed above. LIQUIDITY AND CAPITAL RESOURCES Prior to 1998, GraphOn funded its operations, working capital needs and capital expenditures primarily through cash flow from operations. In 1998, GraphOn received $775,000 from the issuance of notes convertible into shares of GraphOn common stock and, in October and December of 1998, received aggregate net proceeds of $2,697,400 in connection with the first and second closings of a private placement offering. On December 31, 1998, a $200,000 note converted into 200,000 shares of GraphOn common stock and a note in the amount of $100,000 was repaid by GraphOn. As of December 31, 1998, GraphOn had cash and cash equivalents of $1,798,400 as compared to total liabilities of $614,600, exclusive of deferred revenue of $112,600 and, $475,000 convertible note payable. In January 1999, such convertible note was repaid from the net proceeds of the final closing of GraphOn's private placement of securities whereby GraphOn received additional net proceeds of $1,708,600. GraphOn anticipates that cash balances as of December 31, 1998, coupled with the cash infusion from the above sale of common stock in connection with the final closing of the private placement, as well as anticipated revenue from operations, but exclusive of at least $5,400,000 to be available to GraphOn upon consummation of the merger, assuming no conversion of Unity common stock into cash, will be sufficient to meet GraphOn's working capital and capital expenditure needs through December 31, 1999. YEAR 2000 GraphOn is aware of problems associated with computer systems as the year 2000 approaches. Many existing computer systems and applications and other control devices use only two digits to identify a year in the date field, without considering the impact of the upcoming change in the century. Others do not correctly process "leap year" dates. As a result, such systems and applications could fail or create erroneous results unless corrected so that they can correctly process data related to the year 2000 and beyond. These problems are expected to increase in frequency and severity as the year 2000 approaches, and are commonly referred to as the "year 2000 problem." GraphOn is continuing to assess the impact that the year 2000 problem may have on its operations and has identified the following three key areas of its business that may be affected: - PRODUCTS. GraphOn has evaluated each of its most current products and older versions and believes that each is substantially year 2000 compliant. However, GraphOn believes that it is not possible to determine whether all of its customers' products into which the GraphOn products are incorporated or connected will be year 2000 complaint because GraphOn has little or no control over the design, production and testing of its customers' products. - INTERNAL INFRASTRUCTURE. The year 2000 problem could affect the systems, transaction processing computer applications and devices used by GraphOn to operate and monitor all major aspects of its business, including financial systems (such as general ledger, accounts payable and payroll), customer services, infrastructure, materials requirement planning, master production scheduling, networks and telecommunications systems. GraphOn believes that it has identified substantially all of the major systems, software applications and related equipment used in connection with its internal operations that must be modified or upgraded in order to minimize the possibility of a material disruption to its business. GraphOn has modified and upgraded all affected systems. Because most of the software applications used by GraphOn are recent versions of vendor supported, commercially available products, GraphOn has not incurred, and does not expect in the future to incur, significant costs to upgrade these applications as year 2000 complaint versions are released by the respective vendors. 31 - FACILITY SYSTEMS. Systems such as heating, sprinklers, test equipment and security systems at GraphOn's facilities also may be affected by the year 2000 problem. GraphOn currently is assessing the potential effect of and costs of remediating the year 2000 problem on its facility systems. GraphOn estimates that the total cost to the company of completing any required modifications, upgrades or replacements of these systems will not have a material adverse effect on GraphOn's business or results of operations. GraphOn presently estimates that the total cost of addressing its year 2000 issues will be less than approximately $10,000. This estimate was derived utilizing numerous assumptions, including the assumption that GraphOn already has identified its most significant year 2000 issues. However, there can be no guarantee that these assumptions are accurate, and actual results could differ materially from those anticipated. GraphOn currently is developing contingency plans to address the year 2000 issues that may pose a significant risk to its on-going operations. Such plans could include accelerated replacement of affected equipment or software, temporary use of back-up equipment or software or the implementation of manual procedures to compensate for system deficiencies. However, there can be no assurance that any contingency plans implemented by GraphOn would be adequate to meet GraphOn's needs without materially impacting its operations, that any such plan would be successful or that the company's results of operations would not be materially and adversely affected by the delays and inefficiencies inherent in conducting operations in an alternative manner. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK OF GRAPHON GraphOn is not exposed to financial market risks from changes in foreign currency exchange rates or changes in interest rates and does not use derivative financial instruments. A substantial majority of GraphOn's revenue and capital spending is transacted in U.S. dollars. However, in the future, GraphOn may enter into transactions in other currencies. An adverse change in exchange rates would result in a decline in income before taxes, assuming that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, such changes typically affect the volume of sales or foreign currency sales price as competitors' products become more or less attractive. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS In February 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard No. 132, "EMPLOYER'S DISCLOSURE ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS," which standardizes the disclosure requirements for pension and other post-retirement benefits. The adoption of SFAS No. 132 is not expected to impact GraphOn's current disclosures. RECENTLY ISSUED ACCOUNTING STANDARDS AND PRONOUNCEMENTS NOT YET ADOPTED In March 1998, the American Institute of Certified Public Accountants ("AICPA") issued Statement of Position 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP 98-1"). Under the provisions of SOP 98-1, software development is divided into three phases: the preliminary project state, which includes conceptual formulation and selection of alternatives; the application development stage, which includes design of chosen path, coding, installation of hardware and testing; and the post-implementation/operation stage, which includes training and application maintenance. Generally, only internal and external costs incurred during the second phase, the application development stage, are capitalizable, with the exception of data conversion and training costs, which are to be expensed when incurred during this phase. SOP 98-1 is not effective for GraphOn's 1998 financial statements. Management does not expect this standard to have a significant impact on GraphOn's financial statements. 32 In April 1998, the AICPA issued statement of Position 98-5, "Reporting on the Costs of Start-up Activities" ("SOP 98-5"). SOP 98-5 requires the cost of start-up activities, including organizational costs, be expensed as incurred and is not effective for GraphOn's fiscal 1998 financial statements. Management does not expect this standard to have a significant impact on GraphOn's financial statements. In June 1998, FASB issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS No. 133"). SFAS No. 133 requires that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded on the balance sheet as either an asset or liability measured at its fair value. The Statement is effective for all fiscal years beginning after June 15, 1999. As GraphOn currently is not a party to any derivative financial instruments and does not anticipate becoming a party to any derivative instruments, management does not expect this standard to have a significant impact on the GraphOn financial statements. 33 SELECTED HISTORICAL FINANCIAL DATA OF UNITY The following selected historical financial data should be read in conjunction with the historical financial statements of Unity and the notes thereto appearing elsewhere in this joint proxy statement/ prospectus. The selected financial data of Unity as of July 31, 1998 and 1997, for the years ended July 31, 1998 and 1997 and for the period from inception (May 30, 1996) to July 31, 1998 have been derived from the financial statements of Unity, which have been audited by Arthur Andersen LLP, independent public accountants. The data as of and for the six months ended January 31, 1999 and 1998 and for the period from inception (May 30, 1996) to January 31, 1999 have been derived from Unity's unaudited condensed financial statements included elsewhere in this joint proxy statement/prospectus and which, in the opinion of management, include all adjustments (consisting of only normal recurring adjustments) necessary for a fair presentation of the information set forth therein. The results of operations for the six months ended January 31, 1999 are not necessarily indicative of the results that may be expected for the full year. UNITY STATEMENTS OF OPERATIONS DATA:
PERIOD FROM MAY SIX MONTHS ENDED YEAR ENDED 30, 1996 JANUARY 31, JULY 31, (INCEPTION) (1) ---------------------- ---------------------- TO 1999 1998 1998 1997(1) JULY 31, 1996 ---------- ---------- ---------- ---------- ---------------- Revenues.................................... $ -- $ -- $ -- $ -- $ -- Net (loss) income........................... (239,035) 30,526 (315,991) 6,637 (15,000) (Loss) income per common share (basic and diluted).................................. (.13) .02 (.17) -- (.02) ---------- ---------- ---------- ---------- -------- Weighted average common shares.............. 1,875,000 1,875,000 1,875,000 1,515,000 625,000
BALANCE SHEET DATA:
JANUARY 31, JULY 31, JULY 31, 1999 1998 1997 --------------- ------------ ------------ Total Assets........................................................ $ 6,605,885 $6,489,903 $6,465,021 Total Liabilities................................................... 767,099 412,082 71,209 Stockholders' Equity(2)............................................. 4,518,461 4,780,520 5,154,432
- ------------------------ (1) Unity was inactive during the period May 30, 1996 (inception) through November 19, 1996. (2) Does not include shares subject to possible conversion at conversion value. 34 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF UNITY Unity was incorporated in May 1996 for the purpose of raising money to fund a vehicle to effect a merger or similar business combination with an operating business. On November 12, 1996, Unity's registration statement under the Securities Act covering 1,250,000 units, each unit consisting of one share of Unity common stock, one Class A redeemable warrant and one Class B redeemable warrant at an initial public offering price of $6.00 per unit, was declared effective by the SEC. Unity derived $6,402,112 from the IPO, prior to underwriting commissions of $600,000 and other expenses of $497,888. For the six months ended January 31, 1999, for the years ended July 31, 1998 and 1997, and for the period from the date of inception (May 30, 1996) to July 31, 1996, Unity had net income (loss) of $(239,035), $(315,000), $6,637 and $(15,000), respectively. These results of operations were attributable to interest and dividend income offset by general and administrative expenses, primarily consisting of management and professional fees of $151,282, $346,390, $127,775 and $15,000, respectively, and taxes. Unity was inactive during the period May 30, 1996 (date of inception) through November 19, 1996. On January 31, 1999, Unity had cash and cash equivalents and short-term investments, inclusive of restricted cash and investments of $6,604,929, totaling $6,605,885 and total liabilities of $767,099. See "The Merger" for information as to the merger agreement, the parties to the merger agreement and the merger which it contemplates. 35 GRAPHON AND UNITY PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) INTRODUCTION TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) The accompanying unaudited pro forma balance sheet presents the financial position of GraphOn and Unity as of December 31, 1998 and January 31, 1999, respectively, assuming the Merger had been completed as of the respective balance sheet dates. The unaudited pro forma statement of operations for the years ended December 31, 1998 and January 31, 1999 for GraphOn and Unity, respectively, reflect the Merger, as if the Merger had occurred on the first day of the fiscal years presented, taking into effect certain events that occurred subsequent to the periods presented. Separate pro forma financial statements have been presented for the following circumstances: (1) that no Public Unity Shareholders exercise their right to have their shares converted upon the consummation of the Merger, and (2) that 19.99% of interest in Unity Common Stock held by Public Unity Shareholders elect to have their shares converted upon the consummation of the Merger at the conversion value of $5.28 per share, based on the amount held in the Unity trust account, inclusive of interest income to date thereon, at January 31, 1999. The basis of presentation described in (2) results from the possibility that up to a maximum of 19.99% of interest in Unity Common Stock held by Public Unity Shareholders may vote no to the proposed transaction and, if the transaction is consummated, would have their shares redeemed at the conversion value of approximately $5.28 per share, or a total of $1,320,325 as of January 31, 1999. Should 20% or more vote against the proposed transaction, the transaction would not be consummated. In the proposed Merger, each outstanding share of GraphOn Common Stock will be exchanged for Unity Common Stock, at an exchange ratio of approximately 0.5576 of a share of Unity Common Stock to one share of GraphOn Common Stock. As a result of the Merger, the GraphOn Shareholders will collectively acquire approximately 9,124,543 shares of Unity Common Stock or approximately 83.0% of the then outstanding Unity Common Stock. The Merger will be accounted for as a capital transaction which is equivalent to the issuance of stock by GraphOn for Unity's net monetary assets of approximately $6,000,000, accompanied by a recapitalization of GraphOn. The pro forma financial information does not purport to be indicative of the results which would have actually been obtained had such transactions been completed as of the assumed dates and for the periods presented or which may be obtained in the future. 36 GRAPHON AND UNITY PRO FORMA BALANCE SHEET--ASSETS AS OF DECEMBER 31, 1998 (GRAPHON) AND JANUARY 31, 1999 (UNITY) (UNAUDITED)
ADDITIONAL PRO FORMA PRO FORMA ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED (WITH NO STOCK (WITH NO (WITH 19.99% (WITH 19.99% GRAPHON UNITY CONVERSION) STOCK CONVERSION) STOCK CONVERSION) STOCK CONVERSION) ---------- --------- -------------- ----------------- ----------------- ----------------- CURRENT ASSETS: Cash and cash equivalents.......... $1,798,400 $ 956 $6,000,000(b) $ 8,457,956 $(1,320,325)(g) $ 7,269,664 (575,000)(d) 132,033(j) 1,233,600(e) Restricted cash and investments.......... -- 6,604,929 (6,604,929)(b) -- -- Accounts receivable.... 564,700 -- 564,700 564,700 Other current assets... 32,100 -- 32,100 32,100 ---------- --------- ----------------- ----------------- Total current assets... 2,395,200 6,605,885 9,054,756 7,866,464 ---------- --------- ----------------- ----------------- PROPERTY AND EQUIPMENT, NET.................. 423,300 -- 423,300 423,300 PURCHASED TECHNOLOGY... 3,645,400 -- 3,645,400 3,645,400 OTHER ASSETS........... 80,600 -- 80,600 80,600 ---------- --------- ----------------- ----------------- $6,544,500 $6,605,885 $13,204,056 $12,015,764 ---------- --------- ----------------- ----------------- ---------- --------- ----------------- ----------------- CURRENT LIABILITIES: Trade accounts payable.............. $ 115,700 $ -- $ 115,700 $ 115,700 Accrued expenses....... 498,900 690,817 1,189,717 1,189,717 Deferred revenue....... 112,600 -- 112,600 112,600 Advances from affiliates........... -- 76,282 76,282 76,282 Convertible notes payable.............. 475,000 -- (475,000)(e) -- -- ---------- --------- ----------------- ----------------- Total current liabilities.......... 1,202,200 767,099 1,494,299 1,494,299 ---------- --------- ----------------- ----------------- COMMITMENTS AND CONTINGENCIES Common stock, $.0001 par value, 249,875 shares subject to possible conversion, at conversion value................ -- 1,320,325 (1,320,325)(c) -- -- STOCKHOLDERS' EQUITY: Common stock........... 7,480,800 163 (7,479,998) (a) 1,100 (25)(g) 1,075 25 110(e) Additional paid-in capital.............. -- 5,081,687 6,916,609 13,847,157 (1,320,300)(g) 12,658,890 (604,929)(b) 132,033(j) 1,320,300(c) (575,000)(d) 1,708,490(e) Accumulated deficit.... (2,138,500) (563,389) 563,389(a) (2,138,500) (2,138,500) ---------- --------- ----------------- ----------------- Total stockholders' equity............... 5,342,300 4,518,461 11,709,757 10,521,465 ---------- --------- ----------------- ----------------- $6,544,500 $6,605,885 $13,204,056 $12,015,764 ---------- --------- ----------------- ----------------- ---------- --------- ----------------- -----------------
37 GRAPHON AND UNITY PRO FORMA STATEMENT OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 1998 (GRAPHON) AND JANUARY 31, 1999 (UNITY) (UNAUDITED)
ADDITIONAL PRO FORMA PRO FORMA ADJUSTMENTS COMBINED ADJUSTMENTS COMBINED (WITH NO STOCK (WITH NO (WITH 19.99% (WITH 19.99% GRAPHON UNITY CONVERSION) STOCK CONVERSION) STOCK CONVERSION) STOCK CONVERSION) ---------- --------- -------------- ----------------- ----------------- ----------------- REVENUES.............. $2,124,200 $ -- $ 2,124,200 $ 2,124,200 COST OF GOODS SOLD.... 344,200 -- 344,200 344,200 ---------- --------- ----------------- ----------------- Gross margin.......... 1,780,000 -- 1,780,000 1,780,000 COSTS AND EXPENSES: Selling and marketing........... 1,440,300 -- 1,440,300 1,440,300 General and administrative...... 1,208,900 460,839 1,669,739 1,669,739 Research and development......... 840,200 -- 840,200 840,200 ---------- --------- ----------------- ----------------- Total costs and expenses............ 3,489,400 460,839 3,950,239 3,950,239 ---------- --------- ----------------- ----------------- Operating loss........ (1,709,400) (460,839) (2,170,239) (2,170,239) ---------- --------- ----------------- ----------------- OTHER INCOME/ (EXPENSE): Interest income and other............... 9,800 192,522 202,322 (39,633)(h) 162,689 Interest expense...... (46,900) -- (46,900) (46,900) Other expense......... (16,500) -- (16,500) (16,500) ---------- --------- ----------------- ----------------- Total other income (expense)........... (53,600) 192,522 138,922 99,289 ---------- --------- ----------------- ----------------- Loss before taxes..... (1,763,000) (268,317) (2,031,317) (2,070,950) Income tax expense (benefit)........... 800 (5,393) (4,593) (4,593) ---------- --------- ----------------- ----------------- Net loss.............. $(1,763,800) $(262,924) $(2,026,724) $(2,066,357) ---------- --------- ----------------- ----------------- ---------- --------- ----------------- ----------------- NET LOSS PER SHARE (BASIC AND DILUTED)............ $ (0.14) $ (0.18) $ (0.19) --------- ----------------- ----------------- --------- ----------------- ----------------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING......... 1,875,000 10,999,543(f) 10,749,668(i) --------- ----------------- ----------------- --------- ----------------- -----------------
38 NOTES TO PRO FORMA FINANCIAL STATEMENTS (UNAUDITED) 1) BASIS OF PRESENTATION The pro forma balance sheet combines the balance sheets of GraphOn and Unity as of December 31, 1998 and January 31,1999, respectively, assuming that the Merger had been completed as of the respective balance sheet dates. The pro forma statements of operations combine the statement of operations of GraphOn for the year ended December 31, 1998 with the statement of operations of Unity for the year ended January 31, 1999, assuming that the Merger occurred at the beginning of the periods presented, taking into effect certain events that occurred subsequent to the periods presented. Separate pro forma financial statements have been presented for the following circumstances: (1) that no Public Unity Shareholders exercise their right to have their shares converted upon the consummation of the Merger, and (2) that 19.99% of interest in Unity Common Stock held by Public Unity Shareholders elect to have their shares converted upon the consummation of the Merger at the conversion value of $5.28 per share, based on the amount held in the Unity trust account, inclusive of interest income to date thereon, at January 31, 1999. No pro forma adjustments have been provided for (1) any additional payments that may be required to be paid to GraphOn creditors resulting from GraphOn's 1991 bankruptcy proceedings discussed previously herein, or (2) 1,607,000 GraphOn shares issuable for no additional consideration on June 30, 2000 if GraphOn at that date has not completed an inital public offereing or a merger or sale of all of its assets as the transcation with Unity is deemed to be one of the qualifying events identified. The historical balance sheets used in the preparation of the pro forma financial statements have been derived from GraphOn's and Unity's audited and unaudited financial statements, respectively, as of December 31, 1998 and January 31, 1999, respectively. The historical statements of operations for the year ended December 31, 1998 (GraphOn) and the year ended January 31, 1999 (Unity) have been derived from the audited and unaudited statements of operations, respectively. 2) UNAUDITED PRO FORMA ADJUSTMENTS A description of the adjustments included in the unaudited pro forma financial statements are as follows: (a) Reflects the recapitalization of GraphOn through the elimination of Unity's accumulated deficit and adjustment of equity accounts upon the exchange of GraphOn Common Stock into 9,124,543 shares of Unity Common Stock. (b) Reflects the release of Unity's restricted cash as a result of the Merger and the contribution of $6,000,000 to the operations of the ongoing entity, as provided in the merger agreement. The balance of restricted funds released are charged to additional paid in capital as estimated costs of the transaction. (c) Reflects the reclassification of the conversion value of the Unity Common Stock to Shareholder's Equity assuming no stock conversion. (d) Reflects the payment of up to $575,000 to Spencer Trask in consideration of consulting services performed in connection with the Merger. (e) Reflects the (i) issuance of and net proceeds from the sale and issuance of 1,963,868 shares of GraphOn's common stock in a private placement and (ii) retirement of the $475,000 convertible note payable from such proceeds, both of which occurred in January 1999. (f) Reflects the weighted average shares outstanding for Unity of 1,875,000 for the year ended January 31, 1999, plus 9,124,543 shares to be issued upon consummation of the Merger. 39 2) UNAUDITED PRO FORMA ADJUSTMENTS (CONTINUED) (g) Reflects the conversion of 19.99% of interest in Unity Common Stock held by Public Unity Stockholders, or 249,875 shares, at the conversion value of $5.28 per share. The number of shares assumed converted is based on the total Unity shares outstanding prior to the Merger of 1,875,000, less 625,000 Unity shares held by Non-Public Unity Stockholders, and represents the maximum number of shares that may be elected to be converted without precluding the consummation of the Merger. (h) Reflects a reduction of Unity's interest income assuming the proceeds of the Merger were used to convert 249,875 Unity shares as described in (g). The estimate of reduction in interest income is based on the combined entity having $1,320,325 less in proceeds, assuming an average rate of return consistent with that earned by Unity of approximately 3.0% for the year ended January 31, 1999. (i) Reflects the weighted average shares outstanding for Unity of 1,875,000 for the year ended January 31, 1999, less the 249,875 Unity shares assumed converted as described in (g), plus 9,124,543 shares to be issued upon consummation of the Merger. (j) Reflects the reduction in the consulting fee payment to Spencer Trask resulting from the conversion of 249,875 Unity shares as described in (g). 40 BUSINESS OF GRAPHON GRAPHON GraphOn develops, markets, sells and supports server-based software for the enterprise computing environment. "Server-based computing," sometimes referred to as thin-client computing, is a computing model where traditional desktop software applications are relocated to run entirely on a server or host computer. GraphOn's technology uses a small software program at each desktop, which allows the user to interface with an application as if it where running on the user's desktop computer. This centralized deployment and management of applications reduces the complexity and total costs associated with enterprise computing. In addition, by accessing such applications over the Internet, new operational models and sales channels are emerging. GraphOn provides the technology to access applications over the Internet. GraphOn's server-based technology works on today's most powerful personal computer or low-end network computer, without application rewrites or changes to the corporate computing infrastructure. GraphOn has established strategic alliances with technology leaders such as IBM, Sun Microsystems and Corel, who have licensed GraphOn's technology. Using GraphOn technology, Sun Microsystems and IBM provide their network computers access to UNIX applications. Corel plans to use GraphOn's technology to provide Internet access to its applications, such as WordPerfect, over the Internet. INDUSTRY BACKGROUND HISTORY In the 1970's, software applications were executed on central mainframes and typically accessed by low-cost display terminals. Information technology departments were responsible for deploying, managing and supporting the applications to create a reliable environment for users. In the 1980's, the PC became the desktop of choice, empowering the user with flexibility, a graphical user interface, and a multitude of productive and inexpensive applications. In the 1990's, the desktop was provided access to mainframe applications and databases, which run on large server computers. Throughout this computing evolution, the modern desktop has become increasingly complex and costly to administer and maintain. This is further exacerbated as organizations become more dispersed with remote employees, and the desire increases to become more closely connected with vendors and customers through the Internet. LOWERING TOTAL COST OF OWNERSHIP PC software in general has grown dramatically in size and complexity in recent years. As a result, the cost of supporting and maintaining PC desktops has increased substantially. A leading research firm estimates the annual cost of operating a corporate PC was as much as $9,382 in 1997 and will increase to as much as $13,485 by 2001. Industry analysts and enterprise users alike have begun to recognize that the total cost of ownership of a PC, taking into account the recurring cost of technical support, administration and end-user down time, has become high both in absolute terms and relative to the initial hardware purchase price. With increasing demands to better control corporate computing costs, industry leaders are developing technology to address total cost of ownership issues. One approach, led by Sun Microsystems and IBM, utilizes Java-based network computers, which operate by downloading small Java programs to the desktop, which in turn are used for accessing server-based applications. The other approach is Microsoft's Windows NT-TM-, terminal server edition, introduced in June 1998, which permits server-based Windows applications to be accessed from the new Windows-based network computers. Both initiatives are examples of server-based computing, which simplifies the desktop by moving the responsibility of running applications to a central server, with the promise of lowering total cost of ownership. 41 CROSS-PLATFORM COMPUTING Today's enterprises contain a diverse collection of desktop computers, each with its particular operating system, processing power and connection type. Consequently, it is becoming increasingly difficult to provide universal desktop access to business-critical applications across the enterprise. As a result, organizations resort to desktop emulation software, new hardware or costly application rewrites. A common cross-platform problem is the need to access UNIX or Linux applications from a PC desktop. While UNIX-based computers dominate the enterprise applications market, Microsoft Windows-based PCs are used on the majority of enterprise desktops. Since the early 1990's, organizations have been striving to connect desktop PCs to UNIX applications over all types of connections, including networks and standard phone lines. This effort, however, is complex and costly. The primary solution to date is known as PC X Server software, large software programs that require substantial memory and processing resources on the desktop. Typically, PC X Server software is difficult to install, configure and maintain. Enterprises are looking for an effective UNIX connectivity software for PCs and non-PC desktops that is easier and less expensive to administer and maintain. APPLICATION SERVICE PROVIDERS With the ubiquitous nature of the Internet, new operational models and sales channels are emerging. Traditional high-end software packages that were once too expensive for many companies are now available for rent over the Internet. By servicing customers through a centralized operation rather than installing and maintaining applications at each customer site, GraphOn expects that application service providers quickly will play an important role in addressing an enterprise's computing requirements. Today, application service providers are faced with the difficult task of creating or rewriting applications to entertain the broader market. Though the application service provider industry is just beginning to emerge, GraphOn expects it to develop rapidly, due to application vendors' desire to expand their markets. REMOTE COMPUTING The cost and complexity of contemporary enterprise computing has been further complicated by the growth in remote access requirements. As business activities become physically distributed, computer users have looked to portable computers with remote access capabilities to stay connected in a highly dispersed work environment. One problem facing remote computing over the Internet or direct telephone connections is the slow speed of communication in contrast to the high speed of internal corporate networks. Today, applications requiring remote access must be tailored to the limited speed and lower reliability of remote connections, further complicating the already significant challenge of connecting desktop users to business-critical applications. THE GRAPHON APPROACH GraphOn's server-based software deploys, manages, supports and executes applications entirely on the server computer and distributes them efficiently and instantaneously to virtually any desktop device. GraphOn's technology consists of three key components: - The server component runs alongside the server-based application and is responsible for intercepting user-specific information for display at the desktop. - The desktop component is responsible only for sending keystrokes and mouse motion to the server, as well as presenting the application interface to the desktop user. This keeps the desktop simple, or thin, as well as independent of application requirements for resources, processing power and operating systems. 42 - GraphOn's protocol enables efficient communication over fast networks or slow dial-up connections and allows applications to be accessed from virtually any location with network-like performance and responsiveness. The major benefits of the GraphOn approach are as follows: - LOWERS TOTAL COST OF OWNERSHIP. Shrinking recurring costs is a primary goal of GraphOn's products. Today, installing enterprise applications typically is time-consuming, complex and expensive, requiring administrators to manually install and support diverse desktop configurations and interactions. GraphOn's server-based software simplifies application management by enabling deployment, administration and support from a central location. Installation and updates are made only at the server, avoiding desktop software and operating system conflicts and minimizing at-the-desk support. According to a leading research firm, server-based computing strategies, such as those offered by GraphOn, may achieve as much as a 30% savings by, among other things, simplifying the desktop and moving application processing and management from individual desktops to a centralized server-based infrastructure. For example, in a 2,500-PC computing environment, a leading research firm has calculated that a server-based approach would have saved approximately $4.5 million in 1997 and, as computing complexity continues to grow, could save approximately $16 million in 2001. - CONNECTS DIVERSE COMPUTING PLATFORMS. Today's computing infrastructures are a mix of desktop devices, network connections and operating systems. Enterprise-wide communication often requires costly and complex emulation software or application rewrites. For example, Windows PCs typically may not access a company's UNIX applications without installing complex PC X Server software on each PC. Typical PC X Servers are large and require an information technology professional to properly install and configure each desktop. For Macintosh, the choices are even fewer, requiring the addition of yet another vendor product. For the newer desktop technologies, such as Sun Microsystems' and IBM's network computers, access to UNIX is impractical without server-based products. To rewrite an application for each different desktop and their many diverse operating systems is often a difficult and time-consuming task. In addition to the development expense, issues of desktop performance, data compatibility and support costs often make this option prohibitive. GraphOn's products provide organizations the ability to access applications from virtually all desktops, utilizing their existing computing infrastructure, without rewriting a single line of code or changing or reconfiguring desktop hardware. This means that enterprises can maximize their investment in existing technology and allow users to work in their preferred desktop environment. - APPLICATION SERVICE PROVIDERS. Many large enterprises have made significant investments in developing, marketing and selling enterprise-wide software solutions. GraphOn's server-based technology is designed to allow Windows, Linux and UNIX access from any desktop connected to the Internet. Today's packaged applications can be accessed quickly, easily and without modification. - LEVERAGES EXISTING PCS AND DEPLOYS NEW DESKTOP HARDWARE. GraphOn's software brings the benefits of server-based computing to users of existing PC hardware, while simultaneously enabling enterprises to begin to take advantage of and deploy less complex network computers. This assists organizations in maximizing their current investment in hardware and software while, at the same time, facilitating a manageable and cost effective transition to newer desktop devices. - EFFICIENT PROTOCOL. Applications typically are designed for network-connected desktops, which can put tremendous strain on congested networks and may yield poor, sometimes unacceptable, performance over remote connections. For application service providers, bandwidth typically is the top recurring expense when web-enabling or renting access to applications over the Internet. GraphOn's highly efficient protocol sends only keystrokes, mouse clicks and display updates over the network resulting in minimal impact on bandwidth for application deployment, thus lowering cost on a per user basis. Within the enterprise, GraphOn's protocol can extend the reach of 43 business-critical applications to all areas, including branch offices, telecommuters and remote users, over the Internet, phone lines or wireless connections. This concept may be extended further to include vendors and customers for increased manufacturing flexibility, time-to-market and customer satisfaction. PRODUCTS GraphOn's products are designed to allow enterprises to access Windows, UNIX and Linux applications from centrally managed servers without modification. Currently, GraphOn's products provide the UNIX and Linux server-based software. With the integration of the jBridge technology in late 1999, the current product line will be extended to access Windows applications from centrally managed servers, widening GraphOn's product offering and opportunities. - GO-Global is a server-based software product for high performance access to UNIX and Linux applications from any Windows PC located virtually anywhere on an organization's network, the Internet or even over a phone line. GraphOn began selling GO-Global in March 1997. - GO-Joe is a server-based software product for accessing Unix and Linux applications, from virtually any Java-enabled desktop or device, including the Sun Microsystems and IBM network computers, desktops and hand-held devices with web browsers such as Microsoft Internet Explorer-TM- or Netscape Navigator-TM-. GraphOn began selling GO-Joe in July 1998. Sun Microsystems began shipping GO-Joe for distribution with its network computers in July 1998, and IBM is expected to start shipping GO-Joe with its network computers in the second quarter of 1999. - GO-Between is a server-based software product for accessing UNIX and Linux applications from Microsoft's Windows NT, terminal server edition. GO-Between minimizes the impact on server resources over traditional emulator solutions for accessing UNIX and Linux applications from Microsoft's terminal server edition products. This increases the number of simultaneous users that may access UNIX from any one terminal server edition server. Microsoft has released a technical whitepaper describing the UNIX access benefits of GO-Between for terminal server edition users. GraphOn began shipping GO-Between in October 1998. - jBridge is a technology GraphOn acquired from Corel in December 1998. It will enable GO-Global, GO-Between and GO-Joe to access server-based Windows applications. With the anticipated integration of the jBridge technology in late 1999, GraphOn will offer complete cross platform access to Windows applications from virtually any desktop. Since the applications are not running on the desktop, even a non-Windows desktop will be able to access Windows applications. Windows applications can be accessed from desktop computers using various operating systems such as Macintosh, UNIX, Linux and OS/2, which will appear and function as if they were running locally on the desktop. TARGET MARKETS The market for GraphOn's products comprises all organizations that need to access Windows, UNIX and/or Linux applications from a wide variety of desktops from any location, including over the Internet and dial-up lines. This includes large organizations, such as Fortune 1000 companies, government and educational institutions. GraphOn software is designed to allow these enterprises to use the best desktop for a particular purpose, rather than following a "one PC fits all," high total cost of ownership model. GraphOn's opportunity within the marketplace is more specifically broken down as follows: ENTERPRISES EMPLOYING A MIX OF UNIX AND WINDOWS. Most major enterprises employ a mix of UNIX computers and Windows PCs. Companies that utilize a mixed computing environment require cross-platform connectivity solutions like GO-Global that will allow users to access UNIX applications from desktop PCs. It has been estimated that PCs represent over 90% of enterprise desktops. GraphOn believes 44 that its products are well positioned to exploit this opportunity and that its server-based software products will significantly reduce the cost and complexity of connecting PCs to UNIX applications. ENTERPRISES THAT EMPLOY MICROSOFT'S TERMINAL SERVER EDITION. A leading research firm estimates that the Microsoft terminal server market will start to accelerate rapidly, with more than 390,000 host servers installed by the end of 2000. Each terminal server edition server supports a minimum of 10 users, such that the estimated user base for terminal server editions will be at least 3.9 million in 2000. A leading research firm reports that 38% of surveyed terminal server edition users will require access to UNIX applications. GraphOn management believes the terminal server edition market to be a significant opportunity for GO-Between. ENTERPRISES WITH REMOTE COMPUTER USERS. Remote computer users comprise one of the fastest growing market segments in the computing industry. Efficient remote access to applications has become an important part of many enterprise computing strategies. A leading research firm projects that approximately 25 million business users access computing resources remotely in 1998 and that this number will grow to approximately 137 million worldwide in 2003, with 60% of these users still connecting via low-bandwidth modems. GraphOn's protocol is designed to enable highly efficient low-bandwidth connections. APPLICATION SERVICE PROVIDERS. High-end software applications in the fields of human resources, enterprise resource planning, enterprise relationship management and others historically only have been available to organizations able to make large investments in capital and personnel. The Internet has opened up global and mid-tier markets to vendors of this software who may now offer it to a broader market on a rental basis. GraphOn's products enable the vendors to provide Internet access to their applications with minimal additional investment in development implementation. EXTENDED ENTERPRISE SOFTWARE MARKET. Extended enterprises allow access to their computing resources to their customers, suppliers, distributors and other partners, gaining flexibility in manufacturing and increasing speed-to-market and customer satisfaction. For example, extended enterprises may maintain decreased inventory via just-in-time, vendor-managed inventory and related techniques. The Internet has facilitated this development and a leading research firm has predicted the extended enterprise software market will grow to an estimated $5.76 billion in 2002. The early adoption of extended enterprise solutions may be driven in part by enterprises' need to exchange information over a wide variety of computing platforms. GraphOn believes that its server-based software products, along with its low-impact protocol, are well positioned to provide enabling solutions for extended enterprise computing. STRATEGIC RELATIONSHIPS GraphOn believes it is important to maintain its current strategic alliances and intends to seek suitable new alliances in order to improve its technology and/or enhance its ability to penetrate relevant target markets. The alliances that GraphOn currently is focusing on are those that have immediate revenue generating potential, strengthen GraphOn's position in the server-based software market, add complementary capabilities and/or raise awareness of GraphOn's products. SUN MICROSYSTEMS. In October 1996, Sun MicroSystems licensed GraphOn's GO-Joe for distribution within its network computers and GraphOn's server component for distribution with its UNIX computers and operating system. Pursuant to the Sun Microsystems agreement, Sun has a perpetual, non-exclusive, world-wide and fully paid up license to, among other things, distribute and sell GO-Joe with its network computers and to distribute GraphOn's server component with its UNIX computers and operating systems. The license to Sun also allows Sun employees to use GO-Global internally and remotely. In addition to what is provided for in the Sun agreement, Sun's network computers currently display the GO-Joe logo, GraphOn's name and GraphOn's website address each time GO-Joe is started, further increasing company and product awareness. GraphOn plans to work with Sun's sales force and resellers to 45 sell and promote GO-Global and GO-Between as UNIX access solutions for users of PCs and multi-user NT. As of March 26, 1999, Sun paid GraphOn a $2,125,000 one-time royalty payment for completion of product delivery requirements and for a site license for GO-Global. Payments totaling $375,000 currently remain, which are required to be paid to GraphOn upon the completion of certain milestones. The Sun agreement is expected to terminate in December 2000, although Sun will continue to have rights to GraphOn products licensed pursuant to the agreement after its termination. IBM. In April 1998, IBM licensed GO-Joe for $1,500,000 for distribution with certain of its network computers and GraphOn's server component for distribution with its UNIX computers and operating systems. Pursuant to the IBM agreement, IBM and its affiliates have a non-exclusive, world-wide, irrevocable, royalty-free and fully paid up license to, among other things, distribute and sell, and allow sub-licensees to distribute and sell, GO-Joe and GraphOn's server component with IBM products and those of its sub-licensees. GraphOn expects to work with IBM's resellers to persuade IBM's customers to purchase GO-Global and GO-Between to access UNIX applications from their PCs and multi-user NT hosts. IBM currently is promoting GO-Joe, and GraphOn intends to leverage both the IBM relationship and IBM resellers to generate revenues and increase product awareness. The IBM agreement terminates in November 1999. The IBM agreement is renewable at IBM's option with 90 days prior written notice, with pricing terms to be negotiated in good faith. IBM may terminate for convenience at any time on or after August 1, 1999. IBM will continue to have rights to GraphOn products licensed pursuant to the IBM agreement after its termination. COREL CORPORATION. In December 1998, GraphOn acquired Corel's jBridge technology and its jBridge development team, in exchange for certain securities of GraphOn. See "Description of GraphOn's Securities-Corel Warrant and Similar Warrant." jBridge is designed to allow any device running Java to access 32-bit Windows applications remotely and unmodified. When combined with GraphOn's UNIX products, GraphOn believes that jBridge will provide GraphOn customers with a complete enterprise solution, linking any of such platforms to virtually any desktop over virtually any connection. In addition, GraphOn entered into a strategic alliance with Corel. GraphOn intends through this alliance to promote its products to Corel's Windows, UNIX and Linux customers. The alliance has a one year term ending in July 1999 which is renewable by mutual consent for successive one year periods, and is terminable at will by either party. SALES, MARKETING AND SUPPORT GraphOn's customers, to date, are primarily Fortune 1000 companies and large government organizations. Among GraphOn's current customers are the following: Ameritech Corporation Amoco Corporation AT&T Corporation Lucent Technologies, Inc. Canadian Meteorological Centre Motorola, Inc. Cisco Systems, Inc. Nortel Technology Corel Corporation National Semiconductor Corp. Ericsson Telecommunicatie B.V. Pfizer Inc. Hewlett-Packard Company Shell Oil Company IBM Sun Microsystems, Inc. Johnson & Johnson United States Geological Survey
While previously most of GraphOn's revenues were from direct sales and OEM agreements, GraphOn currently is developing and expanding relationships with a select number of resellers. GraphOn expects to benefit from these relationships by availing itself of their established customer-base, co-marketing programs, and marketing and sales capabilities. Such resellers include value-added resellers, system integrators and OEM licensees. GraphOn's sales and marketing efforts will be focused on 46 increasing product awareness and demand among large enterprises and developing formal distribution relationships with UNIX and Windows-oriented resellers. Current marketing activities include a targeted direct mail campaign, tradeshows, production of promotional materials, public relations and maintaining an Internet presence for marketing and sales purposes. In August 1998, GraphOn hired three senior level sales professionals to develop GraphOn's reseller channels. Due to the nature of GraphOn's products, remote access via telephone lines or the Internet can be used to troubleshoot and diagnose problems. GraphOn provides technical support and training to OEMs and resellers that function as the first line of support for their own customers. GraphOn provides 90-day online Internet, e-mail, fax and telephone-based services for technical support and software upgrades at no charge. Additionally, purchasers of GraphOn's products can choose to purchase an annual extended maintenance program, which currently costs 15% of the product purchase price per year. RESEARCH AND DEVELOPMENT GraphOn's research and development efforts currently are focused on developing new products and further enhancing the functionality, performance and reliability of existing products. GraphOn invested $840,200 in research and development in 1998 and expects increased expenditures in 1999. GraphOn has made significant investments in its protocol and in the performance and development of its server-based software. In May 1998, GraphOn hired a group of eight software engineers located in Bellevue, Washington. They have experience in Java, protocol technology and various Microsoft Windows operating systems. They are working to enhance GraphOn's existing software products as well as beginning to conceptualize and architect future products. In December 1998, GraphOn hired nine additional software engineers located in Concord, New Hampshire in connection with the acquisition of the jBridge technology from Corel. This group has substantial Windows and Java experience. GraphOn plans to continue to add software engineers in order to expand its research and development capabilities, although there can be no assurances that qualified personnel will be available to GraphOn as needed. OPERATIONS GraphOn controls all purchasing, inventory, order processing and shipping of GraphOn products and accounting functions related to its operations. Production of software masters, development of documentation, packaging designs, quality control and testing also are performed by GraphOn. CD-ROM and floppy disk duplication, printing of documentation and packaging are accomplished through outside vendors. GraphOn generally ships products upon receipt of order. As a result, GraphOn has relatively little backlog at any given time, and does not consider backlog a significant indicator of future performance. COMPETITION The server-based software market in which GraphOn participates is highly-competitive, although GraphOn believes it has significant advantages over its competitors, both in product performance and market positioning. This market ranges from remote access for a single PC user to server-based software for large numbers of users over many different types of desktop hardware and connections. GraphOn's competitors include manufacturers of conventional PC X Server software and competition is expected from these and other companies in the server-based software market. Competitive factors in the market in which GraphOn competes include price, product quality, functionality, product differentiation and breadth. GraphOn believes its principal competitors for its current products include Hummingbird Communications, Ltd., SCO, WRQ, Network Computing Devices ("NCD") and NetManage. Hummingbird is the established market leader in PC X Servers, believed to have over 50% of that market. WRQ, NCD and NetManage also offer traditional PC X Server software and have minority positions within that market. 47 SCO introduced Tarantella, a server-based Java-to-Unix connectivity product which competes with GO-Joe. However, SCO's principal product is a UNIX operating system that competes with UNIX vendors like Sun Microsystems and IBM. GraphOn believes that SCO, as a competitor to the other UNIX vendors, will have difficulty in penetrating enterprises who utilize other vendors' UNIX operating systems, such as Sun Microsystems and IBM. PROPRIETARY TECHNOLOGY GraphOn licenses key components (the "developed technology") of its server-based technology from three software developers to whom it pays royalties pursuant to three different exclusive license agreements (the "technology agreements"). Certain minor elements of GraphOn's server-based technology (the "nonexclusive technology") also are licensed from two of the software developers pursuant to non-exclusive agreements (the "nonexclusive agreements"), one of which calls for royalty payments by GraphOn. Such royalty payments are based on a percentage of net revenues received by GraphOn for sales of GraphOn products that contain the licensed technology. The royalty rate under all of these agreements is an aggregate of 4.8% and 2.9% for 1999 and 2000, respectively. GraphOn holds options to purchase the developed technology and to purchase a perpetual license to certain of the nonexclusive technology which are exercisable beginning in December 2000. If GraphOn does not exercise its options under the technology agreements, the royalty rate would continue at 2% in 2001 and beyond with respect to the developed technology. The technology agreements and one of the nonexclusive agreements, unless terminated earlier pursuant to their terms, will terminate on September 6, 2006. The other nonexclusive agreement continues unless terminated for material breach. GraphOn and each software developer tentatively have agreed to amend each of these agreements. Under the terms of such proposed amendments, GraphOn will purchase the developed technology and the nonexclusive technology for aggregate payments of $172,381 and $348,000 payable in 1999 and 2000, respectively. GraphOn relies primarily on trade secret protection, copyright law, confidentiality and proprietary information agreements to protect its proprietary technology and registered trademarks. The loss of any material trade secret, trademark, trade name or copyright could have a material adverse effect on GraphOn's results of operations and financial condition. There can be no assurance that GraphOn's efforts to protect its proprietary technology rights will be successful. Despite GraphOn's precautions it may be possible for unauthorized third parties to copy certain portions of GraphOn's products, or to obtain information GraphOn regards as proprietary. See "Legal Proceedings." GraphOn does not believe its products infringe on the rights of any third parties, but there can be no assurance that third parties will not assert infringement claims against GraphOn in the future, or that any such assertion will not result in costly litigation or require GraphOn to obtain a license to proprietary technology rights of such parties. EMPLOYEES AND FACILITIES As of February 28, 1999, GraphOn had a total of 43 employees, including 13 in marketing, sales and support, 25 in research and development and 5 in administration and finance. No employees are covered by a collective bargaining agreement. GraphOn currently occupies approximately 7,200 square feet of office space in Campbell, California pursuant to a lease which expires in April 1999, but is renewable each year at GraphOn's option until April 2006, 2,300 square feet in Bellevue, Washington pursuant to a lease that will expire in May 2001 and 13,000 square feet in Concord, New Hampshire pursuant to a lease that will expire in October 2003 and is cancellable as of October 31, 2001. Annual lease payments currently are approximately $261,600. GraphOn currently is seeking a sublet tenant for a portion of the Concord facility. GraphOn believes the current facilities will be adequate to accommodate its needs until the end of August, 1999 and is investigating the opportunity to expand its facilities to accommodate anticipated future needs in Bellevue. 48 LEGAL PROCEEDINGS In late 1996, GraphOn disclosed aspects of its proprietary technology on a confidential basis to Insignia Solutions, Inc. and Insignia Solutions plc, certain of whose assets were later acquired by Citrix Systems. GraphOn made inquiry of Citrix and Insignia regarding its potential misuse of GraphOn's technology. Citrix instituted litigation in the United States District Court for the Southern District of Florida seeking a judicial declaration that neither Citrix nor Insignia has misappropriated or infringed upon GraphOn's technology or breached a binding agreement. On January 15, 1999, GraphOn responded by filing a motion to dismiss the action. The outcome of this situation is presently uncertain and GraphOn is incurring substantial legal expenses. Loss of the case could also enhance Citrix's position as a competitor of GraphOn. 49 MANAGEMENT OF GRAPHON The following table sets forth certain information regarding GraphOn's executive officers, directors and other key employees:
NAME AGE POSITION - ----------------------------------------------------- --- ----------------------------------------------------- EXECUTIVE OFFICERS AND DIRECTORS Walter Keller........................................ 48 President and Chairman of the Board of Directors Robin Ford........................................... 49 Executive Vice President, Marketing and Sales Christopher Bradlee.................................. 39 Vice President, North America Sales Vince Pfeifer........................................ 33 Vice President, Product Development Edmund Becmer........................................ 40 Chief Financial Officer Thomas A. Bevilacqua................................. 43 Director and Secretary Robert Dilworth...................................... 57 Director Eric Kim............................................. 43 Director August P. Klein...................................... 62 Director Michael P. O'Reilly.................................. 46 Director KEY EMPLOYEES Prakash Jadeja....................................... 44 Director of Engineering Michael Hoegeman..................................... 38 Principal Architect Robert Currey........................................ 32 Principal Architect William Tidd......................................... 36 Director of Software Development
WALTER KELLER has served as President and Chairman of the GraphOn board since GraphOn's founding in 1982 and was Chief Financial Officer from 1991 until February 8, 1999. Prior to founding GraphOn, Mr. Keller's experience included executive staff and senior level management, sales and engineering positions at United Technologies Corporation and Honeywell Inc. Mr. Keller is a member of the Society of Professional Engineers and holds a B.S. in Mechanical Engineering and a M.S. in Electrical Engineering from Santa Clara University in Santa Clara, CA. Mr. Keller is the husband of Ms. Ford. ROBIN FORD has served as Executive Vice President, Marketing and Sales of GraphOn since 1996, was Vice President, Marketing and Sales from 1991 to 1996 and held various positions in sales and marketing at GraphOn from 1983 to 1991. Ms. Ford was a director of GraphOn from October 1991 to June 1998. Prior to joining GraphOn, Ms. Ford held various sales management and technical positions at Intel Corporation, National Semiconductor Corporation and Grid Systems Corporation. Ms. Ford's responsibilities with GraphOn have included building and maintaining GraphOn's sales and marketing operations and obtaining major government and OEM contracts. Ms. Ford is the wife of Mr. Keller. CHRISTOPHER BRADLEE has served as Vice President, North America Sales for GraphOn since August 1998. Prior to joining GraphOn, beginning in March 1997, Mr. Bradlee served as Vice President of Field Sales Operations for North America at Dr. Solomon's Software, a leading producer of anti-virus software. Mr. Bradlee was Director of Channel Sales, North America at Logicraft Information Systems from January 1995 until February 1997. Previously, Mr. Bradlee held several sales management positions within the high tech industry. Mr. Bradlee attended Pennsylvania State University, and received his B.A. from West Chester State University. VINCE PFEIFER has served as Vice President, Product Development of GraphOn since October 1998, and was General Manager and Director of Product Development from June 1998 to August 1998. From June 1995 to May 1998, Mr. Pfeifer served as the Vice-President of Product Development for Exodus Technologies and ConnectSoft Communication Corporation and has nine years of experience in designing, developing, testing and supporting commercial grade software. 50 EDMUND BECMER has served as Chief Financial Officer and Vice President of Finance & Administration of GraphOn since February 8, 1999. From May 1998 until December 1998, Mr. Becmer was Chief Financial Officer of TMCI Electronics, Inc., a publicly held company, based in San Jose, CA, with subsidiaries involved in the manufacturing of semiconductor equipment. In February, 1999, TMCI Electronics filed for reorganization under Chapter 11 of the United States Bankruptcy Code. Prior to joining TMCI Electronics, from March 1996 to May 1998, Mr. Becmer was a member of the accounting firm of Moore Stephens, P.C., where he was responsible for SEC audits, mergers and acquisitions and business consulting. Prior to Moore Stephens, from August 1993 to June 1995, Mr. Becmer was controller of First City Industries, Inc. in New York, NY, a holding company with subsidiaries in manufacturing, commercial real estate and residential real estate. Prior to First City Industries, from June 1987 to June 1993, Mr. Becmer was CFO/Controller of Lincorp Holdings, Inc., a public investment holding company in New York, NY, with investments in banking and commercial real estate and a Fortune Service 500 company. Mr. Becmer also was with the accounting firms of BDO Seidman and Deloitte and Touche in New York and San Diego, CA. Mr. Becmer holds a B.S.B.A. from San Diego State University and is a Certified Public Accountant. THOMAS A. BEVILACQUA has been a director of GraphOn since July 1998. Mr. Bevilacqua has been Executive Vice-President of Corporate Development and General Counsel of E*Trade Group, Inc. since April, 1999. From 1991 to March 1999, Mr. Bevilacqua was a partner of Brobeck, Phleger & Harrison LLP, counsel to GraphOn, and served on that firm's Executive Committee. Mr. Bevilacqua is a director of E*Trade Online Ventures and Schuler Homes, Inc. Mr. Bevilacqua has B.S. and J.D. degrees from the University of California. ROBERT DILWORTH has served as a director of GraphOn since July 1998. Mr. Dilworth has served as Chairman of the Board of Metricom, Inc. ("Metricom") since 1996, and as a Director since 1987. He served as Metricom's CEO from 1987 to 1998. Metricom is a leading provider of wireless data communication and network solutions. Prior to joining Metricom, from 1985 to 1987, Mr. Dilworth served as President of Zenith Data Systems Corporation, a microcomputer manufacturer. Earlier positions include CEO at Morrow Designs, CEO at Ultramagnetics, Division Manager at Varian Associates, Director of Minicomputer Systems at Sperry Univac and Vice President of Finance and Administration at Varian Data Machines. Mr. Dilworth is a Director of VLSI Technology, Inc., Data Technology Corporation and Cortelco Systems, Inc. Mr. Dilworth holds a B.A. in Business and Mathematics from L.A. State University. ERIC KIM has been a director of GraphOn since July 1998. He is CEO and President of the Spencer Trask Software Group, an affiliate of Spencer Trask. From 1994 to 1997, he served as President and CEO of Pilot Software, Inc., a business unit of Dun & Bradstreet Corporation. He also was Corporate Vice President of Strategy at Dun & Bradstreet Corporation from 1993 to 1994. From 1990 to 1992, Mr. Kim was General Manager at Lotus Development Corporation. From 1985 to 1990, he served as Vice President of Marketing for Ashton-Tate Corporation. Mr. Kim holds a B.S. in Physics from Harvey Mudd College, an M.S. in Engineering Systems from the University of California at Los Angeles and an M.B.A. from Harvard Graduate School of Business. Mr. Kim is a nominee of Spencer Trask. AUGUST P. KLEIN has served as a director of GraphOn since August 1998. Mr. Klein has been, since 1995, the Founder, CEO and Chairman of the Board of JSK Corporation and, since 1997, of APJK Corporation, general contractors and service providers for the insurance industry. Previously, from 1989 to 1993, Mr. Klein was founder and CEO of Uniquest, Inc., an object oriented application software company. From 1984 to 1988, Mr. Klein served as CEO of Masscomp, Inc., a developer of high performance real time mission critical systems and UNIX-based applications. Mr. Klein has served as Group Vice President (Serial Printers) at Data Products Corporation and President and CEO at Integral Data Systems, a manufacturer of personal computer printers. From 1957 to 1982, he was General Manager of the Retail Distribution Business Unit and Director of Systems Marketing at IBM. Mr. Klein is a Director of QuickSite Corporation and serves as a trustee of the Computer Museum in Boston, Massachusetts. Mr. Klein holds a B.S. in Mathematics from St. Vincent's College. 51 MICHAEL P. O'REILLY has served as a director of GraphOn since December 18, 1998. Mr. O'Reilly has served as Executive Vice President, Finance, Chief Financial Officer and Treasurer of Corel Corporation since December, 1997. Prior to joining Corel, from 1988 until 1997, Mr. O'Reilly was a senior tax partner in the Ottawa practice of KPMG, the international professional advisory services firm. Mr. O'Reilly is a Chartered Accountant. He holds a B.A. from the University of Western Ontario and an Hons. B. Comm from the University of Windsor. Mr. O'Reilly is a nominee of Corel. PRAKASH JADEJA has served as Director of Engineering of GraphOn since September 1997. From February 1996 to August 1997, Mr. Jadeja led the Digital Video Disc and Compact Disc Recordable System software group at Apple Computer. From February 1992 to January 1996, Mr. Jadeja was Vice President of Engineering at Workstation, Inc. Prior to that, Mr. Jadeja held a number of technical and management positions at Insignia Solutions, Inc., where he was one of the founders. Mr. Jadeja holds a B.S. in Applied Computer Science from De Montford University in England. MICHAEL HOEGEMAN has served as Principal Architect for GraphOn since May 1996. Prior to joining GraphOn, beginning in 1995, Mr. Hoegeman worked as a contractor and lead developer for GraphOn's GO-Global and GO-Joe products. From 1985 to 1996, Mr. Hoegeman held several senior UNIX development positions at GTE. Mr. Hoegeman holds a B.S. in Mathematics from the University of California at Santa Barbara. Mr. Hoegeman has entered into license agreements with GraphOn providing for certain royalty payments. See "Business of GraphOn-Proprietary Technology". ROBERT CURREY has served as Principal Architect and developer for GraphOn since June 1998. Prior to joining GraphOn, beginning in November 1996, Mr. Currey served as team leader at Exodus Technologies. Mr. Currey was Senior Engineer at Connectsoft Corp. from January 1994 until November 1996. Previously, Mr. Currey was Senior Engineer at Attachmate Corp. from June 1992 to January 1994. Mr. Currey has an M.S. in computer science and a B.S. in applied mathematics from Oregon State University. WILLIAM TIDD has served as Director of Software Development for GraphOn since January 1999. Prior to joining GraphOn, from 1996 to 1998, Mr. Tidd served on the jBridge development team for Corel Corporation. Mr. Tidd owned and operated Tirel Corporation, a software development company, from 1994 to 1996 after co-founding Atlantic Design Systems, which became Tirel Corporation in 1994. Mr. Tidd holds a Master of Engineering Degree in mechanical engineering from Carnegie Mellon University. GRAPHON BOARD The GraphOn board consists of six individuals and may be expanded to consist of a maximum of seven individuals. The bylaws of GraphOn provide for cumulative voting for directors. Spencer Trask has the right to designate one individual reasonably acceptable to GraphOn to be a nominee to serve as a director of GraphOn until the earlier of October 28, 2003 or the effective date of an initial public offering of GraphOn's equity securities. Certain of GraphOn's officers, directors and holders of 5% or more of the shares of GraphOn common stock have agreed to vote their shares in favor of Spencer Trask's nominee. GraphOn has determined that the merger will constitute an initial public offering. Thus, if the merger is completed, Spencer Trask will no longer be entitled to a board seat. In addition, Corel has a contractual right to designate one individual to be a nominee to serve as a director of GraphOn until Corel controls less than 17% of the voting power of GraphOn. GraphOn also agreed not to reduce the size of the GraphOn board below six without Corel's prior written consent, until the date which is two years after the date of the initial public offering of GraphOn's equity securities or the closing of the sale of all or substantially all of its assets or of any merger or consolidation with any other entity. The non-employee directors are eligible to participate in the GraphOn stock option plan. 52 EXECUTIVE COMPENSATION AND EMPLOYMENT AGREEMENTS The compensation for GraphOn's key management is determined from time to time by the GraphOn board. In addition, the GraphOn board may, in its discretion, award these individuals cash bonuses, options to purchase shares of the GraphOn common stock under the Stock Option Plan, and such other compensation, including equity-based compensation, as the GraphOn board, or a committee thereof, shall approve from time to time. In the event the merger is consummated, the determination of such compensation, including any awards of cash bonuses, options or other compensation, will be subject to the discretion of the Unity board. The following table sets forth certain information with respect to the compensation of GraphOn's Chief Executive Officer and each of the two other executive officers of GraphOn who were serving as executive officers of GraphOn during fiscal year 1998 and whose total annual salary and bonus during such fiscal year exceeded $100,000 (collectively, the "Named Executive Officers"). SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION ($) ----------------------- ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION ($) - ------------------------------------------------------------------- --------- ---------- ----------- ---------------- Walter Keller...................................................... 1998 $ 135,181 0 0 President and Chief Executive Officer Robin Ford......................................................... 1998 141,960 0 0 Executive Vice President, Marketing and Sales Zdravko Podolski(1)................................................ 1998 94,750 0 $ 75,000 Vice President, Strategic Sales and Alliances
- ------------------------ (1) Mr. Podolski's employment with GraphOn was terminated on September 1, 1998. Pursuant to a severance agreement with Mr. Podolski, GraphOn paid him $75,000 in consideration for the release of any and all claims he may have had against GraphOn. OPTION GRANTS IN FISCAL YEAR 1998 No options were granted to the Named Executive Officers in fiscal year 1998. AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND LAST FISCAL YEAR-END OPTION VALUES No options or stock appreciation rights were exercised by the Named Executive Officers during fiscal year 1998, and no options or stock appreciation rights were owned by the Named Executive Officers on December 31, 1998. EMPLOYMENT AGREEMENTS On October 22, 1998, GraphOn entered into employment agreements with Mr. Keller and Ms. Ford which provide for a term of two years, annual base salaries of $140,000 and $130,000, respectively, and eligibility to receive bonuses at the discretion of the GraphOn board. Such agreements contain provisions for bonuses upon achievement of certain milestones, non-competition for the term of each agreement and confidentiality. The base salaries are subject to change at the discretion of the GraphOn board. Mr. Keller and Ms. Ford also are entitled to participate in any pension insurance or benefit plan of GraphOn, including the GraphOn Stock Option Plan. Each employment agreement also provides for a severance payment in the amount of one year's compensation in the event that the employee is terminated by GraphOn without cause, or the employee resigns for Good Reason (as defined in the agreement) during 53 the employment term. Good Reason includes, among other things, the failure of a successor to GraphOn to assume the employment agreements in connection with certain change in control transactions such as a merger, consolidation or a sale of all or substantially all of GraphOn's assets, including this merger. Good Reason also includes certain changes in the duties, position, compensation and location of the employment. In the event this merger is consummated, any changes in base salary or bonus awards will be subject to the discretion of the Unity board. 1998 STOCK OPTION/STOCK ISSUANCE PLAN GraphOn's 1998 Stock Option/Stock Issuance Plan is intended to promote the interests of GraphOn by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in GraphOn as an incentive for them to remain in service of GraphOn. The plan was adopted by the GraphOn board on June 23, 1998 and was approved by the shareholders on June 23, 1998. A total of 1,300,000 shares of common stock have been authorized for issuance under the plan to officers and other employees of GraphOn, the non-employee board members and independent consultants in GraphOn's service. However, in no event may any one participant in the plan receive option grants or direct stock issuances for more than 500,000 shares of common stock in the aggregate per calendar year. The shares of common stock reserved for issuance under the plan are made available from authorized but unissued common stock or from shares of common stock reacquired by GraphOn, including shares repurchased on the open market. Should an option expire or terminate for any reason prior to exercise in full, the shares subject to the portion of the option not so exercised will be available for subsequent issuance under the plan. Unvested shares issued under the plan and subsequently repurchased by GraphOn will be added back to the share reserve and will accordingly be available for subsequent issuance under the plan. As of May , 1999, options for 353,500 shares of common stock were outstanding under the plan, no options had been exercised, an additional 602,456 shares had been issued directly under the stock issuance program and 344,044 shares remained available for future issuance under the plan. The compensation committee of the board will have exclusive authority to administer the plan with respect to option grants and stock issuances made to GraphOn's executive officers and non-employee board members. The compensation committee and a secondary committee of one or more board members will each have separate but concurrent authority to make option grants and stock issuances under those programs to all other eligible individuals. The term "plan administrator," as used in this description of the plan, will mean either the compensation committee or the secondary committee, to the extent each such entity is acting in its capacity as administrator of the plan. The plan is divided into two separate components: (i) the option grant program under which eligible individuals may, at the discretion of the plan administrator, be granted options to purchase shares of common stock at an exercise price not less than 85% of their fair market value on the grant date and (ii) the stock issuance program under which such individuals may, in the discretion of the plan administrator, be issued shares of common stock directly, through the purchase of vested or unvested shares at a price not less than 85% of their fair market value at the time of issuance or as a fully-vested bonus for past services rendered to GraphOn. The shares subject to each option granted under the option grant program and unvested shares issued under the stock issuance program will vest in one or more installments over the recipient's period of service with GraphOn. However, no vesting schedule will be at a rate less than 20% per year, with the initial vesting to occur no later than one year after the grant date of the option or the issue date of the unvested shares. No granted option may have a term in excess of ten years, and each granted option will be 54 subject to earlier termination within a designated period following the optionee's cessation of service with GraphOn. The exercise price may be paid in cash or in shares of common stock. Options may also be exercised for vested shares through a same-day sale program, pursuant to which a designated brokerage firm effects the immediate sale of those shares and pays over to GraphOn, out of the sale proceeds available on the settlement date, sufficient funds to cover the exercise price for the purchased shares. In addition, the plan administrator may provide financial assistance to one or more participants in connection with the exercise of their outstanding options or the purchase of their unvested shares by allowing such individuals to deliver a full-recourse, interest-bearing promissory note in payment of the exercise or purchase price and any associated withholding taxes incurred in connection with such exercise or purchase. In the event that GraphOn is acquired by merger or sale of substantially all of its assets, each outstanding option under the option grant program which is not to be assumed by the successor corporation or otherwise continued in effect will automatically accelerate in full, and all unvested shares under the plan will immediately vest, except to the extent GraphOn's repurchase rights with respect to those shares are assigned to the successor corporation or otherwise continued in effect. The plan administrator will have complete discretion to grant one or more options under the option grant program which will become exercisable on an accelerated basis for all of the option shares upon (i) an acquisition of GraphOn, whether or not those options are assumed or otherwise continued in effect, or (ii) the termination of the optionee's service within a designated period following an acquisition in which those options are assumed or continued in effect. The vesting of outstanding shares under the stock issuance program may be accelerated upon similar terms and conditions. Unity will assume all outstanding GraphOn options in the merger, and none of the shares subject to those options will vest on an accelerated basis at the time of the merger. The option holders will continue to vest in the Unity shares subject to their assumed options in accordance with the same vesting schedule in effect for their GraphOn options immediately prior to the merger. The plan administrator also is authorized under the option grant and stock issuance programs to grant options and to structure repurchase rights so that the shares subject to those options or repurchase rights will immediately vest in connection with a change in ownership or control of GraphOn (whether by successful tender offer for more than 50% of the outstanding voting stock or by a change in the majority of the board by reason of one or more contested elections for board membership). Such accelerated vesting may occur either at the time of such change in ownership or control or upon the subsequent involuntary termination of the individual's service within a designated period (not to exceed 18 months) following such change in ownership or control. In the event any change is made to the outstanding shares of common stock by reason of any recapitalization, stock dividend, stock split, combination of shares, exchange of shares or other change in corporate structure effected without GraphOn's receipt of consideration, appropriate adjustments will be made to (i) the maximum number and/or class of securities issuable under the plan, (ii) the number and/or class of securities for which any one person may be granted stock options and direct stock issuances under the plan per calendar year and (iii) the number and/or class of securities and the exercise price per share in effect under each outstanding option. Such adjustments will be designed to preclude any dilution or enlargement of benefits under the plan or the outstanding options thereunder. The plan administrator has the authority to effect the cancellation of outstanding options under the option grant program in return for the grant of new options for the same or different number of option shares with an exercise price per share based upon the fair market value of the common stock on the new grant date. The board may amend or modify the plan at any time. The plan will terminate on June 22, 2007, unless sooner terminated by the board or in connection with an acquisition of GraphOn in which the plan is not assumed by the acquiring entity. 55 If the merger is consummated, the plan and all outstanding options will be assumed by Unity. As part of the merger, Unity will assume the GraphOn 1998 Stock Option/Stock Issuance Plan and all outstanding options under that plan. The Unity board will become the plan administrator and all references in the plan to an acquisition or other change in control of GraphOn will be applied on the basis of an acquisition or other change in control of Unity. CERTAIN RELATIONSHIPS AND TRANSACTIONS Mr. Keller, Chairman of the GraphOn board and President of GraphOn, sold to Mr. Bevilacqua (i) on January 1, 1998, 35,004 shares of GraphOn common stock for an aggregate purchase price of $700 and (ii) on August 20, 1998, 68,238 shares of GraphOn common stock for an aggregate purchase price of $5,118. Mr. Bevilacqua is a director and Secretary of GraphOn and a former partner in the law firm of Brobeck, Phleger & Harrison LLP, which firm GraphOn retains for legal services. The 68,238 shares originally were subject to Mr. Keller's right of repurchase which lapses monthly in a series of equal monthly installments upon Mr. Bevilacqua's completion of each month of service on the GraphOn board until May 2000. In addition, Mr. Keller has a right of first refusal exercisable in connection with any proposed transfer of such shares for which the repurchase right has lapsed. As of August 20, 1998, Mr. Keller sold 100,000 shares of GraphOn common stock to Mr. Bradlee, an executive officer of GraphOn, for an aggregate purchase price of $7,500 evidenced by a full-recourse note secured by the shares purchased. The note bears interest at the rate of 5.41% per annum, compounded semi-annually. The 100,000 shares originally were subject to Mr. Keller's right of repurchase which began to lapse November 20, 1998 in a series of 45 successive, equal monthly installments upon Mr. Bradlee's completion of each month of service with GraphOn. In addition, Mr. Keller has a right of first refusal exercisable in connection with any proposed transfer of such shares for which the repurchase right has lapsed. As of August 20, 1998, Mr. Keller sold 25,000 shares of GraphOn common stock to Mr. Klein, a director of GraphOn, for an aggregate purchase price of $1,875. The 25,000 shares are subject to Mr. Keller's right of repurchase which began to lapse November 20, 1998 in a series of 21 successive, equal monthly installments upon Mr. Klein's completion of each month of consulting services to GraphOn. In addition, Mr. Keller has a right of first refusal exercisable in connection with any proposed transfer of such shares for which the repurchase right has lapsed. As of August 20, 1998, Messrs. Kim, Dilworth and Klein, directors of GraphOn, were each issued 75,000 shares of GraphOn common stock under the GraphOn Stock Option Plan at a purchase price of $0.075 per share. Such shares are subject to GraphOn's right of repurchase which began to lapse November 20, 1998 in a series of 45 successive, equal monthly installments upon completion of each month of service on the GraphOn board until May 2000. In March 1998, Spencer Trask Investors, an affiliate of Spencer Trask, purchased 500,000 shares of GraphOn common stock from GraphOn for an aggregate purchase price of $25,000. Concurrently with such transaction, Spencer Trask Investors loaned GraphOn $475,000 evidenced by a Convertible Promissory Note, bearing interest at a rate of 10% per annum. The Convertible Promissory Note was redeemed by GraphOn on January 27, 1999. In March 1998, Spencer Trask Investors entered into a sale arrangement with Mr. Keller and Ms. Ford, Executive Vice President, Marketing and Sales, of GraphOn, with respect to the sale of an aggregate of 3,500,000 shares of GraphOn common stock for aggregate consideration of $3,500,000, comprised of $200,000 cash, a non-recourse promissory note in the principal amount of $800,000 which became due on January 20, 1999, a non-recourse promissory note in the principal amount of $1,000,000 which becomes due on July 20, 1999, and a non-recourse promissory note in the principal amount of $1,500,000 which becomes due on January 20, 2000. Each of the foregoing notes bears interest at the rate of 6% per annum, payable quarterly, and each note is secured by a pledge of the shares purchased, with 56 one share pledged for each $1.00 of principal amount. The shares of GraphOn common stock pledged with respect to each note were placed in escrow until payment in full of the principal and accrued interest of the note representing the purchase price of such shares. The $800,000 note was paid by Spencer Trask Investors and the 800,000 shares pledged with respect to such note were released from escrow on January 20, 1999. In the event that a note is not paid, the shares securing it will be released to Mr. Keller and Ms. Ford, who also maintain voting control over such pledged shares unless and until the related notes are fully paid and the shares are released to Spencer Trask Investors. Spencer Trask Investors has certain registration rights in connection with the above-mentioned shares of GraphOn common stock. See "Description of GraphOn's Securities-Registration Rights." In connection with the issuance and sale by GraphOn of an aggregate of 5,162,868 shares of GraphOn common stock for an aggregate purchase price of $5,162,868 in three separate closings, the final such closing occurring January 27, 1999, in connection with and pursuant to the terms of a Private Placement Memorandum and related agreements (the "Private Placement"), GraphOn entered into a Placement Agency Agreement, dated September 2, 1998, with Spencer Trask. Pursuant to the Placement Agency Agreement, Spencer Trask received a fee equal to 10% of the aggregate offering price for the GraphOn common stock sold in the Private Placement. In addition, GraphOn issued to Spencer Trask the Spencer Trask Warrants. See "Description of GraphOn's Securities-Spencer Trask Warrants and Similar Warrants." Spencer Trask, together with its affiliates, holds an aggregate of 2,266,279 shares of GraphOn common stock and warrants to purchase GraphOn common stock. Mr. Bevilacqua (together with his wife, Therese Mrozek, currently a partner in the law firm of Brobeck, Phleger & Harrison LLP) purchased 5,000 shares of GraphOn common stock in the Private Placement for an aggregate purchase price of $5,000 and Brobeck, Phleger & Harrison LLP purchased 50,000 shares for an aggregate purchase price of $50,000. Spencer Trask Investors and Mr. Keller, upon the commencement of the Private Placement, loaned $200,000 and $100,000, respectively, to GraphOn pursuant to convertible promissory notes which bore interest at 8% per annum and matured at the earlier of the first closing of the Private Placement or 12 months from the date of the notes. Spencer Trask converted the $200,000 note into 200,000 shares of GraphOn common stock on December 31, 1998 and GraphOn paid the $100,000 note held by Mr. Keller on that same date. In addition, Spencer Trask Investors was issued, upon the commencement of the Private Placement, a warrant to purchase 100,000 shares of GraphOn common stock at $1.00 per share, and Mr. Keller was issued a warrant to purchase 50,000 shares of GraphOn common stock at $1.00 per share. See "Description of GraphOn's Securities-Spencer Trask Warrants and Similar Warrants." On December 31, 1998, in consideration of certain tangible and intangible assets, GraphOn sold to Corel Corporation 3,886,503 shares of GraphOn common stock and a warrant to purchase up to 388,650 shares of GraphOn common stock. GraphOn also granted Corel certain rights to appoint a nominee to the GraphOn board and certain registration and preemptive rights with respect to such shares. See "Management of GraphOn-Board of Directors" and "Description of GraphOn's Securities--Corel Warrant and Similar Warrant." Additionally, as of June 30, 2000, if GraphOn has not completed the initial public offering of its securities or the closing of the sale, conveyance or disposal of all or substantially all of its property or any merger or consolidation with any other entity, GraphOn shall become obligated to issue Corel an additional 1,607,000 shares of GraphOn common stock, for no additional consideration. If the merger is consummated, Corel will not receive such shares. If the merger is consummated, in consideration of consulting services performed in connection with the merger, Unity will issue to Spencer Trask 250,000 Class A redeemable common stock purchase warrants, exercisable for an aggregate of up to 250,000 shares of Unity common stock at an exercise price of $5.50 per share, and pay Spencer Trask up to $575,000. 57 PRINCIPAL SHAREHOLDERS OF GRAPHON The following table sets forth certain information known to GraphOn as of May , 1999 and as of such date, giving effect to the merger, based on information obtained from the persons named below, with respect to the beneficial ownership of shares of GraphOn common stock held by - each person known by GraphOn to be the owner of 5% or more of the outstanding shares of GraphOn common stock; - each director of GraphOn; and - all executive officers and directors of GraphOn as a group. Unless otherwise indicated, the address for each shareholder is c/o GraphOn Corporation, 150 Harrison Avenue, Campbell, CA 95008.
BENEFICIAL OWNERSHIP OF GRAPHON COMMON BENEFICIAL OWNERSHIP OF UNITY STOCK PRIOR TO THE MERGER (1) COMMON STOCK AFTER THE MERGER (2) ------------------------------ ------------------------------ NUMBER OF SHARES PERCENT NUMBER OF SHARES PERCENT ----------------- ----------- ----------------- ----------- Corel Corporation (3).................................. 4,275,153 25.5% 2,383,825 21.3% 1600 Carling Avenue Ottawa, Ontario K1Z 8R7, Canada Spencer Trask Holdings, Inc. (4)....................... 2,266,279 13.4% 1,513,677(5) 13.4% 535 Madison Avenue New York, NY 10022 Walter Keller (6)...................................... 2,516,746 15.3% 1,403,337 12.7% Thomas A. Bevilacqua................................... 108,242 * 60,355 * Robert Dilworth........................................ 75,000 * 41,280 * Eric Kim (7)........................................... 130,700 * 72,878 * August P. Klein........................................ 100,000 * 55,760 * Michael O'Reilly....................................... 0 -- 0 -- Robin Ford (8)......................................... 1,900,000 11.6% 1,059,440 9.6% All executive officers and directors as a group (10 4,980,688 30.2% 2,777,232 25.1% persons)(9)..........................................
- ------------------------ * Denotes less than 1% of outstanding GraphOn common stock (1) As used herein, beneficial ownership means the sole or shared power to vote, or direct the voting of, a security, or the sole or shared power to invest or dispose, or direct the investment or disposition, of a security. Except as otherwise indicated, all persons named herein have (i) sole voting power and investment power with respect to their respective shares of GraphOn common stock, except to the extent that authority is shared by spouses under applicable law, and (ii) record and beneficial ownership with respect to their respective shares of GraphOn common stock. With respect to each shareholder, any shares issuable upon exercise of all options and warrants held by such shareholder that are currently exercisable or will become exercisable within 60 days of May ,1999 are deemed outstanding for computing the percentage of the person holding such options but are not deemed outstanding for computing the percentage of any other person. Percentage ownership of GraphOn 58 common stock prior to the merger is based on 16,363,959 shares of GraphOn common stock outstanding as of May , 1999. (2) Assumes no cash conversions of Unity common stock by Unity stockholders or exercise by Unity stockholders or GraphOn shareholders of their respective appraisal rights. Percentage ownership of Unity common stock after the merger is based on 10,999,543 shares of Unity common stock to be outstanding upon consummation of the merger. (3) Includes a warrant exercisable for up to 388,650 shares of GraphOn common stock at an exercise price of $1.00 per share. (4) Includes 1,500,000 shares held by Spencer Trask Investors, an affiliate of Spencer Trask Holdings, Inc., the 100% owner of Spencer Trask, 180,000 shares held by Kevin Kimberlin Partners, L.P. ("KKP"), an affiliate of Spencer Trask Holdings, a warrant exercisable for up to 100,000 shares of GraphOn common stock at an exercise price of $1.00 per share held by Spencer Trask Investors, two warrants exercisable for up to an aggregate of 29,760 shares of GraphOn common stock at an exercise price of $1.00 per share held by KKP, a warrant exercisable for up to an aggregate of 21,990 shares of GraphOn common stock at an exercise price of $1.00 per share held by Kevin Kimberlin, a general partner of KKP and a majority holder of Spencer Trask Holdings, and three warrants exercisable for up to an aggregate of 414,529 shares of GraphOn common stock at an exercise price of $1.00 per share held by Spencer Trask Holdings. Excludes 566,295 shares of GraphOn common stock issuable upon exercise of the Spencer Trask Warrants in which Spencer Trask has no beneficial interest. See "Description of GraphOn's Securities--Spencer Trask Warrants and Similar Warrants." (5) Includes 250,000 shares of Unity common stock issuable upon exercise of 250,000 Class A redeemable common stock purchase warrants at an exercise price of $5.50, to be issued to Spencer Trask upon completion of the merger. (6) Includes 500,000 shares of GraphOn common stock placed in escrow with Brobeck, Phleger & Harrison LLP ("BPH"), as escrow agent, to be sold to Spencer Trask Investors on July 20, 1999, and 750,000 shares of GraphOn common stock placed in escrow with BPH to be sold to Spencer Trask Investors on January 20, 2000. During the respective escrow periods, Mr. Keller cannot sell or otherwise transfer such shares but retains all other shareholder rights, including, without limitation, the right to vote such shares. Also includes (i) a warrant exercisable for up to 50,000 shares of GraphOn common stock at an exercise price of $1.00 per share and (ii) 40,000 shares of GraphOn common stock held by relatives of Mr. Keller who, at the option of Spencer Trask, can be required to enter into a voting agreement granting Mr. Keller the right to vote such shares. Mr. Keller and Ms. Ford are husband and wife. See Footnote 8. (7) Includes a warrant exercisable for up to 55,700 shares of GraphOn common stock at an exercise price of $1.00 per share. (8) Includes 500,000 shares of GraphOn common stock placed in escrow with BPH, as escrow agent, to be sold to Spencer Trask Investors on July 20, 1999, and 750,000 shares of GraphOn common stock placed in escrow with BPH to be sold to Spencer Trask Investors on January 20, 2000. During the respective escrow periods, Ms. Ford cannot sell or otherwise transfer such shares but retains all other shareholder rights, including, without limitation, the right to vote such shares. Also includes 30,000 shares held by relatives of Ms. Ford who, at the option of Spencer Trask, can be required to enter into a voting agreement granting Ms. Ford the right to vote such shares. Mr. Keller and Ms. Ford are husband and wife. See Footnote 6. (9) See footnotes 6 through 8 above. Includes warrants held by Mr. Keller and Mr. Kim exercisable for up to 105,700 shares of GraphOn common stock at an exercise price of $1.00 per share and options exercisable for up to 25,000 shares of GraphOn common stock under the GraphOn Stock Option Plan held by one officer of GraphOn. 59 DESCRIPTION OF GRAPHON'S SECURITIES GENERAL GraphOn is authorized to issue 50,000,000 shares of GraphOn common stock, no par value per share, and 5,000,000 shares of "blank check" preferred stock, no par value per share. As of May , 1999, 16,363,959 shares of GraphOn common stock were outstanding, held of record by approximately 195 persons. No shares of GraphOn preferred stock are outstanding. COMMON STOCK The holders of GraphOn common stock are entitled to one vote for each share held of record on all matters to be voted on by shareholders. Cumulative voting with respect to the election of directors is permitted, with the result that it is a lengthier and more difficult process to effect a change in the composition of the GraphOn board and a potential change in control of the corporation. If the merger is consummated, cumulative voting with respect to the election of directors will continue to be permitted. The holders of GraphOn common stock are entitled to receive dividends when, as and if declared by the GraphOn board out of funds legally available therefor. In the event of liquidation, dissolution or winding up of GraphOn, the holders of GraphOn common stock are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the GraphOn common stock. Holders of shares of GraphOn common stock, as such, have no redemption, preemptive or other subscription rights. There are no conversion provisions applicable to the GraphOn common stock. All of the outstanding shares of GraphOn common stock are fully paid and nonassessable. If the merger is completed, except with respect to those shares as to which dissenters' rights have been perfected, each then outstanding share of GraphOn common stock will be converted into the right to receive approximately .5576 of a share of Unity common stock. For a description of Unity common stock, see "Description of Unity's Securities--Common Stock." PREFERRED STOCK The GraphOn preferred stock may be issued with such designation, rights and preferences as may be determined from time to time by the GraphOn board. Additionally, the GraphOn board may determine the timing, series and number of shares of GraphOn preferred stock to be issued. Accordingly, the GraphOn board is empowered, without shareholder approval, to issue GraphOn preferred stock with dividend, liquidation, conversion, voting or other rights that could adversely affect the voting power or other rights of the holders of GraphOn common stock. Similar to Unity preferred stock, the GraphOn preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of GraphOn if the merger is not completed. Although GraphOn does not currently intend to issue any shares of GraphOn preferred stock, there can be no assurance that GraphOn will not do so at some future date if the merger is not consummated. DIVIDENDS GraphOn never has paid a dividend and is not likely to pay one in the foreseeable future. If the merger is completed, the payment of any subsequent dividends will be in the discretion of the Unity board and will be dependent upon Unity's results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Unity board. See "Description of Unity's Securities--Dividends." PREEMPTIVE RIGHTS Holders of the private placement shares and Corel have the right to participate on a pro rata basis in future private offerings of GraphOn securities until such time as GraphOn completes an initial public 60 offering. GraphOn has determined that the merger will constitute an "initial public offering." Thus, if the merger is completed, such rights will be of no further force and effect. SPENCER TRASK WARRANTS AND SIMILAR WARRANTS GraphOn issued warrants to Spencer Trask (the "Spencer Trask Warrants") to purchase up to an aggregate of 1,032,574 shares of GraphOn common stock. Spencer Trask subsequently transferred its interests in 566,295 of such warrants to nonaffiliated parties. The exercise price of such warrants is $1.00 per share. The Spencer Trask Warrants are exercisable until the later of January 27, 2006 or three years after an initial public offering before such date. The exercise price and number of shares of GraphOn common stock issuable on exercise of the warrants are subject to adjustment in certain circumstances, including in the event of a stock dividend, recapitalization, subdivision or consolidation of GraphOn, or issuance of GraphOn common stock, or options (with certain exceptions), rights or warrants to subscribe for shares of GraphOn common stock, or securities convertible into or exchangeable for shares of GraphOn common stock, at a price below their respective exercise prices. The Spencer Trask Warrants may be exercised upon surrender of the certificate evidencing the respective warrant on or prior to the expiration date at the offices of GraphOn, with the annexed exercise form completed and executed as indicated, accompanied by full payment of the exercise price to GraphOn (by certified or official bank check, payable to GraphOn, in shares of GraphOn common stock, or by the "net issuance" method) for the number of warrant shares being exercised. The holders of Spencer Trask Warrants do not have the rights or privileges of holders of GraphOn common stock. No fractional shares will be issued upon exercise of such warrants. However, GraphOn will pay to such warrantholder, in lieu of the issuance of any fractional share which otherwise is issuable to such warrantholder, an amount in cash based on the fair market value of GraphOn common stock as determined in good faith by the GraphOn board. Spencer Trask Investors, an affiliate of Spencer Trask, and Mr. Keller hold warrants exercisable for up to 100,000 and 50,000 shares, respectively, of GraphOn common stock, the terms of which are substantially the same as those of the Spencer Trask Warrants. If not exercised prior to the effective date of the merger, Unity shall assume GraphOn's obligations with respect to the Spencer Trask Warrants and the warrants held by Spencer Trask Investors and Mr. Keller, which shall be exercisable for up to 575,763, 55,760 and 27,880 shares of Unity common stock, respectively, at an exercise price of approximately $1.79 per share. COREL WARRANT AND SIMILAR WARRANT Corel and one additional shareholder holding less than 1% of the outstanding shares of GraphOn hold an aggregate of two warrants to purchase up to 388,650 and 1,213 shares of GraphOn common stock, respectively. The exercise price of such warrants is $1.00 per share, and they are exercisable until December 18, 2003. The exercise price and number of shares of GraphOn common stock issuable on exercise of such warrants are subject to adjustment in certain circumstances, including in the event of a stock dividend, subdivision or combination of GraphOn capital stock, reclassification, capital reorganization or change in GraphOn capital stock, or consolidation, merger or sale of all or substantially all of GraphOn's assets. Such warrants may be exercised upon surrender of the certificates evidencing them, with the annexed exercise form completed and executed as indicated, accompanied by full payment of the exercise price to GraphOn (by cash or check, payable to GraphOn, or by the "net issuance" method) for the number of warrant shares being exercised. Holders of the warrants, as such, are not entitled to the rights or privileges of holders of GraphOn common stock. No fractional shares will be issued upon exercise of such warrants. However, GraphOn will pay to such warrantholders, in lieu of the issuance of any fractional share which otherwise is issuable to such warrantholders, an amount in cash based on the fair market value of GraphOn common stock as determined in good faith by the GraphOn board. 61 If not exercised prior to the effective date of the merger, Unity shall assume GraphOn's obligations under such warrants which shall be exercisable for up to 216,711 and 676 shares of Unity common stock, respectively, at an exercise price of approximately $1.79 per share. REGISTRATION RIGHTS Holders of shares of GraphOn common stock acquired in the Private Placement, as well as Mr. Keller and Spencer Trask Investors, hold certain automatic, demand and incidental registration rights under a Registration Rights Agreement. GraphOn agreed to file a registration statement under the Securities Act for the resale of the private placement shares and such other shares: - in the event of the closing of an initial public offering prior to January 27, 2001, not later than the expiration of the Lock-Up Period (as defined in the Registration Rights Agreement); provided, however, that any holder of such shares may exclude all or a portion thereof from such registration and GraphOn shall have no obligation to register shares that are freely tradable without restriction; and - in the event that no initial public offering has been completed by January 27, 2002, on two occasions upon demand (a "demand registration") of the holders of at least a majority of the total Registrable Securities (as defined in the Registration Rights Agreement) then outstanding. GraphOn also has agreed that, if at any time it registers securities, it will include the private placement shares and certain shares of GraphOn common stock held by Mr. Keller and Spencer Trask Investors, subject to reduction in certain instances, upon the written request of such investors to GraphOn. All expenses incurred in connection with such registrations shall be borne by GraphOn, except for underwriting discounts and commissions and the costs of the second demand registration. The Registration Rights Agreement contains customary indemnification and contribution provisions involving the participants in any registration effected pursuant to such agreement. The Registration Rights Agreement also provides that purchasers of private placement shares appoint Spencer Trask as their agent to negotiate on their behalf the terms of any restrictions on the right of such purchasers to sell any of their shares which shall be imposed by the managing underwriter of the initial public offering including, in particular, the term of the Lock-Up Period. If GraphOn fails to fulfill any portion of its obligations under the Registration Rights Agreement, GraphOn and certain of its directors, officers and principal shareholders have agreed to give holders of the private placement shares the ability to elect a majority of the GraphOn board in order to provide liquidity until such time as GraphOn's registration responsibility has been fulfilled. In addition, holders of the Spencer Trask Warrants, Spencer Trask Investors, Mr. Keller, Corel and one additional GraphOn shareholder are entitled to certain other registration rights. GraphOn has agreed, if it has any registered securities, to register the shares underlying the Spencer Trask Warrants and certain other warrants held by Spencer Trask Investors and Mr. Keller on two occasions during the term of such warrants if requested by the holders of a majority thereof. The shares underlying such warrants also have "piggy-back" registration rights until the later of October 28, 2007 or the expiration of the period of exercisability of such warrants. GraphOn must notify holders of the shares having such rights of any proposed filing of a registration statement at least 30 business days prior to the filing. Subject to and subordinate to the registration rights granted to the holders of the private placement shares, described above, GraphOn also granted Corel and one additional holder of GraphOn certain "piggy-back" registration rights. If the merger is consummated, each outstanding share of GraphOn common stock will be converted into the right to receive approximately .5576 of a share of Unity common stock, which will be registered pursuant to the registration statement filed in connection with the merger. CONSEQUENTLY, GRAPHON SHALL HAVE NO FURTHER OBLIGATION TO REGISTER SHARES OF GRAPHON COMMON STOCK PURSUANT TO THE AGREEMENTS DESCRIBED ABOVE. 62 SHARES ELIGIBLE FOR FUTURE SALE All outstanding shares of GraphOn common stock currently are subject to restrictions on transfer. No outstanding shares of GraphOn common stock have been registered under the Securities Act and must be held indefinitely unless: - there is in effect a registration statement under the Securities Act covering the proposed disposition, including, without limitation, the registration statement contemplated to be filed in connection with the merger, and such disposition is made in accordance with such registration statement; - the holder of such shares has notified GraphOn of such disposition and, with respect to certain holders of GraphOn common stock, if reasonably requested by GraphOn, such holder has furnished GraphOn with an opinion of counsel, reasonably satisfactory to GraphOn, or, in the case of certain other shareholders, satisfactory assurances that such disposition will not require registration under the Securities Act; or - the shares are sold pursuant to Rule 144 or Rule 144A of the Securities Act. In general, under Rule 144 as currently in effect, if a minimum of one year has elapsed between the later of the date of acquisition of the securities from the issuer or an "affiliate" of the issuer, as that term is defined under the Securities Act, a person (including an affiliate or person whose shares are aggregated) holding such securities beneficially is entitled to sell, within any three-month period, a number of such shares that does not exceed the greater of: - 1% of the then outstanding shares of such class of securities; or - the average weekly reported trading volume in such securities during the four calendar weeks preceding such sale. Such sales are permitted only if - the issuer has been subject to the reporting requirements of the Exchange Act for at least 90 days before the sale and has filed all reports required under the Exchange Act during the 12 months preceding such sale; - such sale is in a brokers' transaction or directly with a market maker; and - a notice of proposed sale is filed with the SEC. If a minimum of two years has elapsed between the later of the date of acquisition of the securities from the issuer or an affiliate, a person (or persons whose shares are aggregated) holding such securities beneficially, who is not deemed an affiliate of the issuer, is entitled to sell such securities under Rule 144 without regard to the limitations described above. There can be no assurance that holders of GraphOn common stock ever will be able to rely on Rule 144 to resell such shares. As a condition to the merger, each holder of private placement shares must be restricted by the terms of a "lock-up" agreement whereby such holder will be prevented from selling, transferring or otherwise disposing of the shares until the date which is six months after the Effective Date. In addition, there are 625,000 shares of Unity common stock outstanding but not currently available for sale by certain Unity stockholders, including shares held by the current officers and directors of Unity and their affiliates. These shares may not be sold or otherwise transferred until the effective time (as hereinafter defined). Such 625,000 shares will be registered under the Securities Act of 1933 at the effective time so as to permit such shares to be offered for sale by their respective holders at any time and from time to time subsequent to the merger. However, 311,500 of these shares are held by Unity stockholders who, as a condition to the merger, must agree not to sell, pledge, transfer or otherwise dispose of any of such shares for a period of 6 months following the effective time. Upon consummation of the merger, approximately 9,124,543 additional shares of Unity common stock will be outstanding. All of 63 such shares will be registered under the Securities Act at the effective time so as to permit such shares to be offered for sale by their respective holders at any time and from time to time subsequent to the merger. However, as a condition to the merger, all of GraphOn's officers and directors and approximately 160 persons and entities who acquired GraphOn common stock in private transactions from October 28, 1998 to January 27, 1999, which holders, officers and directors will hold approximately 86.6% of the additional shares of Unity common stock to be outstanding, must agree not to sell, pledge, transfer or otherwise dispose of any shares of Unity common stock received in connection with the merger for a period of 6 months from the effective time. Upon consummation of the merger, there also will be outstanding options and warrants to purchase a maximum of approximately 4,598,901 shares of Unity common stock, including (i) approximately 1,073,901 shares issuable upon exercise or conversion of GraphOn's options and warrants, (ii) 2,500,000 shares issuable upon exercise of Unity's Class A redeemable warrants and Unity's Class B redeemable warrants issued in Unity's IPO, (iii) 400,000 shares issuable upon exercise of Unity's Class A redeemable warrants and Class B redeemable warrants issued to Unity's current officers and directors, (iv) 375,000 shares issuable upon exercise of all of the components of the unit purchase warrants originally issued to the underwriters and affiliates of the underwriters in connection with the IPO and (v) 250,000 shares issuable upon exercise of the Class A redeemable warrants to be issued to Spencer Trask. The shares of Unity common stock issuable upon exercises of such options and warrants are being registered for sale under the Securities Act as of the date of this joint proxy statement/prospectus. See "Description of Unity's Securities." The sale of any of these shares could have an adverse effect on the future market price of Unity common stock. INFORMATION RIGHTS GraphOn contractually is obligated to provide Spencer Trask and other GraphOn shareholders, until the earlier of October 28, 2003 or the closing of an initial public offering, annual audited financial statements. Additionally, Spencer Trask, holders of the private placement shares and Corel are entitled to certain information rights pursuant to the terms of various agreements until the closing of an initial public offering. GraphOn has determined that the merger will constitute an "initial public offering." Thus, if the merger is completed, GraphOn no longer will be contractually obligated to provide such information to such shareholders. TRANSFER AGENT The transfer agent for the GraphOn common stock is Brobeck, Phleger & Harrison LLP, 2200 Geng Road, Two Embarcadero Place, Palo Alto, CA 94303. BUSINESS OF UNITY Unity was formed in May 1996 to serve as a vehicle to effect a merger, exchange of capital stock, asset acquisition or other similar business combination with an operating business. In November 1996, Unity successfully consummated an IPO from which it derived net proceeds of $6,402,112. Approximately 90% of such net proceeds, inclusive of interest income thereon, are presently held in trust pending the consummation of a merger and will be released to Unity upon consummation of the merger. Unity's executive offices are located at 245 Fifth Avenue, New York, New York 10016, its telephone number is (212) 696-4282. 64 MANAGEMENT OF UNITY PRIOR TO THE MERGER EXECUTIVE OFFICERS AND DIRECTORS
NAME AGE POSITION - ----------------------------------------------------- --- ----------------------------------------------------- Lawrence Burstein.................................... 55 President, Treasurer and Director John Cattier......................................... 66 Director Barry Ridings........................................ 46 Director Norman Leben......................................... 38 Secretary and Director
LAWRENCE BURSTEIN has been President, Treasurer and a director of Unity since its inception. For approximately ten years prior thereto, Mr. Burstein was the President, a director and principal shareholder of Trinity Capital Corporation, a private investment banking concern ("Trinity"). Trinity ceased operations upon the formation of Unity VCA. Since March 1996, Mr. Burstein has been President and a principal shareholder of Unity VCA. Mr. Burstein is a director of four public companies, being, respectively, T-HQ Inc., which designs and markets Nintendo and Sega games, Brazil Fast Food Corp., the owner and operator of the second largest fast food restaurant chain in Brazil, CAS Medical Systems, Inc., engaged in the manufacture and marketing of blood pressure monitors and other medical products principally for the neonatal market, and The MNI Group Inc., engaged in the marketing of specially formulated medical foods. Mr. Burstein received an L.L.B. from Columbia Law School. JOHN CATTIER has been a director and shareholder of Unity since its inception. Since May 1996, Mr. Cattier has been a director and shareholder of Unity VCA. Mr. Cattier has been an independent consultant since January 1985. From 1957 to December 1984, Mr. Cattier was associated with White Weld & Co., investment bankers, serving as a general partner, and with Credit Suisse White Weld (which subsequently became Credit Suisse First Boston), investment bankers, in various capacities. Mr. Cattier is a director of Pacific Assets Trust PLC, a United Kingdom investment trust, and Vice Chairman of Laredo National Bancshares, Inc. of Laredo, Texas, a one bank holding company. Mr. Cattier received a B.A. from Yale University. BARRY RIDINGS has been a director of Unity since its inception. Since March 1990, Mr. Ridings has been a Managing Director of Alex. Brown & Sons, investment bankers. From June 1986 to March 1990, Mr. Ridings was a Managing Director of Drexel Burnham Lambert, investment bankers. Mr. Ridings is a director of Transcor Waste Services Corp., a waste management company, Noodle Kidoodle, Inc., an operator of specialty toy stores, New Valley Corp., formerly known as Western Union, Search Capital Group, an auto finance Company, Telemundo Group, a Spanish language television network, and Norex Industries Inc., a shipping company. Mr. Ridings received an M.B.A. from Cornell University. NORMAN LEBEN has been Secretary and a director of Unity since its inception. Mr. Leben is, and since 1988 has been, a partner of Dalessio Miliner & Leben ("DML"), certified public accountants. Prior thereto and from 1985, Mr. Leben was engaged in the acquisition, management, syndication and operation of real estate and other emerging market businesses. Prior to 1985, Mr. Leben was employed by Laventhol & Horwath. Mr. Leben received a B.B.A. from George Washington University. All directors hold office until the next annual meeting of shareholders and the election and qualification of their successors. Officers are elected annually by the Unity board and serve at its discretion. Mr. Burstein devotes approximately 30% of his time to the affairs of Unity. Unity has not entered into employment agreements with either of its officers. 65 EXECUTIVE COMPENSATION No executive officer has received any cash compensation from Unity since inception for services rendered. Unity's officers receive no compensation for serving as officers other than accountable reimbursement for any reasonable business expenses incurred in connection with activities on behalf of Unity. See "Description of Unity's Securities--Directors' Warrants" for information as to warrants to purchase in the aggregate up to 400,000 shares of Unity common stock. DIRECTORS' COMPENSATION The directors of Unity have received no compensation for serving on the Unity board other than reimbursement of reasonable expenses incurred in attending meetings. STOCK OPTION PLAN Unity's 1996 Stock Option Plan ("1996 Plan") was adopted by both the Unity board and a majority in interest of the Unity stockholders on May 30, 1996. The 1996 Plan provides for the granting of options which are intended to qualify either as incentive stock options ("Incentive Stock Options") within the meaning of Section 422 of the Internal Revenue Code of 1986 or as options which are not intended to meet the requirements of such section ("Nonstatutory Stock Options"). The total number of shares of Unity common stock reserved for issuance under the 1996 Plan is 187,500. Options to purchase shares may be granted under the 1996 Plan to persons who, in the case of Incentive Stock Options, are employees (including officers) of Unity, or, in the case of Nonstatutory Stock Options, are employees (including officers) or non-employee directors of Unity. The 1996 Plan provides for its administration by the Unity board or a committee chosen by the Unity board, which has discretionary authority, subject to certain restrictions, to determine the number of shares issued pursuant to Incentive Stock Options and Nonstatutory Stock Options and the individuals to whom, the times at which and the exercise price for which options will be granted. The exercise price of all Incentive Stock Options granted under the 1996 Plan must be at least equal to the fair market value of such shares on the date of the grant or, in the case of Incentive Stock Options granted to the holder of more than 10% of Unity common stock, at least 110% of the fair market value of such shares on the date of the grant. The maximum exercise period for which Incentive Stock Options may be granted is ten years from the date of grant (five years in the case of an individual owning more than 10% of Unity common stock). The aggregate fair market value (determined at the date of the option grant) of shares with respect to which Incentive Stock Options are exercisable for the first time by the holder of the option during any calendar year shall not exceed $100,000. No options may be granted under the 1996 Plan prior to the consummation of a Business Combination. CERTAIN TRANSACTIONS In June 1996, Unity issued an aggregate of 625,000 shares of Unity common stock at a price of $.0001 per share, as follows: 25,000 shares to Unity VCA, 150,000 shares to Mr. Burstein, 15,000 shares to Mr. Leben, an aggregate of 76,500 shares to Heptagon Investments Ltd. ("Heptagon") and its affiliate, 39,000 shares to Cricket Services Ltd. ("Cricket"), 6,000 shares to Barry Ridings, and 313,500 shares to 24 other persons. Mr. Cattier is Chairman of Heptagon's board of directors and exercises voting and dispositive control over approximately 7.6% of Heptagon's shares of capital stock. Mr. Cattier disclaims any voting or dispositive power over shares of Unity common stock held by Heptagon. Mr. Cattier exercises voting and dispositive control over the shares of Unity common stock held by Cricket. Both Heptagon and Cricket are private investment companies. 66 In June 1996, Unity issued 58,334, 58,333, 58,333 and 25,000 Class A and Class B warrants to each of, respectively, Messrs. Burstein, Leben, Cattier and Ridings (collectively, the "directors' warrants"), in consideration for future services to be rendered by such persons on behalf of Unity. The directors' warrants are identical to Unity's Class A and Class B redeemable warrants offered and sold in the IPO but are not redeemable by Unity and may not be transferred until the completion of a merger with an operating business. Unity has been obligated to pay Unity VCA, since June 1, 1996, a monthly fee of $7,500 for general and administrative services pursuant to an agreement which may be canceled by either party upon 30 days' prior written notice. Such fee includes the use of approximately 500 square feet of office space in premises occupied by Unity VCA. DML, an accounting firm which is an affiliate of Mr. Leben, affords Unity VCA the use of such space at a monthly rental of $2,000. Messrs. Burstein, Cattier and Leben are each directors and stockholders of Unity VCA. As of January 31, 1999, $76,282 of such fees were due and owing to Unity VCA. Unity VCA had made non-interest demand loans aggregating approximately $50,000 to Unity as of the IPO date to cover expenses incurred by Unity in connection with the IPO. Unity repaid these loans out of the proceeds of the IPO. DML has performed bookkeeping, tax and accounting services for certain of the "blank check" companies of which Messrs. Burstein, Cattier and Ridings have been directors and shareholders from their dates of inception through the consummation of their respective Business Combinations and performs similar services for Unity at an aggregate cost of $15,570 and $14,275 for the years ended July 31, 1998 and 1997, respectively. AFTER THE MERGER Upon completion of the merger, the executive officers of GraphOn and certain other persons will become the executive officers and of Unity. See "Management of GraphOn-Board of Directors." 67 PRINCIPAL STOCKHOLDERS OF UNITY The following table sets forth certain information known to Unity as of May , 1999 and as of such date, giving effect to the merger, based on information obtained from the persons named below, with respect to the beneficial ownership of shares of Unity common stock held by - each person known by Unity to be the owner 5% or more of the outstanding shares of Unity common stock; - each director of Unity; and - all executive officers and directors of Unity as a group:
BENEFICIAL OWNERSHIP OF BENEFICIAL OWNERSHIP OF UNITY COMMON STOCK UNITY COMMON STOCK PRIOR TO THE MERGER (1)(2) AFTER THE MERGER(3) ---------------------------- ------------------------------ NUMBER OF SHARES PERCENT NUMBER OF SHARES PERCENT ----------------- --------- ----------------- ----------- Lawrence Burstein........................................ 175,000(4) 9.3% 291,668(6) 2.6% 245 Fifth Avenue New York, NY 10016 John Cattier............................................. 140,500(4)(5) 7.5% 257,168(7) 2.3% Achlain Invermoriston Inverneshire, Scotland IV3 6YN United Kingdom Barry Ridings............................................ 6,000 * 56,000(8) * Lilac Lane Princeton, NJ 08540 Norman Leben............................................. 40,000(4) 2.1% 156,600(9) 1.4% 245 Fifth Avenue New York, NY 10016 James G. Dinan et al..................................... 322,375(10) 17.2% 322,375 2.9% 350 Park Avenue New York, NY 10022 All executive officers and directors as a group (4 311,500(4)(5) 16.6% 711,500(11) 6.2% persons)...............................................
- ------------------------ * Denotes less than 1% of outstanding Unity common stock. (1) As used herein, beneficial ownership means the sole or shared power to vote, or direct the voting of, a security, or the sole or shared power to invest or dispose, or direct the investment or disposition, of a security. Except as otherwise indicated, all persons named herein have (i) sole voting power and investment power with respect to their respective shares of Unity common stock, except to the extent that authority is shared by spouses under applicable law, and (ii) record and beneficial ownership with respect to their respective shares of Unity common stock. With respect to each shareholder, includes any shares issuable upon exercise of all options or warrants held by such shareholder that are currently exercisable or will become exercisable within 60 days of May , 1999. (2) Does not include shares issuable upon exercise of the directors' warrants which are beneficially owned by each of the persons named in the above table but which are not exercisable until the consummation of a merger with an operating business. 68 (3) Assumes no cash conversions of Unity common stock by Unity stockholders or exercise by Unity stockholders and GraphOn shareholders of their respective appraisal rights. (4) Includes 25,000 shares of Unity common stock owned by Unity VCA, over which shares Messrs. Burstein, Leben and Cattier share voting and investment power. (5) Includes (i) 75,000 shares held by Heptagon, (ii) 1,500 shares held by an affiliate of Heptagon and (iii) 39,000 shares held by Cricket. Mr. Cattier is Chairman of Heptagon's board of directors and exercises voting and dispositive control over approximately 7.6% of Heptagon's shares of capital stock. Mr. Cattier disclaims any voting or dispositive power of the shares of Unity common stock held by Heptagon. (6) Includes 116,668 shares issuable upon exercise of directors' warrants. (7) Includes 116,666 shares issuable upon exercise of directors' warrants. (8) Includes 50,000 shares issuable upon exercise of directors' warrants. (9) Includes 116,666 shares issuable upon exercise of directors' warrants. (10) Represents shares held by a "group," within the meaning of Section 13(d)(3) of the Exchange Act, comprised of James G. Dinan, York Investment Limited, York Capital Management, L.P. and York Institutional Partners, L.P., as reflected in Schedule 13G, filed with the SEC on January 21, 1999. (11) Includes 400,000 shares issuable upon exercise of directors' warrants. The shares of Unity common stock owned by the persons named above have been placed in escrow with American Stock Transfer & Trust Company, as escrow agent, until the earlier to occur of (i) the consummation of the merger or (ii) the mandatory liquidation of Unity pursuant to its certificate of incorporation due to the failure of Unity to effect a merger with an operating business. During the escrow period, such persons will not be able to sell or otherwise transfer their respective shares of Unity common stock, but will retain all other rights as stockholders of Unity, including, without limitation, the right to vote such shares. Messrs. Burstein, Cattier, Leben and Unity VCA may be deemed to be "parents" and "promoters" of Unity, as such terms are defined under the Federal securities laws. 69 DESCRIPTION OF UNITY'S SECURITIES GENERAL Unity is authorized to issue 20,000,000 shares of Unity common stock, par value $.0001 per share, and 5,000 shares of "blank check" preferred stock, par value $.01 per share. As of May , 1999, 1,875,000 shares of Unity common stock are outstanding, held of record by 37 persons. No shares of Unity preferred stock currently are outstanding. COMMON STOCK The holders of Unity common stock are entitled to one vote for each share held of record on all matters to be voted on by shareholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors. The holders of Unity common stock are entitled to receive dividends when, as and if declared by the Unity board out of funds legally available therefor. In the event of liquidation, dissolution or winding up of Unity, the holders of Unity common stock, except for the non-public Unity stockholders who have agreed to waive their rights to share in any distribution upon their respective shares of Unity common stock relating to a liquidation of Unity due to either the failure of the Unity stockholders to approve the Amendments or the failure of Unity to effect a merger with GraphOn by June 30, 1999, as applicable), are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision has been made for each class of stock, if any, having preference over the Unity common stock. Holders of shares of Unity common stock, as such, have no redemption, preemptive or other subscription rights. Except as set forth under "The Merger-Conversion Rights," there are no conversion provisions applicable to the Unity common stock. All of the outstanding shares of Unity common stock are, and the shares of Unity common stock issuable in the merger, when delivered in accordance with the terms of the merger agreement, will be, fully paid and nonassessable. PREFERRED STOCK Unity's certificate of incorporation authorizes the issuance of 5,000 shares of Unity preferred stock with such designation, rights and preferences as may be determined from time to time by the Unity board. Accordingly, the Unity board is empowered, without shareholder approval, to issue Unity preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of Unity common stock. The Unity preferred stock could be utilized, under certain circumstances, as a method of discouraging, delaying or preventing a change in control of Unity subsequent to the effective time. Although Unity does not currently intend to issue any shares of Unity preferred stock, there can be no assurance that Unity will not do so subsequent to the completion of the merger. DIVIDENDS Unity does not presently intend to pay any cash dividends as all available cash will be utilized to further the growth of Unity's business subsequent to the effective time and for the proximate future thereafter. The payment of any cash dividends will be in the discretion of the Unity board and will be dependent upon Unity's results of operations, financial condition, contractual restrictions and other factors deemed relevant by the Unity board. TRANSFER AGENT The transfer agent for the Unity common stock is American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005. 70 IPO WARRANTS As of May , 1999, there were 1,250,000 Class A redeemable warrants and 1,250,000 Class B redeemable warrants (collectively, the "Unity IPO Warrants") outstanding, held of record by seven and four persons, respectively. Each Class A redeemable warrant entitles the registered holder to purchase one share of Unity common stock at a price of $5.50 per share, subject to adjustment in certain circumstances, for a period of five years commencing on the later of a merger with an operating business or November 12, 1997. Each Class B redeemable warrant entitles the registered holder to purchase one share of Unity common stock at a price of $7.50 per share subject to adjustment in certain circumstances, for a period of five years commencing on the later of a merger with an operating business or November 12, 1997. Unity may call the Class A redeemable warrants and the Class B redeemable warrants for redemption, each as a class, in whole and not in part, at the option of Unity, at a price of $.05 per IPO warrant at any time upon not less than 30 days' prior written notice, provided that the reported high bid price of Unity common stock equals or exceeds $8.50 per share with respect to the Class A warrants, and $10.50 per share with respect to the Class B warrants, for the 20 consecutive trading days immediately prior to the notice of redemption to warrantholders. The warrantholders shall have exercise rights until the close of business on the date fixed for redemption. The Unity IPO warrants are issued in registered form under a warrant agreement between Unity and American Stock Transfer & Trust Company, as warrant agent. The exercise price and number of shares of Unity common stock issuable on exercise of the Unity IPO warrants are subject to adjustment in certain circumstances, including in the event of a stock dividend, recapitalization, reorganization, merger or consolidation of Unity. However, the Unity IPO warrants are not subject to adjustment for issuances of Unity common stock at a price below their respective exercise prices. Unity has the right, in its sole discretion, to decrease the exercise price of the Unity IPO warrants for a period of not less than 30 days on not less than 30 days' prior written notice to the warrantholders. In addition, Unity has the right, in its sole discretion, to extend the expiration date of the Unity IPO warrants on five business days' prior written notice to the warrantholders. The Unity IPO warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment of the exercise price (by certified check, payable to Unity) to the warrant agent for the number of Unity IPO warrants being exercised. The warrantholders do not have the rights or privileges of holders of Unity common stock. No Unity IPO warrants will be exercisable unless at the time of exercise Unity has filed with the SEC a current prospectus covering the shares of Unity common stock issuable upon exercise of Unity IPO warrants and such shares have been registered or qualified or deemed to be exempt under the securities laws of the state of residence of the holder of such Unity IPO warrants. Unity will use its best efforts to have all shares so registered or qualified on or before the exercise date and to maintain a current prospectus relating thereto until the expiration of the Unity IPO warrants, subject to the terms of the warrant agreement. While it is Unity's intention to do so, there is no assurance that it will be able to do so. No fractional shares will be issued upon exercise of the Unity IPO warrants. However, if a warrantholder exercises all Unity IPO warrants then owned of record by him, Unity will pay to such warrantholder, in lieu of the issuance of any fractional share which otherwise is issuable to such warrantholder, an amount in cash based on the market value of Unity common stock on the last trading day prior to the exercise date. 71 If the merger is consummated, Unity shall issue to Spencer Trask 250,000 Class A redeemable common stock purchase warrants exercisable for an aggregate of up to 250,000 shares of Unity common stock at an exercise price of $5.50 per share. The terms of the warrant are substantially the same as the terms of the Class A redeemable warrants described above. UNDERWRITERS' IPO SECURITIES In connection with the Unity IPO, Unity sold to GKN Securities Corp. and Gaines, Berland Inc., the underwriters of the Unity IPO, for nominal consideration, the right to purchase up to an aggregate of 125,000 units (the "Underwriters' IPO Securities"). Each unit issuable upon exercise of the Underwriters' IPO Securities consists of one share of Unity common stock, one Class A warrant and one Class B warrant (the Class A warrants and the Class B warrants are collectively referred to herein as the "Warrants"). The Warrants are identical to the Unity IPO warrants described above except that the Warrants cannot be redeemed. The Underwriters' IPO Securities are exercisable initially at $6.60 per unit (the "Exercise Price") for a period of five years commencing on November 12, 1996. The Underwriters' IPO Securities contain anti-dilution provisions providing for adjustment of the exercise price upon the occurrence of certain events including the issuance of shares of Unity common stock or other securities convertible into or exercisable for shares of Unity common stock at a price per share less than the exercise price, or in the event of any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transaction. Unity also agreed at the time of the issuance of the Underwriters' IPO Securities to use its best efforts to maintain an effective registration statement with respect to the Underwriters' IPO Securities and the underlying units. In addition, the Underwriters' IPO Securities grant to the holders thereof certain "piggy back" and "demand" rights for periods of seven and five years, respectively, from November 12, 1996 with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of the Underwriters' IPO Securities. DIRECTORS' WARRANTS In June 1996, Unity issued to each of Messrs. Burstein, Leben, Cattier and Ridings 58,334, 58,333, 58,333 and 25,000 Class A, and the same number of Class B, warrants, respectively, in consideration for future services to be rendered by such persons on behalf of Unity. Such warrants are identical to the Class A and Class B redeemable warrants but are not redeemable by Unity and may not be exercised until the consummation of a Business Combination. 72 COMPARISON OF RIGHTS OF HOLDERS OF UNITY COMMON STOCK AND GRAPHON COMMON STOCK If the merger agreement is approved and the merger becomes effective, GraphOn shareholders will become Unity stockholders and their rights as shareholders will be determined by the DGCL and Unity's Restated certificate of incorporation ("certificate of incorporation") and bylaws ("the Unity Bylaws"). Differences between the DGCL and the CCC as well as those between the certificate of incorporation and Bylaws of Unity and the Second Amended and Restated Articles of Incorporation ("Articles of Incorporation") and the amended and restated bylaws ("the GraphOn Bylaws") of GraphOn, are summarized below. This summary is not intended to be complete and is qualified in its entirety by reference to the DGCL, the CCC, and the certificate of incorporation and Unity Bylaws and the Articles of Incorporation and GraphOn Bylaws. SIZE OF THE BOARD OF DIRECTORS. Under California law, the number of directors of a corporation may be fixed in the articles of incorporation or bylaws of a corporation, or a range may be established for the number of directors, with the board of directors given authority to fix the exact number of directors within such range. The GraphOn Bylaws establish a range of five to seven for the number of directors of GraphOn with the exact number currently set at six. The provision setting forth the number of directors in the GraphOn Bylaws may not be amended to reduce the minimum number of directors below five if the votes cast against the adoption of such amendment at a meeting, or the shares not consenting in the case of action by written consent, are equal to more than 16 2/3% of the outstanding shares entitled to vote. Under Delaware law, the number of directors of a corporation, or the range of authorized directors, may be fixed or changed by the board of directors acting alone, by amendment to the corporation's bylaws, unless the directors are not authorized to amend the bylaws or the number of directors is fixed in the certificate of incorporation, in which cases shareholder approval is required. The Unity Bylaws establish a range of one to seven for the number of directors of Unity, with the exact number currently set at four, and Unity's certificate of incorporation authorizes the Unity board to make, alter, amend or repeal the Unity Bylaws. Accordingly, a majority of Unity's board of directors will have the power to change the authorized number of directors. The GraphOn board does not have this power under California law. CUMULATIVE VOTING. Under California law, if any shareholder has given notice of his or her intention to cumulate votes for the election of directors, any other shareholder of the corporation also is entitled to cumulate his or her votes at such election. Cumulative voting is not available under Delaware law unless specifically provided for in a corporation's certificate of incorporation The Unity certificate of incorporation does not provide for cumulative voting and, therefore, the shareholders of GraphOn will no longer have cumulative voting rights. The elimination of cumulative voting would limit the ability of minority shareholders to obtain representation on a corporation's board of directors. CLASSIFIED BOARD OF DIRECTORS. A classified board is one on which a certain number, but not all, of the directors are elected on a rotating basis each year. Under California law, directors generally are elected annually. Delaware law permits, but does not require, a classified board of directors, with staggered terms under which one-half or one-third of the directors are elected for terms of two or three years, respectively. This method of electing directors makes a change in the composition of the board of directors, and a potential change in control of a corporation, a lengthier and more difficult process. Unity's post-merger certificate of incorporation provides for a classified board of directors. WRITTEN CONSENT OF SHAREHOLDERS. Both the CCC and the DGCL provide that the shareholders of a corporation may take action by written consent without a meeting, unless the corporation's charter documents provide otherwise. Both the Articles of Incorporation of GraphOn and the certificate of incorporation of Unity do not contain any provisions prohibiting actions by written consent and, accordingly, the shareholders of both Unity and GraphOn may take action by written consent without a meeting. 73 POWER TO CALL SPECIAL SHAREHOLDERS' MEETINGS. Under California law, a special meeting of shareholders may be called by the board of directors, the chairman of the board, the president, the holders of shares entitled to cast not less than 10% of the votes at such meeting and such additional persons as are authorized by the articles of incorporation or the bylaws. Under Delaware law, a special meeting of shareholders may be called by the board of directors or by any other person authorized to do so in the certificate of incorporation or the bylaws. SHAREHOLDER APPROVAL OF CERTAIN BUSINESS COMBINATIONS. In the last several years, a number of states (but not California) have adopted special laws designed to subject to shareholder approval certain kinds of "unfriendly" corporate takeovers, or other transactions involving a corporation and one or more of its significant shareholders. Under Section 203 of the DGCL ("Section 203"), certain "business combinations" with "interested shareholders" of Delaware corporations are subject to a three-year moratorium unless specified conditions are met. With certain exceptions, an interested shareholder is a person or group who or which owns 15% or more of the corporation's outstanding voting stock (including any rights to acquire stock pursuant to an option, warrant, agreement, arrangement or understanding, or upon the exercise of conversion or exchange rights, and stock with respect to which the person has voting rights only), or is an affiliate or associate of the corporation and was the owner of 15% or more of such voting stock at any time within the previous three years. For purposes of Section 203, the term "business combination" is defined broadly to include mergers with or caused by the interested shareholder, sales or other dispositions to the interested shareholder (except proportionately with the corporation's other shareholders) of assets of the corporation or a subsidiary equal to 10% or more of the aggregate market value of the corporation's consolidated assets or its outstanding stock, the issuance or transfer by the corporation or a subsidiary of stock of the corporation or such subsidiary to the interested shareholder (except for transfers in a conversion or exchange or a pro rata distribution or certain other transactions, none of which increase the interested shareholder's proportionate ownership of any class or series of the corporation's or such subsidiary's stock) or receipt by the interested shareholder (except proportionately as a shareholder), directly or indirectly, of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation or a subsidiary. The three-year moratorium imposed on business combinations by Section 203 does not apply if: - prior to the date on which such shareholder becomes an interested shareholder the board of directors approves either the business combination or the transaction which resulted in the person becoming an interested shareholder; - the interested shareholder owns 85% of the corporation's voting stock upon consummation of the transaction which made him or her an interested shareholder (excluding from the 85% calculation shares owned by directors who are also officers of the target corporation and shares held by employee stock plans which do not permit employees to decide confidentially whether to accept a tender or exchange offer); or - on or after the date such person becomes an interested shareholder, the board approves the business combination and it also is approved at a shareholder meeting by 66 2/3% of the voting stock not owned by the interested shareholder. Section 203 only applies to Delaware corporations which have a class of voting stock that is listed on a national securities exchange, such as the Nasdaq National Market or are held of record by more than 2,000 shareholders. However, a Delaware corporation may elect not to be governed by Section 203 by a provision in its original certificate of incorporation or an amendment thereto or to the bylaws, which amendment must be approved by majority shareholder vote and may not be further amended by the board of directors. Unity is not currently subject to Section 203. 74 REMOVAL OF DIRECTORS. Under California law, any director or the entire board of directors may be removed, with or without cause, with the approval of a majority of the outstanding shares entitled to vote; however, no individual director may be removed (unless the entire board is removed) if the number of votes cast against such removal would be sufficient to elect the director under cumulative voting. Under Delaware law, a director of a corporation that does not have a classified board of directors or cumulative voting may be removed with or without cause with the approval of a majority of the outstanding shares entitled to vote. In the case of a Delaware corporation having cumulative voting, if less than the entire board is to be removed, a director may not be removed without cause unless the number of shares voted against such removal would not be sufficient to elect the director under cumulative voting. A director of a corporation with a classified board of directors may be removed only for cause, unless the certificate of incorporation otherwise provides. FILLING VACANCIES ON THE BOARD OF DIRECTORS. Under California law, any vacancy on the board of directors other than one created by removal of a director may be filled by the board. If the number of directors is less than a quorum, a vacancy may be filled by the unanimous written consent of the directors then in office by the affirmative vote of a majority of the directors at a meeting held pursuant to notice or waivers of notice or by a sole remaining director. A vacancy created by removal of a director may be filled by the board only if so authorized by a corporation's articles of incorporation or by a bylaw approved by the corporation's shareholders. Under Delaware law, vacancies and newly created directorships may be filled by a majority of the directors then in office (even though less than a quorum) unless otherwise provided in the certificate of incorporation or bylaws (and unless the certificate of incorporation directs that a particular class is to elect such director, in which case any other directors elected by such class, or a sole remaining director, shall fill such vacancy). LOANS TO OFFICERS AND EMPLOYEES. Under California law, any loan or guaranty to or for the benefit of a director or officer of the corporation or its parent requires approval of the shareholders unless such loan or guaranty is provided under a plan approved by shareholders owning a majority of the outstanding shares of the corporation. In addition, under California law, shareholders of any corporation with 100 or more shareholders of record may approve a bylaw authorizing the board of directors alone to approve loans or guaranties to or on behalf of officers (whether or not such officers are directors) if the board determines that any such loan or guaranty may reasonably be expected to benefit the corporation. Under Delaware law, a corporation may make loans to, guarantee the obligations of or otherwise assist its officers or other employees and those of its subsidiaries (including directors who are also officers or employees) when such action, in the judgment of the directors, may reasonably be expected to benefit the corporation. INDEMNIFICATION AND LIMITATION OF LIABILITY. California and Delaware have similar laws respecting indemnification by a corporation of its officers, directors, employees and other agents. The laws of both states also permit corporations to adopt a provision in their articles of incorporation eliminating the liability of a director to the corporation or its shareholders for monetary damages for breach of the director's fiduciary duty of care. There are nonetheless certain differences between the laws of the two states respecting indemnification and limitation of liability. The Articles of Incorporation of GraphOn eliminate the liability of directors to GraphOn to the fullest extent permissible under California law. California law does not permit the elimination of monetary liability where such liability is based on: - intentional misconduct or knowing and culpable violation of law; - acts or omissions that a director believes to be contrary to the best interest of the corporation or its shareholders, or that involve the absence of good faith on the part of the director; - receipt of an improper personal benefit; 75 - acts or omissions that show reckless disregard for the director's duty to the corporation or its shareholders where the director in the ordinary course of performing a director's duties should be aware of risks of serious injury to the corporation or its shareholders; - acts or omissions that constitute an unexcused pattern of inattention that amounts to an abdication of the director's duty to the corporation and its shareholders; - interested transactions between the corporation and a director in which a director has a material financial interest; and - liability for improper distributions, loans or guarantees. The certificate of incorporation of Unity also eliminates the liability of directors to the fullest extent permissible under Delaware law, as such law exists currently or as it may be amended in the future. Under Delaware law, such provision may not eliminate or limit director monetary liability for: - breaches of the director's duty of loyalty to the corporation or its shareholders; - acts or omissions not in good faith or involving intentional misconduct or knowing violations of law; - the payment of unlawful dividends or unlawful stock repurchases or redemptions; or - transactions in which the director received an improper personal benefit. Such limitation of liability provision also may not limit a director's liability for violation of, or otherwise relieve Unity or its directors from the necessity of complying with, federal or state securities laws, or affect the availability of non-monetary remedies such as injunctive relief or rescission. California law permits indemnification of expenses incurred in derivative or third-party actions, except that with respect to derivative actions: - no indemnification may be made without court approval when a person is adjudged liable to the corporation in the performance of that person's duty to the corporation and its shareholders, unless a court determines such person is entitled to indemnity for expenses, and then such indemnification may be made only to the extent that such court shall determine; and - no indemnification may be made without court approval in respect of amounts paid or expenses incurred in settling or otherwise disposing of a threatened or pending action or amounts incurred in defending a pending action which is settled or otherwise disposed of without court approval. Delaware allows indemnification of such expenses without court approval. Delaware law generally permits indemnification of expenses incurred in the defense or settlement of a derivative or third-party action, provided there is a determination by a disinterested quorum of the directors, by independent legal counsel or by a majority vote of a quorum of the shareholders that the person seeking indemnification acted in good faith and in a manner reasonably believed to be in or (in contrast to California law) not opposed to the best interests of the corporation. Without court approval, however, no indemnification may be made in respect of any derivative action in which such person is adjudged liable for negligence or misconduct in the performance of his or her duty to the corporation. Delaware law requires indemnification of expenses when the individual being indemnified has successfully defended the action on the merits or otherwise. Indemnification is permitted by California law only for acts taken in good faith and believed to be in the best interests of the corporation and its shareholders, as determined by a majority vote of a disinterested quorum of the directors, independent legal counsel (if a quorum of independent directors is not obtainable), a majority vote of a quorum of the shareholders (excluding shares owned by the indemnified party), or the court handling the action. California law requires indemnification when the 76 individual successfully has defended the action on the merits (as opposed to Delaware law which requires indemnification relating to a successful defense on the merits or otherwise). California corporations may include in their articles of incorporation a provision which extends the scope of indemnification through agreements, bylaws or other corporate action beyond that specifically authorized by statute. Delaware law states that the indemnification provided by statute shall not be deemed exclusive of any other rights under any bylaw, agreement, vote of shareholders or disinterested directors or otherwise. Under Delaware law, therefore, any indemnification agreements entered into by GraphOn with its officers and directors may be assumed by Unity upon completion of the merger. Currently, there are no actions pending against any officers of GraphOn in their capacities as such. INSPECTIONS OF SHAREHOLDERS LIST. Both California and Delaware law allow any shareholder to inspect the shareholders list for a purpose reasonably related to such person's interest as a shareholder. California law provides, in addition, for an absolute right to inspect and copy the corporation's shareholder list by persons holding an aggregate of 5% or more of a corporation's voting shares, or shareholders holding an aggregate of 1% or more of such shares who have filed a Schedule 14B with the SEC relating to the election of directors. Delaware law does not provide for any such absolute right of inspection, and no such right is granted under the certificate of incorporation or Bylaws of Unity. Lack of access to shareholder records, even though unrelated to the shareholder's interest as a shareholder, could result in impairment of the shareholder's ability to coordinate opposition to management proposals, including proposals with respect to a change in control of Unity. DIVIDENDS AND REPURCHASES OF SHARES. California law dispenses with the concepts of par value of shares as well as statutory definitions of capital, surplus and the like. The concepts of par value, capital and surplus are retained under Delaware law. Under California law, a corporation may not make any distribution (including dividends, whether in cash or other property, and repurchases of its shares) unless either the corporation's retained earnings immediately prior to the proposed distribution equal or exceed the amount of the proposed distribution or, immediately after giving effect to such distribution, the corporation's assets (exclusive of goodwill, capitalized research and development expenses and deferred charges) would be at least equal to 1.25 times its liabilities (not including deferred taxes, deferred income and other deferred credits), and the corporation's current assets would be at least equal to its current liabilities (or 1.25 times its current liabilities if the average pre-tax and pre-interest expense earnings for the preceding two fiscal years were less than the average interest expense for such years). Such tests are applied to California corporations on a consolidated basis. Delaware law permits a corporation to declare and pay dividends out of surplus or, if there is no surplus, out of net profits for the fiscal year in which the dividend is declared and/or for the preceding fiscal year as long as the amount of capital of the corporation following the declaration and payment of the dividend is not less than the aggregate amount of the capital of the corporation represented by the issued and outstanding stock of all classes having a preference upon the distribution of assets. In addition, Delaware law generally provides that a corporation may redeem or repurchase its shares only if such redemption or repurchase would not impair the capital of the corporation. SHAREHOLDER VOTING. Both California and Delaware law generally require that a majority of the shareholders of both acquiring and target corporations approve statutory mergers. Delaware law does not require a shareholder vote of the surviving corporation in a merger (unless the corporation provides otherwise in its certificate of incorporation) if: - the merger agreement does not amend the existing certificate of incorporation; 77 - each share of the surviving corporation outstanding before the merger is an identical outstanding or treasury share after the merger; and - the number of shares to be issued by the surviving corporation in the merger does not exceed 20% of the shares outstanding immediately prior to the merger. California law contains a similar exception to its voting requirements for reorganizations where shareholders or the corporation itself, or both, immediately prior to the reorganization will own immediately after the reorganization equity securities constituting more than five-sixths of the voting power of the surviving or acquiring corporation or its entity. Both California and Delaware law also require that a sale of all or substantially all of the assets of the corporation be approved by a majority of the voting shares of the corporation transferring such assets. With certain exceptions, California law also requires that mergers, reorganizations and certain similar transactions be approved by a majority vote of each class of shares outstanding. In contrast, Delaware law generally does not require class voting, except in certain transactions involving an amendment to the certificate of incorporation which adversely affects a specific class of shares. Should Unity authorize and issue shares of a new class of capital stock, the holders thereof would vote with the holders of the Unity common stock on proposals not adversely affecting the Unity common stock. In such event the holders of Unity common stock, if in the minority, would be unable to control the outcome of a vote and, if in the majority, would be able to control the outcome of such a vote. California law also requires that holders of non-redeemable common stock receive non-redeemable common stock in a merger of the corporation with the holders of more than 50% but less than 90% of such common stock or its affiliate unless all of the holders of such common stock consent to the transaction. This provision of California law may have the effect of making a "cash-out" merger by a majority shareholder more difficult to accomplish. Although Delaware law does not parallel California law in this respect, under some circumstances Section 203 of the DGCL does provide similar protection against coercive two-tiered bids for a corporation in which the shareholders are not treated equally. California law also provides that, except in certain circumstances, when a tender offer or a proposal for a reorganization or for a sale of assets is made by an interested party (generally a controlling or managing party of the target corporation), an affirmative opinion in writing as to the fairness of the consideration to be paid to the shareholders must be delivered to shareholders. This fairness opinion requirement does not apply to a corporation which does not have shares held of record by at least 100 persons, or to a transaction which has been qualified under California state securities laws. Furthermore, if a tender of shares or vote is sought pursuant to an interested party's proposal and a later proposal is made by another party at least ten days prior to the date of acceptance of the interested party proposal, the shareholders must be informed of the later offer and be afforded a reasonable opportunity to withdraw any vote, consent or proxy, or to withdraw any tendered shares. Delaware law has no comparable provision, and the shareholders of GraphOn might, therefore, be deprived of an opportunity to consider such other proposal. AMENDMENT OF BYLAWS. Under California law, bylaws may be amended by shareholders holding a majority of the outstanding shares, or by the board, except that if the number or a range of directors are specified in the bylaws, this provision can be changed only with the approval of the shareholders. Shareholders can adopt or amend bylaw provisions to limit the ability of the board to amend the bylaws. Under Delaware law, the bylaws may be amended only by the shareholders, unless the corporation's certificate of incorporation confers the power to amend the bylaws on the directors also. AMENDMENT OF CERTIFICATE OR ARTICLES OF INCORPORATION. Under both Delaware and California law, amendments to a corporation's certificate or articles of incorporation must be approved by a corporation's board of directors and by a majority of the shareholders. In addition, under both Delaware and California law, if a corporation has more than one class or series of stock outstanding, certain amendments that 78 would affect the rights of such class or series require the vote of a majority of the shares of such class or series. "Supermajority" requirements (requirements of a vote of more than a majority of the shares) are permitted under both California and Delaware law. However, California law provides that, for a corporation with outstanding shares held of record by 100 or more persons, such provision: - cannot require a vote higher than 66 2/3%; - must be approved by at least as large a proportion of the outstanding shares as the supermajority provision requires; and - automatically expires after two years unless renewed pursuant to a shareholder vote. INTERESTED DIRECTOR TRANSACTIONS. Under both California and Delaware law, certain contracts or transactions in which one or more of a corporation's directors has an interest are not void or voidable because of such interest provided that certain conditions, such as obtaining the required approval and fulfilling the requirements of good faith and full disclosure, are met. With certain exceptions, the conditions are similar under California and Delaware law. Under California and Delaware law: - either the shareholders or the board of directors must approve any such contract or transaction after full disclosure of the material facts, and in the case of board approval, the contract or transaction must also be "just and reasonable" (in California) or "fair" (in Delaware) to the corporation; or - the contract or transaction must have been just and reasonable or fair as to the corporation at the time it was approved. In the latter case, California law explicitly places the burden of proof on the interested director. Under California law, if shareholder approval is sought, the interested director is not entitled to vote his shares at a shareholder meeting with respect to any action regarding such contract or transaction. If board approval is sought, the contract or transaction must be approved by a majority vote of a quorum of the directors, without counting the vote of any interested directors (except that interested directors may be counted for purposes of establishing a quorum). Under Delaware law, if board approval is sought, the contract or transaction must be approved by a majority of the disinterested directors (even though less than a majority of a quorum). SHAREHOLDER DERIVATIVE SUITS. California law provides that a shareholder bringing a derivative action on behalf of a corporation have been a shareholder at the time of the transaction in question, provided that certain tests are met. Under Delaware law, a shareholder only may bring a derivative action on behalf of the corporation if the shareholder was a shareholder of the corporation at the time of the transaction in question or his or her stock thereafter devolved upon him or her by operation of law. California law also provides that the corporation or the defendant in a derivative suit may make a motion to the court for an order requiring the plaintiff shareholder to furnish a security bond. Delaware does not have a similar bonding requirement. APPRAISAL RIGHTS. Under both California and Delaware law, a shareholder of a corporation participating in certain major corporate transactions may, under varying circumstances, be entitled to appraisal rights pursuant to which such shareholder may receive cash in the amount of the "fair value" (Delaware) or "fair market value" (California) of his or her shares, as determined by a court, in lieu of the consideration he or she would otherwise receive in the transaction. Under Delaware law, such appraisal rights are not available: - with respect to the sale, lease or exchange of all or substantially all of the assets of a corporation; - with respect to a merger or consolidation by a corporation the shares of which either are listed on a national securities exchange or are held of record by more than 2,000 holders if such shareholders receive only shares of the surviving corporation or shares of any other corporation which either are 79 listed on a national securities exchange or held of record by more than 2,000 holders, plus cash in lieu of fractional shares; or - to shareholders of a corporation surviving a merger if no vote of the shareholders of the surviving corporation is required to approve the merger because the merger agreement does not amend the existing certificate of incorporation, each share of the surviving corporation outstanding prior to the merger is an identical outstanding or treasury share after the merger, and the number of shares to be issued in the merger does not exceed 20% of the shares of the surviving corporation outstanding immediately prior to the merger and if certain other conditions are met. The limitations on the availability of appraisal rights under California law are different from those under Delaware law. Shareholders of a California corporation whose shares are listed on a national securities exchange or on a list of over-the-counter margin stocks issued by the Board of Governors of the Federal Reserve System generally do not have such appraisal rights unless the holders of at least 5% of the class of outstanding shares claim the right or the corporation or any law restricts the transfer of such shares. California law also generally affords appraisal rights in sale of asset reorganizations. Appraisal rights are unavailable, however, if the shareholders of a corporation or the corporation itself, or both, immediately prior to the reorganization will own immediately after the reorganization equity securities constituting more than five-sixths of the voting power of the surviving or acquiring corporation or its parent entity. DISSOLUTION. Under California law, shareholders holding 50% or more of the total voting power may authorize a corporation's dissolution, with or without the approval of the corporation's board of directors, and this right may not be modified by the articles of incorporation. Under Delaware law, unless the board of directors approves the proposal to dissolve, in which case a simple majority may approve the dissolution, the dissolution must be approved by shareholders holding 100% of the total voting power of the corporation. In the event of such a board-initiated dissolution, Delaware law allows a Delaware corporation to include in its certificate of incorporation a supermajority voting requirement in connection with dissolutions. APPLICATION OF THE GENERAL CORPORATION LAW OF CALIFORNIA TO DELAWARE CORPORATIONS Under Section 2115 of the California General Corporation Law, certain foreign corporations (i.e., corporations not organized under California law) are placed in a special category if they have characteristics of ownership and operation which indicate that they have significant contacts with California. So long as a Delaware or other foreign corporation is in this special category, and it does not qualify for one of the statutory exemptions, it is subject to a number of key provisions of the California General Corporation Law applicable to corporations incorporated in California. Among the more important provisions are those relating to the election and removal of directors, cumulative voting, classified boards of directors, standards of liability and indemnification of directors, distributions, dividends and repurchases of shares, shareholder meetings, approval of certain corporate transactions, dissenters and appraisal rights and inspection of corporate records. See "Comparison of Rights of Holders of Unity common stock and GraphOn common stock," above. COMPARISON OF CERTIFICATE OF INCORPORATION AND BYLAWS OF UNITY AND ARTICLES OF INCORPORATION AND BYLAWS OF GRAPHON AUTHORIZED SHARES OF CAPITAL STOCK The GraphOn Articles of Incorporation authorize the issuance of 50,000,000 shares of GraphOn common stock, 17,300,755 shares of which were issued and outstanding as of the GraphOn record date, and 5,000,000 shares of preferred stock, none of which were issued on the GraphOn record date. 80 The Unity certificate of incorporation authorizes the issuance of 20,000,000 shares of Unity common stock, 1,875,000 shares of which were issued and outstanding as of the Unity record date, and 5,000 shares of preferred stock, none of which were issued on the Unity record date. MEETINGS Pursuant to the GraphOn Bylaws, annual meetings of GraphOn shareholders shall be held at such time as the GraphOn board may determine. At each annual meeting, the GraphOn shareholders entitled to vote shall elect a board of directors, and they may transact such other corporate business as may properly be brought before the meeting. Special meetings of GraphOn shareholders may be called for any purpose by the GraphOn board, the Chairman of the Board, the President or by one or more shareholders holding not less than 10% of the voting power of GraphOn. Written notice of any meeting of GraphOn shareholders shall be mailed not less than ten nor more than 60 days before such meeting to each GraphOn shareholder entitled to vote thereat. Special meetings of the GraphOn board may be called by the Chairman of the Board, the President, any Vice President, the Secretary or any two directors on at least 48-hours' notice to each director if delivered personally or by telephone, telegraph, facsimile, electronic mail or other electronic means or on at least 4-days' notice to each director if delivered by first-class mail. Pursuant to the Unity By Laws, annual meetings of Unity stockholders for the election of directors and for such other business as may be stated in the notice of the meeting shall be held at such date as the Unity board shall determine and as set forth in the notice of the meeting. At each annual meeting, the Unity stockholders entitled to vote shall elect a board of directors and they may transact such other corporate business as shall be stated in the notice of the meeting. Special meetings of Unity stockholders may be called for any purpose by the President or Secretary by resolution of the directors, or by a notice signed by the registered holders of no less than 10% of Unity's then issued and outstanding capital stock. Written notice shall be given to each Unity stockholder entitled to vote thereat not less than ten nor more than 50 days before the date of the meeting. Special meetings of the Unity board may be called by the President or the Secretary on the written request of any two directors on at least two days' notice to each director. DIRECTORS AND OFFICERS Pursuant to the GraphOn Bylaws, the GraphOn board may fix the number of directors, but such number may not be less than five nor more than seven persons. The GraphOn board has currently fixed the number of directors at six. The officers of GraphOn shall be a Chairman of the Board, a President, one or more Vice Presidents, a Secretary and a Chief Financial Officer and there may be such other officers as may be deemed expedient for the proper conduct of the business of GraphOn. Pursuant to the Unity Bylaws, the number of directors comprising the Unity board shall not be less than one nor more than seven persons. The Unity board has currently fixed the number of directors at four. The officers of Unity shall be a President, a Treasurer and a Secretary. In addition, the Unity board may elect a Chairman, one or more Vice Presidents and such Assistant Secretaries and Assistant Treasurers as they may deem proper. LEGAL MATTERS Matters relating to the legality of the shares of Unity common stock offered by this joint proxy statement/prospectus are being passed upon by Cooperman Levitt Winikoff Lester & Newman, P.C., 800 Third Avenue, New York, New York 10022. Members of such firm own shares of Unity common stock (less than 1%). 81 EXPERTS The financial statements of Unity as of July 31, 1998 and 1997, and for the years ended July 31, 1998 and 1997, for the period from inception (May 30, 1996) to July 31, 1996 and for the period from inception (May 30, 1996) to July 31, 1998 included in this joint proxy statement/prospectus have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto and are included herein in reliance upon the authority of said firm as experts in giving said report. The financial statements and schedules included in this joint proxy statement/prospectus have been audited by BDO Seidman, LLP, independent certified public accountants, to the extent and for the periods set forth in their reports appearing elsewhere herein and in this joint proxy statement/prospectus, and are included in reliance upon such reports given upon the authority of said firm as experts in auditing and accounting. The statements in this joint proxy statement/prospectus under the captions "Joint Proxy Statement/ Prospectus - Summary - Tax Consequences of the merger" and "The Merger - Certain Tax Consequences of the Merger" have been reviewed by Cooperman Levitt Winikoff Lester & Newman, P.C., counsel for Unity, and by Brobeck, Phleger & Harrison LLP, counsel for GraphOn, as experts on such matters, and, based upon that review, such statements are included herein. 82 GRAPHON CORPORATION INDEPENDENT AUDITORS' REPORT......................................................... F-2 FINANCIAL STATEMENTS Balance Sheets..................................................................... F-3 Statements of Operations and Comprehensive Income.................................. F-4 Statements of Stockholders' Equity................................................. F-5 Statements of Cash Flows........................................................... F-6 Summary of Accounting Policies..................................................... F-7 Notes to Financial Statements...................................................... F-11 UNITY FIRST ACQUISITION CORP. Report of Independent Public Accountants........................................... F-20 Balance Sheets as of July 31, 1998 and 1997........................................ F-21 Statements of Operations for the years ended July 31, 1998 and 1997, for the period from inception (May 30, 1996) to July 31, 1996, and for the period from inception (May 30, 1996) to July 31, 1998.................................................. F-22 Statements of Cash Flows for the years ended July 31, 1998 and 1997, for the period from inception (May 30, 1996) to July 31, 1996, and for the period from inception (May 30, 1996) to July 31, 1998.................................................. F-23 Statement of Changes in Stockholders' Equity (Deficit) for the period from inception (May 30, 1996) through July 31, 1996 and for the years ended July 31, 1998 and 1997.................................................................... F-24 Notes to Financial Statements...................................................... F-25 Balance Sheets as of January 31, 1999 (unaudited) and July 31, 1998................ F-30 Statements of Operations for the six months ended January 31, 1999 and 1998, for the three months ended January 31, 1999 and 1998, and for the period from inception (May 30, 1996) to January 31, 1999 (unaudited)......................... F-31 Statements of Cash Flows for the six months ended January 31, 1999 and 1998 and for the period from inception (May 30, 1996) to January 31, 1999 (unaudited)......... F-32 Statement of Changes in Stockholders Equity for the six months ended January 31, 1999 (unaudited)................................................................. F-33 Selected Notes to the Financial Statements (unaudited)............................. F-34
F-1 INDEPENDENT AUDITORS' REPORT Stockholders and Board of Directors GraphOn Corporation Campbell, California We have audited the accompanying balance sheets of GraphOn Corporation as of December 31, 1998 and 1997 and the related statements of operations and comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. These standards require that we plan and perform our audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of GraphOn Corporation as of December 31, 1998 and 1997, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 1998 in conformity with generally accepted accounting principles. /s/ BDO SEIDMAN, LLP BDO Seidman, LLP San Jose, California February 25, 1999 F-2 GRAPHON CORPORATION BALANCE SHEETS
DECEMBER 31, ------------------------ 1998 1997 ------------ ---------- ASSETS CURRENT ASSETS: Cash and cash equivalents (Note 8).................................................... $ 1,798,400 $ 302,800 Accounts receivable, net of allowance for doubtful accounts of $25,000 and $0 (Notes 8 and 9).............................................................................. 564,700 308,100 Available--for--sale securities (Notes 1 and 8)....................................... -- 8,600 Prepaid expenses and other assets..................................................... 32,100 18,300 ------------ ---------- TOTAL CURRENT ASSETS.................................................................... 2,395,200 637,800 ------------ ---------- PROPERTY AND EQUIPMENT, NET (Notes 2 and 3)............................................. 423,300 50,300 PURCHASED TECHNOLOGY (Note 3)........................................................... 3,645,400 -- CAPITALIZED SOFTWARE, net............................................................... 74,200 43,200 OTHER ASSETS............................................................................ 6,400 2,000 ------------ ---------- $ 6,544,500 $ 733,300 ------------ ---------- ------------ ---------- LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Convertible note payable (Notes 5, 6 and 13).......................................... $ 475,000 $ -- Accounts payable...................................................................... 115,700 28,400 Accrued expenses (Note 4)............................................................. 498,900 142,900 Deferred revenue...................................................................... 112,600 443,800 ------------ ---------- TOTAL CURRENT LIABILITIES............................................................... 1,202,200 615,100 COMMITMENTS, CONTINGENCIES AND SUBSEQUENT EVENTS (Notes 5, 6, 10, 11, and 13) STOCKHOLDERS' EQUITY (Notes 5, 6, and 13) Preferred stock, no par value, 5,000,000 shares authorized, no shares issued and outstanding......................................................................... -- -- Common stock, no par value, 50,000,000 shares authorized, 14,294,003 shares issued and outstanding......................................................................... 7,480,800 505,000 Accumulated other comprehensive income (Notes 1 and 8)................................ -- (12,100) Accumulated deficit................................................................... (2,138,500) (374,700) ------------ ---------- STOCKHOLDERS' EQUITY.................................................................... 5,342,300 118,200 ------------ ---------- $ 6,544,500 $ 733,300 ------------ ---------- ------------ ----------
See accompanying summary of accounting policies and notes to financial statements. F-3 GRAPHON CORPORATION STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
YEARS ENDED DECEMBER 31, --------------------------------------- 1998 1997 1996 ------------- ------------ ---------- REVENUES (Notes 8 and 9)................................................ $ 2,124,200 $ 1,926,100 $ 594,800 COST OF REVENUES (Note 10).............................................. 344,200 463,300 335,600 ------------- ------------ ---------- GROSS PROFIT............................................................ 1,780,000 1,462,800 259,200 ------------- ------------ ---------- OPERATING EXPENSES: Selling and marketing................................................. 1,440,300 827,300 192,700 General and administrative (Notes 6 and 10)........................... 1,208,900 324,700 218,900 Research and development.............................................. 840,200 190,500 41,700 ------------- ------------ ---------- TOTAL OPERATING EXPENSES................................................ 3,489,400 1,342,500 453,300 ------------- ------------ ---------- (LOSS) INCOME FROM OPERATIONS........................................... (1,709,400) 120,300 (194,100) OTHER INCOME (EXPENSE): Interest and other income............................................. 9,800 7,200 6,400 Interest expense...................................................... (46,900) (2,100) -- Loss on sale of available-for-sale securities (Note 1)................ (16,500) -- -- ------------- ------------ ---------- (LOSS) INCOME BEFORE PROVISION FOR INCOME TAXES......................... (1,763,000) 125,400 (187,700) PROVISION FOR INCOME TAXES (Note 7)..................................... 800 900 800 ------------- ------------ ---------- NET (LOSS) INCOME....................................................... (1,763,800) 124,500 (188,500) OTHER COMPREHENSIVE INCOME (LOSS), net of tax: Unrealized holding gain (loss) on investment (Note 1)................. 12,100 (8,100) 7,500 ------------- ------------ ---------- COMPREHENSIVE (LOSS) INCOME............................................. (1,751,700) 116,400 (181,000) ------------- ------------ ---------- BASIC AND DILUTED (LOSS) EARNINGS PER COMMON SHARE...................... $ (0.26) $ 0.02 $ (0.03) ------------- ------------ ---------- ------------- ------------ ---------- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.............................. 6,762,667 6,000,000 6,000,000 ------------- ------------ ---------- ------------- ------------ ----------
See accompanying summary of accounting policies and notes to financial statements. F-4 GRAPHON CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY (NOTES 1, 2, 3, 6, AND 13)
COMMON STOCK ACCUMULATED -------------------------- COMPREHENSIVE ACCUMULATED SHARES AMOUNT INCOME DEFICIT TOTAL ------------ ------------ -------------- ------------- ------------ BALANCES, December 31, 1995................... 6,000,000 $ 505,000 $ (11,500) $ (310,700) $ 182,800 Change in market value of available-for-sale securities.................................. -- -- 7,500 -- 7,500 Net loss...................................... -- -- -- (188,500) (188,500) ------------ ------------ -------------- ------------- ------------ BALANCES, December 31, 1996................... 6,000,000 505,000 (4,000) (499,200) 1,800 Change in market value of available-for-sale securities.................................. -- -- (8,100) -- (8,100) Net income.................................... -- -- -- 124,500 124,500 ------------ ------------ -------------- ------------- ------------ BALANCES, December 31, 1997................... 6,000,000 505,000 (12,100) (374,700) 118,200 Change in market value of available-for-sale securities.................................. -- -- 12,100 -- 12,100 Compensation expense related to issuance of common stock and granted options............ -- 191,900 -- -- 191,900 Proceeds from employee stock purchase......... 508,500 38,100 -- -- 38,100 Proceeds from sale of common stock, net of offering costs of $564,700.................. 3,699,000 2,659,300 -- -- 2,659,300 Issuance of common stock and warrants for property and equipment and purchased technology.................................. 3,886,503 3,886,500 -- -- 3,886,500 Exchange of convertible notes payable......... 200,000 200,000 -- -- 200,000 Net loss...................................... -- -- -- (1,763,800) (1,763,800) ------------ ------------ -------------- ------------- ------------ BALANCES, December 31, 1998................... 14,294,003 $ 7,480,800 $ -- $ (2,138,500) $ 5,342,300 ------------ ------------ -------------- ------------- ------------ ------------ ------------ -------------- ------------- ------------
See accompanying summary of accounting policies and notes to financial statements. F-5 GRAPHON CORPORATION STATEMENTS OF CASH FLOWS (NOTE 12)
YEARS ENDED DECEMBER 31, --------------------------------------- 1998 1997 1996 ------------- ----------- ----------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income.......................................................... $ (1,763,800) $ 124,500 $ (188,500) Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization............................................ 65,200 31,000 1,100 Allowance for doubtful accounts.......................................... 25,000 -- -- Loss (gain) on sale of available-for-sale securities..................... 16,500 -- (4,400) Compensation expense..................................................... 268,600 -- -- Changes in operating assets and liabilities: Accounts receivable.................................................... (281,600) 232,000 (461,700) Related party receivable............................................... -- 34,400 (8,500) Prepaid expenses and other assets...................................... (13,900) (400) 28,900 Accounts payable....................................................... 87,300 12,900 (1,800) Accrued expenses....................................................... 279,300 137,000 (19,500) Deferred revenue....................................................... (331,200) (358,300) 802,100 ------------- ----------- ----------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES.......................... (1,648,600) 213,100 147,700 ------------- ----------- ----------- CASH FLOWS FROM INVESTING ACTIVITIES: Proceeds from sale of available-for-sale securities........................ 4,300 -- 40,500 Purchase of available-for-sale securities.................................. -- -- (20,700) Capitalization of software development costs............................... (53,100) (24,000) (35,900) Capital expenditures....................................................... (179,400) (39,300) (28,500) ------------- ----------- ----------- NET CASH USED IN INVESTING ACTIVITIES........................................ (228,200) (63,300) (44,600) ------------- ----------- ----------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from convertible notes payable.................................... 775,000 -- -- Repayment of convertible notes payable..................................... (100,000) -- -- Net proceeds from issuance of common stock................................. 2,697,400 -- -- ------------- ----------- ----------- NET CASH PROVIDED BY FINANCING ACTIVITIES.................................... 3,372,400 -- -- ------------- ----------- ----------- NET INCREASE IN CASH AND CASH EQUIVALENTS.................................... 1,495,600 149,800 103,100 CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR................................. 302,800 153,000 49,900 ------------- ----------- ----------- CASH AND CASH EQUIVALENTS, END OF YEAR....................................... $ 1,798,400 $ 302,800 $ 153,000 ------------- ----------- ----------- ------------- ----------- -----------
See accompanying summary of accounting policies and notes to financial statements. F-6 GRAPHON CORPORATION SUMMARY OF ACCOUNTING POLICIES ORGANIZATION AND BUSINESS GraphOn Corporation (the Company) was incorporated in the state of California in May 1982 and has headquarters in Campbell, California. The Company develops, markets, sells and supports server-based software that empowers a diverse range of desktop computing devices (desktops) to access server-based Windows and UNIX applications from any location, over fast network or slow Internet connections. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments purchased with original maturities of three months or less to be cash equivalents. MARKETABLE SECURITIES The Company accounts for investments in marketable securities under the provisions of Statements of Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Under SFAS No. 115, securities are classified and accounted for as follows: - - Debt securities that the enterprise has the positive intent and ability to hold to maturity are classified as held-to-maturity securities and reported at amortized cost. - - Debt and equity securities that are bought and held principally for the purpose of selling them in the near term are classified as trading securities and reported at fair value, with unrealized gains and losses included in earnings. - - Debt and equity securities not classified as either held-to-maturity securities or trading securities are classified as available-for-sale securities and reported at fair value, with unrealized gains and losses excluded from earnings and reported in a separate component of shareholders' equity. PROPERTY AND EQUIPMENT Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, generally three to seven years. Amortization of leasehold improvements is calculated using the straight-line method over the lesser of the lease term or useful lives of the respective asset, generally seven years. PURCHASED TECHNOLOGY Purchased technology is to be amortized on a straight-line basis over the life of the related technology or five years, whichever is less. F-7 GRAPHON CORPORATION SUMMARY OF ACCOUNTING POLICIES (CONTINUED) CAPITALIZED SOFTWARE COSTS Costs incurred internally in creating computer software products to be sold, leased, or otherwise marketed are charged to expense when incurred as research and development until technological feasibility has been established for the product. Thereafter, such costs are capitalized until the product is available for general release to customers and amortized based on either estimated current and future revenue for each product or straight-line amortization over the shorter of three years or the remaining estimated life of the product, whichever produces the higher expense for the period. As of December 31, 1998 and 1997, capitalized costs aggregated $113,000 and $59,800, with accumulated amortization of $38,800 and $16,600. REVENUE RECOGNITION AND DEFERRED REVENUE The Company recognizes revenues from product sales when goods are shipped to the customer. Customer product maintenance fees committed as part of new product licenses and maintenance fees resulting from renewed maintenance contracts are deferred and recognized ratably over the contract period, generally one year. Consulting service revenue is recognized when services are performed for time and material contracts, and on a percentage of completion basis for fixed price contracts. Deferred revenue, resulting from maintenance and license agreements, aggregated $112,600 and $443,800 as of December 31, 1998 and 1997. ADVERTISING COSTS The cost of advertising is expensed as incurred. Advertising costs for the years ended December 31, 1998, 1997 and 1996, were approximately $58,400, $60,000 and $0, respectively. INCOME TAXES Income taxes are calculated using the liability method of accounting for income taxes specified by SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Deferred income taxes are recognized for the tax consequences of temporary differences between the financial statements and income tax bases of assets, liabilities and carryforwards using enacted tax rates. Valuation allowances are established when necessary, to reduce deferred tax assets to the amount expected to be realized. Realization is dependent upon future pre-tax earnings, the reversal of temporary differences between book and tax income, and the expected tax rates in effect in future periods. FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used by the Company in estimating its fair value disclosures for financial instruments: CASH AND CASH EQUIVALENTS: The carrying amount reported in the balance sheet for cash and cash equivalents approximate fair value. INVESTMENT SECURITIES: The fair values of marketable debt and equity securities are based on quoted market prices. F-8 GRAPHON CORPORATION SUMMARY OF ACCOUNTING POLICIES (CONTINUED) SHORT-TERM DEBT: The fair value of short-term debt is estimated based on current interest notes available to the Company for debt instruments with similar terms and maturities. As of December 31, 1998 and 1997, the fair values of the Company's financial instruments approximate their historical carrying amounts. LONG-LIVED ASSETS Long-lived assets are assessed for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable, or whenever management has committed to a plan to dispose of the assets. Such assets are carried at the lower of book value or fair value as estimated by management based on appraisals, current market value, comparable sales value, and undiscounted future cash flows as appropriate. Assets to be held and used affected by such impairment loss are depreciated or amortized at their new carrying amount over the remaining estimated life; assets to be sold or otherwise disposed of are not subject to further depreciation or amortization. STOCK-BASED INCENTIVE PROGRAMS SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, encourages entities to recognize compensation costs for stock-based employee compensation plans using the fair value based method of accounting defined in SFAS No. 123, but allows for the continued use of the intrinsic value based method of accounting prescribed by Accounting Principles Board (APB) Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES. The Company continues to use the accounting prescribed by APB Opinion No. 25 and as such is required to disclose pro forma net income and earnings per share as if the fair value based method of accounting had been applied. ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 132, EMPLOYER'S DISCLOSURE ABOUT PENSIONS AND OTHER POSTRETIREMENT BENEFITS, which standardizes the disclosure requirements for pension and other postretirement benefits. The adoption of SFAS No. 132 is not expected to impact the Company's current disclosures. In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES. SFAS No. 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133 is effective for all fiscal quarters of fiscal years beginning after June 15, 1999. Historically, the Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard on July 1, 1999 to affect its financial statements. F-9 GRAPHON CORPORATION SUMMARY OF ACCOUNTING POLICIES (CONTINUED) EARNINGS PER COMMON SHARE In February 1997, the FASB issued SFAS No. 128, EARNINGS PER SHARE, which was effective December 28, 1997. Conforming to SFAS No. 128, the Company changed its method of computing earnings per share and restated all prior periods included in the financial statements. Under SFAS No. 128, the dilutive effect of stock options is excluded from the calculation of basic earnings per share. RECLASSIFICATIONS Certain amounts in the 1997 financial statements have been reclassified to conform with the 1996 and 1998 presentation. F-10 GRAPHON CORPORATION NOTES TO FINANCIAL STATEMENTS 1. AVAILABLE-FOR-SALE SECURITIES As of December 31, 1997, the Company held 4,000 shares of common stock in a publicly traded company. In 1998, the Company sold these shares and recorded a loss on the sale of $16,500. A summary of available-for-sale securities follows:
DECEMBER 31, 1998 1997 - ---------------------------------------------------------------------------- ----- --------- Cost of securities.......................................................... $ -- $20,700 Less unrealized loss........................................................ -- 12,100 --- --------- $ -- $8,600 --- --------- --- ---------
2. PROPERTY AND EQUIPMENT Property and equipment consisted of the following:
DECEMBER 31, 1998 1997 - ----------------------------------------------------------------------- ---------- --------- Equipment.............................................................. $ 292,800 $ 61,700 Furniture and fixtures................................................. 175,600 2,300 Leasehold improvements................................................. 13,500 1,900 ---------- --------- 481,900 65,900 Less accumulated depreciation and amortization......................... 58,600 15,600 ---------- --------- $ 423,300 $ 50,300 ---------- --------- ---------- ---------
3. PURCHASED TECHNOLOGY In December 1998, the Company issued 3,886,503 shares of common stock and 388,650 warrants in exchange for certain fixed assets and technology (Note 6). Based on the fair market value of the securities issued the aggregate purchase price was $3,886,500, which was allocated to the following respective assets based on their fair market value at the time of the transaction: Equipment....................................................... $ 77,100 Furniture....................................................... 164,000 Purchased technology............................................ 3,645,400 --------- $3,886,500 --------- ---------
F-11 GRAPHON CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 4. ACCRUED EXPENSES Accrued expenses consisted of the following:
DECEMBER 31, 1998 1997 - ---------------------------------------------------------------------- ---------- ---------- Payroll and related expenses.......................................... $ 140,600 $ 34,400 Professional fees..................................................... 180,000 35,000 Accrued payroll taxes................................................. 76,700 -- Royalties............................................................. 65,300 46,100 Other................................................................. 36,300 27,400 ---------- ---------- $ 498,900 $ 142,900 ---------- ---------- ---------- ----------
5. CONVERTIBLE NOTE PAYABLE In March 1998 the Company issued a convertible note payable for $475,000 to an affiliate (the Agent Affiliate) of the placement agent dated September 2, 1998 for the Company's subsequent private placement offering of common stock (the Offering). The convertible note bears interest at 10% and is due upon the earlier date of the Company raising between $2,500,000 and $3,000,000 in the Offering or six months after its commencement. The note is convertible into shares of common stock at $1.00 per share at the option of the note holder (Note 15). In September 1998, the Agent Affiliate and the Company's CEO loaned $200,000 and $100,000, respectively, to the Company pursuant to convertible promissory notes bearing interest at 8% per annum, which mature at the earlier of the first closing of the Offering or 12 months from the date of the notes. Such notes, at the option of the lender, may be converted into shares of common stock at $1.00 per share. In connection with this transaction, the Agent Affiliate and CEO were issued warrants to purchase 100,000 and 50,000 shares, respectively, at $1.00 per share (Note 6). On December 31, 1998, the loan by the Agent Affiliate was converted into 200,000 shares of common stock. Also on December 31, 1998, the Company repaid the $100,000 loan from the CEO, plus accrued interest. 6. STOCKHOLDERS' EQUITY PRIOR BANKRUPTCY In November 1991, the Company filed a Voluntary Petition for Relief under Chapter 11 of the Bankruptcy Code. At that time, the Company had indebtedness in excess of $2.3 million and had 1,624,940 voting shares of common stock outstanding. In July 1994, the Company's plan of reorganization under Chapter 11 (the Reorganization Plan) was confirmed. At the time of the confirmation of the Reorganization Plan, all shares of stock, options, and warrants outstanding were canceled. In addition, the Reorganization Plan provided for the issuance of 100 shares of the Company's reorganized common stock in exchange for waiver of certain unsecured claims against the Company by its then, and current, CEO. In addition, all administrative claims, priority claims, and allowed claims in the administrative convenience class (generally, those under $200) were paid in full. Unsecured creditors are to receive payment of 50% of the gross royalties received by the Company from certain licensees up to the amount of their total liability, through the year 2000. However, the largest unsecured creditor will receive payments of 50% of the gross royalties received by the Company from the revenue from certain licensees until its claim F-12 GRAPHON CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. STOCKHOLDERS' EQUITY (CONTINUED) is paid in full. The remaining 50% of the gross royalties received by the Company from these certain licensees was available to the Company to conduct its ongoing operations. As of December 31, 1998, the Company does not expect to pay any additional significant amounts under the Reorganization Plan. Accordingly, the amounts are treated as included in the relief of debt as part of the bankruptcy confirmed in 1994. The Company believes that its royalty payment obligations under the bankruptcy court order relate only to licenses in place as of July 11, 1994. However, there is no assurance that the court will not interpret the obligation of the Company to include making payments from royalties earned from subsequent licenses or licenses that it may secure in the future, or that its current technology will not be deemed derivative of its technology existing at July 11, 1994. Consequently, there can be no assurance that the Company will not be required to repay the creditors referenced in the bankruptcy proceedings to the full amount of its liability of approximately $2,230,000. In addition, there is no guarantee that a creditor will not attempt to assert a claim for royalties from subsequent licenses, which could be costly and could have a material adverse effect on the Company's business, financial condition, and/or results of operations. COMMON STOCK During 1998, the CEO personally sold 633,254 shares of his stock to various employees and directors of the Company. In addition, the Company issued and sold 508,500 shares under the Stock Grant Program, and granted 20,000 options, under the Stock Option Plan, to employees of the Company. In accordance with APB Opinion No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, the Company recorded, in General and Administrative expense, $268,600 of compensation costs associated with the sale of the above securities. In March 1998, the Company sold 500,000 shares of common stock for a purchase price of $25,000 to the Agent Affiliate, concurrent with the issuance of a convertible note for $475,000. In July 1998, the Company's Board of Directors declared a 60,000 to 1 stock split. All references to number of shares and per share data in the financial statements have been adjusted to reflect the stock split on a retroactive basis. In September 1998, the Company offered shares of its common stock through a private placement stock offering (the Offering). The Offering established a minimum and maximum offering of 2,500,000 and 4,500,000 shares of common stock, respectively, at $1.00 per share, plus an additional 675,000 shares in the event of over-subscriptions. As part of the Offering, the placement agent received warrants to purchase 20,000 shares of common stock at $1.00 per share for each 100,000 shares sold through the Offering. Pursuant to a Subscription Agreement, executed by each investor who purchased shares of the Company's common stock in connection with the first closing of the Offering (the First Closing Investors), each First Closing Investor holds the right to purchase his pro rata portion of any securities issued by the Company for cash at an amount equal to the price, or other consideration, for which such securities were issued until such time as there is an initial public offering of the Company's securities. Such preemptive rights do not apply to any securities issued pursuant to options, warrants and rights and option plans existing at the time of the first closing. The investors who purchased common stock in connection with the second closing of the Offering, as well as certain of the First Closing Investors who agreed to amend their rights, hold the same right except that such right does not apply to securities issued by the Company in connection with, or in consideration F-13 GRAPHON CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. STOCKHOLDERS' EQUITY (CONTINUED) of, (i) the Company's acquisition of another corporation or entity by consolidation, merger, purchase of all or substantially all of the assets or other business combination in which the Company is the surviving entity, provided such issuance is approved by a majority of the Board of Directors or (ii) any equipment or real property lease, loan, credit line, guaranty of indebtedness or acquisition of assets, other than cash but including intellectual property or other intangible assets. Additionally, in March 1998, the CEO and Executive Vice President of the Company entered into a contingent sale arrangement with respect to the sale of 3,500,000 shares of their common stock in the Company to the Agent Affiliate under non-recourse installment notes. Under the terms of the notes, $200,000 was due and paid with the commencement of the Offering, with $800,000; $1,000,000; and $1,500,000 being due and payable January 1999, July 1999 and January 2000, respectively (Note 13). The notes bear interest at 6%, payable quarterly, and are secured by the underlying pledged shares. The CEO and Executive Vice President retained voting privilege on these shares until fully paid for, and said shares revert back to the CEO and Executive Vice President in case of default by the Agent Affiliate. In December 1998, the Company issued 3,886,503 shares of common stock with an ascribed value of $3,886,500, and granted warrants to purchase 388,650 shares of common stock at $1.00 in exchange for certain fixed assets and technology. The terms of this purchase agreement also require that the Company shall issue an additional 1,607,000 shares of common stock, for no additional consideration, on June 30, 2000, if the Company at that date has not completed an initial public offering of any of its equity securities or a merger or sale of all, or substantially all, of its assets. STOCK PURCHASE WARRANTS As of December 31, 1998, the following common stock warrants were issued and outstanding:
SHARES SUBJECT TO ISSUED WITH RESPECT TO: WARRANT EXERCISE PRICE EXPIRATION DATE - -------------------------------------------------------- ------------------------ --------------- --------------- Convertible notes....................................... 150,000 $ 1.00 (A) Private placement....................................... 639,800 $ 1.00 (A) Purchased technology.................................... 388,650 $ 1.00 12/2003
- ------------------------------ (A) The warrants issued with respect to the convertible notes and the private placement expire upon earlier of three years after the closing date of a merger (Note 13), three years after the closing date of an IPO, or January 2006. STOCK GRANT PROGRAM In July 1998, the Company adopted a stock grant program (Stock Grant Program), which is restricted to employees, officers, and consultants of the Company. The Company has authorized the issuance of up to 1,300,000 shares of the Company's common stock in connection with the Stock Grant Program and the Stock Option Plan, discussed below. Under the Stock Grant Program, eligible individuals may, at the Plan Administrator's discretion, be issued shares of common stock directly, either through (a) the purchase of shares at a price not less than 85% of the estimated fair market value of the stock at the time of the issuance, or (b) as a bonus for past services rendered. Ownership of such shares generally vest over a four year period. During August 1998, the Company issued 508,500 shares under the Stock Grant Program. F-14 GRAPHON CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 6. STOCKHOLDERS' EQUITY (CONTINUED) STOCK OPTION PLAN In July 1998, the Company adopted a Stock Option Plan (The Plan). The Plan is restricted to employees, officers, and consultants of the Company. Options granted under the Plan generally vest over four years and are exercisable over ten years. Non-satutory options are granted at prices not less than 85% of the estimated fair value of the stock on the date of grant as determined by the Board of Directors. Incentive options are granted at prices not less than 100% of the estimated fair value of stock on the date of grant. However, options granted to shareholders who own greater than 10% of the outstanding stock are established at no less than 110% of the estimated fair value of the stock on the date of grant. A summary of status of the Company's Stock Option Plan as of December 31, 1998, and changes during the year then ended is presented in the following table:
OPTIONS OUTSTANDING ---------------------- WEIGHTED- AVERAGE EXERCISE SHARES PRICE --------- ----------- Balances, December 31, 1997................................................................. -- $ -- Shares reserved............................................................................. 791,500 -- Granted..................................................................................... (20,000) 0.075 --------- ----------- Balances, December 31, 1998................................................................. 771,500 $ 0.075 --------- ----------- --------- ----------- Exercisable at year-end..................................................................... 2,664 $ 0.075 --------- ----------- --------- ----------- Weighted-average fair value of options granted during the period:........................... $ 0.075 ----------- -----------
The following table summarizes information about stock options outstanding as of December 31, 1998:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE --------------------------------------------------- ---------------------------- WEIGHTED- WEIGHTED- WEIGHTED- AVERAGE AVERAGE AVERAGE RANGE OF REMAINING EXERCISE EXERCISE EXERCISE NUMBER CONTRACTUAL LIFE PRICE NUMBER PRICE PRICE OUTSTANDING (YEARS) PER SHARE EXERCISABLE PER SHARE - ---------------- ----------- ----------------------- ------------- ------------- ------------- 0$.075--$1.00... 20,000 9.67 $ 0.075 2,664 $ 0.075
SFAS No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, requires the Company to provide pro forma information regarding net (loss) income and (loss) earnings per share as if compensation cost for the Company's stock option plan had been determined in accordance with the fair value based method prescribed in SFAS No.123. The Company estimates the fair value of stock options at the grant date by using the Black-Scholes option pricing-model with the following weighted average assumptions used for grants in 1998: dividend yield of 0; expected volatility of 112%; risk-free interest rate of 5.7%; and expected lives of three years for all plan options. Under the accounting provisions of SFAS No. 123, the Company's pro forma net loss would have been $1,753,200, and the basic net loss per common share would have remained unchanged at $0.26. F-15 GRAPHON CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 7. INCOME TAXES The provision for income taxes for the years ended December 31, 1998, 1997 and 1996 consist of minimum state taxes. The following summarizes the differences between income tax expense and the amount computed applying the federal income tax rate of 34%:
DECEMBER 31, 1998 1997 1996 - --------------------------------------------------------- ----------- ---------- ---------- Federal income tax at statutory rate..................... $ (599,400) $ 41,600 $ (63,800) State income taxes, net of federal benefit............... (102,400) 7,700 (11,500) Utilization of net operating loss carryforwards.......... -- (51,400) -- Tax benefit not currently recognizable................... 697,700 -- 75,300 Other.................................................... 4,900 3,000 800 ----------- ---------- ---------- Provision for income taxes............................... $ 800 $ 900 $ 800 ----------- ---------- ---------- ----------- ---------- ----------
Deferred income taxes and benefits result from temporary timing differences in the recognition of certain expenses and income items for tax and financial reporting purposes, as follows:
DECEMBER 31, 1998 1997 - ------------------------------------------------------------------ ------------- ----------- Net operating loss carryforward................................... $ 1,038,800 $ 452,900 Tax credit carryforward........................................... 112,100 22,800 Capitalized software.............................................. (29,600) (17,200) Depreciation and amortization..................................... (6,000) (2,500) Accrued compensation and benefits................................. 37,500 4,200 Reserves not currently deductible................................. 35,800 17,900 ------------- ----------- Total deferred tax asset.......................................... 1,188,600 478,100 Valuation allowance............................................... (1,188,600) (478,100) ------------- ----------- Net deferred tax asset............................................ $ -- $ -- ------------- ----------- ------------- -----------
The Company has net operating loss carryforwards available to reduce future taxable income, if any, of approximately $2,780,800 for Federal income tax purposes. The benefits from these carryforwards expire through 2018. As of December 31, 1998, management believes it cannot be determined that it is more likely than not that these carryforwards and its other deferred tax assets will be realized, and accordingly, fully reserved for these deferred tax assets. In 1998 the Company experienced a "change of ownership" as defined by the provisions of the Tax Reform Act of 1986. As such, the Company's utilization of its net operating loss carryforwards will be limited to approximately $400,000 per year until such carryforwards are fully utilized. 8. CONCENTRATION OF CREDIT RISK Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and cash equivalents, investments and trade receivables. The Company places its cash and cash equivalents with high quality financial institutions and, by policy, limits the amounts of credit exposure to any one financial institution. Available-for-sale securities are held in public companies for which there is a ready market. F-16 GRAPHON CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 8. CONCENTRATION OF CREDIT RISK (CONTINUED) The Company's accounts receivable are derived from many customers in various industries. The Company believes any risk of accounting loss is significantly reduced due to the diversity of its end-customers and geographic sales areas. The Company performs credit evaluation of its customers' financial condition whenever necessary, and generally does not require cash collateral or other security to support customer receivables. 9. MAJOR CUSTOMERS For the year ended December 31, 1998, three customers accounted for approximately 29%, 21% and 17% of revenues, respectively with related accounts receivable as of December 31, 1998 of $0, $500,000 and $0, respectively. For the year ended December 31, 1997, one customer accounted for approximately 70% of revenues, with related accounts receivable at December 31, 1997 of $62,500. In 1996, no one customer accounted for greater than 10% of revenues. 10. COMMITMENTS OPERATING LEASES In April 1995, the Company entered into an operating lease for its current headquarters facility, which is renewable in one-year increments for ten years. In June 1998, the Company entered into a three-year non-cancelable operating lease for a facility in Washington. In December 1998, the Company entered into a five-year operating lease for a facility in New Hampshire, which is cancelable as of October 31, 2001. The facility leases require the Company to pay certain maintenance and operating expenses, such as taxes, insurance, and utilities. Rent expense for the years ended December 31, 1998, 1997 and 1996 aggregated $48,300, $17,120 and $14,900, respectively. Future minimum annual lease payments for these leases are as follows:
YEAR ENDING DECEMBER 31, - ---------------------------------------------------------------------------------- 1999.............................................................................. $ 261,600 2000.............................................................................. 256,900 2001.............................................................................. 194,000 ---------- $ 712,500 ---------- ----------
ROYALTY AGREEMENTS The Company licenses essential components (Developed Technology) of its core technology from three different parties (collectively, Software Developers) to whom it pays royalties pursuant to three different exclusive license agreements (Technology Agreements). Certain minor elements of the Company's technology (Nonexclusive Technology) are also licensed from the Software Developers pursuant to non-exclusive agreements (Nonexclusive Agreements). The Technology Agreements and the Nonexclusive Agreements call for royalty payments to the Software Developers. Such royalty payments are based on a percentage of net revenues (Royalty Rate) received by the Company for sales of the Company's products that contain the Developed Technology. The Royalty Rate is 4.8% and 2.9% for 1999 and 2000, F-17 GRAPHON CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 10. COMMITMENTS (CONTINUED) respectively. The Company also holds an option to purchase the Developed Technology, and to purchase a perpetual license to the Nonexclusive Technology from the Software Developers, which is exercisable beginning in December 2000, for an aggregate of $6,000 plus the difference between royalties paid to date and certain minimum royalty payments. If the Company does not exercise its option, the Royalty Rate would continue at 2.0% with respect to the Developed Technology. The Technology Agreements and the Nonexclusive Agreements also call for lump sum payments by the Company in the event of a change in control transaction, defined as a sale of all or substantially all of the Company's assets or a merger or reorganization with another business entity after which the shareholders of the Company hold 50% or less of the total equity or voting power of the surviving entity. The payments are based upon a percentage of the total consideration received by the Company or payable to its shareholders in such a transaction (Transaction Rate). The Transaction Rate would be 4.8% and 2.9% if the change in control transaction occurs in 1999 or 2000, respectively. Each of the Technology and Nonexclusive Agreements, unless terminated earlier pursuant to the terms of the Agreements, will terminate on September 6, 2006. 11. EMPLOYEE 401(K) PLAN In December 1998, the Company adopted a 401(k) Plan ("the Plan") to provide retirement benefit for its employees. As allowed under Section 401(k) of the Internal Revenue Code, the Plan provides tax-deferred salary deductions for eligible employees. Employees may contribute up to 15% of their annual compensation to the Plan, limited to a maximum annual amount as set periodically by the Internal Revenue Service. The Company made no contributions to the Plan in 1998. 12. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION The following is supplemental disclosure for the statements of cash flows.
YEARS ENDED DECEMBER 31, 1998 1997 1996 - -------------------------------------------------------------- ------------ --------- --------- CASH PAID: Income taxes.................................................. $ 900 $ 800 $ 800 Interest...................................................... $ 11,300 $ 2,100 $ -- NONCASH INVESTING ACTIVITIES: Stock and warrants issued for purchased technology and other assets...................................................... $ 3,886,500 $ -- $ -- NONCASH FINANCING ACTIVITIES: Issuance of common stock for convertible note payable......... $ 200,000 $ -- $ --
13. SUBSEQUENT EVENTS In January 1999, the Company completed the third and final closing of the Offering, in which it sold 1,963,868 shares of common stock at $1.00 per share, for net proceeds of $1,708,600, and granted additional warrants to purchase 392,774 shares of common stock. F-18 GRAPHON CORPORATION NOTES TO FINANCIAL STATEMENTS (CONTINUED) 13. SUBSEQUENT EVENTS (CONTINUED) In January 1999, the convertible note payable for $475,000 to the Agent Affiliate was retired from proceeds from the third closing of the Offering. In January 1999, the CEO and Executive Vice President received $800,000 for the sale of 800,000 shares of their common stock of the Company to the Agent Affiliate. In February 1999, the Company and its shareholders entered into a merger agreement with Unity First Acquisition Corporation (UFAC), a publicly-traded holding company in New York, under which GraphOn will exchange all its outstanding common stock for UFAC shares at the rate of 0.5576 UFAC shares for every 1.00 GraphOn shares. The transaction will be a forward merger, with UFAC surviving the merger and changing its name to GraphOn Corporation. The merger is expected to close in June 1999 and is subject to approval of the respective shareholders of UFAC and GraphOn Corporation. F-19 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To Unity First Acquisition Corp: We have audited the accompanying balance sheets of Unity First Acquisition Corp. (a Delaware corporation in the development stage) as of July 31, 1998 and 1997, and the related statements of operations, changes in shareholders' equity and cash flows for the years ended July 31, 1998 and 1997, for the period from inception (May 30, 1996) to July 31, 1996, and for the period from inception (May 30, 1996) to July 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Unity First Acquisition Corp. as of July 31, 1998 and 1997, and the results of its operations and its cash flows for the years ended July 31, 1998 and 1997, for the period from inception (May 30, 1996) to July 31, 1996, and for the period from inception (May 30, 1996) to July 31, 1998, in conformity with generally accepted accounting principles. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company is a development stage enterprise with no significant operating results to date and, at July 31, 1998, had $196 of remaining unrestricted assets available to meet its current obligations. These factors raise substantial doubt about the Company's ability to continue as a going concern. Management's plans in regards to these matters are described in Notes 1, 3 and 10. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. /s/ ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP New York, New York December 10, 1998 F-20 UNITY FIRST ACQUISITION CORP. (A DEVELOPMENT STAGE ENTITY) BALANCE SHEETS
JULY 31, -------------------------- 1998 1997 ------------ ------------ ASSETS CASH AND CASH EQUIVALENTS............................................................. $ 196 $ 266,533 RESTRICTED CASH AND INVESTMENTS....................................................... 6,489,707 6,198,488 ------------ ------------ ------------ ------------ TOTAL ASSETS...................................................................... $ 6,489,903 $ 6,465,021 ------------ ------------ ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY LIABILITIES: ACCRUED EXPENSES...................................................................... $ 379,082 $ 67,634 ADVANCES FROM AFFILIATE............................................................... 33,000 -- INCOME TAXES PAYABLE.................................................................. -- 3,575 ------------ ------------ TOTAL LIABILITIES................................................................. 412,082 71,209 ------------ ------------ COMMITMENTS AND CONTINGENCIES Common stock, $.0001 par value, 249,875 shares subject to possible conversion, at conversion value.................................................................... 1,297,301 1,239,380 ------------ ------------ STOCKHOLDERS' EQUITY: Preferred stock, $.01 par value, 5,000 shares authorized, no shares issued or outstanding......................................................................... -- -- Common stock, $.0001 par value, 20,000,000 shares authorized, 1,625,125 shares issued and outstanding (excluding 249,875 shares subject to possible conversion)........... 163 163 Additional paid-in capital............................................................ 5,104,711 5,162,632 Deficit accumulated during the development stage...................................... (324,354) (8,363) ------------ ------------ TOTAL STOCKHOLDERS' EQUITY........................................................ 4,780,520 5,154,432 ------------ ------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY........................................ $ 6,489,903 $ 6,465,021 ------------ ------------ ------------ ------------
See Accompanying Notes to Financial Statements. F-21 UNITY FIRST ACQUISITION CORP. (A DEVELOPMENT STAGE ENTITY) STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED JULY FROM MAY 30, 1996 31, (DATE OF CUMULATIVE ----------------------- INCEPTION) AMOUNTS 1998 1997 TO JULY 31, 1996 FROM INCEPTION ----------- ---------- ------------------ -------------- REVENUE............................................. $ -- $ -- $ -- $ -- ----------- ---------- -------- -------------- EXPENSES: General and administrative...................... 612,237 192,489 15,000 819,726 ----------- ---------- -------- -------------- OTHER INCOME: Interest and dividends.......................... 296,246 202,701 -- 498,947 ----------- ---------- -------- -------------- OPERATING (LOSS) INCOME............................. (315,991) 10,212 (15,000) (320,779) PROVISION FOR INCOME TAXES.......................... -- 3,575 -- 3,575 ----------- ---------- -------- -------------- NET (LOSS) INCOME................................... $ (315,991) $ 6,637 $ (15,000) $ (324,354) ----------- ---------- -------- -------------- ----------- ---------- -------- -------------- NET (LOSS) INCOME PER COMMON SHARE--BASIC AND DILUTED........................................... $ (.17) $ -- $ (.02) ----------- ---------- -------- ----------- ---------- -------- WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING-- BASIC AND DILUTED................... 1,875,000 1,515,000 625,000 ----------- ---------- -------- ----------- ---------- --------
See Accompanying Notes to Financial Statements. F-22 UNITY FIRST ACQUISITION CORP. (A DEVELOPMENT STAGE ENTITY) STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED JULY FROM MAY 30, 1996 31, (DATE OF CUMULATIVE -------------------------- INCEPTION) AMOUNTS 1998 1997 TO JULY 31, 1996 FROM INCEPTION ----------- ------------- ------------------ -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income............................... $ (315,991) $ 6,637 $ (15,000) $ (324,354) CHANGES IN CERTAIN ASSETS AND LIABILITIES: Increase in accrued expenses.................... 311,448 92,634 -- 404,082 (Decrease) increase in income taxes payable..... (3,575) 3,575 -- -- ----------- ------------- -------- -------------- NET CASH (USED IN) PROVIDED BY OPERATING ACTIVITIES................................ (8,118) 102,846 (15,000) 79,728 ----------- ------------- -------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock.......... -- 6,402,112 63 6,402,175 Advances from affiliate......................... 33,000 55,417 40,500 128,917 Repayment to affiliate.......................... -- (95,917) -- (95,917) Deferred registration costs..................... -- -- (25,000) (25,000) ----------- ------------- -------- -------------- NET CASH PROVIDED BY FINANCING ACTIVITIES... 33,000 6,361,612 15,563 6,410,175 ----------- ------------- -------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: (Increase) in restricted cash and investments... (291,219) (6,198,488) -- (6,489,707) ----------- ------------- -------- -------------- NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS..................................... (266,337) 265,970 563 196 CASH AND CASH EQUIVALENTS, beginning of period.... 266,533 563 -- -- ----------- ------------- -------- -------------- CASH AND CASH EQUIVALENTS, end of period.......... $ 196 $ 266,533 $ 563 $ 196 ----------- ------------- -------- -------------- ----------- ------------- -------- --------------
See Accompanying Notes to Financial Statements. F-23 UNITY FIRST ACQUISITION CORP. (A DEVELOPMENT STAGE ENTITY) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT) FOR THE PERIOD MAY 30, 1996 (DATE OF INCEPTION) THROUGH JULY 31, 1996 AND EACH OF THE YEARS ENDED JULY 31, 1998 AND 1997
DEFICIT COMMON STOCK ADDITIONAL ACCUMULATED DURING ----------------------- PAID-IN THE DEVELOPMENT SHARES PAR VALUE CAPITAL STAGE TOTAL ---------- ----------- ------------ ------------------- ------------ Issuance of stock to original founders for cash, at par value................ 625,000 $ 63 $ -- $ -- $ 63 Net (loss) for the period May 30, 1996 (date of inception) through July 31, 1996.................................. -- -- -- (15,000) (15,000) ---------- ----- ------------ ---------- ------------ Balance, July 31, 1996.................. 625,000 63 -- (15,000) (14,937) Issuance of units to public, net of shares subject to possible conversion............................ 1,000,125 100 5,162,632 -- 5,162,732 Net income for the year ended July 31, 1997......................... -- -- -- 6,637 6,637 ---------- ----- ------------ ---------- ------------ Balance, July 31, 1997.................. 1,625,125 163 5,162,632 (8,363) 5,154,432 Net (loss) for the year ended July 31, 1998......................... -- -- -- (315,991) (315,991) Increase in value attributable to common shares subject to possible conversion............................ -- -- (57,921) -- (57,921) ---------- ----- ------------ ---------- ------------ Balance, July 31, 1998.................. 1,625,125 $ 163 $ 5,104,711 $ (324,354) $ 4,780,520 ---------- ----- ------------ ---------- ------------ ---------- ----- ------------ ---------- ------------
See Accompanying Notes to Financial Statements. F-24 UNITY FIRST ACQUISITION CORP. (A DEVELOPMENT STAGE ENTITY) NOTES TO FINANCIAL STATEMENTS NOTE 1--ORGANIZATION AND OPERATIONS Unity First Acquisition Corp. ("Unity") was incorporated in the State of Delaware on May 30, 1996 to serve as a vehicle to effect a merger, exchange of capital stock, asset acquisition or other similar business combination (a "Business Combination"). Unity is currently in the development stage. All activity of Unity to date relates to its formation, fund-raising, and search to effect a Business Combination. NOTE 2--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES UTILIZATION OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share is computed based on the weighted average number of common shares outstanding and common stock equivalents, if not anti-dilutive. In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". This statement establishes standards for computing and presenting earnings per share ("EPS"), replacing the presentation of primary EPS with a presentation of Basic EPS. For entities with complex capital structures, the statement requires the dual presentation of both Basic EPS and Diluted EPS on the face of the statement of operations. Under this new standard, Basic EPS is computed based on the weighted average number of shares actually outstanding during the year. Diluted EPS includes the effect of potential dilution from the exercise of outstanding dilutive stock options and warrants into common stock using the treasury stock method. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, and early application is not permitted. The adoption of this statement did not have a material effect on Unity's financial position or on the results of operations. NOTE 3--OFFERING OF SECURITIES On November 12, 1996, Unity completed its initial public offering (the "Offering") consisting of the sale of 1,250,000 units (the "Units"). Each Unit consisted of one share of Unity's Common Stock ("Common Stock"), $.0001 par value, one Class A Redeemable Warrant (the "A Warrants") and one Class B Redeemable Warrant (the "B Warrants"). Each A Warrant and B Warrant entitles the holder to purchase from Unity one share of Common Stock at an exercise price of $5.50 and $7.50, respectively, commencing on the later of a Business Combination or November 12, 1997. The A Warrants and B Warrants are redeemable, each as a class, in whole and not in part, at the option of Unity and with the consent of the managing underwriter ("Underwriter") upon 30 days notice at any time after the Warrants become exercisable, only in the event that the reported high bid price of the Common Stock is at least $8.50 per share, with respect to the Class A Warrants, and $10.50 per share, with respect to the Class B Warrants for the 20 consecutive trading days immediately prior to notice of redemption, at a price of $.05 per A Warrant or B Warrant. The Warrants are immediately separable and transferable. In connection with F-25 UNITY FIRST ACQUISITION CORP. (A DEVELOPMENT STAGE ENTITY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 3--OFFERING OF SECURITIES (CONTINUED) the Offering, Unity granted the Underwriter an option, exercisable within 45 business days from November 12, 1996, to purchase up to 187,500 additional Units at $6.00 per unit. This option, which was solely for the purpose of covering over-allotments, was not exercised by the Underwriter either in whole or in part prior to its expiration date. None of the A and B Warrants have been exercised through July 31, 1998. Net proceeds of the Offering to Unity including the purchase of warrants by the Underwriter, discussed below, were $6,402,112, after deducting related expenses. Ninety percent (90%) of the net proceeds are held in an interest bearing Trust Fund until the earlier of (i) written notification by Unity of its need for all or substantially all of the net proceeds for the purpose of implementing or facilitating the implementation of a Business Combination or (ii) the liquidation of Unity (See Note 10). Unity's Certificate of Incorporation requires that in the event that Unity does not effect a Business Combination within eighteen months from the date of the Offering, Unity will be dissolved and Unity will distribute to all Public Stockholders in proportion to their respective equity interests in Unity, an aggregate sum equal to Unity's book value, calculated as of the approval date of such proposal. In this regard, Unity's Initial Stockholders, including all of the officers and directors of Unity, have agreed to waive their respective rights to participate in any such liquidation distribution (See Note 10). All of Unity's Initial Stockholders, including all of its officers and directors, have agreed to vote their respective shares of Common Stock in accordance with the vote of the majority of all non-affiliated future stockholders of Unity with respect to a Business Combination. In addition, Unity stock owned by all of the executive officers and directors of Unity, their affiliates and by all persons owning 5% or more of the currently outstanding shares of Common Stock was placed in escrow until the earlier of (i) the occurrence of a Business Combination or (ii) 18 months from the date of the Offering. During the escrow period, such stockholders are not able to sell or otherwise transfer their respective shares of Common Stock, but will retain all other rights as stockholders of Unity, including, without limitation, the right to vote such shares of Common Stock. In connection with the Offering, Unity sold to the Underwriter and its designees, for $100, warrants (the "Underwriter's Warrants") to purchase up to 125,000 Units at an exercise price of $6.60 per Unit. The Underwriter's Warrants will be exercisable for a period of five years commencing on November 12, 1996. The Underwriter's Warrants are not redeemable and have not been exercised. NOTE 4--RESTRICTED CASH AND INVESTMENTS Unity, pursuant to the terms of the Offering, placed $6,007,500 as of November 19, 1996, in a trust account which was primarily invested in a short-term U.S. Government Security. These funds are subject to release upon the earlier of (i) written notification by Unity of its need for all or substantially all of the net proceeds for the purpose of implementing or facilitating the implementation of a Business Combination or (ii) the liquidation of Unity (See Note 10). NOTE 5--CAPITAL STOCK Unity's Certificate of Incorporation authorizes the issuance of 20,000,000 shares of Common Stock. There are 14,862,500 authorized but unissued shares of Common Stock available for issuance (after appropriate reserves for the issuance of Common Stock in connection with the Class A Redeemable Warrants and Class B Redeemable Warrants, the Underwriters' Warrants, the executive officers and F-26 UNITY FIRST ACQUISITION CORP. (A DEVELOPMENT STAGE ENTITY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 5--CAPITAL STOCK (CONTINUED) directors' Class A Warrants and Class B Warrants, and future grants under Unity's 1996 Stock Option Plan). Unity's Board of Directors has the power to issue any or all of the future grants under the Company's 1996 Stock Option Plan. Unity's Board of Directors has the power to issue any or all of the authorized but unissued Common Stock without stockholder approval. Unity currently has no commitments to issue any shares of Common Stock other than as described in the Offering; however, Unity will, in all likelihood, issue a substantial number of additional shares in connection with a Business Combination (See Note 10). To the extent that additional shares of Common Stock are issued, dilution to the interests of Unity's stockholders participating in the Offering will occur. The Board of Directors of Unity is empowered, without stockholder approval, to issue up to 5,000 shares of "blank check" preferred stock (the "Preferred Stock") with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rights of the holders of Unity's Common Stock. To date, no shares of preferred stock have been issued. NOTE 6--RELATED PARTY TRANSACTIONS The Chairman of the Board of Directors and the President of Unity are principal shareholders, officers and directors of Unity Venture Capital Associates Ltd. ("Venture") which owns shares in Unity. Beginning June 1, 1996, commensurate with Unity's activities primarily related to the Offering, Unity agreed to pay Venture a monthly fee of $7,500 for general and administrative services, including the use of office space in premises occupied by Venture. At July 31, 1998, Unity owed $33,000 to Venture for administrative services. Through July 31, 1996, Unity had obtained advances totaling $25,500 from Venture to cover expenses related to the Offering. These advances were repaid out of the proceeds of the Offering in 1997. NOTE 7--STOCK OPTION PLAN On May 30, 1996, Unity's Board of Directors approved a stock option plan (the "Plan"). The Plan, which is subject to shareholder approval, provides for issuance of up to 187,500 options (the "Options") to acquire shares of Unity's Common Stock. The Options are intended to qualify either as incentive stock options ("Incentive Stock Options") within the meaning of Section 422 of the Internal Revenue Code of 1986 or as options which are not intended to meet the requirements of such section ("Nonstatutory Stock Options"). The Options may be granted under the Plan to persons who, in the case of Incentive Stock Options, are key employees (including officers) of the Company, or, in the case of Nonstatutory Stock Options, are key employees (including officers) and nonemployee directors of the Company, except that Nonstatutory Stock Options may not be granted to a holder of more than 10% of the total voting power of Unity. The exercise price of all Incentive Stock Options granted under the Plan must be at least equal to the fair market value of such shares on the date of grant or, in the case of Incentive Stock Options granted to the holder of 10% or more of Unity's Common Stock, at least 110% of the fair market value of such shares on the date of grant. The exercise price of all Nonstatutory Stock Options granted under the Plan shall be determined by the Board of Directors of Unity at the time of grant. The maximum exercise period for which the Options may be granted is ten years from the date of grant (five years in the case of Incentive Stock Options granted to an individual owning more than 10% of Unity's Common Stock.) The aggregate F-27 UNITY FIRST ACQUISITION CORP. (A DEVELOPMENT STAGE ENTITY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 7--STOCK OPTION PLAN (CONTINUED) fair market value (determined at the date of the option grant) of such shares with respect to which Incentive Stock Options are exercisable for the first time by the holder of the option during any calendar year shall not exceed $100,000. The FASB issued Statement of Financial Accounting Standards No. 123, "Accounting for Stock Based Compensation" ("SFAS 123"), which requires companies either to reflect in their financial statements or reflect as supplemental disclosure the impact on earnings and earnings per share of the fair value of stock based compensation using certain pricing models for the option component of stock option plans. As of July 31, 1998, no options have been granted under the Plan. Disclosure, as required by SFAS 123, will be made upon the issuance of options. NOTE 8--INCOME TAXES Income taxes are accounted for in accordance with Statement of Financial Accounting Standards No. 109, "Accounting for Income Taxes." Under this method, deferred income taxes are determined based on differences between the tax bases of assets and liabilities and their financial reporting amounts at each year end, and are measured based on enacted tax rates and laws that will be in effect when the differences are expected to reverse. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized. NOTE 9--CONTINGENCY Unity has agreed to indemnify the Underwriter against certain liabilities, including liabilities under the Securities Act. NOTE 10--PENDING ACQUISITION On May 6, 1998, Unity entered into a letter of intent to effectuate a Business Combination ("Merger") with Worlds, Inc. ("Worlds"), a company engaged in developing music-oriented content applications for its proprietary 3D Internet technology for consumer markets, as well as developing select business oriented applications. On June 25, 1998, Unity and Worlds entered into a definitive Agreement and Plan of Merger and Reorganization (the "Merger Agreement") to effectuate the Merger. On October 29, 1998, Unity's stockholders, at a special meeting convened to consider whether to approve or reject the Merger contemplated by the Merger Agreement, rejected the Merger. As a consequence of the rejection of the Worlds Merger by the Unity Public Stockholders, Article SEVENTH, paragraph (c) of Unity's Certificate of Incorporation would have required the liquidation and dissolution of Unity (the "Liquidation") no later than January 11, 1999. Had such Liquidation taken place on that date, the Unity Public Stockholders, collectively, would have received a liquidating distribution representing their respective pro rata interest in a trust fund established for their benefit upon the consummation of the IPO, which currently approximates $6.5 million. On December 10, 1998, Unity entered into a letter of intent to effectuate a Business Combination with GraphOn Corporation, a privately owned developer and marketer of proprietary "thin client" software that enables a diverse range of desktop computing devices ("desktops") to easily access and utilize UNIX applications from an location, over both fast networks and slow internet connections. F-28 UNITY FIRST ACQUISITION CORP. (A DEVELOPMENT STAGE ENTITY) NOTES TO FINANCIAL STATEMENTS (CONTINUED) NOTE 10--PENDING ACQUISITION (CONTINUED) Unity's Board of Directors has unanimously concluded that a Business Combination with GraphOn would be in the best interests of both Unity and its stockholders, including the Unity Public Stockholders. Consequently, Unity's Board of Directors has sought and obtained an opinion from special Delaware counsel to the effect that such Article SEVENTH, paragraph (c), which attempts to waive Unity's statutory right to amend the Unity Certificate of Incorporation, is contrary to Delaware law and cannot prevent Unity and its stockholders from amending the Unity Certificate of Incorporation. Subject to its submission under the Securities Exchange Act of 1934, as amended, of proxy solicitation materials, Unity's Board of Directors intends to seek the approval of the Unity Public Stockholders to (i) amend the Unity Certificate of Incorporation to remove the provision therein that would have required Unity to commence the Liquidation as a consequence of its inability to consummate a Business Combination within the period defined by Article SEVENTH, paragraph (c) of the Unity Certificate of Incorporation and, if such approval is obtained, to (ii) consider and vote upon a proposal to approve Unity's Business Combination with GraphOn. There can be no assurance that the Unity Stockholders will approve the proposed amendment to the Certificate of Incorporation, or the proposed Business Combination with GraphOn Corporation. The proposed amendment to the Unity Certificate of Incorporation will not affect the right of any Unity Public Stockholders to convert his shares of Unity Common Stock into cash, as provided in Article SEVENTH of the Unity Certificate of Incorporation, should such Unity Public Stockholder object to the GraphOn Business Combination and such Business Combination is approved by a majority in equity interest of the Unity Public Stockholders and thereafter consummated. Depending upon the voting of the Unity Public Stockholders as to the amendment to the Unity Cerficate of Incorporation or the Business Combination with GraphOn, the Company may liquidate. The accompanying financial statements have not been presented on a liquidation basis of accounting as the Company has not decided to liquidate. Additionally, it is not expected that the carrying value of the Company's assets and liabilities would be materially different if presented under a liquidation basis based on the nature of such assets and liabilities. F-29 UNITY FIRST ACQUISITION CORP. (A DEVELOPMENT STAGE ENTITY) BALANCE SHEETS
JANUARY 31, JULY 31, 1999 1998 --------------- ------------ (UNAUDITED) ASSETS CASH AND CASH EQUIVALENTS......................................................... $ 956 $ 196 RESTRICTED CASH AND INVESTMENTS................................................... 6,604,929 6,489,707 --------------- ------------ TOTAL ASSETS.............................................................. $ 6,605,885 $6,489,903 --------------- ------------ --------------- ------------ LIABILITIES AND SHAREHOLDERS' EQUITY LIABILITIES: ACCRUED EXPENSES.............................................................. $ 690,817 $ 379,082 ADVANCES FROM AFFILIATE....................................................... 76,282 33,000 --------------- ------------ TOTAL LIABILITIES......................................................... 767,099 412,082 --------------- ------------ COMMITMENTS AND CONTINGENCIES: Common stock, $.0001 par value, 249,875 shares subject to possible conversion, at conversion value................................................................ 1,320,325 1,297,301 --------------- ------------ SHAREHOLDERS' EQUITY: Preferred stock, $.01 par value, 5,000 shares authorized, no shares issued or outstanding..................................................................... -- -- Common stock, $.0001 par value, 20,000,000 shares authorized, 1,625,125 shares issued and outstanding (excluding 249,875 shares subject to possible conversion)..................................................................... 163 163 Additional paid-in capital........................................................ 5,081,687 5,104,711 Deficit accumulated during the development stage.................................. (563,389) (324,354) --------------- ------------ TOTAL SHAREHOLDERS' EQUITY................................................ 4,518,461 4,780,520 --------------- ------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY................................ $ 6,605,885 $6,489,903 --------------- ------------ --------------- ------------
See Selected Notes to Financial Statements. F-30 UNITY FIRST ACQUISITION CORP. (A DEVELOPMENT STAGE ENTITY) STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE FOR THE SIX MONTHS ENDED THREE MONTHS ENDED JANUARY 31, JANUARY 31, CUMULATIVE --------------------------- -------------------------- AMOUNTS 1999 1998 1999 1998 FROM INCEPTION ------------- ------------ ------------ ------------ -------------- REVENUE......................................... $ -- $ -- $ -- $ -- $ -- ------------- ------------ ------------ ------------ -------------- EXPENSES: General and administrative.................... 378,450 110,100 88,900 54,144 1,198,176 OTHER INCOME: Interest and dividends........................ 139,415 149,594 64,868 74,070 638,362 ------------- ------------ ------------ ------------ -------------- OPERATING (LOSS) INCOME......................... (239,035) 39,494 (24,032) 19,926 (559,814) PROVISION FOR INCOME TAXES...................... -- 8,968 -- 1,105 3,575 ------------- ------------ ------------ ------------ -------------- NET (LOSS) INCOME............................... $ (239,035) $ 30,526 $ (24,032) $ 18,821 $ (563,389) ------------- ------------ ------------ ------------ -------------- ------------- ------------ ------------ ------------ -------------- NET (LOSS) INCOME PER COMMON SHARE--BASIC AND DILUTED....................................... $ (.13) $ .02 $ (.01) $ .01 ------------- ------------ ------------ ------------ ------------- ------------ ------------ ------------ WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING..................... 1,875,000 1,875,000 1,875,000 1,875,000 ------------- ------------ ------------ ------------ ------------- ------------ ------------ ------------
See Selected Notes to Financial Statements. F-31 UNITY FIRST ACQUISITION CORP. (A DEVELOPMENT STAGE ENTITY) STATEMENTS OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED JANUARY 31, CUMULATIVE ------------------------ AMOUNTS 1999 1998 FROM INCEPTION ----------- ----------- -------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net (loss) income..................................................... $ (239,035) $ 30,526 $ (563,389) CHANGES IN CERTAIN ASSETS AND LIABILITIES: Increase (decrease) in accrued expenses................................. 311,735 (20,208) 715,817 ----------- ----------- -------------- NET CASH PROVIDED BY OPERATING ACTIVITIES......................... 72,700 10,318 152,428 ----------- ----------- -------------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from issuance of common stock................................ -- -- 6,402,175 Advances from affiliate............................................... 43,282 -- 172,199 Repayment to affiliate................................................ -- -- (95,917) Deferred registration costs........................................... -- -- (25,000) ----------- ----------- -------------- NET CASH PROVIDED BY FINANCING ACTIVITIES......................... 43,282 -- 6,453,457 ----------- ----------- -------------- CASH FLOWS FROM INVESTING ACTIVITIES: (Increase) in restricted cash and investments......................... (115,222) (145,133) (6,604,929) ----------- ----------- -------------- NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS...................................................... 760 (134,815) 956 CASH AND CASH EQUIVALENTS, beginning of period.......................... 196 266,533 -- ----------- ----------- -------------- CASH AND CASH EQUIVALENTS, end of period................................ $ 956 $ 131,718 $ 956 ----------- ----------- -------------- ----------- ----------- --------------
See Selected Notes to Financial Statements. F-32 UNITY FIRST ACQUISITION CORP. (A DEVELOPMENT STAGE ENTITY) STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (UNAUDITED) FOR THE SIX MONTHS ENDED JANUARY 31, 1999
(DEFICIT) ACCUMULATED COMMON STOCK ADDITIONAL DURING THE ----------------------- PAID-IN DEVELOPMENT SHARES PAR VALUE CAPITAL STAGE TOTAL ---------- ----------- ------------ ------------ ------------ Balance, July 31, 1998......................... 1,875,000 $ 163 $ 5,104,711 $ (324,354) $ 4,780,520 Net loss for the six months ended January 31, 1999............................. -- -- -- (239,035) (239,035) Increase in value attributable to common shares subject to possible conversion............... -- -- (23,024) -- (23,024) ---------- ----- ------------ ------------ ------------ Balance, January 31, 1999...................... 1,875,000 $ 163 $ 5,081,687 $ (563,389) $ 4,518,461 ---------- ----- ------------ ------------ ------------ ---------- ----- ------------ ------------ ------------
See Selected Notes to Financial Statements. F-33 UNITY FIRST ACQUISITION CORP. (A DEVELOPMENT STAGE ENTITY) SELECTED NOTES TO FINANCIAL STATEMENTS (UNAUDITED) 1. FINANCIAL STATEMENTS The financial statements have been prepared by Unity First Acquisition Corp. ("Unity"), without audit. In the opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the financial position, results of operations and cash flows at January 31, 1999 and for all periods presented have been made. The results of operations for the period ended January 31, 1999 are not necessarily indicative of the operating results for a full year. Certain information and footnote disclosures prepared in accordance with general accepted accounting principles and normally included in the financial statements have been condensed or omitted. It is suggested that these financial statements be read in conjunction with the financial statements and notes included in Unity's annual report Form 10-K for the year ended July 31, 1998. 2. ORGANIZATION AND OPERATIONS Unity was incorporated in the State of Delaware on May 30, 1996 to serve as a vehicle to effect a merger, exchange of capital stock, asset acquisition or other similar business combination (a "Business Combination"). Unity is currently in the development stage. All activity of Unity to date relates to its formation, fund-raising, and search to effect a Business Combination. 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES UTILIZATION OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NET INCOME (LOSS) PER COMMON SHARE Net income (loss) per common share is computed based on the weighted average number of common shares outstanding and common stock equivalents, if not anti-dilutive. In 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". This statement establishes standards for computing and presenting earnings per share ("EPS"), replacing the presentation of primary EPS with a presentation of Basic EPS. For entities with complex capital structures, the statement requires the dual presentation of both Basic EPS and Diluted EPS on the face of the statement of operations. Under this new standard, Basic EPS is computed based on the weighted average number of shares actually outstanding during the year. Diluted EPS includes the effect of potential dilution from the exercise of outstanding dilutive stock options and warrants into common stock using the treasury stock method. SFAS No. 128 is effective for financial statements issued for periods ending after December 15, 1997, and early application is not permitted. The adoption of this statement did not have a material effect on Unity's financial position or on the results of its operations. F-34 UNITY FIRST ACQUISITION CORP. (A DEVELOPMENT STAGE ENTITY) SELECTED NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 4. RESTRICTED CASH AND INVESTMENTS Unity, pursuant to the terms of its initial public offering (the "Offering"), placed $6,007,500 as of November 19, 1996, in a trust account which was primarily invested in a short-term U.S. Government Security. These funds are subject to release upon the earlier of (i) written notification by Unity of its need for all or substantially all of the net proceeds for the purpose of implementing or facilitating the implementation of a Business Combination or (ii) the liquidation of Unity (See note 5). 5. PENDING ACQUISITION On May 6, 1998, Unity entered into a letter of intent to effectuate a Business Combination ("Merger") with Worlds, Inc. ("Worlds"), a company engaged in developing music-oriented content applications for its proprietary 3D Internet technology for consumer markets, as well as developing select business oriented applications. On June 25, 1998, Unity and Worlds entered into a definitive Agreement and Plan of Merger and Reorganization (the "Merger Agreement") to effectuate the Merger. On October 29, 1998, Unity's stockholders, at a special meeting convened to consider whether to approve or reject the Merger contemplated by the Merger Agreement, rejected the Merger. As a consequence of the rejection of the Worlds Merger by the Unity Public Stockholders, Article SEVENTH, paragraph (c) of Unity's Certificate of Incorporation would have required the liquidation and dissolution of Unity (the "Liquidation") no later than January 11, 1999. Had such Liquidation taken place on that date, the Unity Public Stockholders, collectively, would have received a liquidating distribution representing their respective pro rata interest in a trust fund established for their benefit upon the consummation of the IPO, which currently approximates $6.6 million. On December 10, 1998, Unity entered into a letter of intent to effectuate a Business Combination with GraphOn Corporation ("GraphOn"), a privately owned developer and marketer of proprietary "thin client" software that enables a diverse range of desktop computing devices ("desktops") to easily access and utilize UNIX applications from an location, over both fast networks and slow internet connections. Unity's Board of Directors has unanimously concluded that a Business Combination with GraphOn would be in the best interests of both Unity and its stockholders, including the Unity Public Stockholders. Consequently, Unity's Board of Directors has sought and obtained an opinion from special Delaware counsel to the effect that such Article SEVENTH, paragraph (c), which attempts to waive Unity's statutory right to amend the Unity Certificate of Incorporation, is contrary to Delaware law and cannot prevent Unity and its stockholders from amending the Unity Certificate of Incorporation. Subject to its submission under the Securities Exchange Act of 1934, as amended, of proxy solicitation material, Unity's Board of Directors intends to seek the approval of the Unity Public Stockholders to (i) amend the Unity Certificate of Incorporation to remove the provision therein that would have required Unity to commence the Liquidation as a consequence of its inability to consummate a Business Combination within the period defined by Article SEVENTH, paragraph (c) of the Unity Certificate of Incorporation and, if such approval is obtained, to (ii) consider and vote upon a proposal to approve Unity's Business Combination with GraphOn. There can be no assurance that the Unity Stockholders will approve the proposed amendment to the Certificate of Incorporation, or the proposed Business Combination with GraphOn Corporation. The proposed amendment to the Unity Certificate of Incorporation will not affect the right of any Unity Public Stockholder to convert his shares of Unity Common Stock into cash, as provided in F-35 UNITY FIRST ACQUISITION CORP. (A DEVELOPMENT STAGE ENTITY) SELECTED NOTES TO FINANCIAL STATEMENTS (UNAUDITED) (CONTINUED) 5. PENDING ACQUISITION (CONTINUED) Article SEVENTH of the Unity Certificate of Incorporation, should such Unity Public Stockholder object to the GraphOn Business Combination and such Business Combination is approved by a majority in equity interest of the Unity Public Stockholders and thereafter consummated. Depending upon the voting of the Unity Public Stockholders as to the amendment to the Unity Certificate of Incorporation or the Business Combination with GraphOn, Unity may liquidate. The accompanying financial statements have not been presented on a liquidation basis of accounting as Unity has not decided to liquidate. Additionally, it is not expected that the carrying value of Unity's assets and liabilities would be materially different if presented under a liquidation basis based on the nature of such assets and liabilities. F-36 EXHIBIT A EXCERPTS FROM RESTATED CERTIFICATE OF INCORPORATION OF UNITY FIRST ACQUISITION CORP. SEVENTH: The following paragraphs (a) through (d) shall apply during the period commencing upon the consummation of the Corporation's initial public offering of securities ("IPO") and terminating upon the consummation of any "Business Combination." ["and may not be amended during such period]. A "Business Combination" shall mean the acquisition by the Corporation, whether by merger, exchange of capital stock, asset or stock acquisition or other similar type of transaction, of any business ("Target Business"). (a) Prior to the consummation of any Business Combination, the Corporation shall submit such Business Combination to its stockholders for approval regardless of whether the Business Combination is of a type which normally would require such stockholder approval under the DGCL. In the event that the holders of a majority of the outstanding Voting Stock vote for the approval of the Business Combination, the Corporation shall be authorized to consummate the Business Combination; provided that the Corporation shall not consummate any Business Combination if 20% or more in interest of the holders of the public shares (as hereafter defined) exercise their conversion rights described in paragraph (b) below. (b) In the event that a Business Combination is approved in accordance with the above paragraph (a) and is consummated by the Corporation, any holder of shares of common stock issued in the IPO ("public shares") who voted against the Business Combination may demand that the Corporation convert his public shares into cash. If so demanded, the Corporation shall convert such public shares at a per-share conversation price equal to the quotient determined by dividing (i) the amount in the Trust Fund (as defined below), inclusive of any interest thereon, as of the record date for determination of stockholders entitled to vote on the Business Combination, by (ii) the number of public shares. "Trust Fund" shall mean that trust account established by the Corporation at the consummation of its IPO and into which certain net proceeds of the IPO are deposited. (c) In the event that the Corporation does not consummate a Business Combination [by the later of (i) 18 months after the consummation of the IPO or (ii) 24 months after the consummation of the IPO in the event that an agreement for a Business Combination was executed but was not consummated within such 18 month period (the later of such dates being referred to as] WITH GRAPHON CORPORATION, A CALIFORNIA CORPORATION, BY JUNE 30, 1999 (the "Termination Date"), the officers of the Corporation shall take all such actions as may be necessary to dissolve and liquidate the Corporation within sixty days of the Termination Date. In the event that the Corporation is so dissolved and liquidated, liquidating distributions shall be made only with respect to the public shares and the Corporation shall pay no liquidating distributions with respect to any shares of common stock outstanding prior to the consummation of the IPO. (d) A holder of public shares shall be entitled to receive distributions from the Trust Fund only in the event of a liquidation of the Corporation or in the event he demands conversion of his shares in accordance with paragraph (b) above. In no other circumstances shall a holder of public shares have any right or interest of any kind in or to the Trust Fund. NINTH: The corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation [(other than the provisions of Article SEVENTH, which may not be amended prior to consummation of a Business Combination)] in the manner now or hereafter prescribed by law, and all rights and powers conferred herein on stockholders, directors and officers are subject to this reserved power. A-1 EXHIBIT B AGREEMENT AND PLAN OF MERGER AND REORGANIZATION, dated as of February 1, 1999 (this "Agreement"), between UNITY FIRST ACQUISITION CORP., a Delaware corporation ("Unity"), and GRAPHON CORPORATION, a California corporation (the "Company"). ------------------------ The Boards of Directors of Unity and the Company have unanimously approved the merger of the Company with and into Unity pursuant to this Agreement (the "Merger") and the other transactions contemplated hereby upon the terms and subject to the conditions set forth herein. It is intended that the Merger shall qualify for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Internal Revenue Code of 1986, as amended (the "Code"). Unity and the Company desire to make certain representations, warranties, covenants and agreements in connection with the Merger. NOW, THEREFORE, in consideration of the foregoing premises and the representations, warranties, covenants and agreements contained herein, the parties hereto, intending to be legally bound hereby, agree as follows: ARTICLE I THE MERGER SECTION 1.1 THE MERGER. Upon the terms and subject to the conditions of this Agreement, at the Effective Time (as defined in Section 1.2 below), the Company shall be merged with and into Unity in accordance with the provisions of Section 252 of the Delaware General Corporation Law (the "DGCL") and of Sections 1100 and 1108 of the California Corporation Code (the "CCC") with the effect provided in Sections 259 thru 261 of the DGCL and Section 1107 of the CCC, and the separate existence of the Company shall thereupon cease. Unity shall be the surviving corporation in the Merger (hereinafter sometimes referred to as "Surviving Corporation") and shall continue to be governed by the laws of the State of Delaware. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time of the Merger, (a) all assets and property of every description, and every interest therein, wherever located, and the rights, privileges, immunities, powers, franchises and authority, of a public as well as of a private nature, of each of Unity and the Company, shall become assets and property of the Surviving Corporation and (b) all liabilities and obligations of Unity and the Company shall be vested in, and become the liabilities and obligations of, the Surviving Corporation without further act or deed. SECTION 1.2 EFFECTIVE TIME OF THE MERGER. The Merger shall become effective at such time (the "Effective Time") as (a) a Certificate of Merger, in the form set forth as Exhibit I hereto, is filed with the Secretary of State of the State of Delaware, and (b) an Agreement of Merger, in the form set forth as Exhibit II hereto, is filed with the Secretary of State of the State of California (collectively, the "Merger Filings"). Such filings shall be made simultaneously with or as soon as practicable after the closing of the transactions contemplated by this Agreement in accordance with Section 3.5. SECTION 1.3 NAME CHANGE. At the Effective Time, Unity shall change its name to "GraphOn Corporation." SECTION 1.4 DISCLOSURE SCHEDULES. Simultaneously with the execution of this Agreement, (a) the Company shall deliver a schedule relating to the Company (the "Company Disclosure Schedule"), and (b) Unity shall deliver a schedule relating to Unity (the "Unity Disclosure Schedule" and collectively, with the Company Disclosure Schedule, the "Disclosure Schedules") setting forth the matters required to be set forth in the Disclosure Schedules as described elsewhere in this Agreement. The Disclosure Schedules shall be deemed to be part of this Agreement. B-1 ARTICLE II SURVIVING CORPORATION SECTION 2.1 CERTIFICATE OF INCORPORATION. The Certificate of Incorporation of Unity as in effect immediately prior to the Effective Time shall be the Certificate of Incorporation of the Surviving Corporation after the Effective Time, until duly amended in accordance with the terms thereof and of the DGCL. SECTION 2.2 BY-LAWS. The By-laws of Unity as in effect immediately prior to the Effective Time shall be the By-laws of the Surviving Corporation after the Effective Time, and thereafter may be amended in accordance with their terms and as provided by the Certificate of Incorporation of the Surviving Corporation and the DGCL. SECTION 2.3 DIRECTORS. The directors of the Company at the Effective Time, together with one (1) designee of the directors of Unity occupying such positions immediately prior to the Effective Time, shall be the directors of the Surviving Corporation, from and after the Effective Time, until their respective successors have been duly elected or appointed and qualified or until death, resignation or removal in accordance with the Certificate of Incorporation and By-laws, as applicable, of the Surviving Corporation. Except as provided for in the immediately preceding sentence, all of the directors of Unity immediately prior to the Effective Time shall each resign such position as of the Effective Time. SECTION 2.4 OFFICERS. The officers of the Company at the Effective Time shall, from and after the Effective Time, be the officers of the Surviving Corporation until their respective successors have been duly elected or appointed and qualified or until death, resignation or removal in accordance with the Certificate of Incorporation and By-Laws, as applicable, of the Surviving Corporation. The officers of Unity immediately prior to the Effective Time shall each resign such position as of the Effective Time. ARTICLE III CONVERSION OF SHARES SECTION 3.1 CONVERSION OF COMPANY SHARES IN THE MERGER. At the Effective Time, by virtue of the Merger and without any action on the part of any holder of any capital stock of the Company: (a) each share of Common Stock, without par value, of the Company ("Company Common Stock"), issued and outstanding at the Effective Time, subject to the terms and conditions of this Agreement, shall be converted (except as provided in Sections 3.1(b) and 3.4), without any further action, into the right to receive, and become exchangeable for, 0.5576 shares (the "Exchange Ratio") of Common Stock, $.0001 par value, of Unity ("Unity Common Stock"), subject to the payment of cash adjustments in lieu of the issuance of fractional shares as provided in Section 3.3 of this Agreement; provided, that if, prior to the Effective Time, Unity should split, reclassify or combine Unity Common Stock, or pay or grant to any stockholders of Unity a stock dividend or other stock distribution in Unity Common Stock or rights to acquire Unity Common Stock, or otherwise change Unity Common Stock into any other securities, then the Exchange Ratio will be appropriately adjusted to reflect such split, reclassification, combination, stock dividend or other distribution; (b) each share of Company Common Stock, if any, owned by Unity or any subsidiary of Unity or the Company immediately prior to the Effective Time shall be cancelled and shall cease to exist from and after the Effective Time; and (c) All options (the "Company Options") outstanding, whether or not exercisable and whether or not vested, at the Effective Time, and whether or not granted pursuant to the Company's 1998 Stock Option/Stock Issuance Plan (the "Company Stock Option Plan") shall remain outstanding following the Effective Time. At the Effective Time, the Company Options shall, by virtue of the B-2 Merger and without any further action on the part of the Company or the holders thereof, be assumed by Unity in such manner that Unity (i) is a corporation "assuming a stock option in a transaction to which Section 424(a) applies" within the meaning of Section 424 of the Internal Revenue Code of 1986, as amended (the "Code"), or (ii) to the extent that Section 424 of the Code does not apply to any such Company Options, would be such a corporation were Section 424 of the Code applicable to such Company Options. From and after the Effective Time, all references to the Company in the Company Stock Option Plan and the applicable stock option agreements issued thereunder shall be deemed to refer to Unity. Each Company Option assumed by Unity shall be exercisable upon the same terms and conditions as under the Company Stock Option Plan and the applicable stock option agreement issued thereunder, except that (A) each such Company Option shall be exercisable for that whole number of shares of Unity Common Stock (rounded down to the nearest whole share) into which the number of shares of Company Common Stock subject to such Company Option immediately prior to the Effective Time would be converted under Section 3.1 (a), and (B) the option price per share of Unity Common Stock shall be an amount equal to the option price per share of Company Common Stock subject to such Company Option in effect immediately prior to the Effective Time divided by the Exchange Ratio (the option price per share, as so determined, being rounded upward to the nearest full cent). No payment shall be made for fractional shares. Within 20 business days after the Effective Time, Unity will issue to each person who, immediately prior to the Effective Time was a holder of a Company Option, a document in form and substance reasonably satisfactory to the Company evidencing the foregoing assumption of such option by Unity. (d) All warrants issued by the Company to purchase shares of Company Common Stock (the "Company Warrants") outstanding, whether or not exercisable and whether or not vested, at the Effective Time shall remain outstanding following the Effective Time. At the Effective Time, the Company Warrants shall, by virtue of the Merger and without any further action on the part of the Company or the holders thereof, be assumed by Unity and each Company Warrant assumed by Unity shall be exercisable upon the same terms and conditions as under the applicable warrant agreements with respect to such Company Warrants, except that (A) each such Company Warrant shall be exercisable for that whole number of shares of Unity Common Stock (to the nearest whole share) into which the number of shares of Company Common Stock subject to such Company Warrant immediately prior to the Effective Time would be converted under Section 3.1 (a), and (B) the exercise price per share of Unity Common Stock shall be an amount equal to the exercise price per share of Company Common Stock subject to such Company Warrant in effect immediately prior to the Effective Time divided by the Exchange Ratio (the exercise price per share, as so determined, being rounded upward to the nearest full cent). From and after the Effective Time, all references to the Company in the respective warrant agreements shall be deemed to refer to Unity. No payment shall be made for fractional shares unless required by the respective terms of the Company Warrants. (e) All outstanding rights of the Company which it may hold immediately prior to the Effective Time to repurchase unvested shares of Company Common Stock (the "Repurchase Options") shall be assigned to Unity in the Merger and shall thereafter be exercisable by Unity upon the terms and conditions in effect immediately prior to the Effective Time, except that the shares purchasable pursuant to the Repurchase Options and the purchase price per shall be adjusted to reflect the Exchange Ratio. SECTION 3.2 EXCHANGE OF CERTIFICATES. (a) From and after the Effective Time, each holder of an outstanding certificate which immediately prior to the Effective Time represented shares of Company Common Stock (the "Company Certificates") shall cease to have any right as a stockholder of the Company and such holder's B-3 sole rights shall be to receive in exchange for such holder's Company Certificates, upon surrender thereof to an exchange agent selected by the Company (the "Exchange Agent"), a certificate or certificates representing the number of whole shares of Unity Common Stock which such holder is entitled to receive pursuant to Section 3.1 plus cash in lieu of fractional shares, as provided in Section 3.3 hereof. Notwithstanding any other provision of this Agreement, (i) until holders of Company Certificates theretofore representing shares of Company Common Stock have surrendered such certificates for exchange as provided herein, (A) no dividends shall be paid by the Company with respect to any shares represented by such Company Certificates and (B) no payment for fractional shares shall be made, provided, in each case, that upon surrender of such Company Certificates, the surrendering holder shall receive all such dividends and payments for fractional shares and (ii) without regard to when such Company Certificates are surrendered for exchange as provided herein, no interest shall be paid on any such dividend or payment for fractional shares. If any certificate for shares of Unity Common Stock is to be issued in a name other than that in which the certificate for shares of Company Common Stock surrendered in exchange therefor is registered, it shall be a condition of such exchange that the person requesting such exchange shall pay any transfer or other taxes required by reason of the issuance of certificates for such shares of Unity Common Stock in a name other than that of the registered holder of the certificate surrendered, or shall establish to the satisfaction of Unity that such tax has been paid or is not applicable. No transfers of Company Common Stock shall be made on the stock transfer books of the Company after the close of business on the day prior to the date of the Effective Time. (b) At or before the Effective Time, Unity shall make available to the Exchange Agent a sufficient number of certificates representing shares of Unity Common Stock required to effect the exchange referred to in Section 3.2(a). (c) Promptly after the Effective Time, Unity shall cause the Exchange Agent to mail to each holder of record of the Company Certificates (i) a form letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Company Certificates shall pass, only upon actual delivery of the Company Certificates to the Exchange Agent) and (ii) instructions for use in effecting the surrender of the Company Certificates in exchange for certificates representing shares of Unity Common Stock. Upon surrender of the Company Certificates for cancellation to the Exchange Agent, together with a duly executed letter of transmittal and such other documents as the Exchange Agent shall reasonably require, the holder of such Company Certificates shall be entitled to receive in exchange therefor one or more certificates representing that number of whole shares of Unity Common Stock into which the shares of Company Common Stock theretofore represented by the Company Certificates so surrendered shall have been converted pursuant to the provisions of Section 3.1, in addition to payment for any fractional share of Unity Common Stock, and the Company Certificates so surrendered shall forthwith be cancelled. Until so surrendered, the Company Certificates shall represent solely the right to receive the number of whole shares of Unity Common Stock that shall be issued in exchange for Company Common Stock and any cash in lieu of the fractional Unity Common Stock as contemplated by Section 3.3. Notwithstanding the foregoing, neither the Exchange Agent nor any party hereto shall be liable to a holder of shares of Company Common Stock for any shares of Unity Common Stock delivered to a public official as required by applicable abandoned property, escheat or similar laws. The Exchange Agent shall not be entitled to vote or exercise any rights of ownership with respect to Unity Common Stock held by it from time to time hereunder. SECTION 3.3 NO FRACTIONAL SHARES. Notwithstanding any other provision of this Agreement, no certificates or scrip for fractional shares of Unity Common Stock shall be issued in the Merger and no Unity Common Stock dividend, reclassification, stock split or interest shall be paid or have effect with B-4 respect to any fractional interest in a share of Unity Common Stock, and such fractional interests shall not entitle the owner thereof to vote or to any other rights of a security holder. In lieu of any such fractional shares, each holder of Company Common Stock who would otherwise have been entitled to receive a fraction of a share of Unity Common Stock upon surrender of Company Certificates for exchange pursuant to this Article III will be paid an amount in cash therefor (without interest) equal to the average of the last reported sale prices of Unity Common Stock on the Electronic Bulletin Board (the "Bulletin Board") for each of the twenty consecutive trading days ending with the third trading day prior to the Closing Date (as defined in Section 3.5) multiplied by the fractional interest of such stockholder in a share of Unity Common Stock. For purposes of determining whether and to what extent a particular stockholder is entitled to receive cash adjustments pursuant to this Section 3.3, shares of record held by such holder and represented by two or more Company Certificates shall be aggregated. SECTION 3.4 DISSENTING SHARES. Notwithstanding any provision of this Agreement to the contrary, shares of Company Common Stock that are outstanding immediately prior to the Effective Time and which are held by stockholders of the Company who shall not have voted in favor of the Merger or consented thereto in writing and who shall have demanded properly in writing the fair value for such shares of Company Common Stock in accordance with Sections 1300-1312 of the CCC (collectively, "Dissenting Stock") shall not be converted into or represent the right to receive shares of Unity Common Stock. Such stockholders shall be entitled to receive payment of the fair value of such shares of Dissenting Stock held by them in accordance with the provisions of such Sections 1300-1312, except that all Dissenting Stock held by stockholders who have failed to perfect or who effectively shall have withdrawn or lost their rights to appraisal of such shares of Dissenting Stock under such Sections 1300-1312 shall thereupon be deemed to have been converted into and to have become exchangeable for, as of the Effective Time, the right to receive shares of Unity Common Stock, without any interest thereon, upon surrender, in the manner provided in Section 3.2, of the Company Certificates that evidence such shares of Dissenting Stock. SECTION 3.5 CLOSING. The closing (the "Closing") of the transactions contemplated by this Agreement shall take place at the offices of Brobeck, Phleger & Harrison LLP, Two Embarcadero Place, 2200 Geng Road, Palo Alto, California 94303, on the third business day following the date on which the last of the conditions set forth in Article VII hereof is fulfilled or waived, or at such other time and place as Unity and the Company shall agree (the date on which the closing occurs being the "Closing Date"). B-5 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Unity as follows (subject in each case to such exceptions as are set forth or cross-referenced in the attached Company Disclosure Schedule in the labeled section corresponding to the caption of the representation or warranty to which such exceptions relate; provided, however, that each exception shall be deemed to apply to any representation of the Company to which it might reasonably apply): SECTION 4.1 ORGANIZATION AND QUALIFICATION. The Company is a corporation duly incorporated, validly existing and in good standing under the laws of the State of California. The Company has all requisite corporate power to carry on its business as it is now being conducted and is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions as set forth in Section 4.1 of the Company Disclosure Schedule, and to the Company's knowledge, such jurisdictions are the only ones in which the properties owned, leased or operated by the Company or the nature of the business conducted by the Company makes such qualification necessary, except where the failure to qualify (individually or in the aggregate) will not have any Material Adverse Effect on the Company. The term "Material Adverse Effect" means, with respect to the Company or Unity (as applicable), a material adverse effect on the business, operations, properties, assets, condition (financial or otherwise) or results of operations of it and its subsidiaries taken as a whole, or on its ability to consummate the transactions contemplated hereby except (i) any effect arising from this Agreement or the transactions contemplated hereby, (ii) any effect applicable generally to the industries in which the Company operates and (iii) general economic or financial effects. The copies of the Certificate of Incorporation and By-laws of the Company, as amended to date and delivered to Unity, are true and complete copies of these documents as now in effect. The minute books of the Company are accurate in all material respects. SECTION 4.2 CAPITALIZATION. (a) The authorized capital stock of the Company as of the date hereof (the "Company's Baseline Capitalization") consists solely of (x) 5,000,000 shares of Preferred Stock, without par value, of which no shares are issued and outstanding, and (y) 50,000,000 shares of Company Common Stock, of which 16,256,049 shares are issued and outstanding. All of such shares of Company Common Stock that are issued and outstanding are duly authorized, validly issued and outstanding, fully paid and non-assessable and, to the knowledge of the Company and except as set forth in the Company Disclosure Schedule, were not issued in violation of the preemptive rights of any person. The term "knowledge", when expressed herein on behalf of the Company or Unity (as applicable), means actual knowledge of their respective executive officers. (b) As of the date hereof, there are also 1,591,224 shares of Company Common Stock ("Company Contingent Stock") which are reserved for issuance upon exercises of issued and outstanding options and warrants (collectively, the "Company Derivatives"), each as more fully set forth in the Company Disclosure Schedule. (c) The Company has entered into that certain Private Placement Memorandum, dated September 2, 1998 (with any supplement thereto, the "Private Placement Memorandum"), with Spencer Trask Securities Incorporated (the "Placement Agent") regarding the issuance and sale of units, each consisting of 100,000 shares of Common Stock. Other than (i) the Company Contingent Stock, (ii) the requirement that the Placement Agent and Corel Corporation, a corporation incorporated under the laws of Canada, Corel Corporation Limited, a corporation incorporated under the laws of the Republic of Ireland, and Corel, Inc., a corporation incorporated under the laws of the State of Delaware (collectively, "Corel"), consent to the sale by the Company of any securities or any rights to acquire any securities of the Company B-6 (except pursuant to options, warrants, rights or option plans described in the Private Placement Memorandum) at a price less than $1.00 per share, (iii) the rights granted to each investor pursuant to the Private Placement Memorandum and to Corel to purchase pro rata portions of any securities offered by the Company prior to the issuance of such securities and until such time as there is the Initial Public Offering, (iv) the obligation of the Company to issue to Corel and, the Company anticipates, to an additional shareholder of the Company approximately 1,612,017 shares of Common Stock, on June 30, 2000 and for no additional consideration, in the event the Company has not consummated the Initial Public Offering as of such date and (v) as described in this Agreement, there are no options, warrants, conversion privileges, subscription or purchase rights or other rights presently outstanding to purchase or otherwise acquire (x) any authorized but unissued, unauthorized or treasury shares of the Company's capital stock, (y) any Company Contingent Stock or (z) other securities of the Company. SECTION 4.3 SUBSIDIARIES. The Company has no Subsidiaries. The term "Subsidiary" shall mean any corporation or other entity of which the Company or Unity (as applicable), directly or indirectly, controls or which the Company or Unity (as applicable) owns, directly or indirectly, 50% or more of the stock or other voting interests, the holders of which are, ordinarily or generally, in the absence of contingencies (which contingencies have not occurred) or understandings (which understandings have not yet been required to be performed) entitled to vote for the election of a majority of the board of directors or any similar governing body. Except as set forth in the Company Disclosure Schedule, the Company does not own any capital stock in any other corporation or similar business entity nor is the Company a partner in any partnership or joint venture. SECTION 4.4 AUTHORITY; NON-CONTRAVENTION; APPROVALS. (a) The Company has full corporate power and authority to enter into this Agreement and, subject to the Company Stockholders' Approval (as defined in Section 7.3 below), and the Required Statutory Approvals (as defined in Section 4.4(c) below), to consummate the transactions contemplated hereby. The Company's execution and delivery of this Agreement, and its consummation of the transactions contemplated hereby, have been duly authorized by its Board of Directors and no other corporate proceedings on its part are necessary to authorize its execution and delivery of this Agreement and its consummation of the transactions contemplated hereby, except for the Company Stockholders' Approval and the obtaining of the Required Statutory Approvals. This Agreement has been duly and validly executed and delivered by the Company, and constitutes its valid and binding agreement, enforceable against it in accordance with its terms, except that such enforcement may be subject to (i) bankruptcy, insolvency, reorganization, moratorium or other similar laws affecting or relating to enforcement of creditors' rights generally and (ii) general equitable principles ((i) and (ii) the "Enforceability Exception"). (b) The Company's execution and delivery of this Agreement does not, and its consummation of the transactions contemplated hereby will not, violate, conflict with or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any lien, security interest, charge or encumbrance upon any of its properties or assets under any of the terms, conditions or provisions of (i) its Certificate of Incorporation or By-Laws, (ii) subject to obtaining the Required Statutory Approvals and the receipt of the Company Stockholders' Approval and the Unity Stockholders' Approval (as defined in Section 7.3 below), any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to it or any of its properties or assets, or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which it is now a party or by which it or any of its properties or assets may be bound, excluding from the foregoing clauses (ii) and (iii), such violations, conflicts, breaches, defaults, terminations, accelerations or creations of liens, security interests, charges or encumbrances that do not, in the aggregate, have a Material Adverse Effect on the Company. B-7 (c) Except for (i) the filing of the Proxy Statement/ Prospectus (as defined in Section 4.13 below) with the Securities and Exchange Commission (the "SEC") pursuant to the Securities Act of 1933, as amended (the "Securities Act"), and the Securities Exchange Act of 1934, as amended (the "Exchange Act"), (ii) the declaration of the effectiveness thereof by the SEC and the qualification thereof under state securities or blue sky laws, (iii) the filing with the California Corporations Commissioner of an Application for Qualification of the Unity Common Stock under Section 25120 of the CCC, and (iv) the making of the Merger Filings (as defined in Section 1.2) with the Secretary of State of the State of Delaware, the Recorder of the County of New Castle, Delaware, and the Secretary of State of the State of California in connection with the Merger, (the filings and approvals referred to in clauses (i) through (iv) above are collectively referred to as the "Required Statutory Approvals"), no declaration, filing or registration with, or notice to, or authorization, consent or approval of, any governmental or regulatory body or authority is necessary for the Company's execution and delivery of this Agreement or its consummation of the transactions contemplated hereby, other than such declarations, filings, registrations, notices, authorizations, consents or approvals which, if not made or obtained, as the case may be, would not, in the aggregate, have a Material Adverse Effect on the Company. SECTION 4.5 CONTRACTS; NO DEFAULT. (a) Section 4.5(a) of the Company Disclosure Schedule consists of a true and complete list of all contracts, agreements, commitments and other instruments (whether oral or written) to which the Company is a party (other than standard Company purchase orders) that (i) involve a receipt or an expenditure by the Company or require the performance of services or delivery of goods to, by, through, on behalf of or for the benefit of the Company, which in each case, relates to a contract, agreement, commitment or instrument that either (A) requires payments in excess of $100,000 per year and receipts in excess of $100,000 per year or (B) is not terminable by the Company on notice of thirty (30) days or less without penalty or the Company being liable for damages of $100,000 or more, or (ii) involve an obligation for the performance of services or delivery of goods by the Company that cannot, or in reasonable probability will not, be performed within one year from the date hereof. (b) All of the contracts, agreements, commitments and other instruments described in Section 4.5(a) of the Company Disclosure Schedule (individually, a "Contract" and collectively, the "Contracts") are valid and binding upon the Company, and to the knowledge of the Company, the other parties thereto, and are in full force and effect and enforceable in accordance with their terms, subject to the Enforceability Exception, and neither the Company, nor to the knowledge of the Company, any other party to any Contract, has materially breached any provision of, nor has any event occurred which, with the lapse of time or action by a third party, could result in a material default under, the terms thereof. To the knowledge of the Company, no stockholder of the Company has received any payment in violation of law from any contracting party in connection with or as an inducement for causing the Company to enter into any Contract. SECTION 4.6 LITIGATION. Except as set forth in Schedule 4.6 of the Company Disclosure Schedule, there is no (i) claim, action, suit or proceeding pending or, to the Company's knowledge, threatened against or directly relating to the Company before any court or governmental or regulatory authority or body or arbitration tribunal, or (ii) outstanding judgment, order, writ, injunction or decree, or application, request or motion therefor, of any court, governmental agency or arbitration tribunal in a proceeding to which the Company or any of its assets was or is a party except, in the case of clauses (i) and (ii) above, such as would not, individually or in the aggregate, have a Material Adverse Effect on the Company. SECTION 4.7 TAXES. The Company has duly filed with the appropriate governmental agencies all material franchise, income and all other material Tax (as hereinafter defined) returns and reports (Tax returns and reports are hereinafter collectively referred to as "Tax Returns") other than Tax Returns which the failure to file would have no Material Adverse Effect on the Company. All such Tax Returns were, when filed, and to the Company's knowledge are, accurate and complete in all material respects and were B-8 prepared in conformity with applicable laws and regulations. The Company has paid or will pay in full or has adequately reserved against all Taxes otherwise assessed against it through the Closing Date. The Company is not a party to any pending action or proceeding by any governmental authority for the assessment of any Tax, and to the Company's knowledge, no claim for assessment or collection of any Tax has been asserted in writing against the Company that has not been paid. There are no Tax liens upon the assets of the Company (other than liens for taxes not yet due and payable). There is no valid basis, to the Company's knowledge, for any assessment, deficiency, notice, 30-day letter or similar intention to assess any Tax to be issued to the Company by any governmental authority. "Tax" or "Taxes" shall mean all federal, state, local and foreign taxes, duties, levies, charges and assessments of any nature, including social security payments and withholdings relating to wages, salaries and benefits and payments to subcontractors (to the extent required under applicable Tax law), and also including all interest, penalties and additions imposed with respect to such amounts. SECTION 4.8 EMPLOYEE BENEFIT PLANS; ERISA. (a) Except as set forth in or pursuant to the plans, programs, practices and arrangements listed in the Company Disclosure Schedule, the Company does not maintain or contribute to any employee benefit plans, programs, arrangements and practices (such plans, programs, arrangements and practices of the Company being hereinafter collectively referred to as the "Company Plans"), including employee benefit plans within the meaning set forth in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended, and all regulations promulgated thereunder, as in effect from time to time ("ERISA"), or any written employment contracts providing for an annual base salary in excess of $100,000 and having a term in excess of one year, which contracts are not immediately terminable without penalty or further liability, or other similar arrangements for the provision of benefits (excluding any "Multi-employer Plan" within the meaning of Section 3(37) of ERISA, and all regulations promulgated thereunder, as in effect from time to time). The Company Disclosure Schedule lists all Multi-employer Plans which the Company maintains or to which it makes contributions. The Company has no obligation to create any additional such plan or to amend any such plan so as to increase benefits thereunder, except as required under the terms of the Company Plans, under existing collective bargaining agreements or to comply with applicable law. (b) (i) There have been no prohibited transactions within the meaning of Section 406 and 407 of ERISA or Section 4975 of the Code with respect to any of the Company Plans that could result in penalties, taxes or liabilities which, singly or in the aggregate, could have a Material Adverse Effect on the Company, (ii) except for premiums due, there is no outstanding liability in excess of $10,000 whether measured alone or in the aggregate, under Title IV of ERISA with respect to any of the Company Plans, (iii) neither the Pension Benefit Guaranty Corporation nor any plan administrator has instituted proceedings to terminate any of the Company Plans subject to Title IV of ERISA other than in a "standard termination" described in Section 4041(b) of ERISA, (iv) none of the Company Plans has incurred any "accumulated funding deficiency" (as defined in Section 302 of ERISA and Section 412 of the Code), whether or not waived, as of the last day of the most recent fiscal year of each of the Company Plans ended prior to the date of this Agreement, (v) based upon reasonable actuarial assumptions currently utilized for such Company Plan, the current present value of all projected benefit obligations under each of the Company Plans which is subject to Title IV of ERISA did not, as of its latest valuation date, exceed the then current value of the assets of such plan allocable to such benefit liabilities by more than the amount, if any, disclosed in the Company Financial Statements (as defined in Section 4.16), (vi) each of the Company Plans has been operated and administered in all material respects in accordance with applicable laws during the period of time covered by the applicable statute of limitations, (vii) each of the Company Plans which is intended to be "qualified" within the meaning of Section 401(a) of the Code has been determined by the Internal Revenue Service to be so qualified and such determination has not been modified, revoked or limited by failure to satisfy any condition thereof or by a subsequent amendment thereto or a failure to amend, except that it may be necessary to make additional amendments retroactively to maintain the qualified status of such Company Plans, and the period for making any such necessary retroactive B-9 amendments has not expired, (viii) with respect to Multi-employer Plans, the Company has not made or suffered a "complete withdrawal" or a "partial withdrawal," as such terms are respectively defined in Sections 4203, 4204 and 4205 of ERISA and, to the knowledge of the Company, no event has occurred or is expected to occur which presents a material risk of a complete or partial withdrawal under said Sections 4203, 4204 and 4205, (ix) there are no pending or, to the knowledge of the Company, threatened or anticipated claims involving any of the Company Plans other than claims for benefits in the ordinary course, and (x) the Company has no current liability in excess of $50,000, whether measured alone or in the aggregate, for plan termination or withdrawal (complete or partial) under Title IV of ERISA based on any plan to which any entity that would be deemed one employer with the Company under Section 4001 of ERISA or Section 414 of the Code contributed during the period of time covered by the applicable statute of limitations (the "Company Controlled Group Plans"), and the Company does not anticipate that any such liability will be asserted against the Company, none of the Company Controlled Group Plans has an "accumulated funding deficiency" (as defined in Section 302 of ERISA and 412 of the Code), and no Company Controlled Group Plan has an outstanding funding waiver which could result in the imposition of liens, excise taxes or liability against the Company or any Company Subsidiary in excess of $10,000 whether measured individually or in the aggregate, and (xi) none of the Company Plans provides welfare benefits to employees and/or their dependents subsequent to termination of employment except as require by Title I, Part 6 of ERISA or applicable state insurance laws. SECTION 4.9 NO VIOLATION OF LAW. The Company is not in violation of and has not been given notice or been charged with any violation of, any law, statute, order, rule, regulation, ordinance or judgment (including, without limitation, any applicable environmental law, ordinance or regulation) of any governmental or regulatory body or authority, except for violations which, in the aggregate, do not have, and would not reasonably be expected to have, a Material Adverse Effect on the Company. The Company has not received any written notice that any investigation or review with respect to it by any governmental or regulatory body or authority is pending or threatened, other than, in each case, those the outcome of which, as far as reasonably can be foreseen, would not reasonably be expected to have a Material Adverse Effect on the Company. The Company has all permits, licenses, franchises, variances, exemptions, orders and other governmental authorizations, consents and approvals necessary to conduct its business as presently conducted, except for those, the absence of which, singly or in the aggregate, would not have a Material Adverse Effect on the Company (collectively, "Permits"). The Company has duly and timely filed all reports and other information required to be filed with any governmental or regulatory authority in connection with its Permits, and is not in violation of the terms of any of its Permits, except for such omissions or delays in filings, reports or violations which, in the aggregate, would not have a Material Adverse Effect on the Company. SECTION 4.10 INSURANCE. The Company is covered by insurance policies, or renewals thereof, as identified and described in Section 4.10 of the Company Disclosure Schedule. The Company has not received notice from any insurer or agent of such insurer that material improvements or expenditures will have to be made in order to continue such insurance and, to the knowledge of the Company, no such improvements or expenditures are required (other than premium payments) except for any of the foregoing that would not have a Material Adverse Effect on the Company. SECTION 4.11 PROPERTIES. Except as provided herein, the Company has good and marketable title to all of the assets and properties which it purports to own as reflected on the most recent balance sheet comprising a portion of the Company Financial Statements (as defined in Section 4.16), or thereafter acquired (except assets and properties sold or otherwise disposed of since the date of such balance sheet in the ordinary course of business). The Company has a valid leasehold interest in all properties of which it is the lessee and each such lease is valid, binding and enforceable against the Company, and, to the knowledge of the Company, the other parties thereto in accordance with its terms, subject to the Enforceability Exception. Neither the Company nor, to the Company's knowledge, the other parties thereto are in default in the performance of any material provision thereunder. Neither the whole nor any B-10 material portion of the assets of the Company is subject to any governmental decree or order to be sold or is being condemned, expropriated or otherwise taken by any public authority with or without payment of compensation therefor, nor, to the Company's knowledge, has any such condemnation, expropriation or taking been proposed. None of the material assets of the Company is subject to any restriction which would have a Material Adverse Effect on the Company. SECTION 4.12 CONDITION OF ASSETS. The material equipment, fixtures and other personal property of the Company are in good operating condition and repair (ordinary wear and tear excepted) for the conduct of its business as presently being conducted, except where the failure to be in such condition or repair would not have a Material Adverse Effect on the Company. SECTION 4.13 REGISTRATION STATEMENT AND PROXY STATEMENT. None of the information to be supplied by the Company for inclusion in (a) the Registration Statement on Form S-4 to be filed under the Securities Act with the SEC by Unity in connection with the Merger for the purpose of registering the shares of Unity Common Stock to be issued in the Merger (the "Registration Statement") or (b) the proxy statement to be distributed in connection with the respective meetings of the stockholders of the Company and Unity to vote upon this Agreement and the transactions contemplated hereby (the "Proxy Statement" and, together with the prospectus included in the Registration Statement, the "Joint Proxy Statement/ Prospectus") will, in the case of the Joint Proxy Statement/Prospectus or any amendments thereof or supplements thereto, at the time of the mailing of the Joint Proxy Statement/Prospectus and any amendments or supplements thereto, and at the time of the meeting of the stockholders of Unity to be held in connection with the transactions contemplated by this Agreement, or, in the case of the Registration Statement, as amended or supplemented, at the time it becomes effective and at the time of such meetings, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading, except that the Company makes no representation or warranty as to information supplied for inclusion therein by or on behalf of Unity. SECTION 4.14 LABOR MATTERS. The Company is not a party to any union contract or other collective bargaining agreement. The Company is in compliance in all material respects with all applicable laws respecting employment and employment practices, terms and conditions of employment and wages and hours, and the Company is not engaged in any unfair labor practice. There is no labor strike, slowdown or stoppage pending (or, to the knowledge of the Company, any labor strike or stoppage threatened) against or affecting the Company. No petition for certification has been filed and is pending before the National Labor Relations Board with respect to any employees of the Company who are not currently organized. SECTION 4.15 EMPLOYEES. Each employee of the Company with access to proprietary information regarding the Company has entered into a confidentiality/assignment of inventions agreement with the Company. To the Company's knowledge, no key employee or group of employees has any plans to terminate employment with the Company. SECTION 4.16 FINANCIAL STATEMENTS. The Company Disclosure Schedule contains or will contain an unaudited interim balance sheet as of September 30, 1998 and related unaudited interim statements of income, cash flows and stockholders' equity of the Company for the nine months ended September 30, 1998 and an audited balance sheet as of December 31, 1997 and related audited statements of income, cash flows and stockholders' equity of the Company for the year ended December 31, 1997 (collectively, the "Company Financial Statements"). The Company Financial Statements present fairly, in all material respects, the financial position and results of operations of the Company as of the dates, period and year indicated, prepared in accordance with generally accepted accounting principles consistently applied ("GAAP"), and in accordance with Regulation S-X, promulgated by the SEC ("Regulation S-X"), and, in particular, Rules 1-02 and 3-05 thereunder (subject, in the case of the unaudited financial statements for the nine months ended September 30, 1998, to normal year-end adjustments and the absence of footnotes. Without limiting the generality of the foregoing, (i) as of the date of the most recent balance sheet B-11 comprising a portion of the Company Financial Statements, there was no material debt, liability or obligation of any nature not reflected or reserved against in the Company Financial Statements or in the notes thereto required to be so reflected or reserved in accordance with GAAP, and (ii) there are no assets of the Company, the value of which (in the reasonable judgment of the Company) is materially overstated in the Company Financial Statements. Except as disclosed therein or in Section 4.16 of the Company Disclosure Schedule or as incurred in the ordinary course of business since September 30, 1998, the Company has no known material contingent liabilities (including liabilities for Taxes) other than as contemplated hereunder or in connection herewith. The Company is not a party to any contract or agreement for the forward purchase or sale of any foreign currency and has not invested in any "derivatives." SECTION 4.17 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in Section 4.17 of the Company Disclosure Schedule or in connection with this Agreement and the transactions contemplated hereby, since September 30, 1998 there has not been: (a) any material adverse change in the financial condition, operations, properties, assets, liabilities or business of the Company; (b) any material damage, destruction or loss of any material properties of the Company, whether or not covered by insurance, which would have a Material Adverse Effect on the Company; (c) any material change in the manner in which the business of the Company has been conducted, which would have a Material Adverse Effect on the Company; (d) any material change in the treatment and protection of trade secrets or other confidential information of the Company, which would have a Material Adverse Effect on the Company; and (e) any occurrence not included in paragraphs (a) through (d) of this Section 4.17 which has resulted, or which the Company has reason to believe, could reasonably be expected to result, in a Material Adverse Effect on the Company. SECTION 4.18 INTELLECTUAL PROPERTY; SOFTWARE. (a) Section 4.18(a) of the Company Disclosure Schedule sets forth a complete and correct list in all material respects of all patents, trademarks, tradenames, service marks, service names, brand names and copyright registrations, and applications therefor, applicable to or used in the business of the Company, together with a complete list of all licenses granted by or to the Company with respect to any of the above (collectively, "Company Intellectual Property"). To the Company's knowledge, all Company Intellectual Property is owned by the Company, free and clear of all liens, claims, security interests and encumbrances of any nature whatsoever, except where the failure to own or use such Company Intellectual Property would not have a Material Adverse Effect on the Company, or is used by the Company pursuant to valid licenses. To the Company's knowledge, the Company is not currently in receipt of any notice of any violation or infringement of, and the Company is not knowingly violating or infringing in any material respect, the rights of others in, or to any patent, unpatented invention, trademark, tradename, service mark, copyright, trade secret, know-how, design, process or other intangible asset. (b) (i) Except as set forth on Schedule 4.18(b)(i) of the Company Disclosure Schedule, the Company has title to all material computer software owned by the Company (other than "off-the-shelf" software not customized for its use ("Owned Software")) free and clear of all liens, claims, security interests and encumbrances whatsoever. Except as set forth in Section 4.18(b)(i) or (ii) of the Company Disclosure Schedule, the Owned Software is not dependent on any Licensed Software (as defined in subsection (ii) below) in order to operate fully in the manner in which it is intended. The source code of any Owned Software has not been published or knowingly disclosed to any other parties, except pursuant to contracts requiring such other parties to keep the source code of any Owned Software confidential. B-12 (ii) Section 4.18(b)(ii) of the Company Disclosure Schedule sets forth a list of the agreements which require the payment of license fees, rents, royalties or other charges by the Company with respect to all material software (other than "off-the-shelf" software that has not been customized for its use) under which the Company is a licensee, lessee or otherwise has obtained the right to use (the "Licensed Software"). The Company, as applicable, has the right and license to use, sublicense, modify and copy Licensed Software, free and clear of any limitations or encumbrances, except as may be set forth in Section 4.18(b)(ii) of the Company Disclosure Schedule or in the agreements referenced therein. The Company is in material compliance with all provisions of each license, lease or other similar agreement pursuant to which it has rights to use the Licensed Software. Except as disclosed on Section 4.18(b)(ii) of the Company Disclosure Schedule, none of the Licensed Software has been incorporated into or made a part of any Owned Software or any other Licensed Software. The Company has not published or knowingly disclosed any Licensed Software to any other party except, in the case of Licensed Software which the Company leases or markets to others, in accordance with and as permitted by any license, lease or similar agreement relating to the Licensed Software and except pursuant to contracts requiring such other parties to keep the Licensed Software confidential. As of the date hereof, to the Company's knowledge, no party to whom the Company has disclosed Licensed Software has breached such obligation of confidentiality. (iii) The Owned Software and Licensed Software constitute all software used in the business of the Company (collectively, the "Company Software"). The transactions contemplated herein will not cause a breach or default under any license, lease or similar agreement relating to the Company Software or impair the ability of Unity and the Company to use the Company Software subsequent to the Effective Time in the same manner as the Company Software is currently used by the Company. The Company is not knowingly infringing in any material respect any intellectual property rights of any other person or entity with respect to the Company Software, and, except as set forth in Section 4.18(b)(iii) of the Company Disclosure Schedule, to the Company's knowledge, no other person or entity is infringing any intellectual property rights of the Company with respect to the Company Software. SECTION 4.19 YEAR 2000 ISSUE; FUNCTIONAL COMPLIANCE. (a) The Company has reviewed the effect of the Year 2000 Issue on the Company Software, as well as those hardware and firmware systems and equipment containing embedded microchips owned or operated by the Company or used or relied upon in the conduct of its business (including systems and equipment supplied by others or with which such computer systems of the Company interface). The costs to the Company of any reprogramming required as a result of the Year 2000 Issue to permit the proper functioning of such systems and equipment and the proper processing of data, and the testing of such reprogramming, are not reasonably expected to have a Material Adverse Effect on the Company. The term "Year 2000 Issue" shall mean the failure of computer software, hardware and firmware systems and equipment containing embedded computer chips to properly receive, transmit, process, manipulate, store, retrieve, re-transmit or in any other way utilize data and information due to the occurrence of the year 2000 or the inclusion of dates on or after January 1, 2000. (b) To the Company's knowledge, the Company's product offerings, whether sold within the last two (2) years, currently in inventory or hereafter produced, based on the Owned Software and, to the Company's knowledge, on the Licensed Software, will maintain full functionality and performance consistent with specifications and contract requirements, and will operate without material error before, during and after January 1, 2000, including, but not limited to, accepting data input, providing data output, storing and manipulating data, providing calculations, recognizing the year 2000 as a leap year, and the years thereafter as occurring subsequent to the year 2000 and, to the Company's knowledge, interfacing with products supplied by others, except to the extent that such other products are not Year 2000 compliant. B-13 SECTION 4.20 BUSINESS LOCATIONS. The Company owns or leases no real property in any state or country except as set forth in Section 4.20 of the Company Disclosure Schedule. The Company has no executive offices or places of business except as otherwise set forth on the Company Disclosure Schedule. SECTION 4.21 COMPENSATION OF DIRECTORS, OFFICERS AND EMPLOYEES. There is set forth in Section 4.21 of the Company Disclosure Schedule a true and complete list showing (a) the names of all directors and officers of the Company; (b) the names of all salaried persons whose aggregate compensation for purposes of tax reporting from the Company in the fiscal year ended December 31, 1998 was, or in the year ending December 31, 1999 is expected to be $100,000 or more per year; and (c) the names and titles of all salespersons whose aggregate compensation for purposes of tax reporting from the Company in the fiscal year ended December 31, 1998 was, or in the year ending December 31, 1999 is expected to be, $100,000 or more per year. SECTION 4.22 BOOKS, RECORDS AND ACCOUNTS. The Company's books, records and accounts fairly and accurately reflect in all material respects transactions and dispositions of assets by the Company, and the system of internal accounting controls of the Company is (in the reasonable judgment of the Company) sufficient to assure that: (a) transactions are executed in accordance with management's authorization; and (b) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP, and to maintain accountability for assets. SECTION 4.23 BROKERS AND FINDERS. Except for the fees and expenses payable to Spencer Trask Securities, Inc., the Company has not employed any investment banker, broker, finder, consultant or intermediary in connection with the transactions contemplated by this Agreement which would be entitled to any investment banking, brokerage, finder's or similar fee or commission in connection with this Agreement or the transactions contemplated hereby. SECTION 4.24 NO OMISSIONS OR UNTRUE STATEMENTS. To the knowledge of the Company, no representation or warranty made by the Company to Unity in this Agreement, the Company Disclosure Schedule or in any certificate of a Company officer required to be delivered to Unity pursuant to the terms of this Agreement contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements contained herein or therein in light of the circumstances in which made not misleading as of the date hereof and as of the Closing Date. B-14 ARTICLE V REPRESENTATIONS AND WARRANTIES OF UNITY Unity hereby represents and warrants to the Company as follows (subject in each case to such exceptions as are set forth or cross-referenced in the attached Unity Disclosure Schedule in the labeled section corresponding to the caption of the representation or warranty to which such exceptions relate; provided, however, that each exception shall be deemed to apply to any representation of Unity to which it might reasonably apply): SECTION 5.1 ORGANIZATION AND QUALIFICATION. Unity is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware. Unity has all requisite corporate power to carry on its business as it is now being conducted and is duly qualified to do business as a foreign corporation and is in good standing in all jurisdictions set forth in Section 5.1 of the Unity Disclosure Schedule, and to Unity's knowledge, such jurisdictions are the only ones in which the properties owned, leased or operated by Unity or the nature of the business conducted by Unity makes such qualification necessary, except where the failure to qualify (individually or in the aggregate) will not have any Material Adverse Effect on Unity. The copies of the Certificate of Incorporation and By-laws of Unity, as amended to date and delivered to Company, are true and complete copies of these documents as now in effect. The minute books of Unity are accurate in all material respects. Unity does not own any capital stock or other voting interests in any corporation or other entity. SECTION 5.2 CAPITALIZATION. The authorized capital stock of Unity as of the date hereof (the "Unity Baseline Capitalization") consists of 20,000,000 shares of Unity Common Stock, $.0001 par value, of which 1,875,000 shares are issued and outstanding, and 5,000 preferred shares, $.01 par value, none of which are outstanding. In addition, Unity has reserved 187,500 shares of Unity Common Stock for issuance pursuant to exercises of options granted under Unity's stock option plan, none of which have been granted as of the date hereof (the "Unity Options"). Furthermore, there are authorized, issued and outstanding 1,250,000 Class A Common Stock Purchase Warrants (the "Class A Warrants") and 1,250,000 Class B Common Stock Purchase Warrants (the "Class B Warrants" and, collectively with the Class A Warrants, the "Public Warrants") providing for the issuance, upon exercise, of like number of shares of Unity Common Stock, which warrants are exercisable at $5.50 and $7.50 per warrant, respectively, 100,000 Class A and 100,000 Class B non-redeemable common stock purchase warrants providing for the issuance, upon exercise, of like number of Unity Common Stock, which warrants are exercisable at $5.50 and $7.50 per warrant, respectively (collectively, the "Private Warrants"), as well as non-redeemable warrants to purchase 125,000 units, exercisable at $6.60 per unit, each unit consisting of one share of Unity Common Stock and one Class A and one Class B common stock purchase warrant (collectively, the "Representative's Unit Warrants"). All of the outstanding securities of Unity are duly authorized, validly issued, fully paid and non-assessable, and were not issued in violation of the preemptive rights of any person. The Unity Common Stock to be issued upon effectiveness of the Merger, when issued in accordance with the terms of this Agreement, shall be duly authorized, validly issued, fully paid and non-assessable. All of the outstanding securities of Unity, including the Unity Common Stock, the Public Warrants, the Private Warrants and the Representative's Unit Warrants, were issued in compliance with all applicable securities laws. No shares of capital stock are held in the treasury of Unity. Other than as stated in this Section 5.2, there are no outstanding subscriptions, options, warrants, calls or rights of any kind issued or granted by, or binding upon Unity, to purchase or otherwise acquire any shares of capital stock of Unity or other securities of Unity. Except as stated in this Section 5.2, there are no outstanding securities convertible or exchangeable, actually or contingently, into shares of Unity Common Stock or other securities of Unity. SECTION 5.3 SUBSIDIARIES. There are no Unity Subsidiaries. Unity does not own any capital stock in any other corporation or similar business entity nor is Unity a partner in any partnership or joint venture. B-15 SECTION 5.4 AUTHORITY; NON-CONTRAVENTION; APPROVALS. (a) Unity has full corporate power and authority to enter into this Agreement and, subject to the Unity Stockholders' Approval and as set forth in Section 5.4 of the Unity Disclosure Schedule (the "Amendment Approval"), and the Required Statutory Approvals, to consummate the transactions contemplated hereby. Unity's execution and delivery of this Agreement, and its consummation of the transactions contemplated hereby, have been duly authorized by its Board of Directors and no other corporate proceedings on its part are necessary to authorize its execution and delivery of this Agreement and its consummation of the transactions contemplated hereby, except for the Unity Stockholders' Approval and the obtaining of the Required Statutory Approvals, both of which will be solicited in accordance with Section 7.3 hereof. This Agreement has been duly and validly executed and delivered by it, and constitutes its valid and binding agreement, enforceable against it in accordance with its terms, except that such enforcement may be subject to the Enforceability Exception. (b) Unity's execution and delivery of this Agreement does not, and its consummation of the transactions contemplated hereby will not, violate, conflict with or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in a right of termination or acceleration under, or result in the creation of any lien, security interest, charge or encumbrance upon any of its properties or assets under any of the terms, conditions or provisions of (i) its Certificate of Incorporation or By-Laws, (ii) subject to obtaining the Required Statutory Approvals and the receipt of the Company Stockholders' Approval and the Unity Stockholders' Approval, any statute, law, ordinance, rule, regulation, judgment, decree, order, injunction, writ, permit or license of any court or governmental authority applicable to it or any of its properties or assets, or (iii) any note, bond, mortgage, indenture, deed of trust, license, franchise, permit, concession, contract, lease or other instrument, obligation or agreement of any kind to which it is now a party or by which it or any of its properties or assets may be bound, excluding from the foregoing clauses (ii) and (iii), such violations, conflicts, breaches, defaults, terminations, accelerations or creations of liens, security interests, charges or encumbrances that do not, in the aggregate, have a Material Adverse Effect on Unity. (c) Except for (i) the filing of the Registration Statement and the Joint Proxy Statement/Prospectus with the SEC pursuant to the Securities Act and the Exchange Act, (ii) the declaration of the effectiveness thereof by the SEC, (iii) the filing under Section 25120 of the CCC with the California Corporations Commissioner, and (iv) the Required Statutory Approvals, no declaration, filing or registration with, or notice to, or authorization, consent or approval of, any governmental or regulatory body or authority is necessary for Unity's execution and delivery of this Agreement or its consummation of the transactions contemplated hereby, other than such declarations, filings, registrations, notices, authorizations, consents or approvals which, if not made or obtained, as the case may be, would not, in the aggregate, have a Material Adverse Effect on Unity. SECTION 5.5 CONTRACTS LISTED; NO DEFAULT. All material contracts, agreements, licenses, leases, easements, permits, rights of way, commitments and understandings, written or oral, connected with or relating in any respect to the present or future operations of Unity are, with the exception of this Agreement and the transactions contemplated hereby, described in Unity's SEC Reports (as defined in Section 5.14) and listed as exhibits thereto (the "Unity Contracts"). The Unity Contracts are valid and binding upon Unity, and to Unity's knowledge, the other parties thereto, and are in full force and effect and enforceable in accordance with their terms, subject to the Enforceability Exception and neither Unity, nor to Unity's knowledge, any other party to any Unity Contract, has materially breached any provision of, nor has any event occurred which, with the lapse of time or action by a third party, could result in a B-16 material default under, the terms thereof. To the knowledge of Unity, no stockholder of Unity has received any payment in violation of law from any contracting party in connection with or as an inducement for causing Unity to enter into any Unity Contract. SECTION 5.6 LITIGATION. There is no (i) claim, action, suit or proceeding pending or, to Unity's knowledge, threatened against or directly relating to Unity before any court or governmental or regulatory authority or body or arbitration tribunal, or (ii) outstanding judgment, order, writ, injunction or decree, or application, request or motion therefor, of any court, governmental agency or arbitration tribunal in a proceeding to which Unity or any of its assets was or is a party except, in the case of clauses (i) and (ii) above, such as would not, individually or in the aggregate, either materially impair or preclude Unity's ability to consummate the Merger or the other transactions contemplated hereby or have a Material Adverse Effect on Unity. SECTION 5.7 TAXES. Unity has duly filed with the appropriate governmental agencies all Tax Returns required to be filed by it other than Tax Returns which the failure to file would have no Material Adverse Effect on Unity. All such Tax Returns were, when filed, and to Unity's knowledge are, accurate and complete in all material respects and were prepared in conformity with applicable laws and regulations. Unity has paid or will pay in full or has adequately reserved against all Taxes otherwise assessed against it through the Closing Date. Unity is not a party to any pending action or proceeding by any governmental authority for the assessment of any Tax, and, to Unity's knowledge, no claim for assessment or collection of any Tax has been asserted against Unity that has not been paid. There are no Tax liens upon the assets of Unity (other than liens for taxes not yet due and payable). There is no valid basis, to Unity's knowledge, for any assessment, deficiency, notice, 30-day letter or similar intention to assess any Tax to be issued to Unity by any governmental authority. SECTION 5.8 EMPLOYEE PLANS. Unity has no employee benefit plans as defined in Section 3(3) of ERISA nor any employment agreements. SECTION 5.9 NO VIOLATION OF LAW. Unity is not in violation of and has not been given notice or been charged with any violation of, any law, statute, order, rule, regulation, ordinance or judgment (including, without limitation, any applicable environmental law, ordinance or regulation) of any governmental or regulatory body or authority, except for violations which, in the aggregate, do not have, and would not reasonably be expected to have, a Material Adverse Effect on Unity. Unity has not received any written notice that any investigation or review with respect to it by any governmental or regulatory body or authority is pending or threatened, other than, in each case, those the outcome of which, as far as reasonably can be foreseen, would not reasonably be expected to have a Material Adverse Effect on Unity. Unity has all permits, licenses, franchises, variances, exemptions, orders and other governmental authorizations, consents and approvals necessary to conduct its business as presently conducted, except for those, the absence of which, alone or in the aggregate, would not have a Material Adverse Effect on Unity (collectively, the "Unity Permits"). Unity (a) has duly and timely filed all reports and other information required to be filed with any governmental or regulatory authority in connection with the Unity Permits, and (b) is not in violation of the terms of any of the Unity Permits, except for such omissions or delays in filings, reports or violations which, alone or in the aggregate, would not have a Material Adverse Effect on Unity. Section 5.9 of the Unity Disclosure Schedule contains a list of the Unity Permits. SECTION 5.10 PROPERTIES. Unity has good and marketable title to all of the assets and properties which it purports to own as reflected on the most recent balance sheet comprising a portion of the Unity Financial Statements (as defined in Section 5.13) or thereafter acquired (except assets and properties sold or otherwise disposed of since the date of such balance sheet in the ordinary course of business). Unity has a valid leasehold interest in all properties of which it is the lessee and each such lease is valid, binding and enforceable against Unity, and, to the knowledge of Unity, the other parties thereto in accordance with its terms, subject to the Enforceability Exception. Neither Unity nor, to Unity's knowledge, the other parties thereto are in default in the performance of any material provision thereunder. Neither the whole nor any B-17 material portion of the assets of Unity is subject to any governmental decree or order to be sold or is being condemned, expropriated or otherwise taken by any public authority with or without payment of compensation therefor, nor, to the knowledge of Unity, has any such condemnation, expropriation or taking been proposed. None of the material assets of Unity is subject to any restriction which would prevent continuation of the use currently made thereof or materially adversely affect the value thereof. SECTION 5.11 REGISTRATION STATEMENT AND PROXY STATEMENT. None of the information to be supplied by Unity for inclusion in the Registration Statement or the Joint Proxy Statement/Prospectus will, in the case of the Joint Proxy Statement/Prospectus or any amendments thereof or supplements thereto, at the time of the mailing of the Joint Proxy Statement/Prospectus and any amendments or supplements thereto, and at the time of the meeting of the stockholders of Unity to be held in connection with the transactions contemplated by this Agreement, or, in the case of the Registration Statement, as amended or supplemented, at the time it becomes effective and at the time of such meetings, contain any untrue statement of a material fact or omit to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they are made, not misleading. SECTION 5.12 BUSINESS. Unity, since its formation, has engaged in no business other than to seek to serve as a vehicle for the acquisition of an operating business, and, except for this Agreement, is not a party to any contract or agreement for the acquisition of an operating business. Unity has no employees. SECTION 5.13 FINANCIAL STATEMENTS. The financial statements of Unity (collectively, the "Unity Financial Statements") included in Unity's SEC Reports (as defined in Section 5.14) present fairly, in all material respects, the financial position and results of operations of Unity as of the respective dates, years and periods indicated, prepared in accordance with GAAP, applied on a consistent basis, and in accordance with Regulation S-X of the SEC and, in particular, Rules 1-02 and 3-05 thereunder (subject, in the case of unaudited interim period financial statements, to normal and recurring year-end adjustments which, individually or collectively, are not material to Unity). Without limiting the generality of the foregoing, (i) there is no basis for any assertion against Unity as of the date of the most recent balance sheet comprising a portion of the Unity Financial Statements of any material debt, liability or obligation of any nature not fully reflected or reserved against in the Unity Financial Statements or in the notes thereto required to be so reflected or reserved in accordance with GAAP; and (ii) there are no assets of Unity, the value of which (in the reasonable judgment of Unity) is materially overstated in the Unity Financial Statements. Except as disclosed therein or as incurred in the ordinary course of business since October 31, 1998, Unity has no known material contingent liabilities (including liabilities for Taxes). Unity is not a party to any contract or agreement for the forward purchase or sale of any foreign currency and has not invested in any "derivatives." SECTION 5.14 UNITY'S SEC REPORTS. The Unity Common Stock has been registered under Section 12 of the Exchange Act on Form 8-A. Since its inception, Unity has filed all reports, registration statements and other documents, together with any amendments thereto, required to be filed under the Securities Act and the Exchange Act, including but not limited to reports on Form 10-K and Form 10-Q, and Unity will file all such reports, registration statements and other documents required to be filed by it from the date of this Agreement to the Closing Date (all such reports, registration statements and documents, including its Form 8-A, filed or to be filed with the SEC, including Unity's initial registration statement relating to the Unity Common Stock, Public Warrants, Private Warrants and the Representative's Unit Warrants, with the exception of the Registration Statement and the Joint Proxy Statement/ Prospectus, are collectively referred to as "Unity's SEC Reports"). As of their respective dates, Unity's SEC Reports complied or will comply in all material respects with all rules and regulations promulgated by the SEC and did not or will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Unity has provided to the Company a true and B-18 complete copy of all of Unity's SEC Reports filed on or prior to the date hereof, and will promptly provide to the Company a true and complete copy of any such reports filed after the date hereof and prior to the Closing Date. Neither Unity nor any of its respective directors or officers is the subject of any investigation, inquiry or proceeding before the SEC or any state securities commission or administrative agency. SECTION 5.15 BULLETIN BOARD. Each of the Unity Common Stock, Class A Warrants and Class B Warrants are quoted on the Bulletin Board under the respective symbols "UFAC", "UFACW" and "UFACZ," and Unity is in compliance in all respects with all rules and regulations of the National Association of Securities Dealers, Inc. applicable to Unity and to the inclusion for quotation of such securities on the Bulletin Board. SECTION 5.16 ABSENCE OF CERTAIN CHANGES OR EVENTS. Except as set forth in Section 5.16 of Unity Disclosure Schedule, since October 31, 1998 there has not been: (a) any material adverse change in the financial condition, operations, properties, assets, liabilities or business of Unity; (b) any material damage, destruction or loss of any material properties of Unity, whether or not covered by insurance; (c) any change in the manner in which the business of Unity has been conducted; (d) any material change in the treatment and protection of trade secrets or other confidential information of Unity; and (e) any occurrence not included in paragraphs (a) through (d) of this Section which has resulted, or which Unity has reason to believe, could reasonably be expected to result, in a Material Adverse Effect on Unity. SECTION 5.17 BOOKS, RECORDS AND ACCOUNTS. Unity's books, records and accounts fairly and accurately reflect in all material respects transactions and dispositions of assets by Unity, and the system of internal accounting controls of Unity is sufficient to assure that: (a) transactions are executed in accordance with management's authorization; (b) transactions are recorded as necessary to permit preparation of financial statements in conformity with GAAP, and to maintain accountability for assets; (c) access to assets is permitted only in accordance with management's authorization; and (d) the recorded accountability for assets is compared with the existing assets at reasonable intervals and appropriate action is taken with respect to any differences. SECTION 5.18 BROKERS AND FINDERS. Unity has not employed any investment banker, broker, finder, consultant or intermediary in connection with the transactions contemplated by this Agreement which would be entitled to any investment banking, brokerage, finder's or similar fee or commission in connection with this Agreement or the transactions contemplated hereby. SECTION 5.19 NO OMISSIONS OR UNTRUE STATEMENTS. To Unity's knowledge, no representation or warranty made by Unity to the Company in this Agreement, the Unity Disclosure Schedule or in any certificate of a Unity officer required to be delivered to the Company pursuant to the terms of this Agreement contains or will contain any untrue statement of a material fact, or omits or will omit to state a material fact necessary to make the statements contained herein or therein in light of the circumstances in which made not misleading as of the date hereof and as of the Closing Date. B-19 ARTICLE VI CONDUCT OF BUSINESS PENDING THE MERGER SECTION 6.1 CONDUCT OF BUSINESS PRIOR TO EFFECTIVE TIME. Each of Unity and the Company hereby covenants and agrees as follows, from and after the date of this Agreement and until the Effective Time, except as specifically consented to in writing by the other party or as set forth in Section 6.1 of the respective Disclosure Schedules: (a) It shall conduct its business in the ordinary and usual course of business and consistent with past practice; (b) It shall not (i) split, combine or reclassify its outstanding capital stock or declare, set aside or pay any dividend or distribution payable in cash, stock, property or otherwise, (ii) spin-off any assets or businesses, (iii) engage in any transaction for the purpose of effecting a recapitalization, or (iv) engage in any transaction or series of related transactions which has a similar effect to any of the foregoing; (c) Other than as set forth in Section 6.1(c) of the Company Disclosure Schedule, it shall not issue, sell, pledge or dispose of, or agree to issue, sell, pledge or dispose of, any additional shares of, or any options, warrants or rights of any kind to acquire any shares of its capital stock of any class or any debt or equity securities convertible into or exchangeable for such capital stock or amend or modify the terms and conditions of any of the foregoing, provided, however, that it (i) may issue shares upon exercise of outstanding options, warrants or stock purchase rights and (ii) in the case of the Company it may (w) grant options to acquire shares of Company Common Stock to both present and future employees under the Company Stock Option Plan, (x) offer and sell shares of Company Common Stock in one or more private transactions at a price of not less than $1.00 per share to an aggregate maximum of $4,175,000 and may issue warrants to acquire shares of Company Common Stock in customary amounts to placement agents who facilitate such sales, (y) issue shares of Company Common Stock as well as warrants to purchase shares of Company Common Stock to non-affiliated persons and entities for the purposes of purchasing or licensing technology which, in the reasonable judgment of the Company's Board of Directors, is necessary or desirable for the Company's growth and development, and (z) issue up to an aggregate maximum of 100,000 shares of Company Common Stock or options or warrants to acquire such shares to entities which currently provide services to the Company or to directors, officers, consultants or employees of such entities; (d) It shall not (i) redeem, purchase, acquire or offer to purchase or acquire any shares of its capital stock, other than as required by the governing terms of such securities, (ii) take any action (either before or after the Effective Time) which would jeopardize the treatment of the Merger as a "reorganization" within the meaning of Section 368(a) of the Code, (iii) take or fail to take any action which action or failure to take action would cause it or its stockholders (except to the extent that any stockholders receive cash in lieu of fractional shares) to recognize gain or loss for federal income tax purposes as a result of the consummation of the Merger, (iv) make any acquisition of any material assets (except in the ordinary course of business) or businesses, (v) sell any material assets (except in the ordinary course of business) or businesses, or (vi) enter into any contract, agreement, commitment or arrangement to do any of the foregoing; (e) It shall use reasonable efforts to preserve intact its business organization and goodwill, keep available the services of its present officers and key employees, and preserve the goodwill and business relationships with suppliers, distributors, customers, and others having business relationships with it, and not engage in any action, directly or indirectly, with the intent to impact adversely the transactions contemplated by this Agreement; (f) It shall confer on a regular basis with one or more representatives of the other to report on material operational matters and the general status of ongoing operations; and B-20 (g) It shall file with the SEC all forms, statements, reports and documents (including all exhibits, amendments and supplements thereto) required to be filed by it pursuant to the Exchange Act. SECTION 6.2 NO SOLICITATION. (a) The Company agrees that, prior to the Effective Time or the termination or abandonment of this Agreement, the Company shall not give authorization or permission to any of its directors, officers, employees, agents or representatives to, and each shall use all reasonable efforts to see that such persons do not, directly or indirectly, solicit, initiate, facilitate or encourage (including by way of furnishing or disclosing information) any merger, consolidation, other business combination involving the Company, acquisition of all or any substantial portion of the assets or capital stock of the Company or of the assets of any division of the Company, or inquiries or proposals concerning or which may reasonably be expected to lead to any of the foregoing (a "Company Acquisition Transaction") or negotiate, explore or otherwise knowingly communicate in any way with any third party (other than Unity or its affiliates) with respect to any Company Acquisition Transaction or enter into any agreement, arrangement or understanding requiring it to abandon, terminate or fail to consummate the Merger or any other transaction expressly contemplated by this Agreement, or contemplated to be a material part thereof. The Company shall advise Unity in writing of any BONA FIDE inquiries or proposals relating to any Company Acquisition Transaction within one business day following the Company's receipt of any such inquiry or proposal. The Company shall also promptly advise any person seeking a Company Acquisition Transaction that it is bound by the provisions of this Section. (b) Unity agrees that, prior to the Effective Time or the termination or abandonment of this Agreement, Unity shall not give authorization or permission to any of its directors, officers, employees, agents or representatives to, and each shall use all reasonable efforts to see that such persons do not, directly or indirectly, solicit, initiate, facilitate or encourage (including by way of furnishing or disclosing information) any merger, consolidation, other business combination involving Unity, acquisition of all or any substantial portion of the assets or capital stock of Unity or of the assets of any division of Unity, or inquiries or proposals or which may reasonably be expected to lead to any of the foregoing (a "Unity Acquisition Transaction") or negotiate, explore or otherwise knowingly communicate in any way with any third party (other than the Company or its affiliates) with respect to any Unity Acquisition Transaction or enter into any agreement, arrangement or understanding requiring it to abandon, terminate or fail to consummate the Merger or any other transaction expressly contemplated by this Agreement, or contemplated to be a material part thereof. Unity shall advise the Company in writing of any BONA FIDE inquiries or proposals relating to a Unity Acquisition Transaction, within one business day following Unity's receipt of any such inquiry or proposal. Unity shall also promptly advise any person seeking a Unity Acquisition Transaction that it is bound by the provisions of this Section. ARTICLE VII ADDITIONAL AGREEMENTS SECTION 7.1 ACCESS TO INFORMATION. Each of Unity and the Company shall afford to the other and the other's accountants, counsel, financial advisors and other representatives reasonable access during normal business hours throughout the period prior to the Effective Time to all properties, books, contracts, commitments and records (including, but not limited to, Tax Returns) of it and, during such period, shall furnish promptly (a) a copy of each report, schedule and other document filed or received by it during such period pursuant to the requirements of federal or state securities laws or filed by it during such period with the SEC in connection with the transactions contemplated by this Agreement or which may have a Material Adverse Effect on its business, properties or personnel and (b) such other information concerning its business, properties and personnel as the other shall reasonably request; provided, however, that no investigation pursuant to this Section 7.1 shall affect any representation or warranty made herein or the B-21 conditions to the obligations of the respective parties to consummate the Merger. All non-public documents and information furnished to Unity or to the Company, as the case may be, in connection with the transactions contemplated by this Agreement shall be deemed to have been received, and shall be held by the recipient, in confidence, except that Unity and the Company, as applicable, may disclose such information as may be necessary in connection with seeking the Unity Required Statutory Approvals, the Unity Stockholders' Approval, the Company Required Statutory Approvals and the Company Stockholders' Approval. The Company shall promptly advise Unity, and Unity shall promptly advise the Company, in writing, of any change or the occurrence of any event after the date of this Agreement and prior to the Effective Time having, or which, insofar as can reasonably be foreseen, in the future would reasonably be expected to have, any Material Adverse Effect on the Company or Unity, as applicable. SECTION 7.2 REGISTRATION STATEMENT AND PROXY STATEMENT/ PROSPECTUS. Unity and the Company shall prepare and file with the SEC as soon as is reasonably practicable after the date hereof the Registration Statement and Joint Proxy Statement/Prospectus and shall use all reasonable efforts to have the Registration Statement declared effective by the SEC as promptly as practicable. Unity and the Company shall take any action required to be taken under applicable California "blue sky" or securities laws in connection with the issuance of Unity Common Stock. Unity and the Company shall promptly furnish to each other all information, and take such other actions, as may reasonably be requested in connection with any action by any of them in connection with the preceding sentence and shall cooperate with one another and use their respective best efforts to facilitate the expeditious consummation of the transactions contemplated by this Agreement. The Registration Statement shall contain an updated prospectus covering the Public Warrants, the Private Warrants and the Representative's Unit Warrants and the like number of shares of Unity Common Stock issuable upon exercise thereof (the "Unity Underlying Stock"), as well as a resale prospectus covering all shares of Unity Common Stock that are beneficially owned by the current officers and directors of Unity and their respective affiliates (collectively, the "Unity Affiliates' Stock"). If the rules and regulations of the SEC shall not permit the utilization of the Registration Statement for this purpose, Unity and the Company shall prepare and file with the SEC contemporaneously with the filing of the Registration Statement and the Joint Proxy Statement/Prospectus a registration statement on Form S-1 covering the Public Warrants, the Private Warrants, the Representative's Unit Warrants, the Unity Underlying Stock and the Unity Affiliates' Stock (the "Companion Registration Statement"), and each covenants with the other to use all reasonable efforts to have the Companion Registration Statement declared effective by the SEC as promptly as practicable but in no event later than the expiration of forty (40) business days following the Effective Time. These covenants shall survive the Effective Time. Unity will pay all expenses of filing, printing and distributing the Registration Statement and the Joint Proxy Statement/Prospectus. SECTION 7.3 STOCKHOLDERS' APPROVAL. The Company shall use its reasonable best efforts to obtain stockholder approval and adoption (the "Company Stockholders' Approval") of this Agreement and the transactions contemplated hereby as soon as practicable following the date upon which the Registration Statement is declared effective by the SEC. The Company shall, through its Board of Directors, recommend to the holders of Company Common Stock approval of this Agreement and the transactions contemplated by this Agreement. Unity shall use its reasonable best efforts to obtain stockholder approval and adoption (the "Unity Stockholders' Approval") of this Agreement and the transactions contemplated hereby as soon as practicable following the date upon which the Registration Statement is declared effective by the SEC. Unity shall, through its Board of Directors, recommend to the holders of Unity Common Stock approval of this Agreement and the transactions contemplated by this Agreement. SECTION 7.4 NASDAQ LISTING. Unity and the Company shall each use its best efforts to effect, at or before the Effective Time, authorization for listing of the shares of Unity Common Stock on the NASDAQ SmallCap Market or, if permissible, the NASDAQ National Market. B-22 SECTION 7.5 AGREEMENT TO COOPERATE. Subject to the terms and conditions herein provided, each of the parties hereto shall cooperate and use their respective best efforts to take, or cause to be taken, all action and to do, or cause to be done, all things necessary, proper or advisable under applicable laws and regulations to consummate and make effective the transactions contemplated by this Agreement, including using its reasonable efforts to obtain all necessary or appropriate waivers, consents and approvals to effect all necessary registrations, filings and submissions and to lift any injunction or other legal bar to the Merger (and, in such case, to proceed with the Merger as expeditiously as possible), subject, however, to obtaining the Required Statutory Approvals, the Company Stockholders' Approval and the Unity Stockholders' Approval; and provided that nothing in this Section 7.5 shall affect any responsibility or obligation specifically allocated to any party in this Agreement. SECTION 7.6 PUBLIC STATEMENTS. The parties shall consult with each other prior to issuing any press release or any written public statement with respect to this Agreement or the transactions contemplated hereby. Unity shall not issue any such press release or any other public statement with respect to this Agreement or the transactions contemplated hereby absent the prior written consent of the Company, except that such prior written consent shall not be required if, in the reasonable judgment of Unity based upon the advice of counsel, seeking and obtaining prior written consent would prevent the timely dissemination of such release or statement in violation of the Exchange Act, other applicable law, rule, regulation or policy of the Bulletin Board. SECTION 7.7 CORRECTIONS TO THE JOINT PROXY STATEMENT/PROSPECTUS AND REGISTRATION STATEMENT. Prior to the Effective Time, each of the Company and Unity shall correct promptly any information provided by it to be used specifically in the Registration Statement, Joint Proxy Statement/Prospectus and, if applicable, Companion Registration Statement that shall have become false or misleading in any material respect and shall take all steps necessary to file with the SEC and have declared effective or cleared by the SEC any amendment or supplement to the Registration Statement, Joint Proxy Statement/ Prospectus or Companion Registration Statement, as applicable, so as to correct the same and to cause appropriate dissemination thereof to the stockholders of the Company and/or stockholders of Unity, in each case to the extent required by applicable law. SECTION 7.8 DISCLOSURE SUPPLEMENTS. From time to time prior to the Effective Time, and in any event immediately prior to the Effective Time, each of Unity and the Company shall promptly supplement or amend its Disclosure Schedule with respect to any matter hereafter arising that, if existing, occurring or known at the date of this Agreement, would have been required to be set forth or described in such Disclosure Schedule or that is necessary to correct any information in such Disclosure Schedule that is or has become inaccurate. Notwithstanding the foregoing, if any such supplement or amendment discloses a Material Adverse Effect, the conditions to the other party's obligations to consummate the Merger set forth in Article VIII hereof shall be deemed not to have been satisfied. B-23 ARTICLE VIII CONDITIONS SECTION 8.1 CONDITIONS TO EACH PARTY'S OBLIGATIONS TO EFFECT THE MERGER. The respective obligation of each party to effect the Merger shall be subject to the fulfillment at or prior to the Closing Date of the following conditions: (a) The Company shall have obtained the Company Stockholders' Approval; (b) Unity shall have obtained the Unity Stockholders' Approval and the Amendment Approval; (c) The Registration Statement shall have become effective in accordance with the provisions of the Securities Act, and no stop order suspending such effectiveness shall have been issued and remain in effect; (d) No preliminary or permanent injunction or other order or decree by any federal or state court which prevents or materially burdens the consummation of the Merger shall have been issued and remain in effect (each party agreeing to use its reasonable efforts to have any such injunction, order or decree lifted); (e) No action shall have been taken, and no statute, rule or regulation shall have been enacted, by any state or federal government or governmental agency in the United States, which would prevent or materially burden the consummation of the Merger; (f) All consents, orders and approvals legally required for the consummation of the Merger and the transactions contemplated hereby (including without limitation all Required Statutory Approvals) shall have been obtained and be in effect at the Effective Time without any material limitations or conditions; and (g) As of the Closing Date, all "blue sky" filings as may be required in order for the offer, issuance and sale of all of the shares of Unity Common Stock to be issued pursuant to Section 3.1 of this Agreement to be in full compliance with all applicable state securities laws and regulations shall have been made and shall be in effect and not subject to any suspension, revocation, or stop order, as may be required in order for the offer, issuance and sale of all such securities to be legally permitted under all such laws and regulations. SECTION 8.2 CONDITIONS TO OBLIGATIONS OF THE COMPANY TO EFFECT THE MERGER. Unless waived by the Company, the obligation of the Company to effect the Merger shall also be subject to the fulfillment at or prior to the Closing Date of the following additional conditions: (a) Unity shall have performed in all material respects its agreements contained in this Agreement required to be performed on or prior to the Closing Date and the representations and warranties of Unity contained in this Agreement shall be true and correct in all material respects (except for those representations and warranties which are themselves limited by a reference to materiality, which shall be true and correct in all respects other than as modified) on and as of (i) the date made and (ii) the Closing Date (in each case except in the case of representations and warranties expressly made solely with reference to a particular date which shall be true and correct in all material respects as of such date); and the Company shall have received a certificate of the President and Chief Executive Officer of Unity to that effect; (b) The Company shall have received an opinion from Cooperman Levitt Winikoff Lester & Newman, P.C. ("Cooperman Levitt"), counsel to Unity, dated the Closing Date, substantially in the form set forth in Exhibit III hereto; (c) The Company shall have received "comfort" letters from Arthur Andersen LLP, independent public accountants for Unity, dated the date of the Joint Proxy Statement/Prospectus, the B-24 effective date of the Registration Statement and the Closing Date (or such other date reasonably acceptable to the Company) with respect to certain financial statements and other financial information included in the Registration Statement in customary form; (d) The Company shall have received an opinion of Brobeck, Phleger & Harrison LLP ("Brobeck Phleger"), counsel to the Company, dated the Effective Time, to the effect that the Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code; (e) Since the date of this Agreement there shall not have been any Material Adverse Effect with respect to Unity, the likelihood of which was not previously disclosed to the Company by Unity in the Unity Disclosure Schedule or contemplated by this Agreement and Unity shall have engaged in no business activity since the date of its incorporation other than conducting a public offering of its securities and, thereafter, seeking to effect a merger or similar business combination with an operating business; (f) Unity shall have furnished to the Company such additional certificates and other customary closing documents as the Company may have reasonably requested as to any of the conditions set forth in this Section 8.2; (g) At the Effective Time, Unity shall have at least an aggregate of $6,000,000 in cash or cash equivalents before giving effect to any payments required to be paid to Unity's stockholders exercising their rights, contained in Unity's Certificate of Incorporation, as amended, to requested conversion of their respective shares of Unity Common Stock into cash (the "Cash Out Option") should the Merger be consummated, but after giving effect to the payment or accrual on or prior to the Effective Time of all expenses incurred by Unity, including, but not limited to, the fees and expenses of Unity's attorneys and accountants, in connection with the transactions contemplated by this Agreement; (h) The holders of no greater than nineteen and 99/100 percent (19.99%) in the aggregate in interest of Unity Common Stock shall exercise the Cash Out Option; (i) The holders of no greater than ten percent (10%) in the aggregate in interest of Unity Common Stock shall have perfected their statutory dissenters' rights with respect to the Merger and have Dissenters' Stock; (j) At Closing, the Unity Baseline Capitalization, the number of Unity Options and the respective numbers of Public Warrants, Private Warrants and Representative's Unit Warrants (collectively "Unity Derivatives") shall be unchanged (other than to reflect issuances, if any, of Unity Common Stock upon exercises prior to the Effective Time of Unity Derivatives) from that set forth in Section 5.2; (k) The Company shall have received a letter agreement signed by each officer, director and principal stockholder of Unity and their respective Affiliates (as such term is defined in Rule 501, promulgated under the Securities Act) (collectively, the "Unity Principals") in substantially the form attached as Schedule 8.2(k) hereto ("Lock-Up Agreements"); (l) The Company shall have received written resignations from each of Unity's officers and directors (except that Lawrence Burstein shall resign only as an officer of Unity), which resignations, by their respective terms, shall become effective immediately prior to the Effective Time; (m) The Company shall have received a copy of a Voting Agreement in substantially the form attached hereto as Schedule 8.2(m) (the "Voting Agreement") signed by each of the Unity Principals; B-25 (n) Unity shall have conducted the operation of its business in material compliance with all applicable laws, rules and regulations, whether Federal, state or local in their nature, and all approvals required of Unity under applicable law to enable Unity to perform its obligations under this Agreement shall have been obtained; and (o) All corporate proceedings of Unity in connection with the Merger and the other transactions contemplated by this Agreement and all agreements, instruments, certificates, and other documents delivered to the Company by or on behalf of Unity pursuant to this Agreement shall be reasonably satisfactory to the Company and its counsel. SECTION 8.3 CONDITIONS TO OBLIGATIONS OF UNITY TO EFFECT THE MERGER. Unless waived by Unity, the obligations of Unity to effect the Merger shall also be subject to the fulfillment at or prior to the Closing Date of the additional following conditions: (a) The Company shall have performed in all material respects its agreements contained in this Agreement required to be performed on or prior to the Closing Date and the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects (except for those representations and warranties which are themselves limited by a reference to materiality, which shall be true and correct in all respects, other than as modified) on and as of (i) the date made and (ii) the Closing Date (in each case except in the case of representations and warranties expressly made solely with reference to a particular date which shall be true and correct in all material respects as of such date); and Unity shall have received a Certificate of the President and Chief Executive Officer or of a Vice President of the Company to that effect; (b) Unity shall have received an opinion from Brobeck Phleger, dated the Closing Date, substantially in the form set forth in Exhibit IV hereto; (c) Unity shall have received "comfort" letters from BDO Seidman, LLP, independent certified public accountants for the Company, dated the date of the Joint Proxy Statement/Prospectus, the effective date of the Registration Statement and the Closing Date (or such other date reasonably acceptable to Unity) with respect to certain financial statements and other financial information included in the Registration Statement in customary form; (d) Unity shall have received an opinion of Cooperman Levitt, dated the Effective Time, to the effect that the Merger will be treated for federal income tax purposes as a reorganization within the meaning of Section 368(a) of the Code; (e) At Closing, the Company's Baseline Capitalization shall be unchanged (other than to reflect issuances, if any, of Company Contingent Stock upon exercises and/or conversions prior to the Effective Time of Company Derivatives) and the number of shares of Contingent Company Stock shall be no greater, respectively, than as set forth in Section 4.2. Notwithstanding the foregoing, (i) the Company may grant options to acquire shares of Company Common Stock to both present and future employees under the Company Stock Option Plan, (ii) the Company may offer and sell shares of Company Common Stock in one or more private transactions at a price of not less than $1.00 per share to an aggregate maximum of $4,175,000 and may issue warrants to acquire shares of Company Common Stock in customary amounts to placement agents who facilitate such sales, (iii) the Company may issue shares of Company Common Stock as well as warrants to purchase shares of Company Common Stock to non-affiliated persons and entities for the purposes of purchasing or licensing technology which, in the reasonable judgment of the Company's Board of Directors, is necessary or desirable for the Company's growth and development, (iv) the Company may issue up to an aggregate maximum of 100,000 shares of Company Common Stock to entities which currently provide services to the Company for future services, and (v) the Company may issue Company Common Stock and/or options or rights to acquire B-26 Company Common Stock and/or warrants to acquire shares of Company Common Stock in satisfaction of the preemptive rights described in Section 4.2(c); (f) The Company shall have furnished to Unity such additional certificates and other customary closing documents as Unity may have reasonably requested as to any of the conditions set forth in this Section 8.3; (g) Since the date of this Agreement there shall not have been any Material Adverse Effect with respect to the Company, the likelihood of which was not previously disclosed to Unity by the Company; (h) Unity shall have received Lock-Up Agreements from each officer, director and principal stockholder of the Company and their respective Affiliates (collectively, the "Company Principals") in substantially the form attached as Schedule 8.3(h) hereto; (i) The Company shall have furnished to Unity evidence, reasonably satisfactory to Unity, that each of the purchasers of Common Stock pursuant to that certain Private Placement Memorandum, dated September 2, 1998, as supplemented, between the Company and Spencer Trask Securities Incorporated has executed, or shall be deemed to have executed Lock-Up Agreements upon substantially identical terms as those contemplated to be executed by each of the Company Principals pursuant to subparagraph (h) of this Section 8.3; (j) The holders of no greater than ten percent (10%) in the aggregate in interest of Company Common Stock shall have perfected their statutory dissenters' rights with respect to the Merger and have Dissenters' Stock; (k) Unity shall have received a copy of the Voting Agreement signed by each of the Company Principals; and (l) All corporate proceedings of the Company in connection with the Merger and the other transactions contemplated by this Agreement and all agreements, instruments, certificates and other documents delivered to Unity by or on behalf of the Company pursuant to this Agreement shall be in substantially the form called for hereunder or otherwise reasonably satisfactory to Unity and its counsel. ARTICLE IX TERMINATION, AMENDMENT AND WAIVER SECTION 9.1 TERMINATION. This Agreement may be terminated at any time prior to the Closing Date, whether before or after approval by the stockholders of the Company and/or Unity: (a) by mutual consent in writing of Unity and the Company; (b) unilaterally upon written notice by Unity to the Company upon the occurrence of a Material Adverse Effect with respect to the Company, the likelihood of which was not previously disclosed to Unity in writing by the Company prior to the date of this Agreement; (c) unilaterally upon written notice by the Company to Unity upon the occurrence of a Material Adverse Effect with respect to Unity, the likelihood of which was not previously disclosed to the Company in writing by Unity prior to the date of this Agreement; (d) unilaterally upon written notice by Unity to the Company in the event of the Company's material breach of any material representation or warranty of the Company contained in this Agreement (unless such breach shall have been cured by the Company within ten (10) days after the giving of such notice by Unity), or the Company's willful failure to comply with or satisfy any material B-27 covenant or condition of the Company contained in this Agreement, or if the Company fails to obtain the Company Stockholders' Approval; (e) unilaterally upon written notice by the Company to Unity in the event of Unity's material breach of any material representation or warranty contained in this Agreement (unless such breach shall have been cured by Unity within ten (10) days after the giving of such notice by the Company), or Unity's willful failure to comply with or satisfy any material covenant or condition of Unity contained in this Agreement, or if Unity fails to obtain the Unity Stockholders' Approval; or (f) unilaterally upon written notice by either Unity or the Company to the other if the Merger is not consummated for any reason not specified or referred to in the preceding provisions of this Section 9.1 by the close of business on June 30, 1999. SECTION 9.2 EFFECT OF TERMINATION. In the event of termination of this Agreement by either Unity or the Company, as provided in Section 9.1, this Agreement shall forthwith become void and there shall be no further obligation on the part of either the Company or Unity (except as set forth in the penultimate sentence of Section 7.1 (with respect to confidential and non-public information) and Section 9.5, which shall survive such termination). Nothing in this Section 9.2 shall relieve any party from liability for any breach of this Agreement. SECTION 9.3 AMENDMENT. This Agreement may not be amended except by an instrument in writing signed on behalf of each of the parties hereto and in compliance with applicable law. SECTION 9.4 WAIVER. At any time prior to the Effective Time, the parties hereto may (i) extend the time for the performance of any of the obligations or other acts of the other parties hereto, (ii) waive any inaccuracies in the representations and warranties contained herein or in any document delivered pursuant thereto and (iii) waive compliance with any of the agreements or conditions contained herein. Any agreement on the part of a party hereto to any such extension or waiver shall be valid only if set forth in an instrument in writing signed on behalf of such party. SECTION 9.5 EXPENSES. Whether or not the Merger is consummated, all costs and expenses incurred in connection with this Agreement and the transactions contemplated hereby shall be paid by the party incurring such costs and expenses, except as otherwise specifically provided for herein. ARTICLE X GENERAL PROVISIONS SECTION 10.1 NON-SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective representations, obligations, agreements and promises of the parties contained in this Agreement and in any schedule, certificate or other document delivered pursuant to this Agreement, other than those that by their terms are to be performed or otherwise are to apply after the Effective Time, shall terminate as of, and shall not survive, the Effective Time. SECTION 10.2 NOTICES. All notices and other communications hereunder shall be in writing and shall be deemed given if delivered personally (effective upon delivery), mailed by registered or certified mail (return receipt requested) (effective three business days after mailing), sent by a reputable overnight courier service for next business day delivery (effective the next business day) or sent via facsimile (effective upon receipt of the telecopy in complete, readable form) to the parties at the following addresses (or at such other address for a party as shall be specified by like notice): B-28 (a) If to Unity to: Unity First Acquisition Corp. 245 Fifth Avenue New York, New York 10016 Attention: President FAX: (212) 582-3293 with a copy to: Cooperman Levitt Winikoff Lester & Newman, P.C. 800 Third Avenue New York, New York 10022 Attention: Ira I. Roxland, Esq. FAX: (212) 755-2839 (b) If to the Company, to: GraphOn Corporation 150 Harrison Avenue Campbell, California 95008 Attention: President FAX: (408) 370-5037 with a copy to: Brobeck, Phleger & Harrison LLP Two Embarcadero Place 2200 Geng Road Palo Alto, California 94303 Attention: Curtis L. Mo, Esq. and Michael F. Cyran, Esq. FAX: (650) 496-2885 SECTION 10.3 INTERPRETATION. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 10.4 MISCELLANEOUS. This Agreement (including the documents and instruments referred to herein) (i) constitutes the entire agreement and supersedes all other prior agreements and understandings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof (including without limitation that certain letter of intent dated December 10, 1998 between Unity and the Company);(ii) shall not be assigned by contract, operation of law or otherwise, and any attempt to do so shall be void; and (iii) shall be governed in all respects, including validity, interpretation and effect, by the laws of the State of New York (without giving effect to the provisions thereof relating to conflicts of law). SECTION 10.5 COUNTERPARTS. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but all of which shall constitute one and the same agreement. In pleading or proving this Agreement, it shall not be necessary to produce or account for more than one fully executed original. SECTION 10.6 PARTIES IN INTEREST. This Agreement shall be binding upon and inure solely to the benefit of each party hereto, and nothing in this Agreement, express or implied, is intended to confer upon any other person any rights or remedies of any nature whatsoever under or by reason of this Agreement. B-29 SECTION 10.7 CAPTIONS. The captions of sections and subsections of this Agreement are for reference only, and shall not affect the interpretation or construction of this Agreement. IN WITNESS WHEREOF, Unity and the Company have caused this Agreement to be signed by their respective officers thereunto duly authorized as of the date first written above. UNITY FIRST ACQUISITION CORP. By: /s/ LAWRENCE BURSTEIN ------------------------------------------ Name: Lawrence Burstein Title: President GRAPHON CORPORATION By: /s/ WALTER KELLER ------------------------------------------ Name: Walter Keller Title: President
B-30 EXHIBIT C SECTION 262 OF THE DELAWARE GENERAL CORPORATION LAW SECTION 262 APPRAISAL RIGHTS (a) Any stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to subsection (d) of this section with respect to such shares, who continuously holds such shares through the effective date of the merger or consolidation, who has otherwise complied with subsection (d) of this section and who has neither voted in favor of the merger or consolidation nor consented thereto in writing pursuant to Section 228 of this title shall be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder's shares of stock under the circumstances described in subsections (b) and (c) of this section. As used in this section, the word "stockholder" means a holder of record of stock in a stock corporation and also a member of record of a nonstock corporation; the words "stock" and "share" mean and include what is ordinarily meant by those words and also membership or membership interest of a member of a nonstock corporation; and the words "depository receipt" mean a receipt or other instrument issued by a depository representing an interest in one or more shares, or fractions thereof, solely of stock of a corporation, which stock is deposited with the depository. (b) Appraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation to be effected pursuant to Section 251 (other than a merger effected pursuant to Section 251(g) of this title), Section 252, Section 254, Section 257, Section 258, Section 263 or Section 264 of this title: (1) Provided, however, that no appraisal rights under this section shall be available for the shares of any class or series of stock, which stock, or depository receipts in respect thereof, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders; and further provided that no appraisal rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the stockholders of the surviving corporation as provided in subsection (f) of Section 251 of this title. (2) Notwithstanding paragraph (1) of this subsection, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to SectionSection251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock anything except: a. Shares of stock of the corporation surviving or resulting from such merger or consolidation, or depository receipts in respect thereof; b. Shares of stock of any other corporation, or depository receipts in respect thereof, which shares of stock (or depository receipts in respect thereof) or depository receipts at the effective date of the merger or consolidation will be either listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000 holders; c. Cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a. and b. of this paragraph; or d. Any combination of the shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a., b. and c. of this paragraph. C-1 (3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under Section 253 of this title is not owned by the parent corporation immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation. (c) Any corporation may provide in its certificate of incorporation that appraisal rights under this section shall be available for the shares of any class or series of its stock as a result of an amendment to its certificate of incorporation, any merger or consolidation in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the corporation. If the certificate of incorporation contains such a provision, the procedures of this section, including those set forth in subsections (d) and (e) of this section, shall apply as nearly as is practicable. (d) Appraisal rights shall be perfected as follows: (1) If a proposed merger or consolidation for which appraisal rights are provided under this section is to be submitted for approval at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, shall notify each of its stockholders who was such on the record date for such meeting with respect to shares for which appraisal rights are available pursuant to subsections (b) or (c) hereof that appraisal rights are available for any or all of the shares of the constituent corporations, and shall include in such notice a copy of this section. Each stockholder electing to demand the appraisal of such stockholder's shares shall deliver to the corporation, before the taking of the vote on the merger or consolidation, a written demand for appraisal of such stockholder's shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such stockholder's shares. A proxy or vote against the merger or consolidation shall not constitute such a demand. A stockholder electing to take such action must do so by a separate written demand as herein provided. Within 10 days after the effective date of such merger or consolidation, the surviving or resulting corporation shall notify each stockholder of each constituent corporation who has complied with this subsection and has not voted in favor of or consented to the merger or consolidation of the date that the merger or consolidation has become effective; or (2) If the merger or consolidation was approved pursuant to Section 228 or Section 253 of this title, each constituent corporation, either before the effective date of the merger or consolidation or within 10 days thereafter, shall notify each of the holders of any class or series of stock of such constituent corporation who are entitled to appraisal rights of the approval of the merger or consolidation and that appraisal rights are available for any or all of the shares of such class or series of stock of such constituent corporation, and shall include in such notice a copy of this section; provided that, if the notice is given on or after the effective date of the merger or consolidation, such notice shall be given by the surviving or resulting corporation to all such holders of any class or series of stock of a constituent corporation that are entitled to appraisal rights. Such notice may, and, if given on or after the effective date of the merger or consolidation, shall, also notify such stockholders of the effective date of merger or consolidation. Any stockholder entitled to appraisal rights may, within 20 days after the date of mailing of such notice, demand in writing from the surviving or resulting corporation the appraisal of such holder's shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such holder's shares. If such notice did not notify stockholders of the effective date of the merger or consolidation, either (i) each such constituent corporation shall send a second notice before the effective date of the merger or consolidation notifying each of the holders of any class or series of stock of such constituent corporation that are entitled to appraisal rights of the effective date of the merger or consolidation or (ii) the surviving or resulting corporation shall send such a second notice to all such holders on or within 10 days after such effective date; provided, however, that if such second notice is sent more than 20 days following the sending of the first notice, such second notice need only be sent to each stockholder who is entitled to appraisal rights and who has demanded appraisal of such holder's shares in accordance with this subsection. An affidavit of the secretary or C-2 assistant secretary or of the transfer agent of the corporation that is required to give either notice that such notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. For purposes of determining the stockholders entitled to receive either notice, each constituent corporation may fix, in advance, a record date that shall be not more than 10 days prior to the date the notice is given, provided, that if the notice is given on or after the effective date of the merger or consolidation, the record date shall be such effective date. If no record date is fixed and the notice is given prior to the effective date, the record date shall be the close of business on the day next preceding the day on which the notice is given. (e) Within 120 days after the effective date of the merger or consolidation, the surviving or resulting corporation or any stockholder who has complied with subsections (a) and (d) hereof and who is otherwise entitled to appraisal rights, may file a petition in the Court of Chancery demanding a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the merger or consolidation, any stockholder shall have the right to withdraw such stockholder's demand for appraisal and to accept the terms offered upon the merger or consolidation. Within 120 days after the effective date of the merger or consolidation, any stockholder who has complied with the requirements of subsections (a) and (d) hereof, upon written request, shall be entitled to receive from the corporation surviving the merger or resulting from the consolidation a statement setting forth the aggregate number of shares not voted in favor of the merger or consolidation and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such written statement shall be mailed to the stockholder within 10 days after such stockholder's written request for such a statement is received by the surviving or resulting corporation or within 10 days after expiration of the period for delivery of demands for appraisal under subsection (d) hereof, whichever is later. (f) Upon the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the surviving or resulting corporation, which shall within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the surviving or resulting corporation. If the petition shall be filed by the surviving or resulting corporation, the petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to the surviving or resulting corporation and to the stockholders shown on the list at the addresses therein stated. Such notice shall also be given by 1 or more publications at least 1 week before the day of the hearing, in a newspaper of general circulation published in the City of Wilmington, Delaware or such publication as the Court deems advisable. The forms of the notices by mail and by publication shall be approved by the Court, and the costs thereof shall be borne by the surviving or resulting corporation. (g) At the hearing on such petition, the Court shall determine the stockholders who have complied with this section and who have become entitled to appraisal rights. The Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Court may dismiss the proceedings as to such stockholder. (h) After determining the stockholders entitled to an appraisal, the Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors. In determining the fair rate of interest, the Court may consider all relevant factors, including the rate of interest which the surviving or resulting corporation would have had to pay to borrow money during the pendency of the proceeding. Upon application by the surviving or resulting corporation or by any stockholder entitled to participate in the appraisal proceeding, the Court may, in its discretion, C-3 permit discovery or other pretrial proceedings and may proceed to trial upon the appraisal prior to the final determination of the stockholder entitled to an appraisal. Any stockholder whose name appears on the list filed by the surviving or resulting corporation pursuant to subsection (f) of this section and who has submitted such stockholder's certificates of stock to the Register in Chancery, if such is required, may participate fully in all proceedings until it is finally determined that such stockholder is not entitled to appraisal rights under this section. (i) The Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting corporation to the stockholders entitled thereto. Interest may be simple or compound, as the Court may direct. Payment shall be so made to each such stockholder, in the case of holders of uncertificated stock forthwith, and the case of holders of shares represented by certificates upon the surrender to the corporation of the certificates representing such stock. The Court's decree may be enforced as other decrees in the Court of Chancery may be enforced, whether such surviving or resulting corporation be a corporation of this State or of any state. (j) The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of all the shares entitled to an appraisal. (k) From and after the effective date of the merger or consolidation, no stockholder who has demanded appraisal rights as provided in subsection (d) of this section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the effective date of the merger or consolidation); provided, however, that if no petition for an appraisal shall be filed within the time provided in subsection (e) of this section, or if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal of such stockholder's demand for an appraisal and an acceptance of the merger or consolidation, either within 60 days after the effective date of the merger or consolidation as provided in subsection (e) of this section or thereafter with the written approval of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just. (l) The shares of the surviving or resulting corporation to which the shares of such objecting stockholders would have been converted had they assented to the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting corporation. C-4 EXHIBIT D SECTIONS 1300 - 1312 OF THE CALIFORNIA CORPORATIONS CODE SECTION 1300. REORGANIZATION OR SHORT-FORM MERGER; DISSENTING SHARES; CORPORATE PURCHASE AT FAIR MARKET VALUE; DEFINITIONS (a) If the approval of the outstanding shares (Section 152) of a corporation is required for a reorganization under subdivisions (a) and (b) or subdivision (e) or (f) of Section 1201, each shareholder of the corporation entitled to vote on the transaction and each shareholder of a subsidiary corporation in a short-form merger may, by complying with this chapter, require the corporation in which the shareholder holds shares to purchase for cash at their fair market value the shares owned by the shareholder which are dissenting shares as defined in subdivision (b). The fair market value shall be determined as of the day before the first announcement of the terms of the proposed reorganization or short-form merger, excluding any appreciation or depreciation in consequence of the proposed action, but adjusted for any stock split, reverse stock split, or share dividend which becomes effective thereafter. (b) As used in this chapter, "dissenting shares" means shares which come within all of the following descriptions: (1) Which were not immediately prior to the reorganization or short-form merger either (A) listed on any national securities exchange certified by the Commissioner of Corporations under subdivision (o) of Section 25100 or (B) listed on the list of OTC margin stocks issued by the Board of Governors of the Federal Reserve System, and the notice of meeting of shareholders to act upon the reorganization summarizes this section and Sections 1301, 1302, 1303 and 1304; provided, however, that this provision does not apply to any shares with respect to which there exists any restriction on transfer imposed by the corporation or by any law or regulation; and provided, further, that this provision does not apply to any class of shares described in SUBPARAGRAPH (A) or (B) if demands for payment are filed with respect to 5 percent or more of the outstanding shares of that class. (2) Which were outstanding on the date for the determination of shareholders entitled to vote on the reorganization and (A) were not voted in favor of the reorganization or, (B) if described in SUBPARAGRAPH (A) or (B) of paragraph (1) (without regard to the provisos in that paragraph), were voted against the reorganization, or which were held of record on the effective date of a short-form merger; provided, however, that *** SUBPARAGRAPH (A) rather than *** SUBPARAGRAPH (B) of this paragraph applies in any case where the approval required by Section 1201 is sought by written consent rather than at a meeting. (3) Which the dissenting shareholder has demanded that the corporation purchase at their fair market value, in accordance with Section 1301. (4) Which the dissenting shareholder has submitted for endorsement, in accordance with Section 1302. (c) As used in this chapter, "dissenting shareholder" means the recordholder of dissenting shares and includes a transferee of record. SECTION 1301. NOTICE TO HOLDERS OF DISSENTING SHARES IN REORGANIZATIONS; DEMAND FOR PURCHASE; TIME; CONTENTS (a) If, in the case of a reorganization, any shareholders of a corporation have a right under Section 1300, subject to compliance with paragraphs (3) and (4) of subdivision (b) thereof, to require the corporation to purchase their shares for cash, such corporation shall mail to each such shareholder a notice of the approval of the reorganization by its outstanding shares (Section 152) within 10 days after the date of such approval, accompanied by a copy of Sections 1300, 1302, 1303, 1304 and this section, a statement of D-1 the price determined by the corporation to represent the fair market value of the dissenting shares, and a brief description of the procedure to be followed if the shareholder desires to exercise the shareholder's right under such sections. The statement of price constitutes an offer by the corporation to purchase at the price stated any dissenting shares as defined in subdivision (b) of Section 1300, unless they lose their status as dissenting shares under Section 1309. (b) Any shareholder who has a right to require the corporation to purchase the shareholder's shares for cash under Section 1300, subject to compliance with paragraphs (3) and (4) of subdivision (b) thereof, and who desires the corporation to purchase such shares shall make written demand upon the corporation for the purchase of such shares and payment to the shareholder in cash of their fair market value. The demand is not effective for any purpose unless it is received by the corporation or any transfer agent thereof (1) in the case of shares described in clause (i) or (ii) of paragraph (1) of subdivision (b) of Section 1300 (without regard to the provisos in that paragraph), not later than the date of the shareholders' meeting to vote upon the reorganization, or (2) in any other case within 30 days after the date on which the notice of the approval by the outstanding shares pursuant to subdivision (a) or the notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder. (c) The demand shall state the number and class of the shares held of record by the shareholder which the shareholder demands that the corporation purchase and shall contain a statement of what such shareholder claims to be the fair market value of those shares as of the day before the announcement of the proposed reorganization or short-form merger. The statement of fair market value constitutes an offer by the shareholder to sell the shares at such price. SECTION 1302. SUBMISSION OF SHARES CERTIFICATES FOR ENDORSEMENT; UNCERTIFICATED SECURITIES Within 30 days after the date on which notice of the approval by the outstanding shares or the notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, the shareholder shall submit to the corporation at its principal office or at the office of any transfer agent thereof, (A) IF THE SHARES ARE CERTIFICATED SECURITIES, the shareholder's certificates representing any shares which the shareholder demands that the corporation purchase, to be stamped or endorsed with a statement that the shares are dissenting shares or to be exchanged for certificates of appropriate denomination so stamped or endorsed OR (B) IF THE SHARES ARE UNCERTIFICATED SECURITIES, WRITTEN NOTICE OF THE NUMBER OF SHARES WHICH THE SHAREHOLDER DEMANDS THAT THE CORPORATION PURCHASE. Upon subsequent transfers of the dissenting shares on the books of the corporation, the new certificates, initial transaction statement, and other written statements issued therefor shall bear a like statement, together with the name of the original dissenting holder of the shares. SECTION 1303. PAYMENT OF AGREED PRICE WITH INTEREST; AGREEMENT FIXING FAIR MARKET VALUE; FILING; TIME OF PAYMENT (a) If the corporation and the shareholder agree that the shares are dissenting shares and agree upon the price of the shares, the dissenting shareholder is entitled to the agreed price with interest thereon at the legal rate on judgments from the date of the agreement. Any agreements fixing the fair market value of any dissenting shares as between the corporation and the holders thereof shall be filed with the secretary of the corporation. (b) Subject to the provisions of Section 1306, payment of the fair market value of dissenting shares shall be made within 30 days after the amount thereof has been agreed or within 30 days after any statutory or contractual conditions to the reorganization are satisfied, whichever is later, and in the case of certificated securities, subject to surrender of the certificates therefor, unless provided otherwise by agreement. D-2 SECTION 1304. ACTION TO DETERMINE WHETHER SHARES ARE DISSENTING SHARES OR FAIR MARKET VALUE; LIMITATION; JOINDER; CONSOLIDATION; DETERMINATION OF ISSUES; APPOINTMENT OF APPRAISERS (a) If the corporation denies that the shares are dissenting shares, or the corporation and the shareholder fail to agree upon the fair market value of the shares, then the shareholder demanding purchase of such shares as dissenting shares or any interested corporation, within six months after the date on which notice of the approval by the outstanding shares (Section 152) or notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder, but not thereafter, may file a complaint in the superior court of the proper county praying the court to determine whether the shares are dissenting shares or the fair market value of the dissenting shares or both or may intervene in any action pending on such a complaint. (b) Two or more dissenting shareholders may join as plaintiffs or be joined as defendants in any such action and two or more such actions may be consolidated. (c) On the trial of the action, the court shall determine the issues. If the status of the shares as dissenting shares is in issue, the court shall first determine that issue. If the fair market value of the dissenting shares is in issue, the court shall determine, or shall appoint one or more impartial appraisers to determine, the fair market value of the shares. SECTION 1305. REPORT OF APPRAISERS; CONFIRMATION; DETERMINATION BY COURT; JUDGEMENT; PAYMENT; APPEAL; COSTS (a) If the court appoints an appraiser or appraisers, they shall proceed forthwith to determine the fair market value per share. Within the time fixed by the court, the appraisers, or a majority of them, shall make and file a report in the office of the clerk of the court. Thereupon, on the motion of any party, the report shall be submitted to the court and considered on such evidence as the court considers relevant. If the court finds the report reasonable, the court may confirm it. (b) If a majority of the appraisers appointed fail to make and file a report within 10 days from the date of their appointment or within such further time as may be allowed by the court or the report is not confirmed by the court, the court shall determine the fair market value of the dissenting shares. (c) Subject to the provisions of Section 1306, judgment shall be rendered against the corporation for payment of an amount equal to the fair market value of each dissenting share multiplied by the number of dissenting shares which any dissenting shareholder who is a party, or who has intervened, is entitled to require the corporation to purchase, with interest thereon at the legal rate from the date on which judgment was entered. (d) Any such judgment shall be payable forthwith with respect to uncertificated securities and, with respect to certificated securities, only upon the endorsement and delivery to the corporation of the certificates for the shares described in the judgment. Any party may appeal from the judgment. (e) The costs of the action, including reasonable compensation to the appraisers to be fixed by the court, shall be assessed or apportioned as the court considers equitable, but, if the appraisal exceeds the price offered by the corporation, the corporation shall pay the costs (including in the discretion of the court attorneys' fees, fees of expert witnesses and interest at the legal rate on judgments from the date of compliance with Sections 1300, 1301 and 1302 if the value awarded by the court for the shares is more than 125 percent of the price offered by the corporation under subdivision (a) of Section 1301). SECTION 1306. PREVENTION OF IMMEDIATE PAYMENT; STATUS AS CREDITORS; INTEREST To the extent that the provisions of Chapter 5 prevent the payment to any holders of dissenting shares of their fair market value, they shall become creditors of the corporation for the amount thereof together D-3 with interest at the legal rate on judgments until the date of payment, but subordinate to all other creditors in any liquidation proceeding, such debt to be payable when permissible under the provisions of Chapter 5. SECTION 1307. DIVIDENDS ON DISSENTING SHARES Cash dividends declared and paid by the corporation upon the dissenting shares after the date of approval of the reorganization by the outstanding shares (Section 152) and prior to payment for the shares by the corporation shall be credited against the total amount to be paid by the corporation therefor. SECTION 1308. RIGHTS OF DISSENTING SHAREHOLDERS PENDING VALUATION; WITHDRAWAL OF DEMAND FOR PAYMENT Except as expressly limited in this chapter, holders of dissenting shares continue to have all the rights and privileges incident to their shares, until the fair market value of their shares is agreed upon or determined. A dissenting shareholder may not withdraw a demand for payment unless the corporation consents thereto. SECTION 1309. TERMINATION OF DISSENTING SHARE AND SHAREHOLDER STATUS Dissenting shares lose their status as dissenting shares and the holders thereof cease to be dissenting shareholders and cease to be entitled to require the corporation to purchase their shares upon the happening of any of the following: (a) The corporation abandons the reorganization. Upon abandonment of the reorganization, the corporation shall pay on demand to any dissenting shareholder who has initiated proceedings in good faith under this chapter all necessary expenses incurred in such proceedings and reasonable attorneys' fees. (b) The shares are transferred prior to their submission for endorsement in accordance with Section 1302 or are surrendered for conversion into shares of another class in accordance with the articles. (c) The dissenting shareholder and the corporation do not agree upon the status of the shares as dissenting shares or upon the purchase price of the shares, and neither files a complaint or intervenes in a pending action as provided in Section 1304, within six months after the date on which notice of the approval by the outstanding shares or notice pursuant to subdivision (i) of Section 1110 was mailed to the shareholder. (d) The dissenting shareholder, with the consent of the corporation, withdraws the shareholder's demand for purchase of the dissenting shares. SECTION 1310. SUSPENSION OF RIGHTS TO COMPENSATION OR VALUATION PROCEEDINGS; LITIGATION OF SHAREHOLDERS' APPROVAL If litigation is instituted to test the sufficiency or regularity of the votes of the shareholders in authorizing a reorganization, any proceedings under Sections 1304 and 1305 shall be suspended until final determination of such litigation. SECTION 1311. EXEMPT SHARES This chapter, except Section 1312, does not apply to classes of shares whose terms and provisions specifically set forth the amount to be paid in respect to such shares in the event of a reorganization or merger. D-4 SECTION 1312. RIGHT OF DISSENTING SHAREHOLDER TO ATTACK, SET ASIDE OR RESCIND MERGER OR REORGANIZATION; RESTRAINING ORDER OR INJUNCTION; CONDITIONS. (a) No shareholder of a corporation who has a right under this chapter to demand payment of cash for the shares held by the shareholder shall have any right at law or in equity to attack the validity of the reorganization or short-form merger, or to have the reorganization or short-form merger set aside or rescinded, except in an action to test whether the number of shares required to authorize or approve the reorganization have been legally voted in favor thereof; but any holder of shares of a class whose terms and provisions specifically set forth the amount to be paid in respect to them in the event of a reorganization or short-form merger is entitled to payment in accordance with those terms and provisions or, if the principal terms of the reorganization are approved pursuant to subdivision (b) of Section 1202, is entitled to payment in accordance with the terms and provisions of the approved reorganization. (b) If one of the parties to a reorganization or short-form merger is directly or indirectly controlled by, or under common control with, another party to the reorganization or short-form merger, subdivision (a) shall not apply to any shareholder of such party who has not demanded payment of cash for such shareholder's shares pursuant to this chapter; but if the shareholder institutes any action to attack the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded, the shareholder shall not thereafter have any right to demand payment of cash for the shareholder's shares pursuant to this chapter. The court in any action attacking the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded shall not restrain or enjoin the consummation of the transaction except upon 10 days' prior notice to the corporation and upon a determination by the court that clearly no other remedy will adequately protect the complaining shareholder or the class of shareholders of which such shareholder is a member. (c) If one of the parties to a reorganization or short-form merger is directly or indirectly controlled by, or under common control with, another party to the reorganization or short-form merger, in any action to attack the validity of the reorganization or short-form merger or to have the reorganization or short-form merger set aside or rescinded, (1) a party to a reorganization or short-form merger which controls another party to the reorganization or short-form merger shall have the burden of proving that the transaction is just and reasonable as to the shareholders of the controlled party, and (2) a person who controls two or more parties to a reorganization shall have the burden of proving that the transaction is just and reasonable as to the shareholders of any party so controlled. D-5 PART II INFORMATION NOT REQUIRED IN PROSPECTUS ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS. Article SIXTH of the Restated Certificate of Incorporation of Unity First Acquisition Corp. (the "registrant") provides with respect to the indemnification of directors and officers that the registrant shall indemnify to the fullest extent permitted by Sections 102(b)(7) and 145 of the Delaware General Corporation Law, as amended from time to time, each person that such Sections grant the registrant the power to indemnify. Article SIXTH of the Restated Certificate of Incorporation of the registrant also provides that no director shall be liable to the registrant or any of its stockholders for monetary damages for breach of fiduciary duty as a director, except with respect to (1) a breach of the director's duty of loyalty to the registrant or its stockholders, (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law, (3) liability under Section 174 of the Delaware General Corporation Law or (4) a transaction from which the director derived an improper personal benefit, it being the intention of the foregoing provision to eliminate the liability of the registrant's directors to the registrant or its stockholders to the fullest extent permitted by Section 102(b)(7) of Delaware General Corporation Law, as amended from time to time. ITEM 21. EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES. (a) Exhibits
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ----------- ------------------------------------------------------------------------------------------------------- 2.1 Agreement and Plan of Merger and Reorganization dated as of February 1, 1999, between Registrant and GraphOn Corporation (included as Exhibit B to the joint proxy statement/ prospectus which forms a part of this Registration Statement (the "Prospectus")) 3.1 Restated Certificate of Incorporation of Registrant (1) 3.2 Bylaws of Registrant (1) 3.3 Second Amended and Restated Articles of Incorporation of GraphOn 3.4 Amended and Restated Bylaws of GraphOn 4.1 Form of certificate evidencing shares of common stock of Registrant (1) 4.2 Form of certificate evidencing Class A Redeemable Warrants of Registrant (1) 4.3 Form of certificate evidencing Class B Redeemable Warrants of Registrant (1) 4.4 Warrant Agreement dated November 12, 1996 between Registrant and GKN Securities Corp. and Gaines, Berland, Inc.(1) 4.5 Redeemable Warrant Agreement dated November 12, 1996 between Registrant and American Stock Transfer & Trust Company(1) 4.6 Registration Rights Agreement dated October 28, 1998 between GraphOn, Spencer Trask Investors, Walter Keller and the investors purchasing units in GraphOn's private placement. 4.7 Amendment to Registration Rights Agreement(2) 5.1 Opinion of Cooperman Levitt Winikoff Lester & Newman, P.C.(2) 8.1 Opinion of Cooperman Levitt Winikoff Lester & Newman, P.C. with respect to certain Federal income tax aspects attendant to the merger(2)
II-1
EXHIBIT NUMBER DESCRIPTION OF EXHIBIT - ----------- ------------------------------------------------------------------------------------------------------- 8.2 Opinion of Brobeck, Phleger & Harrison LLP with respect to certain Federal income tax aspects attendant to the merger (2) 10.1 1996 Stock Option Plan of Registrant(1) 10.2 1998 Stock Option/Stock Issuance Plan of GraphOn 10.3 Placement Agency Agreement by and between GraphOn and Spencer Trask Securities, Inc., dated as of September 2, 1998 10.4 Asset Purchase Agreement by and among GraphOn, Corel Corporation, Corel Corporation Limited and Corel, Inc. (collectively, "Corel"), dated as of December 18, 1998 10.5 Securities Purchase Agreement by and among GraphOn and Corel, dated as of December 18, 1998 10.6 Standard Industrial Lease between GraphOn and Mildred K. Dibona, dated April 14, 1995, as amended on October 2, 1998 (2) 10.7 Hidden Valley Office Park Lease Agreement between GraphOn and ASA Properties, Inc., dated June 5, 1998 10.8 Lease Agreement between Corel Inc. and CML Realty Corp., dated September, 1998 and assumed by GraphOn on December 31, 1998. 23.1 Consent of Arthur Andersen LLP 23.2 Consent of BDO Seidman, LLP 23.3 Consent of Cooperman Levitt Winikoff Lester & Newman, P.C. (to be included in Exhibits 5.1 and 8.1) 23.4 Consent of Richards, Layton & Finger, P.A. (2) 23.5 Consent of Brobeck, Phleger & Harrison LLP (to be included in Exhibit 8.2) 23.6 Consent of Walter Keller (2) 23.7 Consent of Thomas A. Bevilaqua (2) 24.1 Power of Attorney (included on the Signature Page of Part II of this Registration Statement) 99.1 Form of Proxy of Registrant 99.2 Form of Proxy of GraphOn
- ------------------------ (1) Incorporated by reference from Unity's Form S-1, file number 333-11165, filed with the SEC on August 30, 1996. (2) To be filed by Amendment to this Registration Statement. (b) Financial Statement Schedules All schedules for which provision is made in the applicable accounting regulations of the Securities and Exchange Commission are not required under the related instructions or not applicable, and therefore have been omitted. (c) Item 4(b) Information Reference is made to Exhibit 99.1 to this Registration Statement. II-2 ITEM 22. UNDERTAKINGS. (a) Registrant hereby undertakes as follows: (1) that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this Registration Statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), Registrant undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form; and (2) that every prospectus (i) that is filed pursuant to paragraph (1) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Securities Act of 1933, as amended (the "Securities Act"), and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the Registration Statement and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (b) The Registrant hereby undertakes to respond to requests for information that is incorporated by reference into the joint proxy statement/prospectus pursuant to Item 4 of this form, within one business day of receipt of such request, and to send the incorporated documents by first class mail or other equally prompt means. This includes information contained in documents filed subsequent to the effective date of the Registration Statement through the date of responding to the request. (c) The Registrant hereby undertakes to supply by means of a post-effective amendment all information concerning a transaction, and GraphOn being acquired involved therein, that was not the subject of and included in the Registration Statement when it became effective. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the questions whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York, on the 14(th) day of April, 1999. UNITY FIRST ACQUISITION CORP. BY: /S/ LAWRENCE BURSTEIN, PRESIDENT ----------------------------------------- Lawrence Burstein, President POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Lawrence Burstein and Norman Leben and each of them, with full power to act without the other, his true and lawful attorney-in-fact and agent, with full power of substitution and resubstitution for him and in his name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement, and to file the same, with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite or necessary to be done in and about the premises, as fully to all intents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Act of 1933, this Amendment to the Registration Statement has been signed below by the following persons in the capacities and on the dates indicated: SIGNATURE TITLE DATE - ------------------------------ --------------------------- ------------------- President and Director /s/ LAWRENCE BURSTEIN (Principal Executive, - ------------------------------ Financial and Accounting April 14, 1999 Lawrence Burstein Officer) /s/ NORMAN LEBEN Secretary and Director - ------------------------------ April14, 1999 Norman Leben /s/ JOHN CATTIER Director - ------------------------------ April 14, 1999 John Cattier /s/ BARRY RIDINGS Director - ------------------------------ April 14, 1999 Barry Ridings II-4 EX-3.3 2 EXHIBIT 3.3 Exhibit 3.3 SECOND AMENDED AND RESTATED ARTICLES OF INCORPORATION OF GRAPHON CORPORATION The undersigned, Walter Keller and Robin Ford, hereby state that: ONE: They are the duly elected and acting President and Secretary, respectively, of the Corporation. TWO: The Articles of Incorporation of the Corporation shall be amended as and restated to read in full as follows: 1. The name of this Corporation is GraphOn Corporation. 2. The purpose of the Corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation Law of California other than the banking business, the trust company business or the practice of a profession permitted to be incorporated by the California Corporations Code. 3. The Corporation is authorized to issue two classes of stock to be designated, respectively, "Common Stock" and "Preferred Stock." The total number of shares that the Corporation is authorized to issue is Fifty-Five Million (55,000,000) shares. Fifty Million (50,000,000) shares shall be Common Stock, no par value, and Five Million (5,000,000) shares shall be Preferred Stock, no par value. Upon filing of the Second Amended and Restated Articles of Incorporation, a Sixty -Thousand (60,000)-to-One (1) stock split will become effective as to all outstanding capital stock of the Corporation. The Preferred Stock may be issued from time to time in series. The Board of Directors is hereby authorized to fix or alter the rights, preferences, privileges and restrictions granted to or imposed upon any series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or of any of them. Subject to compliance with applicable protective voting rights which may be granted to the Preferred Stock or any series thereof in Certificates of Determination or the Corporation's Articles of Incorporation ("Protective Provisions"), but notwithstanding any other rights of the Preferred Stock or any series thereof, the rights, privileges, preferences and restrictions of any such series may be subordinated to, PARI PASSU with (including, without limitation, inclusion in provisions with respect to liquidation and acquisition preferences, redemption and/or approval of matters by vote or written consent), or senior to any of those of any present or future class or series of Preferred or Common Stock. Subject to compliance with applicable Protective Provisions, the Board of Directors is also authorized to increase or decrease the number of shares of any series, prior to or 1 subsequent to the issuance of shares of that series, but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. 4. (a) The liability of the directors of this Corporation for monetary damages shall be eliminated to the fullest extent permitted under California law. (b) This Corporation is authorized to provide indemnification of agents (as defined in Section 317 of the California Corporations Code) through bylaw provisions, agreements with the agents, vote of shareholders or disinterested directors or otherwise, in excess of the indemnification otherwise permitted by Section 317 of the California Corporations Code, subject only to applicable limits set forth in Section 204 of the California Corporations Code with respect to actions for breach of duty to the Corporation and its shareholders. * * * THREE: The foregoing amendment has been approved by the Board of Directors of the Corporation. FOUR: The foregoing amendment was approved by the holders of the requisite number of shares of the Corporation in accordance with Sections 902 and 903 of the California General Corporation Law; the total number of outstanding shares of each class entitled to vote with respect to the foregoing amendment was 100 shares of Common Stock, all of which voted in favor of the foregoing amendment. 2 The undersigned certify under penalty of perjury that they have read the foregoing Second Amended and Restated Articles of Incorporation and know the contents thereof, and that the statements therein are true. IN WITNESS WHEREOF, the undersigned have executed this certificate at Campbell, California on June 23, 1998. ----------------------------------- Walter Keller, President ----------------------------------- Robin Ford, Secretary 3 EX-3.4 3 EXHIBIT 3.4 Exhibit 3.4 AMENDED AND RESTATED BYLAWS OF GRAPHON CORPORATION ARTICLE I - OFFICES Section 1. The principal executive office of GraphOn Corporation (the "Corporation") shall be at such place inside or outside the State of California as the Board of Directors may determine from time to time. Section 2. The Corporation may also have offices at such other places as the Board of Directors may from time to time designate, or as the business of the Corporation may require. ARTICLE II - SHAREHOLDERS' MEETINGS Section 1. ANNUAL MEETINGS. The annual meeting of the shareholders of the Corporation for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting shall be held at such place and at such time as may be fixed from time to time by the Board of Directors and stated in the notice of the meeting. If the annual meeting of the shareholders be not held as herein prescribed, the election of directors may be held at any meeting thereafter called pursuant to these Bylaws. Section 2. SPECIAL MEETINGS. Special meetings of the shareholders, for any purpose whatsoever, unless otherwise prescribed by statute, may be called at any time by the Chairman of the Board, the President, or by the Board of Directors, or by one or more shareholders holding not less than ten percent of the voting power of the Corporation. Section 3. PLACE. All meetings of the shareholders shall be at any place within or without the State of California designated by the Board of Directors or by written consent of all the persons entitled to vote thereat, given either before or after the meeting. In the absence of any such designation, shareholders' meetings shall be held at the principal executive office of the Corporation. Section 4. NOTICE. Notice of meetings of the shareholders of the Corporation shall be given in writing to each shareholder entitled to vote, either personally or by first-class mail (unless the Corporation has 500 or more shareholders determined as provided by the California Corporations Code on the record date for the meeting, in which case notice may be sent by third-class mail) or other means of written communication, charges prepaid, addressed to the shareholder at his address appearing on the books of the Corporation or given by the shareholder to the Corporation for the purpose of notice. Notice of any such meeting of shareholders shall be sent to each shareholder entitled thereto not less than ten (or, if sent by third-class mail, thirty) nor more than sixty days before the meeting. Said notice shall state the place, date and hour of the meeting and, (1) in the case of special meetings, the general nature of the business to be transacted, and no other business may be transacted, or (2) in the case of annual meetings, those matters which the Board of Directors, at the time of the mailing of the notice, intends to present for action by the shareholders, but subject to Section 601(f) of the California Corporations Code any proper matter may be presented at the meeting for shareholder action, and (3) in the case of any meeting at which directors are to be elected, the names of the nominees intended at the time of the mailing of the notice to be presented by management for election. Section 5. ADJOURNED MEETINGS. Any shareholders' meeting may be adjourned from time to time by the vote of the holders of a majority of the voting shares present at the meeting either in person or by proxy. Notice of any adjourned meeting need not be given unless a meeting is adjourned for forty-five days or more from the date set for the original meeting. Section 6. QUORUM. The presence in person or by proxy of the persons entitled to vote a majority of the shares entitled to vote at any meeting constitutes a quorum for the transaction of business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum, if any action taken (other than adjournment) is approved by at least a majority of the shares required to constitute a quorum. In the absence of a quorum, any meeting of shareholders may be adjourned from time to time by the vote of a majority of the shares, the holders of which are either present in person or represented by proxy thereat, but no other business may be transacted, except as provided above. Section 7. SHAREHOLDER ACTION BY WRITTEN CONSENT. Any action which may be taken at any meeting of shareholders may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, shall be signed by the holders of outstanding shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted; provided, however, that (1) unless the consents of all shareholders entitled to vote have been solicited in writing, notice of any shareholder approval without a meeting by less than unanimous written consent shall be given as required by the California Corporations Code, and (2) directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for the election of directors. Any written consent may be revoked by a writing received by the Secretary of the Corporation prior to the time that written consents of the number of shares required to authorize the proposed action have been filed with the Secretary. 2 Section 8. WAIVER OF NOTICE. The transactions of any meeting of shareholders, however called and noticed, and whenever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present either in person or by proxy, and if, either before or after the meeting, each of the persons entitled to vote, not present in person or by proxy, signs a written waiver of notice, or a consent to the holding of the meeting, or an approval of the minutes thereof. All such waivers, consents, or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 9. VOTING. The voting at all meetings of shareholders need not be by ballot, but any qualified shareholder before the voting begins may demand a stock vote whereupon such stock vote shall be taken by ballot, each of which shall state the name of the shareholder voting and the number of shares voted by such shareholder, and if such ballot be cast by a proxy, it shall also state the name of such proxy. At any meeting of the shareholders, every shareholder having the right to vote shall be entitled to vote in person, or by proxy appointed in a writing subscribed by such shareholder and bearing a date not more than eleven months prior to said meeting, unless the writing states that it is irrevocable and satisfies Section 705(e) of the California Corporations Code, in which event it is irrevocable for the period specified in said writing and said Section 705(e). Section 10. RECORD DATES. In the event the Board of Directors fixes a day for the determination of shareholders of record entitled to vote as provided in Section 1 of Article V of these Bylaws, then, subject to the provisions of the General Corporation Law of the State of California, only persons in whose name shares entitled to vote stand on the stock records of the Corporation at the close of business on such day shall be entitled to vote. If no record date is fixed: The record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; The record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is necessary, shall be the day on which the first written consent is given; and The record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto, or the 60th day prior to the date of such other action, whichever is later. 3 A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting, but the Board of Directors shall fix a new record date if the meeting is adjourned for more than 45 days. Section 11. CUMULATIVE VOTING FOR ELECTION OF DIRECTORS. Provided the candidate's name has been placed in nomination prior to the voting and one or more shareholders has given notice at the meeting prior to the voting of the shareholder's intent to cumulate the shareholder's votes, every shareholder entitled to vote at any election for directors shall have the right to cumulate such shareholder's votes and give one candidate a number of votes equal to the number of directors to be elected multiplied by the number of votes to which the shareholder's shares are normally entitled, or distribute the shareholder's votes on the same principle among as many candidates as the shareholder shall think fit. The candidates receiving the highest number of votes of the shares entitled to be voted for them up to the number of directors to be elected by such shares are elected. ARTICLE III - BOARD OF DIRECTORS Section 1. POWERS. Subject to any limitations in the Articles of Incorporation or these Bylaws and to any provision of the California Corporations Code requiring shareholder authorization or approval for a particular action, the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised by, or under the direction of, the Board of Directors. The Board of Directors may delegate the management of the day-to-day operation of the business of the Corporation to a management company or other person provided that the business and affairs of the Corporation shall be managed and all corporate powers shall be exercised, under the ultimate direction of the Board of Directors. Section 2. NUMBER, TENURE AND QUALIFICATIONS. The number of directors that shall constitute the whole board shall be not more than seven or fewer than five. The exact number of directors may be fixed from time to time within such limit by a duly adopted resolution of the Board of Directors or shareholders. An amendment to these Bylaws reducing the number of directors to a number less than five cannot be adopted if the votes cast against its adoption at a meeting or the shares not consenting in the case of action by written consent are equal to more than 16-2/3% of the outstanding shares entitled to vote. The exact number of directors presently authorized shall be five until changed within the limits specified above by a duly adopted resolution of the Board of Directors or shareholders. Directors need not be shareholders. Directors shall hold office until the next annual meeting of shareholders and until their respective successors are elected. If any such annual meeting is not held, or the directors are not elected thereat, the directors may be elected at any special meeting of shareholders held 4 for that purpose. Section 3. REGULAR MEETINGS. A regular annual meeting of the Board of Directors shall be held without other notice than this Bylaw immediately after, and at the same place as, the annual meeting of shareholders. The Board of Directors may provide for other regular meetings from time to time by resolution. Section 4. SPECIAL MEETINGS. Special meetings of the Board of Directors may be called at any time by the Chairman of the Board, or the President or any Vice President, or the Secretary or any two directors. Written notice of the time and place of all special meetings of the Board of Directors shall be delivered personally or by telephone, including a voice messaging system or other system or technology designed to record and communicate messages, telegraph, facsimile, electronic mail or other electronic means to each director at least forty-eight hours before the meeting, or sent to each director by first-class mail, postage prepaid, at least four days before the meeting. Such notice need not specify the purpose of the meeting. Notice of any meeting of the Board of Directors need not be given to any director who signs a waiver of notice, whether before or after the meeting, or who attends the meeting without protesting prior thereto or at its commencement, the lack of notice to such director. Section 5. PLACE OF MEETINGS. Meetings of the Board of Directors may be held at any place within or without the State of California, which has been designated in the notice, or if not stated in the notice or there is no notice, the principal executive office of the Corporation or as designated by the resolution duly adopted by the Board of Directors. Section 6. PARTICIPATION BY TELEPHONE. Members of the Board of Directors may participate in a meeting through use of conference telephone, electronic video screen communication, or other communications equipment. Participation in a meeting through use of conference telephone constitutes presence in person at the meeting as long as all members participating in such meeting can hear one another. Participation in a meeting through the use of electronic video screen communication or other communications equipment (other than conference telephone) constitutes presence in person at that meeting if all of the following apply: (a) each member participating in the meeting can communicate with all of the other members concurrently, (b) each member is provided the means of participating in all matters before the Board of Directors, including, without limitation, the capacity to propose, or to interpose an objection to, a specific action to be taken by the Corporation, and (c) the Corporation adopts and implements some means of verifying that (i) a person participating in the meeting is a director or other person entitled to participate in the Board of Directors' meeting, and (ii) all actions of, or votes by, the Board of Directors are taken or cast only by the directors and not by persons who are not directors. Section 7. QUORUM. A majority of the Board of Directors shall constitute a quorum at all meetings. In the absence of a quorum a majority of the directors present may 5 adjourn any meeting to another time and place. If a meeting is adjourned for more than 24 hours, notice of any adjournment to another time or place shall be given prior to the time of the reconvened meeting to the directors who were not present at the time of adjournment. Section 8. ACTION AT MEETING. Every act or decision done or made by a majority of the directors present at a meeting duly held at which a quorum is present is the act of the Board of Directors. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, if any action taken is approved by at least a majority of the required quorum for such meeting. Section 9. WAIVER OF NOTICE. The transactions of any meeting of the Board of Directors, however called and noticed or wherever held, are as valid as though had at a meeting duly held after regular call and notice if a quorum is present and if, either before or after the meeting, each of the directors not present signs a written waiver of notice, a consent to holding the meeting, or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 10. ACTION WITHOUT MEETING. Any action required or permitted to be taken by the Board of Directors may be taken without a meeting, if all members of the Board individually or collectively consent in writing to such action. Such written consent or consents shall be filed with the minutes of the proceedings of the Board. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. Section 11. REMOVAL. The Board of Directors may declare vacant the office of a director who has been declared of unsound mind by an order of court or who has been convicted of a felony. The entire Board of Directors or any individual director may be removed from office without cause by a vote of shareholders holding a majority of the outstanding shares entitled to vote at an election of directors; provided, however, that unless the entire Board is removed, no individual director may be removed when the votes cast against removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an election at which the same total number of votes cast were cast (or, if such action is taken by written consent, all shares entitled to vote were voted) and the entire number of directors authorized at the time of the director's most recent election were then being elected. In the event an office of a director is so declared vacant or in case the Board or any one or more directors be so removed, new directors may be elected at the same meeting. Section 12. RESIGNATIONS. Any director may resign effective upon giving written notice to the Chairman of the Board, the President, the Secretary or the Board of Directors of the Corporation, unless the notice specifies a later time for the effectiveness of such resignation. If 6 the resignation is effective at a future time, a successor may be elected to take office when the resignation becomes effective. Section 13. VACANCIES. Except for a vacancy created by the removal of a director, all vacancies in the Board of Directors, whether caused by resignation, death or otherwise, may be filled by a majority of the remaining directors or, if the number of directors then in office is less than a quorum, by (a) the unanimous written consent of the directors then in office, (b) the affirmative vote of a majority of the directors then in office at a meeting held pursuant to notice or waivers of notice complying with California Corporations Code Section 307, or (c) a sole remaining director, and each director so elected shall hold office until his successor is elected at an annual, regular or special meeting of the shareholders. Vacancies created by the removal of a director may be filled only by approval of the shareholders. The shareholders may elect a director at any time to fill any vacancy not filled by the directors. Any such election by written consent requires the consent of a majority of the outstanding shares entitled to vote. Section 14. COMPENSATION. No stated salary shall be paid directors, as such, for their services, but, by resolution of the Board of Directors, a fixed sum and expenses of attendance, if any, may be allowed for attendance at each regular or special meeting of such Board; provided that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. Members of special or standing committees may be allowed like compensation for attending committee meetings. Section 15. COMMITTEES. The Board of Directors may, by resolution adopted by a majority of the authorized number of directors, designate one or more committees, each consisting of two or more directors, to serve at the pleasure of the Board of Directors. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent member at any meeting of the committee. The appointment of members or alternate members of a committee requires the vote of a majority of the authorized number of directors. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have all the authority of the Board of Directors in the management of the business and affairs of the Corporation, except with respect to (a) the approval of any action requiring shareholders' approval or approval of the outstanding shares, (b) the filling of vacancies on the Board or any committee, (c) the fixing of compensation of directors for serving on the Board or any committee, (d) the adoption, amendment or repeal of Bylaws, (e) the amendment or repeal of any resolution of the Board which by its express terms is not so amendable or repealable, (f) a distribution to shareholders, except at a rate or in a periodic amount or within a price range determined by the Board, and (g) the appointment of other committees of the Board or the members thereof. ARTICLE IV - OFFICERS 7 Section 1. NUMBER AND TERM. The officers of the Corporation shall be a Chairman of the Board, a President, one or more Vice-Presidents, a Secretary and a Chief Financial Officer, all of which shall be chosen by the Board of Directors. In addition, the Board of Directors may appoint such other officers as may be deemed expedient for the proper conduct of the business of the Corporation, each of whom shall have such authority and perform such duties as the Board of Directors may from time to time determine. The officers to be appointed by the Board of Directors shall be chosen annually at the regular meeting of the Board of Directors held after the annual meeting of shareholders and shall serve at the pleasure of the Board of Directors. If officers are not chosen at such meeting of the Board of Directors, they shall be chosen as soon thereafter as shall be convenient. Each officer shall hold office until his successor shall have been duly chosen or until his removal or resignation. Section 2. INABILITY TO ACT. In the case of absence or inability to act of any officer of the Corporation and of any person herein authorized to act in his place, the Board of Directors may from time to time delegate the powers or duties of such officer to any other officer, or any director or other person whom it may select. Section 3. REMOVAL AND RESIGNATION. Any officer chosen by the Board of Directors may be removed at any time, with or without cause, by the affirmative vote of a majority of all the members of the Board of Directors. Any officer chosen by the Board of Directors may resign at any time by giving written notice of said resignation to the Corporation. Unless a different time is specified therein, such resignation shall be effective upon its receipt by the Chairman of the Board, the President, the Secretary or the Board of Directors. Section 4. VACANCIES. A vacancy in any office because of any cause may be filled by the Board of Directors for the unexpired portion of the term. Section 5. CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at all meetings of the Board. Section 6. PRESIDENT. The President shall be the chief executive officer of the Corporation unless such title is assigned to another officer of the Corporation; in the absence of a Chairman and Vice Chairman of the Board, the President shall preside as the chairman of meetings of the shareholders and the Board of Directors; and the President shall have general and active management of the business of the Corporation and shall see that all orders and resolutions of the Board of Directors are carried into effect. The President or any Vice President shall execute bonds, mortgages and other contracts requiring a seal, under the seal of the Corporation (if the Corporation has adopted a seal), except where required or permitted by law to be otherwise signed and executed and except where the signing and execution thereof shall be 8 expressly delegated by the Board of Directors to some other officer or agent of the Corporation. Section 7. VICE PRESIDENT. In the absence of the President, or in the event of such officer's death, disability or refusal to act, the Vice President, or in the event there be more than one Vice President, the Vice Presidents in the order designated at the time of their selection, or in the absence of such designation, then in the order of their selection, shall perform the duties of President, and when so acting, shall have all the powers and be subject to all restrictions upon the President. Each Vice President shall have such powers and discharge such duties as may be assigned from time to time by the President or by the Board of Directors. Section 8. SECRETARY. The Secretary shall see that notices for all meetings are given in accordance with the provisions of these Bylaws and as required by law, shall keep minutes of all meetings, shall have charge of the seal and the corporate books, and shall make such reports and perform such other duties as are incident to such office, or as are properly required by the President or by the Board of Directors. The Assistant Secretary or the Assistant Secretaries, in the order of their seniority, shall, in the absence or disability of the Secretary, or in the event of such officer's refusal to act, perform the duties and exercise the powers and discharge such duties as may be assigned from time to time by the President or by the Board of Directors. Section 9. CHIEF FINANCIAL OFFICER. The Chief Financial Officer may also be designated by the alternate title of "Treasurer." The Chief Financial Officer shall have the custody of all moneys and securities of the Corporation and shall keep regular books of account. Such officer shall disburse funds of the Corporation in payment of the just demands against the Corporation, or as may be ordered by the Board, taking proper vouchers for such disbursements, and shall render to the Board from time to time as may be required of such officer, an account of all transactions as Chief Financial Officer and of the financial condition of the Corporation. Such officer shall perform all duties incident to such office or that are properly required by the President or by the Board. If required by the Board of Directors, the Chief Financial Officer shall give the corporation a bond (which shall be renewed every six years) in such sum and with such surety or sureties as shall be satisfactory to the Board of Directors for the faithful performance of the duties of such officer's office and for the restoration to the corporation, in case of such officer's death, resignation, retirement or removal from office, of all books, papers, vouchers, money and other property of whatever kind in such officer's possession or control belonging to the corporation. The Assistant Treasurer or the Assistant Treasurers, in the order of their seniority, shall, in the absence or disability of the Chief Financial Officer, or in the event of such officer's refusal to act, perform the duties and exercise the powers of the Chief Financial Officer, and shall have such powers and discharge such duties as may be assigned from time to time by the President or by the Board of Directors. 9 Section 10. SALARIES. The salaries of the officers shall be fixed from time to time by the Board of Directors and no officer shall be prevented from receiving such salary by reason of the fact that such officer is also a director of the Corporation. Section 11. OFFICERS HOLDING MORE THAN ONE OFFICE. Any two or more offices may be held by the same person, but no officer shall execute, acknowledge or verify any instrument in more than one capacity. Section 12. APPROVAL OF LOAN TO OFFICERS. The Corporation may, upon the approval of the Board of Directors alone, make loans or money or property to, or guarantee the obligations of, any officer of the Corporation or its parent or subsidiary, whether or not a director, or adopt an employee benefit plan or plans authorizing such loans or guaranties provided that (i) the Board of Directors determines that such a loan or guaranty or plan may reasonably be expected to benefit the Corporation, (ii) the Corporation has outstanding shares held of record by 100 or more persons (determined as provided in Section 605 of the California Corporations Code) on the date of approval by the Board of Directors, and (iii) the approval of the Board of Directors is by a vote sufficient without counting the vote of any interested director or directors. ARTICLE V - MISCELLANEOUS Section 1. RECORD DATE AND CLOSING OF STOCK BOOKS. The Board of Directors may fix a time in the future as a record date for the determination of the shareholders entitled to notice of and to vote at any meeting of shareholders or entitled to receive payment of any dividend or distribution, or any allotment of rights, or to exercise rights in respect to any other lawful action. The record date so fixed shall not be more than sixty nor less than ten days prior to the date of the meeting or event for the purposes of which it is fixed. When a record date is so fixed, only shareholders of record at the close of business on that date are entitled to notice of and to vote at the meeting or to receive the dividend, distribution, or allotment of rights, or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the Corporation after the record date. The Board of Directors may close the books of the Corporation against transfers of shares during the whole or any part of a period of not more than sixty days prior to the date of a shareholders' meeting, the date when the right to any dividend, distribution, or allotment of rights vests, or the effective date of any change, conversion or exchange of shares. Section 2. CERTIFICATES. Certificates of stock shall be issued in numerical order and each shareholder shall be entitled to a certificate signed in the name of the Corporation by the Chairman of the Board or the President or a Vice President, and the Chief Financial Officer or the Secretary or an Assistant Secretary, certifying to the number of shares owned by such 10 shareholder. Any or all of the signatures on the certificate may be facsimile. Prior to the due presentment for registration of transfer in the stock transfer book of the Corporation, the registered owner shall be treated as the person exclusively entitled to vote, to receive notifications and otherwise to exercise all the rights and powers of an owner, except as expressly provided otherwise by the laws of the State of California. Section 3. REPRESENTATION OF SHARES IN OTHER CORPORATIONS. Shares of other corporations standing in the name of this Corporation may be voted or represented and all incidents thereto may be exercised on behalf of the Corporation by the Chairman of the Board or the President or the Vice President and the Chief Financial Officer or the Secretary or an Assistant Secretary. Section 4. FISCAL YEAR. The fiscal year of the Corporation shall be determined by the Board of Directors. Section 5. ANNUAL REPORTS. The Annual Report to shareholders, described in the California Corporations Code, is expressly waived and dispensed with until such time as the Corporation has more than 100 shareholders. Section 6. AMENDMENTS. Bylaws may be adopted, amended, or repealed by the vote or the written consent of shareholders entitled to exercise a majority of the voting power of the Corporation. Subject to the right of shareholders to adopt, amend, or repeal Bylaws, Bylaws may be adopted, amended, or repealed by the Board of Directors, except that a Bylaw amendment thereof changing the authorized number of directors may be adopted by the Board of Directors only if these Bylaws permit an indefinite number of directors and the Bylaw or amendment thereof adopted by the Board of Directors changes the authorized number of directors within the limits specified in these Bylaws. Section 7. INDEMNIFICATION OF CORPORATE AGENTS. The Corporation shall indemnify each of its agents against expenses, judgments, fines, settlements and other amounts, actually and reasonably incurred by such person by reason of such person's having been made or having been threatened to be made a party to a proceeding to the fullest extent permissible under the California Corporations Code and the Corporation shall advance the expenses reasonably expected to be incurred by such agent in defending any such proceeding upon receipt of the undertaking required by subdivision (f) of Section 317 of the California Corporations Code. The terms "agent," "proceeding" and "expenses" made in this Section 7 shall have the same meaning as such terms in said Section 317. 11 EX-4.6 4 EXHIBIT 4.6 EXHIBIT 4.6 GRAPHON CORPORATION REGISTRATION RIGHTS AGREEMENT THIS REGISTRATION RIGHTS AGREEMENT (the "Agreement") is made by and among GRAPHON CORPORATION (the "Company") , SPENCER TRASK INVESTORS (the "Partnership"), Walter Keller ("Keller") and each INVESTOR executing a copy hereof (together with the Partnership and Keller, collectively, the "Investors," and each an "Investor"). WHEREAS, the Investors (other than the Partnership and Keller) desire to purchase from the Company, and the Company desires to issue and sell to the Investors, up to an aggregate of 45 Units (plus an additional 6.75 Units solely to cover over-subscriptions, if any), each Unit consisting of 100,000 shares of common stock, no par value per share (the "Common Stock"), all upon the terms set forth in the Company's Confidential Private Placement Memorandum dated September 2, 1998 (the "Memorandum"). WHEREAS, to induce such Investors to purchase Units, the Company has undertaken to register the Common stock, under the terms set forth herein; WHEREAS, the Company has agreed to grant the same registration rights to the Partnership with respect to an aggregate of 4,675,000 shares of Common Stock (the "Partnership Stock"), with 3,500,000 of such shares having been purchased from certain shareholders of the Company, 500,000 of such shares having been purchased from the company, 475,000 of such shares issuable upon conversion of the Convertible Promissory Note and 200,000 shares issuable upon conversion of that certain Note held by the Partnership; and WHEREAS, the Company has agreed to grant the same registration rights to Keller in connection with 100,000 shares of Common Stock (the "Keller Stock") issuable upon conversion of that certain Note held by Keller. NOW, THEREFORE, the Company and the Investors hereby covenant and agree as follows: 1. CERTAIN DEFINITIONS. As used in this Agreement, the following terms shall have the following respective meanings: "Commission" shall mean the Securities and Exchange Commission, or any other federal agency at the time administering the Securities Act. 1 "Common Stock" shall mean the Common Stock, no par value, of the Company, as constituted as of the date of this Agreement. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. "Final Closing Date" shall mean the closing date of the sale of the last shares of Common Stock to Investors pursuant to the Memorandum. "Lock-Up Period" shall mean the period commencing on the day on which an initial public offering of the Company's securities shall be consummated and ending on (i) the first anniversary thereof or (ii) such earlier or later date as shall have been agreed between the underwriter and the Placement Agent, acting on behalf of the holders of the Registrable Securities pursuant to Section 4(c) hereof; provided, however, that in the event that any other holders of the Company's securities shall have been permitted to participate in such initial public offering, the Lock-Up Period shall end 180 days after the consummation of such initial public offering. "Register," "registered" and "registration" shall mean a registration effected by preparing and filing a registration statement or statements or similar documents in compliance with the Securities Act and the declaration or ordering of effectiveness of such registration statement or document by the Commission. "Registrable Securities" shall mean (i) the Common Stock contained in the Units purchased by the Investors, (ii) the Partnership Stock, (iii) the Keller Stock and (iv) any Common Stock of the Company issued as a dividend or other distribution with respect to, or in exchange for or in replacement of such Common Stock otherwise acquired by an Investor other than Keller but excluding any shares of Common Stock satisfying clause (i), (ii), (iii) or (iv) above but which shares are sold by an Investor in a transaction in which such Investor's registration rights under this Agreement are not assigned. "Requisite Period" shall mean, with respect to a firm commitment underwritten public offering the period commencing on the effective date of the registration statement and ending on the date such underwriter has completed the distribution of all securities purchased by it, and, with respect to any other registration, the period commencing on the effective date of the registration statement and ending on the earlier of the date on which the sale of all Registrable Securities covered thereby is completed or 180 days after such effective date. 2 "Securities Act" shall mean the Securities Act of 1933, as amended, or any similar federal statute, and the rules and regulations of the Commission thereunder, all as the same shall be in effect at the time. Capitalized terms not defined herein shall have the meanings set forth in the Memorandum. 2. AUTOMATIC AND DEMAND REGISTRATION. (a) In the event that the Company shall complete an initial public offering of its securities prior to the second anniversary of the Final Closing, the Company shall effect the registration under the Securities Act of all Registrable Securities not later than the expiration of the Lock-Up Period; provided, that a holder of Registrable Securities may inform the Company in writing that it wishes to exclude all or a portion of its Registrable Securities from such registration; and provided further, that the Company shall have no obligation to register Registrable Securities pursuant to this Section 2(a) if such securities are freely tradeable without restriction by virtue of Rule 144 under the Securities Act or otherwise. (b) In the event that on the third anniversary of the Final Closing the Company has not yet completed such an initial public offering, the holders of Registrable Securities constituting at least a majority of the total Registrable Securities then outstanding may, by written notices (collectively, a "Demand Notice"), request that the Company register under the Securities Act all or any portion of the Registrable Securities held by such requesting holder or holders for sale in the manner specified in the Demand Notice. (c) Following receipt of any Demand Notice under Section 2(b) above, the Company shall immediately notify all holders of Registrable Securities from whom a Demand Notice has not been received and shall use its best efforts to register under the Securities Act, for public sale in accordance with the method of disposition specified in the Demand Notice, the number of shares of Common Stock specified in the Demand Notice (and in all notices received by the Company from other holders within 30 days after the giving of such notice by the Company). If such method of disposition shall be an underwritten public offering, the Company may designate the managing underwriter of such offering, subject to the approval of the holders of a majority of the Registrable Securities to be sold in such offering, which approval shall not be unreasonably withheld or delayed. All holders proposing to distribute their securities through such underwriting shall (together with the Company) enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of this Section 2, if the 3 underwriter advises the requesting holders in writing that marketing factors require a limitation of the number of shares to be underwritten, then such holders shall so advise all holders of Registrable Securities which would otherwise be underwritten pursuant hereto, and the number of shares of Registrable Securities that may be included in the underwriting shall be allocated among all holders thereof, including the requesting holders, in proportion (as nearly as practicable) to the amount of Registrable Securities of the Company owned by each holder; provided, however, that the number of shares of Registrable Securities to be included in such underwriting shall not be reduced unless all other securities are first entirely excluded from the underwriting. The Company shall be obligated to register Registrable Securities pursuant to Section 2(b) on two occasions only, provided, that each such obligation shall be deemed satisfied only when a registration statement covering all Registrable Securities specified in notices received as aforesaid, for sale in accordance with the method of disposition specified by the requesting holders, shall have become effective and, if such method of disposition is a firm commitment underwritten public offering, all such Registrable Securities shall have been sold pursuant thereto. (d) Notwithstanding the foregoing, if the Company shall furnish to holders of the Registrable Securities requesting a registration statement pursuant to this Section 2, a certificate signed by the Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer taking action with respect to such filing for a period of not more than 120 days after receipt of the request of the holders of the Registrable Securities; provided, however, that the Company may not utilize this right more than once in any twelve-month period. 3. Piggyback Registration. If the Company in its discretion at any time (other than pursuant to Section 2) proposes to register any of its securities under the Securities Act for sale to the public, whether for its own account or for the account of other security holders or both (except with respect to registration statements on Forms S-4 or S-8), each such time it will give written notice to such effect to all holders of outstanding Registrable Securities at least 30 days prior to such filing. Upon the written request of any such holder, received by the Company within 30 days after the giving of any such notice by the Company, to register any of its Registrable Securities, the Company will cause the Registrable Securities as to which registration shall have been so requested to be included in the securities to be covered by the registration statement proposed to be filed by the Company, all to the extent requisite to permit the sale or other disposition by the holder of such Registrable Securities so registered. Notwithstanding the 4 foregoing, in the event that any registration pursuant to this Section 3 shall be, in whole or in part, an underwritten public offering of Common Stock, the number of Registrable Securities to be included in such an underwriting may be reduced (pro rate among the requesting holders and the Placement Agent (as defined in the Memorandum) and its assigns based upon the number of Registrable Securities requested to be registered by them) of and to the extent that the managing underwriter shall be of the good faith opinion that such inclusion would reduce the number of shares to be offered by the Company, provided that such number of Registrable Securities shall not be reduced if any shares of Common Stock are to be included in such underwriting for the account of any person other than the Company, the Placement Agent and its assigns or requesting holders of Registrable Securities. Notwithstanding the foregoing provisions, the Company may withdraw any registration statement referred to in this Section 3 without thereby incurring any liability to the holders of Registrable Securities. 4. LIMITATIONS ON REGISTRATION; LOCK-UP AGREEMENT; POWER OF ATTORNEY. (a) Notwithstanding anything to the contrary contained in this Agreement, the Company shall not be required to file a registration statement pursuant to Section 2 hereof (i) which would become effective within (A) the Lock-up Period, or (B) 120 days following the effective date of a registration statement (other than a registration statement filed on Form S-4 or S-8) filed by the Company with the Commission pertaining to any subsequent public offering for the account of the Company or another holder of securities of the Company if the holders of Registrable Securities were afforded the opportunity to include all of its Registrable Securities in such subsequent registration pursuant to Section 3, or (ii) if it would violate any restriction or prohibition requested by any managing underwriter for the Company's initial public offering. (b) In connection with the initial public offering or any registration of Registrable Securities in connection with an underwritten public offering, the holders of Registrable Securities agree if required by the underwriter or underwriters not to effect any public sale or distribution, including any sale pursuant to Rule 144 under the Securities Act, of any Registrable Securities, and not to effect any such public sale or distribution of any other equity security of the Company or of any security convertible into or exchangeable or exercisable for any equity security of the Company (in each case, other than as part of such underwritten public offering) during the 15 days prior to, and during (i) the LockUp Period with respect to such initial public offering and (ii) the 120 days following the effective date of the registration statement (other than a registration statement on Form S-4 or S-8) with respect to such other underwritten public offering if the holders of Registrable Securities were afforded the opportunity to 5 include all of their Registrable Securities therein pursuant to Section 3. (c) In connection with any initial public offering by the Company, each holder of Registrable Securities hereby irrevocably appoints the Placement Agent (and all officers designated by Placement Agent) ("Attorney") to act as his or its true and lawful Placement Agent and attorney-in-fact, with full power of substitution, (i) to negotiate with the Company and the managing underwriter(s) for the Company's initial public offering the terms and conditions of the Lock-Up agreements of the holders of Registrable Securities and any other restrictions on the right of such holder to sell his or its shares of Common Stock which shall be imposed by the managing underwriter(s) for such offering (including, without limitation, the length of the Lock-Up Period, and the other rights of such holder of Registrable Securities to sell his or its Registrable Securities), and (ii) to execute and deliver any and all documents, agreements and instruments and to take any and all actions, in the name of and on behalf of the holder of Registrable Securities, as may be necessary or appropriate to effectuate the foregoing on such terms and conditions as the Attorney approves in its sole judgment. No person to whom this Power of Attorney is presented, as authority for Attorney to take any action or actions contemplated hereby, shall be required to inquire into or seek confirmation from the holder of Registrable Securities as to the authority of Attorney to take any action or actions described above, or as to the existence of or fulfillment of any condition to this Power of Attorney, which is intended to grant to Attorney unconditionally the authority to take and perform the actions contemplated herein, and the holder of the Registrable Securities irrevocably waives any right to commence any suit or action, in law or equity, against any person or entity which acts in reliance upon or acknowledges the authority granted under this Power of Attorney. The Power of Attorney granted hereby is coupled with an interest, and may not be revoked or cancelled by the holder of Registrable Securities without Attorney's written consent. The holder of Registrable Securities hereby ratifies, to the extent permitted by law, all that said Attorney shall lawfully do or cause to be done by virtue hereof. 5. REGISTRATION PROCEDURES. If and whenever the Company is required by the provisions of Section 2 or 3 to use its best efforts to effect the registration of any Registrable Securities under the Securities Act, the Company will, as expeditiously as possible: (a) prepare and file with the Commission a registration statement with respect to such securities within 60 days after the closing of the Company's initial public offering under Section 2(a) hereof, and within 60 days after delivery of a Demand Notice under Section 2(b) hereof, and use its best efforts to cause such registration statement to become effective not later than 120 days from the date of its filing and to remain effective for the Requisite 6 Period; (b) prepare and file with the Commission such amendments and supplements to such registration statement and the prospectus used in connection therewith as may be necessary to keep such registration statement effective for the Requisite Period and comply with the provisions of the Securities Act with respect to the disposition of all Registrable Securities covered by such registration statement in accordance with the intended method of disposition set forth in such registration statement for such period; (c) furnish to each seller of Registrable Securities and to each underwriter such number of copies of the registration statement and the prospectus included therein (including each preliminary prospectus) a such persons reasonably may request in order to facilitate the intended disposition of the Registrable Securities covered by such registration statement; (d) use its best efforts (i) to register or qualify the Registrable Securities covered by such registration statement under the securities or "blue sky" laws of such jurisdictions as the sellers of Registrable Securities or, in the case of an underwritten public offering, the managing underwriter reasonably shall request, (ii) to prepare and file in those jurisdictions such amendments (including post-effective amendments) and supplements, and take such other actions, as may be necessary to maintain such registration and qualification in effect at all times for the period of distribution contemplated thereby and (iii) to take such further action as may be necessary or advisable to enable the disposition of the Registrable Securities in such jurisdictions, provided that the Company shall not for any such purpose be required to qualify generally to transact business as a foreign corporation in any jurisdiction where it is not so qualified or to consent to general service of process in any jurisdiction; (e) use its best efforts to list the Registrable Securities covered by such registration statement with any securities exchange on which the Common Stock is then listed, or, if the Common Stock is not then listed on a national securities exchange, use its best efforts to facilitate the reporting of the Common Stock on The Nasdaq Stock Market; (f) immediately notify each seller of Registrable Securities and each underwriter under such registration statement, at any time when a prospectus relating thereto is required to be delivered under the Securities Act, of the happening of any event of which the Company has knowledge as a result of which the prospectus contained in such registration statement, as then in effect, includes any untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements 7 therein no misleading in light of the circumstances then existing and promptly amend or supplement such registration statement to correct any such untrue statement or omission; (g) notify each seller of Registrable Securities of the issuance by the Commission of any stop order suspending the effectiveness of the registration statement or the initiation of any proceedings for that purpose and make every reasonable effort to prevent the issuance of any stop order and, if any stop order is issued, to obtain the lifting thereof at the earliest possible time; (h) permit a single firm of counsel designated as selling stockholders' counsel by the holders of a majority in interest of the Registrable Securities being registered to review the registration statement and all amendments and supplements thereto for a reasonable period of time prior to their filing (provided, however, that in no event shall the Company be required to reimburse legal fees in excess of $25,000 per registration statement pursuant to this Section 5(h) and the Company shall not file any document in a form to which such counsel reasonably objects; (i) make generally available to its security holders as soon as practicable, but not later than 90 days after the close of the period covered thereby, an earnings statement (inform complying with the provisions of Rule 158 under the Securities Act) covering a 12-month period beginning not later than the first day of the Company's next fiscal quarter following the effective date of the registration statement; (j) if the offering is an underwritten offering, the Company will enter into a written agreement with the managing underwriter selected in the manner herein provided in such form and containing such provisions as are usual and customary in the securities business for such an arrangement between such underwriter and companies of the Company's size and investment stature, including, without limitation customary indemnification and contribution provisions; (k) if the offering is an underwritten offering, at the request of any seller of Registrable Securities, use its best efforts to furnish on the date that Registrable Securities are delivered to the underwriters for sale pursuant to such registration; (i) an opinion dated such date of counsel representing the Company for the purposes of such registration, addressed to the underwriters and to such seller, in form and substance as is customarily given to underwriters in an underwritten public offering, (ii) a letter dated such date from the independent public accountants retained by the Company,. addressed to the underwriters and to such seller, stating that they are independent public accountants within the 8 meaning of the Securities Act and that, in the opinion of such accountants, the financial statements of the Company included in the registration statement or the prospectus, or any amendment or supplement thereof, comply as to form in all material respects with the applicable accounting requirements of the Securities Act, and such letter shall additionally cover such other financial matters (including information as to the period ending no more than five business days prior to the date of such letter) with respect to such registration as such underwriters reasonably may request; (l) make available for inspection by each seller of Registrable Securities, any underwriter participating in any distribution pursuant to such registration statement, and any attorney, accountant or other agent retained by such seller or underwriter, all financial and other records, pertinent corporate documents and properties of the Company, and cause the Company's officers, directors and employees to supply all information reasonably requested by any such seller, underwriter, attorney, accountant or agent in connection with such registration statement; (m) provide a transfer agent and registrar, which may be a single entity, for the Registrable Securities not later than the effective date of the Registration Statement; (n) take all actions reasonably necessary to facilitate the timely preparation and delivery of certificates (not bearing any legend restricting the sale or transfer of such securities) representing the Registrable Securities to be sold pursuant to the Registration Statement and to enable such certificates to be in such denominations and registered in such names as the Investors or any underwriters may reasonably request; and (o) take all other reasonable actions necessary to expedite and facilitate the registration of the Registrable Securities pursuant to the Registration Statement. In connection with each registration hereunder, the sellers of Registrable Securities will furnish to the Company in writing such information with respect to themselves and the proposed distribution by them as reasonably shall be necessary in order to assure compliance with federal and applicable state securities laws. 6. EXPENSES. All expenses incurred by the Company in complying with Sections 2 and 3, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel and independent public accountants for the Company, fees and expenses (including counsel fees) 9 incurred in connection with complying with state securities or "blue sky" laws, fees of the National Association of Securities Dealers, Inc., fees of transfer agents and registrars, costs of insurance and, subject to Section 5(h) hereof, fees and disbursements of one counsel for the sellers of Registrable Securities, but excluding any Selling Expenses, are called "Registration Expenses." All underwriting discounts and selling commissions applicable to the sale of Registrable Securities are called "Selling Expenses." The Company will pay all Registration Expenses in connection with the registration statement under Section 2(a), the first registration statement under Section 2(b) and each registration statement under Section 3. All Selling Expenses in connection with reach registration statement under Sections 2 or 3, and all Registration Expenses in connection with the second registration statement under Section 2(b), shall be borne by the participating sellers in proportion to the number of Registrable Securities sold by each or as they may otherwise agree. 7. INDEMNIFICATION AND CONTRIBUTION. (a) In the event of a registration of any of the Registrable Securities under the Securities Act pursuant to Sections 2 or 3, the Company will indemnify and hold harmless and pay and reimburse, each seller of such Registrable Securities thereunder, each underwriter of such Registrable Securities thereunder and each other person, if any, who controls such seller or underwriter within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which such seller, underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any untrue statement or alleged untrue statement of any material fact contained in any registration statement under which such Registrable Securities were registered under the Securities Act pursuant to Sections 2 or 3, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation or alleged violation of the Securities Act or any state securities or "blue sky" laws and will reimburse each such seller, each such underwriter and each such 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, that the Company will not be liable in any such case if and to the extent that any such loss, claim, damage or liability arises out of or is based upon the Company's reliance on an untrue statement or alleged untrue statement or omission or alleged omission so made in conformity with information furnished by any such seller, any such underwriter or any such controlling person in writing specifically 10 for use in such registration statement or prospectus. (b) In the event of a registration of any of the Registrable Securities under the Securities Act pursuant to Sections 2 or 3, each seller of such Registrable Securities thereunder, severally and not jointly, will indemnify and hold harmless the Company, each person, if any, who controls the Company within the meaning of the Securities Act, each officer of the Company who signs the registration statement, each director of the Company, each underwriter and each person who controls any under within the meaning of the Securities Act, against all losses, claims, damages or liabilities, joint or several, to which the Company or such officer, director, underwriter or controlling person may become subject under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon reliance on any untrue statement or alleged untrue statement of any material fact contained in the registration statement under which such Registrable Securities was registered under the Securities Act pursuant to Sections 2 or 3, any preliminary prospectus or final prospectus contained therein, or any amendment or supplement thereof, 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, and will reimburse the Company and each such officer, director, underwriter and 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, that such seller will be liable hereunder in any such case if and only to the extent that any such loss, claim, damage or liability arises out of or is based upon an untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with information pertaining to such seller, as such, furnished in writing to the Company such seller specifically for use in such registration statement or prospectus, and provided, that the liability of each seller hereunder shall be limited to the proportion of any such loss, claim, damage, liability or expense which is equal to the proportion that the public offering price of the Registrable Securities sold by such seller under such registration statement bears to the total public offering price of all securities sold thereunder, but not in any event to exceed the gross proceeds received by such seller from the sale of Registrable Securities covered by such registration statement. (c) Promptly after receipt by an indemnified party hereunder of notice of the commencement of any action, such indemnified party shall, if a claim in respect thereof is to be made against the indemnifying party hereunder, notify the indemnifying party in writing thereof, but the omission so to notify the indemnifying party shall not relieve it from any liability which it may have to such indemnified party other than under this Section 7 and shall only relieve it from 11 any liability which it may have to such indemnified party under this Section 7 if and to the extent the indemnifying party is materially prejudiced by such omission. In case any such action shall be brought against any indemnified party and it shall notify the indemnifying party of the commencement thereof, the indemnifying party shall be entitled to participate in and, to the extent it shall wish, to assume and undertake the defense thereof with counsel to such indemnified party, and, after notice from the indemnifying party to such indemnified party of its election so to assume and undertake the defense thereof, the indemnifying party shall not be liable to such indemnified party under this Section 7 for any legal expenses subsequently incurred by such indemnified party in connection with the defense thereof other than reasonable costs of investigation and of liaison with counsel so selected, provided, that if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that there may be reasonable defenses available to its which are different from or additional to those available to the indemnifying party or if the interests of the indemnified party reasonably may be deemed to conflict with the interests of the indemnifying party, the indemnified party shall have the right to select a separate counsel and to assume such legal defenses and otherwise to participate in the defense of such action, with the expenses and fees of such separate counsel and other expenses related to such participation to be reimbursed by the indemnifying party as incurred. Notwithstanding anything to the contrary contained herein, the indemnity provided in Section 7 shall not apply to amounts paid in settlement of any loss, claim, damage, liability or expense if such settlement is effected without the consent of the indemnified party; provided that such indemnity shall apply to a settlement effected without the consent of an indemnifying party in the event that such indemnifying party has not assumed and undertaken the defense of the claim giving rise to such indemnity. (d) In order to provide for just and equitable contribution to joint liability under the Securities Act in any case in which either (i) any holder of Registrable Securities exercising rights under this Agreement, or any controlling person of any such holder, makes a claim for indemnification pursuant to this Section 7, but it is judicially determined (by the entry of a final judgment or decree by a court of competent jurisdiction and the expiration of time to appeal or the denial of the last right of appeal) that such indemnification may not be enforced in such case notwithstanding the fact this Section 7 provides for indemnification in such case, or (ii) contribution under the Securities Act may be required on the part of any such selling holder or any such controlling person in circumstances for which indemnification is provided under this Section 7; then, in each such case, the Company and such holder will contribute to the aggregate losses, claims, damages or liabilities to which they may be subject (after contribution from others) in such proportion so that such holder is responsible for 12 the portion represented by the percentage that the public offering price of its Registrable Securities offered by the registration statement bears to the public offering price of all securities offered by such registration statement, and the Company is reasonable for the remaining portion; provided, that, in any such case, (A) no such holder will be required to contribute any amount in excess of the public offering price of all such Registrable Securities offered by it pursuant to such registration statement and (B) no person or entity guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) will be entitled to contribution from any person or entity who was not guilty of such fraudulent misrepresentation. 8. CHANGES IN CAPITAL STOCK. If, and as often as, there is any change in the capital stock of the Company by way of a stock split, stock dividend, combination or reclassification, or through a merger, consolidation, reorganization or recapitalization, or by any other means, appropriate adjustment shall be made in the provisions hereof so that the rights and privileges granted hereby shall continue with respect to the capital stock as so changed. 9. RULE 144 REPORTING. With a view to making available the benefits of certain rules and regulations of the Commission which may at any time permit the sale of the Registrable Securities to the public without registration, at all times after 90 days after any registration statement covering a public offering of securities of the Company under the Securities Act shall have become effective, the Company agrees to: (a) make and keep public information available, as those terms are understood and defined in Rule 144 under the Securities Act; (b) file with the Commission in a timely manner all reports and other documents required of the Company under the Securities Act and the Exchange Act; and (c) furnish to each holder of Registrable Securities forthwith upon request a written statement by the Company as to its compliance with the reporting requirements of such Rule 144 and of the Securities Act and the Exchange Act, a copy of the most recent annual or quarterly report of the Company, and such other reports and documents so filed by the Company as such holder may reasonably request in availing itself of any rule or regulation of the Commission allowing such holder to sell my Registrable Securities without registration. 10. EVENT OF ELECTION. In the event that the Company fails to fulfill its registration responsibilities pursuant to Sections 2 or 3 of this Agreement for any 13 reason, then the holders of the Common Stock contained in the Units purchased by the Investors, in addition to all other rights and remedies available to such holders at law or equity, shall have the rights provided in Section 9 of the Subscription Agreement of even date herewith. 11. REPRESENTATIONS AND WARRANTIES OF THE COMPANY. The Company represents and warrants to the Investors as follows: (a) The execution, delivery and performance of this Agreement by the Company have been duly authorized by all requisite corporate action and will not violate any provision of law, any order of any court or other agency of government, the Articles of Incorporation or By-laws of the Company or any provision of any indenture, agreement or other instrument to which it or nay or its properties or assets is bound, conflict with, result in a breach of or constitute (with due notice or lapse of time or both) a default under any such indenture, agreement or other instrument or result in the creation or imposition of any lien, charge or encumbrance of any nature whatsoever upon any of the properties or assets of the Company or its subsidiaries. (b) This Agreement has been duly executed and delivered by the Company and constitute the legal, valid and binding obligation of the Company, enforceable in accordance with its terms. 12. ASSIGNMENT OF REGISTRATION RIGHTS. The rights to have the Company register Registrable Securities pursuant to this Agreement may be assigned by the Investors to transferred or assignees of such securities; provided, that the Company is, within reasonable time after such transfers, furnished with written notice of the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned. The term "Investors" as used in this Agreement shall include such permitted assignees. 13. MISCELLANEOUS. (a) All covenants and agreements contained in this Agreement by or on behalf of any of the parties hereto shall bind and inure to the benefit of the respective successors and assigns of the parties hereto (including without limitation transferees of any Registrable Securities), whether so expressed or not. (b) All notices, requests, consents and other communications hereunder shall be in writing and shall be delivered in person, mailed by certified or registered mail, return receipt requested, or sent by telecopier or telex, 14 addressed (i) if to the Company or Mr. Keller, at 150 Harrison Avenue, Campbell, California 95008, Facsimile No. (408) 370-5047, Attn: Walter Keller; (ii) if to the Partnership, at 535 Madison Avenue, 18th Floor, New York, New York 10022; Attn: William Doguardi; (iii) if to any other party hereto, at the address of such party set forth on the Combined Signature Page to Subscription Agreement and Registration Rights Agreement; and (iv) if to any subsequent holder of Registrable Securities, to it at such address as may have been furnished to the Company in writing by such holder; or, in any case, at such other address or addresses as shall have been furnished in writing to the Company (in the case of a holder of Registrable Securities) or to the holders of Registrable Securities (in the case of the Company) in accordance with the provisions of this paragraph. (c) This Agreement shall be governed by and construed in accordance with the laws of the State of New York applicable to contracts entered into and to be performed wholly within said State. (d) Any judicial proceeding brought against any of the parties to this Agreement on any dispute arising out of this Agreement of any matter related hereto shall be brought in the courts of the State of New York or in the United States District Court for the Southern District of New York, and, by execution and delivery of this Agreement, each of the parties hereto accepts for itself and himself the process in any such action or proceeding by the mailing of copies of such process to it, at its or his address as set forth in paragraph 13(b) and irrevocably agrees to be bound by any judgment rendered thereby in connection with this Agreement. Each party hereto irrevocably waives to the fullest extent permitted by law any objection that it or he may now or hereafter have to the laying of the venue of any judicial proceeding brought in such courts and any claim that any such judicial proceeding has been brought in an inconvenient forum. The foregoing consent to jurisdiction shall not constitute general consent to service of process in the State of New York for any purpose except as provided above and shall not be deemed to confer rights on any person other than the respective parties to this Agreement. (e) This Agreement may not be amended or modified without the written consent of the Company and the holders of at least a majority of the Registrable Securities. (f) Failure of any party to exercise any right or remedy under this Agreement or otherwise, or delay by a party in exercising such right or remedy, shall not operate as a waiver thereof. No waiver shall be effective unless and until it is in writing and signed by the party granting the waiver. 15 (g) 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. (h) The Company shall not grant to any third party other than Spencer Trask Securities Incorporated any registration rights more favorable than or inconsistent with any of those contained herein, or which would in any way, adversely affect the rights of Investors hereunder, so long as any of the registration rights under this Agreement remains in effect. (i) If any provision of this Agreement shall be held to be illegal, invalid or unenforceable, such illegality, invalidity or unenforceability shall attach only to such provision and shall not in any manner affect or render illegal, invalid or unenforceable any other provision of this Agreement, and this Agreement shall be carried out as if any such illegal invalid or unenforced provision were not contained herein. Dated: , 1998 SPENCER TRASK INVESTORS --------------- By: --------------------------- Title: GRAPHON CORPORATION By: --------------------- --------------------------- Title: Walter Keller [COMBINED SIGNATURE PAGE TO SUBSCRIPTION AGREEMENT AND REGISTRATION RIGHTS AGREEMENT TO BE EXECUTED BY COMPANY AND EACH INVESTOR, OTHER THAN THE PARTNERSHIP AND KELLER WHO SIGN THE REGISTRATION RIGHTS AGREEMENT HEREINABOVE] 16 EX-10.2 5 EXHIBIT 10.2 Exhibit 10.2 GRAPHON CORPORATION 1998 STOCK OPTION/STOCK ISSUANCE PLAN ARTICLE ONE GENERAL PROVISIONS I. PURPOSE OF THE PLAN This 1998 Stock Option/Stock Issuance Plan is intended to promote the interests of GraphOn Corporation, a California corporation, by providing eligible persons in the Corporation's employ or service with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in the Corporation as an incentive for them to continue in such employ or service. Capitalized terms herein shall have the meanings assigned to such terms in the attached Appendix. II. STRUCTURE OF THE PLAN A. The Plan shall be divided into two (2) separate equity programs: (i)the Option Grant Program under which eligible persons may, at the discretion of the Plan Administrator, be granted options to purchase shares of Common Stock, and (ii)the Stock Issuance Program under which eligible persons may, at the discretion of the Plan Administrator, be issued shares of Common Stock directly, either through the immediate purchase of such shares or as a bonus for services rendered the Corporation (or any Parent or Subsidiary). B. The provisions of Articles One and Four shall apply to both equity programs under the Plan and shall accordingly govern the interests of all persons under the Plan. III. ADMINISTRATION OF THE PLAN A. The Plan shall be administered by the Board. However, any or all administrative functions otherwise exercisable by the Board may be delegated to the Committee. Members of the Committee shall serve for such period of time as the Board may determine and shall be subject to removal by the Board at any time. The Board may also at any time terminate the functions of the Committee and reassume all powers and authority previously delegated to the Committee. B. The Plan Administrator shall have full power and authority (subject to the provisions of the Plan) to establish such rules and regulations as it may deem appropriate for proper administration of the Plan and to make such determinations under, and issue such interpretations of, the Plan and any outstanding options or stock issuances thereunder as it may deem necessary or advisable. Decisions of the Plan Administrator shall be final and binding on all parties who have an interest in the Plan or any option or stock issuance thereunder. IV. ELIGIBILITY A. The persons eligible to participate in the Plan are as follows: (i)Employees, (ii)non-employee members of the Board or the non-employee members of the board of directors of any Parent or Subsidiary, and (iii)consultants and other independent advisors who provide services to the Corporation (or any Parent or Subsidiary). B. The Plan Administrator shall have full authority to determine, (i) with respect to the grants under the Option Grant Program, which eligible persons are to receive the option grants, the time or times when those grants are to be made, the number of shares to be covered by each such grant, the status of the granted option as either an Incentive Option or a Non-Statutory Option, the time or times when each option is to become exercisable, the vesting schedule (if any) applicable to the option shares and the maximum term for which the option is to remain outstanding, and (ii) with respect to stock issuances under the Stock Issuance Program, which eligible persons are to receive such stock issuances, the time or times when those issuances are to be made, the number of shares to be issued to each Participant, the vesting schedule (if any) applicable to the issued shares and the consideration to be paid by the Participant for such shares. C. The Plan Administrator shall have the absolute discretion either to grant options in accordance with the Option Grant Program or to effect stock issuances in accordance with the Stock Issuance Program. V. STOCK SUBJECT TO THE PLAN A. The stock issuable under the Plan shall be shares of authorized but unissued or reacquired Common Stock. The maximum number of shares of Common Stock which may be issued over the term of the Plan shall not exceed 1,300,000 shares. B. Shares of Common Stock subject to outstanding options shall be available for subsequent issuance under the Plan to the extent (i) the options expire or terminate for any reason prior to exercise in full or (ii) the options are cancelled in accordance with the cancellation-regrant provisions of Article Two. Unvested shares issued under the Plan and subsequently repurchased by the Corporation, at the option exercise or direct issue price paid per share, pursuant to the Corporation's repurchase rights under the Plan shall be added back to the number of shares of Common Stock reserved for issuance under the Plan and shall accordingly be available for reissuance through one or more subsequent option grants or direct stock issuances under the Plan. C. Should any change be made to the Common Stock by reason of any stock split, stock dividend, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration, appropriate adjustments shall be made to (i) the maximum number and/or class of securities issuable under the Plan and (ii) the number and/or class of securities and the exercise price per share in effect under each outstanding option in order to prevent the dilution or enlargement of benefits thereunder. The adjustments determined by the Plan Administrator shall be final, binding and conclusive. In no event shall any such adjustments be made in connection with the conversion of one or more outstanding shares of the Corporation's preferred stock into shares of Common Stock. ARTICLE TWO OPTION GRANT PROGRAM I. OPTION TERMS Each option shall be evidenced by one or more documents in the form approved by the Plan Administrator; PROVIDED, however, that each such document shall comply with the terms specified below. Each document evidencing an Incentive Option shall, in addition, be subject to the provisions of the Plan applicable to such options. A. EXERCISE PRICE. 1. The exercise price per share shall be fixed by the Plan Administrator in accordance with the following provisions: (i)The exercise price per share shall not be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the option grant date. (ii)If the person to whom the option is granted is a 10% Shareholder, then the exercise price per share shall not be less than one hundred ten percent (110%) of the Fair Market Value per share of Common Stock on the option grant date. 2. The exercise price shall become immediately due upon exercise of the option and shall, subject to the provisions of Section I of Article Four and the documents evidencing the option, be payable in cash or check made payable to the Corporation. Should the Common Stock be registered under Section 12 of the 1934 Act at the time the option is exercised, then the exercise price may also be paid as follows: (i)in shares of Common Stock held for the requisite period necessary to avoid a charge to the Corporation's earnings for financial reporting purposes and valued at Fair Market Value on the Exercise Date, or (ii)to the extent the option is exercised for vested shares, through a special sale and remittance procedure pursuant to which the Optionee shall concurrently provide irrevocable instructions (A) to a Corporation-designated brokerage firm to effect the immediate sale of the purchased shares and remit to the Corporation, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased shares plus all applicable Federal, state and local income and employment taxes required to be withheld by the Corporation by reason of such exercise and (B) to the Corporation to deliver the certificates for the purchased shares directly to such brokerage firm in order to complete the sale. Except to the extent such sale and remittance procedure is utilized, payment of the exercise price for the purchased shares must be made on the Exercise Date. B. EXERCISE AND TERM OF OPTIONS. Each option shall be exercisable at such time or times, during such period and for such number of shares as shall be determined by the Plan Administrator and set forth in the documents evidencing the option grant. However, the Plan Administrator may not impose an exercise schedule upon the option grant or any shares of Common Stock subject to that option which is more restrictive than twenty percent (20%) of the option shares becoming exercisable per year, with the initial installment to become exercisable not later than one (1) year after the option grant date. Such limitation shall not be applicable to any option grants made to individuals who are officers of the Corporation, non-employee Board members or independent consultants. In addition, no option shall have a term in excess of ten (10) years measured from the option grant date. C. EFFECT OF TERMINATION OF SERVICE. 1. The following provisions shall govern the exercise of any options held by the Optionee at the time of cessation of Service or death: (i)Should the Optionee cease to remain in Service for any reason other than death, Disability or Misconduct, then the Optionee shall have a period of three (3) months following the date of such cessation of Service during which to exercise each outstanding option held by such Optionee. (ii)Should Optionee's Service terminate by reason of Disability, then the Optionee shall have a period of twelve (12) months following the date of such cessation of Service during which to exercise each outstanding option held by such Optionee. (iii)If the Optionee dies while holding an outstanding option, then the personal representative of his or her estate or the person or persons to whom the option is transferred pursuant to the Optionee's will or the laws of inheritance shall have a twelve (12)-month period following the date of the Optionee's death to exercise such option. (iv)Under no circumstances, however, shall any such option be exercisable after the specified expiration of the option term. (v)During the applicable post-Service exercise period, the option may not be exercised in the aggregate for more than the number of vested shares for which the option is exercisable on the date of the Optionee's cessation of Service. Upon the expiration of the applicable exercise period or (if earlier) upon the expiration of the option term, the option shall terminate and cease to be outstanding for any vested shares for which the option has not been exercised. However, the option shall, immediately upon the Optionee's cessation of Service, terminate and cease to be outstanding with respect to any and all option shares for which the option is not otherwise at the time exercisable or in which the Optionee is not otherwise at that time vested. (vi)Should Optionee's Service be terminated for Misconduct, then all outstanding options held by the Optionee shall terminate immediately and cease to remain outstanding. 2. The Plan Administrator shall have the discretion, exercisable either at the time an option is granted or at any time while the option remains outstanding, to: (i)extend the period of time for which the option is to remain exercisable following Optionee's cessation of Service or death from the limited period otherwise in effect for that option to such greater period of time as the Plan Administrator shall deem appropriate, but in no event beyond the expiration of the option term, and/or (ii)permit the option to be exercised, during the applicable post-Service exercise period, not only with respect to the number of vested shares of Common Stock for which such option is exercisable at the time of the Optionee's cessation of Service but also with respect to one or more additional installments in which the Optionee would have vested under the option had the Optionee continued in Service. D. SHAREHOLDER RIGHTS. The holder of an option shall have no shareholder rights with respect to the shares subject to the option until such person shall have exercised the option, paid the exercise price and become the holder of record of the purchased shares. E. UNVESTED SHARES. The Plan Administrator shall have the discretion to grant options which are exercisable for unvested shares of Common Stock. Should the Optionee cease Service while holding such unvested shares, the Corporation shall have the right to repurchase, at the exercise price paid per share, any or all of those unvested shares. The terms upon which such repurchase right shall be exercisable (including the period and procedure for exercise and the appropriate vesting schedule for the purchased shares) shall be established by the Plan Administrator and set forth in the document evidencing such repurchase right. The Plan Administrator may not impose a vesting schedule upon the option grant or any shares of Common Stock subject to that option which is more restrictive than twenty percent (20%) per year vesting, with the initial vesting to occur not later than one (1) year after the option grant date. However, such limitation shall not be applicable to any option grants made to individuals who are officers of the Corporation, non-employee Board members or independent consultants. F. FIRST REFUSAL RIGHTS. Until such time as the Common Stock is first registered under Section 12 of the 1934 Act, the Corporation shall have the right of first refusal with respect to any proposed disposition by the Optionee (or any successor in interest) of any shares of Common Stock issued under the Plan. Such right of first refusal shall be exercisable in accordance with the terms established by the Plan Administrator and set forth in the document evidencing such right. G. LIMITED TRANSFERABILITY OF OPTIONS. During the lifetime of the Optionee, the option shall be exercisable only by the Optionee and shall not be assignable or transferable other than by will or by the laws of descent and distribution following the Optionee's death. H. WITHHOLDING. The Corporation's obligation to deliver shares of Common Stock upon the exercise of any options granted under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. II. INCENTIVE OPTIONS The terms specified below shall be applicable to all Incentive Options. Except as modified by the provisions of this Section II, all the provisions of the Plan shall be applicable to Incentive Options. Options which are specifically designated as Non-Statutory Options shall NOT be subject to the terms of this Section II. A. ELIGIBILITY. Incentive Options may only be granted to Employees. B. EXERCISE PRICE. The exercise price per share shall not be less than one hundred percent (100%) of the Fair Market Value per share of Common Stock on the option grant date. C. DOLLAR LIMITATION. The aggregate Fair Market Value of the shares of Common Stock (determined as of the respective date or dates of grant) for which one or more options granted to any Employee under the Plan (or any other option plan of the Corporation or any Parent or Subsidiary) may for the first time become exercisable as Incentive Options during any one (1) calendar year shall not exceed the sum of One Hundred Thousand Dollars ($100,000). To the extent the Employee holds two (2) or more such options which become exercisable for the first time in the same calendar year, the foregoing limitation on the exercisability of such options as Incentive Options shall be applied on the basis of the order in which such options are granted. D. 10% SHAREHOLDER. If any Employee to whom an Incentive Option is granted is a 10% Shareholder, then the option term shall not exceed five (5) years measured from the option grant date. III. CORPORATE TRANSACTION A. The shares subject to each option outstanding under the Plan at the time of a Corporate Transaction shall automatically vest in full so that each such option shall, immediately prior to the effective date of the Corporate Transaction, become fully exercisable for all of the shares of Common Stock at the time subject to that option and may be exercised for any or all of those shares as fully-vested shares of Common Stock. However, the shares subject to an outstanding option shall NOT vest on such an accelerated basis if and to the extent: (i) such option is assumed by the successor corporation (or parent thereof) in the Corporate Transaction and the Corporation's repurchase rights with respect to the unvested option shares are concurrently assigned to such successor corporation (or parent thereof) or (ii) such option is to be replaced with a cash incentive program of the successor corporation which preserves the spread existing on the unvested option shares at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same vesting schedule applicable to those unvested option shares or (iii) the acceleration of such option is subject to other limitations imposed by the Plan Administrator at the time of the option grant. B. All outstanding repurchase rights shall also terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, in the event of any Corporate Transaction, except to the extent: (i) those repurchase rights are assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. C. Immediately following the consummation of the Corporate Transaction, all outstanding options shall terminate and cease to be outstanding, except to the extent assumed by the successor corporation (or parent thereof). D. Each option which is assumed in connection with a Corporate Transaction shall be appropriately adjusted, immediately after such Corporate Transaction, to apply to the number and class of securities which would have been issuable to the Optionee in consummation of such Corporate Transaction, had the option been exercised immediately prior to such Corporate Transaction. Appropriate adjustments shall also be made to (i) the number and class of securities available for issuance under the Plan following the consummation of such Corporate Transaction and (ii) the exercise price payable per share under each outstanding option, PROVIDED the aggregate exercise price payable for such securities shall remain the same. E. The Plan Administrator shall have the discretion, exercisable either at the time the option is granted or at any time while the option remains outstanding, to provide for the automatic acceleration (in whole or in part) of one or more outstanding options (and the immediate termination of the Corporation's repurchase rights with respect to the shares subject to those options) upon the occurrence of a Corporate Transaction, whether or not those options are to be assumed in the Corporate Transaction. F. The Plan Administrator shall also have full power and authority, exercisable either at the time the option is granted or at any time while the option remains outstanding, to structure such option so that the shares subject to that option will automatically vest on an accelerated basis should the Optionee's Service terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which the option is assumed and the repurchase rights applicable to those shares do not otherwise terminate. Any option so accelerated shall remain exercisable for the fully-vested option shares until the EARLIER of (i) the expiration of the option term or (ii) the expiration of the one (1)-year period measured from the effective date of the Involuntary Termination. In addition, the Plan Administrator may provide that one or more of the Corporation's outstanding repurchase rights with respect to shares held by the Optionee at the time of such Involuntary Termination shall immediately terminate on an accelerated basis, and the shares subject to those terminated rights shall accordingly vest at that time. G. The portion of any Incentive Option accelerated in connection with a Corporate Transaction shall remain exercisable as an Incentive Option only to the extent the applicable One Hundred Thousand Dollar limitation is not exceeded. To the extent such dollar limitation is exceeded, the accelerated portion of such option shall be exercisable as a Non-Statutory Option under the Federal tax laws. H. The grant of options under the Plan shall in no way affect the right of the Corporation to adjust, reclassify, reorganize or otherwise change its capital or business structure or to merge, consolidate, dissolve, liquidate or sell or transfer all or any part of its business or assets. IV. CANCELLATION AND REGRANT OF OPTIONS The Plan Administrator shall have the authority to effect, at any time and from time to time, with the consent of the affected option holders, the cancellation of any or all outstanding options under the Plan and to grant in substitution therefor new options covering the same or different number of shares of Common Stock but with an exercise price per share based on the Fair Market Value per share of Common Stock on the new option grant date. ARTICLE THREE STOCK ISSUANCE PROGRAM I. STOCK ISSUANCE TERMS Shares of Common Stock may be issued under the Stock Issuance Program through direct and immediate issuances without any intervening option grants. Each such stock issuance shall be evidenced by a Stock Issuance Agreement which complies with the terms specified below. A. PURCHASE PRICE. 1. The purchase price per share shall be fixed by the Plan Administrator but shall not be less than eighty-five percent (85%) of the Fair Market Value per share of Common Stock on the issue date. However, the purchase price per share of Common Stock issued to a 10% Shareholder shall not be less than one hundred and ten percent (110%) of such Fair Market Value. 2. Subject to the provisions of Section I of Article Four, shares of Common Stock may be issued under the Stock Issuance Program for any of the following items of consideration which the Plan Administrator may deem appropriate in each individual instance: (i)cash or check made payable to the Corporation, or (ii)past services rendered to the Corporation (or any Parent or Subsidiary). B. VESTING PROVISIONS. 1. Shares of Common Stock issued under the Stock Issuance Program may, in the discretion of the Plan Administrator, be fully and immediately vested upon issuance or may vest in one or more installments over the Participant's period of Service or upon attainment of specified performance objectives. However, the Plan Administrator may not impose a vesting schedule upon any stock issuance effected under the Stock Issuance Program which is more restrictive than twenty percent (20%) per year vesting, with initial vesting to occur not later than one (1) year after the issuance date. Such limitation shall not apply to any Common Stock issuances made to the officers of the Corporation, non-employee Board members or independent consultants. 2. Any new, substituted or additional securities or other property (including money paid other than as a regular cash dividend) which the Participant may have the right to receive with respect to the Participant's unvested shares of Common Stock by reason of any stock dividend, stock split, recapitalization, combination of shares, exchange of shares or other change affecting the outstanding Common Stock as a class without the Corporation's receipt of consideration shall be issued subject to (i) the same vesting requirements applicable to the Participant's unvested shares of Common Stock and (ii) such escrow arrangements as the Plan Administrator shall deem appropriate. 3. The Participant shall have full shareholder rights with respect to any shares of Common Stock issued to the Participant under the Stock Issuance Program, whether or not the Participant's interest in those shares is vested. Accordingly, the Participant shall have the right to vote such shares and to receive any regular cash dividends paid on such shares. 4. Should the Participant cease to remain in Service while holding one or more unvested shares of Common Stock issued under the Stock Issuance Program or should the performance objectives not be attained with respect to one or more such unvested shares of Common Stock, then those shares shall be immediately surrendered to the Corporation for cancellation, and the Participant shall have no further shareholder rights with respect to those shares. To the extent the surrendered shares were previously issued to the Participant for consideration paid in cash or cash equivalent (including the Participant's purchase-money indebtedness), the Corporation shall repay to the Participant the cash consideration paid for the surrendered shares and shall cancel the unpaid principal balance of any outstanding purchase-money note of the Participant attributable to such surrendered shares. 5. The Plan Administrator may in its discretion waive the surrender and cancellation of one or more unvested shares of Common Stock (or other assets attributable thereto) which would otherwise occur upon the non-completion of the vesting schedule applicable to such shares. Such waiver shall result in the immediate vesting of the Participant's interest in the shares of Common Stock as to which the waiver applies. Such waiver may be effected at any time, whether before or after the Participant's cessation of Service or the attainment or non-attainment of the applicable performance objectives. C. FIRST REFUSAL RIGHTS. Until such time as the Common Stock is first registered under Section 12 of the 1934 Act, the Corporation shall have the right of first refusal with respect to any proposed disposition by the Participant (or any successor in interest) of any shares of Common Stock issued under the Stock Issuance Program. Such right of first refusal shall be exercisable in accordance with the terms established by the Plan Administrator and set forth in the document evidencing such right. II. CORPORATE TRANSACTION A. Upon the occurrence of a Corporate Transaction, all outstanding repurchase rights under the Stock Issuance Program shall terminate automatically, and the shares of Common Stock subject to those terminated rights shall immediately vest in full, except to the extent: (i) those repurchase rights are assigned to the successor corporation (or parent thereof) in connection with such Corporate Transaction or (ii) such accelerated vesting is precluded by other limitations imposed by the Plan Administrator at the time the repurchase right is issued. B. The Plan Administrator shall have the discretionary authority, exercisable either at the time the unvested shares are issued or any time while the Corporation's repurchase rights with respect to those shares remain outstanding, to provide that those rights shall automatically terminate on an accelerated basis, and the shares of Common Stock subject to those terminated rights shall immediately vest, in the event the Participant's Service should subsequently terminate by reason of an Involuntary Termination within a designated period (not to exceed eighteen (18) months) following the effective date of any Corporate Transaction in which those repurchase rights are assigned to the successor corporation (or parent thereof). III. SHARE ESCROW/LEGENDS Unvested shares may, in the Plan Administrator's discretion, be held in escrow by the Corporation until the Participant's interest in such shares vests or may be issued directly to the Participant with restrictive legends on the certificates evidencing those unvested shares. ARTICLE FOUR MISCELLANEOUS I. FINANCING The Plan Administrator may permit any Optionee or Participant to pay the option exercise price or the purchase price for shares issued to such person under the Plan by delivering a full-recourse, interest-bearing promissory note payable in one or more installments and secured by the purchased shares. However, any promissory note delivered by a consultant must be secured by collateral in addition to the purchased shares of Common Stock. In no event shall the maximum credit available to the Optionee or Participant exceed the SUM of (i) the aggregate option exercise price or purchase price payable for the purchased shares plus (ii) any Federal, state and local income and employment tax liability incurred by the Optionee or the Participant in connection with the option exercise or share purchase. II. EFFECTIVE DATE AND TERM OF PLAN A. The Plan shall become effective when adopted by the Board, but no option granted under the Plan may be exercised, and no shares shall be issued under the Plan, until the Plan is approved by the Corporation's shareholders. If such shareholder approval is not obtained within twelve (12) months after the date of the Board's adoption of the Plan, then all options previously granted under the Plan shall terminate and cease to be outstanding, and no further options shall be granted and no shares shall be issued under the Plan. Subject to such limitation, the Plan Administrator may grant options and issue shares under the Plan at any time after the effective date of the Plan and before the date fixed herein for termination of the Plan. B. The Plan shall terminate upon the EARLIEST of (i) the expiration of the ten (10)-year period measured from the date the Plan is adopted by the Board, (ii) the date on which all shares available for issuance under the Plan shall have been issued as vested shares or (iii) the termination of all outstanding options in connection with a Corporate Transaction. All options and unvested stock issuances outstanding at that time under the Plan shall continue to have full force and effect in accordance with the provisions of the documents evidencing such options or issuances. III. AMENDMENT OF THE PLAN A. The Board shall have complete and exclusive power and authority to amend or modify the Plan in any or all respects. However, no such amendment or modification shall adversely affect the rights and obligations with respect to options or unvested stock issuances at the time outstanding under the Plan unless the Optionee or the Participant consents to such amendment or modification. In addition, certain amendments may require shareholder approval pursuant to applicable laws and regulations. B. Options may be granted under the Option Grant Program and shares may be issued under the Stock Issuance Program which are in each instance in excess of the number of shares of Common Stock then available for issuance under the Plan, provided any excess shares actually issued under those programs shall be held in escrow until there is obtained shareholder approval of an amendment sufficiently increasing the number of shares of Common Stock available for issuance under the Plan. If such shareholder approval is not obtained within twelve (12) months after the date the first such excess issuances are made, then (i) any unexercised options granted on the basis of such excess shares shall terminate and cease to be outstanding and (ii) the Corporation shall promptly refund to the Optionees and the Participants the exercise or purchase price paid for any excess shares issued under the Plan and held in escrow, together with interest (at the applicable Short Term Federal Rate) for the period the shares were held in escrow, and such shares shall thereupon be automatically cancelled and cease to be outstanding. IV. USE OF PROCEEDS Any cash proceeds received by the Corporation from the sale of shares of Common Stock under the Plan shall be used for general corporate purposes. V. WITHHOLDING The Corporation's obligation to deliver shares of Common Stock upon the exercise of any options or upon the issuance or vesting of any shares issued under the Plan shall be subject to the satisfaction of all applicable Federal, state and local income and employment tax withholding requirements. VI. REGULATORY APPROVALS The implementation of the Plan, the granting of any options under the Plan and the issuance of any shares of Common Stock (i) upon the exercise of any option or (ii) under the Stock Issuance Program shall be subject to the Corporation's procurement of all approvals and permits required by regulatory authorities having jurisdiction over the Plan, the options granted under it and the shares of Common Stock issued pursuant to it. VII. NO EMPLOYMENT OR SERVICE RIGHTS Nothing in the Plan shall confer upon the Optionee or the Participant any right to continue in Service for any period of specific duration or interfere with or otherwise restrict in any way the rights of the Corporation (or any Parent or Subsidiary employing or retaining such person) or of the Optionee or the Participant, which rights are hereby expressly reserved by each, to terminate such person's Service at any time for any reason, with or without cause. VIII. FINANCIAL REPORTS The Corporation shall deliver a balance sheet and an income statement at least annually to each individual holding an outstanding option under the Plan, unless such individual is a key Employee whose duties in connection with the Corporation (or any Parent or Subsidiary) assure such individual access to equivalent information. APPENDIX The following definitions shall be in effect under the Plan: A. BOARD shall mean the Corporation's Board of Directors. B. CODE shall mean the Internal Revenue Code of 1986, as amended. C. COMMITTEE shall mean a committee of two (2) or more Board members appointed by the Board to exercise one or more administrative functions under the Plan. D. COMMON STOCK shall mean the Corporation's common stock. E. CORPORATE TRANSACTION shall mean either of the following shareholder-approved transactions to which the Corporation is a party: (i)a merger or consolidation in which securities possessing more than fifty percent (50%) of the total combined voting power of the Corporation's outstanding securities are transferred to a person or persons different from the persons holding those securities immediately prior to such transaction, or (ii)the sale, transfer or other disposition of all or substantially all of the Corporation's assets in complete liquidation or dissolution of the Corporation. F. CORPORATION shall mean GraphOn Corporation, a California corporation, and any successor corporation to all or substantially all of the assets or voting stock of GraphOn Corporation which shall by appropriate action adopt the Plan. G. DISABILITY shall mean the inability of the Optionee or the Participant to engage in any substantial gainful activity by reason of any medically determinable physical or mental impairment and shall be determined by the Plan Administrator on the basis of such medical evidence as the Plan Administrator deems warranted under the circumstances. H. EMPLOYEE shall mean an individual who is in the employ of the Corporation (or any Parent or Subsidiary), subject to the control and direction of the employer entity as to both the work to be performed and the manner and method of performance. I. EXERCISE DATE shall mean the date on which the Corporation shall have received written notice of the option exercise. J. FAIR MARKET VALUE per share of Common Stock on any relevant date shall be determined in accordance with the following provisions: (i)If the Common Stock is at the time traded on the Nasdaq National Market, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question, as such price is reported by the National Association of Securities Dealers on the Nasdaq National Market or any successor system. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (ii)If the Common Stock is at the time listed on any Stock Exchange, then the Fair Market Value shall be the closing selling price per share of Common Stock on the date in question on the Stock Exchange determined by the Plan Administrator to be the primary market for the Common Stock, as such price is officially quoted in the composite tape of transactions on such exchange. If there is no closing selling price for the Common Stock on the date in question, then the Fair Market Value shall be the closing selling price on the last preceding date for which such quotation exists. (iii)If the Common Stock is at the time neither listed on any Stock Exchange nor traded on the Nasdaq National Market, then the Fair Market Value shall be determined by the Plan Administrator after taking into account such factors as the Plan Administrator shall deem appropriate. K. INCENTIVE OPTION shall mean an option which satisfies the requirements of Code Section 422. L. INVOLUNTARY TERMINATION shall mean the termination of the Service of any individual which occurs by reason of: (i)such individual's involuntary dismissal or discharge by the Corporation for reasons other than Misconduct, or (ii)such individual's voluntary resignation following (A) a change in his or her position with the Corporation which materially reduces his or her duties and responsibilities or the level of management to which he or she reports, (B) a reduction in his or her level of compensation (including base salary, fringe benefits and target bonuses under any corporate-performance based bonus or incentive programs) by more than fifteen percent (15%) or (C) a relocation of such individual's place of employment by more than fifty (50) miles, provided and only if such change, reduction or relocation is effected without the individual's consent. M. MISCONDUCT shall mean the commission of any act of fraud, embezzlement or dishonesty by the Optionee or Participant, any unauthorized use or disclosure by such person of confidential information or trade secrets of the Corporation (or any Parent or Subsidiary), or any other intentional misconduct by such person adversely affecting the business or affairs of the Corporation (or any Parent or Subsidiary) in a material manner. The foregoing definition shall not be deemed to be inclusive of all the acts or omissions which the Corporation (or any Parent or Subsidiary) may consider as grounds for the dismissal or discharge of any Optionee, Participant or other person in the Service of the Corporation (or any Parent or Subsidiary). N. 1934 ACT shall mean the Securities Exchange Act of 1934, as amended. O. NON-STATUTORY OPTION shall mean an option not intended to satisfy the requirements of Code Section 422. P. OPTION GRANT PROGRAM shall mean the option grant program in effect under the Plan. Q. OPTIONEE shall mean any person to whom an option is granted under the Plan. R. PARENT shall mean any corporation (other than the Corporation) in an unbroken chain of corporations ending with the Corporation, provided each corporation in the unbroken chain (other than the Corporation) owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. S. PARTICIPANT shall mean any person who is issued shares of Common Stock under the Stock Issuance Program. T. PLAN shall mean the Corporation's 1998 Stock Option/Stock Issuance Plan, as set forth in this document. U. PLAN ADMINISTRATOR shall mean either the Board or the Committee acting in its capacity as administrator of the Plan. V. SERVICE shall mean the provision of services to the Corporation (or any Parent or Subsidiary) by a person in the capacity of an Employee, a non-employee member of the board of directors or a consultant or independent advisor, except to the extent otherwise specifically provided in the documents evidencing the option grant. W. STOCK EXCHANGE shall mean either the American Stock Exchange or the New York Stock Exchange. X. STOCK ISSUANCE AGREEMENT shall mean the agreement entered into by the Corporation and the Participant at the time of issuance of shares of Common Stock under the Stock Issuance Program. Y. STOCK ISSUANCE PROGRAM shall mean the stock issuance program in effect under the Plan. Z. SUBSIDIARY shall mean any corporation (other than the Corporation) in an unbroken chain of corporations beginning with the Corporation, provided each corporation (other than the last corporation) in the unbroken chain owns, at the time of the determination, stock possessing fifty percent (50%) or more of the total combined voting power of all classes of stock in one of the other corporations in such chain. AA. 10% SHAREHOLDER shall mean the owner of stock (as determined under Code Section 424(d)) possessing more than ten percent (10%) of the total combined voting power of all classes of stock of the Corporation (or any Parent or Subsidiary). EX-10.3 6 EXHIBIT 10.3 EXHIBIT 10.3 PLACEMENT AGENCY AGREEMENT September 2, 1998 Spencer Trask Securities Incorporated 535 Madison Avenue 18th Floor New York, New York 10022 Ladies and Gentlemen: GraphOn Corporation, a California corporation (the "Company"), hereby confirms its agreement with Spencer Trask Securities Incorporated, a Delaware corporation (the "Placement Agent"), as follows (unless the context otherwise requires, as used herein, the "Company" refers to GraphOn Corporation and each of its subsidiaries, if any): 1. OFFERING. (a) The Company will offer (the "Offering") for sale through the Placement Agent and its selected dealers, as exclusive agent for the Company, up to 45 units (the "Units"), plus an additional 6.75 Units to cover oversubscriptions, if any. Each Unit will consist of I 00,000 shares (the "Shares") of the Company's common stock, no par value per share (the "Common Stock"). (b) Placement of the Units will be made on a "best efforts--all or none" basis with respect to the first 25 Units (the "Minimum Amount") and on a "best efforts" basis as to the remaining Units. The minimum subscription for Units shall be one Unit, however, the Placement Agent may, in its discretion, offer fractional Units. The Units will be offered commencing on the date of the Memorandum (as defined below) for a period of 90 days, unless extended by mutual agreement of the Company and the Placement Agent for an additional 90 days or terminated earlier as provided herein (the "Offering Period"). The date on which the Offering shall terminate shall be referred to as the "Termination Date." (c) Subject to Section 4(c) hereof, subscriptions for the Units will be accepted by the Company at a price of $100,000 per Unit (the "Offering Price"); provided, however, that the Company shall not accept subscriptions for, or sell Units to, any persons or entities who do not qualify as "accredited investors," as such term is defined in Rule 501 of Regulation D promulgated under the Securities Act of 1933 (the "Act"). (d) The offering of the Units will be made by the Company solely pursuant to the Memorandum, which at all times will be in form and substance acceptable to the Placement Agent and its counsel and contain such legends and other information as the Placement Agent and its counsel may, from time to time, deem necessary and desirable to be set forth therein. "Memorandum" as used in this Agreement means the Company's Confidential Private Placement Memorandum dated September 2, 1998, inclusive of all exhibits, and all amendments, supplements and appendices thereto. Unless otherwise defined, each term used in this Agreement will have the same meaning as set forth in the Memorandum. 2. REPRESENTATIONS AND WARRANTIES. The Company hereby represents and warrants to the Placement Agent that: (a) The Memorandum has been diligently prepared by the Company, in conjunction with its legal counsel and independent accountants, in conformity with all applicable laws, and the Offering and the consummation thereof is in compliance with Regulation D as promulgated under Section 4(2) of the Act ("Regulation D"), the Act and the requirements of all other rules and regulations (the "Regulations") of the Securities and Exchange Commission (the "SEC") relating to offerings of the type contemplated by the Offering, and the applicable securities laws and the rules and regulations of those jurisdictions wherein the Units are to be offered and sold. Subject in part to the truth and accuracy of each Purchaser's representations set forth in Section 5 of the Subscription Agreement attached as Annex A to the Memorandum, the Units will be offered and sold pursuant to the registration exemption provided by Regulation D and Section 4(2) and/or Section 4(6) of the Act as a transaction not involving a public offering and the requirements of any other applicable state securities laws and the respective rules and regulations thereunder in those jurisdictions in which the Placement Agent notifies the Company that the Units are being offered for sale. The Memorandum describes all material aspects, including attendant risks, of an investment in the Company. The Company has not taken nor will it take any action which conflicts with the conditions and requirements of, or which would make unavailable with respect to the Offering, the exemption(s) from registration available pursuant to Regulation D or Section 4(2) and/or Section 4(6) of the Act and knows of no reason why any such exemption would be otherwise unavailable to it. None of the Company, its predecessors or affiliates has been subject to any order, judgment or decree of any court of competent jurisdiction temporarily, preliminarily or permanently enjoining such person for failing to comply with Section 503 of Regulation D. (b) The Memorandum does not 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 light of the circumstances under which they were made, not misleading. None of the statements, documents, certificates or other items prepared or supplied by the Company with respect to the transactions contemplated hereby contains an untrue statement of a material fact or omits a material fact necessary to make the statements contained therein not misleading. There is no fact which the Company has not disclosed to the Placement Agent and its counsel in writing and of which the Company is aware which materially and adversely affects or could materially and adversely affect the business, prospects, financial condition, operations, property or affairs of the Company or any of its subsidiaries. (c) The Company is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation. Except as set forth in the Memorandum, the Company has no subsidiaries and does not have an equity interest. in any other firm, partnership, association or other entity. The Company is duly qualified to transact business and is in good standing under the laws of each jurisdiction in which the failure to so qualify would have a material adverse effect on its business or properties. (d) The Company has all requisite power and authority (corporate and other) to conduct its business as presently conducted and as proposed to be conducted (as described in the Memorandum), to enter into and perform its obligations under this Agreement and the other agreements contemplated hereby and by the Memorandum (collectively, the "Transaction Documents") and to issue, sell and deliver the Shares and to issue and deliver the Agent's Securities (as defined below). Each of the Transaction Documents has been duly authorized. This Agreement has been duly executed and delivered and constitutes, and each of the other Transaction Documents, upon due execution and delivery, will constitute, valid and binding obligations of the Company, enforceable against the Company in accordance with their respective terms except (i) as limited by applicable bankruptcy, insolvency, reorganization, moratorium, and other laws of general application affecting enforcement of creditors' rights generally, (ii) as limited by laws relating to the availability of specific performance, injunctive relief, or other equitable remedies, and (iii) to the extent the indemnification provisions contained in the Transaction Documents may be limited by applicable federal or state securities laws. (e) None of the execution and delivery of, or performance by the Company under any of the Transaction Documents or the consummation of the transactions herein or therein contemplated conflicts with or violates, or will result in the creation or imposition of, any lien, charge or other encumbrance upon any of the assets of the Company under any agreement or other instrument to which the Company is a party or by which the Company or its assets may be bound, or any term of the charter or by-laws of the Company, or any license, permit, judgment, decree, order, statute, rule or regulation applicable to the Company or any of its assets. (f) The Company has authorized and outstanding capital stock as set forth under the heading "Capitalization" in the Memorandum. All outstanding shares of capital stock of the Company are duly authorized, validly issued and outstanding, fully paid and nonassessable. Except as set forth in the Memorandum: (i) there are no outstanding options, stock subscription agreements, warrants or other rights permitting or requiring the Company or others to purchase or acquire any shares of capital stock or other equity securities of the Company or to pay any dividend or make any other distribution in respect thereof, (ii) there are no securities issued or outstanding which are convertible into or exchangeable for any of the foregoing and there are no contracts, commitments or understandings, whether or not in writing, to issue or grant any such option, warrant, right or convertible or exchangeable security; (iii) no shares of stock or other securities of the Company are reserved for issuance for any purpose; (iv) there are no voting trusts or other contracts, commitments, understandings, arrangements or restrictions of any kind with respect to the ownership, voting or transfer of shares of stock or other securities of the Company, including without limitation, any preemptive rights, rights of first refusal, proxies or similar rights and (v) no person holds a right to require the Company to register any securities of the Company under the Act or to participate in any such registration. The issued and outstanding shares of capital stock of the Company conform to all statements in relation thereto contained in the Memorandum and the Memorandum describes all material terms and conditions thereof All issuances by the Company of its securities were exempt from registration under the Act and any applicable state securities laws. (g) The Shares and the Agent's Shares (as defined below) have been duly authorized and, when issued and delivered against payment therefor as provided in the Transaction Documents, will be validly issued, fully paid and nonassessable, and will be free and clear of all liens, charges, restrictions, claims and encumbrances imposed by or through the Company other than as provided in the Transaction Documents and under applicable state and federal securities laws. No holder of any of the Shares or the Agent's Securities (as defined below) will be subject to personal liability solely by reason of being such a holder, and none of the Shares or the Agent's Securities are subject to preemptive or similar rights of any shareholder or securityholder of the Company or an adjustment under the anti-dilution or exercise rights of any holders of any outstanding shares of capital stock, options, warrants or other rights to acquire any securities of the Company. A sufficient number of authorized but unissued shares of Common Stock have been reserved for issuance upon the exercise of the Agent's Warrants (as defined below). (h) No consent, authorization or filing of or with any court or governmental authority is required in connection with the issuance of the Shares or the Agent's Securities or the consummation of the transactions contemplated herein or in the other Transaction Documents, except for required filings with the SEC and applicable "Blue Sky" or state securities commissions relating specifically to the Offering (all of which filings have been made by, or on behalf of, the Company, other than those which are required to be made after the First Closing (as defined below), and which will be duly made on a timely basis). (i) The financial statements, together with the related notes thereto, of the Company included in the Memorandum present fairly the financial position of the Company as of the respective dates specified therein and the results of its operations and changes in financial position for the respective periods covered thereby, subject in the case of unaudited ' interim financial statements to normal year-end adjustments. Such financial statements and related notes were prepared in accordance with generally accepted accounting principles applied on a consistent basis throughout the periods indicated, except the unaudited financial statements may not contain all footnotes required by generally accepted accounting principles. Except as set forth in such financial statements or in the Memorandum, the Company has incurred no material liabilities of any kind, whether accrued, absolute, contingent or otherwise or entered into any material transactions other than (i) liabilities incurred in the ordinary course of business subsequent to June 30, 1998, and (ii) obligations under contracts and commitments incurred in the ordinary course of business and not required under generally accepted principles to be reflected in the financial statements, which, in both cases, individually or in the aggregate, are not material to the financial condition or operating results of the Company. The other financial and statistical information with respect to the Company and any pro forma information and related notes included in the Memorandum present fairly the information shown therein on a basis consistent with the audited and unaudited financial statements of the Company included in the Memorandum. The Company does not know of any facts, circumstances or conditions adversely affecting its operations, earnings or prospects which have not been fully disclosed in the Memorandum. 0) The conduct of business by the Company as presently and proposed to be conducted is not subject to continuing oversight, supervision, regulation or examination by any governmental official or body of the United States or any other jurisdiction wherein the Company conducts or proposes to conduct such business, except as described in the Memorandum and except such regulation as is applicable to commercial enterprises generally. The Company has obtained all requisite licenses, permits and other governmental authorizations to conduct its business as presently conducted, the lack of which could materially and adversely affect the business, properties, prospects or financial condition of the Company, and the Company believes it can obtain, without undue burden or expense, any similar authority for the conduct of its business as proposed to be conducted. (k) No default by the Company or, to the best knowledge of the Company, any other party exists in the due performance under any of the agreements referred to in the Memorandum to which the Company is a party or to which any of its assets is subject (collectively, the "Company Agreements"). The Company Agreements are the only material agreements to which the Company is bound or by which its assets are subject, are accurately and fairly described in the Memorandum and are in full force and effect in accordance with their respective terms. (1) Except as set forth in the Memorandum, there are no actions, proceedings, claims or investigations before or by any court or governmental authority (or any state of facts which management of the Company has concluded could give rise thereto) pending or, to the best knowledge of the Company, threatened against the Company, or involving its assets or any of its officers or directors which, if determined adversely to the Company or such officer or director, could result in any material adverse change in the condition (financial or otherwise) or prospects of the Company or adversely affect the transactions contemplated by this Agreement or the other Transaction Documents or the enforceability thereof. (m) The Company is not in violation of. (i) its charter or by-laws; (ii) any indenture, mortgage, deed of trust, note or other agreement or instrument to which the Company is a party or by which it is or may be bound or to which any of its assets may be subject; (iii) any statute, rule or regulation; or (iv) any judgment, decree or order applicable to the Company, which violation or violations individually, or in the aggregate, might result in any material adverse change in the condition (financial or otherwise) or prospects of the Company. (n) The Company does not own any real property in fee simple except as disclosed in the Memorandum, and the Company has good and marketable title to all property (real and personal, tangible and intangible) owned by it, free and clear of all security interests, liens and encumbrances, except such as are described in the Memorandum. (o) The Company owns all right, title and interest in, or possesses adequate and enforceable rights to use, all patents, patent applications, trademarks, trade names, service marks, copyrights, rights, licenses, franchises, trade secrets, confidential information, processes and formulations necessary for the conduct of its business, except as otherwise described in the Memorandum (collectively, the "Intangibles"). Except as set forth in the Memorandum, to the best knowledge of the Company, the Company has not infringed upon the rights of others with respect to the Intangibles and the Company has not received notice that it has or may have infringed or is infringing upon the rights of others with respect to the Intangibles, or any notice of conflict with the asserted rights of others with respect to the Intangibles which could, individually or in the aggregate, materially and adversely affect the condition (financial or otherwise) or prospects of the Company. Except as set forth in the Memorandum, to the best knowledge of the Company, no others have infringed upon the Intangibles. (P) Subsequent to the respective dates as of which information is given in the Memorandum, the Company has operated its business diligently and only in the ordinary course as theretofore conducted and, except as may otherwise be set forth in the Memorandum, there has been no: (i) material adverse change in the condition (financial or otherwise) or prospects of the Company; (ii) transaction otherwise than in the ordinary course of business; (iii) issuance of any securities (debt or equity) or any rights to acquire any such securities; (iv) damage, loss or destruction, whether or not covered by insurance, materially and adversely affecting any asset or property of the Company; or (v) agreement to permit any of the foregoing. (q) The Company has filed, on a timely basis, each Federal, state, local and foreign tax return which is required to be filed, or has requested an extension therefor, and has paid all taxes and all related assessments, penalties and interest to the extent that the same have become due. (r) The Company is not obligated to pay, and has not obligated the Placement Agent to pay, a finder's or origination fee in connection with the Offering and agrees to indemnify the Placement Agent from any such claim made by any other person. The Company has not offered for sale or solicited offers to purchase the Units except for negotiations with the Placement Agent. No other person has any right to participate in any offer, sale or distribution of the Company's securities to which the Placement Agent's rights, described herein, shall apply. (s) The Company has and will maintain appropriate casualty and liability insurance coverage, in scope and amounts reasonable and customary for similar businesses. 3. PLACEMENT AGENT APPOINTMENT AND COMPENSATION. (a) The Company hereby appoints the Placement Agent and its selected dealers as its exclusive agent in connection with the Offering. The Company has not and will not make, or permit to be made, any offers or sales of the Units other than through the Placement Agent without its prior written consent. The Placement Agent has no obligation to purchase any of the Units. The agency of the Placement Agent hereunder shall continue until the later of the Termination Date or the Final Closing (as defined below). (b) The Company has caused to be delivered to the Placement Agent copies of the Memorandum and has consented, and hereby consents, to the use of such copies for the purposes permitted by the Act and applicable securities laws, and hereby authorizes the Placement Agent and its agents, employees and selected dealers to use the Memorandum in connection with the sale of the Units until the Termination Date, and no other person or entity is or will be authorized by the Company to give any information or make any representations other than those contained in the Memorandum or to use any offering materials other than those contained in the Memorandum in connection with the sale of the Units. (c) The Company will cooperate with the Placement Agent by making available to its representatives such information as may be requested in making a reasonable investigation of the Company and its affairs and shall provide access to such employees as shall be reasonably requested. Prior to the First Closing, the Company shall provide, at its own expense, background checks, credit or similar reports on such key management persons as the Placement Agent shall reasonably request. Prior to the First Closing, the Company shall make available to a credit reporting firm such materials relating to the Company, and shall provide such firm with access to such employees, as shall be reasonably requested by the Placement Agent. (d) The Company shall pay to the Placement Agent a placement fee equal to ten percent (IO%) of the Offering Price of all the Units sold and for which net proceeds are disbursed to the Company in the Offering (the "Placement Agent's Fee") and a non-accountable expense allowance of three percent (3%) of the Offering Price of all the Units sold and for which net proceeds are disbursed to the Company in the Offering (the "Expense Allowance"), a non-refundable portion of which equal to $25,000 has been paid to the Placement Agent, which amount shall be credited toward the Expense Allowance at the First Closing. Payment of the proportional amounts of the Placement Agent's Fee and the Expense Allowance will be made out of the proceeds of subscriptions for the Units sold at each Closing. The Placement Agent may direct all such amounts to be paid directly from the escrow account established pursuant to Section 4 hereof. (e) As additional compensation hereunder, at each Closing (as defined below), the Company shall sell to the Placement Agent or its designees for an aggregate purchase price of $1.00, warrants (the "Agent's Warrants") to purchase, at an exercise price of $ 1.00 per share, a number of shares of Common Stock equal to twenty percent (20%) of the Shares contained in the Units sold in the Offering (the "Agent's Shares"; and, collectively with the Agent's Warrants, the "Agent's Securities"). The Agent's Warrants shall be exercisable until the later of the date seven years after the date of the Final Closing or the date which is three years after the closing date of the initial public offering of the Company's securities within such seven year period (the "Warrant Exercise Term"). If the Company at any time has any securities registered under the Act or the Securities Exchange Act of 1934 (the "1934 Act"), the Company agrees to register the Agent's Securities promptly on two separate occasions, at the request of the holders of a majority of the Agent's Securities made at any time during the Warrant Exercise Tenn. The Company shall pay all expenses, other than underwriters' discounts and commissions, relating to registering the Agent's Securities covered by the first request, and the holder(s) of such Agent's Securities shall pay all registration expenses arising from the second registration. Notwithstanding the foregoing, if the Company shall furnish to holders of the Agent's Securities requesting a registration statement pursuant to their demand rights, a certificate signed by the Chief Executive Officer of the Company stating that, in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, the Company shall have the right to defer taking action with respect to such filing for a period of not more than 120 days after receipt of the request of the holders of the Agent's Securities provided, however, that the Company may not utilize this right more than once in any twelve-month period. Prior to the First Closing, the Company and Placement Agent shall enter into a warrant agreement (the "Warrant Agreement") which shall contain such terms and other customary provisions including piggyback registration rights and anti-dilution provisions in form and substance satisfactory to the Placement Agent and the Company. (f) In the event that any purchaser of Units subsequently invests in the Company at any time within the earlier of (i) five years from the later of the Termination Date or the First Closing (if any) or (ii) the effectiveness of an initial public offering of the Company's securities, the Company shall pay to the Placement Agent cash and warrant compensation with respect to such subsequent investments as it paid with respect to the sale of the Units in the Offering (I.E., 10% of per share price paid and 20% warrant coverage). (g) At the First Closing, the Company shall enter into an agreement which will provide that, in the event of an initial public offering of securities of the Company or its shareholders, the Placement Agent shall have the right to participate, at its option, for up to five percent (5%) of such offering (including any over-allotment option) as a member of the underwriting or selling group unless such participation unreasonably interferes (in the reasonable judgment of the underwriters) with the successful completion of such initial public offering, or in the event of such asserted interference as a member of the selling group. Additionally, in the event the Placement Agent introduces the Company to an underwriter (pursuant to the Company's request for such introduction) which effects an initial public offering of the Company's securities, upon the closing of such offering, the Placement Agent shall be entitled to a fee equal to one percent (1%) of the gross proceeds of such offering. The Placement Agent will, at the request of the Company, document any such introductions. (h) At the First Closing, the Company shall enter into a consulting agreement with the Placement Agent which shall provide that the Company shall pay the Placement Agent a one-time fee of $30,000, due and payable at the First Closing, for the Placement Agent's agreement to provide such investment banking advisory services for two years as the Company may from time to time request, such services to include advice relating to corporate finance, strategic planning, financial planning and relationships with banks, securities firms and financial institutions. 4. SUBSCRIPTION AND CLOSING PROCEDURES. (a) Each prospective purchaser will be required to complete and execute two copies of the Combined Signature Page to the Subscription Agreement and Registration Rights Agreement, which agreements shall be in the forms annexed to the Memorandum ("Subscription Documents"), which will be forwarded or delivered to the Placement Agent at the Placement Agent's offices at the address set forth in Section 11I hereof, together with the subscriber's check or good funds in the full amount of the Offering Price for the number of Units desired to be purchased. (b) All funds for subscriptions received from the offering of the Units will be promptly forwarded by the Placement Agent or the Company, if received by it, to and deposited into the escrow account (the "Escrow Account") established for such purpose with United States Trust Company of New York (the "Escrow Agent"). All such funds for subscriptions will be held in the Escrow Account pursuant to the terms of the Escrow Agreement among the Company, the Placement Agent and the Escrow Agent. The Company will pay all fees related to the establishment and maintenance of the Escrow Account. Any interest accruing on funds in the Escrow Account shall be utilized first to reimburse the Company for such fees and the balance shall be distributed in equal proportion to the Company and the Placement Agent. Subject to the receipt of such subscriptions for the Minimum Amount, the Company will either accept or reject the Subscription Documents in a timely fashion and at each 'Closing will countersign the Subscription Documents and provide duplicate copies of such agreements to the Placement Agent for distribution to the subscribers. The Company will give notice to the Placement Agent of its acceptance or rejection of each subscription. The Company will promptly return to subscribers incomplete, improperly completed, improperly executed and rejected subscriptions and give written notice thereof to the Placement Agent upon such return. (c) If subscriptions for at least the Minimum Amount have been accepted prior to the Termination Date, the funds therefor have been collected by the Escrow Agent and all of the conditions set forth elsewhere in this Agreement are fulfilled, a closing shall be held promptly with respect to the Units sold (the "First Closing"). Thereafter, the remaining Units will continue to be offered and sold until the Termination Date. Additional closings ("Closings") may from time to time be conducted at times mutually agreeable with respect to additional Units sold with the final closing ("Final Closing") to occur not later than IO days from the earlier of the Termination Date or the sale of all Units offered. Delivery of payment for the accepted subscriptions for Units from the funds held in the Escrow Account will be made at each Closing at the Placement Agent's offices against delivery of the Units by the Company at the address set forth in Section I I hereof (or at such other place as may be mutually agreed upon between the Company and the Placement Agent). Executed certificates for the Shares constituting the Units and the Agent's Warrants will be in such authorized denominations and registered in such names as the Placement Agent may request on or before the second full business day prior to the date of each Closing ("Closing Date"), and will be made available to the Placement Agent for checking and packaging at the Placement Agent's office at least one full business day prior thereto. (d) If Subscription Documents for the Minimum Amount have not been received and accepted by the Company on or before the Termination Date for any reason, the Offering will be terminated, no Units will be sold, and the Escrow Agent will, at the request of the Company and the Placement Agent, cause all monies received from subscribers for the Units to be promptly returned to such subscribers without interest, penalty, expense or deduction. Any interest accruing on such funds shall be distributed as set forth in Section 4(b). 5. FURTHER COVENANTS. The Company hereby covenants and agrees that: (a) Except with the prior written consent of the Placement Agent, the Company shall not, at any time prior to the Final Closing, take any action which would cause any of the representations and warranties made by it in this Agreement not to be complete and correct on and as of each Closing Date with the same force and effect as if such representations and warranties had been made on and as of each such date, including, without limitation, incurring any material indebtedness, disposing of any material assets or making any material acquisition or change in its business or operations as described in the Memorandum. (b) If, at any time prior to the Final Closing, any event shall, to the Company's knowledge, occur which does or may materially affect the Company or as a result of which it might become necessary to amend or supplement the Memorandum so that the representations and warranties herein remain true, or in case it shall, in the opinion of counsel to the Placement Agent, be necessary to amend or supplement the Memorandum to comply with Regulation D or any other applicable securities laws or regulations, the Company will promptly notify the Placement Agent and shall, at its sole cost, prepare and furnish to the Placement Agent copies of appropriate amendments and/or supplements in such quantities as the Placement Agent may request. The Company will not at any time, whether before or after the Final Closing, prepare or use any amendment or supplement to the Memorandum of which the Placement Agent will not previously have been advised and furnished with a copy, or to which the Placement Agent or its counsel will have objected in writing or orally (confirmed in writing within 24 hours), or which is not in compliance with the Act, the Regulations and other applicable securities laws. As soon as the Company is advised thereof, the Company will advise the Placement Agent and its counsel, and confirm the advice in writing, of any order preventing or suspending the use of the Memorandum, or the suspension of the qualification or registration of the Shares for offering or the suspension of any exemption for such qualification or registration of the Shares for offering in any jurisdiction, or of the institution or threatened (in writing) institution of any proceedings for any of such purposes, and the Company will use its best efforts to prevent the issuance of any such order and, if issued, to obtain as soon as reasonably possible the lifting thereof. (c) The Company shall comply with the Act, the Regulations, the Securities Exchange Act of 1934 and the rules and regulations thereunder, and all applicable state securities laws and the rules and regulations thereunder in the states in which counsel to the Company has advised the Company that the Units are qualified or registered for sale or exempt from such qualification or registration, so as to permit the continuance of the sales of the Units, and will file with the SEC, and shall promptly thereafter forward to the Placement Agent, any and all reports on Form D as are required. (d) The Company shall use its reasonable best efforts to qualify the Units for sale under the securities laws of such jurisdictions as may be mutually agreed to by the Company and the Placement Agent, and the Company will make such applications and furnish information as may be required for such purposes, provided that the Company will not be required to qualify as a foreign corporation in any jurisdiction. The Company will, from time to time, prepare and file such statements and reports as are or may be required to continue such qualifications in effect for so long a period as the Placement Agent may reasonably request. The Company shall pay all filing fees, costs and legal fees for Blue Sky services and related filings and expenses of counsel with respect to Blue Sky qualifications. (e) The Company shall place a legend on the certificates representing the Shares issued to subscribers stating that the securities evidenced thereby have not been registered under the Act or applicable state securities laws and setting forth or referring to the applicable restrictions on transferability and sale of such securities under the Act and applicable state laws. (f) The Company shall apply the net proceeds from the sale of the Units to fund its working capital requirements and for such other purposes as specifically described under "Use of Proceeds" in the Memorandum. Except as specifically set forth in the Memorandum, the net proceeds of the Offering shall not be used to repay indebtedness to officers, directors or shareholders of the Company without the prior written consent of the Placement Agent. (g) During the Offering Period, the Company shall make available for review by prospective purchasers of the Units during normal business hours at the Company's offices, upon their request, copies of the Company Agreements to the extent that such shall not violate any obligation on the part of the Company to maintain the confidentiality thereof. The Company may request that a prospective purchaser of Units sign a non-disclosure agreement prior to review of any of the Company Agreements if the Company, in its reasonable judgment, determines that disclosure thereof to a particular prospective purchaser may be detrimental to the Company. The Company shall afford each prospective purchaser of Units the opportunity to ask questions of and receive answers from an officer of the Company concerning the terms and conditions of the Offering and the opportunity to obtain such other additional information necessary to verify the accuracy of the Memorandum to the extent it possesses such information or can acquire it without unreasonable expense. (h) Except with the prior written consent of the Placement Agent, the Company shall not, at any time prior to the Final Closing, engage in or commit to engage in any transaction outside the ordinary course of business or issue, agree to issue or set aside for issuance any securities (debt or equity) or any rights to acquire any such securities except as contemplated by the Memorandum. (i) For a period of the earlier of five years from the First Closing or the closing of an initial public offering, the Company shall deliver (i) to the Placement Agent and the Company's shareholders annual audited financial statements setting forth fairly the financial position of the Company, (ii) to the Placement Agent quarterly unaudited financial statements including both a balance sheet and statement of income (including year over year quarterly comparisons), (iii) to the Placement Agent and the investors in the Offering a quarterly report of the progress and status of the Company and an annual report setting forth clearly the financial position, progress and status of the Company, (iv) to the Placement Agent a copy of a list of its shareholders as and when so requested and (v) to the Placement Agent such additional information and documents concerning the business and financial condition of the Company as the Placement Agent may from time to time reasonably request. (j) The Company shall pay all reasonable expenses incurred in connection with the preparation and printing of all necessary offering documents and instruments related to the Offering and the issuance of the Shares, the Agent's Shares and the Agent's Warrants and will also pay the Company's own expenses for accounting fees, legal fees and other costs involved with the Offering. The Company will provide at its own expense such quantities of the Memorandum and other documents and instruments relating to the Offering as the Placement Agent may reasonably request. (k) Prior to the Termination Date, neither the Company nor any person or entity acting on its behalf will negotiate with any other placement agent or underwriter with respect to a private or public offering of the Company's or any subsidiary's debt or equity securities. Neither the Company nor anyone acting on its behalf will, until the Termination Date, without the prior written consent of the Placement Agent, offer for sale to, or solicit offers to subscribe for, Units or other securities of the Company from, or otherwise approach or negotiate in respect thereof with, any other person. Prior to the second anniversary of the First Closing, and subject to Section 6(i) hereof, the Company will not, without the Placement Agent's prior written consent, sell any securities, or any rights to acquire any securities, of the Company (except pursuant to any existing options, warrants and rights and option plans described in the Memorandum) at a price less than $ 1.00 per share or create any additional classes or series of capital stock. (l) The following officers of the Company will continue in their current positions following the Offering, and prior to the First Closing, the Company will enter into employment agreements reasonably acceptable to the Placement Agent with such persons: Walter Keller and Robin Ford. Such agreements shall set forth terms of two (2) years, reasonable compensation and expense provisions, non-competition agreements and other reasonable terms and conditions. The Company may establish a management incentive compensation plan reasonably acceptable to and with the prior written consent of the Placement Agent. (m) The Company shall secure prior to the First Closing and thereafter maintain "key man" life insurance for the benefit of the Company in the amount of $1,000,000 on Walter Keller, the President of the Company. (n) The Placement Agent shall have the right, for a period of the earlier of five (5) years from the First Closing or the effectiveness of an initial public offering, to designate one (1) person reasonably acceptable to the Company to be, at the Placement Agent's sole discretion, a nominee for director of the Company. The Principal Shareholders (as defined below) at the First Closing shall agree to vote in favor of such nominee and the Company shall use its best efforts (which shall include, without limitation, the solicitation of proxies on behalf of such nominee) to elect such nominee to the Board of Directors. The Board of Directors shall consist of at least five (5) but not more than seven (7) directors. The Company further agrees that it shall hold "in person" directors' meetings no less frequently than quarterly. Notice of regular or special meetings as may be required to be given to directors by statute or the Company's bylaws shall be given to the Placement Agent. The Company agrees to indemnify and hold the Placement Agent harmless against any and all claims, actions, awards and judgments arising solely out of the attendance and participation of the Placement Agent's designated nominee at any such meeting described herein. In the event the Company maintains a liability insurance policy affording coverage for the acts of its officers and directors, it agrees, if possible, to include the Placement Agent's designated nominee as an insured under such policy. For the purposes hereof, a "Principal Shareholder" shall mean any person, entity or group that beneficially owns, directly or indirectly, five percent (5%) of the Company's capital stock immediately preceding the First Closing and all executive officers and directors of the Company. 6. CONDITIONS OF PLACEMENT AGENT'S OBLIGATIONS. The obligations of the Placement Agent at each Closing hereunder are subject to the fulfillment, at or before each such Closing, of the following additional conditions: (a) Each of the representations and warranties of the Company shall be true and correct when made on the date hereof and on and as of each Closing Date as though made on and as of each Closing Date. (b) The Company shall have performed and complied with all agreements, covenants and conditions required to be performed and complied with by it under the Transaction Documents at or before each Closing. (c) No order suspending the use of the Memorandum or enjoining the offering or sale of the Units shall have been issued, and no proceedings for that purpose or a similar purpose shall have been initiated or pending, or, to the best of the Company's knowledge, are contemplated or threatened. (d) As of the First Closing, the Company will have an authorized capitalization of not more than 50,000,000 shares of Common Stock and 5,000,000 shares of preferred stock, no par value, of which not more than 7,028,500 shares of Common stock shall be issued and outstanding or issuable under any convertible or exchangeable securities, options, warrants or similar rights outstanding or reserved for issuance (excluding (i) up to 475,000 shares issuable upon conversion of the Convertible Note (as defined in the Memorandum), (ii) up to 300,000 shares issuable upon conversion of the Notes (as defined in the Memorandum) and (iii) up to 150,000 shares issuable upon exercise of warrants issued to Walter Keller and Spencer Trask Investors on the date hereof). No shares of preferred stock shall be issued and outstanding or issuable under securities or rights. (e) The Placement Agent shall have received certificates of the Chief Executive Officer and Chief Financial Officer of the Company, dated as of each Closing Date, certifying, in such detail as the Placement Agent may reasonably request, as to the fulfillment of the conditions set forth in subparagraphs (a), (b), (c) and (d) above. (f) The Company shall have delivered to the Placement Agent a certificate regarding incumbency of officers and the following (i) a currently dated good standing certificate from the secretary of state of its jurisdiction of incorporation and (ii) certified copies of the Company's bylaws and resolutions of the Company's Board of Directors approving this Agreement and the other Transaction Documents, and the transactions and agreements contemplated by this Agreement and the other Transaction Documents. (g) On or prior to the date hereof and at each Closing, the independent auditors for the Company shall have provided a letter confirming such matters as the Placement Agent may reasonably request; and (ii) the Chief Executive Officer and the Chief Financial Officer of the Company shall have provided a certificate to the Placement Agent confirming that there have been no material and adverse changes in the condition (financial or otherwise) or prospects of the Company from the date of the financial statements included in the Memorandum, the absence of undisclosed liabilities and such other matters relating to the financial condition and prospects of the Company that the Placement Agent may reasonably request. (h) At each Closing, the Company shall have (i) paid to the Placement Agent, the Placement Agent's Fee and the Expense Allowance as set forth in Section 3(d) hereof and (iii) executed and delivered to the Placement Agent the Agent's Warrants in an amount equal to twenty percent (20%) of the Shares contained in the Units sold. (i) On or prior to the First Closing, each of the Company's officers, directors and shareholders owning, beneficially or of record, five percent (5%) or more of the Common Stock outstanding immediately prior to the First Closing shall have agreed in writing not to sell, transfer or otherwise dispose of more than fifteen percent (15%) of the Company's securities beneficially owned by them or issuable to them pursuant to the exercise of options, warrants or conversion of other securities without the Placement Agent's prior written consent, which consent shall not be unreasonably withheld, until the second anniversary of the First Closing, except that such persons may make transfers to a parent, spouse, sibling or descendent, or to a trust for the benefit of any of the foregoing persons; provided, however, that such transfers shall be subject to this Section 6(i) and that the Placement Agent may require that any such permitted transfer be made subject to a voting agreement pursuant to which the transferring shareholder retains the right to vote all transferred shares until the second anniversary of the First Closing. In addition, if within two years of the First Closing, the Company registers any of its securities under the Act which registration is effective, the officers, directors and present shareholders and any permitted transferees will extend the terms of the "lock-up" set forth in this Section 6(i) for a period of twelve months from completion of the offering contemplated thereby or such longer or shorter period as the underwriter shall require; provided, however, that in the event that such registration is an underwritten registration and the underwriter shall agree, the Company may permit such officers, directors and present shareholders to sell shares in such offering subject to the rights of investors under the Registration Rights Agreement. (j) There shall have been delivered to the Placement Agent a signed opinion of counsel to the Company, dated as of each Closing Date, substantially in the form of Exhibit A hereto and otherwise in form and substance satisfactory to counsel to the Placement Agent. (k) All proceedings taken at or prior to each Closing in connection with the authorization, issuance and sale of the Units and the Agent's Warrants will be reasonably satisfactory in form and substance to the Placement Agent and its counsel, and such counsel shall have been furnished with all such documents, certificates and opinions as they may reasonably request upon reasonable prior notice in connection with the transactions contemplated hereby. (l) On or prior to the First Closing, the Principal Shareholders shall agree to vote their shares of Common Stock in favor of any directors nominated by the investors in the Offering pursuant to Section 9 of the Subscription Agreement at any meeting of the Company's shareholders or pursuant to any written consent in which the election of such directors is submitted to a vote of the Company's shareholders (and to remove directors as necessary to create vacancies therefor). The obligations of the Principal Shareholders under this Section 6(l) shall terminate upon the registration of each such investor's shares pursuant to the Registration Rights Agreement; provided that an investor's shares shall be deemed to be so registered if such investor elects not to include shares in any registration statement in which such shares are entitled to be included pursuant to the Registration Rights Agreement. Additionally, on or prior to the First Closing, the Principal Shareholders shall agree to vote in favor of the Placement Agent's nominee to the Board of Directors. 7. INDEMNIFICATION. (a) The Company will (i) indemnify and hold harmless the Placement Agent, its selected dealers and their respective officers, directors, employees and each person, if any, who controls the Placement Agent within the meaning of the Act and such selected dealers (each an "Indemnitee") against, and pay or reimburse each Indemnitee for, any and all losses, claims, damages, liabilities or expenses whatsoever (or actions or proceedings or investigations in respect thereof), joint or several (which will, for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all reasonable attorneys' fees, including appeals), to which any Indemnitee may become subject, under the Act or otherwise, in connection with the offer and sale of the Units, whether such losses, claims, damages, liabilities or expenses shall result from any claim of any Indemnitee or any third party; and (ii) reimburse each Indemnitee for any legal or other expenses reasonably incurred in connection with investigating or defending against any such loss, claim, action, proceeding or investigation; provided, however, that the Company will not be liable in any such case to the extent that any such loss, claim, damage, liability or expense results from (A) an untrue statement or alleged untrue statement of a material fact made in the Memorandum, or an 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 reliance upon and in conformity with written information furnished to the Company by the Placement Agent or any such controlling persons specifically for use in the preparation thereof, or (B) any violations by the Placement Agent of the Act or state securities laws which does not result from a violation thereof by the Company or any of its affiliates. In addition to the foregoing agreement to indemnify and reimburse, the Company will indemnify and hold harmless each Indemnitee against any and all losses, claims, damages, liabilities or expenses whatsoever (or actions or proceedings or investigations in respect thereof), joint or several (which shall for all purposes of this Agreement, include, but not be limited to, all costs of defense and investigation and all reasonable attorneys' fees, including appeals) to which any Indemnitee may become subject insofar as such costs, expenses, losses, claims, damages or liabilities arise out of or are based upon the claim of any person or entity that he or it is entitled to broker's or finder's fees from any Indemnitee in connection with the Offering. The foregoing indemnity agreements will be in addition to any liability which the Company may otherwise have. (b) The Placement Agent will indemnify and hold harmless the Company, its officers, directors, employees and each person, if any, who controls the Company within the meaning of the Act against, and pay or reimburse any such person for, any and all losses, claims, damages or liabilities or expenses whatsoever (or actions, proceedings or investigations in respect thereof) to which the Company or any such person may become subject, under the Act or otherwise, whether such losses, claims, damages, liabilities or expenses shall result from any claim of the Company, any of its officers, directors, employees, any person who controls the Company within the meaning of the Act or any third party, insofar as such losses, claims, damages or liabilities are based upon any untrue statement or alleged untrue statement of any material fact contained in the Memorandum, but only with reference to information contained in the Memorandum relating to the Placement Agent fumished in writing to the Company by the Placement Agent, specifically for use in the preparation thereof. The Placement Agent will reimburse the Company or any such person for any legal or other expenses reasonably incurred in connection with investigating or defending against any such loss, claim, damage, liability or action, proceeding or investigation to which such indemnity obligation applies. The foregoing indemnity agreements will be in addition to any liability which the Placement Agent may otherwise have. (c) Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, claim, proceeding or investigation ("Action"), such indemnified party, if a claim in respect thereof is to be made against the indemnifying party under this Section 7, will notify the indemnifying party of the commencement thereof, but the omission to so notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party under this Section 7 except to the extent the indemnifying party has been substantially prejudiced by such omission. The indemnifying party will be entitled to participate in, and, to the extent that it may wish, jointly with any other indemnifying party, to assume the defense thereof subject to the provisions herein stated, with counsel reasonably satisfactory to such indemnified party. The indemnified party will have the right to employ separate counsel in any such Action and to participate in the defense thereof, but the fees and expenses of such counsel will not be at the expense of the indemnifying party if the indemnifying party has assumed the defense of the Action with counsel reasonably satisfactory to the indemnified party, provided, however, that if the indemnified party shall be requested by the indemnifying party to participate in the defense thereof or shall have concluded in good faith and specifically notified the indemnifying party either that there may be specific defenses available to it which are different from or additional to those available to the indemnifying party or that such Action involves or could have a material adverse effect upon it with respect to matters beyond the scope of the indemnity agreements contained in this Agreement, then the counsel representing it, to the extent made necessary by such defenses, shall have the right to direct such defenses of such Action on its behalf and in such case the fees and expenses of such counsel in connection with any such participation or defenses shall be paid by the indemnifying party. No settlement of any Action against an indemnified party will be made without the consent of the indemnifying party and the indemnified party, which consent shall not be unreasonably withheld or delayed in light of all factors of importance to such party and no indemnifying party shall be liable to indemnify any person for any settlement of any such claim effected without such indemnifying party's consent. 8. CONTRIBUTION. To provide for just and equitable contribution, if (i) an indemnified party makes a claim for indemnification pursuant to Section 7 hereof and it is finally determined, by a judgment, order or decree not subject to further appeal that such claims for indemnification may not be enforced, even though this Agreement expressly provides for indemnification in such case; or (ii) any indemnified or indemnifying party seeks contribution under the Act, the 1934 Act, or otherwise in a situation in which it would be entitled to indemnification under Section 7, then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Placement Agent on the other in connection with the statements or omissions which resulted in such losses, claims, damages, liabilities or expenses (or actions in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Placement Agent on the other shall be deemed to be in the same proportion as the total net proceeds from the Offering (before deducting expenses) received by the Company bear to the total commissions and fees received by the Placement Agent. The relative fault, in the case of an untrue statement, alleged untrue statement, omission or alleged omission will be determined by, among other things, whether such statement, alleged statement, omission or alleged omission relates to information supplied by the Company or by the Placement Agent, and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement, alleged statement, omission or alleged omission. The Company and the Placement Agent agree that it would be unjust and inequitable if the respective obligations of the Company and the Placement Agent for contribution were determined by pro rata allocation of the aggregate losses, liabilities, claims, damages and expenses or by any other method or allocation that does not reflect the equitable considerations referred to in this Section 8. No person guilty of a fraudulent misrepresentation (within the meaning of Section 11 (f) of the Act) will be entitled to contribution from any person who is not guilty of such fraudulent misrepresentation. For purposes of this Section 8, each person, if any, who controls the Placement Agent within the meaning of the Act will have the same rights to contribution as the Placement Agent, and each person, if any, who controls the Company within the meaning of the Act will have the same rights to contribution as the Company, subject in each case to the provisions of this Section 8. Anything in this Section 8 to the contrary notwithstanding, no party will be liable for contribution with respect to the settlement of any claim or action effected without its written consent. This Section 8 is intended to supersede, to the extent permitted by law, any right to contribution under the Act, the 1934 Act or otherwise available. 9. TERMINATION. (a) The Offering may be terminated by the Placement Agent at any time prior to the expiration of the Offering Period as contemplated in Section 1(b) hereof ("Expiration Date") in the event that (i) any of the representations or warranties of the Company contained herein, in the Memorandum or in any other Transaction Document shall prove to have been false or misleading in any material respect when made or deemed made, (ii) the Company shall have failed to perform any of its material obligations hereunder, (iii) the Placement Agent shall determine that it is reasonably likely that any of the conditions to Closing set forth herein will not, or cannot, be satisfied or (iv) there shall occur any event which could adversely affect the transactions contemplated hereby or the other Transaction Documents or the ability of the parties to perform thereunder. In the event of any such termination occasioned by or arising out of or in connection with any breach or failure hereunder on the part of the Company, the Placement Agent shall be entitled to receive, in addition to other rights and remedies it may have hereunder, at law or otherwise, an amount equal to the sum of. (A) all Placement Agent's Fees earned through the Termination Date, (B) up to $75,000 of the Expense Allowance, including any non-refundable amounts referred to in Section 3(d) hereof, (C) all amounts which may become payable pursuant to Section 3(f) hereof and (D) in the event that the Company is sold, merged or otherwise acquired, or the Company enters into a letter of intent or completes a public or private offering of its securities within one year from the Termination Date, an investment banking fee equal to the lesser of (i) $300,000 or (ii) five percent (5%) of the total consideration received by the Company and/or its shareholders in connection with such sale, merger, acquisition or sale of securities. In the event of any such termination by the Placement Agent as a result of any event described in clause (iii) or (iv) above, or pursuant to Section 4(d) hereof, not occasioned by or arising out of or in connection with any breach or failure hereunder by the Company, the Placement Agent will be entitled to receive the sum of all Placement Agent's Fees earned through the Termination Date, the non-refundable portion of the Expense Allowance and the amounts set forth in clauses (C) and (D) of this Section 9(a). (b) This Offering may be terminated by the Company at any time prior to the Expiration Date in the event that (i) the Placement Agent shall have failed to perform any of its material obligations hereunder or (ii) there shall occur any event described in Section 9(a)(iv) above not occasioned by or arising out of or in connection with any breach or failure hereunder on the part of the Company. In the event of any termination by the Company pursuant to clause (i) above, the Placement Agent shall be entitled to retain the non-refundable portions of the Expense Allowance, but shall be entitled to no other amounts whatsoever except as may be due under any indemnity or contribution obligation provided herein or any other Transaction Document, at law or otherwise. In the event of any termination by the Company pursuant to clause (ii) above, the provisions of the last sentence of Section 9(a) hereof shall apply. (c) Upon any such termination, the Escrow Agent will, at the request of the Placement Agent, cause all monies held by it in respect of subscriptions for Units to be promptly returned to such subscribers without interest, penalty, expense or deduction. Any interest earned thereon shall be applied (i) first to the payment of amounts, if any, due to the Escrow Agent, (ii) second to the payment of any amounts payable to the Placement Agent hereunder which remain unpaid and (iii) third, in equal amounts to the Company and the Placement Agent. 10. SURVIVAL. (a) The obligations of the parties to pay any costs and expenses hereunder and to provide indemnification and contribution as provided herein shall survive any termination hereunder. (b) The respective indemnities, agreements, representations, warranties and other statements of the Company set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of, and regardless of any access to information by, the Company or the Placement Agent, or any of their officers or directors or any controlling person thereof, and will survive the sale of the Units. II. NOTICES. All communications hereunder will be in writing and, except as otherwise expressly provided herein or after notice by one party to the other of a change of address, if sent to the Placement Agent, will be mailed, delivered or telefaxed and confirmed to Spencer Trask Securities Incorporated, 535 Madison Avenue, 18th Floor, New York, New York 10022, Attention: William Dioguardi, Telefax number (212) 751-3483, with a copy to Hertzog, Calamari & Gleason, I 00 Park Avenue, New York, NY 100 1 7, Attn: Stephen A. Ollendorff, Esq., Telefax number (212) 213-1199 and if sent to the Company, will be mailed, delivered or telefaxed and confirmed to GraphOn Corporation, 150 Harrison Avenue, Campbell, CA 95008, Attn: Walter Keller, Telefax number (408) 370-5047, with a copy to Brobeck, Phleger & Harrison LLP, Two Embarcadero Place, 2200 Geng Road, Palo Alto, California 94303-0913, Attn:'Thomas A. Bevilacqua, Esq., Telefax number (650) 496-2755. 12. APPLICABLE LAW, COSTS, ETC. THIS AGREEMENT WILL BE GOVERNED BY, CONSTRUED AND ENFORCED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE AND TO BE PERFORMED WHOLLY WITHIN SUCH STATE. IN THE EVENT THAT EITHER PARTY INSTITUTES A LEGAL PROCEEDING PRIOR TO THE FIRST CLOSING, SUCH PROCEEDING MUST BE INSTITUTED IN A COURT IN THE STATE OF CALIFORNIA, COUNTY OF SANTA CLARA. IN THE EVENT EITHER PARTY INSTITUTES A LEGAL PROCEEDING AFTER THE FIRST CLOSING, SUCH PROCEEDING MUST BE INSTITUTED IN EITHER THE STATE OF CALIFORNIA, COUNTY OF SANTA CLARA, OR THE STATE OF NEW YORK, NEW YORK COUNTY, AT THE CHOICE OF THE PARTY INSTITUTING THE PROCEEDING. SUBJECT TO THE FOREGOING, (A) THE COMPANY HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY NEW YORK STATE OR UNITED STATES FEDERAL COURT SITTING IN NEW YORK COUNTY AND (B) THE PLACEMENT AGENT HEREBY IRREVOCABLY SUBMITS TO THE JURISDICTION OF ANY CALIFORNIA STATE OR UNITED STATES FEDERAL COURT SITTING IN THE COUNTY OF SANTA CLARA OVER ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT OR ANY AGREEMENT CONTEMPLATED HEREBY, AND THE COMPANY AND THE PLACEMENT AGENT, RESPECTIVELY, EACH HEREBY IRREVOCABLY AGREES THAT ALL CLAIMS IN RESPECT OF SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH NEW YORK OR CALIFORNIA STATE OR FEDERAL COURTS. SUBJECT TO THE SECOND AND THIRD SENTENCES OF THIS PARAGRAPH, EACH OF THE COMPANY AND THE PLACEMENT AGENT FURTHER WAIVES ANY OBJECTION TO VENUE IN SUCH STATE AND ANY OBJECTION TO AN ACTION OR PROCEEDING IN SUCH STATE ON THE BASIS OF A NON-CONVENIENT FORUM. EACH OF THE COMPANY AND THE PLACEMENT AGENT FURTHER AGREES THAT ANY ACTION OR PROCEEDING BROUGHT AGAINST THE OTHER PARTY HERETO SHALL BE BROUGHT ONLY IN THE COURTS AS SPECIFIED IN THE SECOND AND THIRD SENTENCES OF THIS PARAGRAPH. SERVICE OF PROCESS MAY BE MADE UPON THE COMPANY OR THE PLACEMENT AGENT BY MAILING A COPY THEREOF TO IT, BY CERTIFIED OR REGISTERED MAIL, AT ITS ADDRESS TO BE USED FOR THE GIVING OF NOTICES UNDER THIS AGREEMENT. THE COMPANY AND THE PLACEMENT AGENT EACH HEREBY WAIVES ITS RIGHT TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY DOCUMENT OR AGREEMENT CONTEMPLATED HEREBY. THE PLACEMENT AGENT OR THE COMPANY, AS THE CASE MAY BE, SHALL BE ENTITLED TO COSTS AND REASONABLE ATTORNEY'S FEES IN THE EVENT IT PREVAILS IN ANY CLAIMS, ACTIONS, AWARDS OR JUDGMENT UNDER THIS AGREEMENT. 13. CONFIDENTIALITY. The Company hereby agrees to hold confidential the identities of the Purchasers in the Offering and prospective investors contacted by the Placement Agent in connection with the Offering, and shall not disclose their names and addresses without the prior written consent of the Placement Agent, unless required by law. The Company hereby consents to the granting of an injunction against it by any court of competent jurisdiction to enjoin it from violating the foregoing confidentiality provisions. The Company hereby agrees that the Placement Agent will not have an adequate remedy at law in the event that the Company breaches the confidentiality provisions contained herein and that the Placement Agent will suffer irreparable damage and injury as a result of any such breach. Resort to such equitable relief shall not, however, be construed to be a waiver of any other rights or remedies which the Placement Agent may have. 14. PLACEMENT AGENT REPRESENTATION. The Placement Agent is in compliance in all material respects with all applicable federal and state securities laws and rules and regulations of the National Association of Securities Dealers, Inc. with which it must comply to perform its obligations hereunder. 15. MISCELLANEOUS. No provision of this Agreement may be changed or terminated except by a writing signed by the party or parties to be charged therewith. Unless expressly so provided, no party to this Agreement will be liable for the performance of any other party's obligations hereunder. Any party hereto may waive compliance by the other with any of the terms, provisions and conditions set forth herein; provided, however that any such waiver shall be in writing specifically setting forth those provisions waived thereby. No such waiver shall be deemed to constitute or imply waiver of any other term, provision or condition of this Agreement. This Agreement contains the entire agreement between the parties hereto and is intended to supersede any and all prior agreements between the parties relating to the same subject matter. This Agreement may be executed in counterparts, each of which shall be deemed an original and all of which shall constitute a single agreement. If the foregoing is in accordance with your understanding of our agreement, kindly sign and return this Agreement, whereupon it will become a binding agreement between the Company and the Placement Agent in accordance with its terms. Very truly yours, GRAPHON CORPORATION ------------------------------- By: Walter Keller Its: President Accepted and agreed to this 2nd day of September, 1998. SPENCER TRASK SECURITIES INCORPORATED - ------------------------------------- By: Its: EX-10.4 7 EXHIBIT 10.4 ASSET PURCHASE AGREEMENT This Agreement made effective as of the 18th day of December, 1998 by and between Corel Corporation, a corporation incorporated under the laws of Canada, together with its wholly-subsidiaries, Corel Corporation Limited, a corporation incorporated under the laws of the Republic of Ireland, and Corel, Inc. a corporation incorporated under the laws of the State of Delaware (together referred to as "Vendor") and GraphOn Corporation, a corporation incorporated under the laws of the State of California ("Purchaser"). RECITALS A. The Vendor is engaged in, among other things, the business of developing and marketing the Purchased Software. B. Purchaser desires to purchase from Vendor the Purchased Software and certain assets used or usable in connection with the development and marketing of the Purchased Software and to assume certain related contracts and obligations, and Vendor desires to sell to Purchaser the Purchased Software and such assets and to transfer to Purchaser the related contracts and obligations, all according to the terms and subject to the conditions set forth in this Agreement (the "Transaction"). C. In consideration of the transfer of the Purchased Software and the above-mentioned related assets, Purchaser has agreed to issue and sell shares of common stock of the Purchaser and a warrant to purchase common stock of Purchaser pursuant to the terms and conditions of that certain Securities Purchase Agreement by and between Vendor and Purchaser dated the date hereof (the "Securities Purchase Agreement"). AGREEMENT NOW, THEREFORE, for and in consideration of the mutual agreements set forth in this Agreement and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, Purchaser and Vendor hereby agree as follows: 1. INTERPRETATION 1.1 DEFINITIONS. As used herein: "ADDITIONAL PURCHASED SHARES" means the 1,607,000 shares of common stock of the Purchaser which may be issued to Vendor pursuant to the terms of the Securities Purchase Agreement. "AFFILIATE" means, with respect to any Person, any other Person who directly or indirectly controls, is controlled by, or is under direct or indirect common control with, such Person, and includes any Person in like relation to an Affiliate. A Person shall be deemed to control a Person if such Person possesses, directly or indirectly, the power to direct or cause the direction of the management and policies of such Person, whether through the ownership of voting securities, by contract or otherwise; and the term "controlled" shall have a similar meaning. "AGREEMENT" means this Asset Purchase Agreement, including the Exhibits and the Schedules to this Agreement, as it or they may be amended or supplemented from time to time, and the expressions "HEREOF", "HEREIN", "HERETO", "HEREUNDER", "HEREBY" and similar expressions refer to this Agreement and not to any particular Section or other portion of this Agreement. "APPLICABLE LAW" means, with respect to any Person, property, transaction, event or other matter, any Law relating or applicable to such Person, property, transaction, event or other matter. Applicable Law also includes, where appropriate, any interpretation of the Law (or any part) by any Person having jurisdiction over it, or charged with its administration or interpretation. "ASSETS" has the meaning given in Section 2.1. "ASSUMED CONTRACTS" has the meaning given in subsection 2.1(c). "ASSUMED LIABILITIES" means the Liabilities of the Vendor listed in SCHEDULE 2.3 to be assumed by the Purchaser that relate to the Assets arising and accruing in respect of the period from and after the Closing Date. "BUG DATABASE" means Vendor's software bug databases respecting the Purchased Software, in electronic format. "BUSINESS DAY" means any day except Saturday, Sunday or any day on which banks are generally not open for business in the City of Ottawa, Ontario or in the City of Campbell, California. "CLOSING" and "CLOSING DATE" shall have the meaning set out in Section 2.6 "CONDITION" means the condition of the assets, liabilities, operations, or financial position of the Purchaser. "CONFIDENTIAL INFORMATION" has the meaning given in Section 8.2. "CUSTOMER LISTS" means all customer lists, files, data and information relating to customers and prospective customers for the Purchased Software as of the Closing Date including, without limitation, any customer list which has been delivered by the Vendor to the Purchaser prior to the date hereof. "DAMAGES" shall include any loss, damage, injury, liability, claim, demand, settlement, judgment, award, fine, penalty, tax, fee (including reasonable legal fees), charge, costs (including reasonable costs of investigation) or reasonable expenses of any nature. "DIRECT CLAIM" has the meaning given in Section 9.3. "EFFECTIVE DATE" means the date first set out above. "ENTITY" means any corporation (including any non-profit corporation), general partnership, limited partnership, limited liability partnership, joint venture, estate, trust, company (including any limited liability company or joint stock company), firm or other enterprise, association, organization or entity. "EXCLUDED SOFTWARE" means the computer programs listed in SCHEDULE 2.1(B)(II), including, to the extent in existence as of Closing, development work in progress on such computer programs, and related designs, drawings, flow charts, functional specifications, engineering and/or source code documentation, and user manuals. "GOVERNMENTAL BODY" means any: (a) nation, state, commonwealth, province, territory, county, municipality, district or other jurisdiction of any nature; (b) federal, state, provincial, 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). "INDEMNIFICATION PERIOD" means the period commencing as of Closing and ending at the close of business on the first anniversary of Closing. "INTELLECTUAL PROPERTY ASSETS" has the meaning given in subsection 2.1(b). "INTERIM PERIOD" means the period from and including the Effective Date to and including the Closing Date. "LEASED PREMISES" means the premises leased by Vendor under the Leases. "LEASES" means the leases and the agreements to lease under which the Vendor leases real property in the State of New Hampshire, as further described in SCHEDULE 2.1(D). "LEGAL PROCEEDING" shall mean any action, suit, litigation, arbitration proceeding (including any civil, criminal, administrative, investigative or appellate proceeding), hearing, inquiry, audit, examination or investigation commenced, brought, conducted or heard by or before, or otherwise involving any court or other Governmental Body or any arbitrator or arbitration panel. "LICENSED SOFTWARE" shall mean the software, in both object and source code format, as described in SCHEDULE 2.2. "LIEN" means any lien, mortgage, charge, hypothec, pledge, security interest, prior assignment, option, warrant, lease, sublease, right to possession, encumbrance, claim, right or restriction which affects, by way of a conflicting ownership interest or otherwise, the right, title or interest in or to any particular property, but excluding any contract or license rights disclosed hereunder. "MARKETING MATERIALS" shall have the meaning set out in Section 2.1(f). "MATERIAL ADVERSE EFFECT" means, with respect to any violation or other matter, same will be deemed to have a "Material Adverse Effect" on the specified Asset or covenant, as applicable, if such violation or other matter would have a material adverse effect on Vendor's or Purchaser's, as applicable, intellectual property rights, liabilities, operations, performance, assets or financial condition. "PERSON" means any individual, Entity or Governmental Body. "PURCHASED SOFTWARE" means the proprietary computer programs listed in SCHEDULE 2(1)(B)(I), in, unless otherwise provided, source code and object code form, including, to the extent in existence as of the Closing Date, development work in progress on such computer programs, and related designs, drawings, flow charts, functional specifications, engineering and/or source code documentation, and user manuals. "PURCHASER INDEMNITEES" means the following Persons: (a) Purchaser; (b) Purchaser's current and future Affiliates, but excluding Vendor; (c) the respective Representatives of the Persons referred to in clauses (a) and (b) above; and (d) the respective successors and assigns of the Persons referred to in clauses (a) and (b) and (c) above. "PURCHASED SHARES" means 3,886,503 shares of common stock of the Purchaser to be issued to the Vendor pursuant to the terms of the Securities Purchase Agreement. "RELOCATION COSTS" means costs associated with the relocation of Transferred Employees to New Hampshire up to a maximum amount of $5,000CDN per Transferred Employee who is relocating from Canada, and up to a maximum of $5,000USD per Transferred Employee who is relocating from within the United States. "REPRESENTATIVES" means officers, directors, employees, agents, legal counsel, accountants, advisors and representatives. "SECURITIES PURCHASE AGREEMENT" has the meaning set forth in the recitals to this Agreement. "TANGIBLE ASSETS" shall mean those Assets set out in SCHEDULE 2.1(a). "TAXES" means all taxes, charges, fees, levies, imposts and other assessments, including all income, sales, use, goods and services, value added, capital, capital gains, alternative, net worth, transfer, profits, withholding, payroll, employer health, excise, franchise, real property and personal property taxes, and any other taxes, customs duties, fees, assessments or similar charges in the nature of a tax including Canada Pension Plan and provincial pension plan contributions, employment insurance payments and workers compensation premiums, together with any instalments with respect thereto, and any interest, fines and penalties, imposed by any governmental authority (including provincial, municipal and foreign governmental authorities), and whether disputed or not. "TAX RETURN" means any return, statement, report or form, including, without limitation, estimated Tax Returns and reports, withholding Tax Returns and reports and information reports and returns required to be filed with respect to Taxes. "THIRD PARTY CLAIM" has the meaning given in Section 9.5. "THIRD PARTY MATERIALS" means the specific third party owned or controlled software or content listed on SCHEDULE 2.1(b)(III). "TRADEMARKS" means all right, title and interest of Vendor in and to the trademarks (whether registered or unregistered) and trademark applications specified on SCHEDULE 2(1)(b)(IV) and the goodwill associated therewith. "TRADE SECRETS" means all non-public information, trade secret rights and know-how in the possession of Vendor used in connection with the development and manufacture of and/or for the distribution of the Products, including vendor information, customer lists, pricing and sales information relating to the Products. "TRANSACTION DOCUMENTS" means all documents or agreements required to be delivered by any party hereunder, including the Agreement itself, the Securities Purchase Agreement, and any related agreements. "TRANSFERRED EMPLOYEES" shall have the meaning set out in Section 8.3. "VENDOR INDEMNITEES" shall mean the following Persons: (a) Vendor; (b) Vendor's current and future Affiliates, but excluding Purchaser; (c) the respective Representatives of the Persons referred to in clauses (a) and (b) above; and (d) the respective successors and assigns of the Persons referred to in clauses (a) and (b) and (c) above. "WARRANT" means the warrant to be issued to Vendor pursuant to the terms of the Securities Purchase Agreement, entitling the Vendor to purchase up to 388,650 shares of common stock of the Purchaser. "WARRANTY CLAIM" means a claim made by either the Purchaser or Vendor based on or with respect to the inaccuracy or non-performance or non-fulfilment or breach of any representation, covenant or warranty made by the other party contained in this Agreement or contained in any document or certificate given in order to carry out the transactions contemplated hereby. 1.2 HEADINGS AND TABLE OF CONTENTS. The division of this Agreement into Articles and Sections and the insertion of headings are for convenience of reference only and shall not affect the construction or interpretation of this Agreement. 1.3 NUMBER AND GENDER. Unless the context requires otherwise, words importing the singular include the plural and vice versa and words importing gender include all genders. 1.4 BUSINESS DAYS. If any payment is required to be made or other action is required to be taken pursuant to this Agreement on a day which is not a Business Day, then such payment or action shall be made or taken on the next Business Day. 1.5 CURRENCY AND PAYMENT OBLIGATIONS. Except as otherwise expressly provided in this Agreement, all dollar amounts referred to in this Agreement are stated in the lawful currency of the United States of America. 1.6 STATUTE REFERENCES. Any reference in this Agreement to any statute or any section thereof shall, unless otherwise expressly stated, be deemed to be a reference to such statute or section as amended, restated or re-enacted from time to time. 1.7 SECTION AND SCHEDULE REFERENCES. Unless the context requires otherwise, references in this Agreement to Sections, Exhibits or Schedules are to Sections, Exhibits or Schedules of this Agreement. The Exhibits and Schedules to this Agreement are an integral part of this Agreement. ARTICLE 2. THE TRANSACTION 2.1 ASSETS. Subject to the terms and conditions of this Agreement, Vendor agrees to grant, convey, sell, assign and transfer to Purchaser on Closing, and Purchaser agrees on Closing to purchase, accept and assume, the assets set forth below (collectively, the "Assets"). The Assets consist of the following: (a) the Tangible Assets; (b) all right, title and interest, including the worldwide intellectual and industrial property rights owned by Vendor in the Purchased Software and Trademarks, including without limitation, copyrights (whether registered or unregistered), copyright applications, trademark rights, trademark applications, Trade Secrets, inventions and the right to seek patents with respect thereto, designs, technologies, including without limitation, all registrations, rights to register or apply for registration, renewals, reissues, divisions, continuations, continuations-in-part, modifications, extensions, reversions, all waivers and assignments of moral rights, and all rights to enforce such rights or interests in any work and all other proprietary rights or other intellectual property or intangible assets and any rights to use or exploit the foregoing (together "Intellectual Property Assets"). The Intellectual Property Assets shall not include any right, title and interest in the Excluded Software, Licensed Software and the Third Party Materials; (c) the specific contracts (collectively, the "Assumed Contracts") set forth on SCHEDULE 2.1(c); (d) all right, title and interest of the Vendor in and to the Leased Premises and under the Leases including, without limitation, any prepaid rent and security deposits thereunder and all leasehold improvements owned by the Vendor and forming part of the Leased Premises; (e) an undivided, joint ownership interest in the Customer Lists; (f) all stock on hand of sales and promotional materials, catalogues and advertising literature , including, without limitation, web-based marketing materials, relating exclusively to the Purchased Software ("Marketing Materials"); and (g) all licenses or sub-licenses to computer software, other than Third Party Materials, including all end-user licenses and associated rights related to the "off-the-shelf" commercial software products listed in SCHEDULE 2.1(g) and used by Vendor at the Leased Premises; and (h) all right, title and interest of the Vendor in the Bug Database. 2.2 GRANT OF LICENSE Subject to the terms and conditions hereof, Vendor hereby grants to Purchaser an irrevocable, nonexclusive, perpetual, royalty-free and worldwide license to the Licensed Software to: (a) Use internally and reproduce for internal use, modify, and prepare derivative works based upon the Licensed Software in source code form, directly as well as with the assistance of third-party contractors; (b) Derive object code versions of the Licensed Software from the source code versions for distribution and other uses pursuant to the licenses granted to Purchaser under this Agreement; (c) Produce, reproduce, distribute, transmit and sublicense the right to use object code versions of the Licensed Software, in any manner, format or media whatsoever, and any related documentation, and permitted derivative works based thereon, directly and indirectly through subcontractors, distributors, subdistributors, resellers and OEMs or other distribution channels, and in any media or by any means or methods now or hereafter known; provided that Purchaser is licensed to distribute, transmit and sublicense the right to use copies thereof only when each such copy is licensed to end user customers as part of Purchaser products and not on a stand-alone basis; (d) Grant sublicenses to third parties (including but not limited to OEM, VAR and distributor customers of Purchaser) that permit such third parties to make use of all or any part of the rights Purchaser is granted under this Agreement respecting the object code of the Licensed Software, including the right to further sublicense any such rights; (e) Purchaser will ensure that each copy of the Licensed Software and software incorporating or based upon the Licensed Software that is distributed by Purchaser will be accompanied by an applicable copy of Purchaser's standard End User software license which shall contain provisions regarding the limitation of Vendor's liabilities and protection of Vendor's intellectual property rights that are substantially and materially similar to those customarily used by Purchaser to limit its liabilities and to protect its intellectual property rights; (f) Purchaser agrees that each copy of a Purchaser product which incorporates the Licensed Software shall contain an appropriate Purchaser copyright notice, and that Purchaser shall place such reasonable Vendor proprietary notices in respect of the Licensed Software in the user manual (in electronic and/or hardcopy form) for such Purchaser products in the place where Purchaser gives credit to other third party developers and in the manner and form as Purchaser generally provides credit, identifies trade notices and lists copyright notices; (g) The license rights granted in this Section 2.2 include the right for Purchaser to exploit the Licensed Software in technology and under intellectual property rights not now known, subject to the limitations set out above. Except for the rights granted to Purchaser under this Agreement, Vendor shall retain all right, title and interest, including intellectual property rights in the Licensed Software. Subject to the restrictions set out in Section 2.2(a), Purchaser shall have all right, title and interest, including intellectual property rights in and to all modifications and derivative works created by Purchaser; (h) Purchaser shall comply with all laws, rules, regulations and industry standards existing with respect to the Licensed Software and the performance by Purchaser of its obligations hereunder existing in the jurisdictions where Purchaser carries on activities under this Agreement and where the Licensed Software is licensed or distributed from time to time. Purchaser shall impose the same obligation on its distribution channels, including without limitation any sub-distributor, reseller or OEM who purchase any product in which any portion of the Licensed Software is incorporated from Purchaser. 2.3 LIABILITIES. Purchaser agrees to assume, at the Closing, and from and after the Closing to pay, perform, discharge and satisfy the Assumed Liabilities and will indemnify the Vendor against such liabilities. 2.4 PAYMENT. The purchase price for the Assets shall be $3,886,503USD, which shall be satisfied in full by the issuance of the Issued Shares. 2.5 TAX MATTERS. Vendor and Purchaser agree that the Purchase Price for the Assets shall be based on the fair market value of the Assets as reasonably determined by Vendor and Purchaser, with reference to the net book value of the Assets as recorded in Vendor's accounting records, and as may be required by applicable provisions of the U.S. Internal Revenue Code of 1986, the Canada Income Tax Act, and the Finance Act (Ireland) each as amended. Vendor and Purchaser each agree not to take any tax position that is inconsistent with the allocation agreed upon by the parties. 2.6 CLOSING. Unless this Agreement shall have been terminated pursuant to section 5.1 and subject to the satisfaction or waiver of the conditions set forth in Section 2.7, the closing (the "Closing") of the Transaction shall take place at the Palo Alto offices of Brobeck, Phleger & Harrison LLP at 10:00a.m., California Time, on December 31, 1998 or such sooner date that is the earliest practicable date after all of the conditions to closing set forth in this Agreement have been satisfied or waived in writing, or at such other time or date, and at such other place, of such other means of exchanging documents, as may be agreed to by the parties hereto. The actual date of the Closing is sometimes referred to as the "Closing Date". 2.7 CONDITIONS OF CLOSING. (a) CONDITIONS OF PURCHASER OBLIGATIONS. The obligations of Purchaser hereunder shall be subject to the satisfaction and fulfillment of each of the following conditions, except that Purchaser may expressly waive any or all of the conditions in writing: (i) NO MATERIAL ADVERSE CHANGES. During the Interim Period, there shall not have occurred any impairment to the Assets resulting from any breach of any representation or warranty of Vendor between the Effective Date and the Closing Date of such severity that it is likely to impair the Assets and result in a Material Adverse Effect to the value of the Assets ("Vendor Impairment"). Impairments to the value of the Assets resulting from (A) general changes in economic conditions outside the control of the parties, (B) conduct of Purchaser or any other Person not controlled by Vendor, or (C) announcement of the transactions contemplated by this Agreement or statements or announcements made by Vendor or Purchaser pursuant to this Agreement, shall not be deemed to constitute a Vendor Impairment. (ii) COMPLIANCE. As of the Closing Date, Vendor shall have complied in all material respects with, and shall have fully performed, in all material respects, all conditions, covenants and obligations of this Agreement imposed on Vendor and required to be performed or complied with by Vendor at, or prior to, the Closing Date. (iii) CLOSING DELIVERIES. Vendor shall have delivered, and Purchaser shall have received, the deliveries described in Section 2.8 hereof. (iv) NO LITIGATION. There shall not be an injunction, judgment, order, decree, ruling or charge in effect preventing or delaying consummation of any of the transactions contemplated by this Agreement or the other Transaction Documents. (v) CONSENTS. Vendor shall have obtained all necessary consents to the assignment of the Assumed Contracts and Leases. (vi) OPINION OF VENDOR'S COUNSEL. The Purchaser shall have received the opinion of Vendor's counsel as to the due authorization, execution and delivery,and enforceability of this Agreement in such form as the Purchaser may reasonably require. (b) CONDITIONS TO VENDOR'S OBLIGATIONS. The obligations of Vendor hereunder shall be subject to the satisfaction and fulfillment of each of the following conditions, except that Vendor may expressly waive any or all of the conditions in writing: (i) NO MATERIAL ADVERSE CHANGES. During the Interim Period there will have been no change in the Condition of Purchaser, howsoever arising, except changes which individually or in the aggregate, have not had a Material Adverse Effect on the Condition of the Purchaser. Without limiting the generality of the foregoing, during the Interim Period: A. no damage to or destruction of any material part of the property or assets of the Purchaser shall have occurred; B. Walt Keller shall not have resigned or have indicated his intention to resign from employment with Purchaser, and C. International Business Machines or Sun Microsystems, shall not have ceased, or advised Purchaser or Vendor in writing of their intention to end their relationship with Purchaser or to otherwise cease licensing software product from Purchaser. (ii)COMPLIANCE. As of the Closing Date, Purchaser shall have complied in all material respects with, and shall have fully performed, in all material respects, all conditions, covenants and obligations of this Agreement imposed on Purchaser and required to be performed or complied with by Purchaser at, or prior to, the Closing Date. (iii) CLOSING DELIVERIES Purchaser shall have delivered, and Vendor shall have received, the deliveries described in Section 2.8 hereof. (iv) NO LITIGATION. There shall not be an injunction, judgment, order, decree, ruling, or charge in effect preventing or delaying consummation of any of the transactions contemplated by this Agreement or the other Transaction Documents. (v) OPINION OF PURCHASER'S COUNSEL. The Vendor shall have received the opinion of Purchaser's counsel as to the due authorization, execution and delivery, and enforceability of this Agreement and as to the valid authorization of the Purchased Shares, the Additional Purchased Shares and the Warrant, and the issue of the Purchased Shares and the Warrant, in such form as the Vendor may reasonably require. 2.8 CLOSING DELIVERIES. At the Closing, the parties shall deliver and receive the following: (a) Vendor shall execute and deliver to Purchaser such bills of sale, certificates of title, endorsements, assignments and other good and sufficient instruments of sale, conveyance and transfer and assignment, in form and substance satisfactory to Purchaser, sufficient to sell, convey, transfer, and assign to Purchaser all right, title and interest of Vendor in the Assets; (b) Vendor and Purchaser shall execute and deliver to each other the Securities Purchase Agreement; (c) Vendor shall deliver to Purchaser the items described in Section 2.9; (d) Vendor shall deliver to Purchaser a certificate certifying that the representations and warranties contained in Article 3 are true and correct in all material respects (except for such representations and warranties which are themselves limited by a reference to materiality, which shall be true and correct in all respects) as of the Closing Date; (e) Purchaser shall deliver to Vendor a certificate certifying that the representations and warranties contained in Article 4 are true and correct in all material respects (except for such representations and warranties which are themselves limited by a reference to materiality, which shall be true and correct in all respects) as of the Closing Date; and (f) Purchaser shall deliver to Vendor a share certificate or certificates evidencing the Purchased Shares; and (g) Purchaser shall deliver to Vendor a certificate evidencing the Warrant. 2.9 DELIVERY OF ASSETS. (a) Upon Closing, Vendor will deliver to Purchaser all designs, diagrams, charts, computer software, programming notes and other documentation owned by Vendor relating to the Purchased Software and Trademarks (including, without limitation the Intellectual Property Assets); and (b) Upon Closing, Vendor will deliver to Purchaser all the equipment, furniture, furnishings and accessories and supplies set out in SCHEDULE 2.1(A). (c) Upon Closing, Vendor will deliver to Purchaser the Marketing Materials, the Bug Database, and the Customer Lists, in electronic format. 2.10 ASSIGNMENT OF ASSUMED CONTRACTS AND OTHER LICENSES (a) Upon the Effective Date, Vendor shall assign to Purchaser Vendor's rights under the Assumed Contracts and Leases or shall make such other arrangements as are mutually agreed to by the parties. (b) Nothing in this Agreement shall be construed as an assignment, license, transfer or conveyance of, or an attempt to assign, license, transfer or convey, any license or sub-license referred to in Paragraph 2.1(g) if such license or sub-license is not assignable, licenseable, transferable or conveyable without the consent of a third party (if such consent has not been obtained) and such assignment, license, transfer or conveyance or attempted assignment, license, transfer or conveyance would constitute a breach of such license or sub-license. Vendor shall use commercially reasonable efforts to obtain such consents and shall take all reasonable actions to preserve the benefits of such licenses and sub-licenses for the Purchaser. ARTICLE 3. REPRESENTATIONS AND WARRANTIES OF VENDOR. Vendor represents and warrants to Purchaser as set forth below. 3.1 ORGANIZATION. Corel Corporation, Corel Corporation Limited and Corel, Inc. are corporations duly organized, validly existing and in good standing under the laws of Canada, the Republic of Ireland and the State of Delaware, respectively, and have the corporate power and authority to carry on their business as it is now being conducted. 3.2 POWER, AUTHORITY AND VALIDITY. Vendor has the full corporate power and authority to enter into, execute and deliver this Agreement and the other Transaction Documents to which it is a party and to perform its obligations hereunder and thereunder, including, without limitation, the execution and delivery, general conveyances, bills of sale, assignments, and other documents and instruments evidencing the conveyance of the Assets. All corporate proceedings that are necessary and appropriate for Vendor to authorize, execute and deliver this Agreement and the other Transaction Documents and the performance of its obligations thereunder and hereunder have been taken. No other corporate proceedings on the part of Vendor are necessary to authorize this Agreement and the Transaction Documents or to consummate the transactions so contemplated hereby and thereby. This Agreement and the Transaction Documents to which it is a party constitute valid and binding obligations of Vendor, enforceable in accordance with their terms except as limited by applicable bankruptcy, insolvency, moratorium, reorganization, or other laws affecting creditors' rights and remedies generally, and except as the indemnification provisions contained in this Agreement may be limited by principles of public policy. Vendor is not subject to or obligated under any charter, bylaw or, subject to the obtaining of any required consents set out in Schedule 3.8, any material license, contract, franchise or permit, or subject to any order or decree, which would be breached or violated in a material manner by or in material conflict with the execution and carrying out of this Agreement and the Transaction. 3.3 TAX MATTERS. The Vendor has timely filed all material Tax Returns relating to or affecting the Assets required to be filed and such Tax Returns are complete and correct in all material respects. Vendor has timely paid all Taxes relating to or affecting the Assets. There is no claim for Taxes that operates as a lien against the Assets other than for Taxes not yet due and payable. There are no pending assessments, asserted deficiencies or claims for additional Taxes that affect or pertain to the Assets that have not been paid. There have been no audits or examinations of any tax returns or reports by any applicable Governmental Body that pertain to or could affect the Assets. There is no extension of the statute of limitations on the assessment of any Taxes relating to or affecting the Assets granted by the Vendor and currently in effect. No state of facts exists or has existed which would constitute grounds for the assessment of any penalty or of any further Tax liability with respect to the Assets. 3.4 TITLE. Vendor has good, valid and marketable title to the Tangible Assets free and clear of all Liens and are fully paid. All Tangible Assets are suitable and adequate for use in the ordinary course of business and conform in all material respects to all applicable laws. All leases are binding, valid and enforceable in accordance with their terms subject to the effect, if any, of (i) applicable bankruptcy and other similar laws affecting the rights of creditors generally, and (ii) rules of law governing specific performance, injunctive relief and other equitable remedies, and there are no current defaults or events which have occurred with which the giving of notice or lapse of time or both would constitute a material default under any lease. After the time of Closing, Purchaser will be entitled to the continued use and possession of the Leased Premises, for the terms specified in the Leases and for the purposes for which such property is used. Vendor has no knowledge of any pending or threatened condemnation or similar proceeding affecting Leased Premies. 3.5 PROPRIETARY RIGHTS. (a) SCHEDULE 3.5 sets forth, with respect to each Intellectual Property Asset registered with any Governmental Body or for which an application has been filed with any Governmental Body (e.g. patents, patent applications, registered copyright and registered trademarks), the names of the jurisdictions covered by the applicable registration or application. (b) No claim with respect to the Purchased Software by or against any current or former directors, officers, consultants or employees of Vendor or any third party has been made or now exists and Vendor knows of no basis for any such claims. Vendor is not aware of any breach of any confidentiality agreement in favor of Vendor relating to the Purchased Software either by its current or former directors, officers, consultants, employees or third parties. (c) Vendor has not disposed of in any manner (other than through a license in the ordinary course of business) any rights to the Intellectual Property Assets. (d) Except pursuant to this Agreement, no Person or Entity has any written or oral agreement, option, understanding or commitment, or any right or privilege capable of becoming an agreement, for the purchase or transfer from Vendor of any of the Assets. 3.6 LITIGATION. Except as set out in SCHEDULE 3.6, as of the Effective Date, there is no suit, claim, investigation, action or proceeding, either administrative or judicial (i) pending or, to the best of Vendor's knowledge, threatened against Vendor or any officer or director of Vendor, involving the Assets, at law or in equity, before any federal, state, local, or foreign court, or regulatory agency, or other governmental authority, including, without limitation, any unfair labor practice or grievance proceedings or otherwise, or (ii) which questions or challenges the validity of this Agreement or the Transaction Documents. Except as set out in SCHEDULE 3.6, Vendor has not received any complaints from any of its customers or suppliers within the last six months, which complaints could reasonably be expected individually or in the aggregate, to have a potential adverse effect on the Assets. There is no judgment, decree, injunction, rule or order of any Governmental Body outstanding against Vendor which relates to the ownership, development or distribution of the Assets. 3.7 COMPLIANCE WITH LAWS. Each of Corel Corporation, Corel Corporation Limited and Corel, Inc. has complied and is in compliance with all applicable foreign, federal, state, and local laws, statutes, licensing requirements, rules, and regulations, and judicial or administrative decisions where the failure to so comply could have a Material Adverse Effect on the Assets. 3.8 CONSENTS. Except as set out in SCHEDULE 3.8, the execution and delivery of this Agreement by the Vendor does not, and the performance of this Agreement and the Transaction Documents by the Vendor, including the transfer of the Assets, shall not require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Body, or any other third party, including licensors and lenders. 3.9 CONTRACTS AND COMMITMENTS. Except as set out in SCHEDULE 3.9, Vendor has performed all of its obligations under the terms of each contract to which it is a party, and is not in default thereunder, where such non-performance or default could have a Material Adverse Effect on the Assets. No event or omission has occurred which but for the giving of notice or lapse of time or both would constitute a default by any party thereto under any such contract, where such default by any party could have a Material Adverse Effect on the Assets. Each such contract is valid and binding on all parties thereto and in full force and effect. Vendor has received no notice of default, cancellation, or termination in connection with any such contract. 3.10 TANGIBLE ASSETS. The Tangible Assets are suitable for the purpose or purposes for which they are being used, are in good operating condition and in reasonable repair, and free from any known defects, except such minor defects as do not interfere with the continued use thereof. Each tangible Asset has been serviced and maintained in accordance with customary industry practices. 3.11 BUG DATABASE. The Bug Database delivered to Purchaser hereunder shall contain a listing of all critical bugs in the Purchased Software known to Vendor as of Closing. 3.12 NO CONFLICT OR DEFAULT. Subject to obtaining the consents set out in Schedule 3.8, neither the execution and delivery of this Agreement or any other Transaction Document, nor compliance with the terms and provisions hereof and thereof, including without limitation, the consummation of the transactions contemplated hereby and thereby, will violate any statute, regulation, or ordinance of any Governmental Body, or conflict with or result in the breach of any term, condition, or provision of its Articles of Incorporation or Bylaws, as presently in effect, or of any agreement, deed, contract, mortgage, indenture, writ, order, decree, legal obligation, or instrument to which Vendor is a party or by which it or any of the Assets are or may be bound, or constitute a default (or an event which, with the lapse of time or the giving of notice, or both, would constitute a default) thereunder. 3.13 LABOR RELATIONS. (a) There are no labor controversies pending or threatened between Vendor and any of its employees listed on Schedule 8.3 (a)(i) or (ii), or any labor union or other collective bargaining unit representing any such employees. (b) Vendor has never entered into a collective bargaining agreement or other labor union contract relating to the employees listed on Schedule 8.3 (a)(i) or (ii). (c) There are no written employment or separation agreements, or oral employment or separation agreements which create a fixed term of employment or which contain severance benefits between Vendor and any of the employees listed on Schedule 8.3 (a)(i) or (ii). 3.14 COMPLETE DISCLOSURE. The copies of all instruments, agreements, other documents and written information delivered by Vendor to the Purchaser or its counsel are and will be complete and correct in all material respects as of the date of delivery thereof. 3.15 CONSENTS. Vendor shall promptly apply for or otherwise seek, and use its best efforts to obtain, all consents and approvals required for the consummation of the transactions set forth hereby, other than any consents required to assign to Purchaser the commercial software licenses set out in Section 2.1(g), which Vendor shall use its diligent efforts to obtain. 3.16 BEST EFFORTS. Vendor shall use its best efforts to effectuate the transactions contemplated hereby and to fulfill and cause to be fulfilled the conditions to Closing under this Agreement. 3.17 DISCLAIMER OF OTHER WARRANTIES. THE WARRANTIES IN THIS SECTION 3 AS THEY RELATE TO THE ASSETS ARE IN LIEU OF ALL OTHER WARRANTIES OR CONDITIONS, EXPRESS OR IMPLIED, IN FACT OR IN LAW, INCLUDING BUT NOT LIMITED TO ANY IMPLIED WARRANTIES OR CONDITIONS OF MERCHANTABLE QUALITY, MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT AND THOSE ARISING BY STATUTE OR OTHERWISE IN LAW OR FROM A COURSE OF DEALING OR USAGE OF TRADE. ARTICLE 4. REPRESENTATIONS AND WARRANTIES OF PURCHASER. Purchaser represents and warrants to Vendor that: 4.1 ORGANIZATION AND GOOD STANDING. Purchaser is a corporation duly organized, validly existing and in good standing under the laws of the State of California, and has full power and authority to carry on its business as now conducted. 4.2 POWER, AUTHORIZATION AND VALIDITY. Purchaser has the right, power, legal capacity and authority to enter into and perform its obligations under this Agreement and the other Transaction Documents to which it is a party. To the extent required, the execution and delivery of this Agreement and the other Transaction Documents have been duly and validly approved and authorized by the Board of Directors of Purchaser. No authorization or approval, governmental or otherwise, is necessary in order to enable Purchaser to enter into and to perform the terms of this Agreement or other Transaction Documents on its part to be performed. 4.3 NO VIOLATION OF EXISTING AGREEMENTS. Neither the execution and delivery of this Agreement nor the consummation of the Transaction will conflict with, or result in a material breach or violation of, any provision of Purchaser's articles of incorporation or bylaws, as currently in effect, any material instrument or material contract to which Purchaser is a party or by which it is bound, or any federal, provincial, state or local judgment, writ, decree, order, statute, rule or regulation applicable to it, if such conflict or material breach or violation of such judgement, writ, decree, order, statute, rule or regulation would have a Material Adverse Effect on the Condition of the Purchaser. 4.4 LITIGATION. There is no suit, action, proceeding, claim or investigation pending or, to the best of Purchaser's knowledge, threatened against Purchaser before any court or administrative agency or which questions or challenges the validity of this Agreement. ARTICLE 5. TERMINATION; SURVIVAL AND LIMITATIONS OF REPRESENTATIONS AND WARRANTIES 5.1 TERMINATION. This Agreement may be terminated prior to the Closing as follows: (a) at any time on or prior to the Closing Date, by mutual written consent of the Company and the Purchaser; (b) at the election of the Company or the Purchaser by written notice to the other parties hereto after 5:00 p.m., California time, on December 31, 1998, if the Closing shall not have occurred, unless such date is extended by the mutual written consent of the Company and the Purchaser; (c) at the election of the Company, if there has been a material breach of any representation, warranty, covenant or agreement on the part of the Purchaser contained in this Agreement, which breach has not been cured within 15 Business Days of notice to the Purchaser of such breach; or (d) at the election of the Purchaser, if there has been a material breach of any representation, warranty, covenant or agreement on the part of the Company contained in this Agreement, which breach has not been cured within 15 Business Days notice to the Company of such breach. If this Agreement so terminates, it shall become null and void and have no further force or effect, except as provided in Section 5.2. 5.2 SURVIVAL. If this Agreement is terminated and the transactions contemplated hereby are not consummated as described above, this Agreement shall become void and of not further force and effect; except for the provisions of Article 1 and this Section 5.2; PROVIDED that (a) none of the parties hereto shall have any liability in respect of a termination of this Agreement pursuant to Section 5.1(a)or 5.1(b) and (b) nothing shall relieve any of the parties from liability for actual damages resulting from a termination of this Agreement pursuant to Section 5.1(c) or 5.1(d); and PROVIDED, FURTHER, that none of the parties hererto shall have any liability for speculative, indirect, unforeseeable or consequential damages resulting from any legal action relating to this Agreement or any termination of this Agreement. 5.3 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. (a) Subject to Sections 5.1 and 5.2, the representations and warranties made by Vendor shall survive Closing and shall remain in full force and effect and shall survive until the end of the Indemnification Period and shall survive thereafter only with respect to any claims made prior to the end of the Indemnification Period. The representations and warranties made by Purchaser herein shall survive the Closing and shall remain in full force and effect and shall survive until the end of the Indemnification Period and shall survive thereafter only with respect to any claims made prior to the end of the Indemnification Period. (b) The representations, warranties, covenants and obligations of Vendor and Purchaser, and the rights and remedies that may be exercised by the Purchaser Indemnitees or the Vendor Indemnitees, shall not be limited or otherwise affected by or as a result of any information furnished to, or any investigation made by or knowledge of, any of the Purchaser Indemnitees, the Vendor Indemnitees, or any of their Representatives. ARTICLE 6. LIMITATION ON WARRANTY CLAIMS 6.1 LIMITATION ON WARRANTY CLAIM(S) BY VENDOR. (a) The Vendor shall not be entitled to make a Warranty Claim if the Vendor has been advised in writing or otherwise has actual knowledge prior to Closing of the inaccuracy, non-performance, non-fulfilment or breach which is the basis for such Warranty Claim and the Vendor completes the transactions hereunder notwithstanding such inaccuracy, non-performance, non-fulfilment or breach. (b) The amount of any damages which may be claimed by the Vendor pursuant to a Warranty Claim shall be calculated to be the cost or loss to the Vendor after giving effect to: (i) any insurance proceeds available to the Vendor in relation to the matter which is the subject of the Warranty Claim, and (ii) the value of any related, determinable tax benefits realized, or to be realized within a two (2) year period following the date of incurring such cost or loss, by the Vendor in relation to the matter which is the subject of the Warranty Claim. (c) Vendor shall not be entitled to make any Warranty Claim until such time as the total amount of all Damages (including the Damages directly arising from such inaccuracy or breach and all other Damages arising from any other inaccuracies in or breaches of any representations, warranties, covenants or obligations) that have been directly suffered or incurred by the Vendor exceeds Twenty-Five Thousand Dollars ($25,000). Notwithstanding the foregoing, in the event the total amount of all such Damages exceed Twenty-Five Thousand Dollars, Purchaser's liability shall include the initial Twenty-Five Thousand Dollars ($25,000) amount. Except in the event of a breach by Purchaser of the confidentially provisions set out in Section 8.2 (to which the limitation in this section 6.1 shall not apply), the maximum aggregate liability of the Purchaser in respect of all Warranty Claims by the Vendor will be limited to $760,000. 6.2 LIMITATION ON WARRANTY CLAIM(S) BY PURCHASER (a) The Purchaser shall not be entitled to make a Warranty Claim if the Purchaser has been advised in writing or otherwise has actual knowledge prior to Closing of the inaccuracy, non-performance, non-fulfilment or breach which is the basis for such Warranty Claim and the Purchaser completes the transactions hereunder notwithstanding such inaccuracy, non-performance, non-fulfilment or breach. (b) The amount of any damages which may be claimed by the Purchaser pursuant to a Warranty Claim shall be calculated to be the cost or loss to the Purchaser after giving effect to: (i) any insurance proceeds available to the Purchaser in relation to the matter which is the subject of the Warranty Claim, and (ii) the value of any related, determinable tax benefits realized, or to be realized within a two (2) year period following the date of incurring such cost or loss, by the Purchaser in relation to the matter which is the subject of the Warranty Claim. (c) Purchaser shall not be entitled to make any Warranty Claim until such time as the total amount of all Damages (including the Damages directly arising from such inaccuracy or breach and all other Damages arising from any other inaccuracies in or breaches of any representations, warranties, covenants or obligations) that have been directly suffered or incurred by the Purchaser exceeds Twenty-Five Thousand Dollars ($25,000). Notwithstanding the foregoing, in the event the total amount of all such Damages exceed Twenty-Five Thousand Dollars, Vendor's liability shall include the initial Twenty-Five Thousand Dollars ($25,000) amount. Except in the event of a breach by Vendor of the confidentially provisions set out in Section 8.2 (to which the limitation in this section 6.2 shall not apply), the maximum aggregate liability of the Vendor in respect of all Warranty Claims by the Purchaser will be limited to $760,000. ARTICLE 7. POST-CLOSING COVENANTS REGARDING TRANSITION SUPPORT. 7.1 TRANSITION SERVICES. Vendor agrees to provide certain quality assurance testing ("QA Testing"), sales and marketing ("Sales Assistance") assistance, and employee relocation assistance to Purchaser as described herein in order to facilitate the orderly transition of the development and marketing of the Purchased Software from Vendor to Purchaser. Vendor and Purchaser shall each appoint one designated representative who shall act as the point of contact with respect to Transition Services. (a) QA TESTING. For a period of ninety (90) days from Closing, Vendor shall continue to provide QA Testing for the Purchased Software at Vendor's headquarters in Ottawa in accordance with its existing practices and policies. Vendor shall have the discretion to use any employee or contractor to perform the QA Testing; provided that the level of testing is at least equivalent to the current level of QA Testing for the Purchased Software. Vendor shall provide the QA Testing services to Purchaser at no cost. (b) CUSTOMER TRANSITION AND SALES ASSISTANCE. For a period of thirty (30) days from Closing, Vendor shall make Eric Lefebvre available to debrief Purchaser regarding the status of the relationship and/or negotiations with existing and prospective customers for the Purchased Software, and to contact and accompany Purchaser personnel in visiting such existing and prospective customers. Purchaser will cover all costs of travel and other out-of-pocket cost incurred in connection with the assistance provided by Eric Lefebvre, but Purchaser will not be charged for his services. (c) EMPLOYEE RELOCATION COSTS. Vendor shall pay Relocation Costs for up to three (3) employees from Canada, and up to three (3) employees from the United States, listed on Schedule 8.3(a)(ii), or otherwise approved by Vendor; provided any such employees from Vendor's Orem, Utah site who are currently being paid a completion bonus may not commence employment with Purchaser prior to February 1st, 1999. 7.2 FURTHER ASSURANCES. Vendor agrees to provide to Purchaser such assistance as Purchaser shall reasonably request in order to fulfill the intent of this Agreement. To the extent that Vendor fails to provide such assistance, Vendor hereby grants to Purchaser a permanent, irrevocable power of attorney to perform on Vendor's behalf all actions necessary or useful to meet the objectives of this Agreement. ARTICLE 8. OTHER POST-CLOSING COVENANTS. 8.1 PUBLIC ANNOUNCEMENT. Vendor and Purchaser agree to make no public announcement concerning the transactions contemplated by this Agreement or the terms of this Agreement (other than to their respective employees or agents) except as provided in this Section 8.1. The initial public announcement concerning the transactions contemplated by this Agreement shall be made with the prior approval of both Vendor and Purchaser, which approval shall not be unreasonably delayed or withheld. Neither party will disclose the financial terms of the Transaction, except for the Purchase Price, or the terms of the representations and warranties, indemnification obligations or similar provisions of this Agreement, except as permitted below. A party may disclose terms of this Agreement that are otherwise required to be kept confidential under this Section 6.1 where required by judicial or other governmental order, provided that such party makes every reasonable effort to obtain confidential treatment or similar protection to the fullest extent available to avoid public disclosure of the terms of this Agreement. A party required by law to make disclosure of the terms of this Agreement will promptly notify the other party and permit the other party to review and participate in the application process seeking confidential treatment. Either party may disclose, under confidentiality and use restrictions, such terms of this Agreement as are reasonably necessary to disclose for purposes of customary due diligence relating to acquisition transactions, financings, borrowings or the like. Both parties shall remain free to disclose the existence of this Agreement and the origin and ownership of the Assets to which rights have been granted or transferred under this Agreement. 8.2 CONFIDENTIALITY. (a) Each party acknowledges that in the course of the performance of this Agreement, it will obtain non-public technical and business information which is the valuable confidential and proprietary information of the other ("Confidential Information"), including, without limitation, source code for any computer software, source code documentation, Trade Secrets, all nonpublic documents obtained from the disclosing party which the receiving party would not otherwise have been entitled to obtain, information which is identified with a suitable legend identifying it as confidential or proprietary information of a party, or related information which is disclosed orally. (b) All such Confidential Information shall be treated as strictly confidential by the receiving party and its employees, contractors and agents and shall not be disclosed by the receiving party without the disclosing party's prior written consent. However, the receiving party may disclose Confidential Information of the disclosing party in accordance with judicial or other governmental order, provided the receiving party shall continue to otherwise hold the information in confidence, shall give the disclosing party reasonable notice prior to such judicial or governmental disclosure and shall comply with any applicable protective order or equivalent. The obligations of confidence under this Agreement will not apply to information which the receiving party can establish before a court of competent jurisdiction: (i) prior to or after the time of disclosure becomes part of the public domain without the act or omission of the party to whom it was disclosed; (ii) is disclosed to the receiving party by a third party under no legal obligation to maintain the confidentiality of such information; or (iii) was independently developed by the receiving party. (c) Neither party shall in any way duplicate all or any part of the other party's Confidential Information, except in accordance with the terms and conditions of this Agreement. Each party shall have an appropriate agreement with each of its employees, contractors and agents having access to the other party's Confidential Information sufficient to enable that party to comply with all the terms of this Agreement. Each party agrees to protect the other's Confidential Information with a fiduciary duty and shall adopt or maintain procedures to protect such Confidential Information commensurate with such duty. (d) Each party agrees not to disclose any such Confidential Information without the prior written consent of the other, to anyone other than that party's employees, contractors and agents who have a need to know same to carry out the rights granted hereunder. Each party shall use its reasonable efforts to protect all such Confidential Information from material harm, damage, theft, tampering, sabotage, interference or unauthorized use, during the term of this Agreement and during such time as such Confidential Information remains in the possession of the other party. (e) Each party shall promptly report to the other any actual or suspected violation of the terms of this Section 8.2, and shall take all reasonable steps to prevent, control or remedy such violation. (f) In recognition of the unique and proprietary nature of the Confidential Information disclosed by the parties, it is agreed that each party's remedies at law for a breach by the other of its obligations under this Section 8.2 shall be inadequate and the disclosing party shall, in the event of such breach be entitled to seek equitable relief, including without limitation, injunctive relief and specific performance, in addition to any other remedies provided hereunder or available at law. 8.3 EMPLOYEE MATTERS. (a) During the Interim Period, Purchaser hereby agrees to offer employment to employees of the Vendor associated with the development, sales and marketing of the Purchased Software as further described in SCHEDULE 8.3(a)(I) hereto ("Required Offers") and shall also be entitled to offer employment to those employees of the Vendor as further described in SCHEDULE 8.3(b)(II) (together"Employees"). The parties agree that the Required Offers do not have to be on the same terms and conditions as such Employees are currently employed by Vendor; provided that Purchaser agrees to make offers of employment that are reasonably calculated to provide a compensation package that is comparable in value to that currently held by such Employees. Those Employees who accept such offers shall hereafter collectively be referred to as the "Transferred Employees". The Vendor will be responsible for severance obligations, if any, with respect to Employees who do not accept the Purchaser's offer of employment. If Purchaser terminates any Transferred Employee, Purchaser shall be responsible for severance obligations, if any, to such Transferred Employees. (b) Except with the prior written consent of Vendor, for a period of one (1) year from the Effective Date, Purchaser, and any Affiliate of Purchaser, shall be prohibited from making any offer of employment to any employee of Vendor, other than those Employees described in subsection 8.3(a). ARTICLE 9. INDEMNIFICATION. 9.1 INDEMNIFICATION BY VENDOR. (a) From and after Closing during the Indemnification Period, Vendor shall hold harmless, defend, indemnify and pay for the defense of each of the Purchaser Indemnitees from and against, and shall compensate and reimburse each of the Purchaser Indemnitees for, any Damages which are suffered or incurred by any of the Purchaser Indemnitees or to which any of the Purchaser Indemnitees may otherwise become subject (regardless of whether or not such Damages relate to any third-party claim) and which arise from or as a result of, or are connected with: (i) any inaccuracy in or breach of any representation or warranty set forth in Article 3 hereunder or in any certificate delivered by Vendor in connection with this Agreement; (ii) any breach of any covenant or obligation of Vendor hereunder; (iii) any Legal Proceeding resulting from the items referred to in clause (i) or (ii) above (including any Legal Proceeding commenced by any Purchaser Indemnitee for the purpose of enforcing any of its rights under this Section 9.1 if such Purchaser Indemnitee is the prevailing party in any such Legal Proceeding); (iv) any third party claim commenced after the Closing Date which alleges (i) that the Purchased Software, Trademarks, or any other right or property acquired by Purchaser hereunder, infringe any U.S. or Canadian copyright, trademark, trade secret right, patent right that has been issued as of the Effective Date, or other proprietary right. The foregoing indemnification does not extend to any claim arising out of a modification by Purchaser to the Purchased Software to the extent such claim would not have arisen had such modification not been made or the combination of any portion of the Purchased Software with any other software or hardware product. THE FOREGOING STATES THE ENTIRE LIABILITY AND OBLIGATIONS OF VENDOR AND THE EXCLUSIVE REMEDY OF PURCHASER WITH RESPECT TO ANY ALLEGED INTELLECTUAL PROPERTY INFRINGEMENT BY THE PURCHASED SOFTWARE. (b) The obligations of indemnification by the Vendor pursuant to Section 9.1(a) are: (i) subject to the limitations referred to in Section 5.3 with respect to the survival of the representations and warranties by the Purchaser; (ii) subject to the limitations referred to in section 6.2 ; and (iii) subject to the provisions of sections 9.3, 9.4, 9.5 and 9.6. 9.2 INDEMNIFICATION BY PURCHASER. (a) From and after Closing during the Indemnification Period, Purchaser shall hold harmless, defend, indemnify and pay for the defense of each of the Vendor Indemnitees from and against, and shall compensate and reimburse each of the Vendor Indemnitees for, any Damages which are suffered or incurred by any of the Vendor Indemnitees or to which any of the Vendor Indemnitees may otherwise become subject (regardless of whether or not such Damages relate to any third-party claim) and which arise from or as a result of, or are connected with: (i) any inaccuracy in or breach of any representation or warranty set forth in Article 4 hereunder or in any certificate delivered by Purchaser in connection with this Agreement; (ii) any breach of any covenant or obligation of Purchaser hereunder; or (iii) any Legal Proceeding resulting from the items referred to in clause (i) or (ii) above (including any Legal Proceeding commenced by any Vendor Indemnitee for the purpose of enforcing any of its rights under this Section 9.2 if such Purchaser Indemnitee is the prevailing party in any such Legal Proceeding); or (iv) any third party claim after Closing alleging that any product developed, marketed or distributed by or on behalf of Purchaser, excluding the unmodified Purchased Software, infringes any copyright, trade-mark, confidentiality right, patent or other intellectual property right of any third party. (b) The obligations of indemnification by the Vendor pursuant to Section 9.2(a) are: (i) subject to the limitations referred to in Section 5.3 with respect to the survival of the representations and warranties by the Purchaser; (ii) subject to the limitations referred to in section 6.1 ; and (iii) subject to the provisions of sections 9.3, 9.4, 9.5 and 9.6. 9.3 NOTICE OF CLAIM. If an Indemnified Party becomes aware of a claim or Legal Proceeding in respect of which indemnification is provided for pursuant to either of Section 9.1 or 9.2, as the case may be, the Indemnified Party shall promptly give written notice of the claim or Legal Proceeding to the Indemnifying Party. Such notice shall specify whether the claim or Legal Proceeding arises as a result of a claim by a Person against the Indemnified Party (a "THIRD PARTY CLAIM") or whether the claim does not so arise (a "DIRECT CLAIM"), and shall also specify with reasonable particularity (to the extent that the information is available): (a) the factual basis for the claim; and (b) the amount of the claim, if known, the basis thereof and documentation supporting the same. If, through the fault of the Indemnified Party, the Indemnifying Party does not receive notice of any claim or Legal Proceeding in time effectively to contest the determination of any liability susceptible of being contested, then the liability of the Indemnifying Party to the Indemnified Party under this Article shall be reduced by the amount of any losses incurred by the Indemnifying Party resulting from the Indemnified Party's failure to give such notice on a timely basis. 9.4 DIRECT CLAIMS. In the case of a Direct Claim, the Indemnifying Party shall have 30 days from receipt of notice of the claim within which to make such investigation of the claim as the Indemnifying Party considers necessary or desirable. For the purpose of such investigation, the Indemnified Party shall make available to the Indemnifying Party the information relied upon by the Indemnified Party to substantiate the claim, together with all such other information as the Indemnifying Party may reasonably request, provided, however, that the Indemnifying Party agrees at all times to maintain the Confidentiality of such information. If both parties agree at or before the expiration of such 60 day period (or any mutually agreed upon extension thereof) to the validity and amount of such claim, the Indemnifying Party shall immediately pay to the Indemnified Party the full agreed upon amount of the claim, failing which the matter shall be referred to binding arbitration in accordance with Section 10.9. 9.5 THIRD PARTY CLAIMS. In the case of a Third Party Claim, the Indemnifying Party shall have the right, at its expense, to participate in or assume control of the negotiation, settlement or defense of the claim or Legal Proceeding and, in such event, the Indemnifying Party shall reimburse the Indemnified Party for all of the Indemnified Party's out-of-pocket expenses as a result of such participation or assumption. If the Indemnifying Party elects to assume such control, the Indemnified Party shall have the right to participate in the negotiation, settlement or defence of such Third Party Claim and to retain counsel to act on its behalf, provided that the fees and disbursements of such counsel shall be paid by the Indemnified Party unless the Indemnifying Party consents to the retention of such counsel at its expense. If the Indemnifying Party, having elected to assume such control, thereafter fails to defend the Third Party Claim within a reasonable time, the Indemnified Party shall be entitled to assume such control and the Indemnifying Party shall be bound by the results obtained by the Indemnified Party with respect to such Third Party Claim and shall solely bear all reasonable expenses associated with the defense of such Third Party Claim. If either Party makes a payment, resulting in settlement of the Third Party Claim, which precludes a final determination of the merits of the Third Party Claim and the Indemnified Party and the Indemnifying Party are unable to agree whether such payment was unreasonable in the circumstances having regard to the amount and merits of the Third Party Claim, then such dispute shall be referred to and finally settled by binding arbitration in accordance with Section 10.9. 9.6 SETTLEMENT OF THIRD PARTY CLAIMS. If the Indemnifying Party fails to assume control of the defense of any Third Party Claim, the Indemnified Party shall have the exclusive right to contest, settle or pay the amount claimed and the Indemnifying Party shall be bound by the results obtained by the Indemnified Party with respect to such Third Party Claim and shall solely bear all reasonable expenses associated with the defense of such Third Party Claim. Whether or not the Indemnifying Party assumes control of the negotiation, settlement or defense of any Third Party Claim, neither party shall settle any Third Party Claim without the written consent of the other party, which consent shall not be unreasonably withheld or delayed; provided, however, that the liability of such party shall be limited to the proposed settlement amount if any such consent is not obtained for any reason within a reasonable time after the request therefor. If the exercise by Purchaser of any of the rights granted to it pursuant to this Agreement is enjoined or, in Vendor's reasonable opinion, is likely to be enjoined due to the type of infringement or misappropriation specified in Paragraph 9.1 above, without prejudice to the rights and remedies of Purchaser, shall upon request of Purchaser and at Purchaser's expense, provide reasonable cooperation to Purchaser and its counsel with all necessary technical information related to the design regarding defense or other resolution of the claim. ARTICLE 10. MISCELLANEOUS. 10.1 GOVERNING LAWS. It is the intention of the parties that the laws of the State of New York (irrespective of its choice of law principles and excluding the United Nations Convention on Contracts for the International Sale of Goods and any legislation implementing such Convention, if otherwise applicable) shall govern the validity of this Agreement, the construction of its terms, and the interpretation and enforcement of the rights and duties of the parties. 10.2 BINDING UPON SUCCESSORS AND ASSIGNS. Subject to, and unless otherwise provided in, this Agreement, each and all of the covenants, terms, provisions, and agreements contained herein shall be binding upon, and inure to the benefit of, the permitted successors, executors, heirs, representatives, administrators and assigns of the parties. 10.3 SEVERABILITY. If any provision of this Agreement, or the application thereof, shall for any reason and to any extent be invalid or unenforceable, the remainder of this Agreement and application of such provision to other persons or circumstances shall be interpreted so as best to reasonably effect the intent of the parties. The parties further agree to replace such void or unenforceable provision of this Agreement with a valid and enforceable provision which will achieve, to the extent possible, the economic, business and other purposes of the void or unenforceable provision. 10.4 ENTIRE AGREEMENT. This Agreement, the exhibits hereto, the documents referenced herein, including, without limitation the Securities Purchase Agreement, and the exhibits thereto, constitute the entire understanding and agreement of the parties with respect to the subject matter hereof and thereof and supersede all prior and contemporaneous agreements or understandings, inducements or conditions, express or implied, written or oral, between the parties with respect hereto and thereto. 10.5 COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which shall be an original as against any party whose signature appears thereon and all of which together shall constitute one and the same instrument. This Agreement shall become binding when one or more counterparts hereof, individually or taken together, shall bear the signatures of all of the parties reflected hereon as signatories. A facsimile copy of this Agreement bearing the signature of a party to this Agreement shall be considered an original as against such party. 10.6 EXPENSES. Each party shall pay all of its own costs and expenses incurred with respect to the negotiation, execution and delivery of this Agreement and the exhibits hereto including all legal and accounting fees and expenses, whether or not the Transaction is consummated. 10.7 AMENDMENT AND WAIVERS. Any term or provision of this Agreement may be amended, and the observance of any term of this Agreement may be waived (either generally or in a particular instance and either retroactively or prospectively) only by a writing signed by the party to be bound thereby. The waiver by a party of any breach hereof for default in payment of any amount due hereunder or default in the performance hereof shall not be deemed to constitute a waiver of any other default or any succeeding breach or default. 10.8 NO WAIVER. The failure of any party to enforce any of the provisions hereof shall not be construed to be a waiver of the right of such party thereafter to enforce such provisions. 10.9 ARBITRATION. The parties agree that they shall use all reasonable efforts to amicably settle disagreements arising from or in connection with this Agreement. To this effect, following notice of either party to the other of a disagreement (which shall include any failure to agree upon a matter to be agreed upon), the parties shall consult and negotiate with one another in good faith an understanding to reach a just and equitable solution. If those attempts fail after a period of fifteen (15) Business Days from the time the parties have been notified of the disagreement, then either party may refer the matter to arbitration, by written notice to the other party. Notwithstanding the foregoing, the parties shall be entitled to seek injunctive relief or other equitable remedies from any court of competent jurisdiction. Except where clearly prevented by the issue in dispute, the parties agree to continue performing their respective obligations under this Agreement and the other related agreements entered into in connection with this Agreement while the dispute is being resolved unless and until such obligations are terminated or expire in accordance with the provisions hereof. 10.10 NOTICES. Any notice provided for or permitted under this Agreement will be treated as having been given when (i) delivered personally, (ii) sent by confirmed facsimile with a copy sent by mail, (iii) sent by commercial overnight courier with written verification of receipt, or (iv) mailed postage prepaid by certified or registered mail, return receipt requested, to the party to be notified, at the address set forth below, or at such other place of which the other party has been notified in accordance with the provisions of this Section 10.10. Vendor: Corel Corporation 1600 Carling Ave. Ottawa, Ontario K1Z 8R7 Attention: President With copy to: Legal Department Purchaser: GraphOn Corporation 150 Harrison Avenue Campbell, CA 95008 USA Attention: President With copy to: Brobeck, Phleger & Harrison LLP Two Embarcadero Place 2200 Geng Road Palo Alto, California 94303-0913 Attention: Thomas A. Bevilacqua Fax: 650-496-2722 Such notice will be treated as having been received upon actual receipt. 10.11 CONSTRUCTION OF AGREEMENT. The titles and headings herein are for reference purposes only and shall not in any manner limit the construction of this Agreement which shall be considered as a whole. 10.12 NO PARTNERSHIP OR JOINT VENTURE. Nothing contained in this Agreement shall be deemed or construed as creating a partnership, joint venture between the parties. No party is by virtue of this Agreement authorized as an agent, employee or legal representative of the other party. No party shall have the power to control the activities and operations of the other and their status is, and at all times, will continue to be, that of independent contractors with respect to each other. No party shall have any power or authority to bind or commit the other party. No party shall hold itself out as having any authority or relationship in contravention of this Section 10.12. 10.13 FURTHER ASSURANCES. Each party agrees to cooperate fully with the other parties and to execute such further instruments, documents and agreements and to give such further written assurances, as may be reasonably requested by the other party to better evidence and reflect the transactions described herein and contemplated hereby and to carry into effect the intents and purposes of this Agreement 10.14 ABSENCE OF THIRD PARTY BENEFICIARY RIGHTS. No provisions of this Agreement are intended, nor shall be interpreted, to provide or create any third party beneficiary rights or any other rights of any kind in any client, customer, affiliate, shareholder, partner of any party or any other person or entity unless specifically provided otherwise herein, and, except as so provided, all provisions hereof shall be personal solely between the parties to this Agreement. IN WITNESS WHEREOF, the parties have executed this Agreement as of the date first set forth above. COREL CORPORATION COREL CORPORATION LIMITED Per: Per: --------------------------- -------------------------- Name: Name: Title: Title: Per: --------------------------- Name: Title: COREL, INC. GRAPHON CORPORATION Per: Per: ---------------------------- -------------------------- Name: Name: Walt Keller Title: Title: President EX-10.5 8 EXHIBIT 10.5 Exhibit 10.5 ------------------------------------------------------------------------- SECURITIES PURCHASE AGREEMENT AMONG GRAPHON CORPORATION AND EACH OF COREL CORPORATION, COREL CORPORATION LIMITED AND COREL, INC. ------------------------- Dated as of December 18, 1998 -------------------------- ------------------------------------------------------------------------- TABLE OF CONTENTS
Page ARTICLE 1 DEFINITIONS..............................................................1 1.1 Definitions......................................................1 1.2 Accounting Terms; Financial Statements...........................7 ARTICLE 2 PURCHASE AND SALE........................................................7 2.1 Purchase and Sale of Securities..................................7 2.2 Closing .........................................................7 ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY............................7 3.1 Corporate Existence and Power....................................7 3.2 Authorization; No Contravention..................................8 3.3 Governmental Authorization.......................................8 3.4 Binding Effect...................................................8 3.5 Litigation.......................................................8 3.6 Compliance with Laws.............................................8 3.7 Capitalization...................................................8 3.8 No Default or Breach; Contractual Obligations....................9 3.9 Title to Properties.............................................10 3.10 FIRPTA..........................................................10 3.11 Financial Statements............................................10 3.12 Taxes...........................................................10 3.13 No Material Adverse Change......................................11 3.14 Investment Company..............................................11 3.15 Private Offering................................................11 3.16 Labor Relations.................................................11 3.17 Title to Assets.................................................11 3.18 Liabilities.....................................................12 3.19 Intellectual Property...........................................12 3.20 Insurance.......................................................12 3.21 Environmental Matters...........................................12 3.22 Broker's, Finder's or Similar Fees..............................13 3.23 Complete Disclosure.............................................13 3.24 Best Efforts....................................................13 3.25 Private Placement Memorandum....................................13 ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS........................13 4.1 Existence and Power.............................................13 4.2 Authorization; No Contravention.................................13 4.3 Governmental Authorization; Third Party Consents................13 4.4 Binding Effect..................................................13 4.5 Purchase for Own Account........................................14 4.6 Restricted Securities...........................................14 4.7 Broker's, Finder's or Similar Fees..............................15
ARTICLE 5 CONDITIONS TO THE OBLIGATION OF THE PURCHASER TO CLOSE..................15 5.1 Representations and Covenants...................................15 5.2 Secretary's Certificate.........................................15 5.3 Documents.......................................................15 5.4 Warrant.........................................................15 5.5 Purchased Shares................................................15 5.6 Consents and Approvals..........................................16 5.7 Securities Exemption............................................16 5.8 Due Diligence Review............................................16 5.9 Additional Private Placement Closing............................16 5.10 Private Placement Memorandum....................................16 ARTICLE 6 CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE....................16 6.1 Representations and Covenants...................................16 6.2 Secretary's Certificate.........................................17 6.3 Documents.......................................................17 6.4 Asset Purchase Agreement........................................17 6.5 Consents and Approvals..........................................17 ARTICLE 7 AFFIRMATIVE COVENANTS...................................................17 7.1 Financial Statements and Other Information......................17 7.2 Reservation of Common Stock.....................................18 7.3 Books and Records...............................................18 7.4 Board of Directors..............................................18 7.5 Issuance of Stock...............................................18 7.6 Market Stand-Off................................................18 7.7 Registration....................................................19 7.8 Preemptive Rights...............................................19 ARTICLE 8 MISCELLANEOUS...........................................................20 8.1 Survival of Representations and Warranties......................20 8.2 Notices.........................................................20 8.3 Successors and Assigns; Third Party Beneficiaries...............21 8.4 Amendment and Waiver............................................21 8.5 Counterparts....................................................21 8.6 Headings........................................................22 8.7 GOVERNING LAW...................................................22 8.8 Severability....................................................22 8.9 Entire Agreement................................................22 8.10 Further Assurances..............................................22 8.11 Arbitration.....................................................22 ARTICLE 9 TERMINATION OF AGREEMENT................................................23 9.1 TERMINATION.....................................................23 9.2 SURVIVAL........................................................23 ARTICLE 10 INDEMNIFICATION........................................................23 10.1 Indemnification by Purchaser....................................23
10.2 Indemnification by Company......................................24 10.3 Notice of Claim.................................................25 10.4 Direct Claims...................................................26 10.5 Third Party Claims..............................................26 10.6 Settlement of Third Party Claims................................26 ARTICLE 11 LIMITATION ON WARRANTY CLAIMS..........................................27 11.1 Limitation on Warranty Claim(s) by Purchaser....................27 11.2 Limitation on Warranty Claim(s) by Company......................27
EXHIBITS A. Warrant B. Asset Purchase Agreement COMPANY DISCLOSURE SCHEDULES 3.5 Litigation 3.8 Defaults or Breaches of Contractual Obligations; Contractual Obligations 3.13 No Material Adverse Change; Ordinary Course of Business 3.19(b) Intellectual Property 3.19(c) Intellectual Property SECURITIES PURCHASE AGREEMENT SECURITIES PURCHASE AGREEMENT, dated as of December 18, 1998 (this "Agreement"), among GRAPHON CORPORATION, a California corporation (the "Company") and COREL CORPORATION, a corporation incorporated under the laws of Canada, together with its wholly owned subsidiaries, COREL CORPORATION LIMITED, a corporation incorporated under the laws of the Republic of Ireland, and COREL, INC., a corporation incorporated under the laws of the State of Delaware (collectively, the "Purchaser") WHEREAS, upon the terms and conditions set forth in this Agreement, the Company proposes to issue and sell to Purchaser (i) an aggregate of 3,886,503 shares, no par value per share, of Common Stock of the Company (the "Common Stock") and (ii) a warrant to purchase up to 388,650 shares of Common Stock pursuant to the terms and conditions of the Warrant to Purchase Common Stock of GraphOn Corporation, dated the date hereof, attached hereto as EXHIBIT A (the "Warrant"). WHEREAS, upon the terms and conditions set forth in that certain asset purchase agreement by and between the Company and the Purchaser, dated the date hereof, the form of which is attached hereto as EXHIBIT B (the "Asset Purchase Agreement"), Purchaser shall transfer the Assets (as defined therein) to the Company and the Company shall assume the Assumed Liabilities (as defined therein). NOW, THEREFORE, in consideration of the mutual covenants and agreements set forth herein and for good and valuable consideration, the receipt and adequacy of which hereby is acknowledged, the parties hereto agree as follows: ARTICLE 1 DEFINITIONS 1.1 DEFINITIONS. As used in this Agreement, and unless the context requires a different meaning, the following terms have the meanings indicated: "ADDITIONAL PURCHASED SHARES" has the meaning given in Section 7.5 of this Agreement. "AFFILIATE" shall mean any Person who is an "affiliate" as defined in Rule 12b-2 of the General Rules and Regulations under the Exchange Act. "AGREEMENT" has the meaning set forth in the recitals to this Agreement, as the same may be amended, supplemented or modified in accordance with the terms hereof. "ARTICLES OF INCORPORATION" means the Articles of Incorporation of the Company in effect on the Closing Date as the same may be amended from time to time. "ASSET PURCHASE AGREEMENT" has the meaning set forth in the recitals to this Agreement. "AUDITED FINANCIAL STATEMENTS" has the meaning set forth in Section 3.11 of this Agreement. "BOARD OF DIRECTORS" means the Board of Directors of the Company. "BUSINESS DAY" means any day other than a Saturday, Sunday or other day on which commercial banks in the State of California are authorized or required by law or executive order to close. "BY-LAWS" means the by-laws of the Company in effect on the Closing Date, as the same may be amended from time to time. "CAPITAL LEASE OBLIGATIONS" of any Person shall mean, as of the date of determination, the obligations of such Person to pay rent or other amounts under any lease of (or other arrangement conveying the right to use) real or personal property, or a combination thereof, which obligations are required to be classified and accounted for as capital leases on a balance sheet of such Person under GAAP and, for the purposes of this Agreement, the amount of such obligations at any time shall be the capitalized amount thereof at such time determined in accordance with GAAP consistently applied. "CLAIMS" has the meaning set forth in Section 3.5 of this Agreement. "CLOSING" has the meaning set forth in Section 2.2 of this Agreement. "CLOSING DATE" has the meaning set forth in Section 2.2 of this Agreement. "CODE" means the Internal Revenue Code of 1986, as amended, or any successor thereto. "COMMISSION" means the Securities and Exchange Commission or any similar agency then having jurisdiction to enforce the Securities Act. "COMMON STOCK" has the meaning set forth in the recitals to this Agreement. "COMPANY" has the meaning set forth in the recitals to this Agreement. "COMPANY DISCLOSURE SCHEDULE" has the meaning set forth in the first paragraph of Article 3 of this Agreement. "COMPANY INDEMNITEES" shall the following Persons: (a) Company; (b) Company's current and future Affiliates, but excluding Purchaser; (c) the respective Representatives of the Persons referred to in clauses (a) and (b) above; and 2 (d) the respective successors and assigns of the Persons referred to in clauses (a), (b) and (c) above. "CONDITION OF THE COMPANY" means the assets, properties, results of operations or financial condition of the Company, taken as a whole. "CONTINGENT OBLIGATION" means, applied to any Person, any liability of that Person with respect to any Indebtedness, lease, guaranty, letter of credit or other similar obligation. "CONTRACTUAL OBLIGATIONS" means as to any Person, any provision of any security issued by such Person or of any agreement, undertaking, contract, indenture, mortgage, deed of trust or other instrument to which such Person is a party or by which it or any of its property is bound. "COPYRIGHTS" means any foreign or United States copyright registrations and applications for registration thereof, and any non-registered copyrights. "DAMAGES" shall include any loss, damage, injury, liability, claim, demand, settlement, judgment, award, fine, penalty, tax, fee (including reasonable legal fees), charge, costs (including reasonable costs of investigation) or reasonable expenses of any nature. "DIRECT CLAIM" has the meaning set forth in Section 10.3 of this Agreement. "EMPLOYMENT AGREEMENTS" has the meaning set forth in the recitals to this Agreement. "ENVIRONMENTAL LAWS" means federal, state and local laws, regulations and codes, as well as orders, decrees, judgments or injunctions issued, promulgated, approved or entered thereunder relating to pollution or protection of the environment. "EXCHANGE ACT" means the Securities Exchange Act of 1934, as amended, and the rules and regulations of the Commission thereunder. "FINANCIAL STATEMENTS" has the meaning set forth in Section 3.11. "GAAP" means United States generally accepted accounting principles consistently applied. "GOVERNMENTAL AUTHORITY" means the government of any nation, state, city, locality or other political subdivision thereof, any entity exercising executive, legislative, judicial, regulatory or administrative functions of or pertaining to government, and any corporation or other entity owned or controlled, through stock or capital ownership or otherwise, by any of the foregoing. "INDEBTEDNESS" means, as to any Person, (a) all obligations of such Person for borrowed money (including, without limitation, reimbursement and all other obligations with respect to surety bonds, letters of credit and bankers' acceptances, whether or not matured), (b) all obligations of such Person evidenced by notes, bonds, debentures or similar instruments, 3 (c) all Capital Lease Obligations of such Person, (d) all indebtedness secured by any Lien (other than Liens in favor of lessors under leases other than leases included in clause (c)) on any property or asset owned or held by that Person regardless of whether the indebtedness secured thereby shall have been assumed by that Person or is non-recourse to the credit of that Person and (e) any Contingent Obligations of such Person. "INDEMNIFICATION PERIOD" means the period commencing on the Closing Date and terminating on the date which is the one year anniversary thereof. "INDEMNIFIED PARTY" has the meaning set forth in Section 10.3 of this Agreement. "INITIAL PUBLIC OFFERING" has the meaning set forth in Section 7.5 of this Agreement. "INTELLECTUAL PROPERTY" has the meaning set forth in Section 3.19 of this Agreement. "INTERNET ASSETS" means any internet domain names and other computer user identifiers and any rights in and to sites on the worldwide web, including rights in and to any text, graphics, audio and video files and html or other code incorporated in such sites. "LEGAL PROCEEDING" shall mean any action, suit, litigation, arbitration proceeding (including any civil, criminal, administrative, investigative or appellate proceeding), hearing, inquiry, audit, examination or investigation commenced, brought, conducted or heard by or before, or otherwise involving any court or other Governmental Authority or any arbitrator or arbitration panel. "LIABILITIES" has the meaning set forth in Section 3.18 of this Agreement. "LIEN" means any mortgage, deed of trust, pledge, hypothecation, assignment, encumbrance, lien (statutory or other) or preference, priority, right or other security interest or similar preferential arrangement of any kind or nature whatsoever (excluding preferred stock and equity related preferences). "MATERIAL CONTRACTUAL OBLIGATION" has the meaning set forth in Section 3.8 of this Agreement. "ORDERS" has the meaning set forth in Section 3.2 of this Agreement. "PATENTS" means any foreign or United States patents and patent applications, including any divisions, continuations, continuations-in-part, substitutions or reissues thereof, whether or not patents are issued on such applications and whether or not such applications are modified, withdrawn or resubmitted. "PERSON" means any individual, firm, corporation, partnership, trust, incorporated or unincorporated association, joint venture, joint stock company, limited liability company, Governmental Authority or other entity of any kind, and shall include any successor (by merger or otherwise) of such entity. 4 "PLACEMENT AGENT" has the meaning set forth in Section 3.7 of this Agreement. "PURCHASER INDEMNITEE" shall mean the following Persons: (a) Purchaser; (b) Purchaser's current and future Affiliates, but excluding Company; (c) the respective Representatives of the Persons referred to in clauses (a) and (b) above; and (d) the respective successors and assigns of the Persons referred to in clauses (a), (b) and (c) above. "PREEMPTIVE RIGHT NOTICE" has the meaning set forth in Section 7.8(b) of the Agreement. "PREFERRED STOCK" has the meaning set forth in Section 3.7 of this Agreement. "PRIVATE PLACEMENT MEMORANDUM" has the meaning set forth in Section 3.7 of this Agreement. "PRO RATA PORTION" has the meaning set forth in Section 7.8(c) of this Agreement. "PURCHASED SHARES" has the meaning set forth in Section 2.1 of this Agreement. "PURCHASER" has the meaning set forth in the recitals to this Agreement. "REGULATIONS" means the Treasury Regulations promulgated under the Code. "REPRESENTATIVES" means officers, directors, employees, agents, legal counsel, accountants, advisors and representatives. "REQUIREMENTS OF LAW" means, as to any Person, any law, statute, treaty, rule, regulation, right, privilege, qualification, license or franchise or determination of an arbitrator or a court or other Governmental Authority or stock exchange, in each case applicable to or binding upon such Person or any of its property or to which such Person or any of its property is subject or pertaining to any or all of the transactions contemplated or referred to herein. "SECURITIES ACT" means the Securities Act of 1933, as amended, and the rules and regulations of the Commission thereunder. "SELL" has the meaning set forth in Section 7.6 of this Agreement. "SOFTWARE" means any computer software programs, source code, object code, data and documentation. "STOCK EQUIVALENTS" means any security or obligation which is by its terms convertible into or exchangeable for shares of Common Stock or other capital stock or securities 5 of the Company, and any option (including options granted pursuant to the Stock Option Plan), warrant or other subscription or purchase right with respect to Common Stock or such other capital stock or securities. "STOCK OPTION PLAN" means the 1998 Stock Option/Stock Issuance Plan pursuant to which up to an aggregate of 791,500 of the fully diluted shares of Common Stock outstanding immediately following the Closing are or may be subject to option grants to certain employees, directors and consultants of the Company and other Persons approved by the Board of Directors. "SUBSIDIARIES" means, as of the date hereof, a Person of which 50% or more of the voting power of the outstanding securities or 50% or more of the outstanding economic equity interest is held, directly or indirectly, by the Company. "TAXABLE" has the meaning set forth in Section 3.12 of this Agreement. "TAX AUTHORITY" has the meaning set forth in Section 3.12 of this Agreement. "TAXES" has the meaning set forth in Section 3.12 of this Agreement. "TAX RETURN" has the meaning set forth in Section 3.12 of this Agreement. "THIRD PARTY CLAIM" has the meaning set forth in Section 10.3 of this Agreement. "TRADE SECRETS" means any trade secrets, research records, processes, procedures, manufacturing formulae, technical know-how, technology, blue prints, designs, plans, inventions (whether patentable and whether reduced to practice), invention disclosures and improvements thereto. "TRADEMARKS" means any foreign or United States trademarks, service marks, trade dress, trade names, brand names, designs and logos, corporate names, product or service identifiers, whether registered or unregistered, and all registrations and applications for registration thereof. "TRANSACTION DOCUMENTS" means collectively, this Agreement, the Warrant, and the Asset Purchase Agreement. "TRANSFER TAXES" has the meaning set forth in Section 3.12 of this Agreement. "UNAUDITED FINANCIAL STATEMENTS" has the meaning set forth in Section 3.11 of this Agreement. "WARRANT" has the meaning set forth in the recitals to this Agreement. "WARRANTY CLAIM" means a claim made by either the Company or the Purchaser based on or with respect to the inaccuracy or non-performance or non-fulfillment or breach of any representation, covenant or warranty made by the other party contained in this Agreement or the Asset Purchase Agreement or contained in any document or certificate given in order to carry out the transactions contemplated hereby. 6 1.2 ACCOUNTING TERMS; FINANCIAL STATEMENTS. All accounting terms used herein not expressly defined in this Agreement shall have the respective meanings given to them in accordance with GAAP. ARTICLE 2 PURCHASE AND SALE 2.1 PURCHASE AND SALE OF SECURITIES. Subject to the terms and conditions herein set forth, the Company agrees to issue and sell to the Purchaser, and the Purchaser agrees that it will purchase from the Company, on the Closing Date, 3,886,503 shares of Common Stock (the "Purchased Shares") and the Warrant. In consideration of the purchase and sale of the Purchased Shares and the Warrant, the Company and the Purchaser each agree to execute and deliver the Asset Purchase Agreement. 2.2 CLOSING . Unless this Agreement shall have been terminated pursuant to Article 9 and subject to the satisfaction or waiver of the conditions set forth in Articles 5 and 6, the closing of the sale and purchase of the Purchased Shares and the Warrant, and the execution and delivery of the Asset Purchase Agreement (the "Closing") shall take place at the Palo Alto offices of Brobeck Phleger & Harrison LLP at 10:00 a.m., Pacific Daylight Time, on the Business Day on which the conditions set forth in Articles 5 and 6 shall be satisfied or waived in accordance with this Agreement, or at such other time, place and date that the Company and the Purchaser mutually may agree (the "Closing Date"). On the Closing Date, the Company shall deliver to the Purchaser (i) a certificate representing the Purchased Shares and (ii) the Warrant being purchased by such Purchaser against delivery to the Company by the Purchaser of the Asset Purchase Agreement. ARTICLE 3 REPRESENTATIONS AND WARRANTIES OF THE COMPANY Except as set forth in a disclosure schedule delivered by the Company to the Purchaser concurrently with the execution hereof (the "Company Disclosure Schedule") identifying each such exception by a specific reference to the applicable Section of this Article 3 (it being understood that any exception identified by reference to one Section of this Article which reasonably is applicable to another Section of this Article shall be deemed an exception to such other Section of this Article), the Company represents and warrants to the Purchaser the following: 3.1 CORPORATE EXISTENCE AND POWER. The Company (a) is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its incorporation, (b) has all requisite power and authority to own and operate its property, to lease the property it operates as lessee and to conduct the business in which it currently is engaged, (c) is duly qualified as a foreign corporation, licensed and in good standing under the laws of each jurisdiction in which its ownership, lease or operation of property or the conduct of its business requires such qualification, except to the extent that the failure to do so would not reasonably be 7 expected to have a material adverse effect on the Condition of the Company and (d) has the corporate power and authority to execute, deliver and perform its obligations under this Agreement and each of the other Transaction Documents to which it is a party. 3.2 AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and performance by the Company of this Agreement and each of the other Transaction Documents and the transactions contemplated hereby and thereby (a) have been duly authorized by all necessary corporate action of the Company, (b) do not contravene the terms of the Certificate of Incorporation or the By-laws, (c) do not violate, conflict with or result in any breach or contravention of, or result in the creation of any material Lien under any Material Contractual Obligation of the Company or Requirement of Law applicable to the Company and (d) do not violate any judgment, injunction, writ, award, decree or order (collectively, "Orders") of any Governmental Authority against, or binding upon, the Company. 3.3 GOVERNMENTAL AUTHORIZATION. No approval, consent, compliance, exemption, authorization or other action by, or notice to or filing with any Governmental Authority or any other person, and no lapse of a waiting period under a Requirement of Law, is necessary or required in connection with the execution, delivery or performance by, or enforcement against, the Company of this Agreement and the other Transaction Documents or the transactions contemplated hereby and thereby, except for the filing pursuant to Section 25102(f) of the California Corporate Securities Law of 1968, as amended, and the rules thereunder. 3.4 BINDING EFFECT. This Agreement has been, and as of the Closing Date each of the other Transaction Documents will have been duly executed and delivered by the Company, and this Agreement constitutes, and as of the Closing Date each of the other Transaction Documents will constitute, the legal, valid and binding obligations of the Company enforceable against the Company in accordance with their terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting the enforcement of creditors' rights generally and by general principles of equity relating to enforceability (regardless of whether considered in a proceeding at law or in equity). 3.5 LITIGATION. Except as set forth in Section 3.5 of the Company Disclosure Schedule, there are no actions, suits, proceedings, claims, complaints, disputes, arbitrations or investigations (collectively, "Claims") pending at law, in equity, in arbitration or before any Governmental Authority by or against the Company. No Order has been issued by any court or other Governmental Authority against the Company purporting to enjoin or restrain the execution, delivery or performance of this Agreement or any of the other Transaction Documents. 3.6 COMPLIANCE WITH LAWS. The Company is in compliance in all material respects with all Requirements of Law and all Orders issued by any court or Governmental Authority against the Company. 3.7 CAPITALIZATION. (a) On the Closing Date, after giving effect to the transactions contemplated by this Agreement, the authorized capital stock of the Company shall consist of (i) 50,000,000 shares of Common Stock, of which 11,895,003 are issued and outstanding, including the 8 Purchased Shares, and (ii) 5,000,000 shares of preferred stock, no par value per share (the "Preferred Stock"), none of which are issued and outstanding, and Stock Equivalents, including the Warrant but excluding shares of Common Stock issued or issuable under the Stock Option Plan, exercisable for or convertible into up to 1,125,000 shares of Common Stock. The Company has reserved 1,916,500 shares of Common Stock for issuance under the Stock Option Plan and pursuant to the exercise or conversion of issued and outstanding Stock Equivalents, including the Warrant, as set forth in Section 3.7 of the Company Disclosure Schedule. The Company has entered into that certain Private Placement Memorandum, dated September 2, 1998 (with any supplement thereto, the "Private Placement Memorandum"), with Spencer Trask Securities Incorporated ("the Placement Agent") regarding the issuance and sale of units, each consisting of 100,000 shares of Common Stock. Pursuant to the Private Placement Memorandum, the Company has sold 1,000,000 shares of Common Stock and the Company intends to issue and sell between 1,500,000 and 3,500,000 additional shares of Common Stock (which stock the Company covenants shall be the only stock issued and sold in connection with any exercise of the preemptive rights described in clause "iii" below in connection with the issuance of the Purchased Shares, the Additional Purchased Shares or the Warrant pursuant to this Agreement) and the Company has a discretionary option to sell up to 675,000 additional shares of Common Stock solely to cover over-subscriptions. Other than (i) such Stock Equivalents, (ii) the requirement that the Placement Agent consent to the sale of any securities by the Company or any rights to acquire any securities of the Company (except pursuant to options, warrants, rights or option plans described in the Private Placement Memorandum) at a price less than $1.00 per share, (iii) the rights which, for greater certainty, are deemed to be Stock Equivalents granted to each investor pursuant to the Private Placement Memorandum to purchase pro rata portions of any securities offered by the Company, including the securities offered hereby, prior to the issuance of such securities and until such time as there is the Initial Public Offering, and as contemplated by this Agreement, there are no options, warrants, conversion privileges, subscription or purchase rights or other rights presently outstanding to purchase or otherwise acquire (a) any authorized but unissued, unauthorized or treasury shares of the Company's capital stock, (b) any Stock Equivalents or (c) other securities of the Company. The issued and outstanding shares of Common Stock are all duly authorized, validly issued, fully paid (to the Company's knowledge) and nonassessable, and were issued in compliance with the registration and qualification requirements of all applicable federal and state securities laws. The Purchased Shares, the Warrant and the Additional Purchased Shares are duly authorized, and when issued and sold pursuant to this Agreement, will be validly issued, and the Purchased Shares and, if issued, the Additional Purchased Shares, will be fully paid and nonassessable and, assuming the truth and accuracy of the Purchaser's representations and warranties contained herein, will be issued in compliance with the registration and qualification requirements of all applicable federal and state securities laws. The Company has no Subsidiaries. 3.8 NO DEFAULT OR BREACH; CONTRACTUAL OBLIGATIONS. Section 3.8 of the Company Disclosure Schedule lists all of the Contractual Obligations to which the Company is a party, which involve an outstanding amount in excess of $100,000 or which are otherwise material to the Condition of the Company (each of the foregoing, a "Material Contractual Obligation"). The Company has not received notice of, and is not in default under, any Material Contractual Obligation. All of such Material Contractual Obligations are valid, subsisting, in full force and effect and binding upon the Company. The Company has not received any notice of termination of any Material Contractual Obligation. 9 3.9 TITLE TO PROPERTIES. The Company has good, record and marketable title in fee simple to, or holds interests as lessee under leases in full force and effect in, all real property used by it in connection with its business or otherwise owned or leased by it, except for such defects in title as would not, individually or in the aggregate, have a material adverse effect on the Condition of the Company. 3.10 FIRPTA. The Company is not a "foreign person" within the meaning of Section 1445 of the Code. 3.11 FINANCIAL STATEMENTS. The Company has delivered to the Purchaser the audited consolidated financial statements of the Company (balance sheet and statements of operation, cash flow and stockholders' equity, together with the notes thereto) for the fiscal period ended December 31, 1997 (the "Audited Financial Statements"), and the unaudited consolidated financial statements of the Company (balance sheet and statement of operations) for the fiscal period ended September 30, 1998 (the "Unaudited Financial Statements" and, together with the Audited Financial Statements, the "Financial Statements"). The Financial Statements have been prepared in accordance with GAAP, applied on a consistent basis throughout the periods indicated and with each other, except that the Unaudited Financial Statements do not contain footnotes or year-end adjustments. The Financial Statements fairly present the financial condition, operating results and cash flows of the Company as of the respective dates and for the respective periods indicated in accordance with GAAP, subject in the case of the Unaudited Financial Statements to normal year-end adjustments. 3.12 TAXES. (a) All material Taxes (as defined below) which have come due and are required to be paid by the Company through the date hereof have been paid by or on behalf of the Company or adequately reserved for in accordance with GAAP on the Financial Statements; (b) all material Tax Returns (as defined below) required to be filed on or before the date hereof (including all applicable extensions) by the Company have been timely filed or caused to be filed and all such Tax Returns are accurate and complete in all material reports; (c) with respect to all Tax Returns of the Company there is no (i) claim or other proceeding pending against or with respect to the Company in respect of any Tax, (ii) deficiency proposed against the Company or (iii) audit or other examination of any Tax Return of the Company being conducted by a Tax Authority nor has the Company been notified of any request for such an audit or examination and (d) all provisions for income and other Tax liabilities of the Company made in the Financial Statements have been made in accordance with GAAP consistently applied and all liabilities for Taxes of the Company attributable to periods prior to or ending on the Closing Date have been accrued on the Financial Statements in accordance with GAAP. The Company has not elected pursuant to the Code to be treated as an "S" corporation or a collapsible corporation pursuant to Section 341(f) or Section 1362(a) of the Code. For purposes of this Agreement, the following terms have the following meanings: "Tax" (and, with correlative meaning, "Taxes" and "Taxable") means (i) any net income, alternative or add-on minimum tax, gross income, gross receipts, sales, use, ad valorem, transfer, franchise, profits, license, withholding, payroll, employment, excise, severance, stamp, occupation, premium, property, environmental or windfall profit tax, custom, duty or other tax, governmental fee or other like assessment or charge of any kind whatsoever, together with any interest or any penalty, addition to tax or additional amount imposed by any Governmental Authority (a "Tax Authority") responsible for the imposition of any such tax (domestic or foreign); provided, however, that Tax shall not 10 include any Transfer Taxes, (ii) any liability for the payment of any amounts of the type described in (i) as a result of being a member of an affiliated, consolidated, combined or unitary group for any Taxable period and (iii) any liability for the payment of any amounts of the type described in (i) or (ii) as a result of any express or implied obligation to indemnify any other person. As used herein, "Tax Return" shall mean any return, statement, report or form (including, without limitation,) estimated Tax Returns and reports, withholding Tax Returns and reports and information reports and returns required to be filed with respect to Taxes, and "Transfer Taxes" shall mean any state and local sales, use or other transfer taxes attributable to the sale of the assets to the Company pursuant to the Asset Purchase Agreement. 3.13 NO MATERIAL ADVERSE CHANGE. Since September 30, 1998, other than as provided in the Transaction Documents and except as set forth in Section 3.13 of the Company Disclosure Schedule, the Company has not: (a) incurred any Indebtedness for money borrowed individually in excess of $50,000 or in excess of $100,000 in the aggregate or otherwise permitted any of its assets to become subject to any Lien; (b) entered into any Contractual Obligations or otherwise sold, leased, transferred or licensed any assets (other than Intellectual Property) individually in excess of $100,000 or in excess of $200,000 in the aggregate; (c) sold, assigned, leased, licensed or transferred any Intellectual Property (other than the license and sublicense of Intellectual Property in the ordinary course of business); (d) changed any of its methods of accounting or accounting practices in any material respect for financial, accounting or Tax purposes; or (e) agreed or committed to do any of the things described in this Section 3.13. 3.14 INVESTMENT COMPANY. The Company is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended. 3.15 PRIVATE OFFERING. No form of general solicitation or general advertising was used by the Company or its representatives in connection with the offer or sale of the Purchased Shares or the Warrant. Assuming the truth and accuracy of the Purchaser's representations and warranties contained herein, no registration of the Purchased Shares, the Additional Purchased Shares or the Warrant pursuant to the provisions of the Securities Act or any state securities or "blue sky" laws will be required by the offer, sale or issuance of the Purchased Shares, the Additional Purchased Shares or the Warrant. 3.16 LABOR RELATIONS. The Company is in compliance in all material respects with all applicable state and federal equal employment opportunity laws and the Federal Fair Labor Standards Act. 3.17 TITLE TO ASSETS. The Company owns and has good, valid and marketable title to all properties and 11 assets that are necessary for the conduct of its business, which properties and assets include the properties and assets reflected as owned by it on the Financial Statements or so described in the Company Disclosure Schedule (collectively, the "Assets"). 3.18 LIABILITIES. All direct and indirect obligations or liabilities (the "Liabilities") of the Company which should, in accordance with GAAP, be disclosed on the Financial Statements or in the footnotes thereto, adequately are reflected or reserved against on such Financial Statements other than Liabilities incurred since September 30, 1998 (i) as a result of the transactions contemplated hereby or (ii) in the ordinary course of business. 3.19 INTELLECTUAL PROPERTY. (a) The Company is the owner of, or has the license or right to use, sell (other than off-the shelf software which is commercially available for retail purchase and used solely on the computers of the Company) or license (other than off-the shelf software which is commercially available for retail purchase and used solely on the computers of the Company), all of the Copyrights, Patents, Trade Secrets, Trademarks, Internet Assets and Software (collectively, "Intellectual Property") that are used, sold or licensed in connection with its business as presently conducted free and clear of all Liens. (b) Section 3.19(b) of the Company Disclosure Schedule sets forth all of the registered Intellectual Property owned by, and filings and applications for any of the above filed by, the Company. None of the Intellectual Property owned by the Company listed on Section 3.19(b) of the Company Disclosure Schedule is subject to any outstanding Order, and no action, suit, proceeding, hearing, investigation, charge, complaint, claim or demand is pending or, to the Company's knowledge, threatened, which challenges the validity, enforceability, use or ownership of the item. (c) Except as set forth in Section 3.19(c) of the Company Disclosure Schedule, the use, sale or license by the Company of the Intellectual Property currently sold or licensed by the Company to any Person or used by or licensed to the Company does not infringe upon or otherwise violate any Intellectual Property rights of others. (d) No litigation is pending and no Claim has been made against the Company contesting the right of the Company to sell or license to any Person or use the Intellectual Property presently sold or licensed to such Person or used by the Company. 3.20 INSURANCE. The insurance policies held by or on behalf of the Company are valid and enforceable in accordance with their terms and are in full force and effect and cover all risks associated with the Company's business that are customarily insured against in the industry in such amounts as are customary in the industry. 3.21 ENVIRONMENTAL MATTERS. The Company is in material compliance with all applicable Environmental Laws. There is no civil, criminal or administrative judgment, action, suit, demand, claim, hearing, notice of violation, investigation, proceeding, notice or demand letter pending against the Company pursuant to Environmental Laws which would reasonably be expected to result in a fine, penalty or other obligation, cost or expense that would have a material adverse affect on the Condition of the Company. 12 3.22 BROKER'S, FINDER'S OR SIMILAR FEES. There are no brokerage commissions, finder's fees or similar fees or commissions payable by the Company in connection with the transactions contemplated hereby based on any agreement, arrangement or understanding with the Company or any action taken by any such Person. 3.23 COMPLETE DISCLOSURE. The copies of all instruments, agreements, other documents and written information delivered by the Company to the Purchaser or its counsel are and will be complete in all material respects as of the date of delivery thereof. 3.24 BEST EFFORTS. The Company shall use its best efforts to effectuate the transactions contemplated hereby and cause to be fulfilled the conditions to Closing under this Agreement. 3.25 PRIVATE PLACEMENT MEMORANDUM. The Private Placement Memorandum does not and will not on the Closing Date contain any untrue statements of a material fact or omit to state a material fact necessary to make the statements therein, in light of the circumstance under which they were made, not misleading. ARTICLE 4 REPRESENTATIONS AND WARRANTIES OF THE PURCHASERS The Purchaser hereby represents and Warrant to the Company as follows: 4.1 EXISTENCE AND POWER. The Purchaser is a corporation duly organized and validly existing under the laws of the jurisdiction of its formation and has the requisite corporate power and authority to execute, deliver and perform its obligations under this Agreement and each of the other Transaction Documents to which it is a party. 4.2 AUTHORIZATION; NO CONTRAVENTION. The execution, delivery and performance by the Purchaser of this Agreement and each of the other Transaction Documents to which it is a party and the transactions contemplated hereby and thereby (a) have been duly authorized by all necessary action, (b) do not contravene the terms of such Purchaser's organizational documents or any amendment thereof, (c) do not violate, conflict with or result in any breach or contravention of, or the creation of any Lien under, any Contractual Obligation of such Purchaser or any Requirement of Law applicable to such Purchaser and (d) do not violate any Order of any Governmental Authority against or binding upon the Purchaser. 4.3 GOVERNMENTAL AUTHORIZATION; THIRD PARTY CONSENTS. No approval, consent, compliance, exemption, authorization or other action by, or notice to, or filing with any Governmental Authority or any other Person, and no lapse of a waiting period under any Requirement of Law, is necessary or required in connection with the execution, delivery or performance by, or enforcement against, such Purchaser of this Agreement and each of the other Transaction Documents to which such Purchaser is a party, or the transactions contemplated hereby and thereby. 4.4 BINDING EFFECT. This Agreement and each of the other Transaction Documents to which such Purchaser is a party have been duly executed and delivered by such Purchaser and 13 constitute the legal, valid and binding obligations of such Purchaser, enforceable against it in accordance with its terms, except as enforceability may be limited by applicable bankruptcy, insolvency, reorganization, fraudulent conveyance or transfer, moratorium or similar laws affecting the enforcement of creditors' rights generally or by equitable principles relating to enforceability (regardless of whether considered in a proceeding at law or in equity). 4.5 PURCHASE FOR OWN ACCOUNT. The Purchased Shares, the Additional Purchased Shares and the Warrant to be acquired by the Purchaser pursuant to this Agreement are being or will be acquired for its own account and with no intention of distributing or reselling such Purchased Shares, Additional Purchased Shares, the Warrant or any part thereof in any transaction that would be in violation of the securities laws of the United States of America or any state, without prejudice, however, to the rights of such Purchaser at all times to sell or otherwise dispose of all or any part of such Purchased Shares, Additional Purchased Shares or the Warrant under an effective registration statement under the Securities Act or under an exemption from such registration available under the Securities Act, and subject, nevertheless, to the disposition of such Purchaser's property being at all times within its control. If such Purchaser should in the future decide to dispose of any of such Purchased Shares, Additional Purchased Shares or the Warrant such Purchaser understands and agrees that it may do so only in compliance with the Securities Act and applicable state securities laws, as then in effect. Such Purchaser agrees to the imprinting, so long as required by law, of a legend on certificates representing all of its Purchased Shares and Additional Purchased Shares and shares of Common Stock issuable upon exercise of the Warrant, as the case may be, to the following effect: THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR THE SECURITIES LAWS OF ANY JURISDICTION OF THE UNITED STATES. THE SECURITIES MAY NOT BE TRANSFERRED EXCEPT PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER SUCH ACT AND UNDER THE APPLICABLE STATE SECURITIES LAWS OR PURSUANT TO AN OPINION OF COUNSEL TO THE COMPANY OR OTHER COUNSEL REASONABLY SATISFACTORY TO THE COMPANY, IF REQUESTED BY THE COMPANY, THAT THERE IS AN APPLICABLE EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF SUCH ACT AND SUCH LAWS. 4.6 RESTRICTED SECURITIES. Such Purchaser understands that the Purchased Shares, the Additional Purchased Shares and the Warrant will not be registered at the time of their issuance under the Securities Act for the reason that the sale provided for in this Agreement is exempt pursuant to Section 4(2) of the Securities Act and that the reliance of the Company on such exemption is predicated in part on such Purchaser's representations set forth herein. The Purchaser represents that it is experienced in evaluating companies such as the Company, has such knowledge and experience in financial and business matters as to be capable of evaluating the merits and risks of its investment and has the ability to suffer the total loss of its investment. The Purchaser further represents that it has had the opportunity to ask questions of and receive answers from the Company concerning the terms and conditions of the offering and to obtain additional information to such Purchaser's satisfaction and is an "accredited investor" as defined in Rule 501 of Regulation D promulgated under the Securities Act. The Purchaser also 14 acknowledges that the Company makes no representations or warranties other than those set forth in this Agreement and the Asset Purchase Agreement. 4.7 BROKER'S, FINDER'S OR SIMILAR FEES. There are no brokerage commissions, finder's fees or similar fees or commissions payable by the Purchaser in connection with the transactions contemplated hereby based on any agreement, arrangement or understanding with the Purchaser or any action taken by the Purchaser. ARTICLE 5 CONDITIONS TO THE OBLIGATION OF THE PURCHASER TO CLOSE The obligation of the Purchaser to purchase the Purchased Shares, the Additional Purchased Shares and the Warrant pursuant to this Agreement, to execute and deliver the Transaction Documents and to perform any obligations hereunder or thereunder shall be subject to the satisfaction as determined by, or waiver by, the Purchaser of the following conditions on or before the Closing Date. 5.1 REPRESENTATIONS AND COVENANTS. The representations and warranties of the Company contained in this Agreement shall be true in all material respects (except for any such representations and warranties which are qualified by their terms by a reference to materiality or material adverse effect, which representations and warranties as so qualified shall be true and correct in all respects) on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date. The Company shall have performed and complied in all material respects with all covenants and agreements required by this Agreement to be performed or complied with by the Company on or prior to the Closing Date. 5.2 SECRETARY'S CERTIFICATE. The Purchaser shall have received a certificate from the Company, in form and substance satisfactory to the Purchaser, dated the Closing Date and signed by the Secretary or an Assistant Secretary of the Company, certifying that the attached copies of resolutions of the Board of Directors approving this Agreement and each of the other Transaction Documents, as necessary, to which the Company is a party and the transactions contemplated hereby and thereby, are all true, complete and correct and remain unamended and in full force and effect. 5.3 DOCUMENTS. The Purchaser shall have received true, complete and correct copies of such documents and other materials as it reasonably may request in connection with or relating to the purchase and sale of the Purchased Shares and the Warrant and the transactions contemplated hereby. 5.4 WARRANT. The Company shall have duly executed and delivered the Warrant. 5.5 PURCHASED SHARES. The Company shall be prepared to deliver to the Purchaser certificates in definitive form representing the Purchased Shares, registered in the name of such Purchaser. 15 5.6 CONSENTS AND APPROVALS. All consents, exemptions, authorizations or other actions by, or notices to, or filings with Governmental Authorities and other Persons in respect of all Requirements of Law and with respect to those Contractual Obligations of the Company required to be obtained prior to the Closing Date shall have been obtained and be in full force and effect, and the Purchaser shall have been furnished with appropriate evidence thereof, as requested. 5.7 SECURITIES EXEMPTION. The offer and sale of the Purchased Shares, the Additional Purchased Shares and the Warrant shall be exempt from the registration requirements of the Securities Act and shall comply with any Requirements of Law and the registration and/or qualification requirements of all other applicable state securities laws and Canadian federal or provincial securities laws. 5.8 DUE DILIGENCE REVIEW. The Purchaser shall have completed and satisfied itself with respect to its due diligence review of the Company and the transactions contemplated by the Transaction Documents including all matters disclosed by the Company herein and therein to its sole satisfaction. 5.9 ADDITIONAL PRIVATE PLACEMENT CLOSING. The Company shall have issued and received payment for not less than an additional 2,000,000 shares of Common Stock at a price of $1.00 per share pursuant to the terms of the Private Placement Memorandum. 5.10 PRIVATE PLACEMENT MEMORANDUM The Company's shall have delivered to the Purchaser a copy of any supplement to the Private Placement Memorandum and the Purchaser shall be satisfied with such supplement in its sole discretion. ARTICLE 6 CONDITIONS TO THE OBLIGATION OF THE COMPANY TO CLOSE The obligation of the Company to issue and sell the Purchased Shares and the Warrant pursuant to this Agreement, to execute and deliver the Transaction Documents and to perform any obligations hereunder or thereunder shall be subject to the satisfaction as determined by, or waiver by, the Company of the following conditions on or before the Closing Date: 6.1 REPRESENTATIONS AND COVENANTS. The representations and warranties of the Purchaser contained in this Agreement shall be true in all material respects (except for any such representations and warranties which are qualified by a reference to materiality or material adverse effect, which representations and warranties as so qualified shall be true and correct in all respects) on and as of the Closing Date with the same force and effect as though made on and as of the Closing Date. The Purchaser shall have performed and complied with all covenants and agreements required by this Agreement to be performed or complied with by it on or prior to the Closing Date. 16 6.2 SECRETARY'S CERTIFICATE. The Company shall have received a certificate from the Purchaser, in form and substance satisfactory to the Company, dated the Closing date and signed by the Secretary or an Assistant Secretary of the Purchaser, certifying that the attached copies of resolutions of the Board of Directors of the Purchaser approving this Agreement and each of the other Transaction Documents, as necessary, to which the Purchaser is a party and the transactions contemplated hereby or thereby, are all true, complete and correct and remain unamended and in full force and effect. 6.3 DOCUMENTS. The Company shall have received the complete and collect copies of such documents and other materials as it reasonably may request in connection with or relating to the Transaction Documents and the transactions contemplated hereby. 6.4 ASSET PURCHASE AGREEMENT. The Purchaser shall have duly executed and delivered the Asset Purchase Agreement. 6.5 CONSENTS AND APPROVALS. All consents, exemptions, authorizations or other actions by, or notices to, or filings with Governmental Authorities and other Persons in respect of all Requirements of Law and with respect to any Contractual Obligations of the Purchaser required to be obtained prior to the Closing Date shall have been obtained and be in full force and effect, and the Company shall have been furnished with appropriate evidence thereof, as requested. 6.6 DUE DILIGENCE REVIEW. The Company shall have completed, and satisfied itself with respect to, its due diligence review of Purchaser and the transactions contemplated by the Transaction Documents, including all matters disclosed by the Purchaser herein and therein, to its sole satisfaction. ARTICLE 7 AFFIRMATIVE COVENANTS 7.1 FINANCIAL STATEMENTS AND OTHER INFORMATION. Until the date as of which the Company shall have completed the initial public offering of any of its equity securities pursuant to an effective registration statement filed under the Securities Act, the Company shall deliver to the Purchaser, in form and substance satisfactory to such Purchaser: (a) As soon as available, but not later than 60 days, if available, and in any event not later than 75 days after the end of each fiscal year of the Company, a copy of the audited consolidated balance sheet of the Company as of the end of such fiscal year and the related statements of operations and cash flows for such fiscal year, setting forth in each case in comparative form the figures for the previous year all in reasonable detail, and accompanied by the opinion of a nationally recognized independent certified public accounting firm, which report shall state without qualification that such consolidated financial statements present fairly the consolidated financial condition as of such date and results of operations and cash flows for the periods indicated in conformity with GAAP applied on a consistent basis; and 17 (b) Commencing with the fiscal period ending on March 31, 1999, as soon as available, but in any event not later than 45 days after the end of each of the first three fiscal quarters of each fiscal year, the consolidated unaudited balance sheet of the Company, and the related statements of operations and cash flows for such quarter and for the period commencing on the first day of the fiscal year and ending on the last day of such quarter, all certified by an appropriate officer of the Company as presenting fairly the consolidated financial condition as of such date and results of operations and cash flows for the periods indicated in conformity with GAAP applied on a consistent basis, subject to normal year-end adjustments and the absence of footnotes required by GAAP. 7.2 RESERVATION OF COMMON STOCK. From and after the Closing Date, the Company shall at all times reserve and keep available out of its authorized shares of Common Stock, solely for the purpose of issuance or delivery of the Additional Purchased Shares and upon exercise of the Warrant, the maximum number of shares of Common Stock that may be issuable or deliverable upon such exercise. 7.3 BOOKS AND RECORDS. The Company shall keep proper books of record and account, in accordance with GAAP consistently applied. 7.4 BOARD OF DIRECTORS. From and after the Closing Date and until such time as the Purchaser controls less than 17% of the voting power of the Company, the Purchaser shall be entitled to appoint one member of the Board of Directors and the Company shall take such action necessary to ensure such appointment. Until the date which is two years after the date of the Initial Public Offering, the Company agrees not to reduce the size of the Board of Directors below six without Purchaser's prior written consent. 7.5 ISSUANCE OF STOCK. As of the date which is 18 months after the Closing Date, if the Company has not completed the initial public offering of any of its equity securities pursuant to an effective registration statement filed under the Act, including, including without limitation, in connection with said sale, conveyance or disposal of all or substantially all of its property, or business or any merger or consolidation with any other entity, in a transaction or series of related transactions (the "Initial Public Offering"), the Company shall issue Purchaser an additional 1,607,000 shares of Common Stock (the "Additional Purchased Shares"), for no additional consideration, subject to the execution of standard investment representations by Purchaser as set forth in Section 4 hereof. 7.6 MARKET STAND-OFF. Subject to Section 7.7 hereof, Purchaser hereby agrees that, during the period commencing on the Closing Date and terminating on the date which is three years thereafter, it shall not, directly or indirectly, sell, offer to sell, contract to sell (including, without limitation, any short sale), grant any option to purchase or otherwise transfer or dispose of (other than to donees who agree to be similarly bound) ("Sell") any securities of the Company held by it at any time during such period; PROVIDED, HOWEVER, that: (i) Purchaser may Sell up to 2% of the securities of the Company held by it per fiscal quarter of the Company, on a cumulative basis, beginning in the fiscal quarter ending March 31, 2000 and (ii) Purchaser may, at all times, Sell securities of the Company owned by it pursuant to the provisions of Rule 144 promulgated under the Act. 18 In order to enforce the foregoing covenant, the Company may impose stop-transfer instructions with respect to the securities of the Company owned by Purchaser until the end of such period. 7.7 REGISTRATION. Subject to and subordinate to any registration rights granted to any investors pursuant to the Private Placement Memorandum, if the Company in its discretion at any time proposes to register any of its securities under the Act for sale to the public, whether for its own account or for the account of other security holders or both (except with respect to registration statements on Forms S-4 or S-8), each such time it will give written notice to such effect to the Purchaser at least 30 days prior to such filing. Upon the written request of the Purchaser, received by the Company within 30 days after the giving of any such notice by the Company, to register any of its Common Stock, the Company will cause the Common Stock as to which registration shall have been so requested to be included in the securities to be covered by the registration statement proposed to be filed by the Company, all to the extent requisite to permit the sale or other disposition by the Purchaser of such Common Stock so registered. Notwithstanding the foregoing, in the event that any registration pursuant to this Section 7.7 shall be, in whole or in part, an underwritten public offering of Common Stock, the number of shares of Common Stock of the Purchaser to be included in such an underwriting may be reduced if and to the extent that the managing underwriter shall be of the good faith opinion that such inclusion would reduce the number of shares to be offered by the Company. Notwithstanding the foregoing provisions, the Company may withdraw any registration statement referred to in this Section 7.7 without thereby incurring any liability to the Purchaser. 7.8 PREEMPTIVE RIGHTS. (a) Prior to the second anniversary of the Closing Date, the Company shall not, without the Purchaser's prior written consent, sell any securities or any rights to acquire any securities of the Company (except pursuant to any existing options, warrants and rights and option plans described in the Private Placement Memorandum) at a price less than $1.00 per share. (b) Subject to Section 7.8(a), the Company shall, until such time as there is an Initial Public Offering, prior to any issuance by the Company of any of its securities, offer to the Purchaser, by written notice (the "Preemptive Right Notice"), the right to purchase the Purchaser's Pro Rata Portion (as defined below) for cash at an amount equal to the price or other consideration for which such securities are to be issued; PROVIDED, that the preemptive rights set forth in this Section 7.8 shall not apply to securities issued pursuant to the exception described in the parenthetical clause in Section 7.8(a) and, PROVIDED FURTHER, that such preemptive rights shall not apply to securities issued by the Company in connection with or in consideration of (i) any acquisition by the Company of another corporation or entity by consolidation, merger, purchase of all or substantially all of the assets or other business combination in which the Company is the surviving entity, provided such issuance is approved by a majority of the Board of Directors of the Company or (ii) any equipment or real property lease, loan, credit line, guaranty of indebtedness or acquisition of assets (other than cash, but including, without limitation, intellectual property or other intangible assets). (c) The Preemptive Right Notice shall describe the securities that the Company proposes to issue and specify the number, price and payment terms. The Purchaser 19 shall be entitled to purchase its pro rata portion of such securities ("Pro Rata Portion"), which shall be the number of securities as is equal to the full number of securities offered by the Company multiplied by a fraction, the numerator of which shall be the number of shares of Common Stock held by the Purchaser as of the date of the Preemptive Right Notice and the denominator of which shall be the aggregate number of shares of Common Stock issued and outstanding. The Purchaser may accept the Company's offer as to all or part of its Pro Rata Portion, by written notice thereof given to the Company given within 30 days after receipt of the Preemptive Right Notice, in which event the Company shall promptly sell and the Purchaser shall buy, upon the terms specified, the number of securities agreed to be purchased by the Purchaser. (d) The Company shall be free at any time prior to 90 days after the date of the Preemptive Right Notice to offer and sell to any third party or parties the number of such securities not purchased by the Purchaser at a price and on payment terms no less favorable to the Company than those specified in the Preemptive Right Notice. However, if such third party sale or sales are not consummated within such 90 day period, the Company shall not sell such securities as shall not have been purchased within such period without again complying with this Section 7.8. ARTICLE 8 MISCELLANEOUS 8.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. All of the representations and warranties made herein shall survive the execution and delivery of this Agreement until the date which is one year after the date hereof; PROVIDED, HOWEVER, that such representations and warranties shall not survive the termination of this Agreement pursuant to Article 9 hereof. 8.2 NOTICES. All notices, demands and other communications provided for or permitted hereunder shall be made in writing and shall be by registered or certified first-class mail, return receipt requested, telecopier, courier service or personal delivery: (a) if to the Company: GraphOn Corporation 150 Harrison Avenue Campbell, CA 96008 Telecopy: (408) 370-5047 Attention: Walt Keller with a copy to: Brobeck, Phleger & Harrison LLP Two Embarcadero Place 2200 Geng Road Palo Alto, CA 94303 Telecopy: (650) 496-2722 20 Attention: Thomas A. Bevilacqua if to Purchaser: Corel Corporation Corporate Headquarters 1600 Carling Avenue Ottawa, Ontario K1Z8R7 Canada Telecopy: (613) 725-2691 Attention: President with a copy to: Legal Department Telecopy: (613) 725-2691 Attention: Eric J. Smith All such notices and communications shall be deemed to have been duly given when delivered by hand, if personally delivered; when delivered by courier, if delivered by commercial courier service; and five Business Days after being deposited in the mail, postage prepaid, if mailed; and when receipt is mechanically acknowledged, if telecopied. 8.3 SUCCESSORS AND ASSIGNS; THIRD PARTY BENEFICIARIES. This Agreement shall inure to the benefit of and be binding upon the successors and permitted assigns of the parties hereto. Neither the Company or the Purchaser may assign any of its rights under this Agreement without the written consent of the other party hereto. No Person other than the parties hereto and their successors and permitted assigns is intended to be a beneficiary of this Agreement. 8.4 AMENDMENT AND WAIVER. (a) No failure or delay on the part of the Company or the Purchaser in exercising any right, power or remedy hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, power or remedy preclude any other or further exercise thereof or the exercise of any other right, power or remedy. The remedies provided for herein are cumulative and are not exclusive of any remedies that may be available to the Company or the Purchaser at law, in equity or otherwise. (b) Any amendment, supplement or modification of or to any provision of this Agreement, any waiver of any provision of this Agreement, and any consent to any departure by the Company or the Purchaser from the terms of any provision of this Agreement shall be effective only if it is made or given in writing and signed by the Company and the Purchaser. 8.5 COUNTERPARTS. This Agreement may be executed in any number of counterparts and by the parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute one and the same agreement. 21 8.6 HEADINGS. The headings in this Agreement are for convenience of reference only and shall not limit or otherwise affect the meaning hereof. 8.7 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK, WITHOUT REGARD TO THE PRINCIPLES OF CONFLICTS OF LAW OF ANY JURISDICTION. 8.8 SEVERABILITY. If any one or more of the provisions contained herein, or the application thereof in any circumstance, is held invalid, illegal or unenforceable in any respect for any reason, the validity, legality and enforceability of any such provision in every other respect and of the remaining provisions hereof shall not be in any way impaired, unless the provisions held invalid, illegal or unenforceable shall substantially impair the benefits of the remaining provisions hereof. 8.9 ENTIRE AGREEMENT. This Agreement, together with the Company Disclosure Schedule, exhibits and schedules hereto and the other Transaction Documents is intended by the parties as a final expression of their agreement and intended to be a complete and exclusive statement of the agreement and understanding of the parties hereto in respect of the subject matter contained herein and therein. There are no restrictions, promises, warranties or undertakings, other than those set forth or referred to herein or therein. This Agreement, together with the exhibits hereto and the other Transaction Documents, supersede all prior agreements and understandings between the parties with respect to such subject matter. 8.10 FURTHER ASSURANCES. Each of the parties shall execute such documents and perform such further acts (including, without limitation, obtaining any consents, exemptions, authorizations or other actions by, or giving any notices to, or making any filings with any Governmental Authority or any other Person, and otherwise fulfilling, or causing the fulfillment of, the conditions to Closing set forth in Articles 5 and 6 hereof) as may reasonably be required or desirable to carry out or to perform the provisions of this Agreement and to consummate and make effective as promptly as possible the transactions contemplated by this Agreement. 8.11 ARBITRATION. The parties agree that they shall use all reasonable efforts to amicably settle disagreements arising from or in connection with this Agreement. To this effect, following notice of any party to the others of a disagreement (which shall include any failure to agree upon a matter to be agreed upon) the parties shall consult and negotiate with one another in good faith an understanding to reach a just and equitable solution. If those attempts fail after a period of 15 Business Days from the time the parties have been notified of the disagreement, then either party may refer the matter to arbitration. Notwithstanding the foregoing, the parties shall be entitled to seek injunctive relief or other equitable remedies form any court of competent jurisdiction. Except where clearly prevented by the issue in dispute, the parties agree to continue performing their respective obligations under this Agreement and the other related agreements entered into in connection with this Agreement while the dispute is being resolved unless and until such obligations are terminated or expire in accordance with the provisions hereof. 22 ARTICLE 9 TERMINATION OF AGREEMENT 9.1 TERMINATION. This Agreement may be terminated prior to the Closing as follows: (a) at any time on or prior to the Closing Date, by mutual written consent of the Company and the Purchaser; (b) at the election of the Company or the Purchaser by written notice to the other parties hereto after 5:00 p.m., California time, on December 31, 1998, if the Closing shall not have occurred, unless such date is extended by the mutual written consent of the Company and the Purchaser; (c) at the election of the Company, if there has been a material breach of any representation, warranty, covenant or agreement on the part of the Purchaser contained in this Agreement, which breach has not been cured within 15 Business Days of notice to the Purchaser of such breach; or (d) at the election of the Purchaser, if there has been a material breach of any representation, warranty, covenant or agreement on the part of the Company contained in this Agreement, which breach has not been cured within 15 Business Days notice to the Company of such breach. If this Agreement so terminates, it shall become null and void and have no further force or effect, except as provided in Section 9.2. 9.2 SURVIVAL. If this Agreement is terminated and the transactions contemplated hereby are not consummated as described above, this Agreement shall become void and of no further force and effect; except for the provisions of Article 1 and this Section 9.2; PROVIDED that (a) none of the parties hereto shall have any liability in respect of a termination of this Agreement pursuant to Section 9.1(a) or 9.1(b) and (b) nothing shall relieve any of the parties from liability for actual damages resulting from a termination of this Agreement pursuant to Section 9.1(c) or 9.1(d); and PROVIDED, FURTHER, that none of the parties hereto shall have any liability for speculative, indirect, unforeseeable or consequential damages resulting from any legal action relating to this Agreement or any termination of this Agreement. ARTICLE 10 INDEMNIFICATION 10.1 INDEMNIFICATION BY PURCHASER. (a) From and after Closing during the Indemnification Period, Purchaser shall hold harmless, defend, indemnify and pay for the defense of each of the Company Indemnitees from and against, and shall compensate and reimburse each of the Company Indemnitees for, any Damages which are suffered or incurred by any of the Company Indemnitees or to which any of the Company Indemnitees may otherwise become subject (regardless of whether or not such 23 Damages relate to any third-party claim) and which arise from or as a result of, or are connected with: (i) any inaccuracy in or breach of any representation or warranty set forth in Article 4 hereunder or in any certificate delivered by Purchaser in connection with this Agreement; (ii) any breach of any covenant or obligation of Purchaser hereunder; (iii) any Legal Proceeding resulting from the items referred to in clause (i) or (ii) above (including any Legal Proceeding commenced by any Company Indemnitee for the purpose of enforcing any of its rights under this Section 10.1 if such Company Indemnitee is the prevailing party in any such Legal Proceeding); (iv) any third party claim commenced after the Closing Date which alleges (i) that the Purchased Software (as defined in the Asset Purchase Agreement), Trademarks (as defined in the Asset Purchase Agreement), or any other right or property acquired by Purchaser hereunder, infringe any U.S. or Canadian copyright, trademark, trade secret right, patent right that has been issued as of the date hereof, or other proprietary right. The foregoing indemnification does not extend to any claim arising out of a modification by Purchaser to the Purchased Software to the extent such claim would not have arisen had such modification not been made or the combination of any portion of the Purchased Software with any other software or hardware product. THE FOREGOING STATES THE ENTIRE LIABILITY AND OBLIGATIONS OF PURCHASER AND THE EXCLUSIVE REMEDY OF PURCHASER WITH RESPECT TO ANY ALLEGED INTELLECTUAL PROPERTY INFRINGEMENT BY THE PURCHASED SOFTWARE. (b) The obligations of indemnification by the Purchaser pursuant to Section 10.1(a) are: (i) subject to the limitations referred to in Section 8.1 with respect to the survival of the representations and warranties by the Purchaser; (ii) subject to the provisions of Sections 10.3, 10.4, 10.5 and 10.6; and (iii) subject to the limitations referred to in Section 11.2. 10.2 INDEMNIFICATION BY COMPANY. (a) From and after Closing during the Indemnification Period, Company shall hold harmless, defend, indemnify and pay for the defense of each of the Purchaser Indemnitees from and against, and shall compensate and reimburse each of the Purchaser Indemnitees for, any Damages which are suffered or incurred by any of the Purchaser Indemnitees or to which any of the Purchaser Indemnitees may otherwise become subject (regardless of whether or not 24 such Damages relate to any third-party claim) and which arise from or as a result of, or are connected with: (i) any inaccuracy in or breach of any representation or warranty set forth in Article 3 hereunder or in any certificate delivered by Company in connection with this Agreement; (ii) any breach of any covenant or obligation of Company hereunder; (iii) any Legal Proceeding resulting from the items referred to in clause (i) or (ii) above (including any Legal Proceeding commenced by any Purchaser Indemnitee for the purpose of enforcing any of its rights under this Section 10.2 if such Purchaser Indemnitee is the prevailing party in any such Legal Proceeding); or (iv) any third party claim after Closing alleging that any product developed, marketed or distributed by or on behalf of Company, excluding the unmodified Purchased Software, infringes any copyright, trade-mark, confidentiality right, patent or other intellectual property right of any third party. (b) The obligations of indemnification by the Company pursuant to Section 10.2(a) are: (i) subject to the limitations referred to in Section 8.1 with respect to the survival of the representations and warranties by the Company; (ii) subject to the provisions of Sections 10.3, 10.4, 10.5 and 10.6; and (iii) subject to the limitations referred to in Section 11.1. 10.3 NOTICE OF CLAIM. If a party entitled to indemnification hereunder (an "Indemnified Party") becomes aware of a claim or Legal Proceeding in respect of which indemnification is provided for pursuant to either of Section 10.1 or 10.2, as the case may be, the Indemnified Party shall promptly give written notice of the claim or Legal Proceeding to the party obligated to indemnify the Indemnified Party (the "Indemnifying Party"). Such notice shall specify whether the claim or Legal Proceeding arises as a result of a claim by a Person against the Indemnified Party (a "Third Party Claim") or whether the claim does not so arise (a "Direct Claim"), and shall also specify with reasonable particularity (to the extent that the information is available): (a) the factual basis for the claim; and (b) the amount of the claim, if known, the basis thereof and documentation supporting the same. If, through the fault of the Indemnified Party, the Indemnifying Party does not receive notice of any claim or Legal Proceeding in time effectively to contest the determination of any liability susceptible of being contested, then the liability of the Indemnifying Party to the Indemnified Party under this Article shall be 25 reduced by the amount of any losses incurred by the Indemnifying Party resulting from the Indemnified Party's failure to give such notice on a timely basis. 10.4 DIRECT CLAIMS. In the case of a Direct Claim, the Indemnifying Party shall have 30 days from receipt of notice of the claim within which to make such investigation of the claim as the Indemnifying Party considers necessary or desirable. For the purpose of such investigation, the Indemnified Party shall make available to the Indemnifying Party the information relied upon by the Indemnified Party to substantiate the claim, together with all such other information as the Indemnifying Party may reasonably request, PROVIDED, HOWEVER, that the Indemnifying Party agrees at all times to maintain the confidentiality of such information. If both parties agree at or before the expiration of such 30 day period (or any mutually agreed upon extension thereof) to the validity and amount of such claim, the Indemnifying Party shall immediately pay to the Indemnified Party the full agreed upon amount of the claim, failing which the matter shall be referred to binding arbitration in accordance with Section 8.11. 10.5 THIRD PARTY CLAIMS. In the case of a Third Party Claim, the Indemnifying Party shall have the right, at its expense, to participate in or assume control of the negotiation, settlement or defense of the claim or Legal Proceeding and, in such event, the Indemnifying Party shall reimburse the Indemnified Party for all of the Indemnified Party's out-of-pocket expenses as a result of such participation or assumption. If the Indemnifying Party elects to assume such control, the Indemnified Party shall have the right to participate in the negotiation, settlement or defense of such Third Party Claim and to retain counsel to act on its behalf, provided that the fees and disbursements of such counsel shall be paid by the Indemnified Party unless the Indemnifying Party consents to the retention of such counsel at its expense. If the Indemnifying Party, having elected to assume such control, thereafter fails to defend the Third Party Claim within a reasonable time, the Indemnified Party shall be entitled to assume such control and the Indemnifying Party shall be bound by the results obtained by the Indemnified Party with respect to such Third Party Claim and shall solely bear all reasonable expenses associated with the defense of such Third Party Claim. If either party makes a payment, resulting in settlement of the Third Party Claim, which precludes a final determination of the merits of the Third Party Claim and the Indemnified Party and the Indemnifying Party are unable to agree whether such payment was unreasonable in the circumstances having regard to the amount and merits of the Third Party Claim, then such dispute shall be referred to and finally settled by binding arbitration in accordance with Section 8.11. 10.6 SETTLEMENT OF THIRD PARTY CLAIMS. If the Indemnifying Party fails to assume control of the defense of any Third Party Claim, the Indemnified Party shall have the exclusive right to contest, settle or pay the amount claimed and the Indemnifying Party shall be bound by the results obtained by the Indemnified Party with respect to such Third Party Claim and shall solely bear all reasonable expenses associated with the defense of such Third Party Claim. Whether or not the Indemnifying Party assumes control of the negotiation, settlement or defense of any Third Party Claim, neither party shall settle any Third Party Claim without the written consent of the other party, which consent shall not be unreasonably withheld or delayed; PROVIDED, HOWEVER, that the liability of such party shall be limited to the proposed settlement amount if any such consent is not obtained for any reason within a reasonable time after the request therefor. If the exercise by Company of any of the rights granted to it pursuant to this Agreement is enjoined or, in Purchaser's reasonable opinion, is likely to be enjoined due to the 26 type of infringement or misappropriation specified in Section 10.1 above, without prejudice to the rights and remedies of Company, Purchaser shall upon request of Company and at Company's expense, provide reasonable cooperation to Company and its counsel with all necessary technical information related to the design regarding defense or other resolution of the claim. ARTICLE 11 LIMITATION ON WARRANTY CLAIMS 11.1 LIMITATION ON WARRANTY CLAIM(S) BY PURCHASER. (a) The Purchaser shall not be entitled to make a Warranty Claim if the Purchaser has been advised in writing or otherwise has actual knowledge prior to Closing of the inaccuracy, non-performance, non-fulfilment or breach which is the basis for such Warranty Claim and the Purchaser completes the transactions hereunder notwithstanding such inaccuracy, non-performance, non-fulfilment or breach. (b) The amount of any damages which may be claimed by the Purchaser pursuant to a Warranty Claim shall be calculated to be the cost or loss to the Purchaser after giving effect to: (i) any insurance proceeds available to the Purchaser in relation to the matter which is the subject of the Warranty Claim, and (ii) the value of any related, determinable tax benefits realized, or to be realized within a two year period following the date of incurring such cost or loss, by the Purchaser in relation to the matter which is the subject of the Warranty Claim. (c) The Purchaser shall not be entitled to make any Warranty Claim until such time as the total amount of all Damages (including the Damages directly arising from such inaccuracy or breach and all other Damages arising from any other inaccuracies in or breaches of any representations, warranties, covenants or obligations) that have been directly suffered or incurred by the Purchaser exceeds $25,000. Notwithstanding the foregoing, in the event the total amount of all such Damages exceed $25,000, the Company's liability shall include the initial $25,000 amount. Except in the event of a breach by the Company of the confidentially provisions set out in Section 8.2 of the Asset Purchase Agreement (to which the limitation in this section 11.1 shall not apply), the maximum aggregate liability of the Company in respect of all Warranty Claims by the Purchaser will be limited to $760,000. 11.2 LIMITATION ON WARRANTY CLAIM(S) BY COMPANY (a) The Company shall not be entitled to make a Warranty Claim if the Company has been advised in writing or otherwise has actual knowledge prior to Closing of the inaccuracy, non-performance, non-fulfilment or breach which is the basis for such Warranty Claim and the Company completes the transactions hereunder notwithstanding such inaccuracy, non-performance, non-fulfilment or breach. 27 (b) The amount of any damages which may be claimed by the Company pursuant to a Warranty Claim shall be calculated to be the cost or loss to the Company after giving effect to: (i) any insurance proceeds available to the Company in relation to the matter which is the subject of the Warranty Claim, and (ii) the value of any related, determinable tax benefits realized, or to be realized within a two year period following the date of incurring such cost or loss, by the Company in relation to the matter which is the subject of the Warranty Claim. (c) The Company shall not be entitled to make any Warranty Claim until such time as the total amount of all Damages (including the Damages directly arising from such inaccuracy or breach and all other Damages arising from any other inaccuracies in or breaches of any representations, warranties, covenants or obligations) that have been directly suffered or incurred by the Company exceeds $25,000. Notwithstanding the foregoing, in the event the total amount of all such Damages exceed $25,000, Purchaser's liability shall include the initial $25,000 amount. Except in the event of a breach by Purchaser of the confidentially provisions set out in Section 8.2 of the Asset Purchase Agreement (to which the limitation in this section 11.2 shall not apply), the maximum aggregate liability of the Purchaser in respect of all Warranty Claims by the Company will be limited to $760,000. 28 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and delivered by their respective officers hereunto duly authorized on the date first above written. GRAPHON CORPORATION By: ---------------------------------------- Name: Walt Keller Title: President COREL CORPORATION By: ---------------------------------------- Name: Title: By: ---------------------------------------- Name: Title: COREL CORPORATION LIMITED By: ---------------------------------------- Name: Title: COREL, INC. By: ---------------------------------------- Name: Title: [Signature Page to Securities Purchase Agreement] EXHIBIT A THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES OR DELIVERY OF AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES THAT SUCH OFFER, SALE, TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE ACT. No. W-1 WARRANT TO PURCHASE COMMON STOCK OF GRAPHON CORPORATION (THE "COMPANY") This warrant (the "Warrant") certifies that, in consideration of that certain Securities Purchase Agreement, dated December 18, 1998, by and between the Company and Corel Corporation (including its assignees, the "Holder") and the transactions contemplated thereby, and for other good and valuable consideration, the receipt of which hereby is acknowledged, the Holder is entitled, upon surrender of this Warrant at the principal office of the Company (or at such other place as the Company shall notify Holder in writing), to purchase up to 388,650 shares of the Common Stock of the Company (the "Common Stock") at $1.00 per share (such price, as adjusted from time to time, is herein referred to as the "Exercise Price"). The shares of Common Stock issuable pursuant to this Warrant (the "Warrant Shares") shall be subject to adjustment pursuant to Section 8 hereof. 1. EXERCISE PERIOD. This Warrant is exercisable, in whole or in part, commencing upon the date hereof and shall remain so exercisable for a period of 5 years following such date, subject to earlier termination as set forth in Section 8(b) hereof. 2. EXERCISE OF WARRANT. (a) The purchase rights represented by this Warrant are exercisable by the Holder in whole or in part, at any time or from time to time, during the exercise period hereof as described in Section 1 above. Such exercise shall be effected by the surrender of this Warrant and the Notice of Exercise annexed hereto duly completed and executed on behalf of the Holder, at the office of the Company, upon payment of the Exercise Price in cash or by check. A-1 (b) This Warrant shall be deemed to have been exercised immediately prior to the close of business on the date of its surrender for exercise as provided above, and the person entitled to receive the Warrant Shares issuable upon such exercise shall be treated for all purposes as the holder of record of such shares as of the close of business on such date. As promptly as practicable on or after such date, the Company at its expense shall issue and deliver to the person or persons entitled to receive the same a certificate or certificates for the number of Warrant Shares issuable upon such exercise. If such exercise is for less than all of the Warrant Shares, the Company shall additionally, as promptly as practicable on or after such date, at its expense, issue and deliver a replacement warrant identical to this Warrant, except that the number of shares available for exercise shall be reduced by the number of Warrant Shares exercised. 3. NET ISSUE EXERCISE. In lieu of exercising this Warrant by paying the Exercise Price in cash or by check, Holder may elect to receive shares equal to the value of this Warrant (or the portion thereof being canceled) by surrender of this Warrant at the principal office of the Company, together with notice of such election, in which event the Company shall issue to Holder a number of shares of the Common Stock computed using the following formula: Where X - The number of shares of Common Stock to be issued to Holder. X= (Y)(A-B) A Y - The number of shares of Common Stock to be canceled pursuant to such exercise under this Warrant. A - The fair market value of one share of Common Stock. B - Exercise Price (as adjusted to the date of such calculations). For purposes of this Section, while the Company is privately held, the fair market value of one share of the Common Stock shall be the fair market value of such share as determined in good faith by the Board of Directors of the Company. 4. NO FRACTIONAL SHARES OR SCRIP. No fractional shares or scrip representing fractional shares shall be issued upon the exercise of this Warrant. In lieu of any fractional share to which the Holder would otherwise be entitled, the Company shall make a cash payment equal to the Exercise Price multiplied by such fraction. 5. NO RIGHTS OF SHAREHOLDER. The Holder shall not be entitled to vote or receive dividends or be deemed the holder of Common Stock or any other securities of the Company or receive any benefits thereunder, accrued or otherwise, that may at any time be issuable on the exercise hereof for any purpose, nor shall anything contained herein be construed to confer upon the Holder, as such, any of the rights of a shareholder of the Company or any right to vote for the election of directors or upon any matter submitted to shareholders at any meeting thereof, or to give or withhold consent to any corporate action or to receive notice of meetings, or to receive dividends or subscription rights or otherwise until the Warrant shall have A-2 been exercised and the Warrant Shares purchasable upon the exercise hereof shall have been issued, as provided herein. 6. TRANSFER OF WARRANT. (a) WARRANT REGISTER. The Company will maintain a register (the "Warrant Register") containing the names and addresses of the Holder (or Holders, if any portion of this Warrant is transferred pursuant to this Section 6). Any Holder of this Warrant or any portion thereof may change his address as shown on the Warrant Register by written notice to the Company requesting such change. Any notice or written communication required or permitted to be given to the Holder may be delivered or given by mail to such Holder as shown on the Warrant Register and at the address shown on the Warrant Register. Until this Warrant is transferred on the Warrant Register of the Company, the Company may treat the Holder as shown on the Warrant Register as the absolute owner of this Warrant for all purposes, notwithstanding any notice to the contrary. (b) NON-TRANSFERABILITY AND NON-NEGOTIABILITY OF WARRANT. This Warrant may not be transferred or assigned without compliance with all applicable federal and state securities laws by the transferor and the transferee (including the delivery of investment representation letters and legal opinions reasonably satisfactory to the Company). (c) COMPLIANCE WITH SECURITIES LAWS. i) PURCHASE ENTIRELY FOR OWN ACCOUNT. The Holder of this Warrant, by acceptance hereof, acknowledges that this Warrant and the Warrant Shares to be issued upon exercise hereof are being acquired solely for the Holder's own account and not as a nominee for any other party, and for investment, and that the Holder will not offer, sell or otherwise dispose of this Warrant or any Warrant Shares to be issued upon exercise hereof except under circumstances that will not result in a violation of the Act or any state securities laws. Upon exercise of this Warrant, the Holder shall, if requested by the Company, confirm in writing, in a form satisfactory to the Company, that the Warrant Shares so purchased are being acquired solely for the Holder's own account and not as a nominee for any other party, for investment, and not with a view toward distribution or resale. ii) DISCLOSURE OF INFORMATION. The Holder believes that it has received all the information it considers necessary or appropriate with respect to this Warrant. The Holder further represents that it has had an opportunity to ask questions and receive answers from the Company regarding the terms and conditions of this Warrant. iii) INVESTMENT EXPERIENCE. The Holder is an investor in securities of companies in the development stage and acknowledges that it is able to fend for itself, can bear the economic risk of its investment and has such knowledge and experience in financial or business matters that it is capable of evaluating the merits and risks of this Warrant. If other than an individual, the Holder also represents that it has not been organized for the purpose of acquiring the Warrant. A-3 iv) ACCREDITED INVESTOR. The Holder is an "accredited investor" within the meaning of SEC Rule 501 of Regulation D, as presently in effect and understands the meaning of that term. v) RESTRICTED SECURITIES. The Holder understands that this Warrant and the Warrant Shares issuable upon exercise hereof are "restricted securities" under the federal securities laws inasmuch as they are being acquired from the Company in a transaction not involving a public offering and that under such laws and applicable regulations such securities may be resold without registration under the Act only in certain limited circumstances. In this connection, the Holder represents that it is familiar with SEC Rule 144, as presently in effect, and understands the resale limitations imposed thereby and by the Act. vi) FURTHER LIMITATIONS ON DISPOSITION. Without in any way limiting the representations set forth in (i) above, the Holder further agrees not to make any disposition of all or any portion of this Warrant or any Warrant Shares to be issued upon exercise hereof unless and until the transferee has agreed in writing for the benefit of the Company to be bound by this Section 6, provided and to the extent such sections are then applicable, and: (A) there is then in effect a registration statement under the Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or (B) (1) the Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition and (2) upon request by the Company, the Holder shall have furnished the Company with an opinion of counsel, satisfactory to the Company, that such disposition will not require registration of such securities under the Act. vii) LEGENDS. This Warrant and all Warrant Shares issued upon exercise hereof may bear one or all of the following legends: (A) "THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF A REGISTRATION STATEMENT IN EFFECT WITH RESPECT TO SUCH SECURITIES, OR DELIVERY OF AN OPINION OF COUNSEL IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES THAT SUCH OFFER, SALE, TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE WITH THE ACT." (B) Any legend required under any applicable state securities laws. 7. RESERVATION OF STOCK. The Company covenants that during the term this Warrant is exercisable, the Company will reserve from its authorized and unissued Common Stock a sufficient number of shares to provide for the issuance of the Warrant Shares upon the exercise of this Warrant and, from time to time, will take all steps necessary to amend its Articles A-4 of Incorporation to provide sufficient reserves of shares of Common Stock issuable upon exercise of this Warrant, to the extent the Company can readily ascertain the number of shares of Common Stock. The Company further covenants that all shares that may be issued upon the exercise of rights represented by this Warrant and payment of the Exercise Price, as set forth herein, shall be free from all liens and charges in respect of the issue thereof. The Company agrees that its issuance of this Warrant shall constitute full authority to its officers who are charged with the duty of executing stock certificates to execute and issue the necessary certificates for shares of Common Stock upon the exercise of this Warrant. 8. ADJUSTMENT OF EXERCISE PRICE AND NUMBER OF WARRANT SHARES. The number of and kind of securities purchasable upon exercise of this Warrant and the Exercise Price shall be subject to adjustment from time to time as follows: (a) SUBDIVISIONS, COMBINATIONS AND OTHER ISSUANCES. If the Company shall at any time prior to the expiration of this Warrant subdivide its Common Stock, by split-up or otherwise, or combine its capital stock, or issue additional securities as a dividend with respect to any shares of its Common Stock, the number of Warrant Shares issuable upon the exercise of this Warrant shall forthwith be proportionately increased, in the case of a subdivision or stock dividend, or proportionately decreased in the case of a combination. Appropriate adjustments shall also be made to the Exercise Price payable per share, but the aggregate purchase price payable for the total number of Warrant Shares purchasable under this Warrant (as adjusted) shall remain the same. Any adjustment under this Section 8(a) shall become effective at the close of business on the date the subdivision or combination becomes effective, or as of the record date of such dividend, or in the event that no record date is fixed, upon the making of such dividend. (b) RECLASSIFICATION, REORGANIZATION, MERGER OR SALE. In case of any reclassification, capital reorganization, change in the capital stock of the Company (other than as a result of a subdivision, combination or stock dividend provided for in Section 8(a) above), or any consolidation or merger of the Company with another corporation, or the sale of all or substantially all of its assets to another corporation effected in such a way that holders of Common Stock shall be entitled to receive stock, securities or assets with respect to or in exchange for Common Stock, then, as a condition of such reclassification, reorganization, change, merger or sale, lawful provision shall be made, and duly executed documents evidencing the same from the Company or its successor shall be delivered to the Holder, so that the Holder shall have the right at any time prior to the expiration of this Warrant to purchase, at a total price equal to that payable upon the exercise of this Warrant, the kind and amount of shares of stock and other securities and property receivable in connection with such reclassification, reorganization, change, merger or sale, by a holder of the same number of shares of capital stock as were purchasable by the Holder immediately prior to such reclassification, reorganization, change, merger or sale. In any such case appropriate provisions shall be made with respect to the rights and interest of the Holder so that the provisions hereof shall thereafter be applicable with respect to any shares of stock or other securities and property deliverable upon exercise hereof, and appropriate adjustments shall be made to the Exercise Price per share payable hereunder, provided the aggregate purchase price shall remain the same. A-5 (c) NOTICE OF ADJUSTMENT. When any adjustment is required to be made in the number or kind of shares purchasable upon exercise of the Warrant, or in the Exercise Price, the Company promptly shall notify the Holder of such event and of the number of shares, the adjusted Exercise Price and the type of securities or property thereafter purchasable upon exercise of the Warrant. 9. AMENDMENTS. (a) Any term of this Warrant may be amended only with the written consent of the Company and the Holder. (b) No waivers of or exceptions to any term, condition or provision of this Warrant, in any one or more instances, shall be deemed to be, or construed as, a further or continuing waiver of any such term, condition or provision. 10. MISCELLANEOUS. (a) GOVERNING LAW. This Warrant shall be governed by and construed under the laws of the State of California, excluding that body of law relating to conflict of laws. (b) NOTICES. Unless otherwise provided, any notice required or permitted under this Warrant shall be given in writing and shall be deemed effectively given upon personal delivery to the party to be notified or upon deposit with the United States Post Office, by registered or certified mail, postage prepaid and addressed to the party to be notified at the address indicated for such party on the signature page hereof in the case of the Company, and on the Warrant Register in the case of the Holder, or at such other address as such party may designate by ten days' advance written notice to the other parties. (c) COUNTERPARTS. This Warrant may be executed in counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. A-6 IN WITNESS WHEREOF, the Company has caused this Warrant to be executed by its officers thereunto duly authorized. Dated: December 31, 1998 GRAPHON CORPORATION By: --------------------------------------- Name: Walt Keller Title: President Address: 150 Harrison Avenue Campbell, CA 96008 ACCEPTED: COREL CORPORATION By: --------------------------------------- Name: --------------------------------------- Title: --------------------------------------- Address: Corporate Headquarters 1600 Carling Avenue Ottawa, Ontario K1Z8R7 Canada [SIGNATURE PAGE TO WARRANT TO PURCHASE COMMON STOCK] NOTICE OF EXERCISE To: GraphOn Corporation (the "Company") The undersigned hereby elects to purchase __________ shares of the Common Stock (or such stock or securities receivable upon the exercise of the Warrant) at an exercise price per share as set forth in the Warrant. The undersigned hereby: ______ "Net-exercises" the Warrant. ______ Tenders payment of the aggregate exercise price in cash, check and/or cancellation of debt. The undersigned requests that the Company issue a certificate or certificates representing said shares of the Common Stock (or such stock or securities receivable upon exercise of the Warrant) of the Company in the name of the undersigned or in such other name as is specified below: --------------------------------------- (Print Name) By its signature below, the undersigned hereby confirms and acknowledges that the shares of Common Stock issuable upon exercise of the Warrant (or such stock or securities receivable upon exercise of the Warrant) are being acquired solely for the account of the undersigned and not as a nominee for any other party, and for investment, and that the undersigned will not offer, sell or otherwise dispose of any such shares of Common Stock (or such stock or securities receivable upon the exercise of the Warrant) except under circumstances that will not result in a violation of the ____________or any state securities laws. Date: ------------------ --------------------------------------------- (Print Name) --------------------------------------------- (Signature) By: ------------------------------------------ (Name and title of signatory, if non-natural person) Please issue a new Warrant for the unexercised portion of the attached Warrant in the name of the undersigned or in such other name as is specified below: ------------------------------------------ [Name] ------------------------------------------ - ----------------- ------------------------------------------ [Date] [Signature] EX-10.7 9 LEASE AGREEMENT Exhibit 10.7 HIDDEN VALLEY OFFICE PARK LEASE AGREEMENT Landlord: ASA PROPERTIES, INC. a Washington corporation Tenant: GraphOn Corporation a California corporation OFFICE-LEASE BASIC-LEASE-INFORMATION Date of Lease: Landlord: ASA Properties, Inc., a Washington corporation Tenant: GraphOn Corporation, a California corporation Name and Location of Building: Hidden Valley Office Park [Paragraph 1(a)] 1750 112th Ave. NE, Bellevue, WA 98004 Net Rentable Area of Premises: 2,277 rsf (Suite C-242) [Paragraph l(b)) Base Year: 1998 [Paragraph l(c)) Tenant's Percentage Share: 1.91% (.0191) [Paragraph 1(k)] Net Rentable Area of Building: 119,710 sf [Paragraph 1 (k) Term Commencement: June 8, 1998 [Paragraph 3] Term Expiration: May 3l, 2001 [Paragraph 3] Minimum Rent: $3,890.00/mo. Months 1-12 [Paragraph 4(a)] $4,006.70/mo. Months 13-24 $4,126.90/mo. Months 25-36 (The first month's rental is prorated if less than a full month) Security Deposit: $4,126.90 [Paragraph 32] Tenant's Address for Notices: 1750 - 112th Avenue N.E., Bellevue, WA 98004 [Paragraph 37] Suite C-242 Landford's Address for Notices: 8805 148th Ave. NE [Paragraph 37] Redmond, WA 98052 Exhibits: A, B, C, D & E [Paragraph 44]) Additional Provisions: Tenant to pay the first month's basic rent [Paragraph 45] and security deposit in advance at the execution of this Lease by Tenant. The provisions of the Lease identified above in brackets are those provisions where reference to particular Basic Lease Information appear. Each reference to an item of basic Lease Information set forth above. In the event of any conflict between any Basic Lease Information and the Lease, the latter shall control. TENANT LANDLORD GraphOn Corporation, ASA Properties, Inc., a California corporation a Washington Corporation Please Initial: Please Initial: --------- ---------
TABLE OF CONTENTS 1. Definitions 4 2. Premises 5 3. Term 5 4. Rent 5 5. Taxes and Assessments 6 6. Operating Expenses 6 7. Estimated Payments 6 8. Common Areas 7 9. Use 7 10. Services 8 11. Alterations, Fixtures and Improvements 8 12. Liens 8 13. Repair and Maintenance of Premises 9 14. Damage and Destruction 9 15. Indemnification 10 16. Insurance 10 17. Condemnation 11 18. Compliance with Legal Requirements 11 19. Assignment and Subletting 12 20. Rules and Regulations 13 21. Landlord's Access 13 22. Default 14 23. Landlord's Right to Cure Default 15 24. Attorneys' Fees 15 25. Subordination 15 26. No Merger 16 27. Sale by Landlord 16 28. Estoppel Certificate 16 29. Holdover Tenancy 16 30. Building Security 16 31. Parking 17 32. Security Deposit 17 33. No Partnership 17 34. Recording 17 35. Modification and Financing Conditions 17 36. Waiver 18 37. Notices and Consents 18 38. Complete Agreement 18 39. Corporate Authority 18 40. Limits to Tenant's Remedy 18 41. Brokers 19 42. No Light and Air Easement 18
43. Miscellaneous 18 44. Basic Lease Information and Exhibits 19 45. Additional Provisions EXHIBITS C - Rules and Regulations 20 Parking Rules and Regulations 24
OFFICE LEASE THIS LEASE, DATED June 5, 1998, for purposes of reference only, is made and entered into by and between ASA-Properties,-Inc., a Washington corporation ("Landlord") and GraphOn-Corporation a Califomia corporation ("Tenant") WITNESSETH: Landlord hereby leases to Tenant, and Tenant hereby leases from Landlord the premises described in paragraph I (b) below for the term and subject to the terms, covenants, agreements and conditions hereinafter set forth, to each and all of which Landlord and Tenant hereby mutually agree. 1. Definitions. Unless the context otherwise specifies or requires, the following terms shall have the meanings herein specified: (a) The term "Building" shall mean the parcel of real property described on Exhibit A attached hereto, situated in the location and commonly know by the name specified in the Basic Lease Information, which name Landlord may change at any time, and all other improvements on or appurtenances to such parcel. (b) The term "Premises" or "premises" shall mean that portion of a floor of the Building outlined in red on the diagrams attached hereto as Exhibit B. The premises contain the net rentable area specified in the Basic Lease Information. (c) The term "Base Year" shall mean the calendar year specified in the Basic Lease Information as the Base Year. (d) The term "Operating Expenses" shall mean (1) all costs of management, operation and maintenance of the Building including, without limitation, wages, salaries and payroll burden of employees, janitorial, maintenance, guard and other services, fees to any property manager (including Landlord if Landlord performs property management services) license, permit and inspection fees, charges and fees for transit development, housing or any other purpose, Building office rent or rental value, power, water, waste disposal and other utilities, materials and supplies, maintenance and repairs, Property Taxes (as defined in subparagraph 16) below), depreciation on personal prop" and insurance, including without limitation, casualty (including, without limitation, extended and broad form coverage risks, mudslide, land subsidence, volcanic eruption, flood, and earthquake), public liability, workmen's compensation, and rental loss insurance, (2) the cost of compliance with all state, federal or local governmental regulations affecting the Building, including, without limitation, any cleanup, removal, remedial or restoration work required by any federal, state or local governmental agency or political subdivision because of Hazardous Material (defined in paragraph 9 below) present in or about any part of the Building, including, without limitation, the soil or ground water under the Building; all costs of legal proceedings contesting any matter concerning operating and 1 managing the Building or the amount or the validity of any taxes, assessments, fees, or other impositions levied, assessed or imposed against the Building or use, occupancy or operation thereof, (3) the cost of any capital improvements made to the Building by Landlord after the Base Year that reduce other Operating Expenses or made to the Building by Landlord after the date of this Lease that are required under any governmental law or regulation that was not applicable to the Building at the time it was constructed, such cost or allocable portion thereof to be amortized over such reasonable period as Landlord shall determine together with interest on the unamortized balance at the rate of 10% per annum or such higher rate as may have been paid by Landlord on funds borrowed for the purpose of constructing such capital improvements and (4) a fee to Landlord (in addition to any property management fee) to supervise and administer property management in an amount not in excess of 10% of Operating Expenses; provided, however, that Operating Expenses shall not include depreciation on the Building other than depreciation on exterior window draperies provided by Landlord and carpeting in public corridors and common areas, costs of tenants' improvements, real estate brokers' commissions, interest and capital items other than those refined to in clause (3) above. There shall be deducted from Operating Expenses all amounts that have been included in Operating Expenses which have in fact been paid by any tenant, including Tenant, on account o the cost or repairs or services for which such tenant is directly and solely responsible. Actual Operating Expenses for both the Base Year and each subsequent calendar year shalI be adjusted to equal Landlord's reasonable estimate of Operating Expenses had the total rentable area of the Building been occupied. (e) The term "Base Operating Expenses" shall mean the Operating Expenses paid or incurred by Landlord in the Base Year. (f) The term "net rentable area" shall mean: (1) as to a floor leased entirely by Tenant, all areas within exterior permanent Building walls, measured to the inside surface of exterior Building walls, including rest rooms, janitor, telephone and electrical closets, mechanical areas, and columns and projections necessary to the Building, but excluding public stairs, elevator shafts and pipe shafts, together with the enclosing walls thereof, (2) as to a floor only a portion of which is leased by Tenant, the aggregate of the net usable area of the portion of the floor occupied by Tenant, plus the result obtained by multiplying the area of the common area on such floor times a fraction, whose numerator is the net usable area of Tenant's portion of the floor and whose denominator is the net usable area of all tenant space on such floor. (g) The term "net usable area" shall mean all floor area in a tenant space, measured to the inside surface of exterior Building walls, to the office side of corridors and i*her permanent partitions, and to the center of partitions that separate the tenant space 2 from adjoining tenant spaces, without deduction for columns and projections necessary to the Building. (h) The term "common area" shall mean the total area on the floor dedicated to rest rooms, janitor, telephone and electrical closets, mechanical area, and public corridors providing access to tenant space an such floor, but excluding public stairs elevator shafts and pipe shags, together with the enclosing walls thereof. (i) The term "Lease Year" shall mean each twelve month period during the term hereof ending on December 3 1, provided that the First Lease Year shall commence upon the commencement of the term hereof and shall end on the next succeeding December 3 1, and the last Lease Year shall end upon the expiration of the term hereof. (j) The term "Property Taxes" shall mean any form of real or personal property taxes, assessments, special assessments, fees, charges, levies, penalties, service payments in lieu of taxes, excises, assessments and charges for transit, housing or any other purpose, impositions or taxes of every kind and nature whatsoever, assessed or levied or imposed by any authority having the direct or indirect power to tax, including, without limitation, any city, county, state or federal government, or any improvement or assessment district of any kind or nature whatsoever, whether or not consented to or joined in by Landlord, against the Building or any legal or equitable interest of Landlord therein or any personal property of Landlord used in the operation thereof, whether now or hereafter imposed, whether or not now customary or in the contemplation of the parties on the date of this Lease, excepting only taxes measured by the net income of Landlord from all sources, any state, local, federal, personal, franchise, capital stock, inheritance, estate, gift or corporate income tax, or any other tax measured by the income of landlord; provided that Property taxes shall not include any taxes, assessments or other charges payable by Tenant pursuant to paragraph 5 below. (k) The term "Tenant's percentage share" shall mean the percentage figure specified in the Basic Lease information. Landlord and Tenant acknowledge that Tenant's percentage share has been obtained by dividing the net rentable area of the Premises specified in the Basic Lease information by the total net rentable area of the existing rental space in the Building specified in the Basic Lease information and multiplying such quotient by100, In the event either the net rentable area of the premises or the total net rentable area of the buiIding is changed, Tenant's percentage share shall be appropriately adjusted, and as to the calendar year in which such change occurs, Tenant's percentage share shall be determined on the basis of the number of days during such calendar year at each such percentage share. 2. Premises. (a) Tenant hereby acknowledges that the premises shall be delivered in an "as 3 is" condition and that Landlord, except as may be expressly agreed by Landlord in writing, has no obligation to alter, repair, renovate, or render fit for tenant's occupancy, any part of the premises. Landlord reserves to itself the use of the roof, exterior walls and the area beneath the premises, together with the right to install, maintain, use, repair and replace plumbing, telephone facilities, equipment, machinery, connections, pipes, ducts, conduits, and wires leading through the premises and serving other parts of the Building in a manner and in locations which will not unreasonably interfere with Tenant's use. (b) In the event Landlord determines to permit early occupancy of the premises and, therefore, informs Tenant in writing that the premises are ready for occupancy prior to the date set forth in the Basic Lease Information for the commencement of the term of the Lease, Tenant shall have the right to take early occupancy of the premises on such date as Landlord and Tenant shall agree, and notwithstanding the provisions of paragraph 3 below, the term of the Lease shall commence upon such occupancy. (c) The occupancy by Tenant of the premises shall constitute an acknowledgment by Tenant that the premises are then in good, sanitary and tenantable condition and repair. Notwithstanding the foregoing, Iandlord represents and warrants, to (he best of its knowledge without inquiry, to Tenant that, as of the Commencement Date, tile Premises, including any improvements made by Landlord, shall be in compliance with all laws and regulations, and built in a good and workmanlike manner with good materials and the equipment and Building services serving the Premises shall be in good working order. 3. Term. The term of this Lease shall commence and, unless sooner terminated, shall end on the date respectively specified in the Basic Lease Information. If Landlord for any reason cannot deliver possession of the premises to Tenant by the date specified for term commencement, this Lease shall not be void or voidable nor shall Landlord be liable to Tenant for any damage resulting therefrom, but in that event, provided that the delay is not occasioned by the act or omission of tenant, rental shall be waived for the period between the commencement of such term and the date when possession is delivered. Provided, however, if Landlord has not delivered the premises to Tenant within sixty (60) days of the Term Commencement, this Lease shall be deemed null and void without liability to either party, so long as such failure is not due to a delay caused by the act of omission of Tenant. 4. Rent. Tenant shall pay to Landlord as rental for the use and occupancy of the premises, at the times and in the manner hereinafter provided, the following sums of money: (a) Tenant shall pay to Landlord minimum rent in the amount specified in the Basic Lease Information per year, payable in equal monthly installments in advance on the commencement of the term hereof and on or before the first day of each and every successive calendar month during the term hereof. If the term commences on other than 4 the first day of a calendar month, the first payment of rent shall be appropriately prorated on the basis of a 30-day month. (b) Tenant shall pay, as additional rent, all sums of money required to be paid to Landlord pursuant to paragraphs 5, 6, 7, 10, 13 and 16 below, and all other sums of money or charges required to be paid by Tenant hereunder in addition to minimum rental, whether or not the some are designated "additional rent". If such amounts or charges are not paid at the time provided in this Lease, they shall nevertheless be collectible as additional rent with the next installment of minimum rental thereafter falling due, but nothing herein contained shall be deemed to suspend or delay the payment of any amount of money or charge at the time the same becomes due and payable hereunder, or limit any other remedy of Landlord. All amounts of money payable by Tenant to Landlord under this Lease, if not paid when due, shall bear interest from the due date until paid at the rate of the greater of 15% per annum or the prime rate publicly announced by the Seafirst Bank at its main office in Seattle Washington or its successor or its equivalent size competitor in the Seattle market place should Seafirst Bank cease to exist, but not to exceed the maximum rate of interest permitted by law ("Default Interest"). All payments due from Tenant to Landlord hereunder shall be made to Landlord without deduction or offset in lawful money of the United States of America at Landlord's address for notices hereunder, or to such other person at such other place as Landlord may from time to time designate in writing to Tenant. (c)Tenant hereby acknowledges that late payment by Tenant to Landlord of rent and other sums due hereunder after the expiration of any applicable grace period will cause Landlord to incur costs not contemplated by this Lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges, and late charges which may be imposed on Landlord by the terms of any mortgage or trust deed covering the premises. Accordingly, if any installment of rent or any other sums due from Tenant shall not be received by Landlord when due Tenant shall pay to Landlord a late charge equal to 6% of such overdue amount. The parties hereby agree that such late charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late payment by Tenant, Acceptance of such late charge by Landlord shall in no event constitute a waiver of Tenant's default as provided above, or prevent Landlord from exercising any of the other rights and remedies available to Landlord hereunder or at law. 5. Taxes and Assessments. In addition to the monthly rental and other charges to be paid by Tenant hereunder, Tenant shall reimburse Landlord upon demand for any and all taxes, assessments, levies, fees, charges and impositions whatsoever levied or imposed or assessed by any authority having the direct or indirect power to tax, including, without limitation, any city, county, state or federal government or any improvement or other assessment district, whether or not consented to or joined in by Landlord, payable by Landlord (other than income taxes, measured by the net income of Landlord from all 5 sources), whether or not now customary or within the contemplation of the parties hereto on the date of this Lease: (a) upon, measured by or reasonably attributable to the cost or value of tenant's equipment, furniture, fixtures and other personal property located in the premises or by the cost or value of any leasehold improvements made in or to the premises by or for Tenant, other then building standard tenant improvements made by Landlord, regardless of whether title to such improvements shall be in Tenant or Landlord; (b) upon or measured by the rental payable hereunder, including without limitation any gross income tax or excise tax levied by any city, county, state, federal or other governmental body with respect to the receipt of such rental; (c) upon or with respect to the possession, leasing, operation, management, maintenance, improvement, alteration, repair, use or occupancy by Tenant of the premises or any portion thereof; (d) upon (his transaction or any document to which Tenant is a party creating or transferring an interest or an estate in the premises. In the event that it shall not be lawful for Tenant so to reimburse Landlord, the monthly rental payable to Landlord under this Lease shall be revised to net Landlord the same net rental after such imposition as would have been payable to Landlord prior to such imposition. 6. Operation Expenses. Tenant shall, during the entire term hereof, pay to Landlord Tenant's percentage share of the amount by which all Operating Expenses paid or incurred by Landlord in any Lease Year exceed Base Operating Expenses. The amount of all sums payable hereunder shall be paid by Tenant to Landlord in the manner set forth in paragraph 7 below. 7. Estimated Payments. Unless otherwise expressly designated herein, all monetary amounts payable to Tenant to Landlord pursuant to this Lease shall be payable as follows: (a) During December of each Lease Year or as soon thereafter as practicable, Landlord shall give Tenant notice of its estimate of amounts payable hereunder for the ensuing Lease Year. On or before the first day of each month during the ensuing Lease Year, Tenant shall pay to Landlord 1/12 of such estimated amounts, provided that if such notice is not given in December Tenant shall continue to pay on the basis of the prior year's estimate until the month after such notice is given. If, at any time or times, it appears to Landlord that the amounts payable for the current Lease Year will vary from its estimate by more than 5%, Landlord shall, by notice to Tenant, revise its estimate for such year, in which case subsequent payments by Tenant for such year shall be based upon such revised estimate. (b) Within 90 day after the close of each Lease Year or as soon after such 90- day period as practicable, Landlord shall deliver to Tenant a statement of amounts payable for such Lease Year. If on the basis of such statement Tenant owes an amount that is less than the estimated payments for such Lease Year previously made by Tenant and Tenant is not in default hereunder, Tenant shall receive a credit in the amount if such excess against the next installments due under paragraphs 6 and 7 hereof. If on the basis 6 of such statement Tenant owes an amount that is more than the estimated payments for such Lease Year previously made by Tenant, Tenant shall pay the deficiency to Landlord within 30 days after delivery of the statement. (c) If this Lease shall terminate an other than the last day of a calendar year, the adjustment in rent applicable to the Lease Year in which such termination shall occur shall be prorated on the basis which the number of days from the commencement of such Lease Year to and including such expiration date bears to 365. If the adjustment in rent is not determined until after the termination of this Lease, any excess amounts due Tenant or deficiency amounts due Landlord shall be paid in cash within 30 days after delivery of the statement setting forth such adjustment determination. (d) Notwithstanding the foregoing, if, at any time, Landlord incurs for any item actual costs or expenses which are reimbursable in whole or in part by Tenant pursuant to this Lease and such costs or expenses are in excess of the estimated amount budgeted for such item and otherwise payable by Tenant, then, upon written demand ftom Landlord accompanied by a statement of such costs of expenses, Tenant shall immediately pay to Landlord the full amount of any excess reimbursable costs or expenses. 8. Common Areas. (a) The use and occupation by Tenant of the premises shall include a right to the use in common with others entitled thereto of the common areas and other facilities as may be designated from time to time by Landlord, subject, however, to the terms and conditions of this Lease. All common areas and facilities not within the premises, which Tenant may be permitted to use and occupy pursuant to this paragraph, are to be Used and occupied tinder a revocable license. If the measure of such areas is diminished by Landlord, Landlord shall not be subject to any liability nor shall Tenant be entitled to any compensation or diminution or abatement of rent, nor shall such diminution of such areas be deemed constructive or actual eviction. (b) Landlord shall at all times during the term of this Lease have the following rights with respect to the common area and other facilities: (1) Landlord shall have the right from time to time to alter and modify the common areas and other facilities as it deems desirable in its sole discretion; (2) Landlord may discontinue the existence of the common area subject to the requirements of laws and ordinances applicable thereto; (3) Landlord may promulgate and enforce such rules and regulations relating to the use of the common areas and other facilities as Landlord deems necessary or desirable. 7 Landlord shall exercise the foregoing rights in such a manner as to minimize the interference with Tenant's beneficial enjoyment of the premises. 9. Use. (a) The premises shall be used solely for general office purposes and no other, except chiropractic services are permitted to the extent they are permitted under codes for the City of Bellevue. Tenant shall not use or permit the premises to be used for any other purpose without Landlord's prior written consent. Landlord and Tenant hereby further acknowledge that the identity of Tenant, the specific character of Tenant's business and anticipated use of the premises and the relationship between such use and other uses within the Building has been a material consideration to Landlord's entry into this Lease. Any material change in the character if Tenant's business or use shall constitute a default under this Lease. (b) Tenant shall not do or permit to be done in, on or about he premises, nor bring or keep or permit to be brought or kept therein, anything which is prohibited by or will in any way conflict with any law, statute, ordinance or governmental rule or regulation now in force or which may hereafter be enacted or promulgated, or which is prohibited by the standard form of fire insurance policy or will in any way increase the existing rate of or affect any fire or other insurance upon the Building, or cause a cancellation of any insurance policy covering the Building or any part thereof of any of its contents. Tenant shall not do or permit anything to be done in or about the premises which will in any way obstruct or interfere with the rights of other tenants of the Building, or injure or annoy them, or use or allow the premises to be used for any improper, immoral, unlawful or objectionable purpose. Nor shall Tenant cause, maintain or permit any nuisance in, or about the premises or commit or stiffer to be committed any waste in or upon the premises. (c) Except for normal office and janitorial supplies in customary quantities, Tenant shall not cause or permit any Hazardous Material to be brought upon, kept or used in or about the premises or the Building. If Tenant breaches the obligations stated in the preceding sentence, or if the presence of Hazardous Material on the premises or the Building caused or permitted by Tenant results in contamination of the premises or the Building the Tenant shall indemnify, defend and hold Landlord harmless for, from and against any and all claims, judgments, damages, penalties, fines, costs, liabilities or losses (including, without limitation, diminution in value of the Building, damages for the loss or restriction on use of rentable or usable space or of any amenity of the Building, damages arising from any adverse impact on marketing of space in the Building, and sums paid in settlement of claims, reasonable attorneys' fees, consultant fees and expert fees) which arise during or after the Lease Term as a result of such contamination. This indemnification of Landlord by Tenant includes, without limitation, costs incurred in connection with any investigation of site conditions or any cleanup, remedial, removal or 8 restoration work required by any federal, state or local governmental agency or political subdivision because of hazardous Material present in or about any part of the Building, including, without limitation, the soil or ground water under the Building. As use herein, the term "Hazardous Material" means any hazardous or toxic substance, material or waste which is or becomes regulated by any federal, state or other local governmental authority, including, without limitation, any material or substance which is designated as a "hazardous substance" pursuant to Section 31 1 of the Federal Water Pollution Control Act (33 U.S.C. ss.1317), defined as a "hazardous waste" pursuant to Section 1004 of the Federal Resource Conservation and Recovery Act, (42 U.S.C. 6901 ET SEQ.), or defined as a "hazardous substance" pursuant to Section 101 of the Comprehensive Environmental Response, Compensation and Liability Act, (42 U.S.C. ss. 9601 ET SEQ.) 10. Services. (a) Landlord shall maintain the public and common areas of the Building, including lobbies, stairs, elevators, corridors, restrooms, windows, mechanical, plumbing and electrical systems and the structure itself, in reasonably good order and condition except for damage occasioned by the act of Tenant or Tenant's invites, which damage shall be repaired by Landlord at Tenant's expense. (b) Landlord shall furnish the premises with (1) electricity for fighting and the operations of office machines, (2) heat and air conditioning to the extent reasonably required for comfortable occupancy by Tenant in its use of the premises during the period from 7:30 a.m. to 6 p.m. on weekdays (except holidays), or such shorter period as may be prescribed by any applicable policies or regulations adopted by any utility or governmental agency, (3) elevator service, (4) initial lighting installation (for building standard lights), (5) restroom supplies, (6) window washing with reasonable frequency, (7) janitorial service five nights per week (except labor holidays) furnished in the manner that such service is customarily famished in comparable office buildings in the locale of the Building. Landlord shall not be in default hereunder or be liable for any damages directly or indirectly resulting from, nor shall the rental herein reserved be abated by reason of (i) the installation, use or interruption of use of any equipment in connection with the furnishing of any of the foregoing services, (it) failure to furnish or delay in furnishing any such services when such failure or delay is caused by accident or any improvements to the premises or to the Building, or (iii) the limitation, curtailment, rationing or restrictions on use of water, electricity, gas or any other form of energy serving the premises or the Building. Landlord shall use reasonable efforts diligently to remedy any interruption in the furnishing of such services. (c) Whenever heat generating machines or equipment or lighting other than building standard lights are used in the premises by Tenant which affect the temperature 9 otherwise maintained by the air conditioning system, Landlord shall have the right to install supplementary air conditioning facilities in the premises or otherwise modify the ventilating and air conditioning system serving the premises, and the cost of such facilities and modifications shall be home by Tenant. Tenant shall also pay as additional rent the cost of providing all heating or cooling energy to the premises in excess of that required for normal office use or during hours requested by Tenant when heat or air conditioning is not other-wise furnished by Landlord. If Tenant installs lighting requiring power in excess of that required for normal office use in the Building or if Tenant installs equipment requiring power in excess of that required for normal desk-top office equipment or normal copying equipment, Tenant shall pay for the cost of such excess power as additional rent, together with the cost of installing any additional risers or other facilities that may be necessary to furnish such excess power to the premises. (d) Landlord at the commencement of this Lease shall equip the standard electrical fixtures of the premises with light globes and fluorescent tubes and ballasts, as the case may be; replacement thereof shall be Tenant's responsibility and cost, and if Tenant shall request Landlord to replace same, then the cost shall be paid by Tenant to Landlord. 11. Alteration, Fixtures and Improvements. (a) Tenant shall not make or suffcr to be made any alterations, additions, or improvements to or of the premises or any part thereof, or attach any fixture or equipment thereto, without first obtaining Landiord's written consent which consent shall not be unreasonably withheld, conditioned or delayed. At the time Landlord consents to any alterations, additions or improvements, Landlord shall inform Tenant inwriting whether Tenant is responsible for the removal of such alterations and improvments at the expiration or earlier termination of the term of this Lease. Nothwithstanding anything to the contrary herein, Tenant shall have the right to make non-stnicrtiral alterations to the Premises which do not affect the Building systems,or structural components, which cost less than Ten Thousand Dollars ($1 0,000) each (each a "Permitted Alteration") with the prior written consent of Landlord which shall not be unreasonably withheld, conditioned or delayed, provided that such alterations are otherwise made in compliance with the terms of this Lease, permits are applied for and approved by the City of Bellevue and such such improvements enhance the Premises' ability to be re-)et in the ftinire. Any alterations, additions or improvements to the premises consented to by Landlord shall be made by Tenant at Tenant's sole cost and expense according to plans and specifications approved by Landlord, and any contractor or person selected by Tenant to make the same must first be approved by Landlord. Landlord may require, at it option, that Tenant provide Landlord at Tenant's sole cost and expense payment and performance bonds, in an amount equal to 150% the estimated cost of any contemplated alterations, fixtures, and improvements, to insure Landlord against any liability for mechanics' or niatcrialmen's liens and to insure the completion of such work. All alterations, additions, fixtures and improvements, 10 whether temporary or pen-nanent in character, made in or upon the premises either by Tenant of Landlord (other than furnishings, trade fixtures and equipment installed by Tenant), shall be Landiord's property and zit the end of the term hereof, shall remain on the premises without compensation to Tenant, provided that, if Landlord requested in Landlord's consent as provided for in this Section 11, Tenant shall remove all such alterations, fixtures and improvements from the premises and return the premises to the condition in which they were delivered to Tenant. Upon such removal Tenant shall immediately and fully repair any damage to the premises occasioned by the removal. (b) Landlord may perform, or cause to be performed, substantial renovation and remodeling to the exterior and interior of the Building and Landlord reserves the right to enter the premises in connection therewith. Landlord shall reasonably attempt to minimize any iptemiption of tenant's business caused by such renovation and remodeling. 12. Liens. Tenant shall keep the premises and the Building free from any liens arising out of any work performed, materials fumished or obligations incurred by Tenant. In the event that Tenant shall not, within 10 days following the imposition of any such lien, cause the same to be released of record, Landlord shall have, in addition to all other remedics provided herein and by law, the right but not the obligation to cause the same to be released by such means as it shall deem proper, including payment of the claim giving rise to such lien. All sums paid by Landlord for such purpose, and all expenses incurred by it in connection therewith including, without limitation, any attorneys' fees, court costs, and expenses of litigation, together with Default interest thereon, shall be payable to Landlord by Tenant on demand. Nothing in this Lease shall be construed in any way as constituting the consent or request of the Landlord, expressed or imposed, by inference or otherwise, to any contractor, subcontractor, laborer, or materialmen, for t ie performance of any labor, or the furnishing of any materials for any specific improvement, alteration and repair of or to the premises or as giving Tenant the right, power or authority, to contract for or permit the rey deicing of any service or the furnishing of any material that would give rise to the filing of any mechanic's I ens against the premises. Landlord shall have the right to post and keep posted on the premises any notices, it at may be provided by law or which Landlord may deem to be proper for the protection of Landlord, the premises and the Building from such liens, and Tenant shall give Landlord at least 5 days' prior notice of the date of commencement of any construction on the premises in order to permit the posting of such notices. 13. Repairs and Maintenance of Premises. (a) Tenant shall at all times during the term hereof and at Tenant's sole cost and expense, keep the premises and every part thereof in reasonably good condition and repair, ordinary wear and tear, damage thereto by fire, earthquake, act of God or the elements excepted. Subject to the provisions of paragraph 11I above concerning the 11 removal of alterations, additions and improvements, Tenant shall at the end of the term hereof surrender to Landlord the premises and all alterations, additions and improvements thereto in the same condition as when received or when first installed, ordinary wear and tear and damage by fire, earthquake, act of God or the elements excepted. Landlord has no obligation and has made no promise to alter, remodel, improve, repair, decorate or paint the premises or any part thereof. No representations respecting the condition of the premises or the Building have been made by Landlord to Tenant, except as specifically herein set forth. The Tenant hereby waives any and all express or implied warranties relating to or arising from this Lease, the Premises or the tenancy. (b) Landlord shall assign to Tenant, and Tenant shall have the benefit of, any guarantee or warranty to which Landlord is entitled under any purchase, construction or installation contract relating to a component of the premises which Tenant is obligated to repair and maintain. Tenant shall have the right to call upon the contractor to make such adjustments, replacements, or repairs which are required to be made by the contractor under such contract. (c) Notwithstanding the provisions of subparagraph 13(a) above, Landlord shall repair and maintain the structural portions of the Building, including the basic plumbing, air conditioning, heating and electrical systems, installed and furnished by Landlord, unless such maintenance and repairs are caused in material part or in whole by the act, neglect, fault or omission of any duty by Tenant, its agents, servants, employees or invitees, in which case Tenant shall pay to Landlord the reasonable cost of such maintenance and repairs. Landlord shall not be liable for any failure to make any such repairs or to perform any maintenance unless such failures shall persist for an unreasonable time, considering all factors, including the availability of material, utilities and labor, after written notice of the need of such repairs or maintenance is given to Landlord by Tenant. There shall be no abatement of rent and no liability of Landlord by reason of any injury to or interference with Tenant's business arising from the making or failure to make any repairs, alterations or improvements in or to any portion of the Building or the premises or in or to fixtures, appurtenances, and equipment therein. (d) Tenant hereby waives any right to make repairs at landlord's expense under the provisions of any laws permitting repairs by a tenant at the expense of a landlord to the extent allowed by law; Landlord an Tenant have by this Lease made specific provision for such repairs and have expressly defined their respective obligations. 14. Damage and Destruction. (a) If the premises or the portion of the Building necessary for Tenant's occupancy should be damaged or destroyed during the term hereof by any casualty insurable under standard fire and extended coverage insurance policies, Landlord shall (except as hereafter provided) repair or rebuild tile premises to substantially the condition 12 in which the premises were immediately prior to such destruction. (b) Landlord's obligation tinder this paragraph shall in no event exceed the lesser of (1) with respect to the premises, the scope of building standard improvements installed by Landlord in the original construction of the premises, or (2) the extent of proceeds received by Landlord or any insurance policy maintained by Landlord pursuant to paragraph 16(a) below, unless Landlord nevertheless elects to repair or rebuild the premises. (c) The minimum rent shall be abated proportionately during any period in which, by reason of any damage or destruction not occasioned by the negligence or willful misconduct of Tenant or Tenant's employees or invitees, there is a substantial interference with the operation of the business of Tenant. Such abatement shall be proportional to the measure of business in the premises which Tenant may be required to discontinue. The abatement shall continue for the period commencing with such destruction or damage and ending with the completion by the Landlord of such work, repair or reconstruction as Landlord is obligated to do. (d) Notwithstanding the foregoing, if the premises, or the portion of the Building necessary for Tenant's occupancy should be damaged or destroyed (1) to the extent of 10% or more of the then replacement value of either, (2) in the last year of the term hereof, (3) by a cause or casualty other than those covered by fire and extended coverage insurance, or (4) to the extent that it would take, in Landlord's opinion, in excess of 90 days to complete the requisite repairs, then Landlord may either terminate this Lease or elect to repair or restore said damage or destruction, in which event Landlord shall repair or rebuild the same as provided in subparagraph (a) above. If such damage or destruction occurs and this Lease is not so terminated by Landlord, this Lease shall remain in full force and effect. The parties hereby waive the provisions of any law that would dictate automatic termination or grant either party an option to terminate in the event of damage or destruction. Landlord's election to terminate Landlord's obligation under this paragraph shall be exercised by written notice to Tenant given within 60 days following the damage or destruction. Such notice shall set forth the effective date of the termination of this Lease. (e) Upon the completion of any such work of repair or restoration by Landlord, Tenant shall forthwith repair and restore all other parts of the premises including without limitation, non-building standard leasehold improvements and all trade fixtures, equipment, furnishings, signs and other improvements originally installed by Tenant, subject to the requirements of subparagraph 11 (a) above. 15. Indemnification. Except to the extent caused by the gross negligence or willful misconduct of Landlord or Landlord's agents, employees or invitees, Landlord shall not be liable to Tenant and Tenant hereby waives all claims against Landlord for any injury to or 13 death of any person of damage to or destruction of property in or about the premises or the Building by or from any cause whatsoever, including, without limitation, acts of other tenants or other third parties, gas, fire, oil, electricity or leakage of any character from the roof, walls, basement or other portion of the premises or the Building. Except to the extent caused by the gross negligence or willful misconduct of Landlord or Landlord's agents, employees or invitees, Tenant shall hold Landlord and any ground Landlord harmless for, from and against and defend Landlord against any and all claims, liability, damage or loss, and for, from and against all costs and expenses, including reasonable attorneys' fees, arising out of any injury to or death of any person or damage to or destruction of any property, from any cause whatsoever (except any cause resulting solely from the gross negligence or willful act of Landlord, its authorized agents or employees) occurring in or about the premises or the Building and, if occurring on or about any portion of the common areas or elsewhere in or about the Building, when such injury or damage shall be caused in whole or in part by the act, neglect, default or omission of any duty by Tenant, its agents, employees or invitees or otherwise by any conduct or transactions of any of said persons in or about or concerning the premises, including any failure of Tenant to observe or perform any of its obligations hereunder. 'Me provisions of this paragraph 15 shall survive the termination of this Lease with respect to any damage, injury or death occurring prior to such termination. 16. Insurance. (a) Tenant shall procure and maintain in full force and effect during the entire term hereof, at its own expense and in companies acceptable to Landlord, the following policy or policies of insurance. (1) Comprehensive liability insurance, including property damage, insuring Landlord and the Building, as Landlord may designate, hereinafter called "additional designated insured") from and against all claims, demands, actions or liability for injury to or death of any persons, and for damage to property arising from or related to the use of occupancy of the premises or the operation of Tenant's business. No deductible shall be carried under this coverage without the prior written consent of Landlord. Such policy shall contain but not be limited to, coverage for premises and operations, products and completed operations, blanket contractual, personal injury, operations, ownership, maintenance and use of owned, non-owned, or hired automobiles, bodily injury and property damage. The policy shall have limits in amounts not less than $1,000,000 per person and per occurrence, with an aggregate limit of $2,000,000. This insurance shall carry a contractual coverage endorsement specifically insuring the performance by Tenant of its indemnity agreement contained in paragraph 15 above. If in the opinion of Landlord's insurance advisor, based on a substantial increase in recovered liability claims, the aforesaid amounts of coverage are no longer adequate, then such coverage shall be proportionately increased. 14 (2) Worker's Compensation Insurance and Employer's Liability Insurance with a limit of no less than that amount required by law, provided that Employer's Liability Insurance shall have a minimum coverage of $1,000,000 per person and per occurrence. (3) Fire insurance with standard extended coverage of "all risk" endorsement, including, without limitation, vandalism and malicious mischief, to extent of 90% of the replacement value of all furnishings, trade fixtures, leasehold improvements, equipment, merchandise and other personal property and leasehold improvements from time to time situated in, on or upon the premises. As long as this Lease is improvements from time to time in effect, the proceeds from any such insurance shall be held in trust to be used only for the repair or replacement of the improvements, fixtures and other property so insured. (b) Landlord may elect to procure and maintain liability insurance and insurance covering fire and such other risks of direct indirect loss or damage as it reasonably deems appropriate, including extended and broad form coverage risks, mudslide, land subsidence, volcanic eruption, flood and earthquake, on leasehold as improvements in the Building. Tenant shall reimburse Landlord for the costs of all such insurance as part of Operating Expenses reimbursable pursuant to paragraph (6). Any insurance coverage herein provided shall be for the benefit of Landlord, Tenant and any additional designated insured, as their interests may appear, Tenant shall not adjust losses or execute proofs of loss under such policies without Landlords prior written approval. (c) Should this Lease be canceled pursuant to the provisions of paragraph 14 above by reason of damage or destruction and Tenant is thus relieved of its obligation to restore or rebuild the improvements on the premises, any insurance proceeds for damage to the premises, including all fixtures and leasehold improvements thereon, shall belong to Landlord, free and clear of any claims by Tenant. (d) All policies of insurance described in this paragraph 16 of which Tenant is to procure and maintain, shall be issued by good, responsible companies, reasonably acceptable to Landlord and qualified to do business in the state in which the Building is situated. Executed copies of such policies of insurance or, at Landlord's election, certificates thereof, shall be delivered to Landlord and any additional designated insureds within 10 days after delivery of possession of the premises to Tenant and thereafter within 30 days prior to the termination or expiration of the term of each existing policy. All public liability and property damage policies shall contain the following provisions: (1) Landlord, and any additional designated insureds although named as insured, shall nevertheless be entitled to recovery under said policies for any loss occasioned to them, their servant , agents and employees by reason of the negligence of Tenant, its officers, agents or employees; (2) the company writing such policy shall agree to give Landlord and any additional designated insured not less than 30 days' notice in writing prior to any cancellation, reduction or modification of such insurance; and (3) at the election of 15 Landlord's mortgagee, the proceeds of any insurance shall be paid to a trustee or depository designated by Landlord's mortgagee. All public liability, property damage and other casualty policies shall be written as primary policies, not entitled to contribution from, nor contributing with, any coverage which Landlord may carry. Tenant hereby acknowledges that the late delivery by Tenant to Landlord of the insurance certificates or policies referred to above will cause Landlord to incur costs nol contemplated by this lease, the exact amount of which will be extremely difficult to ascertain. Such costs include, but are not limited to, processing and accounting charges and penalties which may be imposed on Landlord by the terms of any mortgage or trust deed covering the premises. Accordingly, if any insurance certificate or policy required to be delivered by Tenant above shall not be received by Landlord at the time prescribed above, Tenant shall pay to Landlord a charge in the sum of $300. The parties hereby agree that such charge represents a fair and reasonable estimate of the costs Landlord will incur by reason of late delivery by Tenant, and acceptance of such charge by Landlord shall in no event constitute a waiver of Tenant's default with respect to such late delivery, nor prevent Landlord from exercising any of the other rights and remedies available to Landlord hereunder or at law. (e) Notwithstanding anything to the contrary contained within this paragraph, Tenant's obligations to carry the insurance provided for herein may be brought within the coverage of the so-called blanket policy or policies of insurance carried and maintained by Tenant; provided, however, that (1) Landlord and such other persons shall be named as additional insureds thereunder as their interests may appear; (2) the coverage afforded to Landlord and such other persons will not be reduced of diminished by reason of the use of such blanket policy of insurance; and (3) all other requirements set forth herein are otherwise satisfied. If Tenant should fail either to acquire the insurance required pursuant to this paragraph 16 and to pay the premiums therefor or to deliver required certificates or policies, Landlord may in addition to any other rights and remedies available to Landlord, acquire such insurance and pay the requisite premiums therefor, which premiums shall be payable by Tenant to Landlord immediately upon demand. (g) Landlord and Tenant hereby waive any rights each may have against the other for loss or damage to its property or property in which it may have an interest where such loss is caused by a peril of the type generally covered by fire insurance with extended coverage or arising from any cause which the claiming party was obligated to insure against under this Lease, and each party on behalf of its insurer waives any right of subrogation that the insurer might otherwise have against the other party. The parties agree to cause their respective insurance companies insuring the premises or insuring their property on or in the premises to execute a waiver of any such rights of subrogation. 16 17. Condemnation. (a) The term "total taking" means the taking of the fee title or Landlord's master leasehold estate to so much of the premises or a portion of the Building necessary for Tenant's occupancy by right of eminent domain or other authority of law, or a voluntary transfer tinder the threat of the exercise thereof, that the premises are not suitable for Tenant's intended use. The term "partial taking" means the taking of only a portion of the premises or the Building which does not constitute a total taking as above defined. (b) If during the term hereof there shall be a total taking then this Lease, and the leaschold estate of Tenant in and to the premises, shall cease and terminate as of the date possession is taken. As used in this paragraph, the phrase "date possession is taken" means the date of taking actual physical possession thereof by the condemning authority or such earlier date as the condemning authority gives notice that it shall be deemed to have taken possession. (c) If during the term hereof there shall be a partial taking of the premises, this Lease shall terminate as to the portion of the premises taken on the date on which actual possession of the portion of the premises is taken pursuant to the eminant domain proceedings and this Lease shall continue in full force and effect as the remainder of the premises. The minimum rent payable by Tenant for the balance of the term shall be abated in the ratio that the net rentable area of the premises taken bears to the net rentable area of the premises immediately prior to such taking, and Landlord shall make all necessary repairs or alterations to make the remaining premises a complete architectural unit, suitable for Tenant's permitted use hereunder. (d) All compensation and damages awarded for the taking of the premises, any portion thereof, or the whole or any portion of the common area or Building shall, except as otherwise herein provided, belong to and be the sole property of Landlord, and Tenant shall not have any claim or be entitled to any award for diminution in value of its rights hereunder or for the value of any unexpired term of this Lease; provided, however, that Tenant shall be entitled to make its own claim for, and receive separate award that may be made for Tenant's loss of business or for the taking of or injury to Tenant's improvements, or on account of any cost or loss Tenant may sustain the removal of Tenant's trade fixtures, equipment, and furnishings, or as a result of any alterations, modifications or repairs which may be reasonably required by Tenant in order to place the remaining portion of the premises not so condemned in a suitable condition for the continuance of Tenant's occupancy. The Tenant's award pursuant to this subparagraph shall not reduce Landlord's award. (e) If this Lease is terminated pursuant to the provisions of this paragraph 17, then all rentals and other charges payable by Tenant to Landlord hereunder shall be paid up to the date upon which possession shall be taken by the condemning agency and any 17 rentals and other charges paid in advance and allocable to the period after the date possession is taken, shall be repaid to Tenant by Landlord, and the parties shall thereupon be released from all further liability hereunder. 18. Compliance With Legal Requirements. Tenant shall at its sole cost and expense promptly comply with all laws, statutes, ordinances and governmental rules, regulations or requirements now in force or which may hereafter be in force, with the requirements of any board of fire underwriters or other similar body now or hereafter constituted, with any direction or occupancy certificate issued pursuant to any low by any public officer or officers, as well as the provisions of all recorded documents affecting the premises, as they relate to or affect the condition, use or occupancy of the premises, excluding requirements of structural changes not related to or affected by improvements made by or for Tenant or Tenant's use of the premises. 19. Assignment and Subletting. (a) Tenant shall not transfer, assign, sublet, enter into license or concession agreements, or hypothecate this Lease or the Tenant's interest in and to the premises without first procuring the written consent of Landlord, which consent shall not unreasonably be withheld, coaditioned or delayed. Any attempted transfer, assignment, subletting license or concession agreement or hypothecation without Landiord's consent shall be void and shall, at the option of Landlord, terminate this Lease. This Lease shall not, nor shall any interest herein, be assignable as to the interest of Tenant by operation of law without the consent of Landlord. Tenant agrees to reimburse Landlord for Landiord's reasonable attorneys' fees incurred in conjunction with the processing and documentation of any such requested transfer, assignment, subletting, licensing or concession agreement, or hypothecation of this Lease or Tenant's interest in and to the premises. As it pertains to this Lease, any overage or other compensation above the base rental established herein paid to Tenant in any sublease or assignment shall belong in its entirety to Landlord. (b) Before entering into any assignment of this Lease or into a sublease of all or part of the premises, Tenant shall give wri"cn notice to Landlord identifying the intended assignee or subtenant by name and address and specifying the terms of the intended assignment or sublease. For a period of thirty (30) days after such notice is given, Landlord shall have the right by written notice to Tenant to (i) in the case of a proposed sublease, either (A) sublet from tenant any portion of the premises proposed to be sublet for the term for which such portion is proposed to be sublet but at the same rent as Tenant is required by pay to Landlord under this Lease for the same space, computed on a pro rata square footage basis, or (B) if the proposed subletting is for substantially the remaining period of the term of this Lease, terminate this Lease or terminate this Lease as is pertains to the portion of the premises so proposed by Tenant to be sublet, or (it) in the case of a proposed assignment, terminate this Lease. If Landlord so terminates this 18 Lease, such termination shall be as of the date specified in Landlord's notice, If Landlord so terminates this Lease, Landlord may, if it elects, enter into a ne%v lease covering the premises or a portion thereof with the intended assignee or subtenant on such terms as Landlord and such person may agree, or enter into a new lease covering the premises or a portion thereof with any other person; in such event, Tenant shall not be entitled to any portion of the profit, if any, which Landlord may realize on account of such termination and reletting. Landlord's exercise of its aforesaid option shall not be construed to impose any liability upon Landlord with respect to any real estate brokerage commission(s) or any other costs or expenses incurred by Tenant in connection with its proposed subletting or assignment. (c) If Tenant complies with the provisions of this section and Landlord does not exercise an option provided to Landlord under lb) above, Landlord's consent to a proposed assignment or sublet shall not be unreasonably withheld, conditioned or delayed. Without limiting the other instances in which it may be reasonable for Landlord to witlihold its consent to an assignment or subletting, Landlord and Tenant acknowledge that is shall be reasonable for Landlord to williliold its consent in any of the following instances: (1) the proposed assignee or stiblessee is a governmental agency; (2) in Landlord's reasonable judgment, the use of the premises by the proposed assignee or sublessee would entail any alterations which would lessen the value of the leaschold improvements in the premises, or would require material increased services by Landlord; (3) in Landlord's reasonablejudgment, the financial wonh of the proposed assignee or sublessce does not meet the credit standards applied by Landlord for other tenants under leases with comparable terms; (4) in Landlord's reasonable judgment, the character, reputation or business of tenant is inconsistent with the desired tenant-mix or the quality of other tenancies in the Building; (5) Landlord has received from any prior lessor to the proposed assignee or subtenant a negative report concerning such prior lessor's experience with the proposed assignee or subtenant; (6) Landlord has experienced previous defaults by or is in litigation with the proposed assignee or subtenant; (7) (i) the proposed assignee's or subtenant's anticipated use of the premises involves the generation, storage, use, treatment or disposal of Hazardous Material; (ii) the proposed assignee or subtenant has been required by any prior landlord, 19 lender or governmental authority to take remedial action in connection with Hazardous Material contaminating a property if the contamination resulted from such assignee's or subtenant's actions or use of the property in question; or (iii) the proposed assignee or subtenant is subject to an enforcement order issued by any governmental authority in connection with the use, disposal or storage of a Hazardous Material; (8) the use of the premises by the proposed assignee or subtenant will violate any applicable law, ordinance or regulation; (9) the proposed assignment or sublease will create a vacancy elsewhere in the Building; (10) the proposed assignee or subtenant, or any person that, directly or indirectly, controls, is controlled by, or is under conunon control with the proposed assignee or subtenant, is then an occupant of the Building; (11) the proposed assignee or subtenant is a person with whom Landlord is negotiating to lease space in the Building; (12) the proposed assignment or sublease fails to include all of the terms and provisions required to be included therein pursuant to this paragraph; (13) Tenant is in default of any obligation of Tenant under this Lease, or Tenant has defaulted under this Lease on three (3) or more occasions during the twelve (I 2) months preceding the date that Tenant shall request consent; or (14) in the case of a subletting of less that the entire premises, if the subletting wou Id resu It in the division of the premises into more than two subparcels or would require access to be provided through space leased or held for lease to another tenant or improvements to be made outside of the premises. (d) in the case of an assignment, 100% of any sums or other economic consideration received by Tenant as a result of such assignment shall be paid to Landlord after first deducting the unamortized cost of leasehold improvements paid by Tenant, and the cost of any real estate commissions incurred in connection with such assignment. In the case of a subletting, 100% of any sum or economic consideration received by Tenant as a result of such subletting shall be paid to Landlord after first deducting (1) the rental due hereunder, prorated to reflect only rental allocable to the sublet portion of the premises, and (2) the cost of any real estate commissions incurred in connection with such subletting, amortized over the term of the sublease. Upon Landiord's request, Tenant shall assign to Landlord all amounts to be paid to Tenant by any such subtenant or assignee and shall direct such subtenant or assignee to pay the same directly to Landlord. (e) Notwithstanding the provisions of sxibparagraphs (a) and lb) above, Tenant 20 may assign this Lease or sublet the premises or any portion thereof, without Landiord's consent, to any corporation which controls, is controlled by or is tinder common control with Tenant or to any corporation resulting from the merger or consolidation with Tenant so long as there is no change in control of Tenant, provided that said assignee assumes, in full, the obligations of Tenant under this Lease. (f) Regardless of Landiord's consent, no subletting, assignment, hypothecation, license or concession shall release Tenant of Tenant's obligation or alter the primary liability of Tenant to pay the rental and to perform all other obligations to be performed by Tenant hereunder. The acceptance of rental by Landlord from any other person shall not be deemed to be a waiver by Landlord of any provision hereof Consent to one assignment, subletting, hypothecation, license or concession agreement shall not be deemed consent to any subsequent assignment, subletting, hypothecation, license or concession agreement. In the event of default by any assignee of Tenant or any successor of Tenant in the performance of any of the terms hereof, Landlord may proceed directly against Tenant without he necessity of exhausting remedies against such assignee or successor. Landlord may consent to subsequent assignments or modifications to this Lease, with assignees of Tenant %without notifying Tenant or any successor of Tenant, and without obtaining its or their consent thereto and such action shall not relieve Tenant of liability under this Lease. (g) Each transfer, assignment, subletting, license, concession agreement and hypothecation to which there has been consent or which has been permitted pursuant to subparagraph (e) above, shall be by an instrument in form satisfactory to Landlord and shall be executed by the ttansfcror, assignor, sublessor, licenser, concessionaire, hypothecator or mortgagor and the transferee, assignee, sublessce, licensee, concessionaire or mortgagee in each instance, as the case may be; and each transferee, assignee or sublessee shall agree in writing t-or the benefit of Landlord to assume, to be bound by, and to perform the terms, covenants and conditions of this Lease to be done, kept and performed by Tenant. One executed copy of such instrument shall be delivered to Landlord. No sublessee other than Landlord shall have the right further to sublet. (h) In the event Tenant shall assign or sublet the premises or request Landiord's consent to a proposed assignment, subletting, or other act, then Tenant shall pay (1) to Landlord and administrative fee in the sum of $300 and (ii) Landlord's reasonable attorneys' fees incurred in connection therewith. (i) For the purpose of this Lease, a transfer of more than (i) 50% of the partnership interest in Tenant if Tenant is a partnership, or (ii) 50% of the outstanding voting stock if Tenant is a corporation, shall constitute an assignment of this Lease. Notwithstanding anything to the contrary in the Lease, the terms of this Section 19 (i) shall not apply to Tenant if Tenant is a publicly traded company. Further, an initial public trading of Tonant's stock shall not constitute an assignment or transfer for purposes of this 21 Section 19 (i). 20. Rules and Regulations. Tenant shall faithfully observe and comply with the rules and regulations a"aclied to this Lease as Exhibit C and, after notice thereof, all reasonable modifications thereof and additions thereto from time to time promulgated in writing by Landlord. Landlord shall not be responsible to Tenant for the nonperformance by any other tenant or occupant of the Building of any of such rules and regulations. 21. Landlord's Access. Landlord may enter the premises at reasonable hours to (1) inspect he same; (2) exhibit the same to prospective purchasers, mortgagees or tenants; (3) determine whether Tenant is complying with all its obligations hereunder; (4) supply any service to be provided by Landlord to Tenant hereunder; (5) post notices of non-responsibility; (6) post "to Lease" signs of reasonable size upon the premises during the last 90 day of the term hereof; and (7) make repairs required of Landlord under the terms hereof or repairs to any adjoining space or utility services or make repairs, alterations or additions to the premises or any other portion of the Building, provided, however, that all such work shall be done as promptly as reasonably possible and so as to cause as little interference to Tenant as reasonably possible and that any repairs, alterations, or additions to the premises shall, when completed, not materially and adversely affect Tenant's use of the premises. Tenant hereby waives any claim for damages for any injury or inconvenience to or interference with Tenant's business and any loss of occupancy or quiet enjoyment of the premises Landlord shall at all times have and retain a key with which to unlock all of the doors in, on or about the premises (excluding Tenant's vaults, safes and similar areas designated in writing by Tenant in advance) and Landlord shall have the right to use any and all means which Landlord may deem proper to open such doors in an emergency in order to obtain entry to the premises. Any entry to the premises obtained by Landlord by any of such means, or otherwise, shall not under any circumstances be construed or deemed to be a forcible or unlawful entry into or a detainer of the premises or an eviction, actual or constructive, of tenant from the premises, or any portion thereof. 22. Default. If: (1) Tenant shall fail to pay any rent or other sum payable hereunder for a period of 5 days after written notice from Landlord and the same is due; (2) Tenant shall fail to observe, keep or perform any of the other terms, covenants, agreements or conditions contained herein or in the rules and regulations to be observed or performed by Tenant and such default continues for a period of 30 days after notice by Landlord or beyond the time reasonably necessary for cure if such default is of a nature to require in excess of 30 days to remedy-, (3) Tenant shall become banknipt or insolvent or make a transfer if fraud of creditors, or make an assignment for the benefit of creditors, or take or have taken against Tenant any proceedings of any kind under any provision of the Federal Bankruptcy Act or under any other insolvency, bankruptcy or reorganization act or, in the event any such proceedings are involuntary, such involuntary proceedings are not dismissed within 60 days thereafter-, (4) a receiver is appointed for a substantial part of 22 the assets of Tenant; (5) Tenant shall vacate or abandon the premises; or (6) this Lease or any interest of Tenant hereunder shall be levied upon by any attachment or execution, then any such event shall constitute an event of default by Tenant. Upon the occurrence of any event of default by Tenant hereunder, Landlord may, at its option and without any further notice or demand, in addition to 3ny other rights and remedies given hereunder or by law, do any of the following: (a) Landlord shall have the right, so long as such default continues, to give notice of termination to Tenant. On the date specified in such notice (which shall not be less than 3 days after the giving of such notice) this Lease shall terminate. (b) In the event of any such termination of this Lease, Landlord may then or at any time thereafter, re-enter the premises and remove therefrom all persons and property and again repossess and enjoy the premises, without prejudice to any other remedies that Landlord may have by reason of Tenant's default or of such termination. (c) The amount of damages which Landlord may recover in event of such termination shall include, without limitation, (1) the amount at the time of award of (A) unpaid rental earned and other sums owed by Tenant to Landlord hereunder, as of the time of termination, together with interest thereon as provided on this Lease, (B) the amount by which the unpaid rent which would have been earned during the period from termination until the award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided and (C) the amount by which the unpaid rent for the balance of the term after the time of the award exceeds the amount of such rental loss that Tenant proves could be reasonably avoided (computed by discounting such amount at the discount rate of the Federal Reserve Bank of San Francisco at the time of award plus one percent), (2) all legal expenses and other related costs incurred by Landlord following Tenant's default including reasonable attorneys' fees incurred in collecting any amount owed hereunder, (3) all costs incurred by Landlord in restoring the premises to good order and condition, or in remodeling, renovating or otherwise preparing tile premises for relenting, and (4) all costs (including without limitation any brokerage commissions) incurred by Landlord in teletting the premises. For the purpose o(determining the unpaid rent in the event of a termination of this Lease, the monthly rent reserved in this Lease shall be deemed to be the sum of (1) the minimum rent and (2) the Operating Expense charge and any other amounts last payable by Tenant pursuant to Paragraphs 5, 6, 7, 10, 13, and 16 above. (d) Following tile termination of this Lease or Tenant's right of possession hereunder (or upon Tenant's failure to remove its personal property from the premises after the expiration of the term of the Lease), Landlord may remove its personal property from the premises after the expiration of the term of such property in a public or private warehouse or elsewhere at the sole cost and expense of Tenant; such warehouser shall have all rights and remedies provided by law against Tenant as the owner of such 23 property. In addition, in the event that Tenant shall not immediately pay the cost of storage of such property after the same has been stored for a period of 30 days or more, Landlord may sell any or all thereof at a public or private sale in such manner and at such times and places as Landlord in its sole discretion may deem proper, without notice to or demand upon Tenant. Tenant waives all claims for damages that may be caused by Landlord's removing or storing or selling the property as herein provided, and Tenants shall indemnify and hold Landlord free and harmless for, from and against any and all losses, costs and damages, including without limitation all costs of court and attorneys' fees of Landlord occasioned thereby. (e) Landlord shall have the right to cause a receiver to be appointed in any action against Tenant to take possession of the premises and to collect the rents or profits derived therefrom. The appointment of such receiver shall not constitute an election on the part oflandiord to terminate this Lease unless notice of such intention is given to Tenant. (f) Even though Tenant has breached this Lease and/or abandoned tile premises, this Lease shall continue in effect for so long as Landlord does not terminate this Lease, and Landlord may enforce all its rights and remedies under this Lease, including the right to recover the rental in periodic actions as it becomes due under this Lease. In such event, Landlord may re-enter the premises and remove all persons and property if the premises have not been vacated, using any available summary proceedings, without such re-entry or removal being deemed a termination or acceptance of surrender of this Lease. Landlord may then elect to relet the premises for the account of tenant for a period which may extend beyond the term hereof, and upon such other ten- ns as Landlord may reasonably deem appropriate. Tenant shall reimburse Landlord upon demand for all costs incurred by Landlord in connection with such reletting, including, without limitation, necessary restoration, renovation, or improvement costs, reasonable attorneys' fees and brokerage commissions. The proceed of such reletting shall be applied first to any sums then due and payable Landlord from Tenant, including the reimbursement described above. In balance, if any, shall be applied to the payment of future rent as it becomes due hereunder. 23. Landlord's Right to Cure Default. All covenants and agreements to be performed by Tenant under any of the terms of this Lease shall be at its sole cost and expense and without any abatement of rent. If Tenant shall fail to pay any sum of money, other than rent, required to be paid by it hereunder or shall fail to perform any other act on its part to be performed hereunder and such failure shall have become an event of default tinder paragraph 22 above, Landlord may, but shall not be obligated to do so, and without waiving or releasing Tenant from any obligations of tenant, make any such payment or perform any such other act on Tenant's part to be made or performed as in this Lease provided. All sums so paid by Landlord and all necessary incidental costs shall be deemed additional rent hereunder and shall be payable to Landlord on demand together 24 with Default Interest from the date of expenditure by Landlord until repaid. 24. Attorneys' Fees. If as a result of any breach or default in the performance of any of the provisions of this Lease or in order to enforce its rights hereunder, Landlord uses the services of an attorney in a nonjudicial action, at trial, or upon an appeal, to secure compliance with such provisions or recover damages therefor, to exercise such rights, or to terminate this Lease or evict Tenant, Tenant shall reimburse Landlord upon demand for any and 211 reasonable attorneys' fees and expenses so incurred by Landlord. If tenant shall be the prevailing party in any legal action brought by Landlord against Tenant, Tenant shall be entitled to recover for tile fees of its attorneys in such amount as the court may adjudge reasonable. Tenant, to the extent permitted by law, does hereby waive any further right to attorneys' fees provided by applicable state or federal law. 25. Subordination. (a) This Lease shall be subject and subordinated at all times to all ground or underlying leases which may hereafter be executed affecting the Building, and the lien of all mortgages and deeds of trust in any amount or amounts whatsoever now or hereafter placed on or against the Building or on or against Landlord's interest or estate therein or on or against all such ground or underlying leases, all without the necessity of having further instruments executed on the part of Tenant to effectuate such subordination. Notwithstanding the foregoing (1) in the event of termination for any reason whatsoever of any ground or underlying lease hereafter executed, this Lease shall not be barred, terminated, cut off or foreclosed nor shall the rights and possession of tenant hereunder be disturbed if tenant shall not then be in default in the payment of rental or other sums or be otherwise in default under the terms of this Lease, and Tenant shall attorn to the Landlord of any such ground or underlying Lease, or, if requested, enter into a new lease for the balance of the original or extended term hereof then remaining upon the same terms and provisions as are in this Lease contained; (2) in the event of a foreclosure of any such mortgage or deed of trust hereafter executed or of any other action or proceeding for the enforcement thereof, or of any sale thereunder, this Lease will not be barred, terminated, cut off or foreclosed nor will the rights and possession oftenant thereunder be disturbed if Tenant shall not then be in default in the payment of rental or other sums or be otherwise in default tinder the terms of this Lease, and Tenant shall attom to the purchaser at such foreclosure, sale or other action or proceeding; and (3) Tenant agrees to execute and deliver upon demand such further reasonable instruments evidencing such subordination of this lease, ground or underlying leases, and to the lien of any such mortgages or deed of mist as may reasonably be required by Landlord. Tenant's covenant to subordinate this Lease to ground or underlying leases, and mortgages or deeds of trust hereafter executed is conditioned upon each such senior instrument containing the commitments specified in the preceding clauses (1) and (2); and (4) Tenant further waives the provisions of any statute of rule of law, now or hereafter in 25 effect, which may give or purport to give Tenant any right or election to terminate or otherwise adversely affect the Lease and the obligations of Tenant hereunder in the event of such foreclosure or sale. (b) Tenant shall mail by certified or registered post, return receipt requested, or personally deliver to any Landlord under a ground lease or mortgage lender a duplicate copy of any and all notices in writing which Tenant may from time to time give to or serve upon Landlord pursuant of the provisions of this Lease, and such copy shall be mailed or delivered at, or as near as possible to, the same time such notices are given or served by Tenant. No notice by Tenant to Landlord hereunder shall be deemed to have been given unless and until a copy thereof shall have been so mailed or delivered to any ground lease landlord or mortgage lender. Upon the execution of any ground lease or mortgage, Tenant shall be informed in writing of the vesting of the interest evidenced by the ground lease or mortgage. (c) Should any event of default by Landlord under this Lease occur, any ground lease landlord or mortgage lender shall have 30 days after receipt of written notice from Tenant sening forth the nature of such event of default within which to remedy the default; provided that in the case of a default which cannot with due diligence be cured within such 30-day period, the ground lease landlord or mortgage lender shall have the additional time reasonably necessary to accomplish the cure, provided that (i) it has conunenced the curing within such 30 days and (ii) thereafter diligently prosecutes the cure to completion. If the default is such that the possession of the premises may be reasonably necessary to remedy the default, any ground lease landlord or mortgage lender shall have a reasonable additional time after the expiration of such 30-day period within which to remedy such default, provided that (i) it shall have fully cured any default in the payment of any monetary obligations of Landlord under this Lease within 30 day period and shall continue to pay currently such monetary obligations as and when the same are due and (ii) it shall have acquired Landiord's estate or commenced foreclosure or other appropriate proceedings within such period, or prior thereto, and is diligently prosecuting any such proceedings. 26. No Merger. The voluntary or other surrender of this Lease by Tenant, or a mutual cancellation thereof, shall not work a merger, and shall, at the option of Landlord, terminate all or any existing subleases or stibtenancies, or may, at the option of Landlord. operate as a assignment to it of any or all such subleases or subtenancies. 27. Sale by Landlord. In the event the original Landlord hereunder, or any successor owner of the Building, shall sell or convey the Building, all liabilities and obligations on the part of the original Landlord, or such successor owner, under this Lease accruing thereafter shall terminate, and thereupon all such liabilities and obligations shall be binding upon the new owner. Tenant agrees to attorn to such new owner. 26 28. Estoppel Certificate. At any time from time to time, but on not less than 10 days prior notice by Landlord, Tenant will execute, acknowledge and deliver to Landlord, promptly upon request, a certificate certifying (a) that this Lease is unmodified and in full force and effect (or, if there have been modifications, that his Lease is in full force andeffect, as modified, and stating the date and nature of each such modification), lb) the date, if any, to which rental and other sums payable hereunder have been paid, (c) that no notice has been received by tenant of any default which has not been cured, except as to defaults specified in said certificate, and (d) such other matters as may be reasonably requested by Landlord. Tenant hereby appoints Landlord as Tenant's atiomey-in-fact to execute, acknowledge and deliver such certificate if Tenant shall fail to do so within the above-prescribed time penod. Any such certificate may be relied upon by any prospective purchaser, mortgagee of beneficiary under any deed or trust of the Building. 29. Holdover Tenancy. If, without objection by Landlord, Tenant holds possession of the premises after expiration of the term of this Lease, Tenant shall become a Tenant from month to month upon all of the terms specified in ibis Lease as applicable immediately prior to expiration of such term, except that minimum rent will be 150% of that applicable immediately prior to expiration of such term. Each party shall give the other notice of its intention to terminate such tenancy at least one month prior to the date of such termination. 30. Building Security. (a) Landlord shall have the right, but not the obligation, from time to time to adopt such policies, procedures and programs as it shall deem necessary or appropriate for the security of the Building, and Tenant shall cooperate with Landlord in tile enforcement of the policies, procedures and programs adopted by Landlord. (b) Without limiting the generality of subparagraph (a) above, Landlord reserves the right to exclude from the 13iiilding between the hours of 6 p.m. and 7 a.m. and at all hours on Saturdays, Sundays and holidays all persons who do not present a valid pass to the Building. If Landlord does elect to adopt such pass system, Landlord shall fumish passes to persons for whom Tenant requests the same in writing, and Tenant shall be responsible for all person for whom it request passes and shall be liable to Landlord for all acts of such persons. Landlord shall in no case be liable for damages for any error with regard to the admission to or exclusion form the Building of any person. In case of invasion, mob, riot, public demonstration or other circumstances rendering such action advisable in Landiord's opinion, Landlord reserves the right to prevent access to the Bkii[ding during the continuance of the same by such action as Landlord may deem appropriate, including closing doors. (c) In the event of any picketing, public demonstration or other threat to the security of the Building that is directly attributable to Tenant, Tenant shall reimburse 27 Landlord for any costs incurred by Landlord in connection with such picketing, demonstration or other threat in order to protect the security of the Building. 31. Parking. (a) Any parking areas appurtenant or within the Building, or designated portions thereof, shall be available for the use of Tenants of the Building, and, to the extent designated by Landlord, the employees, agents, customers and invitees of said tenants, subject to the rules, regulations, charges, and rates as set forth by the Landlord from time to time; provided, however, that Landlord may restrict to certain portions of the parking areas, parking for Tenant or other tenants of the Building and their employees and agents, and may designate other areas to be used only by customers and invitees of Tenants of the Building. Notwithstanding anything herein contained, Landlord reserves the right from time to time to make reasonable changes in ,additions to, and deletions from parking areas as now or hereafter constituted. (b) Landlord, or its agents, shall have the right to cause to be removed any cars, trucks, trailers or other motorized or nonmotorized vehicles of tenants, its employees, agents, guests or invitees that are parked in violation hereof or in violation of regulations of the Building, without liability of any kind to Landlord, its agents or employees, and Tenant agrees to hold Landlord harmless from and defend it against any and all claims, losses, or damages and demands asserted or arising in respect to or in connection with the removal of any such vehicles as aforesaid. Tenant shall from time to time upon request of Landlord supply Landlord with a list of license plate numbers of all vehicles owned by its employees and agents who are to have parking privileges hereunder. Landlord may, as a part of the regulations promulgated by it for the use of the parking areas, require that Tenant cause any identification sticker issued by Landlord to be affixed to the bumpers or other designated location on all vehicles of tenant and its employees and agents who are authorized to park in the parking areas. 32. Security Deposit. Tenant has deposited with Landlord the Security Deposit sum specified in the Basic Lease Information (the 'Deposit'). The Deposit shall be held by Landlord as security for the faithful performance by Tenant of all of the provisions of the Lease to be performed or observed by Tenant. If Tenant fails to pay rent or other charges due hereunder, or otherwise defaults with respect to any provision of this Lease, Landlord may use, apply or retain all or any portion of the Deposit for the payment of any rent or other charge in default or for reason of Tenant's default, or compensate Landlord for any loss or damage which Landlord may suffer thereby. If Landlord so uses or applies all or any portion of the Deposit, Tenant shall within ten (10) days after demand therefor deposit cash with Landlord in an amount sufficient to restore the Deposit to the full amount thereof and Tenant's failure to do so shall be a material breach of this Lease. 28 Landlord shall not be required to keep the Deposit separate from its general accounts. If Tenant performs all of Tenant's obligations hereunder, the Deposit, or so much thereof as has not theretofore been applied by Landlord, shall be returned, without payment of interest or other increment for its use, to Tenant (or, at Landlord's option, to the last assignee, if any, of Tenant's interest hereunder) at the expiration of the Term hereof, and after Tenant has vacated the Premises. No trust relationship is created herein between Landlord and Tenant with respect to the Deposit. 33. No Partnership. It is expressly understood that Landlord does not, in any way or for any purpose, become a partner of Tenant in the conduct of its business, or otherwise, or joint vent-,ire or a member of a joint enterprise with Tenant. 34. Recording. Tenant shall not record this Lease without the prior written consent of Landlord. 35. Modification and Financing Conditions. Landlord has obtained financing and may seek to obtain further financing for the Building, portions thereof, and the operation thereof, secured by mortgages or deeds of trust encumbering the Building. Landlord may also elect to enter into a ground lease of the Building. If any mortgage lender should require, as a condition to such financing, or pursuant to rights of approval set forth in tile mortgage or deed of trust encumbering the Building, or if any ground lease should require, as a condition to such ground lease or pursuant to rights of approval set forth therein, any modification of the terms or conditions of this Lease, Tenant agrees to execute such modification or amendment, provided that, such modification or amendment (a) shall not increase the rental or Tenant's share of any costs in addition to minimum rent or increase any other Tenant obligation or reduce any right under the terms hereof which are not provided for hereunder, (b) shall not materially interfere with Tenant's use or occupancy, and (c) if requested by a mortgage lender with a lien on the Building or a ground lessee pursuant to a ground lease effective as of the date hereof, shall have been requested prior to 30 days after the date hereof. If Tenant should refuse to execute any modifications so required within 10 days after receipt of same, Landlord shall have the right by notice to Tenant to cancel this Lease, and upon such cancellation Landlord shall refund any unearned rental or security deposit, and neither party shall have any liability thereafter accruing under this Lease, except as provided in paragraph 15 above. 36. Waiver. The waiver by Landlord of any term, covenant, agreement or condition herein contained shall not be deemed to be a waiver of any other then existing or subsequent breach of the same of any other term, covenant, agreement or condition herein contained. Nor shall any custom or practice which may develop between the parties in the administration of the terms hereof be construed to waive or to lessen the right of the Landlord to insist upon the performance by Tenant in strict accordance with such terms. The subsequent acceptance of rent or any other sum of money or other performance hereunder by Landlord shall not be deemed to be waiver of any preceding 29 breach by Tenant of any term, covenant, agreement or condition of this Lease, other than the failure of Tenant to pay tile particular rent or other sum so accepted, regardless of Landlord's knowledge of such preceding breach at the time of acceptance of such rent or other sum or performance. 37. Notices and Consents. All notices, demand, consents or approval which may be given by either parry to the other hereunder shall be in writing and shall be deemed to have been fully given when deposited in the United States mail, registered or certified, return receipt requested, postage prepaid, and addressed as follows: to Tenant at the address specified in the Basic Lease Information, or to such other place as Tenant may from time to time designate in a notice to Landlord; to Landlord at the address specified in the Basic Lease Information, or to such place as Landlord may from time to time designate in a notice to Tenant; or, in case of Tenant, delivered to Tenant at the premises. Tenant hereby appoints as its agent to receive the service of all dispossessory or restraint proceedings and notices thereunder and person or persons in charge of our occupying the premises at the time, and, if no person shall be in charge of or occupying the same, then such service may be made by attaching tile same on the main entrance of the premises. 38. Complete Agreement. There are no oral agreements between Landlord and Tenant affecting this Lease, and this Lease supersedes and cancels any and all previous negotiation, arrangements, brochures, agreements and understandings, if any, between Landlord and Tenant or displayed by Landlord to Tenant with respect tot the subject matter of this Lease or the Building. 'Mere are no representations between Landlord and Tenant other than those contained in this Lease and all reliance with respect to any representations is solely upon the representations contained herein. This lease may not be amended or modified in any respect whatsoever except by an instrument in writing signed by Landlord and Tenant. 39. Corporate Authority. If Tenant signs as a corporation, each of the person executing this Lease on behalf of the Tenant does hereby covenant and warrant that Tenant is a 4uly authorized and existing corporation, that Tenant is qualified to do business in the State in which the Building s situated, that the corporation has full right and authority to enter into this Lease. and that each person signing on behalf of the corporation is authorized to do so. 40. Limits to Tenant's Remedy. If Landlord should default in the performance of its obligations hereunder, it is understood and agreed that any claims by Tenant against Landlord shall be limited in recourse to Landlord's interest in the Building. Tenant expressly waives any and all rights otherwise to proceed on a recourse basis against Landlord, tile individual partners of Landlord, or the officers, directors and shareholders of any corporate partner of Landlord. 41. Brokers. Tenant warrants that it has had no dealings with any real estate broker or 30 agents in connection with tile location or negotiation of this Lease other than any broker or agent identified in paragraph 45 below. 42. No Light and Air Easement. No diminution or shutting off of light, air, or view by any structure which may be erected on land adjacent to or in the vicinity of the Building shall in any way affect this Lease or impose any liability on Landlord. 43. Miscellaneous. The words "Landlord" and "Tenant" as used herein shall include the plural as well as the singular. If there be more that one Tenant, tile obligations hereunder imposed upon Tenant shall be joint and several. Time is of the essence of this Lease and each and all of its provisions. Submission of this instrument for examination or signature by Tenant does not constitute a reservation of or option for lease, and it is not effective as a lease or otherwise until execution and delivery by both Landlord and Tenant. The terms, covenants, agreements and conditions herein contained shall, subject to the provisions as to assignment, apply to and bind the heirs, successors, executors, administrators and assigns of the parties hereto. lf any provisions of this Lease shall be determined to be illegal or unenforceable, such determination shall not affect any other provisions of this Lease and all such other provisions shall remain in full force and effect. Landlord and Tenant agree that each parry and its counsel have reviewed this Lease and that the normal rule of construction to the effect that ambiguities are to be resolved against the drafting party is not appropriate and shall be governed by and construed pursuant to the laws of the State in which the Building is situated. 31 Exhibit A Schedule A 31885-D Page 2 5. THE LAND REFERRED TO IN THIS POLICY IS DESCRIBED AS FOLLOWS: That portion of the southeast quarter of the northeast quarter of Section 29, Township 25 North, Range 5 East, W.M., in King County, Washington, described as follows: Commencing at the southwest corner of the southeast quarter of the northeast quarter of said Section 29; thence south 88'30'24' east along the south line of said subdivision 50.00 feet to the easterly margin of 112th Avenue Northeast (S.S.H. Number 2-A) and the point of beginning; thence north 01'16'26" east along said easterly margin 859.41 feet; thence south 88'43'37" east 111.50 feet; thence south 47'40'00" east 70.00 feet; thence south 77'00100' east 167.42 feet to the westerly margin of Interstate 405 (P.S.H. Number 1-R.E.); thence southerly along said westerly margin by the following courses and distances: south 02'45'43' west 212.79 feet; south 09'19'44' east 305.00 feet; south 01'03'36" west 268.35 feet to the south line of said southeast quarter of the northeast quarter of Section 29; thence north 88'30'24" west along said line 379.81 feet to the point of beginning; ALSO known as Lot Number 3 of City of Bellevue Short Plat Number 79-20, as recorded under Recording Number 7905221049, being a revision of City of Bellevue Short Plat Numbers 79-02 and 78-63, as recorded under Recording Numbers 7901160937 and 7809150288, respectively. 32 EXHIBIT C Rules and Regulations 1. The sidewalks, halls, passages, exists, entrances, elevators and stairways of the Building shall not be obstructed by any of the Tenants or used by them for any purpose other than for ingress to and egress from their respective premises. The halls, passages, exists, entrances, elevators, and stairways are not for the general public, and Landlord shall in all cases retain the right to control and prevent access thereto of all persons whose presence in the judgment of Landlord would be prejudicial to the safety, character, reputation and interests of the Building and its Tenants, provided that nothing herein contained shall be construed to prevent such access to persons with whom any Tenant normally deals in the ordinary course of its business, unless such persons are engaged in illegal activities. No Tenant and no employee or invitee of any Tenant shall go upon the roof of the Building. 2. No sign, placard, picture, name, advertisement or notice visible from the exterior of any Tenant's premises shall be inscribed, painted, affixed or otherwise displayed by any Tenant on any part of the Building without the prior written consent of Landlord. Landlord will adapt and furnish to Tenant general guidelines relating to signs inside tile Building on the office floors. Tenant agrees to conform to such guidelines, but may request approval of Landlord for modifications, which approval will not be unreasonably withheld. All approved signs or lettering on doors shall be printed, painted, affixed or inscribed at the expense of the Tenant by a person approved by Landlord, which approval will not be unreasonably withheld. Material visible from outside the Building will not be permitted. 3. No Tenant shall employ any person or persons other than the janitor of Landlord for the purpose of cleaning the premises, unless other wise agreed to by Landlord in writing. Except with the written consent of Landlord, no person or persons other than those approved by Landlord shall be permitted to enter the Building for tile purpose of cleaning the same. No Tenant shall cause any unnecessary labor by reason of such Tenant's carelessness or indifference in tile preservation of good order and cleanliness. Janitor service will not be furnished on nights when rooms are occupied after 9:30 P.M. unless, by agreement in writing, service is extended to a later hour for specifically designated rooms. 4. The premises shall not be used for lodging or the storage of merchandise held for sale to the public, and unless ancillary to a restaurant or other food service use specifically authorized in the lease of a particular Tenant, no cooking shall be done or permitted by any Tenant on the premises, except that the preparation of coffee, tea, hot chocolate and similar items for Tenants and their employees shall be permitted. 5. Landlord will furnish each Tenant with two keys free of charge. Landlord may make reasonable charge for any additional keys. No Tenant shall have any keys made. No 33 Tenant shall alter any lock or install a new or additional lock or any bolt on any door of its premises without the prior consent of Landlord. Each Tenant shall in each case furnish Landlord with a key for any such lock. Each Tenant upon the termination of its tenancy, shall deliver to Landlord all keys to doors in the Building which shall have been furnished to Tenant. Each Tenant shall see that the doors of its premises are closed and securely locked at such times as Tenant's employees leave the premises. 6. No Tenant shall use or keep in the premises or the Building any kerosene, gasoline or inflammable or combustible fluid or material or use any method of heating or air conditioning other than that supplied by Landlord, No Tenant shall use, keep or permit to be used or kept any foreign or noxious gas or substance in the premises, or permit or suffer the premises to be occupied or used in a manner offensive or objectionable to Landlord or other occupants of the Building by reason of noise, odors, or vibrations. or interfere in any way with other Tenants or those having business therein. 7. In the case of invasion, mob, riot, public excitement, or other circumstances rendering such action advisable in Landlord's opinion, Landlord reserves the right to prevent access to the Building during the continuance of the same by such an action as Landlord may deem appropriate. including closing entrances to the Building. 8. The toilet rooms, toilets, urinals, wash bowls and other apparatus shall not be used for any purpose other than that for which they were constructed and no foreign substance of any kind whatsoever shall be thrown therein. The expense of any breakage, stoppage of damage resulting from the violation of this rule shall be borne by the Tenant who, or whose employees or invitees, shall have caused it. 9. Except with prior consent of Landlord, no Tenant shall sell, or permit the sale in the premises or use or permit the use of any common area for the sale of newspapers, magazines, periodicals, theater tickets or any other goods merchandise or service. Tenant shall not carry on, or permit or allow any employee or other person to carry on the business of stenography, typewriting, or any similar business in or from the premises for the service or accommodation of occupants of any other portion of the Building, nor shall the premises of any Tenant be used for manufacturing of any kid, or any business or activity other than that specifically provided for in such Tenant's lease. 10. Tenant shall not use any advertising media which may be heard outside of the premises and Tenant shall not place or permit the placement of any radio or television, or other communications antenna, loudspeaker, sound amplifier, phonograph, searchlight, flashing light or other device of any nature on the roof or outside of the boundaries of the premises (except for Tenant's approved identification sign or signs) or at any place where the same may be seen or heard outside of the premises. 11. All loading and unloading of merchandise, supplies, materials, garbage and refuse 34 shall be made only throng such entryways and elevators and at such times as Landlord shall designate. In its use of the loading areas the Tenant shall not obstruct or permit the obstruction of said loading area and at no time shall park or allow its officers, agents or employees to park vehicles therein except for leading and unloading. 12. Landlord shall have the right, exercisable without notice and without liability to any Tenant, to change the name and street address of the Building. 13. The freight elevator shall be available for use by all Tenants in the Building, subject to such reasonable scheduling as Landlord in its discretion shall deem appropriate. The persons employed to move such equipment in or out of the Building must be acceptable to Landlord. Landlord shall have the right to prescribe the weight, size and position of all equipment, materials, furniture or other property brought into the Building. Heavy objects shall, if considered necessary by Landlord, stand on wood strips of such thickness as is necessary to properly distribute the weight. Landlord will not be responsible for loss of or damage to any such property from any cause, and all damage done to the Building, by moving or maintaining such property shall be repaired at the expense of Tenant. 14. The directory of the Building will be provided for the display of the name and location of Tenants and a reasonable number of the principal officers, partners and employees of Tenants, and Landlord reserves the right to exclude any other names therefrom. Any additional name which Tenant shall desire to place upon said bulletin board must first be approved by Landlord, and, if so approved, a charge will be made therefor. 15. No curtains, draperies, blinds, shutters, shades, screens or other coverings, hangings or decorations shall be attached to, hung or placed in, or used in connection with any window of the Building without the prior written consent of Landlord. In any event, with the prior written consent of Landlord, such items shall be installed on the office side of Landlord's standard window covering and shall in no way be visible from the exterior of the Building. 16. No Tenant shall obtain for use in the premises, ice, drinking water, food beverage, towel or other similar services, except at such reasonable hours and under such reasonable regulations as may be fixed by Landlord. 17. Each Tenant shall see that the doors of its premises are closed and locked and that all water faucets, water apparatus and utilities are shut of before Tenant or Tenant's employees leave the premises, so as to prevent waste or damage, and for any default or carelessness in this regard Tenant shall be liable for, and shall indemnify Landlord against and hold Landlord harmless for, from and against all injuries sustained by other tenants or occupants of the Building or Landlord. On multiple-tenancy floors, all Tenants shall keep the doors to the Building corridors closed at all times except for ingress and egress. 35 18. No Tenant shall use any portion of the common area for any purpose when the premises of such Tenant are not open for business or conducting work in preparation therefor. 19. The requirements of the Tenants will be attended to only upon application by telephone or in person at the office of the Building. Employees of Landlord shall not perform any work or do anything outside of their regular duties unless under special instructions from Landlord. 20. Landlord may waive any one or more of these Rules and Regulations for the benefit of any particular Tenant or Tenants, but no such waiver by Landlord shall, be construed as a waiver of such Rules and Regulations in favor of any other Tenant or Tenants, nor prevent Landlord from thereafter enforcing any such Rules and Regulation against any or all of the Tenants of the Building. 21. These Rules and Regulations are in addition to and shall not be construed to in any way modify, alter or amend, in whole or in part, the terms, covenants, agreements and conditions of any Lease of premises in the Building. 22. Landlord reserves the right to make such other and reasonable rules and regulations as in its judgment may from time to time be needed for the safety, care and cleanliness of the Building, and for the preservation of good order herein. 36 EXHIBIT D Guaranty (Deleted On Purpose) 37 Exhibit E Other Conditions Landlord agrees, at its sole cost and expense, to have the carpet in the Premises shampooed prior to the commencement date of this Lease. Landlord agrees to paint the entire suite as soon as possible to the building standard color. To the extent Tenant moves into the space prior to the Suite being painted, Tenant can either not have specific rooms painted or be fully responsible for damage to any of Tenant's property due to such painting. Subject to the rights of any other existing tenants at the Property having prior rights thereto, to the extent Tenant is not in default under the Lease at the date of its intent to exercise its right to expand, nor has it been in default under the Lease more than once previously during the Lease term, Tenant shall be afforded the right to expand into larger space in the Building, if available, for the period between 12 and 24 months from the commencement date hereof under the same terms and conditions of this Lease, except for the base rental which shall be negotiated between Landlord and Tenant and the term shall be for an additional three years from the commencement date of the expansion space, by delivering to Landlord written notification of its intent to exercise such right to expand not later than 15 days after Landlord has given written notice to Tenant that such space is available in the Building and no other existing tenant in the Building has a right to lease such space. If, in the event, Tenant sublets or assigns its interest in this Lease, in part or whole, at any time prior the commencement of the any such expansion, or in case of any default of this Lease by Tenant, this expansion right becomes null and void. Should Tenant exercise its rights to expand and subsequently does expand within the Building, Tenant may elect to terminate its leasing of Suite C-242. or it may elect to keep leasing such Suite, as long as Tenant gives Landlord written notice of such election prior to the lease commencement date of the expansion space. Notices not delivered in a timely manner shall be deemed to be conclusive that no election is made herewith. - ------------------- ------------------- Landlord's Initials Tenant's Initials 38 PARKING RULES AND REGULATIONS THESE PARKING RULES AND REGULATIONS supplement the parking requirements for Hidden Valley Office Park. All Tenants, subtenants, employees, guests, invitees and customers of Tenants must conform to these Parking Rules and Regulations. 1. To the extent not designated to individual tenants by clearly marked lettering or numbers on stalls, all uncovered parking spaces are permitted to be used in common with all Tenant's employees, subtenants, invitees, guests and customers within the lot of the building which Tenant leases. Parking is not allowed in areas previously designated for other Tenant use. 2. During the Term hereof Landlord reserves the sole right to institute controls of all the parking areas serving the Building and its lot including, but not limited to, changing the methods by which vehicles are parked, repainting the parking lot, allocating individual space it designated areas for specific license plate numbers or named Persons or companies, and allocating visitor only parking, allocating compact car spaces, and issuing parking decals. 3. Tenant's rights and privileges under these Parking Rules and Regulations are conditioned upon the valid existence of the Lease between Landlord and Tenant at the Property. Tenant's rights hereunder are also conditioned upon Tenant not being in default of any provision of said lease nor in default of the any Rules and Regulations which are incorporated therein. 4. Tenant's rights are further subject to the parking rules and regulations as follows: i. Restriction or Removal. Landlord reserves the right to restrict access to the parking areas of the Building, or to have removed from the parking areas, at the vehicle owner's expense, any vehicle which, in the opinion of the Landlord: (a) represents a hazard to the health and welfare of the tenants of the Building or the general public; (b) is not in operable condition; (c) contains explosive cargo (other than gasoline or fuel in the original equipment vehicle tanks); (d) is leaking fluids of any kind, including water; (e) contains illegal goods or contraband; (f) disregards the posted speed limit signs or other posted signage; (g) or any other vehicle normally not considered acceptable in the area of a high quality office park. Landlord shall park only in such areas or spaces as are authorized by Landlord. Landlord reserves the right to remove any vehicle not authorized to park in the classification of parking area in which it is located. Tenant shall ensure strict compliance with parking areas marked for the handicapped. ii. Speed and Traffic Controls. Tenant, its employees, subtenants invitees, guests 39 and customers shall observe all speed and traffic controls established by Landlord from time to time. iii. Violations. The vehicles of Tenant's who violate any of the provisions of these Parking Rules and Regulations may be impounded and/or removed from the parking facilities at the option of the Landlord of the lot, or casement area, being violated at the expense of the Tenant. iv. Changes or Additions to Parking Regulations. Landlord reserves the right to from time to time to amcnd, modify, expand or change in any way these Parking Rules and Regulations. 5. Landlord reserves the right to refuse access or to exclude or expel from said parking areas, to any individual who fails to observe any of the provisions of these Parking Rules and Regulations. 6. Landlord reserves the right to make such other and reasonable rules and regulations as in its judgement may from time to time be needed for the safety, care and cleanliness of the parking areas, for the preservation of good order herein, and for the common well being of the Building's tenants. - ------------------- ------------------- Landlord's Initials Tenant's Initials 40 EX-10.8 10 LEASE AGREEMENT Exhibit 10.8 LEASE AGREEMENT THIS LEASE AGREEMENT ("Lease") made as of the 10th day of September, 1998, between CML Realty Corp. , a New Hampshire corporation with its principal place of business at 6 Loudon Road, Concord, Merrimack County, New Hampshire, sometimes hereinafter referred to as "Lessor" and Corel Inc. referred to hereinafter as "Lessee or "Tenant." W I T N E S S E T H: WHEREAS, Lessor currently owns the entire five-story office building containing 61,956 square feet located at 6 Loudon Road, Concord, New Hampshire, on a parcel of land consisting of approximately 3.96 acres shown as Lot #2 on a certain plan entitled "Survey for Earl Flanders, Location Concord, New Hampshire" dated October 6, 1975, prepared by Rayco Engineering recorded at Merrimack County Registry of Deeds as Plan #4160 (the "Premises" or "Office Building"); WHEREAS, Lessor and Lessee desire that a portion of the 2nd floor of the office Building be leased to Lessee for its exclusive occupancy ("Lessee's Quarters"), and that portions of the Office Building shall be used in common by Lessee and other tenants ("Quarters Used in Common"); WHEREAS, portions of the Premises have been designed for the parking of motor vehicles ("Parking Facilities"); and WHEREAS, the Lessee's Quarters, Quarters Used in Common and Parking Facilities are together hereinafter sometimes referred to as the "Leased Premises". NOW THEREFORE, in consideration of the covenants and agreements contained herein, and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereby agree as follows: 1. TERM The initial term of this Lease shall be for a period of five (5) years commencing an October 15, 1998 and ending October 31, 2003. 2. LEASED PREMISES. A. LESSEE'S QUARTERS. Lessor does hereby' lease to Lessee for its exclusive use the Lessee's Quarters which are designated by red diagonal lines on the plan of the 2nd Floor Office Building (the "2nd Floor Plan") attached hereto. The area so designated shall be occupied exclusively by the Lessee. 1 B. QUARTERS USED IN COMMON. Lessor grants; to Lessee the right (i) to use in common with Lessor and other tenants, the Quarters Used in Common designated by green diagonal lines can the 2nd Floor Plan and (ii) to use in common with other tenants, certain portions of the Office Building necessary for access to Lessee's Quarters which shall include, without limiting the generality of the foregoing, the common hallway, stairways, stairwells, lobby, rest room facilities, elevators and certain pipes, ducts, conduits and wires. C. PARKING FACILITIES. Lessee agrees that its use, and the use of the Parking Facilities by its employees, agents and invitees, shall be limited solely to the Parking Facility located directly south of the office Building and in accordance with the parkings and use restrictions generally applicable from time to time to the Parking Facility. Lessor shall permit Lessee to use the driveways and walkways for access to and from the Office Building. D. SMOKING AREA. Lessee agrees that smoking is not permitted on the Premises except in certain areas or facilities designated by Lessor from time to time ("Smoking Area"). Lessee agrees that its use of the Premises, and the use by its employees, agents and invitees, for smoking shall be limited solely to the Smoking Area(s) designated from time to time. 3. BASE RENT. Lessee shall pay to Lessor annual rent in the amount of Two Hundred and Eight Thousand Dollars ($208,000.00) the "Base which Base Rent is calculated at Sixteen Dollars ($16.00) per square square foot for Thirteen Thousand (13,000) square feet (except for any fractional months at the beginning and end of each term which shall be prorated) . Lessee shall make payments in equal monthly installments of Seventeen Thousand Three Hundred Thirty Three Dollars and Thirty Three Cents ($17,333.33) in advance on the first day of each month. 4. ADDITIONAL RENT. Commencing as of January, 1, 2000 and each year thereafter on the anniversary date thereof, Lessee agrees to Day Lessor as additional rent a sum equal to Twenty Percent (20%) of the if any, by which the cost to Lessor for (i) real estate taxes for the Premises for the tax year beginning April 1, 1999, and (ii) water, heating, and electricity for the Premises actually consumed during the calendar year ending on the immediately preceding December 31, 1999 is greater than the individual cost to the Lessor for the like items for the tax year beginning April 1, 1995 and for actual consumption during the calendar year ending December 31, 1998. Lessee's share of the additional rent shall be calculated by Lessor for each rental year as soon as all of the foregoing costs become Lessee's share shall be prorated in 2 accordance with the portion of the preceding calendar year during which this Lease was in effect. Lessee shall pay the additional rent, if applicable, for each calendar year within thirty (30) days of Lessee's receipt of written notice by Lessor of the amount of suh additional rent due. Lessor shall provide upon written request by Lessee copies of the bills for real estate taxes, water, heating and electricity. 5. UTILITIES. Subject to reimbursement by Lessee pursuant to Paragraph 4 herein, Lessor shall pay all utility charges with respect to the Lessee's Quarters and Quarters Used in Common (except telephone charges) and shall at its expense provide heat, water, interior lighting, air conditioning and electricity for Lessee's Quarters in quantities reasonably appropriate for standard office occupancy. 6. REPAIRS, CLEANING AND OTHER SERVICES. Lessor shall at its own expense maintain in good repair and state of cleanliness the Office (including without limitation, the roof, exterior walls, foundation, doors and windows, and utility systems) the walkwavs, driveways, Parking Facilities and the Quarters Used in Common, including without limiting the generality of the foregoing, all plumbing and air conditioning, elevators, and standpipe fire retention system. Lessor shall maintain the unattended elevator service and remove snow from the Parking Facilities, driveways and walkways. 7. CONDITION OF LESSEE'S QUARTERS. Lessee shall at its own expense maintain the Lessee's Quarters in good repair and state Of cleanliness. Lessee, accompanied by Lessor, may enter the Lessee's Quarters ii advance of the term of this Lease for the purpose of inspection. Lessee may install in the Lessee's Quarters at its own expense fixtures, equipment, window coverings, furnishings and other effects for the purpose of decorating the interior of the Lessee's Quarters. Such items that Lessee installs shall remain property of Lessee throughout the Term of this Lease and upon expiration or termination therein. 7A. LEASEHOLD IMPROVEMENTS, Lessor shall be responsible for all Leasehold Improvements as mutually agreed between Lessor and Lessee including but not limited to: - demolition of existing fit-up - carpet and base replacement - complete construction of office environment as per specifications - quality ceiling tiles and appropriate placement of lighting grid - electrical requirements as per specifications - HVAC installation and balancing as per specifications - any other work necessary to meet Building Code requirements. ("Leasehold Improvements") 3 (i) All Leasehold Improvements must be substantially completed in accordance with the specifications mutually agreed upon by both parties by no later than October 15, 1998. (ii) Fixturing Period. Lessee may enter premises, rent free, on October 7, 1998 for installation of voice and data cabling and any other equipment to establish a normal working environment. (iii) If Leasehold Improvements are not completed by October 15, 1998, Lessee has the right to occupy the Lessee's quarters rent free until such time as Leasehold Improvements are completed. 8. RIGHT OF ENTRY. The Lessor may enter Lessee's Quarters for the reasonable purposes, such as but not limited to, the making of repairs or renovations to, or the showing of the Lessee's Quarters to prospective tenants, at any reasonable time during normal business hours and upon 24 hours prior notice and in a manner that does not interfere with Lessee's use thereof. 9. RESTRICTIONS. Lessee agrees that it shall not permit any portion of the Lessee's Quarters to be used (i) so as to cause unreasonable noise or other nuisance; (ii) so as to consume unreasonable amounts of heat, electricity or water; or (iii) for the conduct of activities involved in the promotion, distribution or sale of alcohol, tobacco, gambling or pornography materials or activities, (iv) for the performance of medical or related procedure for abortion or euthanasia; (v) for the use, storage, generation, transportation or disposal of hazardous waste; or (vi) for the conduct of any acts prohibited by law. Lessee shall not make or permit to be made any structural alteration, improvement or addition in or to the Lessee's Quarters unless approved in writing by the Lessor or sublease Lessee's Quarters or assign this, Lease without Lessor's consent, which consent shall not be unreasonably withheld. Lessor's consent to any such assignment or sublease shall not be deemed a waiver with regard to the requirement for its consent to any future assignment or subleases. 10. EMINENT DOMAIN OR DESTRUCTION. If the Leased Premises or any substantial portion thereof shall be taken by the exercise of the right of eminent domain or shall be destroyed or damaged by fire, water or other unavoidable casualty or by action of any public authority, or shall suffer any direct consequential damage for which Lessor and Lessee, or either of them, shall be entitled to compensation by reason of anything done in pursuance to any public or other authority during this Lease or any extension thereof, then this Lease shall terminate at the election of either party hereto which election may be made, whether or not Lessor's entire interest has been divested; and if neither party shall 4 so elect, then in case of such taking, destruction or damage rendering the premises unfit for use and occupation, a just proportion of said rent according to the nature and extent of the injury shall be abated until the Leased Premises, or in the case of a partial taking that portion which may remain thereof, shall have been put by Lessor at its sole cost and expense in proper condition for use and occupation. Lessor reserves and excepts all rights to damages to the Leased Premises by reason of anything lawfully done in pursuance of any public or other authority; and by way of confirmation, Lessee grants to Lessor all Lessee's rights to such damages and covenants to execute and deliver such further instruments of assignment thereof as Lessor may from time to time request. Lessor or Lessee shall give the other party notice of its decision to terminate this Lease within ninety (90) days after any such occurrence giving rise t:o such party's right to so terminate. If the Lease is not terminated, Lessor shall promptly commence to restore the Leased Premises. 11. WASTE. Lessee agrees that it will not suffer any waste on the Leased Premises and that it will peaceably quit and deliver to Lessor, the Lessee's Quarters when required to do so under the terms of this Lease in as good order and condition, reasonable wear and tear and unavoidable, casualties excepted, as the same were delivered to Lessee on the date hereof. 12. DEFAULT AND TERMINATION. 1) If Lessee shall neglect or fail to make any rental payment within thirty (30) days after its due date provided that Lessee is given a reasonable opportunity to cure such default, or if Lessee shall fail to cure (or to commence to cure) a default in the performance of any of the other of Lessee's covenants within thirty (30) days after date of notice of such default by Lessor, or if Lessee, having commenced to cure a default within the thirty (30) days period, shall fail to complete the curing of the default without unreasonable delay, Lessor lawfully may immediately or any time thereafter terminate this agreement. Lessor shall have all rights described herein and this Lease shall also terminate if (i) the leasehold hereby created shaIl be taken on execution or by other process of law, (ii) any assignment shaIl be made of Lessee's property for the benefit of creditors, (iii) a receiver, guardian, conservator, trustee in bankruptcy or similar officer shall be appointed by a court of competent jurisdiction to take charge of all or part of Lessee's property, or (iv) Lessee commits any act of bankruptcy, or if a petition is filed by Lessee under any bankruptcy or insolvency law and the same shall not be dismissed within thirty (30) days from the date upon which it is filed. Lessee covenants that if the Lease is terminated, Lessee shall be liable to Lessor for payment of a sum equal to the amount of the rent and other payments called for hereunder for the remainder of the original term and any extensions thereof, less any amounts received by Lessor as a result of Lessor's lease of the Lessee's Quarters to a third party. Lessor shall make reasonable efforts to lease the Lessee's Quarters at rent equal to the prevailing local raze. In addition, Lessee shall pay Lessor's expenses, including, but not limited to, court costs and 5 attorneys' fees, incurred in enforcing any obligation of this Lease with which Lessee has not complied. 2) Not withstanding any other provisions in this contract and provided that notice is given no earlier than April 30, 2001, either party may terminate this agreement by providing a six (6) month prior written notice to the other party. 13. INDEMNIFICATION. Lessee shall indemnify and save Lessor harmless from any and all liability, loss, damage, expenses, causes of action, suits, claims or judgments arising from loss of life, injury to person or property resulting from or based upon the actual injury to person or property resulting from or based upon the actual or alleged use, operation, delivery to or transportation from any or all of the Leased Premises or their location or condition, except for any such liability arising from Lessor's acts of negligence; or from any loss or damage from Lessee's failure to perform its obligations under this Lease; and shall, at its own cost and expense, defend any and all suits which may be brought against Lessor, either alone or in conjunction with others, upon any such liability or claim or claims and shall satisfy, pay and discharge any and all judgments and fines that may be recovered against Lessor, and pay Lessor's expenses, including reasonable attorneys' fees, incurred in enforcing any obligation of this Lease which has not been complied with by Lessee. In alike manner, the lessor shall indemnify and hold harmless the Lessee from any and all liability and claims which are the lessor's responsibility and shall pay all expenses, including reasonable attorney's fees, to defend and or settle claims which are judged the responsibility of the Lessor. 14. SUCCESSORS. The conditions, agreements, covenants and provisions contained herein shall extend to and be binding upon the successors and assigns of Lessor and Lessee; provided, however, that Lessee shall not assign this Lease or sublease the Lessee's Quarters without written consent of Lessor, such consent not to be unreasonably withheld. No "for lease" sign 'or advertisement of any type shall be placed by Lessee on the Premises without the advance written consent of Lessor, which consent may be withheld by Lessor in Lessor's absolute discretion. No sublease rental amount below the then current standard price quoted by Lessor for comparable space shall be publicized by Lessee or shall be communicated by Lessee to any real estate agent or broker. Lessor shall provide to Lessee no less than ninety (90) days written notice of any assignment of this Lease. 15 . NOTICES. All notices which may be given under the terms of this instrument shall be in writing and, if mailed, shall be sent by registered or certified mail, return receipt required, or by a nationally recognized express delivery service, to the respective parties at the addresses shown below or to such other address as the parties have notified each other of by such written notice or by facsimile, confirmation receipt required. 6 CML Realty Corp. Corel Corporation ATTENTION: Douglas G. Noyes ATTENTION: Director, Facility Management 6 Loudon Road, Suite 503 1600 Carling Ave. Concord, NH 03301 Ottawa, Ontario K1Z 8R7 Canada Copy to Corel's Legal Department Fax No. 603-224-1795 Fax No. 613-725-2691 16. ENTIRE AGREEMENT. This Agreement constitutes the entire agreement between the parties concerning the subject matter and supersedes all prior statements, representations, discussions, negotiations land and agreements both oral and written and embodies the entire agreement between Lessor and Lessee and may not be modified, changed or altered in any way except in writing by authorized signing officers of each party. 17. SUBORDINATION TO MORTGAGES. This Lease is subordinated to mortgages in favor of The Penn Mutual Life Insurance Company and Christian Mutual Life Insurance Company, as recorded in Merrimack County Registry of Deeds and to any subsequent mortgages. The Lessee shall, when requested, promptIy execute and deliver any such instrument as may be reasonably necessary or helpful to evidence the subordination of this Lease to any such mortgages and/or to permit additional assignment of Lessor's rights herein. Tenant's subordination and obligations hereunder shall be conditioned upon Lessor's delivery to tenant of a non-disturbance agreement from each such mortgage holder. 7 IN WITNESS WHEREOF, CML Realty Corp., Lessor, and Corel Inc., Lessee, have executed this Lease in original counterparts on the date written above. Witness: CML REALTY CORP., LESSOR By: ------------------------------------------ Douglas G. Noyes Its: Duly authorized individual Witness: COREL INC, LESSEE By: - ----------------- ------------------------------------------ Michael O'Reilly Its: Vice President Finance, CFO, Treasurer By: - ----------------- ------------------------------------------ Mitch Desrochers Its: Controllers STATE OF NEW HAMPSHIRE County of Merrimack The foregoing instrument was acknowledged before me this14th day of September, 1998 by Douglas G. Noyes, duly authorized individual of CML Realty Corp. ---------------------------------- Justice of the Peace/Notary Public The foregoing instrument was acknowledged before me this 10th of September, 1998 by Michael O'Reilly, Vice President Finance, CFO, Treasurer and Mitch Desrochers, Controller of Corel Inc. ---------------------------------- Justice of the Peace/Notary Public 8 EX-23.1 11 EX-23.1 EXHIBIT 23.1 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the use of our reports and to all references to our firm included in or made a part of this Registration Statement. /s/ Arthur Andersen LLP -------------------------- ARTHUR ANDERSEN LLP New York, New York April 14, 1999 EX-23.2 12 EX-23.2 EXHIBIT 23.2 CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors GraphOn Corporation We hereby consent to the use of our report, in the Registration Statement on Form S-4, dated February 25, 1999, relating to the balance sheets of GraphOn Corporation (the Company) as of December 31, 1998 and 1997, and the related statements of operations and comprehensive income, stockholders' equity and cash flows for each of the three years in the period ended December 31, 1998. We also consent to the reference to our firm under the heading "Experts" in the Registration Statement on Form S-4. /s/ BDO SEIDMAN, LLP - ----------------------- BDO Seidman, LLP San Jose, California March 29, 1999 EX-99.1 13 EX-99.1 EXHIBIT 99.1 UNITY FIRST ACQUISITION CORP. 245 FIFTH AVENUE NEW YORK, NEW YORK 10016 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints Lawrence Burstein and Norman Leben as Proxies, each with the power to appoint his substitute, and hereby authorizes them, and each of them, to represent and vote, as designated below, all the shares of common stock of Unity First Acquisition Corp. ("Unity") held of record by the undersigned on April , 1999 at the Special Meeting of shareholders to be held on May , 1999, or any adjournment thereof. 1. To consider and vote upon a proposal to amend the Certificate of Incorporation of Unity in the manner described in the Special Meeting Proxy Statement. |_| FOR |_| AGAINST |_| ABSTAIN 2. To consider and vote upon a proposal to approve and adopt a certain Agreement and Plan of Merger and Reorganization, dated as of February 1, 1999, between Unity and GraphOn Corporation, a California corporation ("GraphOn"), providing for, among other things, the merger of GraphOn with and into Unity, and the issuance by Unity of approximately 9,730,540 shares of its common stock to GraphOn's shareholders, all upon the terms and conditions described therein. |_| FOR |_| AGAINST |_| ABSTAIN 3. To approve an adjournment or postponement of the Special Meeting, if necessary, to permit further solicitation of proxies in the event that there are not sufficient votes at the Special Meeting to approve Proposal 1, above. |_| FOR |_| AGAINST |_| ABSTAIN 4. To transact any other business incidental to the Special Meeting that may properly come before such meeting or any adjournment or postponement thereof. (CONTINUED ON REVERSE SIDE) THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2 AND 3. A VOTE TO "ABSTAIN" WILL NOT BE COUNTED TOWARDS THE REQUISITE AFFIRMATIVE VOTE TO APPROVE PROPOSAL 1. PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. Please sign exactly as name appears below. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by the President or other authorized officer. If a partnership, please sign in partnership name by authorized person. --------------------------------------- Signature --------------------------------------- Signature if held jointly. Dated: _________, 1999 EX-99.2 14 EX-99.2 EXHIBIT 99.2 GRAPHON CORPORATION 150 HARRISON AVENUE CAMPBELL, CALIFORNIA 95008 THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS The undersigned hereby appoints Walter Keller and Edmund Becmer as Proxies, each with the power to appoint his substitute, and hereby authorizes them, and each of them, to represent and vote, as designated below, all the shares of common stock of GraphOn Corporation ("GraphOn") held of record by the undersigned on April , 1999 at the Special Meeting of shareholders to be held on April , 1999, or any adjournment thereof. 1. To consider and vote upon a proposal to approve and adopt a certain Agreement and Plan of Merger and Reorganization, dated as of February 1, 1999, between Unity First Acquisition Corp., a Delaware corporation ("Unity"), and GraphOn, providing for, among other things, the merger of GraphOn with and into Unity, and the issuance by Unity of approximately 9,730,540 shares of its common stock to GraphOn's shareholders, all upon the terms and conditions described therein. |_| FOR |_| AGAINST |_| ABSTAIN 2. To approve an adjournment or postponement of the Special Meeting, if necessary, to permit further solicitation of proxies in the event that there are not sufficient votes at the Special Meeting to approve Proposal 1, above. |_| FOR |_| AGAINST |_| ABSTAIN 3. To transact any other business incidental to the Special Meeting that may properly come before such meeting or any adjournment or postponement thereof. (CONTINUED ON REVERSE SIDE) THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED IN THE MANNER DIRECTED BY THE UNDERSIGNED SHAREHOLDER. IF NO DIRECTION IS MADE, THIS PROXY WILL BE VOTED FOR PROPOSALS 1, 2 AND 3. A VOTE TO "ABSTAIN" WILL NOT BE COUNTED TOWARDS THE REQUISITE AFFIRMATIVE VOTE TO APPROVE PROPOSAL 1. PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY USING THE ENCLOSED ENVELOPE. Please sign exactly as name appears below. When shares are held by joint tenants, both should sign. When signing as attorney, executor, administrator, trustee or guardian, please give full title as such. If a corporation, please sign in full corporate name by the President or other authorized officer. If a partnership, please sign in partnership name by authorized person. ----------------------------------------- Signature ----------------------------------------- Signature if held jointly. Dated: ________, 1999 -----END PRIVACY-ENHANCED MESSAGE-----