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filedFiled with the Securities and Exchange Commission onDecember 23, 1999August 10, 2005Registration No.
333-______ ================================================================================333-124791UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549______________________ FormAMENDMENT NO. 1 TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933______________________ GraphOn Corporation (Exact nameGRAPHON CORPORATION
(Exact Name of Registrant asspecifiedSpecified in itscharter)Charter)
Delaware 7372 13-3899021 (State or other jurisdiction (Primary
(State of Incorporation)6770
(Primary Standard Industrial(I.R.S. Employer of incorporation or organization)
Classification Code Number)13-3899021
(I.R.S. Employer
Identification Number)
3130 Winkle Avenue
Santa Cruz, California 95065
(800) 472-7466
(Address and Telephone Number of Registrant's Principal Executive Offices)
William Swain
Secretary and Chief Financial Officer
GraphOn Corporation
3130 Winkle Avenue
Santa Cruz, California 95065
(800) 472-7466
(Name, Address and Telephone Number of Agent for Service)150 Harrison Avenue Campbell, California 95008 (408) 370-4080 (Address, including zip code, and telephone number, including area code, of Registrant's principal executive offices) ______________________ Walter Keller President GraphOn Corporation 150 Harrison Avenue Campbell, California 95008 (408) 370-4080 (Name, address, including zip code, and telephone number, including area code, of agent for service) Copies to: ---------- Ira Roxland, Esq. Joseph H. Schmitt, Esq. Cooperman Levitt Winikoff Lester & Newman, P.C. 800 Third Avenue New York, New York 10022 (212) 688-7000 Fax: (212) 755-2839 ______________________
Copies to:Ira I. Roxland, Esq.
Sonnenschein Nath & Rosenthal LLP
1221 Avenue of the Americas
New York, New York 10020
(212) 768-6700
Fax: (212) 768-6800Approximate date of commencement of proposed sale to the public:
As soon as practicable
From time to time after the effective date of thisregistration statement.Registration Statement.If any of the securities being registered on this
Formform are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.[x]ýIf this
Formform 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.[_]oIf this
Formform is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.[_]oIf this
Formform 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.[_]oIf delivery of the prospectus is expected to be made pursuant to Rule 434, check the following box.
[_]oCALCULATION OF REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------- Proposed Proposed Maximum Maximum Offering Aggregate Amount of Title of Each Class of Amount to Price Per Offering Registration Securities to be Registered be Registered Share (1) Price (1) Fee (1) --------------------------- ------------- --------- -------- ------- - -------------------------------------------------------------------------------------------------------------------Common Stock............... 300,000 shs. $ 20.00 $6,000,000.00 $1,584.00 - -------------------------------------------------------------------------------------------------------------------- --------------------
Title of Each Class of
Securities to be RegisteredAmount to be
RegisteredProposed
Maximum
Aggregate Price
Per Unit(1)Proposed
Maximum
Aggregate
Offering PriceAmount of
Registration
FeeCommon stock, par value $0.0001 per share(2) 35,293,993 $0.35 $12,352,897.55 $1,453.94 (3)
- (1)
- Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(c).
- (2)
- Pursuant to Rule 416 under the Securities Act of
1933. ----------------------1933, this registration statement also covers any additional securities that may be offered or issued in connection with any stock split, stock dividend or similar transaction.- (3)
- $1,454.03 previously paid.
Pursuant to Rule 429 promulgated under the Securities Act of 1933, the prospectus forming a part of this
registration statementRegistration Statement on Form S-1 also relates to(1)(i)(A) 1,250,000 shares of common stock issuable upontheexercise of 1,250,000 Class A redeemable common stock purchase warrants and (B) 1,250,000 shares of common stock issuable upon the exercise of 1,250,000 Class B redeemable common stock purchase warrants (collectively, the "IPO Securities"), (ii)(A) 125,000 shares of common stock, (B) 125,000 shares of common stock issuable upon the exercise of 125,000 Class A common stock purchase warrants and (C) 125,000 shares of common stock issuable upon the exercise of 125,000 Class B common stock purchase warrants, issuable to the managing underwriters of the IPO Securities upon the exercise of the managing underwriters' unit purchase option, and (iii)(A) 200,000 shares of common stock issuable upon the exercise of 200,000 Class A common stock purchase warrants and (B) 200,000 shares of common stock issuable upon the exercise of 200,000 Class B common stock purchase warrants issued to officers and directors of registrant, all initially included in the registrant's registration statementRegistrant's Registration Statement on Form S-1(Fileto Form S-3 (Registration No.333-11165) declared333-112758), effective on May 14, 2004; (ii) the Registrant's Registration Statement on Form S-3 (Registration No. 333-51420), effective on December12, 199620, 2000; and(2)(i) 876,790 shares of common stock issuable upon(iii) theexercise of common stock purchase warrants assumed by registrant pursuant to a merger on July 12, 1999 and (ii) 250,000 shares of common stock issuable upon the exercise of 250,000 Class A common stock purchase warrants issued in consideration for consulting services performed in connection with the merger, all initially included in the registrant's registration statementRegistrant's Registration Statement on Form S-4(File(Registration No. 333-76333)declared, effective on June 15, 1999.______________________The Registrant hereby amends this
registration statementRegistration 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 thisregistration statementRegistration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or untilthe registration statementthis Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.================================================================================The information
containedin this prospectus is not complete and may be changed.WeThe selling stockholders may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities anditis not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.- --------------------------------------------------------------------------------* * * * * *
Subject to Completion,
- Dated December 23, 1999dated August 10, 2005Preliminary Prospectus
GRAPHON CORPORATION
300,00044,270,682 Shares of Common Stock
This prospectus relates to the offer and sale from time to time of up to 44,270,682 shares of
Common Stock The person named on page 62 ofour common stock by the persons described in this prospectus, whom we call the "sellingstockholder,stockholders."may use this prospectus to offerOf such 44,270,682 shares, 29,414,793 shares are being offered for resale by current stockholders andsell up to 300,00014,855,889 shares are being offered for resale upon exercise ofour common stock from time to time.warrants and options held by certain of the selling stockholders. We are registering these sharesfor offer and saleas requiredunderby the terms ofa certainregistration rightsagreementagreements betweenus andthe sellingstockholder. Ourstockholders and us. Such registrationof the offered sharesdoes not mean that the sellingstockholderstockholders will actually offer or sell any of these shares. We will receive no proceeds from the sale of anysalesofthe offeredthese sharesbyif the sellingstockholder, but we will incur expenses in connection with the offering. The selling stockholder maystockholders sellthe offered shares in public or private transactions, on or off the Nasdaq SmallCap Market, at prevailing market prices or at privately negotiated prices. The selling stockholder may sell the offered shares directly or through agents or broker-dealers acting as principal or agent, or in a distribution by underwriters.them.Our common stock is
quotedcurrently traded onThe Nasdaq SmallCap Marketthe OTC Bulletin Board under the symbol "GOJO." The closing price of our common stock onDecember ___, 1999August 3, 2005 was$_____$0.45 per share.Please readThis investment involves risks. You should refer to the
Risk Factorsdiscussion of risk factors, beginning on page74 of thisprospectus before making a decision to invest in our common stock.prospectus.Neither the Securities and Exchange Commission nor any
state securities commissionother regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete.ItAny representation to the contrary isillegal fora criminal offense., 2005
Page Forward Looking Statements i Prospectus Summary 1 Risk Factors 4 Price Range Of Common Stock 8 Selected Financial Data 9 Management's Discussion And Analysis Of Financial Condition And Results Of Operations 10 Business 28 Management 38 Certain Transactions 42 Principal Stockholders 44 Selling Stockholders 46 Plan Of Distribution 51 Description Of Our Securities 53 Legal Matters 55 Experts 55 Where You Can Find More Information 55 Index To Financial Statements 56 Because we want to provide you with meaningful and useful information, this prospectus contains certain forward-looking statements that reflect our current expectations regarding our future results of operations, performance and achievements. We have tried, wherever possible, to identify these forward-looking statements by using words such as "anticipate," "believe," "estimate," "expect," "plan," "intend" and similar expressions. These statements reflect our current beliefs and are based on information currently available to us. Accordingly, these statements are subject to certain risks, uncertainties and contingencies, including the factors set forth under "Risk Factors," which could cause our actual results, performance or achievements to differ materially from those expressed in, or implied by, any
personof these statements. You should not place undue reliance on any forward-looking statements. Except as otherwise required by federal securities laws, we undertake no obligation totell you otherwise. ___________, 1999Tablerelease publicly the results ofContents Page ---- Summary................................................... 3 Risk Factors.............................................. 7 Price Rangesany revisions to any such forward-looking statements that may be made to reflect events or circumstances after the date ofSecurities................................ 19 Selected Historical Financial Data........................ 20 Management's Discussion and Analysisthis prospectus or to reflect the occurrence ofFinancial Condition and Results of Operations.......... 22 Business.................................................. 32 Management................................................ 45 Certain Relationships and Transactions.................... 55 Principal Stockholders.................................... 59 Selling Stockholder....................................... 62 Description of Securities................................. 64 Legal Matters............................................. 69 Experts................................................... 69 Available Information..................................... 69 Index to Financial Statements............................. F-1 2unanticipated events. i
The following summary
highlights selected information from this prospectus and maydoes not contain all the information thatismay be important toyou. To understandyou in making a decision to acquire ourbusinesscommon stock. For a more complete understanding of our company andthis offering fully,our common stock, you should readthisthe entire prospectus,carefully,including theRisk Factorsrisks described under "Risk Factors" found elsewhere in this prospectus.Overview
We are a Delaware corporation, founded in May of 1996. We are developers of business connectivity software, including Unix, Linux and
the financial statements and accompanying notes. Unless otherwise indicated, all share and per share amounts give effect to our merger on July 12, 1999 with GraphOn Corporation, a California corporation. Our Business We develop, market, sell and supportWindows server-based software, with an immediate focus on web-enabling applications forthe enterprise computing environment.use by independent software vendors (ISVs), application service providers (ASPs), corporate enterprises, governmental and educational institutions, and others.Server-based computing, sometimes referred to as thin-client computing, is a computing model where traditional desktop software applications are relocated to run entirely on a server, or host computer.
Our technology uses a small software program at each desktop, which allows the user to interface with an application as if it were running on the user's desktop computer.This centralized deployment and management of applications reduces the complexity and total costs associated with enterprise computing.In addition,Our software architecture provides application developers with the ability toaccess suchrelocate applications traditionally run on the desktop to a server, or host computer, where they can be run over a variety of connections from remote locations to a variety of display devices. With our server-based software, applications can be web enabled, without any modification to theInternet creates new operational models and sales channels. We provideoriginal application software required, allowing thetechnologyapplications toaccess applications over the Internet.be run from browsers or portals. Our server-based technologyworks on today's most powerful personal computercan web-enable a variety of Unix, Linux orlow-end network computer, without application rewrites or changesWindows applications.On January 31, 2005, we acquired Network Engineering Software, Inc. (NES), which is engaged in the development and patenting of proprietary technologies relating to the
corporate computing infrastructure.submission, storage, retrieval and security of information remotely accessed by computers, typically through computer networks or the Internet.Our headquarters are located at 3130 Winkle Avenue, Santa Cruz, California, 95065 and our phone number is 1-800-GRAPHON (1-800-472-7466). Our Internet website is http://www.graphon.com. The information on our website is not part of this prospectus. We also have
established strategic alliances with technology leaders such as Sun Microsystems, Compuware and Corel, who have licensed our technology. Using our technology, Sun Microsystems provides its network computers access to UNIX applications. Compuware has expressed its intention to use our technology to provide access over the Internet to applications built with its UNIFACE product. Corel currently plans to use our technology to provide access to some of its applications, such as WordPerfect(TM), over the Internet. We are headquartered in Campbell, California withoffices inBellevue, Washington,Concord, New Hampshire, Rolling Hills Estates, California andReading,Berkshire, England, United Kingdom.The Offering
Common stock offered for sale by the selling stockholder 300,000
Common stock offered for sale by the selling stockholders 44,270,682 shares(1)
Common stock to be outstanding after this offering
61,002,936 shares(1)(2)
- (1)
- Includes 13,605,889 and 1,250,000 shares
(1) Common stock to be outstanding after offering 11,566,302 shares (1)(2) __________ (1) Assumes the exercise by the selling stockholder of warrants to purchase a like number of shares of our common stock. 3(2) Excludes 811,723 shares of our common stockissuable upon the exercise of outstanding warrants and options,underrespectively, held by the selling stockholders.- (2)
- Based upon our issued and outstanding shares of common stock
option plans.as of June 30, 2005. This number excludes 4,381,268 shares of our common stock, which are issuable upon exercise of our outstanding options. An additional1,418,677129,591 shares are reserved for future grants under our equity compensation plans and 116,455 shares are reserved for purchase pursuant to our employee stockoption plans. Use of Proceeds We will not receive any proceeds from the sale of the common stock offered by the selling stockholder. We will receive the proceeds from the exercise of the selling stockholder's warrants, which will amount to $2,550,000 if all of these warrants are exercised. We intend to use any such monies, net of our expenses in preparing this prospectus, for working capital and other general corporate purposes. 4purchase plan.
SummaryHistoricalConsolidated FinancialData You should read theStatementsThe following
summary consolidatedfinancial data should be read in conjunction withthe audited financial statements and the unaudited financial statements, and their accompanying notes, which are contained elsewhere in this prospectus. You should also read "Selected Historical Financial Data" and"Management's Discussion and Analysis of Financial Condition and Results ofOperations," which are both containedOperations" and our historical consolidated financial statements and the notes thereto included elsewhere in this prospectus.The resultsWe derived the consolidated statement of operations data forthe nine months ending September 30, 1999 and 1998 are not necessarily indicative of results that may be expected for the full year. Statements of Operations Data (dollars in thousands, except per share amounts):
Nine Months Ended September 30, Year Ended December 31, ----------------------- ----------------------------------------------------------------- 1999 1998 1998 1997 1996 (1) 1995 (1) 1994 (1)Revenues................. $ 2,450 $ 1,499 $ 2,124 $ 1,926 $ 595 $ 588 $ 1,097 Costs of revenues........ 291 251 344 463 336 214 350 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Gross profit............. 2,159 1,248 1,780 1,463 259 375 747 Operating expenses: Selling and.............. 2,359 860 1,440 827 193 - - marketing General and.............. 3,725 783 1,119 325 219 389 647 administrative Research and development.............. 1,772 634 840 191 42 59 67 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total operating expenses................. 7,856 2,277 3,399 1,343 453 448 714 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (Loss) income from operations............... (5,697) (1,029) (1,619) 120 (194) (73) 33 Other income (expense): Interest and other income................... 77 9 10 7 6 - - Interest expense......... ( 9) (368) (522) (2) - - - Other expense............ - - (17) - - - - ---------- ---------- ---------- ---------- ---------- ---------- ---------- (Loss) income before provision for income taxes......... (5,630) (1,389) (2,148) 125 (188) (73) 33 Provision for income taxes............. 1 1 1 1 1 - 15 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net (loss) income........ $ (5,631) $ (1,390) $ (2,149) $ 124 $ (189) $ (73) $ 18 ========== ========== ========== ========== ========== ========== ========== Basic and diluted (loss) income per share................ $ ( 0.59) $ ( 0.39) $ (0.32) $ 0.02 $ (0.03) $ - $ - ========== ========== ========== ========== ========== ========== ========== Weighted average common shares outstanding.............. 9,540,148 3,583,798 6,762,669 6,000,000 6,000,000 3,345,600 3,345,600 ========== ========== ========== ========== ========== ========== ==========5Balance Sheet Data (in thousands): September 30, 1999 December 31, 1998 December 31, 1997 ------------------ ----------------- ----------------- Working capital....... $4,719 $1,193 $ 23 Total assets.......... 8,199 7,110 733 Total liabilities..... 952 1,202 615 Stockholders' equity.. 7,248 5,908 118 ___________ (1) Duringthe years ended December 31,1996, 19952004, 2003 and1994,2002 and the consolidated balance sheet data as of December 31, 2004 and 2003 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the statements of operations data for the years ended December 31, 2001 and 2000 and the balance sheet data as of December 31, 2002, 2001 and 2000 from our audited consolidated financial statements not included in this prospectus. We derived the consolidated statement of operations data for the three months ended March 31, 2005 and 2004 and the consolidated balance sheet data as or March 31, 2005 and 2004 from our unaudited financial statements included elsewhere in this prospectus, which include all adjustments (consisting of normal recurring items) that wewere engaged inconsider necessary for a fair presentation of thebusinessfinancial statements.Statement of
manufacturing, marketing and selling computer terminal hardware in an industry significantly different from that in which we presently do business. See "Management's Discussion and Analysis of Financial Condition and Results of Operations." 6Operations Data:
Year Ended December 31, Three Months Ended
March 31,2004 2003 2002 2001 2000 2005 2004 (Amounts in thousands, except share and per share data) Revenue $ 3,530 $ 4,170 $ 3,535 $ 5,911 $ 7,567 $ 1,180 $ 903 Costs of revenue 904 1,371 1,680 2,613 1,044 121 310 Gross profit 2,626 2,799 1,855 3,298 6,523 1,059 593 Operating expenses: Selling and marketing 1,384 1,680 2,235 5,989 5,750 335 358 General and administrative 1,183 1,419 2,801 4,561 4,653 727 250 Research and development 1,501 1,515 2,831 4,134 4,060 323 419 Asset impairment loss — — 914 4,501 — — — Restructuring charge — 80 1,943 — — — — Total operating expenses 4,068 4,694 10,724 19,185 14,463 1,385 1,027 Loss from operations (1,442 ) (1,895 ) (8,869 ) (15,887 ) (7,940 ) (326 ) (434 ) Other income (expense) net 15 8 77 410 (1,434 ) 7 3 Loss before provision for income taxes (1,427 ) (1,887 ) (8,792 ) (15,477 ) (9,374 ) (319 ) (431 ) Provision for income taxes — — — 1 1 — — Net loss $ (1,427 ) $ (1,887 ) $ (8,792 ) $ (15,478 ) $ (9,375 ) $ (319 ) $ (431 ) Basic and diluted loss per common share $ (0.07 ) $ (0.11 ) $ (0.50 ) $ (0.97 ) $ (0.65 ) $ (.01 ) $ (.02 ) Weighted average common shares outstanding 21,307,966 16,607,328 17,465,099 16,007,763 14,396,435 28,620,913 20,036,876 Balance Sheet Data:
As of December 31, As of March 31, 2004 2003 2002 2001 2000 2005 2004 (Amounts in thousands) Working capital (deficit) $ (213 ) $ 284 $ 668 $ 6,173 $ 12,879 $ 2,317 $ 650 Total assets 2,224 2,562 4,550 12,986 21,040 9,693 2,856 Total liabilities 1,858 1,715 1,820 1,660 1,983 2,333 1,466 Shareholders' equity 366 847 2,730 11,326 19,057 7,360 1,390
RISK FACTORSBefore you invest in our common stock, you should be aware that there are various risks, including those described below.You should carefully consider
these riskthe following factors,together with allas well as other informationincludedappearing elsewhere in this prospectus, before you decide whetheror notto purchase shares of ourshares. We recently changedcommon stock. The risks and uncertainties described in this prospectus are not the only ones facing ourcorporate strategycompany. Additional risks and uncertainties not presently known to us, or risks that we do not consider significant, may also impair our business. This document also contains forward-looking statements that involve risks and uncertainties, and actual results may differ materially from the results we discuss in the forward-looking statements. If any of the following risks actually occur, they could have alimited history operating undersevere negative impact on ourcurrent business model Although we were founded in 1982, we have a relatively brief operating history as a provider of server-based software. We changed our strategic focus in early 1996 from manufacturingfinancial results andselling 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.stock price.We have a history of operating losses and
weexpect these losses to continue,and to increase,at least for the nearfuturefuture.We have experienced significant losses since we began operations. We expect to continue to incur
significantlosses at least for theforeseeablenear future. We incurred net losses of approximately7$5,630,500$1,427,500, $1,886,600 and$2,148,500$8,792,500 for thenine months ended September 30, 1999 and for the yearyears ended December 31,1998. We expect our2004, 2003 and 2002, respectively, and $318,600 and $431,100 for the three-months ended March 31, 2005 and 2004, respectively. Our expensestowill increase as weexpandbegin ourbusiness butefforts to commercially exploit the patents we acquired in the NES acquisition; however, we cannotassure yougive assurance thatourrevenues will increaseas a result of increased spending. Ifsufficiently to exceed costs. We do not expect to be profitable in 2005. In future reporting periods, if revenues grow more slowly than anticipated, or if operating expenses exceed expectations, we may not become profitable. Even if we become profitable, we may be unable to sustain profitability.If we are unable to generate a positive cash flow from operations, or are unsuccessful in securing external means of financing, we may not be able to continue our operations.
We have not been able to generate positive cash flow from our operations and have been financing our operations primarily from the cash raised when we called various warrants in 1999 and 2000, and from selling common and preferred stock in private placements. We believe that we have sufficient cash to meet our operating needs throughout 2005 and the first few reporting periods of 2006 with the cash we raised in the 2005 private placement and the cash we had on hand as of December 31, 2004. However, if we were unable to generate positive cash flow from our operations in future periods or were unable to raise external sources of financing, we might need to discontinue our operations entirely.
We may not realize the anticipated benefits of acquiring NES.
We acquired NES in January 2005 with the anticipation that we would realize various benefits, including, among other things, expansion of our product offerings, enhancement of our current product line, ownership of 11 issued patents and another 43 patent applications in process. We may not fully realize some or all of these benefits and the acquisition may result in the diversion of management time and cash resources to the detriment of our core software business. Costs incurred and liabilities assumed in connection with this acquisition could also have an adversely impact our future operating results.
Our revenue is typically generated from a very limited number of significant customers.
A material portion of our revenue during any reporting period is typically generated from a very limited number of customers. Consequently, if any of these significant customers reduce their order level or fail to order during a reporting period, our revenue could be materially adversely impacted.
Several of our significant customers are ISVs who have bundled our products with theirs to sell as web-enabled versions of their products. Other significant customers include distributors who sell our products directly. We do not control our significant customers. Some of our significant customers
maintain inventories of our products for resale to smaller end-users. If they reduce their inventory of our products, our revenue and business could be materially adversely impacted.
If we are unable to develop new products and enhancements to our existing products, our business, results of operations and financial condition could be materially adversely impacted.
Our future success depends on our ability to continually enhance our current products and develop and introduce new products that our customers choose to buy. If we are unable to satisfy our customers' demands and remain competitive with other products that could satisfy their needs by introducing new products and enhancements, our business, results of operations and financial condition could be materially adversely impacted.
Our stock price has historically been volatile and you could lose the value of your investment.
Our stock price has historically been volatile; it has fluctuated significantly to date. The trading price of our stock is likely to continue to be highly volatile and subject to wide fluctuations. Your investment in our stock could lose value.
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
investorsinvestors.Our operating results are likely to fluctuate significantly in the future on a quarterly and on an annual basis due to a number of factors, many of which are outside our control. Factors that could cause our revenues to fluctuate include the following:
.
- •
- The degree of success of our commercial exploitation of the NES patents;
- •
- The degree of success of our recently introduced products;
. variations- •
- Variations in the timing of and shipments of our products;
. variations- •
- Variations in the size of orders by our customers;
. increased- •
- Increased competition;
. the- •
- The proportion of overall revenues derived from different sales channels such as distributors,
OEMsoriginal equipment manufacturers (OEMs) and others;. changes- •
- Changes in our pricing policies or those of our competitors;
. the- •
- The financial stability of major customers;
. new- •
- New product introductions or enhancements by us or by competitors;
. delays- •
- Delays in the introduction of products or product enhancements by us or by competitors;
. the- •
- The degree of success of new products;
. any- •
- Any changes in operating expenses; and
. general- •
- General economic conditions and economic conditions specific to the software industry.
8In 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,sales; therefore, if orders and sales levels are below expectations, our operating results are likely to be materially adversely affected. Additionally, becauseasignificantportionportions 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 resultsin 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.be affected.We may not be successful in attracting and retaining key management or other personnel.
Our success and business strategy is also dependent in large part on our ability to attract and retain key management and other personnel. The loss of the services of one or more members of our management group and other key personnel, including our interim Chief Executive Officer, may have a material adverse effect on our business.
Our failure to adequately protect our proprietary rights may adversely affect
usus.Our commercial success is dependent, in large part, upon our ability to protect our proprietary rights. We rely on a combination of patent, copyright and trademark laws, and on trade secrets and confidentiality provisions and other contractual provisions to protect our proprietary rights. These measures afford only limited protection. We cannot assure you that measures we have taken will be adequate to protect us from misappropriation or infringement of our intellectual property.
We license essential components of our core technology from one party to whom we pay royalties, although we hold an option, which is exercisable in the year 2001, to purchase the technology under such license. This license may be terminated upon material breach of the agreement, and if it is terminated our business will be harmed.Despite our efforts to protect proprietary rights, it may be possible for unauthorized third parties to copy aspects of our products or obtain and use information that we regard as proprietary. In addition, the laws of some foreign countries do not protect our intellectual property rights as fully as do the laws of the United States. Furthermore, we cannot assure you that the existence of any proprietary rights will prevent the development of competitive products. The infringement upon, or loss of any proprietary rights, or the development of competitive products despite such proprietary rights, could have a material adverse effect on our business.As regards our intention to exploit the portfolio of patents that we acquired from NES:
- •
- Although we believe the NES patents to be strong, there can be no assurance that they will not be found invalid either in whole or in part if challenged.
- •
- Invalidation of their broadest claims could result in very narrow claims that do not have the potential to produce meaningful license revenues.
- •
- Many of the companies that we intend to seek licenses from are very large with significant financial resources. We currently lack the ability to initiate infringement litigation or to defend our patents against claims of invalidity if such litigation is heavily contested over an extended period of months or even years.
- •
- We may not be able to engage attorneys that will work on our behalf on a contingent fee basis or that will pursue litigation until a resolution is achieved that is favorable to us. Such attorneys may seek to limit their exposure either by advocating licensing settlements that are not favorable to us or may abandon their efforts on our behalf.
- •
- Because NES obtained no foreign patents or filed any foreign patent applications, infringing companies may seek to avoid our demand for licenses by moving the infringing activities offshore where US patents cannot be enforced.
We face risks of claims from third parties for intellectual property infringement that could adversely affect our
businessbusiness.At any time, we may receive communications from third parties asserting that features or content of our products may infringe upon their intellectual property rights. Any such claims, with or without merit, and regardless of their outcome, may be time consuming and costly to defend. We may not have sufficient resources to defend such claims and they could divert management's attention and resources, cause product shipment delays or require us to enter into
9new royalty or licensing agreements. New royalty or licensing agreements may not be available on beneficial terms, and may not be available at all. If a successful infringement claim is brought against us and we fail to license the infringed or similar technology, our business could be materially adversely affected.
Our business significantly benefits from strategic relationships and there can be no assurance that such relationships will continue in the
futurefuture.Our business and strategy relies to a significant extent on our strategic relationships with other companies. There is no assurance that we will be able to maintain or develop any of these relationships or to replace them in the event any of these relationships are terminated. In addition, any failure to renew or extend any licenses between
us andany third party and us may adversely affect our business.Because our market is new and emerging, we cannot accurately predict its future growth rate or its ultimate size, and widespread acceptance of our products is uncertain The market for server-based software, which enables programs to be accessed and run with minimal memory resident on a desktop computer or remote user device, still is emerging, and we cannot assure you that our products will receive broad-based market acceptance or that this market will continue to grow. Additionally, we cannot accurately predict our market's future growth rate or its ultimate size. Even if server-based software products achieve market acceptance and the market for these products grows, we cannot assure you that we will have a significant share of that market. If we fail to achieve a significant share of the server-based software market or if such market does not grow as anticipated, our business, results of operations and financial condition may be adversely affected. We may need additional capital in the future and may not be able to secure adequate funds on terms acceptable to us In the future, we may need to raise additional funds to meet our obligations, cover operating expenses, pursue business strategies, respond to financial, technological or marketing hurdles or take advantage of new opportunities. However, we cannot assure you that any additional funds required will be available at the time or times needed, or available on terms acceptable to us. If adequate funds are not available, or are not available on acceptable terms, we may not be able to meet our obligations, pursue business strategies, take advantage of market opportunities, develop new products or otherwise respond to competitive pressures. Such inability could have a material adverse effect on our business, financial condition and results of operations. 10We rely on indirect distribution channels for our products and may not be able to retain existing reseller relationships or to develop new reseller
relationshipsrelationships.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, value-added resellers (VARs), distributors and other vendors to encourage these parties to recommend or distribute our products and to add resellers both domestically and internationally. We currently invest,inand intend to continue to invest, significant resources to expand our sales and marketing capabilities. We cannot assure you that we will be able to attract and/or retain resellers to market our products effectively. Our inability to attract resellers and the loss of any current reseller relationships could have a material adverse effect on our business, results of operations and financial condition. Additionally, we cannot assure you that resellers will devote enough resources to provide effective sales and marketing support to our products.Our future success will depend in part upon our ability to enhance our existing products and to develop and introduce, on a timely basis, new products and features that meet changing customer requirements and emerging industry standards The server-based software market still is emerging and characterized by rapid technological change, evolving industry standards, changes in end-user requirements and frequent new product introductions and enhancements. The introduction of new technological products and the emergence of new industry standards could render our products obsolete and unmarketable. From time to time, we may develop new products, capabilities or technologies that have the potential to replace or shorten the life cycle of our existing products. Additionally, we cannot assure you that announcements of currently planned or newly introduced product offerings will not cause customers to defer purchasing our existing products. In addition, we cannot assure you that we will be able to develop products that keep pace with new technology, or that new technology will not obviate the need for our products. If any new or enhanced technology gains widespread acceptance and we fail to develop and provide compatible products on a timely basis, our competitive position, business, results of operations and financial condition could be adversely affected. Our future success depends in large part upon: . our ability to enhance our current products; . our ability to develop and successfully introduce new products that keep pace with technological developments; and . our ability to respond to evolving end-user requirements. 11We cannot assure you that we will successfully develop and market new products or product enhancements on a timely basis, or that new products or product enhancements we develop will achieve market acceptance. We filed for bankruptcy on November 15, 1991 and may be required to pay up to $2.23 million and interest, if any, to creditors. On November 15, 1991, we filed for reorganization under Chapter 11 of the United States Bankruptcy Code and, later, submitted a Debtor's Proposed Amended Plan of Reorganization. The plan was confirmed by order of the bankruptcy court on July 11, 1994 and the court established a plan of payment for the benefit of our creditors. Under the bankruptcy court order, we established a disbursement account into which 50% of the ongoing terminal royalties we receive from OEMs with whom we had a current relationship must be deposited to pay named creditors. See "Business -- Corporate History" for a more complete description of these OEMs. For all but one unsecured creditor, payments from the disbursement account were ordered to continue up to the earlier of: . the limit of our liability to each unsecured creditor or . through the year 2000. However, the largest unsecured creditor's claim, which currently totals approximately $964,000, must be paid from available funds, if any, in the disbursement account until such amount is fully paid. Our potential total remaining liability under the bankruptcy, as of September 30, 1999, is limited to the lesser of: . approximately $2,230,000 or . 50% of future ongoing terminal royalties we receive from the OEMs. To date, only royalties received pursuant to some of our license agreements existing at the time of the bankruptcy have been deposited into the disbursement account, and we have not deposited into such account or paid creditors out of royalties received or currently received on our subsequently developed and licensed server-based technology. We believe that our royalty payment obligations under the bankruptcy court order relate only to licenses in place as of July 11, 1994, and no payments to creditors have been made since November 14, 1997. We cannot assure you that a court will not interpret our obligation to include payments to the disbursement account from royalties earned from subsequent licenses of the server-based technology or licenses that we secure in the future, or that our current technology will not be deemed derivative of our technology existing at July 11, 1994. Consequently, we cannot assure you that we will not be required to repay creditors referenced in the bankruptcy proceedings the full amount of our liability, which is approximately $2,230,000, and interest on any payments 12that a court deems to be owed based upon a ruling that our interpretation is wrong. In addition, we cannot guarantee you that a creditor will not assert a claim for payment out of the royalties from subsequent licenses of the server- based technology. Such claims could be costly and time-consuming for us. If any of these events takes place, it could have a material adverse effect on our business, financial condition and results of operations. See Note 6 to our Financial Statements. Our failure to manage expanding operations could adversely affect us To exploit the emerging server-based software market, we must rapidly execute our business strategy and further develop products while managing our anticipated growth in operations. To manage our growth, we must: . continue to implement and improve our operational, financial and management information systems; . hire and train additional qualified personnel; . continue to expand and upgrade core technologies; and . effectively manage multiple relationships with various licensees, consultants, strategic and technological partners and other third parties. We cannot assure you that our systems, procedures, personnel or controls will be adequate to support our operations or that management will be able to execute strategies rapidly enough to exploit the market for our products and services. Our failure to manage growth effectively or execute strategies rapidly could have a material adverse effect on our business, financial condition and results of operations. Competition for key management and other personnel in our industry is intense, and we may not be successful in attracting and retaining these personnel Our success and business strategy is dependent in large part on our ability to attract and retain key management and other personnel. Such individuals are in high demand and often have competing employment offers. In particular, our success depends on our ability to retain the services of Mr. Walter Keller, our President and Ms. Robin Ford, our Executive Vice President, Marketing and Sales. We have entered into employment agreements with these individuals that each contain non-competition and confidentiality covenants. We currently anticipate the need to attract additional sales, marketing, financial and software engineer personnel in the near future. Competition for such personnel in the computer software and services industry is intense, 13and therefore, we cannot assure you we will be able to attract or retain such personnel. The loss of the services of one or more members of our management group or the inability to retain or hire additional personnel as needed may have a material adverse effect on our business. Our planned expansion into international markets makes us susceptible to risks from international operations As part of our long term strategy we intend to address the global needs of our customers and expand our business to commit resources to international market expansion. In order to execute this strategy, we will need to hire and train additional personnel and recruit additional international resellers to successfully expand our international sales. We cannot assure you that we will be able to increase or maintain international sales of our products or that international reseller channels will be willing or able to adequately service and support our products. Our international operations will be subject to a number of risks including: . difficulties in staffing and managing foreign operations; . variability of foreign economic conditions and changing restrictions imposed by United States export laws; . unexpected changes in regulatory requirements; . tariffs and other trade barriers; . lack of acceptance of products in foreign countries; . the burdens of complying with a wide variety of foreign laws; and . foreign restrictions on the transfer of currency and variability of foreign currency exchange rates. We cannot assure you that these factors will not have a material adverse effect on our future international sales and, consequently, our business, results of operations and financial condition. 14The market in which we participate is highly competitive and has more established
competitorscompetitors.The market we participate in is intensely competitive, rapidly evolving and subject to technological changes. We expect competition to increase as other companies introduce additional competitive products. In order to compete effectively, we must continually develop and market new and enhanced products and market those products at competitive prices. As markets for our products continue to develop, additional companies, including companies in the computer hardware, software and networking industries with significant market presence, may enter the markets in which we compete and further intensify competition. A number of our current and potential competitors have longer operating histories, greater name recognition and significantly greater financial, sales, technical, marketing and other resources than we do. We cannot assure you that our competitors will not develop and market competitive products that will offer superior price or performance features or that new competitors will not enter our markets and offer such products. We believe that we will need to invest increasing financial resources in research and development to remain competitive in the future. Such financial resources may not be available to us at the time or times that we need them, or upon terms acceptable to us. We cannot assure you that we will be able to establish and maintain a significant market position in the face of our competition and our failure to do so would adversely affect our business.
We are subject to risk of undetected errors which could substantially reduceThe following table sets forth, for the
effectiveness of our productsperiods indicated, the high andadversely affect us Our complex software products may contain undetected errors or failures when first introduced or as new versions are released. We cannot assure you that errors will not be found in our products after commencement of commercial shipments. In addition, third-party products that our products depend upon, including current and future versions of operating systems and application programs provided by companies such as Sun Microsystems, IBM and Microsoft, may contain defects which could reduce the performance of our products or render them useless. Because we do not develop our own application programs and depend upon third party applications, errors in any application utilized by our customers could adversely impact the marketability of our products. Similarly, we cannot assure you that errors or defects in our products will not be discovered, causing delays in product introductions and shipments or requiring design modifications that could adversely affect our reputation, competitive position, business, results of operations and financial condition. Our management are able to exert significant control over us Our executive officers, directors and their affiliates own or have voting control over approximately 38.47% of the outstanding shares of common stock. As a result, if they act as a 15group, the executive officers and directors may exercise significant influence over such matters as amendments to our charter and fundamental corporate transactions such as mergers, assetlow reported salesand our sale. In addition, they will be able to influence the direction of our business and the election of members to the board of directors. We have agreed to contractual provisions that could discourage acquisition bids A number of our agreements contain express provisions that do not allow us to assign them without written consent. These provisions could deter third parties from making bids to acquire us. These provisions could also limit the price future investors are willing to pay for shares of our common stock. Our failure to be Year 2000 compliant would negatively impact our business Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field and therefore are not designed to handle any dates beyond the year 1999. These date code fields will need to accept four digit entries to distinguish 21st century dates from 20th century dates. As a result, in a relatively short time, computer systems and/or software used by many companies may need to be upgraded to comply with such year 2000 requirements to remain functional. Significant uncertainty exists in the software industry concerning the potential effects associated with such compliance. Although we currently offer software products that are designed and, in certain circumstances, are warranted to be year 2000 compliant, there can be no assurance that our software products contain all necessary date code changes. In addition, there may be a significant amount of litigation arising out of year 2000 compliance issues. Because of the unprecedented nature of such litigation, it is uncertain whether or to what extent we may be affected by it. We believe that the purchasing patterns of customers and potential customers may be affected by year 2000 issues in a variety of ways. Many companies are expending significant resources to purchase new software or correct their current software systems for year 2000 compliance. These expenditures may result in reduced funds available to purchase our products. In addition, many potential customers may choose to defer purchasing year 2000 compliant products until they believe it is absolutely necessary, thus resulting in potentially stalled market sales within the server-based software industry. Conversely, year 2000 issues may cause other companies to accelerate purchases, causing an increase in short-term demand and a consequent decrease in long-term demand for our year 2000 compliant products. There can be no assurance that year 2000 issues will not affect us in one or more of a number of possible ways, and will not result in a material adverse effect on our business, operating results and financial condition. 16Potential public sales of a significant number of shares of our common stock could reduce the market price of our common stock We cannot predict the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the marketprice of our common stock.Sales of substantial amounts ofFrom August 9, 2000 to May 27, 2002, our common stockor the perception that such sales could occur, may adversely affect prevailing market prices forwas quoted on The Nasdaq National Market System. From May 28, 2002 to March 26, 2003, our commonstock. Asstock was quoted on The Nasdaq SmallCap Market System. Since March 27, 2003 our common stock has been quoted on the Over-the-Counter Bulletin Board. Our common stock is quoted under the symbol "GOJO."
Fiscal 2005 Fiscal 2004 Fiscal 2003 Quarter High Low High Low High Low 1st $ 0.63 $ 0.40 $ 1.03 $ 0.20 $ 0.28 $ 0.13 2nd $ 0.44 $ 0.28 $ 0.93 $ 0.41 $ 0.34 $ 0.13 3rd na na $ 0.51 $ 0.25 $ 0.28 $ 0.18 4th na na $ 0.56 $ 0.25 $ 0.28 $ 0.15 On August 3, 2005, there were approximately 181 holders of
the date of this prospectus, there are 11,266,302 sharesrecord of our commonstock outstandingstocks and5,004,125 shares issuable upon exercise of outstanding options and warrants. Restrictions underthesecurities laws and lock-up agreements prevent the immediate sale in the public market of 811,723 of such shares of common stock. However, all of these restricted shares will become available for sale on January 12, 2000. No dividends will be paid in the foreseeable futurelast reported sales price was $0.45.We have never declared or paid
cashdividends on our commonstock andstock. We do not anticipate paying any cash dividends for the foreseeable future. We currently intend toreinvestretain future earnings, if any,funds that might otherwise be available forto finance operations and thepayment of dividends in further developmentexpansion of our business.The priceAny future determination to pay cash dividends will be at the discretion of oursecurities may fluctuate The market priceBoard ofour securities is likely toDirectors and will behighly volatiledependent upon the earnings, financial condition, operating results, capital requirements and other factors as deemed necessary by thestock market in general, and the market for technology companies in particular, has been highly volatile. Stockholders may have difficulty selling our common stock following periodsBoard ofvolatility because of the market's adverse reaction to such volatility. Factors which could cause such volatility may include, among others: . conditions or trends in the computer software industry; . changes in the market valuations of other computer software companies; . actual or anticipated variations in quarterly operating results; . announcements of technological innovations; . capital commitments and expenditures; 17. departures of key employees; and . announcements by us or our competitors of strategic alliances, joint ventures and significant acquisitions. Many of these factors are beyond our control and may materially adversely affect the market price of our common stock, regardless of our future operating results. The trading prices of many technology companies' stocks have reached historical highs within the last 12 months and have reflected valuations substantially above historical levels. During the same period, such companies' stocks have also been highly volatile and have recorded lows well below such historical highs. We cannot assure you that our securities will trade at the same levels of other technology companies or that technology stocks in general will sustain their current levels. Our certificate of incorporation and bylaws could make it difficult for a third party to acquire us Our amended and restated certificate of incorporation and bylaws could have the effect of delaying, deferring or preventing an acquisition of us. For example, our board may issue preferred stock without stockholder approval. Additionally, such certificate of incorporation provides for a classified board, with each member having a staggered three year term, prohibits the stockholders from taking action by written consent and limits their ability to call special meetings and make proposals at such meetings. These provisions could make it more difficult for a third party to remove or replace our management or to acquire us. Forward-looking statements found in this prospectus may not be accurate indicators of our future performance This prospectus contains certain forward-looking statements and information relating to our business. We have identified forward-looking statements in this prospectus using words such as "believes," "intends," "expects," "predicts," "may," "will," "should," "contemplates," "anticipates," or similar statements. These statements are based on our beliefs as well as assumptions we made using information currently available to us. Because these statements reflect our current views concerning future events, these statements involve certain risks, uncertainties and assumptions. Actual future results may differ significantly from the results discussed in the forward-looking statements. 18PRICE RANGES OF SECURITIES Since August 26, 1999, our common stock, Class A redeemable warrants and Class B redeemable warrants have been quoted on The Nasdaq SmallCap Market under the symbols GOJO, GOJOW and GOJOZ, respectively. Prior to such date, such securities were quoted on the OTC Bulletin BoardDirectors.The following
table sets forth the range of the high and low bid quotations of such securities on The Nasdaq SmallCap Market and the OTC Bulletin Board for the periods indicated:
Class A Class B Common Stock Redeemable Warrants Redeemable Warrants ----------------------- ------------------------- ------------------------- Quarter Ended High Low High Low High Low - -------------------- ----------------------- ------------------------- -------------------------March 31, 1997 $ 5-1/8 $ 4-3/8 $ 1-5/16 $ 5/8 $ 1-1/4 $ 5/8 June 30, 1997 5-1/8 4-7/16 1 3/8 1 5/16 September 30, 1997 5-1/8 4-9/16 3/4 1/4 9/16 1/8 December 31, 1997 5-3/8 4-5/8 1-1/16 5/16 3/4 3/16 March 31, 1998 5-1/2 4-3/4 1-1/4 7/16 3/4 1/4 June 30, 1998 5-5/16 4-3/4 1-1/4 3/8 1/2 3/16 September 30, 1998 5-3/8 4-3/4 1-3/8 1/32 1/2 1/4 December 31, 1998 5-7/16 4-11/16 15/16 11/16 5/8 1/16 March 31, 1999 5-3/8 5 1-17/32 1-1/16 1 7/16 June 30, 1999 7-15/16 5-1/8 2-13/16 1-1/16 1-3/4 11/16 September 30, 1999 9-1/2 3 4-5/16 1-1/8 3-9/16 3/4 December 31, 1999 14-5/16 6-1/8 8-3/4 3-1/8 6-3/4 2-1/6 (through December 3)The above quotations represent prices between dealers and do not include retail markup, markdown or commission. They do not necessarily represent actual transactions. On December 3, 1999, the last reported closing bid prices of our common stock, Class A redeemable warrants and Class B redeemable warrants were $13, $7- 3/4 and $5-7/8. On that date, there were 257 recordholders of our common stock, although we believe that there are other persons who are beneficial owners of shares of our common stock held in street name. 19SELECTED HISTORICAL FINANCIAL DATA The followingselectedhistoricalfinancial data should be read in conjunction withour historical financial statements and the notes thereto beginning on page F-1 of this prospectus. Our selected financial data as of December 31, 1998 and 1997 and for the years ended December 31, 1998, 1997 and 1996 have been derived from our financial statements which have been audited by BDO Seidman LLP, independent public accountants. The data as of September 30, 1999 and for the nine months ended September 30, 1999 and 1998 and for the years ended December 31, 1995 and 1994 have been derived from our unaudited condensed financial statements which, in the opinion of management, include all adjustments, consisting of only normal recurring adjustments, necessary for a fair presentation of the information set forth in such financial statements. The results of operations for the nine months ended September 30, 1999 are not necessarily indicative of results that may be expected for the full year. Statements of Operations Data (dollars in thousands, except per share amounts):
Nine Months Ended September 30, Year Ended December 31, ----------------------- ---------------------------------------------------------------------- 1999 1998 1998 1997 1996 (1) 1995 (1) 1994 (1) ---------- ---------- ---------- ---------- ---------- ---------- ----------Revenues................... $ 2,450 $ 1,499 $ 2,124 $ 1,926 $ 595 $ 588 $ 1,097 Costs of revenues.......... 291 251 344 463 336 214 350 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Gross profit............... 2,159 1,248 1,780 1,463 259 375 747 Operating expenses: Selling and marketing............ 2,359 860 1,440 827 193 - - General and administrative....... 3,725 783 1,119 325 219 389 647 Research and development.......... 1,772 634 840 191 42 59 67 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total operating expenses........ 7,856 2,277 3,399 1,343 453 448 714 ---------- ---------- ---------- ---------- ---------- ---------- ---------- (Loss) income from operations.............. (5,697) (1,029) (1,619) 120 (194) (73) 33 Other income (expense): Interest and other income............ 77 9 10 7 6 - - Interest expense........ ( 9) (368) (522) (2) - - - Other expense........... - - (17) - - - - ---------- ---------- ---------- ----------- ---------- ---------- ---------- (Loss) income before provision for income taxes........ (5,630) (1,389) (2,148) 125 (188) (73) 3320
Provision for income taxes........... 1 1 1 1 1 - 15 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Net (loss) income......... $ (5,631) $ (1,390) $ (2,149) $ 124 $ (189) $ (73) $ 18 ========== ========== ========== ========== ========== ========== ========== Basic and diluted (loss) income per share.............. $ ( 0.59) $ ( 0.39) $ (0.32) $ 0.02 $ (0.03) $ - $ - ========== ========== ========== ========== ========== ========== ========== Weighted average common shares outstanding............ 9,540,148 3,583,798 6,762,669 6,000,000 6,000,000 3,345,600 3,345,600 ========== ========== ========== ========== ========== ========== ==========Balance Sheet Data (in thousands): September 30, 1999 December 31, 1998 December 31, 1997 ------------------ ----------------- ----------------- Working capital........ $4,719 $1,193 $ 23 Total assets........... 8,199 7,110 733 Total liabilities...... 952 1,202 615 Stockholders' equity... 7,248 5,908 118 ___________ (1) During the years ended December 31, 1996, 1995 and 1994, we were engaged in the business of manufacturing, marketing and selling computer terminal hardware in an industry significantly different from that in which we presently do business. See"Management's Discussion and Analysis of Financial Condition and Results ofOperations." 21Operation" and our historical consolidated financial statements and the notes thereto included elsewhere in this prospectus. We derived the consolidated statement of operations data for the years ended December 31, 2004, 2003 and 2002 and the consolidated balance sheet data as of December 31, 2004 and 2003 from our audited consolidated financial statements included elsewhere in this prospectus. We derived the statements of operations data for the years ended December 31, 2001 and 2000 and the balance sheet data as of December 31, 2002, 2001 and 2000 from our audited consolidated financial statements not included in this prospectus. We derived the consolidated statement of operations data for the three months ended March 31, 2005 and 2004 and the consolidated balance sheet data as or March 31, 2005 and 2004 from our unaudited financial statements included elsewhere in this prospectus, which include all adjustments (consisting of normal recurring items) that we consider necessary for a fair presentation of the financial statements. Statement of Operations Data:
Year Ended December 31, Three Months Ended March 31 2004 2003 2002 2001 2000 2005 2004 (Amounts in thousands, except share and per share data) Revenue $ 3,530 $ 4,170 $ 3,535 $ 5,911 $ 7,567 $ 1,180 $ 903 Costs of revenue 904 1,371 1,680 2,613 1,044 121 310 Gross profit 2,626 2,799 1,855 3,298 6,523 1,059 593 Operating expenses: Selling and marketing 1,384 1,680 2,235 5,989 5,750 335 358 General and administrative 1,183 1,419 2,801 4,561 4,653 727 250 Research and development 1,501 1,515 2,831 4,134 4,060 323 419 Asset impairment loss — — 914 4,501 — — — Restructuring charge — 80 1,943 — — — — Total operating expenses 4,068 4,694 10,724 19,185 14,463 1,385 1,027 Loss from operations (1,442 ) (1,895 ) (8,869 ) (15,887 ) (7,940 ) (326 ) (434 ) Other income (expense) , net 15 8 77 410 (1,434 ) 7 3 Loss before provision for income taxes (1,427 ) (1,887 ) (8,792 ) (15,477 ) (9,374 ) (319 ) (431 ) Provision for income taxes — — — 1 1 — — Net loss $ (1,427 ) $ (1,887 ) $ (8,792 ) $ (15,478 ) $ (9,375 ) $ (319 ) $ (431 ) Basic and diluted loss per common share $ (0.07 ) $ (0.11 ) $ (0.50 ) $ (0.97 ) $ (0.65 ) $ (.01 ) $ (.02 ) Weighted average common shares outstanding 21,307,966 16,607,328 17,465,099 16,007,763 14,396,435 28,620,913 20,036,876 Balance Sheet Data:
As of December 31, As of March 31 2004 2003 2002 2001 2000 2005 2004 (Amounts in thousands) Working capital (deficit) $ (213 ) $ 284 $ 668 $ 6,173 $ 12,879 $ 2,317 $ 650 Total assets 2,224 2,562 4,550 12,986 21,040 9,693 2,856 Total liabilities 1,858 1,715 1,820 1,660 1,983 2,333 1,466 Shareholders' equity 366 847 2,730 11,326 19,057 7,360 1,390
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONSThe following
description of our financial condition and results of operationsdiscussion should be read in conjunction with theinformation includedconsolidated financial statements and accompanying notes provided elsewhere in this prospectus.Critical Accounting Policies
The
description contains forward-lookingpreparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make judgments, assumptions and estimates thatinvolve risksaffect the amounts reported in the Consolidated Financial Statements anduncertainties. Our actualaccompanying notes. Estimates are used for, but not limited to, the accounting for the allowance for doubtful accounts, the impairment of intangible assets, contingencies and other special charges and taxes. Actual results could differ materially from these estimates. The following critical accounting policies are impacted significantly by judgments, assumptions and estimates used in the preparation of the Consolidated Financial Statements.
Revenue Recognition
Generally, software license revenues are recognized when a non-cancelable license agreement has been signed and the customer acknowledges an unconditional obligation to pay, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed or determinable and collection is considered probable. Delivery is considered to have occurred when title and risk of loss have been transferred to the customer, which generally occurs when the media containing the licensed programs is provided to a common carrier. In the case of electronic delivery, delivery occurs when the customer is given access to the licensed programs. If collectibility is not considered probable, revenue is recognized when the fee is collected.
Revenue earned on software arrangements involving multiple elements is allocated to each element arrangement based on the relative fair values of the elements. If there is no evidence of the fair value for all the elements in a multiple element arrangement, all revenue from the
results discussedarrangement is deferred until such evidence exists or until all elements are delivered. We recognize revenue from the sale of software licenses when all the following conditions are met:
- •
- Persuasive evidence of an arrangement exists;
- •
- Delivery has occurred or services have been rendered;
- •
- Our price to the customer is fixed or determinable; and
- •
- Collectibility is reasonably assured.
Revenues recognized from multiple-element software arrangements are allocated to each element of the arrangement based on the fair values of the elements, such as licenses for software products, maintenance, consulting services or customer training. The determination of fair value is based on objective evidence. We limit our assessment of objective evidence for each element to either the price charged when the same element is sold separately or the price established by management having the relevant authority to do so, for an element not yet sold separately. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.
Certain of our ISV, VAR or ASP customers (who we refer to as "resellers") prepay for licenses they intend to resell. Upon receipt of the prepayment, if all other revenue recognition criteria outlined above have been met, we recognize licensing revenue when the reseller is given access to the licensed
programs. The resellers provide us with monthly sell-through reports that detail, for the respective month, the number of licenses purchased from us, the number they have sold to other parties, the ending balance of licenses they hold as inventory available for future sale and certain information pertaining to their customers such as customer name, licenses purchased, purchase date and contact information. We monitor and reconcile the resellers' inventory records to our records via the monthly sell-through reports.
Other resellers will only purchase licenses from us when they have already closed a deal to sell our product to another party. These resellers will typically submit a purchase order to us in order to receive product that they can deliver to their customer. In these cases, assuming all other revenue recognition criteria, as set forth above, have been satisfied, we recognize licensing revenue when the reseller has been given access to the licensed programs. There are no rights of return granted to resellers or other purchasers of our software programs.
Allowance for Doubtful Accounts
The allowance for doubtful accounts is based on our assessment of the collectibility of specific customer accounts and the aging of the accounts receivable. If there is a deterioration of a major customer's credit worthiness or actual defaults are higher than our historical experience, our estimates of the recoverability of amounts due us could be adversely affected.
Patents
The patents we acquired in the
forward-looking statementsNES acquisition are being amortized over their estimated remaining economic life, currently estimated to be approximately 6 years, as of June 30, 2005. Costs associated with filing, documenting or writing method patents are expensed as incurred as the acquired patents, and all continuations thereof, are method patents.
Capitalized Software Development Costs
Software development costs incurred in the research and development of new products are expensed as incurred until technological feasibility, in the form of a working model, has been established, at which time such costs are typically capitalized until the product is available for general release to customers. Capitalized costs are amortized based on either estimated current and future revenue for the 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.
Impairment of Intangible Assets
We perform impairment tests on our intangible assets on an annual basis and between annual tests in certain circumstances. In response to changes in industry and market conditions, we may strategically realign our resources and consider restructuring, disposing of, or otherwise exiting businesses, which could result in an impairment of intangible assets. During 2002 we recorded significant write-downs to the value of our intangible assets as a result of the
risk factors set forth belowimpairment tests performed. A significant consideration impacting the results of the impairment tests was the substantial delay in getting our most recently released Windows-based product upgrade, GO-Global for Windows, into marketable condition.
Loss Contingencies
We are subject to the possibility of various loss contingencies arising in the ordinary course of business. We consider the likelihood of the loss or impairment of an asset or the incurrence of a liability as well as our ability to reasonably estimate the amount of loss in determining loss contingencies. An estimated loss contingency is accrued when it is probable that a liability has been
incurred or an asset has been impaired and the amount of the loss can be reasonably estimated. We regularly evaluate current information available to us to determine whether such accruals should be adjusted.
Stock Compensation
We apply Accounting Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to Employees" and related interpretations thereof (hereinafter collectively referred to as APB 25) when accounting for our employee and directors stock options and employee stock purchase plans. In accordance with APB 25, we apply the intrinsic value method in accounting for employee stock options. Accordingly, we generally recognize no compensation expense with respect to stock-based awards to employees.
We have determined pro forma information regarding net income and earnings per share as if we had accounted for employee stock options under the fair value method as required by Statement of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation" as amended by SFAS 148 (hereinafter collectively referred to as SFAS 123). The fair value of these stock-based awards to employees was estimated using the Black-Scholes option-pricing model. Had compensation cost for our stock option plans and employee stock purchase plan been determined consistent with SFAS 123, our reported net loss and net loss common per share would have been changed to the amounts discussed in the consolidated financial statements included elsewhere in this prospectus.
Overview We develop, market, sellSee New Accounting Pronouncements, below, for further details on accounting for stock-based compensation.Results of Operations
The first table that follows sets forth our income statement data for the years ended December 31, 2004 and
support server-based software that is designed2003, respectively, and calculates the dollar change and percentage change from 2003 toenable a diverse range of desktop computers to access server-based Windows and UNIX applications from any location, over fast or slow Internet connections. We were incorporated in May 1982 and engaged2004 in the respective line items. The second table that follows presents the same information for the years ended December 31, 2003 and 2002 and the third table that follows presents the same information for the three-months ended March 31, 2005 and 2004.
Year Ended
December 31,(Dollars in 000s) Dollars
ChangePercentage
Change2004 2003 Revenue $ 3,530 $ 4,170 $ (640 ) (15.3 )% Cost of revenue 904 1,371 (467 ) (34.1 ) Gross profit 2,626 2,799 (173 ) (6.2 ) Operating expenses: Selling and marketing 1,384 1,680 (296 ) (17.6 ) General and administrative 1,183 1,419 (236 ) (16.6 ) Research and development 1,501 1,515 (14 ) (0.9 ) Restructuring charges — 80 (80 ) (100.0 ) Total operating expenses 4,068 4,694 (626 ) (13.3 ) Loss from operations (1,442 ) (1,895 ) 453 23.9 Other income (expense): Interest and other income 15 13 2 15.4 Interest and other expense — (5 ) 5 100.0 Total other income (expense) 15 8 7 87.5 Net loss $ (1,427 ) $ (1,887 ) $ 460 24.4
Year Ended
December 31,(Dollars in 000s) Dollars
ChangePercentage
Change2003 2002 Revenue $ 4,170 $ 3,535 $ 635 18.0 % Cost of revenue 1,371 1,680 (309 ) (18.4 ) Gross profit 2,799 1,855 944 50.9 Operating expenses: Selling and marketing 1,680 2,235 (555 ) (24.8 ) General and administrative 1,419 2,801 (1,382 ) (49.3 ) Research and development 1,515 2,831 (1,316 ) (46.5 ) Asset impairment loss — 914 (914 ) (100.0 ) Restructuring charges 80 1,943 (1,863 ) (95.9 ) Total operating expenses 4,694 10,724 (6,030 ) (56.2 ) Loss from operations (1,895 ) (8,869 ) 6,974 78.6 Other income (expense): Interest and other income 13 153 (140 ) (91.5 ) Interest and other expense (5 ) (76 ) 71 (93.4 ) Total other income (expense) 8 77 (69 ) (89.6 ) Net loss $ (1,887 ) $ (8,792 ) $ 6,905 78.5
Three-Months Ended
March 31,(Dollars in 000s) Dollars
ChangePercentage
Change2005 2004 Revenue $ 1,180 $ 903 $ 277 30.7 % Cost of revenue 121 310 (189 ) (61.0 ) Gross profit 1,059 593 466 78.6 Operating expenses: Selling and marketing 335 358 (23 ) (6.4 ) General and administrative 727 250 477 190.8 Research and development 323 419 (96 ) (22.9 ) Total operating expenses 1,385 1,027 358 34.9 Loss from operations (326 ) (434 ) 108 24.9 Other income (expense): Interest and other income 8 3 5 166.7 Interest and other expense (1 ) — (1 ) (100.0 ) Total other income (expense) 7 3 4 133.3 Net loss $ (319 ) $ (431 ) $ 112 26.0
Revenue
Our revenue is primarily derived from product licensing fees and service fees from maintenance contracts. Other sources of revenue include private labeling fees and sales of software development kits. Private labeling fees are derived when we contractually agree to allow a customer to brand our product with their name. We defer these fees upon contract signing and
manufacturerecognize the revenue ratably over the initial term ofhardware computer terminals. In 1996,the contract. Software development kits are tools that allow end users to develop, interface and brand their own applications for use in conjunction with either our Windows or Unix/Linux products. Currently, westarteddo not generate a significant amount of revenue from private labeling transactions, nor do we anticipate generating a significant amount of revenue from them or from the sale of software development kits during 2005.The first table that follows summarizes product licensing fees for the years ended December 31, 2004 and 2003, respectively and calculates the change in dollars and percentage from 2003 to
transition2004 in the respective line item. The second and third tables that follow present the same information for the years ended December 31, 2003 and 2002, and the three-months ended March 31, 2005 and 2004, respectively.
Year Ended December 31, Increase/(Decrease) Product licensing fees 2004 2003 Dollars Percentage Windows $ 1,361,600 $ 1,649,000 $ (287,400 ) (17.4 )% Unix/Linux 1,033,600 1,523,100 (489,500 ) (32.1 ) Total $ 2,395,200 $ 3,172,100 $ (777,000 ) (24.5 )
2003 2002 Dollars Percentage Windows $ 1,649,000 $ 1,394,200 $ 254,800 18.3 % Unix/Linux 1,523,100 1,547,800 (24,700 ) (1.6 ) Total $ 3,172,100 $ 2,942,000 $ 230,100 7.8
Three-Months Ended March 31, Increase/(Decrease) 2005 2004 Dollars Percentage Windows $ 620,900 $ 429,700 $ 191,200 44.5 % Unix/Linux 266,900 216,500 50,400 23.3 Total $ 887,800 $ 646,200 $ 241,600 37.4 The majority of our product licensing fees has been realized from a
hardwarelimited number of customers. As such, product licensing fees revenue has varied, sometimes substantially, from quarter to quarter and year to year. We expect our quarterly product licensing fees revenue to continue to vary during 2005.During 2004, one of our significant ISV customers informed us that they would begin selling our Windows-based products as an add-on to their software applications products, instead of bundling our products with theirs, as had been done previously. Sales to this customer declined by approximately $419,000 in 2004 from 2003, and were the primary contributing factor to our overall decline in Windows product licensing fees. Partially offsetting this decrease was the recognition of approximately $188,000 of revenue from a Windows product licensing sale that we had originally recorded as a deferred item during December of 2003 because not all of the criteria for revenue recognition had been met. Once all the criteria were met, in early 2004, we recognized this revenue.
Approximately $302,800 of the decrease in 2004 Unix/Linux product licensing fee revenue was due to a
software manufacturer by working with three independent software developers, with whomone-time sale to a governmental end-user, which occurred during 2003. The majority of the remaining 2004 decrease was due to the aggregate variations in our other customers' sales orders.During the fourth quarter of 2002, we entered into
exclusive license agreements callinga significant one-time transaction with a customer that generated approximately $552,500 of Unix product licensing fee revenue. Net of this transaction, 2003 revenue from Unix product licensing fees increased by approximately $527,800, or 53.0%, from 2002 levels. Approximately $300,000 of this increase came from one long-standing Unix ISV customer.Our customers' response to the release of the significantly upgraded version of our Windows product, GO-Global for
royalties aggregating 16.4%, 9.7%, 4.8% and 2.9%Windows, during the fourth quarter ofnet revenues2002 was a significant contributing factor to the increase in 2003 of Windows product licensing fees fromsales of software products which contain the licensed technology2002.The increase in Windows-based product revenue for the three-months ended March 31, 2005, as compared with the three-months ended March 31, 2004 was reflective of how our revenue varies from quarter to quarter because a significant portion of our revenue has been, and continues to be earned from a very limited number of significant customers. Two ISVs that have been customers for a few years
1997, 1998, 1999 and 2000. After Decembergenerated approximately $104,700 more in Windows-based product revenue in the first quarter of 2005 as compared with the first quarter of 2004. An ISV we started doing business with during the second quarter of 2004 generated approximately $33,900 of Windows-based product revenue during the first quarter of 2005. We recognized $12,500 more in Windows-based product revenue from our distributor in Japan in the first quarter of 2005 as compared to the same period in 2004. We also recognized approximately $72,000 in Windows-based product revenue from a sale to a new enterprise customer during the first quarter of 2005.Partially offsetting these amounts was an approximate $70,200 decrease in Windows-based product revenue, for the three-month period ended March 31,
2000, we have the option, under particular circumstances,2005, topurchase the licensed technology or exclusive rightsa large ISV who, as discussed above, is no longer bundling our product with every product of theirs that they ship. This ISV began offering our Windows-based products as an add-on extra feature toit. We purchased most of the licensed technology from two of the software developers for an aggregate purchase price of $378,000 intheir product line during the third quarter of1999. Before October 1996, while we were developing our server-based software products, our2004. Windows-based product revenue from this ISV declined from approximately $146,300 in the first quarter of 2004 to approximately $76,100 in the first quarter of 2005.The increase in Windows-based product revenue was
derived principally fromalso partially offset by approximately $48,000 as a result of two enterprise customers who did not purchase any product during thesale and repairfirst quarter ofhardware computer terminals. We discontinued selling hardware products2005.The increase in
1996 and now provide only return-to-factory repairUnix-based product revenue for theinstalled customer base. Software licensing revenue in 1996 was $72,900, representing only 12.3% of our revenue. Software revenue consists of licensing fees for products sold and revenues from OEM license agreements relating to our software products called GO-Global, GO-Joe and GO-Between, in addition to fees for training and software maintenance. Consequently, we do not consider comparisons between 1997 and 1996 fiscal performance to be meaningful. In October 1996, Sun Microsystems licensed GO-Joe for distribution with its network computers, our server software for distribution with its UNIX operating systems and GO-Global for use by its employees. GO-Global was released for sale to customers other than Sun Microsystems in March 1997. In April 1998, IBM licensed GO-Joe for distribution with its network computers and our server software for distribution with computers using its UNIX operating systems. GO- Joe was released for sale to customers other than IBM in July 1998. In December 1998, Corel licensed our software for distribution with its WordPerfect Office Suite products. 22During 1997 and part of 1998, we concentrated our efforts on OEM opportunities and strategic alliances to establish product acceptance. OEM licensing revenue from the Sun Microsystems agreement accounted for approximately 70.0% of revenue in 1997 and licensing revenue from the Sun Microsystems, IBM and Corel agreements accounted for approximately 18.8%, 16.5% and 20.6% of revenues in 1998. We intend to continue to commit significant financial and other resources toward our objective of expanding our strategic OEM relationships and developing reseller channels. In pursuit of this objective, in August 1998, we hired a Vice President of Sales and two sales directors to create and develop our reseller channel. In May 1998, we hired eight software engineers based in Bellevue, Washington and in December 1998 added eight engineers in Concord, New Hampshire in connection with the acquisition of Corel's jBridge technology. In February 1999, we hired a Chief Financial Officer. We have increased our headcount from 12 at December 31, 1997 to 49 at September 30, 1999. Product license revenues are recognized upon shipment only if we have no significant obligations and collection of the resulting receivable is deemed probable. When product licenses require product engineering development by us, recognition of revenue is after delivery and customer acceptance of contract milestones. Revenues for training are recognized when the services are performed. Revenue from customer yearly maintenance fees, for ongoing customer support and product updates are recognized equally over the term of the contract, which typically is 12 months. Our limited operating history as a software developer and manufacturer makes the prediction of future operating results difficult and unreliable. Future operating results may fluctuate due to many factors, including our ability to attract and retain strategic partners, the degree and rate of growth of the markets in which we compete and accompanying demand for our products, the level of product and price competition, and our ability to establish and build our software product reseller channels. Nine Months Ended September 30, 1999 Versus Nine Months Ended September 30, 1998 Revenues. Software revenues have been derived primarily from two sources: GO-Global product sales and OEM licensing revenues for GO-Joe, GO-Global and our server software. Total revenues for the nine-monththree-month period endedSeptember 30, 1999 increased by $950,500, or 63.4%, to $2,449,500 from $1,499,000 forMarch 31, 2005, as compared with the same period in1998. The most important contributing factor2004, was primarily due to an approximate $52,500 increase in orders from one of our significant ISVs. Other significant Unix-based product revenue increases included revenue from one other ISV, which increased by approximately $14,300, and revenue of approximately $11,000 from a new enterprise customer. Partially offsetting these increases was anincrease in OEM license sales in 1999aggregate decrease of $28,700 of Unix-based product revenue from two enterprise customers during the first quarter of 2005, as compared with the first quarter of 2004.The remainder of the increases in the first quarter 2005 Windows-based product revenue and Unix-based product revenue, as compared with the first quarter of 2004, was due to
1998. Salesa combination of the demand by andMarketing Expenses. Sales and marketing expenses primarily consistcomposition ofsalaries, sales commissions, travel expenses, trade show related activities and promotional costs. Sales and marketing expenses increased by $1,499,200, or 174.3%, to $2,359,200, or 96.3% of 23revenue, for the nine months ended September 30, 1999 from $860,000, or 57.4%our many smaller customers.During 2004, we recognized approximately $1,015,000 of revenue
forfrom service fees, an increase of $184,100, or approximately 22.2% from thesame period in 1998.approximately $830,900 recognized during 2003. This increase has primarilyisresulted from continued increases in sales of maintenance contracts to our Windows customers resulting from the release of GO-Global for Windows during the fourth quarter of 2002.During 2004, we recognized approximately $119,600 of revenue from other items, a decrease of $47,700, or approximately 28.5%, from the approximately $167,300 recognized during 2003. The decrease was primarily due to a $150,000 decrease in distributor fee revenue, which was partially offset by $100,000 of revenue recognized from the sale of a software development kit. We had signed a $300,000 two-year distribution agreement with our distributor in Japan and had been ratably recognizing the distributor fee as revenue over the underlying initial two-year term, which expired on December 31, 2003. The sale of the software development kit was a one-time transaction and we do not currently anticipate selling another kit during 2005.
During 2003, we recognized approximately $830,900 of revenue from service fees, an increase of $388,700, or 87.9%, from the approximately $442,200 recognized during 2002. The increase was primarily attributable to
the additionan increased level of salesand marketing personnel andof maintenance contracts, which began when we introduced our GO-Global for Windows product during the fourth quarter of 2002. Additionally, we sold approximately $300,000 worth of maintenance contracts as part of the large Unix transaction that we entered into during the fourth quarter of 2002, (discussed above), that are being amortized over asubstantial increase in trade show, promotional and public relations activities. General and Administrative. General and administrative expenses primarily consistthree-year period. A negligible amount ofsalaries and legal and professional services. In addition, our corporate rent, utilities and administrative employee benefits are included in general and administrative expenses. General and administrative expenses increased by $2,942,700,service fees from this transaction was recognized as revenue during 2002 as compared with approximately $100,000, or375.9%, to $3,725,500, or 152.1%one full-year's worth, during 2003.During 2003, we recognized approximately $167,300 of revenue
for the nine months ended September 30, 1999from$782,800, or 52.2% of revenue, for the same period in 1998. This increase is primarily due to: . amortization and depreciation expense recorded in connection with the acquisition of technology and assets from Corel Corporation in the approximate amount of $2,400,000 for the nine months ended September 30, 1999, respectively; .other items, an increasein legal services; . hiring additional administrative personnel; and . increased utilities expenses necessary to support expanding operations. In addition, weof $16,500, or approximately 10.9%, from the approximately $150,800 recognizednon-cash compensation charges in 1999 due to the recognition of deferred compensation charges in the latter part of 1998. Research and Development. Research and development expenses consist primarily of salaries and benefits to software engineers, supplies and payments to contract programmers and rent on facilities. Research and development expenses increased by $1,137,400, or 179.3%, to $1,771,800, or 72.3% of revenue, for the nine months ended September 30, 1999 from $634,400, or 42.3% of revenue, for the same period in 1998.during 2002. The increase was primarily due to theadditionrecognition ofsoftware engineers andprivate labeling revenue derived from two customers. If customers, typically ISVs, wish to brand our product with their name, we charge them a private labeling fee, which we recognize as revenue, ratably, over therent on new facility locations. Aslife ofSeptember 30, 1999,the respective contract.During the three-months ended March 31, 2005, we
had 28 software engineers compared to 13 asrecognized approximately $286,600 ofSeptember 30, 1998. Interest Expense. Interest expense decreased in 1999 as compared to 1998 due to the repayment of a convertible note payable in January 1999. 24Year Ended December 31, 1998 Versus Year Ended December 31, 1997 Revenues. Total revenues for the year ended December 31, 1998 were $2,124,200,revenue from service fees, an increase of10.3% over$34,500, or approximately 13.7%, from the approximately $252,100 recognized during the same period in1997.2004. Themost important contributing factorincrease wasa 10.4% increase in software-related revenuesprimarily attributable to$1,971,000 in 1998 as compared to $1,785,000 in 1997. Our software revenues have been derived primarily from two sources: GO-Global product sales and OEM licensing revenues for GO-Joe, GO-Global and our server software. Revenues from the Sun Microsystems OEM licensing agreement represented 70.0% of total revenue in 1997 and from OEM license agreements with Sun Microsystems, IBM and Corel, collectively, represented 67.0% of revenues in 1998. Revenues also includeservice feesfromassociated with a higher level of maintenance contracts sold to one of our significant Unix-based ISVs that began during the third quarter of 2004 andtraining services. The maintenance program was started in June 1997 to provide product updates and support fromcontinued into thetimefirst quarter ofpurchase. It is expected2005.We anticipate that many of
theour customers will enter into, and periodically renew, maintenanceprograms will be renewed by customerscontracts toassureensure continued product updates and support.Service revenueRevenue from maintenance contracts was$116,000 in 1998, or 5.5% of revenue, as compared to a nominal amountapproximately 28.8%, 19.9% and 12.5% of revenue in
1997.2004, 2003 and 2002, respectively. We expect revenue from maintenance contracts in 2005 to approximate 2004 levels.Sales to our three largest customers for 2004 represented approximately 20.9%, 14.9% and 14.1%, respectively, of total revenue. These three customers' December 31, 2004 year-end accounts receivable balances represented approximately 30.9%, 2.9% and 0.0% of reported net accounts receivable. By March 16, 2005, we had collected the majority of these outstanding balances.
Sales to our three largest customers for 2003 represented approximately 27.4%, 18.4% and 9.2%, respectively, of total revenue. These three customers' December 31, 2003 year-end accounts receivable balances represented approximately 0.0%, 28.0%, and 44.1% of reported net accounts receivable. By March 18, 2004, we had collected the majority of these outstanding balances.
Sales to our three largest customers for the first quarter of 2005 represented approximately 41.1%, 23.3% and 19.1%, respectively, of total revenue. These three customers' March 31, 2005 quarter-end accounts receivable balances represented approximately 25.6%, 53.3% and 0.0% of reported net accounts receivable. By June 30, 2005, we had collected the majority of these outstanding balances.
Cost of
Goods Sold.RevenueCost of
goods soldrevenue consists primarily ofroyalties, materials such as manuals, mediathe amortization of acquired technology andpackaging, expenses associated with product maintenance and enhancements such as software corrections and updates, andthe amortization of capitalizedresearch and development expenses.technology developed in-house. Also included in cost of revenue are the costs of servicing maintenance contracts. Research and development costs for new product development, after technological feasibility is established, aretreatedrecorded as"capitalized software"capitalized software on our balance sheet and subsequentlyexpensedamortized as cost ofgoods soldrevenue over the shorter of three years or the remaining estimated life of theproducts, whichever producesproducts.The decreases in cost of revenues in 2004 from 2003, in 2003 from 2002 and in the
higher expense for the period. Costfirst quarter ofgoods sold was reduced to 16.2% of revenue in 1998,2005 as compared to24.1%the first quarter of 2004, were due primarily to certain elements of our acquired technology becoming fully amortized during 2003, the remaining elements becoming fully amortized during 2004 and the write-downs of the estimated remaining carrying values of certain of our intangible assets that were recorded during the third quarter of 2002.As more fully explained below under Asset Impairment Loss, during September 2002 we wrote down the historical cost of various components of our purchased technology assets as part of our periodic assessments of asset impairment. The amortization of our technology assets, as explained above, is recorded as a component of Cost of Revenue.
Based on our current product development plan and as a result of certain of our acquired intangible assets becoming fully amortized during 2004, we expect that our cost of revenue will be significantly lower in
1997. This primarily is attributed to2005 as compared with 2004. Cost of revenue was approximately 25.6%, 32.9% and 47.5% of total revenues for thereduction inyears 2004, 2003 and 2002, respectively. Cost of revenue was approximately 10.2% and 34.4% of total revenues for theroyalty rate paid to outside software developers under our exclusive licensing agreements.first quarter of 2005 and 2004, respectively.
Sales and Marketing
Expenses.ExpensesSales and marketing expenses primarily consist of salaries and related benefits, sales commissions, outside consultants, travel expenses, trade show related activities and promotional costs.
The decrease in sales and marketing expenses in 2004 from 2003 was primarily caused by decreased salaries, benefits and commissions ($240,600) and facilities allocations ($170,200), which were partially offset by an increase in outside consultants ($123,300). The reasons for these changes were as follows:
- •
- The decrease in salaries, benefits and commissions was the result of terminating two people during late 2003 and two during 2004.
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- The decrease in facilities allocation was the result of the 2003 terminations. All of the sales and marketing employees who had been sharing space with general and administrative employees at our corporate headquarters location were terminated during 2003. Accordingly, the allocation of overhead costs to sales and marketing ceased.
- •
- The increase in outside consultants was a result of outsourcing marketing work after the 2003 terminations.
The decrease in sales and marketing expenses in 2003 from 2002 was primarily caused by decreased human resources costs ($392,900), trade show activities and promotional costs ($134,300) and travel and entertainment ($62,600). Partially offsetting these decreases was an increase in outside consulting services ($115,800). The reasons for these changes were as follows:
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- The decrease in human resources costs was the result of the restructurings made during 2002, involving terminations of 16 of our then 24 sales and marketing individuals during 2002, and was reflected for a full year in 2003.
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- The decrease in trade shows activities and promotional costs was part of our decision made in 2002 to cut these costs to a minimal level while using our remaining cash on strategic engineering initiatives.
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- The decrease in travel and entertainment was due to the reductions in head count made in 2002 as well as prioritizing the engineering initiatives over sales and marketing activities.
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- The increase in outside consulting services reflected the hiring of a marketing firm to assist with marketing efforts during 2003, once various elements of the engineering initiatives reached completion.
The decrease in sales and marketing expenses in the first quarter of 2005 as compared to the first quarter of 2004 was primarily caused by decreased costs of outside consultants ($58,300) and travel and entertainment ($9,200). Partially offsetting these decreases was an increase in employee costs ($46,100). The reasons for these changes were as follows:
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- The decrease in outside consultants was a result of deferring certain planned activities beginning in the fourth quarter of 2004 that was continued in the first quarter of 2005, as we needed to
conserve cash on hand until we consummated both the NES acquisition and the 2005 private placement.
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- The decrease in travel and entertainment was primarily a result of conserving cash on hand until the consummation of the NES acquisition and the 2005 private placement. Also leading to the decrease in travel and entertainment expense was having one less salesperson in the first quarter of 2005 as compared with the first quarter of 2004.
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- The increase in employee costs resulted primarily from increased commissions and performance bonuses attributable to first quarter 2005 results, as compared with first quarter 2004 results. These increases were partially offset by lower wages and benefits expense attributable to having one less salesperson in the first quarter of 2005 as compared with the first quarter of 2004.
We expect that cumulative sales and marketing expenses in 2005 will approximate those incurred during 2004. 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 saleswere approximately 39.2%, 40.3% andmarketing personnel and a substantial increase in trade show, promotional and public relations activities. We expect that sales and marketing expenses will continue to increase in dollar amounts, but decline as a percentage63.2% of total revenuesas we continue to hire additional salesfor the years 2004, 2003 andmarketing personnel, establish reseller channels2002, respectively, andexpand promotional activities.28.4% and 39.7% of total revenues for the first quarter of 2005 and 2004, respectively.
General and
Administrative.Administrative ExpensesGeneral and administrative expenses primarily consist of salaries and related benefits, legal and professional
services. In addition, our rent, utilitiesservices, insurance, costs associated with being a publicly held company and bad debts expense.General and administrative
employee benefits are includedexpense decreased in 2004 from 2003 primarily because of decreased facilities allocations ($152,900) and decreased directors and officers insurance ($103,100). The reasons for these decreases were as follows:
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- Our overhead structure was greatly reduced when we consummated a buy-out of our former lease for our corporate headquarters facilities at 400 Cochrane Circle, Morgan Hill, CA. This facility had been approximately 14,000 square feet. Since October 2003, we have maintained our corporate offices in approximately 1,000 square feet of space.
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- Our directors and officers insurance expense was $0 in 2004 because we did not renew our policy upon its expiration in 2003.
The decrease in general and administrative
expenses. Generalexpenses in 2003 from 2002 was primarily caused by decreased outside services ($446,000), legal fees ($324,800), deferred compensation ($187,400), directors and25administrative expenses increased 244.5% to $1,118,600, or 52.7% of revenue, in 1998, from $324,700, or 16.9% of revenue, in 1997. This increase primarily is attributed to legal services, hiring additional administrative personnelofficers' insurance ($158,600), travel andincreased rent, utilitiesentertainment ($141,000) andbenefit expenses necessary to support expanding operations. Interest Expense. Interest expense increasedhuman resources costs ($173,100). The reasons for these decreases were as follows:
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- We abandoned the merger talks we had conducted throughout 2002 with three related entities in the
amount of $519,800 in 1998 primarily duetelecommunications industry, thus reducing our needs for general and administrative outside services during 2003. Our interim Chief Executive Officer's 2003 fees were lower than his 2002 fees, which also contributed to therecordingdecrease in outside consulting fees.- •
- As a result of
interestthe abandonment of the merger talks, we also reduced the need for legal services.- •
- The decrease in deferred compensation expense was because the amounts previously deferred became fully amortized during 2002.
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- In addition to our 2002 restructurings, we also aggressively reduced costs during 2002, including the costs of our directors and officers insurance. Upon its renewal for the 2002/2003 policy year, we reduced the policy's coverage by approximately 40% and then discontinued it entirely upon its expiration in
the amount of $475,000 on the convertible note payableJune 2003.- •
- Travel and entertainment and human resource costs were lower in 2003 as a result of the
issuancereduction in headcount experienced as part of278,800 sharesthe restructurings that occurred in 2002.The increase in general and administrative expenses for the first quarter of
common stock at $.09 per share2005 from the same period inconnection with such note.2004 was primarily caused by increased professional services ($219,000), depreciation and amortization ($142,800), employee costs ($99,300) and travel and entertainment ($10,600). The primary reasons for these decreases were as follows:
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- Professional services increased due to the legal fees related to the administration of the patent portfolio, which we began incurring upon the consummation of the NES acquisition in January 2005, as well as legal fees pertaining to general corporate operations.
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- The increase in depreciation and amortization was primarily due to the commencement of amortization of the patents acquired from NES in January 2005. Partially offsetting this amortization was a decrease in fixed asset depreciation related to property and equipment.
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- Travel and entertainment expense was higher primarily due to activities related to the NES acquisition, the exploitation of the patents acquired therein and the 2005 private placement.
The ending balance of our allowance for doubtful accounts as of March 31, 2005 and 2004, and December 31, 2004, 2003 and 2002 was $46,800and $46,800, and $46,800, $46,800 and $50,300,
respectively. Bad debt expense was $0, $16,300 and $31,600 for the years ended December 31, 2004, 2003 and 2002, respectively, and $0 and $0 for the first quarters of 2005 and 2004, respectively.
We anticipate that cumulative general and administrative expense in 2005 will exceed those incurred during 2004 primarily due to the costs we expect our newly initiated patent group to incur as they begin exploring viable means of commercially exploiting the NES patent portfolio. General and administrative expenses were approximately 33.5%, 34.0% and 79.2% of 2004, 2003 and 2002 total revenues, respectively, and 61.6% and 27.7% of first quarter 2005 and 2004 total revenue, respectively.
Research and
Development.Development ExpensesResearch and development expenses consist primarily of salaries and related benefits paid to software engineers,
supplies andpayments to contractprogrammers.programmers, and facility expenses related to our remotely located engineering offices.Research and development
expenses increasedexpense for 2004 approximated 2003 levels, as reported. Research and development expense for 2003 does not include approximately $149,100 of wages and related costs and $133,100 of outside consulting services related to software development costs that were capitalized during 2003. No such costs were capitalized during 2004.The decrease in research and development expense in 2003 from 2002 was primarily caused by
341.1%decreased human resources costs ($693,500), depreciation of fixed assets ($130,100), rent ($113,000), the allocation of corporate overheads ($78,000) and outside consultants ($38,100), which were partially offset by an increase in customer service costs ($144,600). The reasons for these changes were as follows:
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- Human resources costs were decreased as a result of the 2002 restructuring. We began 2002 with 28 research and development employees and ended the year with 15. No changes were made to
$840,200,research and development headcount during 2003.- •
- The decrease in depreciation expense was due to the timing of various assets reaching the end of their estimated useful lives, as well as an overall decrease in the asset base that resulted from the 2002 and 2001 restructuring charges.
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- The decrease in rent was primarily due to the negotiated settlement of the lease on our former Bellevue, Washington engineering offices.
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- The allocation of corporate overhead decreased as a result of the headcount reductions as well as the overall lowered cost structure resulting from the 2002 and 2001 restructurings.
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- The reduction in outside consultants was primarily due to the non-renewal of an engineering consultant's contract as the requested work had been completed.
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- Customer service costs consist primarily of wages and benefits paid to various engineers and are charged to cost of sales instead of being charged to research and development. More engineering time was spent providing customer service during 2003, as compared to 2002, consequently, more costs were charged to cost of sales than to research and development.
The decrease in research and development expense for the first quarter of 2005, as compared to the first quarter of 2004 was primarily attributable to decreases in employee costs ($40,200), outside consultants ($29,100), depreciation and amortization ($18,800) and supplies ($3,400). The reasons for these changes were as follows:
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- Employee costs decreased primarily because there were two less engineers during the first quarter of 2005 as compared with the same period in 2004.
- •
- The cost of outside consultants decreased principally because certain contracts were not renewed upon their expiration. In order to conserve our cash while awaiting consummation of both the NES acquisition and the 2005 private placement, once certain elements of the work being performed for us was completed, the underlying programmers' contracts were not renewed as their services were not immediately required. We believe that we will be able to enter into new contracts with these engineers, or
39.6%ones with similar talents, without difficulty in the future, should we need their services again.- •
- Depreciation and amortization was lower because we purchased virtually no new capitalizable assets in support of
revenue,our research and development efforts. Since the beginning of 2003, various assets have become fully depreciated, or amortized, more quickly than we have replaced them and hence, depreciation and amortization expense has steadily declined. We expect to make more fixed asset purchases in1998, from $190,500,2005 than we did in 2004, however, we do not expect to replace all the assets that have, or9.9%will, become fully depreciated, or amortized. Consequently, we expect depreciation and amortization expense for 2005 o remain lower than 2004 levels.- •
- We spent less on supplies during the first quarter of
revenue, in 1997.2005, as compared with 2004, as we were trying to conserve our cash, pending the consummation of the NES acquisition and the 2005 private placement.We believe that a significant level of investment for research and development is required to remain
competitivecompetitive. Accordingly, during 2005 we will continue working towards our goal of full maturity for our products through a combination of in-house and contracted research and development efforts. We anticipate thatsuch expenses arethese efforts will include a combination of enhancing the functionality of our current product offerings and adding additional features to them. We expect research and development expenditures in 2005 to approximate 2004 levels. Research and development expense was approximately 42.5%, 36.3% and 80.1% of total revenues for the years 2004, 2003 and 2002, respectively, and 27.4% and 46.5% for the first quarter of 2005 and 2004, respectively.
Asset Impairment Loss
During 2002 we recorded an asset impairment charge of $914,000 against several of our intangible assets, primarily capitalized technology assets. We review our long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Examples of events or changes in circumstances that indicate that the recoverability of the carrying amount of an asset should be addressed, including the following:
- •
- A significant decrease in the market value of an asset;
- •
- A significant change in the extent or manner in which an asset is used;
- •
- A significant adverse change in the business climate that could affect the value of an asset; and
- •
- Current and historical operating or cash flow losses.
We believed that a review of our carrying values in 2002 to evaluate whether the value of any of our long-lived technology assets had been impaired was warranted, due to several factors, including:
- •
- The challenges we faced in bringing our GO-Global for Windows and GO-Global:XP products to maturity;
- •
- The continued pervasive weakness in the world-wide economy;
- •
- How we were incorporating and planning to incorporate each element of the purchased technologies into our legacy technology;
- •
- Our continued and historical operating and cash flow losses.
Based on studies of the various factors affecting asset impairment, as outlined above, the following asset impairment charges were determined to be necessary in order to reduce the carrying value of certain of these assets to our current estimate of the present value of the expected future cash flows to
continuebe derived from these assets:
Net Book Value
Before ImpairmentImpairment
Write DownNet Book Value
After ImpairmentPurchased Technology $ 2,145,200 $ 775,100 $ 1,370,100 Capitalized Software 277,800 138,900 138,900 Totals $ 2,423,000 $ 914,000 $ 1,509,000 The asset impairment charges were approximately 0.0%, 0.0% and 25.9% of total revenues for the years 2004, 2003 and 2002, respectively. We do not anticipate recording an asset impairment charge during 2005.
Restructuring charges
During 2002 we closed our Morgan Hill, California and Bellevue, Washington office locations as part of our strategic initiatives to
increasereduce operating costs. In conjunction with these closures, we reduced headcount in all of our operating departments and wrote off the costs of leasehold improvements and other assets that were abandoned. A summary of the restructuring charge recorded during 2002 is as follows:
Category Restructuring
ChargeCash
PaymentsNon-cash
ChargesDecember 31, 2002
Ending Balance
Restructuring
AccrualYear ended December 31, 2002: Employee severance $ 831,000 $ (831,000 ) $ — $ — Fixed assets abandonment 657,800 — (657,800 ) — Minimum lease payments 443,800 (161,600 ) — 282,200 Other 10,200 (10,200 ) — — Totals $ 1,942,800 $ (1,002,800 ) $ (657,800 ) $ 282,200 During 2003 we negotiated settlements of the leases for our former offices in Bellevue, Washington and Morgan Hill, California, which completed the restructuring activities that had been approved under Emerging Issues Task Force (EITF) 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)," during 2002 and had begun in 2002, as explained above. Additionally, we relocated our Morgan Hill, California offices from 400 Cochrane Circle to 105 Cochrane Circle and further disposed of certain assets that were no longer in service. To the extent that the December 31, 2002 ending restructuring charge accrual balance was less than the costs incurred for these activities, we recorded an additional
restructuring charge during 2003. A summary of the restructuring charge recorded during 2003 is as follows:
Category Additional
Restructuring
ChargeCash
PaymentsNon-cash
ChargesDecember 31, 2003
Ending Balance
Restructuring
AccrualYear ended December 31, 2003: Opening accrual balance $ — $ — $ — $ 282,200 Fixed assets abandonment 42,200 — (42,200 ) — Leases settlements—rent 36,800 (269,000 ) — (232,200 ) Deposits forfeited 16,000 — (56,000 ) (40,000 ) Commissions 12,000 (22,000 ) — (10,000 ) Other(1) (26,900 ) — 26,900 — Totals $ 80,100 $ (291,000 ) $ (71,300 ) $ —
- (1)
- Includes the write-off of deferred rent associated with the Morgan Hill lease and other miscellaneous items.
During June 2003, we negotiated a buy out of the lease for our former engineering offices in Bellevue, Washington. The total buy out price was approximately $184,000 and consisted of a lump-sum cash payment of $144,000, the forfeiture of an approximate $40,000 security deposit and a $10,000 commission to the real estate broker who was involved in the transaction. It is estimated that the buy out saved approximately $355,800 over the
foreseeable future.contractually scheduled lease term.During August 2003, we negotiated a buy out of the lease for our former corporate offices in Morgan Hill, California. The total buy out price was approximately $153,000 and consisted of a lump-sum cash payment of $125,000, the forfeiture of an approximate $16,000 security deposit and a $12,000 commission to the real estate broker who was involved in the transaction. It is estimated that the buy out saved approximately $270,000 over the contractually scheduled lease term.
The net aggregate amount of the annual lease payments made under all of our leases in the years 2004, 2003 and 2002, excluding lease buyout payments, was approximately $95,700, $295,400 and $525,700, respectively.
Interest and Other Income
During the years ended December 31, 2004, 2003 and 2002 and the first quarter of 2005 and 2004, the primary component of interest and other income was interest income derived on excess cash. Our excess cash was held in relatively low-risk, highly liquid investments, such as U.S. Government obligations, bank and/or corporate obligations rated "A" or higher by independent rating agencies, such as Standard and Poors, or interest bearing money market accounts with minimum net assets greater than or equal to one billion U.S. dollars.
The increase in interest income in 2004 from 2003 was primarily due to interest income accrued on our note receivable ($3,000), which was partially offset by lower interest income on excess cash due to lower amounts of excess cash in 2004 as compared with 2003. The decrease in interest income in 2003 from 2002 was due to lower average cash and cash equivalents, and available-for-sale securities balances in 2003 as compared with 2002. Additionally, the decrease was reflective of a decrease in our portfolio's average yield rate, which reflected the market's response to the cuts and subsequent stabilization made in interest rates by the Federal Reserve during these time periods. The increase in interest income for the first quarter of 2005, as compared with the same period in 2004, was primarily due to higher average cash balances and interest rates. The average cash balances were higher due to
the proceeds of the 2005 private placement and the interest rates were higher due to increases in the prime rate as set by the Federal Reserve Bank.
The lower cash and cash equivalents balance at year end 2004, as compared with year end 2003, was primarily due to the outflow of approximately $620,000 resulting from 2004 operating activities. The higher cash and cash equivalents balance at the end of the first quarter of 2005, as compared with year end 2004, was primarily due to the net proceeds of the 2005 private placement. As more fully explained under Liquidity and Capital Resources, we have been consuming cash in our operations and have seen our cash reserves continually decline for the past several years. Interest and other income was approximately 0.4%, 0.3% and 4.3% of total revenues for the years 2004, 2003 and 2002, respectively, and 0.7% and 0.4% of total revenues for the first quarters of 2005 and 2004, respectively.
Interest and Other Expense
Interest and other expense has historically consisted primarily of the cost of accrued interest on bonds and other investments that we purchased with our excess cash. However we incurred no such interest and other expense during 2004 as all of our excess cash was maintained in a highly liquid money market account and we purchased no bonds. The decrease in 2003 from 2002 was primarily due to our discontinuance of purchasing bonds with our excess cash.
Interest and other expense was approximately 0.0%, 0.1% and 2.2% of total revenues for the years 2004, 2003 and 2002, respectively, and 0.7% and 0.4% of total revenues for the first quarters of 2005 and 2004, respectively.
Provision for Income
Taxes.TaxesAt December 31,
1998,2004, we had approximately$2.8 million$41,464,000 in federal net operating loss carryforwards. The federal net operating loss carryforwards will expire at various times from 2007 through2018,2020, if not utilized. In addition, the Tax Reform Act of 1986 contains provisions that may limit the net operating loss carryforwards available for use in any given period upon the occurrence of various events, including a significant change in ownership interests. In 1998, we experienced a "change of ownership" as defined by the provisions of the Tax Reform Act of 1986. As such, our utilization of our net operating loss carryforwards through 1998 will be limited to approximately $400,000 per year until such carryforwards are fullyutilized. To date, we haveutilizeda portion of our net operating loss carryforwards to reduce our overall income tax liability. Year Ended December 31, 1997 Versus Year Ended December 31, 1996 Before October 1996, while we were developing our server-based software products, our revenue was derived principally from the sale and repair of hardware computer terminals. We discontinued selling hardware products in 1996 and now provide only return-to-factory repair for the installed customer base. Software licensing revenue in 1996 was $72,900, representing only 12.3% of revenue as compared to 92.7% in 1997. Accordingly, the comparison of the year ended December 31, 1997 to the year ended December 31, 1996 is considered not meaningful by management. Revenues. Total revenues for the year ended December 31, 1997 were $1,926,100, an increase of 223.8% over the same period in 1996. We believe the most important contributing factor was a $1,712,000 increase in software- related revenues to $1,785,000 in 1997 versus 26$72,900 in 1996 due to our change from selling hardware products in 1996 to software products in 1997. Cost of Goods Sold. Cost of goods sold was reduced to 24.1% of revenue in 1997, versus 50.4% in 1996. This reduction primarily is attributable to our change in products from hardware to software as discussed above. Sales and Marketing Expenses. Sales and marketing expenses increased 329.3% to $827,300,or43.0% of revenue, in 1997 from $192,700, or 32.4% of revenue, in 1996. This increase primarily is attributable to the addition of sales and marketing personnel and a substantial increase in trade show, promotional and public relations activities. General and Administrative. General and administrative expenses increased by 48.4% to $324,700, or 16.9% of revenue, in 1997 from $218,900, or 36.8% of revenue, in 1996. This increase primarily is attributed to hiring additional administrative personnel, legal services and benefit expenses necessary to support expanding operations. Research and Development. Research and development expenses increased by 356.8% to $190,500, or 9.9% of revenue, in 1997 from $41,700, or 7.0% of revenue, in 1996 due to the change in our products as discussed above.expire.Liquidity and Capital Resources
PriorWe are continuing to
1998,operate the business by striving to bring our cash expenditures in line with our revenues. We are simultaneously looking at ways to improve or maintain our revenue stream. Additionally, wefundedcontinue to review potential merger opportunities as they present themselves to us and at such time as a merger might make financial sense and add value for our stockholders, we will pursue that merger opportunity. We believe that improving or maintaining our current revenue stream, coupled with our cash on hand, including the cash raised in the 2005 private placement will sufficiently support our operations during 2005.On January 29, 2004, we completed a private placement, which raised a total of $1,150,000 through the sale of 5,000,000 shares of common stock and five-year warrants to purchase 2,500,000 shares of common stock (the 2004 private placement). Net proceeds of approximately $930,000, as well as other working capital
needsitems, were used to fund our operations during 2004.On February 2, 2005, we completed a private placement, which raised a total of $4,000,000 (inclusive of a $665,000 credit as described below) through the sale of 148,148 shares of Series A preferred stock and
capital expenditures primarilyfive-year warrants to purchase 74,070 shares of Series B preferred stock. In a contemporaneous transaction, we acquired NES for 9,599,993 shares of common stock, the assumptionof approximately $232,800 of NES' indebtedness and the reimbursement to AIGH Investment Partners, LLC (AIGH), an affiliate of a principal stockholder (Orin Hirschman), of $665,000 for its advance on our behalf of a like sum in December 2004 to settle certain third party litigation against NES. We reimbursed the advance through a partial credit against the price of our securities acquired by AIGH in the 2005 private placement.
As of March 31, 2005 we had consumed approximately $244,600 and $671,400 of the cash
flow from operations. In 1998,raised paying for expenses related to the 2005 private placement and the NES acquisition , respectively. We estimate that wereceived $775,000will disburse an additional $121,100 and $167,900 of cash paying for expenses related to the 2005 private placement and the NES acquisition, respectively, however, there can be no guarantees that these amounts will be final. We estimate that once all aggregate costs associated with the 2005 private placement and NES acquisition have been paid, there will be net proceeds of approximately $2,130,000 remaining from theissuance2005 private placement available for general corporate purposes.Pursuant to the terms of
notes convertible intoan agreement with the purchasers of the securities in the 2005 private placement, we have agreed to prepare and file with the SEC a registration statement covering the resale of shares of our common stock underlying the Series A preferred stock andin October and Decemberthe Series B preferred stock. In addition, under the terms of1998 received aggregate net proceeds of $2,697,400an agreement entered into in connection with thefirstNES acquisition, we agreed to register the shares of common stock issued in the NES acquisition.During 2004 we consumed $863,000 of cash in our operating activities. This consumption of cash related primarily to our net loss of $1,427,500, which included non-cash charges, primarily depreciation and
second closingsamortization of $664,700, interest accrued on our directors' notes of $1,400 and an aggregate decrease in cash flow from our operating assets and liabilities of $98,800. We consumed $435,500 of cash in our investing activities, primarily resulting from a $350,000 increase in note receivable—related party, a $59,200 increase in deferred acquisition costs, (both of which were related to our acquisition of NES), the purchase of approximately $33,400 of fixed assets and a $7,100 reduction in other assets. We generated positive financing cash flows of $947,300. These cash flows primarily related to net proceeds from the 2004 private placementoffering. On December 31, 1998, a $200,000 note converted into 111,520 sharesof $931,400, proceeds from the exercise of warrants issued as part of the 2004 private placement of $6,900 and the proceeds of sales of common stock to our employees under the provisions of our employee stock purchase plan of $9,000.During 2003 we consumed $710,800 of cash in our operating activities. This consumption of cash related primarily to our net loss of $1,886,600, which included non-cash charges, primarily depreciation and amortization of $1,248,400, the write-off of fixed assets abandoned as part of our 2003 restructuring of $42,200, the loss on assets disposed in our normal operations of $4,300, which were partially offset by a decrease in our provision for doubtful accounts of $3,500, and an aggregate decrease in cash flow from our operating assets and liabilities of $115,600. We consumed $225,700 of cash in our investing activities, resulting primarily from the capitalization of software development costs of $282,200 and the purchase of fixed assets of $1,600, which were partially offset by a $58,100 decrease in other assets. We generated positive financing cash flows of $2,800, resulting from the proceeds of the sale of common stock to our employees under the provisions of our employee stock purchase plan.
During the first quarter of 2005 our operating activities provided $23,600 of cash. The cash was generated primarily by increases in deferred revenue ($394,600) and
a notedepreciation and amortization ($207,300), which were offset by our net loss ($318,600) and an increase in accounts receivable ($457,000). We also generated cash through theamountcollection of$100,000notes receivable ($52,900), the collection of interest accrued on the notes receivable collected ($4,300) and an increase in accounts payable ($55,800). We consumed $622,500 of cash in our investing activities, the majority of which wasrepaid by us. In January 1999,related to theabove $475,000 convertible note was repaidNES acquisition, and we generated cash flows form financing activities ($3,095,000) primarily from the net result of the 2005 private placement.
Cash and cash equivalents
As of March 31, 2005, cash and cash equivalents were approximately $3,171,300 as compared with $675,300 at December 31, 2004. The increase was primarily due to the net cash proceeds of the
final closing of2005 private placement. We anticipate that ourprivate placement of securities whereby we received additional net proceeds of $1,708,600 in consideration of 1,095,053 shares of our common stock and warrants to purchase an additional 219,010 shares of our common stock. In February 1999, we sold 62,525 shares of our common stock and warrants to purchase an additional 676 shares of our common stock for gross proceeds of $97,200. 27On July 12, 1999, we completed a merger with GraphOn Corporation, a California corporation ("GraphOn-CA"). By reason of the merger, each share of GraphOn-CA's common stock was exchanged for 0.5576 shares of our common stock and each outstanding option and warrant to purchase GraphOn-CA's common stock was exchanged for options or warrants to purchase 0.5576 shares of our common stock. We were the surviving corporation and changed our name, which was then Unity First Acquisition Corp., to GraphOn Corporation. Each of GraphOn-CA's officers is continuing in such role with us. The merger provided us with $5,425,000 in netcashproceeds which was previously held in trust for us until we consummated a merger with an operating business. As of September 30, 1999, we hadand cash equivalentsof $2,795,200 as well as $999,000 in available-for-sale securities compared to total liabilities of $876,500, exclusive of deferred revenue of $75,400. We anticipate that cash balancesas ofSeptember 30, 1999, as well as anticipated revenueMarch 31, 2005 and therevenue from 2005 operations will be sufficient tomeetfund ourworking capital and capital expenditure needs throughanticipated expenses, inclusive of those that will be attributable to taking steps to realize the maximum value of the patents we acquired from NES, during the next twelve months. However, due to the inherent uncertainties associated with predicting future operations, there can be no assurances that these resources will be sufficient to fund our anticipated expenses during the next twelve months.
Accounts receivable, net
At March 31, 2005, we had approximately $975,900 in accounts receivable, net of allowances totaling $46,800. The net accounts receivable increased from the $518,900, net of the $46,800 allowance, we reported at December 31, 2004. We did not write off any receivables the first quarter of 2005. From time to time, we could maintain individually significant accounts receivable balances from one or more of our significant customers. If the financial condition of any of these significant customers should deteriorate, our operating results could be materially adversely affected.
Commitments and contingencies
On December 10, 2004 we entered into an agreement (the Reimbursement Agreement) with AIGH pursuant to which we agreed to reimburse AIGH $665,000, as well as its legal fees and expenses, relating to its successful efforts to settle certain third party litigation against NES and certain affiliates of NES. The third party litigation was brought against NES by one of its creditors.
Our obligation to reimburse AIGH was contingent upon several conditions, including the consummation of the NES acquisition, the completion of the 2005 private placement, and our receipt of an assignment of the rights to NES' intellectual property, which were held by AIGH, and was to be satisfied within five business days of the occurrence of the contingencies. Since these events had not occurred as of December 31, 2004 we did not recognize a liability on our balance sheet for the Reimbursement Agreement. In January 2005, upon the consummation of these contingencies, we credited the $665,000 owed to AIGH against AIGH's approximate $820,000 investment in the 2005 private placement.
We have no material capital expenditure commitments for the next twelve months.
Year 2000 Compliance We are awareThe following table discloses our contractual commitments for future periods, which consist entirely ofproblems associated with computer systemsleases for office space, as previously discussed and assumes that we will occupy all current leased facilities for theyear 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 impactfull term of theupcoming changeunderlying leases:
Year ending December 31, 2005 $ 62,600 2006 and thereafter $ — Rent expense aggregated approximately $95,700, $295,400 and $525,700 in fiscal 2004, 2003 and 2002, respectively, and $27,700 and $24,600 for the
century. Others do not correctly process "leap year" dates. As a result, such systemsfirst quarters of 2005 andapplications could fail or create erroneous results unless corrected so that they can correctly process data related to the year 2000 and beyond. These problems are expected to increase in frequency and severity as the year 2000 approaches, and are commonly referred to as the "year 2000 problem." We are continuing to assess the impact that the year 2000 problem may have on our operations and have identified the following three key areas of our business that may be affected: . Products. We have evaluated each of our most current products and older versions and believe that each is substantially year 2000 compliant. However, we believe that it is not possible to determine whether all of our customers' products into which our products are incorporated or connected will be year 2000 complaint because we have little or no control over the design, production and testing of our customers' products. 28. Internal Infrastructure. The year 2000 problem could affect the systems, transaction processing computer applications and devices used by us to operate and monitor all major aspects of our business, including financial systems, customer services, infrastructure, materials requirement planning, master production scheduling, networks and telecommunications systems. We believe that we have identified substantially all of the major systems, software applications and related equipment used in connection with our internal operations that must be modified or upgraded in order to minimize the possibility of a material disruption to our business. We have modified and upgraded all affected systems. Because most of the software applications used by us are recent versions of vendor supported, commercially available products, we have not incurred, and do not expect in the future to incur, significant costs to upgrade these applications as year 2000 complaint versions are released by the respective vendors. . Facility Systems. Systems such as heating, sprinklers, test equipment and security systems at our facilities also may be affected by the year 2000 problem. We currently are assessing the potential effect of and costs of remediating the year 2000 problem on our facility systems. We estimate that our total cost of completing any required modifications, upgrades or replacements of these systems will not have a material adverse effect on our business or results of operations. We presently estimate that the total cost of addressing our year 2000 issues will be less than approximately $10,000. This estimate was derived utilizing numerous assumptions, including the assumption that we already have identified our most significant year 2000 issues. However, there can be no guarantee that these assumptions are accurate, and actual results could differ materially from those anticipated. We currently are developing contingency plans to address the year 2000 issues that may pose a significant risk to our on-going operations. Such plans could include accelerated replacement of affected equipment or software, temporary use of back-up equipment or software or the implementation of manual procedures to compensate for system deficiencies. However, there can be no assurance that any contingency plans that we implement would be adequate to meet our needs without materially impacting our operations, that any such plan would be successful or that our results of operations would not be materially and adversely affected by the delays and inefficiencies inherent in conducting operations in an alternative manner. 29Quantitative and Qualitative Disclosures about Market Risk We are not exposed to financial market risks from changes in foreign currency exchange rates or changes in interest rates and do not use derivative financial instruments. A substantial majority of our revenue and capital spending is transacted in U.S. dollars. However, in the future, we may enter into transactions in other currencies. An adverse change in exchange rates would result in a decline in income before taxes, assuming that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, such changes typically affect the volume of sales or foreign currency sales price as competitors' products become more or less attractive. Adoption of2004, respectively.New Accounting Pronouncements
In
February 1998,December 2004, the Financial Accounting Standards Board (FASB) issuedStatement of Financial Accounting StandardSFAS No.132, "Employer's Disclosure about Pensions and Other Postretirement Benefits,123R, "Share-Based Payment," whichstandardizesrequires companies to expense thedisclosure requirementsvalue of employee stock options and similar awards. SFAS No. 123R is effective as of the beginning of the first annual reporting period that begins after June 15, 2005. As of the effective date, we will be required to expense all awards granted,modified, cancelled or repurchased as well as the portion of prior awards for
pensionwhich requisite service has not yet been rendered, based on the grant-date fair value of those awards as calculated for pro forma disclosures under SFAS No. 123 "Stock-Based Compensation." We will apply SFAS No. 123R using a modified version of prospective application. Under this method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS No. 123 for either recognition or pro forma disclosures.Benefits of tax deductions in excess of recognized compensation cost are required by SFAS 123R to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net cash flows from operations and
other post-retirement benefits.increase cash flows from financing in periods after adoption. The adoption of SFASNo. 132 did not impact our disclosures. Recently Issued Accounting Standards and Pronouncements Not Yet Adopted In June 1998, FASB issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities." This standard requires that every derivative instrument, including derivative instruments embedded in other contracts, be 30recorded on the balance sheet as either123R will have anasset or liability measured at its fair value. The standard is effective for all fiscal years beginning after June 15, 2000. As we currently are not a party to any derivative financial instruments and do not anticipate becoming a party to any derivative instruments, management does not expect this standard to have a significantimpact on our results of operations; however, we cannot currently estimate what the impact will be because, among other things, it will depend on the levels of share-based payments granted in the future. We are currently in the process of determining the effects on our financialstatements. 31position, results of operations and cash flows that will result from the adoption of SFAS 123R. General
We
develop, market, sellare a Delaware corporation, founded in May of 1996. We are developers of business connectivity software, including Unix, Linux andsupportWindows server-based software, with an immediate focus on web-enabling applications forthe application service providers, independent software vendors,use by ISVs, ASPs, corporate enterprises, governmental andthe enterprise computing environment.educational institutions, and others.Server-based computing, sometimes referred to as
thin- clientthin-client computing, is a computing model where traditional desktop software applications are relocated to run entirely on a server, or host computer.Our technology uses a small software program at each desktop, which allows the user to interface with an application as if it where running on the user's desktop computer.This centralized deployment and management of applications reduces the complexity and total costs associated withdesktopenterprise computing.TheOur software architecture provides application developers with the ability toaccess suchrelocate applications traditionally run on the desktop to a server, or host computer, where they can be run over a variety of connections from remote locations to a variety of display devices. With our server-based software, applications can be web enabled, without any modification to the original application software required, allowing the applications to be run from browsers or portals. Our server-based technology can web-enable a variety of Unix, Linux or Windows applications.On January 31, 2005, we acquired NES, which is engaged in the development and patenting of proprietary technologies relating to the submission, storage, retrieval and security of information remotely accessed by computers, typically through computer networks or the Internet. In a contemporaneous transaction, we raised net proceeds of approximately $2,130,000 in a private placement (the 2005 private placement) of newly authorized Series A Preferred Stock and
thewarrants to purchase newly authorized Series B Preferred Stock.Our headquarters are located at 3130 Winkle Avenue, Santa Cruz, California, 95065 and our phone number is 1-800-GRAPHON (1-800-472-7466). Our Internet
creates new computingwebsite is http://www.graphon.com. The information on our website is not part of this prospectus. We also have offices in Concord, New Hampshire, Rolling Hills Estates, California andoperational models, in addition to new sales channels. Our server- based technology works on today's most powerful personal computer or low-end network computer, without application rewrites or changes to the corporate computing infrastructure.Berkshire, England, United Kingdom.Industry Background
History
In the
1970's,1970s, software applications were executed on central mainframes and typically accessed by low-cost display terminals. Information technology departments were responsible for deploying, managing and supporting the applications to create a reliable environment for users. In the1980's,1980s, the PC became the desktop ofchoice,choice: empowering the user with flexibility, a graphical user interface, and a multitude of productive and inexpensive applications. In the1990's,1990s, the desktopwasprovided access to mainframe applications and databases, which run on large, server computers. Throughoutthisthe computing evolution, the modern desktop has become increasingly complex and costly to administer and maintain. This situation is furtherexacerbatedworsened as organizations become moredisperseddecentralized with remote employees, andtheas their desire increases to become more closely connected with vendors and customers through the Internet.
Lowering Total Cost of Ownership
PC software in general has grown dramatically in size and complexity in recent years. As a result, the cost of supporting and maintaining PC desktops has increased substantially.
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 PC ownership,of a PC,taking into account the recurring cost of technical support, administration, security and end-user down time, has become high, both in absolute terms and relative to the initial hardware purchase price.32With increasing demands to
bettercontrol 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 otherAnother approach is Microsoft's WindowsNT(TM)Terminal Services™,terminal server edition,introduced in June1998, which1998. It permits server-based Windows applications to be accessed fromthe newWindows-based network computers. Both initiatives are examples of server-basedcomputing, which simplifiescomputing. They simplify the desktop by moving the responsibility of running applications to a central server, with the promise of lowering total cost of ownership.
Enterprise Cross-Platform Computing
Today's enterprises contain a diverse collection of
desktop computers,end user devices, each with its particular operating system, processing power and connection type. Consequently, it is becoming increasingly difficult to provide universaldesktopaccess to business-critical applications across the enterprise. As a result, organizations resort todesktopemulation software, new hardware or costly applicationrewrites.rewrites in order to provide universal application access.A common cross-platform problem for the enterprise is the need to access
UNIXUnix or Linux applications from a PC desktop. WhileUNIX-basedUnix-based computers dominate the enterprise applications market, Microsoft Windows-based PCsare used ondominate themajority ofenterprisedesktops.desktop market. Since the early1990's, organizations1990s, enterprises have been striving to connect desktop PCs toUNIXUnix applications over all types of connections, including networks and standard phone lines. This effort, however, is complex and costly. The primary solution to date is known as PC X Server software. PC X Server software is a large softwareprogramsprogram thatrequirerequires substantial memory and processing resources on the desktop. Typically, PC X Server software is difficult to install, configure and maintain. Enterprises are looking foraneffectiveUNIXUnix connectivity software for PCs and non-PC desktops that is easier and less expensive to administer and maintain.Application Service ProvidersToday businesses are exploring alternatives to the Windows desktop. The Linux desktop is a popular choice as it promises lower acquisition costs and avoids "single vendor lock-in." The Linux desktop or the Unix desktop, popular in many engineering organizations, both need to access the large number of applications written for the Microsoft operating environment, such as Office 2003. Our technology enables Windows applications to be published to any client device running our GO-Global client software, including: Linux, Unix, Windows and Macintosh desktops and devices.
ASPs
With the ubiquitous nature of the Internet,
has led to the emergence ofnew operational models and saleschannels.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 eachcustomercustomer's site,we expect that application service providers quickly willASPs play an important role in addressing an enterprise's computing requirements. Today,application service providersASPs are faced with the difficult task of creating, or rewriting, applications to entertain the broader market.Though the application service provider industry is just beginning to emerge, we expect it to develop rapidly, due to application vendors' desire to expand their markets. 33
Remote Computing
The cost and complexity of contemporary enterprise computing has been further complicated by the growth in remote access requirements. As business activities become physically distributed, computer users have looked to portable computers with remote access capabilities to stay connected in a highly dispersed work environment. One problem facing remote computing over the Internet, or direct telephone connections, is the slow speed of communication in contrast to the high speed of internal corporate networks. Today, applications requiring remote access must be tailored to the limited
speed and lower reliability of remote connections, further complicating the already significant challenge of connecting desktop users to business-critical applications.
The GraphOnOur Approach
Our server-based software deploys, manages, supports and executes applications entirely on the server computer and
distributes thempublishes their user interface efficiently and instantaneously tovirtually anydesktopdevice.devices. The introduction of the Windows-based version of our Bridges software, during 2000, enabled us to enter the Windows application market. This allowed us to provide support for Windows applications to both enterprise customers and to leverage ISVs as a channel. During the fourth quarter of 2002 we introduced GO-Global for Windows, a significant upgrade to our product offerings in the Windows market. This new version has increased application compatibility, server scalability and improved application performance over our previous version.Our technology consists of three key components:
.
- •
- 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 presentingserver. It also presents the application interface to the desktop user. This keeps the desktop simple, or thin, as well as independent of application requirements for resources, processing power and operating systems..- •
- Our protocol enables efficient communication over fast networks or slow dial-up connections and allows applications to be accessed from
virtually any locationremote locations with network-like performance and responsiveness.TheWe believe that the major benefits of our
approachtechnology are as follows:.
- •
- Lowers Total Cost of Ownership.
Shrinking recurringReducing information technology costs is a primary goal of our products. Today, installing enterprise applicationstypicallyis time-consuming, complex andexpensive, requiringexpensive. It typically requires administrators to manually install and support diverse desktop configurations and interactions. Our server-based software simplifies application management by enabling deployment, administration and support from a central location. Installation and updates are made onlyaton the server, thereby avoiding desktop software and operating system conflicts and minimizing at-the-desk support.According- •
- Supports Strong Information Security Practices. The distributed nature of most organizations' computing environments makes information security difficult. Corporate assets in the form of data are often dispersed among desktop systems. Our server-based approach places the application and data on servers behind firewalls. This allows the corporation to centrally manage their applications and data.
- •
- Web Enables Existing Applications. The Internet represents a
leading research firm, server-based computing strategies, such as those offeredfundamental change in distributed computing. Organizations now benefit from ubiquitous access to corporate resources byus, may achieve as 34much asboth local and remote users. However, to fully exploit this opportunity, organizations need to find a30% savings by, among other things, simplifyingway to publish existing applications to Internet enabled devices. Our technology is specifically targeted at solving this problem. With GO-Global, an organization can publish an existing application to an Internet-enabled device without thedesktop and movingneed to rewrite the application. This reduces applicationprocessing and management from individual desktopsdevelopment costs while preserving the rich user interface so difficult toa centralized server-based infrastructure. For example,replicate in a2,500-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. .native Web application.- •
- Connects Diverse Computing Platforms. Today's computing infrastructures are a mix of
desktopcomputing devices, network connections and operating systems. Enterprise-widecommunicationapplication deployment is problematic due to this heterogeneity, oftenrequiresrequiring costly and complex
emulation software or application rewrites. For example, Windows PCs typically may not access a company's
UNIXUnix 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 newerdesktoptechnologies, such asSun Microsystems' and IBM's network computers,tablet PCs or handheld devices, application accessto UNIX is impractical without server-based products.will be challenging.
- •
- To rewrite an application for each different display device (be that a desktop PC or tablet PC) and
theireach of the many diverse operating systems is often a difficult and time-consuming task. In addition to the development expense, issues of desktop performance, data compatibility and support costs often make this option prohibitive. Our products provide organizations the ability to access applications from virtually alldesktops,devices, utilizing their existing computing infrastructure, without rewriting a single line of code or changing or reconfiguringdesktophardware. This means that enterprises can maximize their investment in existing technology and allow users to work in their preferreddesktopenvironment.. Application Service Providers. Many large enterprises have made significant investments in developing, marketing and selling enterprise-wide software solutions. Our server-based technology is designed to allow Windows, Linux and UNIX access from any desktop connected to the Internet. Today's packaged applications can be accessed quickly, easily and without modification. .- •
- Leverages Existing PCs and Deploys New Desktop Hardware. Our software brings the benefits of server-based computing to users of existing PC hardware, while simultaneously enabling enterprises to begin to take advantage of and deploy many of the new, less complex network computers. This assists organizations in maximizing their current investment in hardware and software while, at the same time, facilitating a manageable and cost effective transition to newer
desktopdevices..- •
- Efficient Protocol. Applications typically are designed for
network- connectednetwork-connected desktops, which can put tremendous strain on congested networks and may yield35poor, sometimes unacceptable, performance over remote connections. For application service providers,ASPs, bandwidth typically is the top recurring expense when web-enabling, or renting, access to applications over the Internet. In the wireless market, bandwidth constraints limit application deployment. Ourhighly efficientprotocol sends only keystrokes, mouse clicks and display updates over the network, resulting in minimal impact on bandwidth for application deployment, thus lowering cost on a per user basis. Within the enterprise, our protocol can extend the reach ofbusiness- criticalbusiness-critical applications toallmany 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 increasedmanufacturingflexibility, time-to-market and customer satisfaction.Products Our- •
- We also intend to exploit the revenue potential of our NES patent portfolio, summarized elsewhere herein, by:
- •
- licensing such patents to companies that utilize the technology covered by such patents in their products or services;
- •
- initiating litigation against those companies who we believe are
designedinfringing such patents and who are unwilling or who refuse toallow enterprisessign license agreements which provide for royalty payments toaccess UNIX, Linuxus; andWindows, applications from centrally managed servers without modification. Currently, our products provide- •
- determining the
UNIX and Linux server-based software. Withextent to which theintegration oftechnology covered by theWinBridge (formerly jBridge) technology in early 2000,NES patents has application to our current GO-Global product line and to the development of new products.Given our limited cash resources, we intend to prosecute any infringement litigation that we initiate, as well as defend attempts to declare one or more of our patents invalid, by engaging law firms on a contingency basis. If we are able to engage one or more law firms in this manner, as to which we can offer no assurance, this would reduce our net proceeds from successful litigation.
We anticipate that any cash flow that we are able to derive from our licensing activities, if not used for working capital in the ordinary course of our business, will be
extendeddeployed toaccessdevelop additional patentable technology.Products
We are dedicated to creating business connectivity technology that brings Windows,
applications from centrally managed servers, widening our product offering and opportunities. . GO-Global is a server-based software product for high performance access to UNIX and Linux applications from any Windows PC located virtually anywhere on an organization's network, the Internet or even over a phone line. We began selling GO-Global in March 1997. . GO-Joe is a server-based software product for accessingUnix, and Linux applications to the web without modification. Our customers include ISVs, VARs, ASPs and small to medium-sized enterprises. By employing our technology, customers benefit fromvirtually any Java-enabled desktop or device, including the Sun Microsystemsa very quick time to market, overall cost savings via centralized computing, a client neutral cross-platform solution, andIBM network computers, desktopshigh performance remote access.Our product offerings include GO-Global for Windows and
hand-held devices with web browsers such as Microsoft Internet Explorer(TM) or Netscape Navigator(TM). We began selling GO-Joe in July 1998. Sun Microsystems began shipping GO-JoeGO-Global fordistribution with its network computers in July 1998. . GO-Between is a server-based software productUnix.GO-Global for
accessing UNIX and Linux applications from Microsoft'sWindowsNT, 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 36whitepaper describing the UNIX access benefits of GO-Between for terminal server edition users. We began shipping GO-Between in October 1998. . WinBridge (formerly jBridge) is a technology we acquired from Corel in December 1998. It will enable GO-Global, GO-Between and GO-Joe to access server-based Windows applications. With the anticipated integration of the WinBridge technology in early 2000, we will offer complete cross platformallows access to Windows applications fromvirtually any desktop. Sinceremote locations and a variety of connections, including theapplications are not running on the desktop, even a non-Windows desktop will be able to accessInternet and dial-up connections. GO-Global for Windowsapplications.allows Windows applicationscanto beaccessedrun via a browser fromdesktop computers usingWindows or non-Windows devices, over many types of data connections, regardless of the bandwidth or operating system. With GO-Global for Windows, web enabling is achieved without modifying the underlying Windows applications' code or requiring costly add-ons.GO-Global for Unix web-enables Unix and Linux applications allowing them to be run via a browser from many different display devices, over various types of data connections, regardless of the bandwidth or operating systems
such as Macintosh, UNIX,being used. GO-Global for Unix web-enables individual Unix and Linux applications, or entire desktops. When using Go-Global for Unix, Unix andOS/2, which will appear and function as if they were running locally onLinux web enabling is achieved without modifying thedesktop.underlying applications' code or requiring costly add-ons.Target Markets
The target market for our products comprises
allorganizations that need to accessUNIX,Windows, Unix and/or Linuxand Windowsapplications from a wide variety ofdesktopsdevices, fromany location,remote locations, including over the Internet, dial-up lines, anddial-up lines.wireless connections. This includeslargeorganizations, such asFortune 1000small to medium-sized companies,governmentgovernmental and educationalinstitutions.institutions, ISVs, VARs and ASPs. Our software is designed to allow these enterprises tousetailor thebest desktopconfiguration of the end user device for a particular purpose, rather than following a "one PC fits all," high total cost of ownership model. Our opportunity within the marketplace is more specifically broken down as follows:.
- •
- ISVs. By web-enabling their applications, software developers can strengthen the value of their product offerings, opening up additional revenue opportunities and securing greater satisfaction and loyalty from their customers. We believe that ISVs who effectively address the web computing needs of customers and the emerging ASP market will have a competitive advantage in the marketplace.
By combining our products with desktop versions of their software applications, our ISV customers have been able to accelerate the time to market for web-enabled versions of their software applications without the risks and delays associated with rewriting applications or using third party solutions. Our technology quickly integrates with their existing software applications without sacrificing the full-featured look and feel of their original software application, thus providing ISVs with out-of-the-box web-enabled versions of their software applications with their own branding for licensed, volume distribution to their enterprise customers.
- •
- Enterprises Employing a Mix of Unix, Linux, Macintosh and Windows. Most major enterprises employ a heterogeneous mix of
UNIX computers and Windows PCs. Companiescomputing environments. Small to medium-sized companies that utilize a mixed computing environment require cross-platform connectivity solutions, like
GO-Global, that will allow users to access
UNIXapplications fromdesktop PCs.different client devices. It has been estimated that PCs represent over 90% of enterprise desktops. We believe that our products are well positioned to exploit this opportunity and that our server-based software products will significantly reduce the cost and complexity of connecting PCs toUNIXvarious applications.. Enterprises That Employ Microsoft's Terminal Server Edition. A leading research firm estimates that the Microsoft terminal server market will start to accelerate rapidly, with more than 390,000 host servers installed by the end of 2000. Each terminal server edition server supports a minimum of 10 users, such that the estimated user base for terminal server editions will be at least 3.9 million in 2000. A leading research firm reports that 38% of surveyed terminal server edition users will require access to UNIX applications. Our management believes the terminal server edition market to be a significant opportunity for GO-Between. 37.
- •
- Enterprises With Remote Computer Users. Remote computer users comprise one of the fastest growing market segments in the computing industry. Efficient remote access to applications has become an important part of many
enterpriseenterprises' computing strategies.A leading research firm projects that approximately 25 million business users access computing resources remotely in 1998 and that this number will grow to approximately 137 million worldwide in 2003, with 60% of these users still connecting via low-bandwidth modems.Our protocol is designed to enable highly efficient low-bandwidth connections.. Application Service Providers.- •
- ASPs. High-end software applications in the fields of human resources, enterprise resource planning, enterprise relationship management and others, historically have only
havebeen available to organizations able to make large investments in capital and personnel. The Internet has opened up global and mid-tier markets to vendors of this software who may now offer it to a broader market on a rental basis. Our products enable the vendors to provide Internet access to their applications with minimal additional investment in development implementation..- •
- VARs. The VAR channel presents an additional sales force for our products and services. In addition to creating broader awareness of GO-Global, the VAR channel also provides integration and support services for our current and potential customers. Our products allow software resellers to offer a cost effective competitive alternative for Server-Base Thin Client computing. In addition, reselling our GO-Global software creates new revenue streams for our VARs through professional services and maintenance renewals.
- •
- Extended Enterprise Software Market. Extended enterprises allow access to their computing resources to
theircustomers, suppliers, distributors and other partners, thereby gaining flexibility in manufacturing and increasing speed-to-market and customer satisfaction. For example, extended enterprises may maintain decreased inventory viajust-in- time,just-in-time, vendor-managed inventory and related techniques.The Internet has facilitated this development and a leading research firm has predicted the extended enterprise software market will grow to an estimated $5.76 billion in 2002.The early adoption of extended enterprise solutions may be driven in part by enterprises' need to exchange information over a wide variety of computing platforms. We believe that our server-based software products, along with our
low- impactlow-impact protocol, are well positioned to provide enabling solutions for extended enterprise computing.Strategic Relationships
We believe it is important to maintain our current strategic alliances and
intendto seek suitable new alliances in order to enhance stockholder value, improve our technology and/or enhance our ability to penetrate relevant target markets.The alliances that we currentlyWe also are focusing onare thosestrategic relationships that have immediate revenue generating potential, strengthen our position in the server-based software market, add complementary capabilities and/or raise awareness of ourproducts. Sun MicroSystems. In October 1996, Sun MicroSystems licensed our GO-Joe for distribution within its network computersproducts andour server component for distribution with its 38UNIX computers and operating system. Pursuant to the Sun Microsystems agreement, Sun has a perpetual, non-exclusive, world-wide and fully paid up license to, among other things, distribute and sell GO-Joe with its network computers and to distribute our server component with its UNIX computers and operating systems. The license to Sun also allows Sun employees to use GO-Global internally and remotely. In addition to what is provided for in the Sun agreement, Sun's network computers currently display the GO-Joe logo, our name and our website address each time GO-Joe is started, further increasing company and product awareness. We plan to work with Sun's sales force and resellers to sell and promote GO-Global and GO-Between as UNIX access solutions for users of PCs and multi-user NT. As of September 30, 1999, Sun paid us a $2,500,000 one-time royalty payment for completion of product delivery requirements and for a site license for GO-Global. The Sun agreement is expected to terminate in December 2000, although Sun will continue to have rights to our products licensed pursuant to the agreement after its termination. Compuware. In September 1999, we entered into a three year, non- exclusive agreement with Compuware, an international software and services company. Pursuant to this agreement, we will license our WinBridge (formerlyjBridge) server-based software for inclusion with Compuware's UNIFACE software, a powerful development and deployment environment for enterprise customer-facing applications. Compuware customers will use GraphOn's server- based solution to provide enterprise-level UNIFACE applications over the Internet. Compuware will private label and completely integrate WinBridge into its UNIFACE deployment architecture as UNIFACE Jti. Corel Corporation. In December 1998, we acquired Corel's jBridge technology and its jBridge development team, in exchange for our securities. See "Description of Securities-Corel Warrant and Similar Warrant." jBridge is designed to allow any device running Java to access 32-bit Windows applications remotely and unmodified. When combined with our UNIX products, we believe that jBridge will provide our customers with a complete enterprise solution, linking any of such platforms to virtually any desktop over virtually any connection. In addition, we entered into a strategic alliance with Corel. We intend through this alliance to promote our products to Corel's Windows, UNIX and Linux customers. The alliance has a one year term ending in July 2000 which is renewable by mutual consent for successive one year periods, and is terminable at will by either party. In October 1999, we entered into an agreement with Corel pursuant to which we licensed to Corel the right to include our WinBridge technology with any of Corel's applications. Under this non-exclusive perpetual license, Corel will bundle our WinBridge software with certain of its applications, beginning with its WordPerfect Office 2000 suite and, in the future, will fully integrate our software into these applications. We are to receive $1,000,000 for this license, of which $600,000 has been recognized to date, with the balance scheduled to be paid prior to the end of calendar year 2000. Alcatel Italia.us.In July 1999, we entered into a five-year, non-exclusive agreement with Alcatel Italia, the Italian Division of Alcatel, the telecommunications, network systems and services company. Pursuant to this agreement, Alcatel
will licensehas licensed ourGO-Global thin-clientGoGlobal thin client PC X server software for inclusion withAlcatel'stheir Turn-key Solution software, an optical networking system.AlcatelAlcatel's customers areexpected to use GraphOn'susing our server-based solution to access Alcatel's UNIX/X Network Management Systems applications fromT- basedT-based PCs.In addition, 39Alcatel will deploy GO-Globalhas deployed GoGlobal internally to provideAlcateltheir employees withhigh- speedhigh-speed network access toAlcatel'stheir own server-based software over dial-upLANsconnections, local area networks (LANs) andWANs.wide area networks (WANs). Although this agreement expired in July 2004, our relationship with Alcatel continues as if the contract were still in effect. We anticipate renewing this agreement during 2005.In February 2002 we signed a three-year, non-exclusive agreement with Agilent Technologies, an international provider of technologies, solutions and services to the communications, electronics, life sciences and chemical analysis industries. Pursuant to this agreement, we licensed our Unix-based web-enabling products to Agilent for inclusion in their Agilent OSS Web Center, an operations support system that provides access to mission-critical applications remotely via a secure Internet browser. This agreement was renewed during February 2005 for an additional one-year term.
In June 2002, we amended our distribution agreement with KitASP, a Japanese application service provider, which was founded by companies within Japan's electronics and infrastructure industries, including NTT DATA, Mitsubishi Electric, Omron, RICS, Toyo Engineering and Hitachi, to extend its term through June 2006 and to afford KitASP, should it achieve certain performance criteria, an exclusive right, within Japan, to distribute our web-enabling technology, bundled with their ASP services, and to resell our software.
In March 2004, we entered into our fifth consecutive one-year, non-exclusive licensing agreement with FrontRange, an international software and services company. Pursuant to our original agreement, we licensed our Bridges for Windows server-based software for integration with FrontRange's HEAT help desk software system. FrontRange has private labeled and completely integrated Bridges for Windows into its HEAT help desk software as iHEAT. As part of our 2003 renewal of this agreement, we licensed our GO-Global for Windows server-based software to FrontRange for integration with both FrontRange's HEAT and its Client Relationship Management software package Goldmine. We anticipate restructuring our licensing agreement with FrontRange during 2005.
In September 2003, we amended our non-exclusive licensing agreement with Compuware, an international software and services company, to afford Compuware the right to include, for a three year period, our GO-Global for Windows server-based software with Compuware's UNIFACE software, a development and deployment environment for enterprise customer-facing applications. Compuware's customers are using our server-based solution to provide enterprise-level UNIFACE applications over the Internet. Compuware has private labeled and completely integrated GO-Global for Windows into its UNIFACE deployment architecture as UNIFACE Jti.
Sales, Marketing and Support
Our customers, to date,
are primarily Fortune 1000 companieshave included small to medium-sized enterprises, ISVs, VARs and largegovernmentgovernmental organizations.AmongSales to Alcatel, KitASP and FrontRange represented approximately 23.3%, 41.1% and 19.1% of ourcurrent customers are the following:
Alcatel Johnson & Johnson Ameritech Corporation Lucent Technologies, Inc. Amoco Corporation Motorola, Inc. AT&T Corporation Nortel Technology Canadian Meteorological Centre National Semiconductor Corp. Cisco Systems, Inc. Pfizer Inc. Corel Corporation Shell Oil Company Ericsson Telecommunicatie B.V. Sun Microsystems, Inc. Hewlett-Packard Company United States Geological Survey IBMWhile previously mostfirst quarter 2005 revenues. Sales to Alcatel, KitASP and FrontRange represented approximately 20.9%, 14.9% and 14.1%, respectively, of our revenueswere from direct salesin 2004. Sales to FrontRange andOEM agreements, we currently are developingAlcatel represented approximately 27.4% andexpanding relationships with a select number18.4%, respectively, ofresellers.our revenues in 2003. Weexpectconsider KitASP, Alcatel and FrontRange tobenefit from these relationships by availing ourselves of their established customer-base, co-marketing programs and marketing and sales capabilities. Such resellers include value-added resellers, system integrators and OEM licensees.be our most significant customers.Our sales and marketing efforts will be focused on increasing product awareness and demand among
largeISVs, ASPs, small to medium-sized enterprises, anddeveloping formal distribution relationships with UNIX and Windows-oriented resellers.VARs who have a vertical orientation or are focused on Unix, Linux or Windows environments. Current marketing activities includea targeteddirect mail,campaign,targeted advertising campaigns, tradeshows, production of promotional materials, public relations and maintaining an Internet presence for marketing and sales purposes.In August 1998, we hired three senior level sales professionals to develop our reseller channels. Due to the nature of our products, remote access via telephone lines or the Internet can be used to troubleshoot and diagnose problems. We provide technical support and training to OEMs and resellers that function as the first line of support for their own customers. We provide 90-day online Internet, e-mail, fax and telephone-based services for technical support and software upgrades at no charge. Additionally, purchasers of our products can choose to purchase an annual extended maintenance program, which currently costs 15% of the product purchase price per year. 40Research and Development
Our research and development efforts currently are focused on developing new products and further enhancing the functionality, performance and reliability of existing products. We invested
$840,200$1,500,900, $1,797,200 and$1,771,800$3,129,800 in research and development in19982004, 2003 and 2002, respectively, including capitalized software development costs of $0, $282,200 and $298,500, respectively. We invested $323,700 and $419,600 in research and development in the firstnine monthsquarter of1999. We expect increased expenditures in 2000.2005 and 2004, respectively. No capitalized software development costs were incurred during the first quarter of 2005and 2004. We have made significant investments in our protocol and in the performance and development of our server-based software.
In May 1998, we hired a group of eight software engineers locatedWe expect investments inBellevue, Washington. They have experience in Java, protocol technology and various Microsoft Windows operating systems. They are working to enhance our existing software products as well as beginning to conceptualize and architect future products. In December 1998, we hired nine additional software engineers located in Concord, New Hampshire in connection with the acquisition of the jBridge technology from Corel. This group has substantial Windows and Java experience. We plan to continue to add software engineers in order to expand ourresearch and developmentcapabilities, although there can be no assurances that qualified personnel will be availableduring 2005 tous as needed. Operations We control all purchasing, inventory, order processing and shipping of our products and accounting functions related to our operations. Production of software masters, development of documentation, packaging designs, quality control and testing also are performed by us. CD-ROM and floppy disk duplication, printing of documentation and packaging are accomplished through outside vendors. We generally ship products upon receipt of order. As a result, we have relatively little backlog at any given time, and do not consider backlog a significant indicator of future performance.approximate 2004 levels.Competition
The server-based software market in which we participate is
highly- competitive, although wehighly competitive. We believe that we have significant advantages over our competitors, both in product performance and market positioning. This market ranges from remote access for a single PC user to server-based software for large numbers of users over many different types ofdesktop hardwaredevice and network connections. Our competitors include manufacturers of conventional PC XServer software and competitionserver software. Competition is expected from these and other companies in the server-based software market. Competitive factors intheour marketin which we compete includespace include; price, product quality, functionality, product differentiation and breadth.41We believe our principal competitors for our current products include Citrix Systems, Inc., Hummingbird Communications, Ltd.,
SCO,Tarantella, WRQ, Network Computing Devices and NetManage. Citrix is the established leading vendor of server-based computing software. Hummingbird is the established market leader in PC XServers, believed to have over 50% of that market.Servers. WRQ, Network Computing Devices, and NetManage also offer traditional PC X Serversoftware and have minority positions within that market. SCO introduced Tarantella, a server-based Java-to-Unix connectivity product which competes with GO-Joe. However, SCO's principal product is a UNIX operating system that competes with UNIX vendors like Sun Microsystems and IBM. We believe that SCO, as a competitor to the other UNIX vendors, will have difficulty in penetrating enterprises who utilize other vendors' UNIX operating systems, such as Sun Microsystems and IBM.software.Proprietary Technology
We license key components of our server-based technology from one software developer to whom we pay royalties pursuant to an exclusive license agreement. Minor elements of our server-based technology also are licensed pursuant to a non-exclusive agreement, which calls for royalty payments by us. Such royalty payments are based on a percentage of net revenues received by us for sales of our products that contain the licensed technology. The royalty rate under all of these agreements is an aggregate of 4.8% and 2.9% for 1999 and 2000. We hold options to purchase the developed technology and to purchase a perpetual license to some of the non-exclusively licensed technology which are exercisable beginning in December 2000. If we do not exercise our options under the exclusive license agreements, the applicable royalty rate would continue at 2% in 2001 and beyond. The exclusive license agreement, unless terminated earlier pursuant to its terms, will terminate on September 6, 2006. The non-exclusive agreement continues unless terminated for material breach. We purchased most of the licensed technology for an aggregate purchase price of $378,000 in the third quarter of 1999.We rely primarily on trade secret protection, copyright law, confidentiality and proprietary information agreements to protect our proprietary technology and registered trademarks. The loss of any material trade secret, trademark, trade name or copyright could have a material adverse effect on our results of operations and financial condition. There can be no assurance that our efforts to protect our proprietary technology rights will be successful.
Despite our precautions, it may be possible for unauthorized third parties to copy portions of our products, or to obtain information we regard as proprietary.
See "Legal Proceedings."We do not believe our products infringe on the rights of any third parties, but there can be no assurance that third parties will not assert infringement claims against us in the future, or that any such assertion will not result in costly litigation or require us to obtain a license to proprietary technology rights of such parties.42In November 1999, we
acquireacquired a U.S. patent for the remote display of Microsoft Windows applications onUNIXUnix and Linux desktops with X Windows. As a result, we believe that we have acquired patent protection and licensing rights for the deployment of all Windows applications remoted, or displayed, over a network or any other type of connection to any XWindow systems,Windows systems. This patent, which covers ourWinBridgeBridges for Windows (formerly jBridge) technology, was originally developed by a team of engineers formerly with Exodus Technology and hired by us in May 1998.EmployeesUpon our acquisition of NES on January 31, 2005, we acquired the right to 11 patents, all of which were either owned by, or exclusively licensed to NES. These are primarily method patents that describe software and
Facilitiesnetwork architectures to accomplish certain tasks. Generally, our patents describe:
- •
- methods to collect, store and display information developed and accessed by users and stored on host computer servers
- •
- methods to provide multiple virtual websites on one computer
- •
- methods to protect computers and computer networks from unauthorized access
- •
- methods to provide on-line information and directory service
The patents, summarized below, have applicability to computer networks, virtual private networks and the Internet.
Patent
NumberDate of Grant Scope of Coverage 5,778,367
6,324,538
6,850,940(1)July 7, 1998
November 27, 2001
February 1, 2005(1)Automated, network-accessible, user-populated
database, particularly for the World Wide Web.
" "
" "5,870,550
6,647,422February 9, 1999
November 11, 2003Network-accessible server that hosts multiple websites
" "5,826,014
6,061,798October 20, 1998
May 9, 2000Internet firewall application in which a "proxy agent"
screens incoming request from network users and
verifies the authority of the incoming request before
permitting access to a network element.5,898,830
6,052,788
6,751,738
6,804,783April 27, 1999
April 18, 2000
June 15, 2004
October 12, 2004Firewall computers that act as intermediaries between
pairs of other computers including control of access to
a virtual private network.
" "
" "
" "5,790,664 August 4, 1998 Technology for monitoring the license status of
software application(s) installed on a client computer
- (1)
- Patent granted on February 1, 2005, subsequent to the acquisition of NES, thereby increasing the number of issued patents from 11 to 12.
As of
SeptemberJune 30,1999,2005, we have 61 applications for patents filed in the US Patent Office covering various aspects of methods relating to the submission, storage, retrieval and security of information stored on computers accessed remotely, typically through computer networks or the Internet. At that date, the applications had been pending for various periods ranging from 7 to 55 months. Of the 61 applications, 59 are continuations of previously issued patents and two are continuations in part. No applications for patents have been filed in any non-US jurisdiction.Operations
Our current staff performs all purchasing, order processing and shipping of our products and accounting functions related to our operations. Production of software masters, development of documentation, packaging designs, quality control and testing are also performed by us. When required by a customer, CD-ROM and floppy disk duplication, printing of documentation and packaging are also accomplished through in-house means. We generally ship products electronically immediately upon receipt of order. As a result, we have relatively little backlog at any given time, and do not consider backlog a significant indicator of future performance. Additionally, since virtually all of our orders are currently being fulfilled electronically, we do not maintain any prepackaged inventory.
Employees
As of August 5, 2005, we had a total of
4926 employees, including14five in marketing, sales and support,2812 in research and development,and 7six in administration andfinance.finance and three in our patent group. We believe our relationship with our employees is good. No employees are covered by a collective bargaining agreement.Properties
We currently occupy approximately
7,2001,000 square feet of office space inCampbell, CaliforniaSanta Cruz, California. The office space is rented pursuant to a one-year operating lease, whichexpiresbecame effective August 1, 2004. Rent on the Santa Cruz facility is approximately $1,400 per month. We have recently signed a three-year operating lease to occupy approximately 1,500 square feet of office space inApril 2000, but is renewable each year atSanta Cruz, California, commencing August 1, 2005. We plan on moving into this facility during August 2005 and vacating ouroption until April 2006. We are required to vacate thesecurrent premises by the end ofFebruary 2000 asAugust 2005. Rent on theCitynew facility, inclusive ofCampbell has acquiredour estimated share of pro rata utilities, facilities maintenance and other costs will average approximately $3,600 per month over thebuilding for redevelopment. We anticipate no particular difficulty in locating and moving to new facilities in a timely fashion. The City of Campbell has agreed to pay us $85,000 to facilitate our relocation.three-year term. We alsooccupyhave an option to renew for an additional three-year term upon the original lease's expiration on August 1, 2008.During October 2004 we renewed our lease for approximately 3,300 square feet of office space in Concord, New Hampshire, for a one-year term, which is cancelable upon 30-days written notice by either our landlord or us. Rent on the Concord facility is approximately $5,300 per month.
We have been occupying leased facilities in
Bellevue, Washington, Concord, New Hampshire, and Reading,Rolling Hills Estates, California on a month-to-month basis since October 2002. Rent on this office is approximately $1,000 per month.We also have been renting a small office in Berkshire, England, United Kingdom
pursuant to leases expiring at varying datessince December 2002. Our current lease runs through2003. Annual lease payments currently areDecember 2005. Rent on this office, which can fluctuate depending on exchange rates, is approximately$310,000.$400 per month.We believe our current facilities
other that those in Campbell,will be adequate to accommodate our needsuntilfor theendforeseeable future.Legal Proceedings
We are currently not party to any legal proceedings that we believe will have a material negative impact on our operations.
Executive Officers and Directors of
2000. Legal Proceedings In late 1996, we disclosed numerous aspectsthe RegistrantSet forth below is information concerning each of our
proprietary technology on a confidential basis to Insignia Solutions plc, some of whose assets were later acquired by Citrix Systems, Inc. When we learned of that acquisition in January 1998, we made inquiry of Citrix and Insignia seeking assurances that there had been no potential misuse of our confidential information. On November 23, 1998, Citrix instituted litigation in the United States District Court for the Southern District of Florida seeking a judicial declaration that neither Citrix nor Insignia had misappropriated or infringed upon our proprietary technology or breached the non-disclosure agreement. We responded by filing a motion to dismiss the action for lack of jurisdiction. On May 14, 1999, the court granted our motion and dismissed the case. Essentially, the Florida court held there was no existing dispute between us and Citrix. Citrix has appealed the dismissal of its case to the United States Court of Appeals for the Eleventh Circuit, where the matter is awaiting oral argument. On October 4, 1999, Insignia filed a complaint against us in the Superior Court of the State of California, Santa Clara County, alleging that we had attempted to disrupt Insignia's sale to Citrix, on February 5, 1998, of assets related to Insignia's NTRIGUE software product line. 43The complaint alleges that, as a result of such efforts, Insignia was required by Citrix to place $8.75 million in escrow to enable Citrix to deal with potential claims by us of proprietary rights in the assets being sold. The complaint seeks unspecified general and punitive damages. On December 13, 1999 we filed an answer denying the material allegations in Insignia's complaint. Insignia's complaint also names Citrix and its UK subsidiary as defendants, alleging that these companies have breached their February 5, 1998 contract with Insignia by refusing to release money from the escrow. The complaint seeks compensatory damages from Citrix related to that company's refusal to release purchase money from escrow for payment to Insignia and other unspecified damages. 44MANAGEMENT General The following table sets forth information regarding our executive officers,directors andother key employees:executive officers.
Name Age Position ----- --- --------Executive Officers and DirectorsRobert Dilworth .................. 5863 Chairman of the Board of Directors Walter Keller .................... 49 PresidentandDirector Robin Ford ....................... 49Chief ExecutiveVice President, Marketing and Sales and Director Vince Pfeifer .................... 34 Vice President, Product Development Eric Lefebvre .................... 33 Vice President, Business Development Edmund Becmer .................... 41Officer (Interim)William Swain 64 Chief Financial Officer and Secretary Lawrence Burstein ................ 57 DirectorAugust P. Klein .................. 6368 Director Michael P. O'Reilly .............. 46Volker56 Director Marshall C. Phelps, Jr. .......... 55Gordon Watson 69 Director Key Employees Russann Keller ................... 30 Director of Marketing and Public Relations Prakash Jadeja .................. 44 Director of Engineering Robert Currey ................... 33 Principal Architect William Tidd ..................... 37 Director of Software DevelopmentThe members of our board of directors are classified into three classes, one of which is elected at each annual meeting of stockholders to hold office for a three-year term and until successors of such class have been elected and qualified. The respective members of each class are set forth below: . Class III: Walter Keller and Robin Ford (terms expire 2002) . Class II:Robert Dilworth
and August Klein (terms expire 2001) 45has served as one of our directors since July . Class I: Michael O'Reilly, Lawrence Burstein and Marshall C. Phelps, Jr. (terms expire 2000) Robert Dilworth was appointed our Chairman in December 1999. He previously1999 and of GraphOn-CA between July1998 andJulywas appointed Chairman in December 1999. In January 2002, Mr. Dilworthhaswas appointed Interim Chief Executive Officer upon the termination, by mutual agreement, of our former Chief Executive Officer, Walter Keller. From 1987 to 1998 he served as the Chief Executive Officer and Chairman of the Board of Metricom, Inc.since 1996, and as a director since 1987. He served as Metricom's CEO from 1987 to 1998. Metricom is, a leading provider of wireless data communication and network solutions. Prior to joining Metricom, from 1985 to1987,1988, Mr. Dilworth served as President of Zenith Data Systems Corporation, a microcomputer manufacturer. Earlier positionsinclude CEO atincluded Chief Executive Officer and President of Morrow Designs,CEO atChief Executive Officer of Ultramagnetics,Division Manager atGroup Marketing and Sales Director of Varian Associates Instruments Group, Director of Minicomputer Systems at Sperry Univac and Vice President of Finance and Administration at Varian Data Machines. Mr. Dilworth is also a director ofVLSI Technology, Inc., Data Technology Corporation, Cortelco Systems, Inc.eOn Communications, Sky Pipeline andPhotonics Corp.Yummy Interactive. Mr. Dilworthholds a B.S. in Business and Mathematics from L.A. State University. Walter Keller has served as our President since July 1999 and of GraphOn-CA between 1982 and July 1999. Mr. Keller, whopreviously served asour Chairman from July 1999 until succeeded by Mr. Dilworth in December 1999 and as Chairman of GraphOn-CA between 1982 and July 1999, was Chief Financial Officer of GraphOn-CA from 1991 until February 8, 1999. Prior to the founding of GraphOn-CA in 1992, Mr. Keller's experience included executive staff and senior level management, sales and engineering positions at United Technologies Corporation and Honeywell Inc. Mr. Keller is a member of the Society of Professional Engineers and holds a B.S. in Mechanical Engineering and a M.S. in Electrical Engineering from Santa Clara University in Santa Clara, CA. Mr. Keller is the husband of Ms. Ford. Robin Ford has served as our Executive Vice President, Marketing and Sales since July 1999 and of GraphOn-CA between 1996 and July 1999. She was elected as one of our directors in December 1999. Ms Ford was Vice President, Marketing and Sales of GraphOn-CA from 1991 to 1996 and held various positions in sales and marketing at GraphOn-CA from 1983 to 1991. Ms. Ford was adirector ofGraphOn-CA from October 1991 to June 1998. Prior to joining GraphOn-CA, Ms. Ford held various sales managementMobility Electronics andtechnical positions at Intel Corporation, National Semiconductor Corporation and Grid Systems Corporation. Ms. Ford's responsibilities with GraphOn and GraphOn-CA have included building and maintaining GraphOn's and GraphOn-CA's sales and marketing operations and obtaining major government and OEM contracts. Ms. Ford is the wife of Mr. Keller. Vince Pfeifer has served as our Vice President, Product Development since July 1999 and of GraphOn-CA between October 1998 and July 1999. Mr. Pfeifer was General Manager and Director of Product Development of GraphOn-CA from June 1998 to August 1998. From June 1995 to May 1998, Mr. Pfeifer served as the Vice- President of Product Development for Exodus Technologies and ConnectSoft Communication Corporation and has nine years of experience in designing, developing, testing and supporting commercial grade software. 46Eric Lefebvre has served as our Vice President, Business Development since July 1999 and of GraphOn-CA between June 1999 and July 1999. From April 1997 through June 1999, he served as Director of Strategic Business and Alliances at Corel Corporation where he was responsible for developing strategic alliances and seeking new areas of business. From April 1996 to May 1997, Mr. Lefebvre served as International Corporate Communications Manager at Corel. From November 1991 to April 1996, her served at Corel as Communication and Market Development Manager and Marketing Manager (Europe). Mr. Lefebvre holds a Masters of International Affairs from Carleton University and an Honours B.Sc. in Government and Politics and Business Management from the University of Maryland. Edmund BecmerGet2Chip.com, Inc.William Swain has served as our Chief Financial Officer and
Vice President of Finance & AdministrationSecretary sinceJuly 1999 and of GraphOn-CA between February 1999 and July 1999. From MayMarch 2000. Mr. Swain was a consultant from August 1998 untilDecember 1998,February 2000, working with entrepreneurs in the technology industry in connection with the start-up and financing of new business opportunities. Mr.BecmerSwain was Chief Financial Officer and Secretary ofTMCI Electronics,Metricom Inc.,a publicly-traded company, basedfrom January 1988 until June 1997, during which time he was instrumental inSan Jose, CA,private financings as well as Metricom's initial public offering and subsequent public financing activities. He continued as Senior Vice President of Administration withsubsidiaries involved in the manufacturing of semiconductor equipment. In February, 1999, TMCI Electronics filed for reorganization under Chapter 11 of the United States Bankruptcy Code.Metricom from June 1997 until July 1998. Prior to joiningTMCI Electronics, from March 1996 to May 1998,Metricom, Mr.Becmer was a member ofSwain held senior financial positions with leading companies in theaccounting firm of Moore Stephens, P.C., where he was responsible for SEC audits, mergerscomputer industry, including Morrow Designs, Varian Associates andacquisitions and business consulting. From August 1993 to June 1995,Univac. Mr.Becmer was controller of First City Industries, Inc. in New York, NY, a holding company with subsidiaries in manufacturing, commercial real estate and residential real estate. From June 1987 to June 1993, Mr. Becmer was CFO/Controller of Lincorp Holdings, Inc., a public investment holding company in New York, NY, with investments in banking and commercial real estate and a Fortune Service 500 company. Mr. Becmer also was with the accounting firms of BDO Seidman, LLP and Deloitte and Touche LLP. Mr. BecmerSwain holds aB.S.B.A.Bachelors degree in Business Administration fromSan DiegoCalifornia State University of Los Angeles and is a Certified PublicAccountant. Lawrence BursteinAccountant in the State of California.August P. Klein has served as one of our directors since
May 1996. Mr. Burstein was President and Treasurer between May 1996 and July 1999. For approximately ten years prior to 1996, Mr. Burstein was the President, a director and principal stockholder of Trinity Capital Corporation, a private investment banking concern. Trinity ceased operations upon the formation of Unity Venture Capital Associates Ltd. ("Unity VCA"). Since March 1996, Mr. Burstein has been President and a principal stockholder of Unity VCA. Mr. Burstein is a director of the following four public companies: T-HQ Inc., which designs and markets Nintendo and Sega 47games; 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.AugustP. Klein has served as one of our directors since July 1999 and of GraphOn-CA between August 1998 and July 1999.1998. Mr. Klein has been, since 1995, theFounder, CEOfounder, Chief Executive Officer and Chairman of the Board of JSKCorporation and, since 1997, of APJK Corporation, general contractors and service providers for the insurance industry.Corporation. From 1989 to 1993, Mr. Klein was founder andCEOChief Executive Officer of Uniquest, Inc., anobject orientedobject-oriented application software company. From 1984 to 1988, Mr. Klein served asCEOChief Executive Officer of Masscomp, Inc., a developer of high performance real time mission critical systems andUNIX-basedUnix-based applications. Mr. Klein has served as Group Vice President, Serial Printers at Data Products Corporation and President andCEOChief Executive Officer 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 andserveshas served as a trustee of the Computer Museum in Boston,Massachusetts.Massachusetts since 1988. Mr. Klein holds a B.S. in Mathematics from St.Vincent'sVincent College.Michael
P. O'ReillyVolker has served as one of our directors since July1999 and2001. Mr. Volker has been, since 1996, Director ofGraphOn-CA between December 1998 and July 1999.Simon Fraser University's Industry Liaison Office. From 1996 to 2001, Mr.O'Reilly has served asVolker was Chairman of the Vancouver Enterprise Forum, a non-profit organization dedicated to the development of British Columbia's technology enterprises. From 1987 to 1996, Mr. Volker was Chief ExecutiveVice President, Finance, Chief FinancialOfficer and
TreasurerChairman ofCorelthe Board of Directors of RDM Corporation,since December, 1997. Priora publicly listed company. RDM is a developer of specialized hardware and software products for both Internet electronic commerce and paper payment processing. From 1988 tojoining Corel, from 1988 until 1997,1992, Mr.O'ReillyVolker was Executive Director of BC Advanced Systems Institute, asenior tax partnerhi-tech research institute. Since 1982, Mr. Volker had been active in various early stage businesses as a founder, investor, director and officer. Mr. Volker, a registered professional engineer in theOttawa practiceProvince ofKPMG, the international professional advisory services firm. Mr. O'Reilly is a Chartered Accountant. HeBritish Columbia, holds aB.A.Bachelor's and Master's degree from the University ofWestern Ontario and an Hons. B. Comm from the University of Windsor. Mr. O'Reilly is a nominee of Corel. Marshall C. Phelps, Jr.Waterloo.Gordon Watson has served as one of our directors since
November 1999.April 2002. In 1997, Mr. Watson founded Watson Consulting, LLC, a consulting company for early stage technology companies, in 1997, and has served as its President since its inception. From1980 until August 1999,1996 to 1997 he served as Western Regional Director, Lotus Consulting of Lotus Development Corporation. From 1988 to 1996, Mr.Phelps was employed by IBM in a series of executiveWatson held various positions with Platinum Technology, Incorporated, most recently serving asIBM'sVice PresidentIntellectual PropertyBusiness Development, Distributed Solutions. Earlier positions include Senior Vice President of Sales for Local Data, Incorporated, President, Troy Division, Data Card Corporation, andLicensing,Vice President and General Manager, Minicomputer Division, Computer Automation, Incorporated. Mr. Watson also held various executive and director level positions withresponsibility for IBM's worldwide intellectual property activities, licensing, standardsTRW, Incorporated, Varian Data Machines, andtelecommunications policy. HeComputer Usage Company. Mr. Watson holds a Bachelors of Science degree in electrical engineering from the University of California at Los Angeles and has taught at the University of California at Irvine. Mr. Watson is also a director ofCommercialWare Inc., a developer of order processing and fulfillment sofware for direct marketing concerns. Mr. Phelps holds a BA from Muskingum College, an MS in Advanced Management from Stanford Graduate School of Business, and a JD from Cornell University School of Law. Russann Keller has served as our Director of MarketingDPAC Technologies, PATH Communications andPublic Relations since early 1999 and previously held various sales, marketing, and technical positions with us since 1990, including MarCom Manager, Corporate Communications Manager and Support Manager. Ms. Kelley has also held various technical, editorial, and marketing positions at Knight-Ridder, Boole and Babbage, Elan Software, and was co-founder and Vice President at 48Syber Sonic,SoftwarePROSe, Inc.Ms. Keller holds a degree in Environmental Biology. Ms. Keller is the daughter of Mr. Keller. Prakash Jadeja has served as our Director of Engineering since July 1999 and of GraphOn-CA between September 1997 and July 1999. From February 1996 to August 1997, Mr. Jadeja led the Digital Video Disc and Compact Disc Recordable System software group at Apple Computer. From February 1992 to January 1996, Mr. Jadeja was Vice President of Engineering at Workstation, Inc. Prior to that, Mr. Jadeja held a number of technical and management positions at Insignia Solutions, Inc., which he co-founded. Mr. Jadeja holds a B.S. in Applied Computer Science from De Montford University in England. Robert Currey has served as our Principal Architect and developer since July 1999 and of GraphOn-CA between June 1998 and July 1999. Prior to joining GraphOn-CA, beginning in November 1996, Mr. Currey served as team leader at Exodus Technologies. Mr. Currey was Senior Engineer at Connectsoft Corp. from January 1994 until November 1996. Previously, Mr. Currey was Senior Engineer at Attachmate Corp. from June 1992 to January 1994. Mr. Currey has an M.S. in computer science and a B.S. in applied mathematics from Oregon State University. William Tidd has served as our Director of Software Development since July 1999 and of GraphOn-CA between January 1999 and July 1999. Prior to joining GraphOn-CA, from 1996 to 1998, Mr. Tidd served on the jBridge development team for Corel Corporation. Mr. Tidd owned and operated Tirel Corporation, a software development company, from 1994 to 1996 after co-founding Atlantic Design Systems, which became Tirel Corporation in 1994. Mr. Tidd holds a Master of Engineering Degree in mechanical engineering from Carnegie Mellon University.Our Board of Directors
and Committees Our boardhas an audit committee consisting of three directors,consistsall ofseven individuals. Corel has a contractual right to designate one individual to be a nominee to servewhom are independent asa director until Corel controls less than 17%defined by the listing standards of The Nasdaq Stock Market. The current members of thevoting poweraudit committee are August P. Klein (committee chairman), Michael Volker and Gordon Watson. Our Board ofour capital stock. We also agreed notDirectors has determined that Mr. Klein meets the SEC's definition of an audit committee financial expert.Our Board of Directors has adopted a Code of Ethics applicable to
reduce the size of the our board below six without Corel's prior written consent, until the date which is two years after the date of the initial public offering of our equity securities or the closing of the sale of all or substantiallyall of ourassets oremployees, including our chief executive officer, chief financial officer and controller. This code ofany merger or consolidation with any other entity. The non-employee directors are eligibleethics was filed as an exhibit toparticipate inourstock option plan. We have established an audit committee which reviews and supervises our financial controls, including selection of our auditors, reviewingannual report on Form 10-K for thebooks and accounts, meeting with our officers regarding our financial controls, acting upon recommendations of auditors and taking further actions as the audit committee deems necessary to complete an audit of our books and accounts. The audit committee also evaluates potential conflicts of interest between us and our 49year ended December 31, 2003. All executive officers
and directors and serves to evaluate any transactions or events which could be deemed to be improper, as well as other matters which may come before it or as directed byserve at theboard. The audit committee currently consistsdiscretion oftwo directors, Messrs. O'Reilly and Phelps. We have established a compensation committee, which reviews and approvesthecompensation and benefits for our executive officers, administers our stock plans and performs other duties as may from time to time be determined by the board. The compensation committee currently consistsBoard oftwo directors, Messrs. Dilworth and Klein. ExecutiveDirectors.Summary Compensation
and Employment Agreements The compensation for our key management is determined from time to time by our board or compensation committee. In addition, our board or compensation committee may, in our discretion, award these individuals cash bonuses, options to purchase shares of our common stock under the Stock Option Plan, and such other compensation, including equity-based compensation, as our board or compensation committee shall approve from time to time.TableThe following table sets forth information
with respectfor the fiscal years ended December 31, 2004, 2003 and 2002 concerning compensation we paid tothe compensation ofour Chief Executive Officer andeach of the twoour other executive officerswho were serving as our executive officers during fiscal year 1998 andwhose total annual salary and bonusduring such fiscalexceeded $100,000 for the yearexceeded $100,000: Summary Compensationended December 31, 2004.
Long-term Compensation Annual Compensation -------------------Awards Payouts Name and Principal
PositionYear Salary Bonus Other Annual
CompensationRestricted
Stock
AwardsSecurities
Underlying
OptionsLTIP
PayoutsAll Other Year Salary Bonus
Compensation---- --------- ------ ------------Walter Keller ............................. 1998 $135,181 0 $ 0 PresidentRobert Dilworth
Chairman of the Board and Chief Executive OfficerRobin Ford ................................ 1998 $141,960 0(Interim)(1)2004
2003
2002$ 0 Executive Vice President, Marketing
$
$99,000
129,000
256,000—
—
——
—
——
—
—300,000
40,000
100,000(2) —
—
——
—
—William Swain
Chief Financial Officer andSales Zdravko Podolski(1) ....................... 1998Secretary2004
2003
2002$ 94,750 0 $75,000 Vice President, Strategic Sales and Alliances
$
$123,100
96,200
147,700—
—
——
—
——
—
—380,000
40,000
—(2) —
—
—$
$
$2,000
2,000
2,000(3)
(3)
(3)___________
- (1)
- Mr.
Podolski's employment with us was terminated on September 1, 1998. Pursuant toDilworth began as Chief Executive Officer (Interim) during January 2002. As interim Chief Executive Officer, Mr. Dilworth is compensated as aseverance agreement with Mr. Podolski, we paid him $75,000 in consideration for the release of anyconsultant andall claimsnot an employee. Although hemay have had against us. 50Employment Agreements On October 22, 1998, we entered into employment agreements with Mr. Keller and Ms. Ford which provide for a term of two years, annual base salaries of $140,000 and $130,000, respectively, and eligibility
is eligible to receive
bonusescompensation for his services as a director, he has elected, since assuming the interim Chief Executive Officer position, to forgo the cash compensation we pay all directors for their attendance at board and committee meetings as well as thediscretionquarterly retainer and receive cash compensation only for his services as our interim Chief Executive officer. Consequently, the salary figures in the above table are solely for Mr. Dilworth's performance as our interim Chief Executive Officer.
- (2)
- During 2004, Mr. Dilworth and Mr. Swain voluntarily surrendered, on May 14, 2004, 260,000 and 380,000 out-of-the-money options, respectively, in conjunction with participation in a voluntary stock option exchange program. New option grants equal to the number cancelled were made on November 15, 2004. All options granted to Mr. Dilworth during fiscal 2004 were granted in his capacity as one of our
board. Such agreements contain provisions for bonusesdirectors.- (3)
- Company contribution to the 401(k) Plan.
Option Grants in Last Fiscal Year
The following table shows the stock option grants made to the executive officers named in the Summary Compensation Table during the 2004 fiscal year:
Potential Realizable Value
at Assumed Annual Rates
of Stock Appreciation for
Option TermNumber of Shares of
Common Stock
Underlying
Options
GrantedPercent of
Total Options
Granted to
Employees
In Fiscal YearName Exercise
Price(1)Expiration
Date5% 10% Robert Dilworth 300,000 (2) 22.2 % $ 0.34 11/14/14 $ 1,457,100 $ 1,910,800 William Swain 380,000 (2) 28.1 % $ 0.34 11/14/14 $ 1,845,700 $ 2,420,300
- (1)
- Options were granted at an exercise price equal to the fair market value of our common stock, as determined by the closing sales price reported on the Over-the-Counter Bulletin Board on the date of grant.
- (2)
- During 2004, Mr. Dilworth and Mr. Swain voluntarily surrendered, on May 14, 2004, 260,000 and 380,000 out-of-the-money options, respectively, in conjunction with participation in a voluntary stock option exchange program. New option grants equal to the number cancelled were made on November 15, 2004. All options granted to Mr. Dilworth during fiscal 2004 were granted in his capacity as one of our directors.
Fiscal Year-End Option Values
The following table shows information with respect to unexercised stock options held by the executive officers named in the Summary Compensation Table as of December 31, 2004. No options held by such individuals were exercised during 2004.
Number of Securities Underlying
Unexercised Options
at Fiscal Year-End(1)Value of Unexercised In-The-Money
Options at Fiscal Year-End(2)Name Exercisable Unexercisable Exercisable Unexercisable Robert Dilworth 440,000 — $ 112,200 — William Swain 420,000 — $ 98,800 —
- (1)
- Options are generally immediately exercisable and vest in 33 equal monthly installments beginning three months after the date of grant. Shares issued upon
achievementthe exercise ofmilestones set forth in such agreements, non-competition for the term of each agreement and confidentiality. The base salariesoptions are subject tochangeour repurchase, which right lapses as the shares vest.
- (2)
- The value of the in-the-money options was calculated as the difference between the exercise price of the options and $0.56, the fair market value of our common stock as of December 31, 2004, multiplied by the number of the in-the-money options outstanding.
Compensation of Directors
During the year ended December 31, 2004, directors who were not otherwise our employees were compensated at the
discretionrate of $1,000 for attendance at each meeting of ourboard. Mr. Keller and Ms. Ford also are entitled to participate in any of our pension, insurance or benefit plans, including our stock option plans. Each employment agreement also providesboard, $500 if their attendance is via telephone, $500 fora severance payment in the amount of one year's compensation in the event that the employee is terminated by us without cause, or the employee resigns for Good Reason (as defined in the agreement) during the employment term. Good Reason includes, among other things, the failureattendance at each meeting of asuccessor to us to assumeboard committee, and a $1,500 quarterly retainer. Additionally, outside directors are granted stock options periodically, typically on a yearly basis. In theemployment agreements in connection with change in control transactions such as a merger, consolidation or a sale of all or substantially all ofaggregate, ourassets. Good Reason also includes substantial changes in the duties, position, compensation and location of the employment. On February 8, 1999, we entered into an employment agreement with Mr. Becmer providing for employment at-will, an annual base salary of $125,000 andoutside directors received options to purchaseup to 69,700 shares of common stock under our Stock Option/Stock Issuance Plan. Options to purchase 4,356 shares vested on May 8, 1999 and the remaining options will vest monthly in 45 equal installments. The base salary is subject to annual review by our board. The agreement provides for eligibility to receive additional options to purchase up to 13,940152,500 shares of our common stockupon meeting quarterly management objectivesduringhis first2004 at an average exercise price of $0.56 per share.Compensation Committee Interlocks and Insider Participation
During the year ended December 31, 2004, the Compensation Committee was comprised of
employment. Mr. Becmer also is entitled to participate in any ofRobert Dilworth, ourpension, insurance or benefit plans, including our stock option plans. The agreement provides for a severance payment in the amount of six months' compensation in the event of a termination due to a merger or acquisition where Mr. Becmer's duties substantially change, a reduction in his compensation, a relocation or the failure of any successor to us to assume the agreement. 1998 Stock Option/Stock Issuance Plan Our 1998 Stock Option/Stock Issuance Plan is intended to promote our interests by providing eligible persons with the opportunity to acquire a proprietary interest, or otherwise increase their proprietary interest, in us as an incentive for them to remain in our service. The plan was adopted by our board on June 23, 1998Interim Chief Executive Officer andwas approved by our stockholders on June 23, 1998. Pursuant to the termsChairman of theplan, 2,230,400Board, and August Klein, a non-employee director.On January 29, 2004, we issued and sold to certain individuals and entities in a private placement (the 2004 private placement) 5,000,000 shares of common stock
may be issuedand five-year warrants toour officers and other employees, our non-employee board members and independent consultants in our service. However, in no event may any one participant in the plan receive option grants or 51direct stock issuances for more than 278,000 shares of common stock in the aggregate per calendar year. The shares of common stock reserved for issuance under the plan are made available from authorized but unissued common stock or from shares of common stock reacquired by us, including shares repurchased on the open market. Should an option expire or terminate for any reason prior to exercise in full, the shares subject to the portion of the option not so exercised will be available for subsequent issuance under the plan. Unvested shares issued under the plan and subsequently repurchased by us will be added back to the share reserve and will accordingly be available for subsequent issuance under the plan. The compensation committee of the board will have exclusive authority to administer the plan with respect to option grants and stock issuances made to our executive officers and non-employee board members. The compensation committee and a secondary committee of one or more board members will each have separate but concurrent authority to make option grants and stock issuances under those programs to all other eligible individuals. The term "plan administrator," as used in this description of the plan, will mean either the compensation committee or the secondary committee, to the extent each such entity is acting in its capacity as administrator of the plan. The plan is divided into two separate components: . the option grant program under which eligible individuals may, at the discretion of the plan administrator, be granted options to purchaseacquire 2,500,000 shares of common stock at an exercise pricenot less than 85%oftheir fair market value on$0.33 per share. We derived net proceeds of approximately $931,400 from thegrant date and .2004 private placement. We also issued to Griffin Securities Inc., as a placement agent fee in respect to thestock issuance program under which such individuals may, in the discretion of the plan administrator, be issued2004 private placement, warrants to acquire 500,000 shares of common stockdirectly, through the purchase of vested or unvested sharesata price not less than 85% of their fair market value at the time of issuance or as a fully-vested bonus for past services rendered to us. The shares subject to each option granted under the option grant program and unvested shares issued under the stock issuance program will vest in one or more installments over the recipient's period of service with us. However, no vesting schedule will be at a rate less than 20% per year, with the initial vesting to occur no later than one year after the grant date of the option or the issue date of the unvested shares. No granted option may have a term in excess of ten years, and each granted option will be subject to earlier termination within a designated period following the optionee's cessation of service with us. 52The exercise price may be paid in cash or in shares of common stock. Options may also be exercised for vested shares through a same-day sale program, pursuant to which a designated brokerage firm effects the immediate sale of those shares and pays over to us, out of the sale proceeds available on the settlement date, sufficient funds to cover the exercise price for the purchased shares. In addition, the plan administrator may provide financial assistance to one or more participants in connection with the exercise of their outstanding options or the purchase of their unvested shares by allowing such individuals to deliver a full-recourse, interest-bearing promissory note in payment of the exercise or purchase price and any associated withholding taxes incurred in connection with such exercise or purchase. In the event that we are acquired by merger or sale of substantially all of our assets, each outstanding option under the option grant program which is not to be assumed by the successor corporation or otherwise continued in effect will automatically accelerate in full, and all unvested shares under the plan will immediately vest, except to the extent our repurchase rights with respect to those shares are assigned to the successor corporation or otherwise continued in effect. The plan administrator will have complete discretion to grant one or more options under the option grant program which will become exercisable on an accelerated basis for all of the option shares upon either: . an acquisition of us, whether or not those options are assumed or otherwise continued in effect or . the termination of the optionee's service within a designated period following an acquisition in which those options are assumed or continued in effect. The vesting of outstanding shares under the stock issuance program may be accelerated upon similar terms and conditions. The plan administrator also is authorized under the option grant and stock issuance programs to grant options and to structure repurchase rights so that the shares subject to those options or repurchase rights will immediately vest in connection with a change in ownership or control of us, whether by successful tender offer for more than 50% of the outstanding voting stock or by a change in the majority of the board by reason of one or more contested elections for board membership. Such accelerated vesting may occur either at the time of such change in ownership or control or upon the subsequent involuntary termination of the individual's service within a designated period, not to exceed 18 months, following such change in ownership or control. In the event any change is made to the outstanding shares of common stock by reason of any recapitalization, stock dividend, stock split, combination of shares, exchange of shares or 53other change in corporate structure effected without our receipt of consideration, appropriate adjustments will be made to: . the maximum number and/or class of securities issuable under the plan; . the number and/or class of securities for which any one person may be granted stock options and direct stock issuances under the plan per calendar year; and . the number and/or class of securities and the exercise price per share in effect under each outstanding option. Such adjustments will be designed to preclude any dilution or enlargement of benefits under the plan or the outstanding options granted pursuant to the plan. The plan administrator has the authority to effect the cancellation of outstanding options under the option grant program in return for the grant of new options for the same or different number of option shares withan exercise price of $0.23 per sharebased upon the fair market value of the common stock on the new grant date. The board may amend or modify the plan at any time. The plan will terminate on June 22, 2007, unless sooner terminated by the board or in connection with an acquisition of us in which the plan is not assumed by the acquiring entity. 1996 Stock Option Plan Our 1996 Stock Option Plan was adopted by both our board and a majority in interest of our stockholders on May 30, 1996. The plan provides for the granting of options which are intended to qualify either as incentive stock options within the meaning of Section 422 of the Internal Revenue Code or as nonstatutory stock options which are not intended to meet the requirements of such section. The total number of shares of our common stock reserved for issuance under the plan is 187,500. Options to purchase shares may be granted under the plan to persons who, in the case of incentive stock options, are our employees, including officers, or, in the case of nonstatutory stock options, are our employees, including officers, or our non-employee directors. The plan provides for its administration by our board or a committee chosen by our board, which has discretionary authority, subject to restriction, to determine the number of shares issued pursuant to incentive stock options and nonstatutory stock options and the individuals to whom, the times at which and the exercise price for which options will be granted. 54The exercise price of all incentive stock options granted under the plan must be at least equal to the fair market value of such shares on the date of the grant or, in the case of incentive stock options granted to the holder of more than 10% of our common stock, at least 110% of the fair market value of such shares on the date of the grant. The maximum exercise period for which incentive stock options may be granted is ten years from the date of grant or five years in the case of an individual owning more than 10% of our common stock. The aggregate fair market value of shares with respect to which incentive stock options are exercisable for the first time by the holder of the option during any calendar year shall not exceed $100,000. The aggregate fair market value is determined at the date of the option grant. As of September 30, 1999, options for 811,723 shares of common stock were outstanding under our 1998 and 1996 plans, no options had been exercised and 1,418,677 shares remained available for future issuance under these plans. CERTAIN RELATIONSHIPS AND TRANSACTIONS Mr. Keller, our Chairman and President, sold to Mr. Thomas A. Bevilacqua: . on January 1, 1998, 19,518 shares of our common stock for an aggregate purchase price of $700 and . on August 20, 1998, 38,049 shares of our common stock for an aggregate purchase price of $5,118. Mr. Bevilacqua, who was one of our directors until his resignation in December 1999, is a former partner in the law firm of Brobeck, Phleger & Harrison LLP, which firm we have retained from time to time for legal services. The 38,049 shares originally were subject to Mr. Keller's right of repurchase which lapses monthly in a series of equal monthly installments upon Mr. Bevilacqua's completion of each month of service on our board until May 2000. In addition, Mr. Keller has a right of first refusal exercisable in connection with any proposed transfer of such shares for which the repurchase right has lapsed. As of August 20, 1998, Mr. Keller sold 55,760 shares of our common stock to Mr. Bradlee, one of our former executive officers, for an aggregate purchase price of $7,500 evidenced by a full-recourse note secured by the shares purchased. The note bore interest at the rate of 5.41% per annum, compounded semi-annually. The 55,760 shares originally were subject to Mr. Keller's right of repurchase which began to lapse November 20, 1998 in a series of 45 successive, equal monthly installments upon Mr. Bradlee's completion of each month of service with us. In addition, Mr. Keller had a right of first refusal exercisable in connection with any proposed transfer of such shares for which the repurchase right has lapsed. Upon the end of 55Mr. Bradlee's employment with us in May 1999, Mr. Keller repurchased 48,324 of such shares paid for by forgiving $6,500 of the note. As of August 20, 1998, Mr. Keller sold 13,940 shares of our common stock to Mr. Klein, one of our directors, for an aggregate purchase price of $1,875. The 13,940 shares are subject to Mr. Keller's right of repurchase which began to lapse November 20, 1998 in a series of 21 successive, equal monthly installments upon Mr. Klein's completion of each month of consulting services to us. In addition, Mr. Keller has a right of first refusal exercisable in connection with any proposed transfer of such shares for which the repurchase right has lapsed. As of August 20, 1998, Eric Kim, then one of our directors, and Messrs. Dilworth and Klein, each one of our directors, were each issued 41,820 shares of our common stock under our stock option plan at a purchase price of $0.135 per share. Such shares are subject to our right of repurchase which began to lapse November 20, 1998 in a series of 45 successive, equal monthly installments upon completion of each month of service on our board until May 2000. On September 30, 1999, Mr. Kim resigned as a director and we purchased 30,668 shares of our common stock from Mr. Kim for $4,294. In March 1998, Spencer Trask Investors, an affiliate of Spencer Trask, purchased 278,800 shares of our common stock from us for an aggregate purchase price of $25,000. Concurrently with such transaction, Spencer Trask Investors loaned us $475,000 evidenced by a convertible promissory note, bearing interest at a rate of 10% per annum. The convertible promissory note was redeemed by us on January 27, 1999. In March 1998, Spencer Trask Investors, entered into a sale arrangement with Mr. Keller and Ms. Ford, our Executive Vice President, Marketing and Sales, with respect to the sale of an aggregate of 1,951,600 shares of our common stock for aggregate consideration of $3,500,000, comprised of $200,000 cash, a non- recourse promissory note in the principal amount of $800,000 which became due on January 20, 1999, a non-recourse promissory note in the principal amount of $1,000,000 which became due on July 20, 1999, and a non-recourse promissory note in the principal amount of $1,500,000 which becomes due on January 20, 2000. Each of the foregoing notes bears interest at the rate of 6% per annum, payable quarterly, and each note is secured by a pledge of the shares purchased, with one share pledged for each $1.79 of principal amount. The shares of our common stock pledged with respect to each note were placed in escrow until payment in full of the principal and accrued interest of the note representing the purchase price of such shares. The $800,000 note was paid by Spencer Trask Investors and the 446,080 shares pledged with respect to such note were released from escrow on January 20, 1999. The $1,000,000 note was paid by Spencer Trask Investors and the 557,600 shares pledged with respect to such note were released from escrow on July 20, 1999. In the event that a note is not paid, the shares securing it will be released to Mr. Keller and Ms. Ford, who also maintain voting control over such pledged shares unless and until the related notes are fully paid and the shares are released to Spencer Trask Investors. 56In connection with the issuance and sale by us of an aggregate of 2,878,815 shares of our common stock for an aggregate purchase price of $5,162,868 in three separate closings, the final such closing occurring January 27, 1999, in connection with and pursuant to the terms of a private placement memorandum and related agreements (the "private placement"), we entered into a placement agency agreement, dated September 2, 1998, with Spencer Trask. Pursuant to the placement agency agreement, Spencer Trask received a fee equal to 10% of the aggregate offering price for our common stock sold in the private placement. In addition, we issued to Spencer Trask the Spencer Trask Warrants. See "Description of Securities-Spencer Trask Warrants and Similar Warrants." Spencer Trask, together with its affiliates, holds an aggregate of 1,686,461 shares of our common stockand warrants topurchase 880,427 shares of our common stock. Mr. Bevilacqua, together with his wife, Therese Mrozek, currently a partner in the law firm of Brobeck, Phleger & Harrison LLP, purchased 2,788 shares of our common stock in the private placement for an aggregate purchase price of $5,000 and Brobeck, Phleger & Harrison LLP purchased 27,880 shares for an aggregate purchase price of $50,000. Spencer Trask Investors and Mr. Keller, upon the commencement of the private placement, loaned $200,000 and $100,000, respectively, to us pursuant to convertible promissory notes which bore interest at 8% per annum and matured at the earlier of the first closing of the private placement or 12 months from the date of the notes. Spencer Trask converted the $200,000 note into 111,520 shares of our common stock on December 31, 1998 and we paid the $100,000 note held by Mr. Keller on that same date. In addition, Spencer Trask Investors was issued, upon the commencement of the private placement, a warrant to purchase 55,760 shares of our common stock at $1.79 per share, and Mr. Keller was issued a warrant to purchase 27,880 shares of our common stock at $1.79 per share. See "Description of Securities - Spencer Trask Warrants and Similar Warrants." On December 31, 1998, in consideration of tangible and intangible assets, we sold to Corel Corporation 2,167,114 shares of our common stock and a warrant to purchase up to 216,711 shares of our common stock. We also granted Corel the right to appoint a nominee to our board and registration. See "Management of Directors" and "Description of Securities-Corel Warrant and Similar Warrant." In consideration of consulting services performed in connection with the merger between us and GraphOn-CA, we issued to Spencer Trask Class A redeemable common stock purchase warrants to purchase an aggregate of up toacquire 250,000 shares of our common stock at an exercise price of$5.50$0.33 per share.Orin Hirschman purchased 3,043,478 shares of common stock and warrants to acquire 1,521,739 shares of common stock in the 2004 private placement for approximately $700,000 in cash (representing in the aggregate 9.9% of our outstanding shares of common stock as of March 30, 2005). As a condition of the sale, we entered into an Investment Advisory Agreement, expiring on January 29, 2007, with Mr. Hirschman, which provides for our payment of 5% of the value of any business transaction that he introduces to us and which we accept.
On October 6, 2004, we entered into a letter of intent to acquire NES. We contemporaneously loaned $350,000 to Ralph Wesinger, NES' majority shareholder, to fund his purchase of all the NES common stock then owned by another person. We received Mr. Wesinger's 5-year promissory note, which bears interest at a rate of 3.62% per annum and which was secured by his approximately 65% equity interest in NES, to evidence this loan. Mr. Wesinger also agreed that we would receive 25% of the gross proceeds of any sale or transfer of these shares, which shall be applied in reduction of the then outstanding balance of his note. We have the option to accelerate the maturity date of this note upon the occurrence of certain events.
On December 10, 2004 we entered into an agreement with AIGH Investment Partners, LLC (AIGH), an affiliate of Orin Hirschman, to reimburse AIGH $665,000, as well as its legal fees and expenses, relating to its successful efforts to settle certain third party litigation against NES and certain of its affiliates.
On January 31, 2005, we completed our acquisition of NES in exchange for 9,599,993 shares of common stock, the assumption of approximately $232,500 of NES' indebtedness and the reimbursement to AIGH of $665,000 for its advance on our behalf of a like sum in December 2004 to settle certain third party litigation against NES. This reimbursement was effected (as discussed below) by a partial credit against the purchase price of our securities acquired by AIGH in the 2005 private placement. Of such 9,599,993 shares, 4,963,158 were issued to Mr. Wesinger, an aggregate 2,439,335 shares were issued to NES' other shareholders and an aggregate 2,197,500 shares to two of NES' remaining creditors. Immediately thereafter, 3,260,391 of the shares issued to Mr. Wesinger were substituted for the NES shares that he had previously pledged to us to secure repayment of his $350,000 note. In accordance with the terms of the acquisition, Mr. Wesinger became a non-executive employee of our company upon consummation of the acquisition.
On February 2, 2005, we issued and sold to certain individuals and entities in the 2005 private placement 148,148 shares of newly authorized Series A preferred stock at a price of $27.00 per share and
pay Spencer Trask upfive-year warrants to$575,000. In June 1996,acquire 74,070 shares of newly authorized Series B preferred stock at an exercise price of $40.00 per share. We derived net proceeds of approximately $2,130,000 from the 2005 private placement.AIGH purchased 30,368 shares of Series A preferred stock and warrants to acquire 15,184 shares of Series B preferred stock in the 2005 private placement for an aggregate purchase price of $820,000. We repaid the $665,000 we owed AIGH by crediting AIGH's purchase price of our securities with a like sum. The balance of the purchase price ($155,000) was paid in cash. As a condition of the 2005 private placement, we extended the expiration date of Mr. Hirschman's Investment Advisory
Agreement to January 29, 2008. Pursuant to the agreement with AIGH as described above, we also paid legal fees and expenses incurred by Mr. Hirschman, AIGH and the investors in the 2005 private placement of approximately $108,000.
Pursuant to an agreement, dated December 16, 2003, with Griffin Securities Inc., placement agent for our 2004 private placement, we issued Griffin Securities five-year warrants to purchase 14,815 shares of Series A preferred stock at an
aggregateexercise price of625,000$27.00 per share and five-year warrants to purchase 7,407 shares of Series B preferred stock at an exercise price of $40.00 per share as a finder's fee in respect of our 2005 private placement. Additionally, pursuant to the agreement dated December 16, 2003, we paid Griffin a $50,000 agent fee in respect of our 2005 private placement.On March 29, 2005, our stockholders approved an amendment to our certificate of incorporation increasing our authorized but unissued common stock from 45,000,000 to 195,000,000 shares. Upon the effectiveness of the certificate of amendment to our certificate of incorporation implementing this increase, each share of Series A preferred stock was automatically converted into 100 shares of our common stock and each warrant was automatically converted into a warrant to purchase that number of shares of common stock equal to the number of shares of preferred stock subject to the warrant multiplied by 100. As a result, all outstanding shares of Series A Preferred Stock (148,148 shares) were converted into 14,814,800 shares of our common stock. In addition, upon the effectiveness of the certificate of amendment, all outstanding warrants to purchase shares of Series A preferred stock (14,815 shares) and Series B preferred stock (81,477 shares) were converted into five-year warrants to purchase 1,481,500 shares of our common stock at
aan exercise price of$.0001$0.27 per shareas follows: 150,000and five-year warrants to purchase 8,147,700 sharesto Lawrence Burstein, oneof ourdirectors, 25,000 57shares to Unity VCA,common stock at anaffiliateexercise price ofMr. Burstein, 136,500 shares to the three other then directors of GraphOn and their affiliates, and 313,500 shares to various other persons. In June 1996, we issued 58,334 and 141,666 Class A and a like number of Class B warrants to Mr. Burstein and the three other then directors of GraphOn in consideration for future services to be rendered by such persons on behalf of us. Such warrants are identical to our Class A and Class B redeemable warrants offered and sold in our initial public offering but are not redeemable by us. We paid Unity VCA between June 1996 and July 1999 a monthly fee of $7,500 for general and administrative services. Such fee included the use of approximately 500 square feet of office space in premises occupied by Unity VCA. Dalessio Miliner & Leben ("DML"), an accounting firm which is an affiliate of a then director of us, affords Unity VCA the use of such space at a monthly rental of $2,000. Mr. Burstein and two other then directors of GraphOn are each directors and stockholders of Unity VCA. The agreement with Unity VCA has been terminated. Unity VCA had made non-interest demand loans aggregating approximately $50,000 to us as of the November 12, 1996 to cover expenses incurred by us in connection with our initial public offering. We repaid these loans out of the proceeds of our initial public offering. 58$0.40 per share, respectively. The following table sets forth certain information,
known to usas ofDecember 3, 1999, based on information obtained from the persons named below,June 30, 2005, with respect to the beneficial ownership of shares of our common stock heldby .by: (i) each director; (ii) each person known by us tobe the owner ofbeneficially own 5% or more ofthe outstanding shares ofour common stock;.(iii) eachof our directors;executive officer named in the summary compensation table; and.(iv) allof ourdirectors and executive officersand directorsas a group. Unless otherwise indicated, the address for each stockholder is c/o GraphOn Corporation,150 Harrison3130 Winkle Avenue,Campbell, CA 95008.
Number of Shares Beneficially Owned (1) Percent of Class ------------------------- -----------------Corel Corporation (2)................................ 2,383,825 20.76% 1600 Carling Avenue Ottawa, Ontario K1Z 8R7, Canada Spencer Trask Holdings, Inc. (3)...................... 1,686,461 19.48% 535 Madison Avenue New York, NY 10022 Walter Keller (4) ................................... 1,005,582 9.15% Robert Dilworth .................................... 41,820 * August P. Klein .................................... 55,760 * Michael O'Reilly (2) ................................ 2,383,825 20.76% Robin Ford (5) ...................................... 641,240 5.69% Vince Pfeifer (6) ................................... 19,143 * Edmund Becmer (7) ................................... 9,293 * Eric Lefebvre(8) ................................... 3,666 * Lawrence Burstein(9)................................. 291,668 2.56% Marshall C. Phelps, Jr............................... All executive officers and directors as a group 4,479,877 38.47% (10 persons) (10)..................................___________Santa Cruz, California 95065.
Name and Address of Beneficial Owner Number of Shares of Common
Stock Beneficially Owned(1)(2)Percent of
ClassRobert Dilworth(3) 693,820 1.5 William Swain(4) 599,000 1.3 August P. Klein(5) 445,760 1.0 Michael Volker(6) 318,200 * Gordon Watson(7) 280,000 * Orin Hirschman(8)
6006 Berkeley Avenue
Baltimore, MD 212099,120,417 18.5 Ralph Wesinger(9). 4,129,824 8.9 IDT Capital, Inc.(10)
520 Broad Street
Newark, NJ 071025,555,500 11.6 Paul Packer(11)
C/o Globis Capital Partners
60 Broad Street, 38th Floor
New York, NY 100043,821,278 8.2 All current executive officers and directors as a group (5 persons)(12) 2,336,780 4.8
- *
- Denotes less than 1%
of our outstanding common stock 59. - (1)
- As used in this
prospectus,table, 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, based on information provided by the named individuals, all persons namedin this prospectusherein have sole voting power and investment power with respect to their respective shares of our common stock, except to the extent that authority is shared by spouses under applicable law, and record and beneficial ownership with respect to their respective shares of our common stock. With respect to each stockholder, any shares issuable upon exercise ofalloptions and warrants held by such stockholder that are currently exercisable or will become exercisable within 60 days ofDecember 3, 1999June 30, 2005 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.- (2)
- Percentage ownership of our common stock is based on
11,266,30246,147,047 shares of common stock outstanding as of June 30, 2005 and reflects the effectiveness of the Certificate of Amendment that was approved by our stockholders at our Special Meeting of Stockholders on March 29, 2005. Upon the effectiveness of the Certificate of Amendment each share of our previously outstanding Series A preferred stock was automatically converted into 100 shares of our common stock and each warrant that was exercisable for shares of our Series A or Series B preferred stock was automatically converted into a warrant exercisable for that number of shares of our common stock
equal to the number of shares of Series A or Series B preferred stock subject to the warrant multiplied by 100.
- (3)
- Includes 640,000 shares of common stock issuable upon the exercise of outstanding
asoptions.- (4)
- Includes 580,000 shares of
December 3, 1999. (2)common stock issuable upon the exercise of outstanding options.- (5)
- Includes
2,167,114295,000 shares of common stock issuable upon the exercise of outstanding options.- (6)
- Includes 260,000 shares of common stock issuable upon the exercise of outstanding options.
- (7)
- Includes 280,000 shares of common stock issuable upon the exercise of outstanding options.
- (8)
- Based on information contained in a Schedule 13D/A filed by Orin Hirschman on February 17, 2005. Includes 1,521,739 shares of common stock issuable upon the exercise of outstanding warrants. Also includes 3,036,800 shares of common stock and
a warrant exercisable for up to 216,7111,518,400 shares ofourcommon stockat anissuable upon the exercisepriceof$1.79 per shareoutstanding warrants held byCorel.AIGH. Mr.O'ReillyHirschman is theExecutive Vice President, Finance, Chief Financial Officermanaging member of AIGH andTreasurer of Corelhas sole voting anda director of us. However, Mr O'Reilly disclaims beneficial ownership of all of these shares. (3) Includes 94,792dispositive power with respect to shares held bySpencer Trask, 717,631AIGH.- (9)
- Based on information contained in a Form 4 filed by Mr. Wesinger on June 28, 2005. Includes 1,569,816 shares held in escrow pursuant to the terms of an escrow agreement (the NES Escrow Agreement) entered into in connection with the acquisition by
Kevin Kimberlin Partners, L.P. ("KKP"), an affiliateGraphOn ofSpencer Trask Holdings, Inc.,NES. For the100% ownerduration ofSpencer Trask, 37,638 shares and warrants exercisable for upthe escrow, Mr. Wesinger has the right toan aggregatevote, but not to dispose of,66,900such shares. Includes 166,666 shares ofour common stock at an exercise price of $1.79 per share held by William P. Dioguardi, the President of the Spencer Trask, three warrants exercisable for up to an aggregate of 58,971 shares of our common stock at an exercise price of $1.79 per share held by KKP, a warrant exercisable for up to an aggregate of 12,261 shares of our common stock at an exercise price of $1.79 per share held by Kevin Kimberlin, a general partner of KKP and a majority holder of Spencer Trask Holdings, four warrants exercisable for up to an aggregate of 242,293 shares of our common stock at an exercise price of $1.79 per share held by Spencer Trask Holdings and 250,000 warrants exercisable for up to an aggregate of 250,000 shares of our common stock at an exercise price of $5.50 held by Spencer Trask. Excludes 324,667 shares of ourcommon stock issuable upon exercise ofthe Spencer Trask Warrantsoutstanding options.- (10)
- Based on information contained in
which Spencer Trask has no beneficial interest. See "Description of Securities-Spencer Trask Warrants and Similar Warrants." (4)a Schedule 13D filed by IDT Capital, Inc. on February 15, 2005. Includes418,2001,851,800 shares ofourcommon stockplacedissuable upon the exercise of warrants. Howard S. Jonas exercises sole voting and dispositive power with respect to the listed shares.- (11)
- Based on information contained in
escrow with Brobeck, Phleger & Harrison LLP ("BPH"), as escrow agent, to be sold to Spencer Trask Investorsa Schedule 13G filed onJanuary 20, 2000. During the escrow period, Mr. Keller cannot sell or otherwise transfer such shares but retains all other stockholder rights, including, without limitation, the right to vote such shares. Also includes a warrant exercisable for up to 27,880February 10, 2004. Includes 587,791 shares ofour 60common stock at an exercise price of $1.79 per shareand22,304293,896 shares ofourcommon stockheld by relatives of Mr. Keller who, at the option of Spencer Trask, can be required to enter into a voting agreement granting Mr. Keller the right to vote such shares. Mr. Keller and Ms. Ford are husband and wife. See footnote 5 below. (5) Includes 418,200 shares of our common stock placed in escrow with BPH, as escrow agent, to be sold to Spencer Trask Investors on January 20, 2000. During the escrow period, Ms. Ford cannot sell or otherwise transfer such shares but retains all other stockholder rights, including, without limitation, the right to vote such shares. Also includes 16,728 shares held by relatives of Ms. Ford who, at the option of Spencer Trask, can be required to enter into a voting agreement granting Ms. Ford the right to vote such shares. Mr. Keller and Ms. Ford are husband and wife. See footnote 4 above. (6) Includes options exercisable for up to 5,203 shares of our common stock at an exercise price of $1.52 per share. (7) Includes options exercisable for up to 9,293 shares of our common stock at an exercise price of $1.52 per share. (8) Includes options exercisable for up to 3,666 shares of our common stock at an exercise price of $1.52 per share. (9) Includes 25,000 shares of our common stock owned by Unity VCA, over which shares Mr. Burstein shares voting and investment power. Also includes 58,334 sharesissuable upon the exercise ofClass A warrants and 58,334 shares issuable upon exercise of Class B warrants. (10) See footnotes 3 through 7 above. Includesoutstanding warrants held by Mr.KellerPaul Packer andCorel exercisable for up to 244,591370,400 shares ofourcommon stockat an exercise price of $1.79 per shareandoptions exercisable for up to 18,162185,200 shares ofourcommon stock issuable upon the exercise of outstanding warrants held bythreeGlobis Overseas Fund Ltd. (Globis Overseas). Includes 1,589,381 shares ofour officers. 61common stock and 794,630 shares of common stock issuable upon the exercise of outstanding warrants held by Globis Capital Partners (Globis Capital). Mr. Packer is the managing member of Globis Capital and is the managing member of the general partner of the manager of Globis Overseas. Mr. Packer exercises sole voting and dispositive power with respect to the shares beneficially owned by Globis Capital and Globis Overseas. - (12)
- Includes 2,055,000 shares of common stock issuable upon the exercise of outstanding options. Remainder of page intentionally left blank.
SELLINGSTOCKHOLDER The registration statement, of which thisSTOCKHOLDERSThis prospectus
forms a part,relates to our registration, for the account of the sellingstockholder,stockholders indicated below, of an aggregate of300,00044,270,682 shares of our common stock, including 13,605,889 and 1,250,000 shares underlying certain of our warrantsissued to the selling stockholder in October 1999. These shares are being registeredand options, respectively, pursuant to registration rights granted by us to the sellingstockholderstockholders. We have agreed to pay all expenses and costs to comply with our obligation to register the selling stockholders' shares of common stock. We have also agreed to indemnify and hold harmless the selling stockholders against certain losses, claims, damages or liabilities, joint or several, arising under the Securities Act of 1933.The selling stockholders acquired our common stock and/or warrants in one or more of the following transactions:
- •
- On February 2, 2005, we issued in a private placement 148,148 shares of Series A preferred stock and warrants to purchase 74,070 shares of Series B preferred stock (the 2005 private placement). In connection with the 2005 private placement, warrants to purchase 14,815 shares of Series A preferred stock and 7,401 shares of Series B preferred stock were issued to Griffin Securities, Inc. as a finder's fee. On March 29, 2005, the preferred stock and warrants to purchase preferred stock were converted into an aggregate of 14,814,800 shares of common stock and warrants to purchase 9,629,200 shares of common stock.
- •
- On January 31, 2005, we acquired NES for 9,599,993 shares of common stock and other consideration (the NES Acquisition). Of such shares, 1,999,999 shares were placed in escrow to settle any post-acquisition contingencies pursuant to the terms of an escrow agreement (the NES Escrow Agreement). Up to 1,750,000 shares will be released on August 1, 2006 and up to 249,999 shares will be released on the later of February 1, 2007 or the expiration of the statute of limitations applicable to certain tax matters as stated in the acquisition agreement.
- •
- On January 29, 2004, we issued in a private placement 5,000,000 shares of common stock and five-year warrants to purchase 2,500,000 shares of common stock (the 2004 private placement). We also issued to Griffin Securities, as a placement agent fee in respect to the 2004 private placement, warrants to acquire 500,000 shares of common stock.
- •
- On August 9, 2000, we issued warrants to purchase 300,000 shares of common stock to EarlyBirdCapital, Inc. for financial consulting services.
- •
- Prior to its
acquisitionmerger with us in July 1999, our predecessor issued warrants in three private placements, ofthese warrants.which warrants to purchase 456,689 shares of common stock remain outstanding.See Certain Transactions for further information concerning the 2004 private placement, the 2005 private placement and the NES Acquisition.
On February 1, 2005, we issued employee stock options to purchase 1,000,000 shares of common stock to Ralph Wesinger. On February 16, 2005, we issued employee stock options to purchase 250,000 shares of common stock to Gary Green.
We believe
based on information supplied bythat theselling stockholder, that except as noted, it haspersons named in this table have sole voting and investment power with respect to all shares of common stockwhich itthat they beneficiallyowns.own. The last columninof this table assumes the sale of all of our shares offered by this prospectus.The registration of the offered shares does not mean that any or all of the selling stockholders will offer or sell any of these shares. Except as set forth
Number of Number of Shares Shares Beneficially Offered by Number of Shares Beneficially Owned Prior Selling Owned After Offering ---------------------------- Name of Selling Stockholder to Offering Stockholder Number Percent - ------------------------------ -------------- -------------- ------------ ----------Super Tech Holdings Limited..... 300,000 300,000 -- --%in the notes to this table, there is not nor has there been a material relationship between us and any of the selling stockholders within the past three years.
Shares Beneficially
Owned After OfferingName of Selling Stockholder Number of Shares
Beneficially OwnedCommon Stock
Offered by Selling
StockholderNumber Percent Ralph Wesinger(1) 4,830,207 (2)(3) 4,830,207 (2)(3) — — Crystal Bay Capital, LLC(4) 1,847,262 (5) 1,847,262 (5) — — Steven Levy(6) 28,954 (5) 28,954 (5) — — Oso Partners(6) 185,979 (5)(7) 185,979 (5)(7) — — William Kennedy(6) 167,975 (5) 167,975 (5) — — Forest R. and Judith A. Romas(6) 143,289 (5) 143,289 (5) — — Clark Reams(6) 53,361 (5) 53,361 (5) — — Neil Ison(6) 28,954 (5) 28,954 (5) — — William Sanders(6) 18,561 (5) 18,561 (5) — — Craig Sjoberg(6) 97,951 (5) 97,951 (5) — — Sierra Patent Group(8) 1,697,500 (5) 1,697,500 (5) — — Cardinal Law Group(9) 500,000 500,000 — — Orin Hirschman 9,120,417 (10)(11) 4,565,217 (11) — — AIGH Investment Partners, LLC(12) 4,555,200 (13) 4,555,200 (13) — — Paul Packer 3,821,278 (14)(15) 881,687 (15) — — Globis Capital Partners L.P.(16) 2,383,991 (17) 2,383,991 (17) — — Globis Overseas Fund Ltd.(16) 555,600 (18) 555,600 (18) — — Richard Grossman 603,887 (19) 603,887 (19) — — James Kardon 178,299 (20) 178,299 (20) — — Anthony Altamura 30,000 (21) 30,000 (21) — — Hewlett Fund(22) 599,487 (23) 599,487 (23) — — Hershel Berkowitz 1,978,261 (24) 1,978,261 (24) — — Joshua A. Hirsch 418,671 (25) 418,671 (25) — — IDT Capital, Inc.(26) 5,555,500 (27) 5,555,500 (27) — — Dr. Jack Dodick 884,500 (28) 884,500 (28) — — Spira Family Investment Partnership(29) 416,700 (30) 416,700 (30) — — Fame Associates(31) 416,700 (32) 416,700 (32) — — Cam Co(33) 1,388,800 (34) 1,388,800 (34) — — Anfel Trading Limited(35) 1,944,300 (36) 1,944,300 (36) — — Ganot Corporation(37) 833,400 (38) 833,400 (38) — — Mazel D&K, Inc.(39) 1,111,000 (40) 1,111,000 (40) — — F.Lyon Polk III 111,000 (41) 111,000 (41) — — Paul Tramontano 111,000 (41) 111,000 (41) — — SLAM Partners(42) 90,500 (43) 55,500 (43) 35,000 * Griffin Securities, Inc.(44) 2,315,950 (45) 2,315,950 (45) — — Friendly Capital LLC(44) 93,750 (46) 93,750 (46) — — Robert U. Giannini(47) 136,201 (46) 136,201 (46) — — Mark H. Zizzamia(47) 130,625 (46) 130,625 (46) — — Thomas W. Muldowney(47) 163,602 (46) 163,602 (46) — — Salvatore J. Saraceno(47) 130,625 (46) 130,625 (46) — — Kevin Kimberlin 315,757 (48) 12,262 (46) — — Spencer Trask &Co(49) 225,565 (46) 225,565 (46) — — Spencer Trask Ventures, Inc.(49) 5,576 (46) 5,576 (46) — — Spencer Trask Investors(49) 55,760 (46) 55,760 (46) — —
Kevin Kimberlin Partners(49) 16,594 (46) 16,594 (46) — — A. Emerson Martin(50) 13,271 (46) 13,271 (46) — — Arnaud de Vienne(50) 8,433 (46) 8,433 (46) — — David Hochman(50) 7,207 (46) 7,207 (46) — — Eric Kim(50) 31,058 (46) 31,058 (46) — — Jerry Engel(50) 4,879 (46) 4,879 (46) — — John Nelson(50) 4,809 (46) 4,809 (46) — — Joseph Gatti(50) 349 (46) 349 (46) — — Joseph Nese(50) 3,827 (46) 3,827 (46) — — Michael Padnis(50) 1,046 (46) 1,046 (46) — — Ray Rivers(50) 279 (46) 279 (46) — — Rick Elkin(50) 418 (46) 418 (46) — — Rosemary Sheahan(50) 1,185 (46) 1,185 (46) — — Todd Harrigan(50) 7,041 (46) 7,041 (46) — — Webb Turner(50) 697 (46) 697 (46) — — Walter Keller(51) 27,880 (46) 27,880 (46) — — EarlyBirdCapital, Inc.(52) 142,500 (46) 142,500 (46) — — Denis Frelinghuysen(53) 28,402 (46) 28,402 (46) — — Wayne Brannen(53) 28,402 (46) 28,402 (46) — — Anthony Stoss(53) 57,783 (46) 57,783 (46) — — Steve Levene(53) 15,670 (46) 15,670 (46) — — David Nussbaum(53) 8,325 (46) 8,325 (46) — — Robert Gladstone(53) 1,959 (46) 1,959 (46) — — Dave Karlin(53) 1,959 (46) 1,959 (46) — — Graubard Mollen & Miller 15,000 (46) 15,000 (46) — — Gary Green(54) 250,000 (55) 250,000 (55) — — Kennedy Capital Management 1,000,000 1,000,000 — —
- *
- Denotes less than 1%
- (1)
- Prior to the NES Acquisition, Mr. Wesinger was a director, the president and the majority shareholder of NES. In accordance with the terms of the NES Acquisition agreement, Mr. Wesinger became a non-executive employee of our company upon consummation of the NES Acquisition.
- (2)
- Includes 1,569,816 shares held in escrow pursuant to the NES Escrow Agreement. For the duration of the escrow, Mr. Wesinger has the right to vote, but not to dispose of, such shares.
- (3)
- Includes 1,000,000 shares of common stock issuable upon exercise of options. 83,333 of such shares vest on May 1, 2005 and the remainder vest in a series of 33 successive equal monthly installments upon Mr. Wesinger's completion of each additional month's service as our employee.
- (4)
- Prior to the NES Acquisition, Crystal Bay Capital, LLC (CBC) was a shareholder of NES. Nicholas Sprinkel is the managing member of CBC and has sole voting and dispositive power with respect to the shares held by CBC.
- (5)
- Approximately 15.8% of such shares are held in escrow pursuant to the terms of the NES Escrow Agreement, except for the Sierra Patent Group, for whom approximately 15.0% of such shares are
held in escrow. For the duration of the escrow, the holder of such shares has the right to vote, but not to dispose of, such shares.
- (6)
- Prior to the NES Acquisition, such person was a shareholder of NES.
- (7)
- Scott Fine is the managing partner of Oso Partners. Mr. Fine exercises sole voting and dispositive power with respect to the shares beneficially owned by Oso Partners.
- (8)
- Prior to the NES Acquisition, Sierra Patent Group was a creditor of NES. Ken D'Alesandro is the managing director of the Sierra Patent Group and has sole voting and dispositive power with respect to such shares.
- (9)
- Prior to the NES Acquisition, Cardinal Law Group was a creditor of NES. Frank Nicholas is president of the Cardinal Law Group and has sole voting and dispositive power with respect to such shares.
- (10)
- Includes 3,036,800 shares held by, and 1,518,400 shares issuable upon exercise of warrants held by, AIGH Investment Partners, LLC.
- (11)
- 1,521,739 of such shares are issuable upon exercise of warrants held by Orin Hirschman.
- (12)
- Orin Hirschman is the managing member of AIGH Investment Partners, LLC and has sole voting and dispositive power with respect to such shares.
- (13)
- 1,518,400 of such shares are issuable upon exercise of warrants.
- (14)
- Includes 1,589,361 shares held by, and 794,630 shares issuable upon exercise of warrants held by, Globis Capital Partners L.P. and 370,400 shares held by, and 185,200 shares issuable upon exercise of warrants held by, Globis Overseas Fund Ltd.
- (15)
- 293,896 of such shares are issuable upon exercise of warrants held by Paul Packer.
- (16)
- Paul Packer is the managing member of Globis Capital Partners (Globis Capital) and is the managing member of the general partner of the manager of Globis Overseas Fund, Ltd. (Globis Overseas). Mr. Packer exercises sole voting and dispositive power with respect to the shares beneficially owned by Globis Capital and Globis Overseas.
- (17)
- 794,630 of such shares are issuable upon exercise of warrants.
- (18)
- 185,200 of such shares are issuable upon exercise of warrants.
- (19)
- 201,296 of such shares are issuable upon exercise of warrants.
- (20)
- 59,399 of such shares are issuable upon exercise of warrants.
- (21)
- 10,000 of such shares are issuable upon exercise of warrants.
- (22)
- Jacob J. Spinner, the general partner of Hewlett Fund, exercises voting and investment power over the shares held by this entity. Mr. Spinner disclaims beneficial ownership of the shares, except to the extent of his pecuniary interest therein. We have been informed by Hewlett Fund that it purchased the shares being offered pursuant to this prospectus in the ordinary course of business and, at the time of the purchase of such shares, had no agreements or understandings, directly or indirectly, with any person to distribute the shares.
- (23)
- 247,496 of such shares are issuable upon exercise of warrants.
- (24)
- 659,387 of such shares are issuable upon exercise of warrants.
- (25)
- 139,557 of such shares are issuable upon exercise of warrants.
- (26)
- Howard Jonas exercises sole voting and dispositive power with respect to such shares.
- (27)
- 1,851,800 of such shares are issuable upon exercise of warrants.
- (28)
- 294,800 of such shares are issuable upon exercise of warrants.
- (29)
- Steven W. Spira exercises sole voting and dispositive power with respect to such shares.
- (30)
- 138,900 of such shares are issuable upon exercise of warrants.
- (31)
- Abraham Fruchthandler, general partner of Fame Associates, exercises sole voting and dispositive power with respect to such shares.
- (32)
- 138,900 of such shares are issuable upon exercise of warrants.
- (33)
- Charles Alpert exercises sole voting and dispositive power with respect to such shares.
- (34)
- 462,900 of such shares are issuable upon exercise of warrants.
- (35)
- Tzvi Levy exercises sole voting and dispositive power with respect to such shares.
- (36)
- 648,100 of such shares are issuable upon exercise of warrants.
- (37)
- Sisel Klurman exercises sole voting and dispositive power with respect to such shares.
- (38)
- 277,800 of such shares are issuable upon exercise of warrants.
- (39)
- Reuven Dessler and Jack Koval exercise shared voting and dispositive power with respect to such shares.
- (40)
- 370,300 of such shares are issuable upon exercise of warrants.
- (41)
- 37,000 of such shares are issuable upon exercise of warrants.
- (42)
- Sam Katzman, general partner of SLAM Partners, exercises sole voting and dispositive power with respect to such shares.
- (43)
- 18,500 of such shares are issuable upon exercise of warrants.
- (44)
- Adrian Stecyk, the Chief Executive Officer of Griffin Securities, exercises voting and investment power over the shares held by this entity. Mr. Stecyk disclaims beneficial ownership of the shares, except to the extent of his pecuniary interest therein. Griffin Securities acted as placement agent for our January 2004 private placement. Griffin Securities received a finder's fee for the 2005 private placement.
- (45)
- 834,450 of such shares are issuable upon exercise of warrants.
- (46)
- All of such shares are issuable upon exercise of warrants
- (47)
- Messrs. Giannini, Zizzamia, Muldowney and Saraceno are managing directors of Griffin Private Equity Group, a division of Griffin Securities. We have been informed by Griffin Securities and Messrs. Giannini, Zizzamia, Muldowney and Saraceno that they obtained the warrants (of which the underlying shares are being offered pursuant to this prospectus) in the ordinary course of business and, at the time they obtained such warrants, had no agreements or understandings, directly or indirectly, with any person to distribute the warrants or the shares underlying the warrants.
- (48)
- 225,565 of such shares are issuable upon exercise of warrants held by Spencer Trask & Co., 55,760 shares are issuable upon exercise of warrants held by Spencer Trask Investors, 5,576 shares are issuable upon exercise of warrants held by Spencer Trask Ventures, Inc., 16,594 shares are issuable upon exercise of warrants held by Kevin Kimberlin Partners and 12,262 shares are issuable upon exercise of warrants held by Mr. Kimberlin.
- (49)
- Spencer Trask & Co. was the placement agent of three private placements in 1998 and 1999 by our predecessor. Kevin Kimberlin is the controlling stockholder of Spencer Trask & Co., which controls Spencer Trask Ventures, Inc. and Spencer Trask Investors. Mr. Kimberlin is the general partner of Kevin Kimberlin Partners.
- (50)
- Such person was an employee of Spencer Trask & Co. when the warrants were issued.
- (51)
- Mr. Keller was a director and chief executive officer of our company from the inception of our predecessor, until January 2002.
- (52)
- EarlyBirdCapital, Inc. provided us with financial consulting services between August 2000 and August 2001.
- (53)
- Such person was an employee of EarlyBirdCapital, Inc. when the warrants were issued.
- (54)
- Mr. Greene is one of our employees.
- (55)
- Includes 250,000 shares of common stock issuable upon exercise of options. 7,576 of such shares vest on May 16, 2005 and the remainder vest in a series of 32 successive equal monthly installments upon Mr. Greene's completion of each additional month's service as our employee.
We are registering the shares on behalf of the selling stockholders, as well as on behalf of their donees, pledgees, transferees or other successors-in-interest, if any, who may sell shares received as gifts, pledges, partnership distributions or other non-sale related transfers. All costs, expenses and fees in connection with the registration of the shares offered hereby will be borne by us. Brokerage commissions and similar selling expenses, if any, attributable to the sale of the shares will be borne by the selling
stockholder'sstockholders.Sales of the shares may be effected by the selling stockholders from time to time in one or more types of transactions
which(which may include blocktransactions by or for the account of the selling stockholder,transactions) on any securities exchange, in the over-the-counter market,orin negotiated transactions, through put or call option transactions relating to the shares, through short sales of shares, short sales versus thewriting of options on the selling stockholder's shares,box, or a combination ofthesesuch methods of sale,or otherwise. Sales may be madeat fixed prices,which may be changed, atmarket prices prevailing at the time of sale, prices related to market prices, varying prices determined at the time of sale or at negotiated prices. Such transactions may or may not involve brokers or dealers. The sellingstockholderstockholders have advised us that they have not entered into any agreements, understandings or arrangements with any underwriters or broker-dealers regarding the sale of their securities, nor is there an underwriter or coordinating broker acting in connection with the proposed sale of the shares by the selling stockholders.The selling stockholders may effect
thesuch transactions by sellingitsthe shares directly to purchasers or to or through broker-dealers,actingwhich may act as agentsfor the selling stockholder,ortoprincipals. Such broker-dealerswho may purchase shares as principals and thereafter sell the selling stockholders's shares from time to time in the over- the-counter market, in negotiated transactions, or otherwise. In effecting sales, brokers and dealers engaged by the selling stockholder may arrange for other broker-dealers to participate in the resales. The selling stockholder may enter into hedging transactions with broker-dealers, and in connection with these transactions, broker-dealers may engage in short sales of the shares. The selling stockholder may also sell shares short and deliver these shares to close out their short positions. Selling stockholder may also enter into option or other transactions with broker-dealers that involve the delivery of these shares to the broker-dealers, who may then resell or otherwise transfer such shares. The selling stockholder may also pledge these shares to a broker-dealer who, upon a default, may sell or otherwise transfer these shares. 62These broker-dealers, if any,may receive compensation in the form of discounts, concessions, or commissions from the sellingstockholderstockholders and/or thepurchaserpurchasers of the shares for whom such broker-dealers may act as agents or to whom theymaysell asprincipalsprincipal, or bothwhich(which compensation as to a particular broker-dealermaymight be in excess of customarycommissions.commissions). In effecting sales, broker-dealers engaged by the selling stockholders may arrange for other broker-dealers to participate.The selling
stockholderstockholders and any broker-dealersif any, actingthat act in connection withthese salesthe sale of the shares might be deemed to be "underwriters" within the meaning ofsectionSection 2(11) of the Securities Act of1933. Any commission they receive1933, and any commissions received by such broker-dealers and any profituponon the resale of thesecuritiesshares sold by them while acting as principals might be deemed to be underwriting discountsandor commissions under the Securities Act. The selling stockholders may agree to indemnify any agent, dealer or broker-dealer that participates in transactions involving sales of the shares against certain liabilities, including liabilities arising under the Securities Act.Because selling stockholders may be deemed to be "underwriters" within the meaning of Section 2(11) of the Securities Act, the selling stockholders will be subject to the prospectus delivery requirements of the Securities Act. We have
advisedinformed the sellingstockholderstockholders thatduring such time as it may be engaged in a distributionthe anti-manipulative provisions ofthe common stock covered by this prospectus it will be required to comply withRegulation M promulgated under the Securities Exchange Act of1934. With certain exceptions, Regulation M precludes any1934 may apply to their sales in the market.The selling
stockholder, any affiliated purchasers, and any broker-dealerstockholders also may resell all orother person who participates in such distribution from bidding for or purchasing, or attempting to induce any person to bid for or purchase any security which is the subjecta portion of thedistribution until the entire distribution is complete. Regulation M also prohibits any bids or purchases madeshares inorder to stabilize the price of a securityopen market transactions inconnection with the distribution of that security. All of the foregoing may affect the marketability of our common stock. Sales of any shares of our common stock by the selling stockholder may depress the market price of our common stock. Any securities covered by this prospectus that qualify for sale pursuant to SECreliance upon Rule 144 under the Securities Act,may be sold under that Rule rather than pursuantprovided they meet the criteria and conform tothis prospectus. There can be no assurance thattheselling stockholder will sellrequirements of such Rule.Sales of any
or all of theshares of common stockcoveredby the selling stockholders may depress the price of the common stock in any market that may develop for the common stock.If we are notified by a selling stockholder that any material arrangement has been entered into with a broker-dealer for the sale of the shares through a block trade, special offering, exchange distribution or secondary distribution or a purchase by a broker or dealer, we will, if required, file a supplement to this
prospectus. 63prospectus or a post-effective amendment to the registration statement of which this prospectus is a part under the Securities Act, disclosing:
- •
- the name of each such selling stockholder and of the participating broker-dealer(s);
- •
- the number of shares involved;
- •
- the price at which such shares were sold;
- •
- the commissions paid or discounts or concessions allowed to such broker-dealer(s), where applicable;
- •
- that such broker-dealer(s) did not conduct any investigation to verify the information set out or incorporated by reference in this prospectus; and
- •
- other facts material to the transaction.
We will not receive any of the proceeds received by the selling stockholders in connection with any of their sales of our common stock. However, we will receive proceeds of up to $7,067,200 if all of the warrants that relate to the common stock being offered by the selling stockholders are exercised. We intend to use such proceeds, if any, for working capital and general corporate purposes.
DESCRIPTION OF OUR SECURITIESGeneralCommon Stock
We are currently authorized to issue
45,000,000up to 195,000,000 shares of our common stock, $0.0001 parvalue $.0001 per share, and 5,000,000 shares of "blank check" preferred stock, par value $.01 per share.value. As ofDecember 3, 1999, 11,266,302June 30, 2005, 46,147,047 shares of our common stock were issued and outstanding, and held of record by257approximately 178 persons.No sharesWe estimate that there are in excess of 5,000 beneficial owners of ourpreferred stock currently are outstanding. Common Stock The holderscommon stock.Holders of shares of our common stock are entitled to
one vote for each share held of recordsuch dividends as may be declared from time to time by the board in its discretion, onall matters to be voted on by stockholders. There is no cumulative voting with respect to the election of directors, with the result that the holders of more than 50% of the shares voted for the election of directors can elect all of the directors. The holders of our common stock are entitled to receive dividends when, as and if declared by our board of directorsa ratable basis, out of funds legally availabletherefor. In the eventtherefrom, and to a pro rata share ofourall assets available for distribution upon liquidation, dissolution or other winding upthe holdersof ourcommon stock are entitled to share ratably in all assets remaining available for distribution to them after payment of liabilities and after provision has been made for each class of stock, if any, having preference over our common stock. Holders of our common stock, as such, have no conversion, redemption, preemptive or other subscription rights.affairs. All of the outstanding shares of our common stock are fully paid andnonassessable. Preferred Stock Our certificate of incorporation authorizes the issuance of 5,000,000 shares of preferred stock with such designation, rights and preferences as may be determined from time to time by our board of directors. Accordingly, our board is empowered, without stockholder approval, to issue preferred stock with dividend, liquidation, conversion, voting or other rights which could adversely affect the voting power or other rightsnon-assessable.Warrants
The material terms of the
holders of our common stock. Our preferred stock could be utilized as a method of discouraging, delaying or preventing a change in control of us subsequentwarrants issued to theeffective time. Although we do not currently intend to issue any shares of preferred stock, there can be no assurance that we will not do so in the future. Dividends We do not presently intend to pay any cash dividendsselling stockholders are asall available cash will be utilized to further the growth of our business for the proximate future thereafter. The payment of any cash dividends will be in the discretion of our board and will be dependent upon our results of operations, financial condition, contractual restrictions and other factors deemed relevant by our board. 64Transfer Agent The transfer agent for the our common stock is American Stock Transfer & Trust Company, 40 Wall Street, New York, New York 10005. IPO Warrants As of December 3, 1999, there were 1,056,949 Class A redeemablefollows:
- •
- warrants
and 1,249,799 Class B redeemable warrants (collectively, the "IPO warrants") outstanding, held of record by 6 and 7 persons. Each Class A redeemable warrant entitles the registered holderto purchaseone sharean aggregate ofour common stock at a price of $5.50 per share, subject to adjustment, for a period of five years commencing on July 12, 1999. Each Class B redeemable warrant entitles the registered holder to purchase one share of our common stock at a price of $7.50 per share, subject to adjustment, for a period of five years commencing on July 12, 1999. We may call the Class A redeemable warrants and the Class B redeemable warrants for redemption, each as a class, in whole and not in part, at our option, at a price of $.05 per IPO warrant at any time upon not less than 30 days' prior written notice, provided that the reported high bid price of our common stock equals or exceeds $8.50 per share with respect to the Class A warrants, and $10.50 per share with respect to the Class B warrants, for the 20 consecutive trading days immediately prior to the notice of redemption to warrantholders. The warrantholders shall have exercise rights until the close of business on the date fixed for redemption. On December 21, 1999, we called the warrants for redemption as the price of our common stock had satisfied the redemption criteria. We fixed January 24, 2000 as the redemption date. The IPO warrants are issued in registered form under a warrant agreement between us and American Stock Transfer & Trust Company, as warrant agent. The exercise price and number of2,750,000 shares of our common stockissuableare exercisable at $0.33 per share and expire onexerciseJanuary 29, 2009;- •
- warrants to purchase an aggregate of
the IPO warrants are subject to adjustment, including in the event of a stock dividend, recapitalization, reorganization, merger or consolidation of us. However, the IPO warrants are not subject to adjustment for issuances of our common stock at a price below their respective exercise prices. We have the right, in our sole discretion, to decrease the exercise price of the IPO warrants for a period of not less than 30 days on not less than 30 days' prior written notice to the warrantholders. In addition, we have the right, in our sole discretion, to extend the expiration date of the IPO warrants on five business days' prior written notice to the warrantholders. The IPO warrants may be exercised upon surrender of the warrant certificate on or prior to the expiration date at the offices of the warrant agent, with the exercise form on the reverse side of the warrant certificate completed and executed as indicated, accompanied by full payment 65of the exercise price to the warrant agent for the number of IPO warrants being exercised. Payment of the exercise price is by certified check, payable to us. The warrantholders do not have the rights or privileges of holders of our common stock. No IPO warrants will be exercisable unless at the time of exercise we have filed with the SEC a current prospectus covering the470,000 shares of our common stockissuable upon exercise of IPOare exercisable at $0.23 per share and expire on January 29, 2009;- •
- warrants
and such shares have been registered or qualified or deemedtobe exempt under the securities laws of the state of residence of the holder of such IPO warrants. We will use our best efforts to have all shares so registered or qualified on or before the exercise date and to maintain a current prospectus relating thereto until the expiration of the IPO warrants, subject to the terms of the warrant agreement. While it is our intention to do so, there is no assurance that we will be able to do so. No fractional shares will be issued upon exercise of the IPO warrants. However, if a warrantholder exercises all IPO warrants then owned of record by him, we will pay to such warrantholder, in lieu of the issuance of any fractional share which otherwise is issuable to such warrantholder, an amount in cash based on the market value of our common stock on the last trading day prior to the exercise date. Upon consummation of our merger with GraphOn-CA, we issued to Spencer Trask 250,000 Class A redeemable common stockpurchasewarrants exercisable foran aggregate ofup to 250,0001,481,500 shares of our common stock are exercisable at $0.27 per share and expire on February 2, 2010;- •
- warrants to purchase an
exercise priceaggregate of$5.50 per share. The terms of the warrants are substantially the same as the terms of the Class A redeemable warrants described above, except that the warrants will not be redeemable until the reported high bid price8,147,700 shares of our common stockequals or exceeds $15.00are exercisable at $0.40 per sharefor the 20 consecutive trading days immediately priorand expire on February 2, 2010;- •
- warrants to
the notice of redemption to the warrantholders. Underwriters' IPO Securities In connection with our initial public offering, we sold to GKN Securities Corp. and Gaines, Berland Inc., the underwriters of our initial public offering, for nominal consideration, the right topurchaseup toan aggregate of125,000 units (the "Underwriters' IPO Securities"). Each unit issuable upon exercise of the Underwriters' IPO Securities consists of one share456,689 shares of our common stockone Class A warrant and one Class B warrant (the Class A warrants and the Class B warrants are collectively referred to in this prospectus as the "Warrants"). The Warrants are identical to the IPO warrants described above except that the Warrants cannot be redeemed. The Underwriters' IPO Securitiesare exercisableinitiallyat$6.60$1.79 perunit (the "Exercise Price") for a periodshare and expire on January 27, 2006; and- •
- warrants to purchase an aggregate of
five years commencing300,000 shares of our common stock are exercisable at $5.25 per share and expire onNovember 12, 1996.August 9, 2005.The
Underwriters' IPO Securities contain anti- dilution provisions providing for adjustmentexercise price of theexercise pricewarrants is subject to adjustment upon the occurrence of certain events, including the issuance ofshares of our common stock or other securities convertible into or exercisable for shares of our common stock at a price per share less 66than the exercise price, or in the event of any recapitalization, reclassification, stock dividend, stock split, stock combination or similar transaction. We also agreed at the time of the issuance of the Underwriters' IPO Securities to use our best efforts to maintain an effective registration statement with respect to the Underwriters' IPO Securities and the underlying units. In addition, the Underwriters' IPO Securities grant to the holders of the securities "piggy back" and "demand" rights for periods of seven and five years from November 12, 1996 with respect to the registration under the Securities Act of the securities directly and indirectly issuable upon exercise of the Underwriters' IPO Securities. As of December 3, 1999, 34,125 of the Underwriters' IPO Securities remained outstanding and unexercised. Directors' Warrants In June 1996, we issued 58,334 and 141,666 Class A and a like number of Class B warrants to Mr. Burstein and the three other then directors of GraphOn in consideration for future services to be rendered by such persons on our behalf. Such warrants are identical to our Class A and Class B redeemable warrants offered and sold in our initial public offering but are not redeemable by us. Spencer Trask Warrants and Similar Warrants We issued 575,763 warrants to Spencer Trask to purchase up to an aggregate of 575,763 shares of our common stock in January 1999. Spencer Trask subsequently transferred its interests in 324,667 of such warrants to nonaffiliated parties. The exercise price of such warrants is $1.79 per share. The Spencer Trask warrants are exercisable until January 27, 2006. The exercise price and number of shares of our common stock issuable on exercise of the warrants are subject to adjustment in particular circumstances, including in the event of a stock dividend, recapitalization, subdivision or consolidation of us, or issuance of our common stock, or options, rights or warrants to subscribe for shares of our common stock, or securities convertible into or exchangeable for shares ofour common stock at a price belowtheir respective exercise prices. The Spencer Trask warrants may be exercised upon surrender of the certificate evidencing the respective warrant on or prior to the expiration date at the offices of us, with the annexed exercise form completed and executed as indicated, accompanied by full payment ofthe exercise price of the warrants or a split-up or combination of our common stock and a reorganization or merger to which we are a party.Limitation of Liability
As permitted by the General Corporation Law of the State of Delaware, our restated certificate of incorporation provides that our directors shall not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director, except for liability:
- •
- for any breach of the director's duty of loyalty to us or our stockholders;
- •
- for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law;
- •
- under section 174 of the Delaware law, relating to unlawful payment of dividends or unlawful stock purchases or redemption of stock; and
- •
- for any transaction from which the director derives an improper personal benefit.
As a result of this provision, we and our stockholders may be unable to obtain monetary damages from a director for breach of his or her duty of care.
Our restated certificate of incorporation provides for the
numberindemnification ofwarrant shares being exercised. The exerciseour directors and officers, and, to the extent authorized by our board in its sole and absolute discretion, employees and agents, to the full extent authorized by, and subject to the conditions set forth in the Delaware law.Delaware Anti-Takeover Law
We are subject to the provisions of section 203 of the Delaware law. Section 203 prohibits publicly held Delaware corporations from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless the business combination is approved in a prescribed manner. A "business combination" includes mergers, asset sales and other transactions resulting in a financial benefit to the interested stockholder. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. These provisions could have the effect of delaying, deferring or preventing a change of control of us or reducing the price
maythat certain investors might bepaid by certified or official bank check,willing to pay in the future for shares of our commonstock or by the "net issuance" method.stock.Transfer Agent
The
holders of Spencer Trask warrants do not have the rights or privileges of holders of our common stock. No fractional shares will be issued upon exercise of such warrants. However, we will pay to such warrantholder, in lieu of the issuance of any fractional share which otherwise 67is issuable to such warrantholder, an amount in cash based on the fair market value oftransfer agent for our common stockas determined in good faith by our board. Spencer Trask Investors, an affiliate of Spencer Trask, and Mr. Keller hold warrants exercisable for up to 55,760 and 27,880 shares of our common stock, the terms of which are substantially the same as those of the Spencer Trask warrants. Corel Warrant and Similar Warrant Corel and one additional stockholder holding less than 1% of the outstanding shares of our common stock hold an aggregate of two warrants to purchase up to 216,711 and 676 shares of our common stock. The exercise price of such warrantsis$1.79 per share, and they are exercisable until December 18, 2003. The exercise price and number of shares of our common stock issuable on exercise of such warrants are subject to adjustment in particular circumstances, including in the event of a stock dividend, subdivision or combination of our capital stock, reclassification, capital reorganization or change in our capital stock, or consolidation, merger or sale of all or substantially all of our assets. Such warrants may be exercised upon surrender of the certificates evidencing them, with the annexed exercise form completed and executed as indicated, accompanied by full payment of the exercise price to us for the number of warrant shares being exercised. The exercise price may be paid by cash or check or by the "net issuance" method. Holders of the warrants, as such, are not entitled to the rights or privileges of holders of our common stock. No fractional shares will be issued upon exercise of such warrants. However, we will pay to such warrantholders, in lieu of the issuance of any fractional share which otherwise is issuable to such warrantholders, an amount in cash based on the fair market value of our common stock as determined in good faith by the our board. Shares Eligible for Future Sale We cannot predict the effect, if any, that future sales of shares, or the availability of shares for future sale, will have on the market price of our common stock. Sales of substantial amounts of common stock, or the perception that such sales could occur, may adversely affect prevailing market prices for our common stock. As of the date of this prospectus, there are 11,266,302 shares of our common stock outstanding and 5,004,125 shares issuable upon exercise of outstanding options and warrants. Restrictions under the securities laws and lock-up agreements prevent the immediate sale in the public market of 9,435,383 of such shares of common stock. However, 7,268,269 of these restricted shares will become available for sale on January 12, 2000. 68Legal MattersAmerican Stock Transfer & Trust Company.The validity of the shares of our common stock covered by this prospectus has been passed upon by
Cooperman Levitt Winikoff LesterSonnenschein Nath &Newman, P.C.,Rosenthal LLP, New York, New York.Certain members of this firm own shares of our common stock. Experts OurThe consolidated financial statements
asand schedule ofDecember 31, 1998, 1997GraphOn Corporation included in this prospectus and in the registration statement have been audited by Macias Gini & Company LLP, Independent Registered Public Accounting Firm, to the extent and for theyears ended December 31, 1998, 1997period set forth in their report appearing elsewhere in this prospectus and1996in the registration statement, andrelated schedulesis included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.The consolidated financial statements and schedule included in this prospectus and in the registration statement have been audited by BDO Seidman, LLP,
independent certified public accountants,Independent Registered Public Accounting Firm, to the extent and for the periods set forth in their reports (which contain an explanatory paragraph regarding the Company's ability to continue as a going concern) appearing elsewhere herein and inthis prospectus,the registration statement, and are included in reliance upon such reports givenuponon the authority ofsaidsuch firm as experts inauditingaccounting andaccounting. Available Informationauditing.The financial statements of Network Engineering Software, Inc. included in this prospectus and in the registration statement have been audited by Macias Gini & Company LLP, Independent Registered Public Accounting Firm, to the extent and for the periods set forth in their report (which contains an explanatory paragraph regarding the company's ability to continue as a going concern) appearing elsewhere in this prospectus and in the registration statement, and is included in reliance upon such report given on the authority of such firm as experts in accounting and auditing.
WHERE CAN YOU FIND MORE INFORMATIONWe have filed with the SEC a registration statement
on Form S-1, including all amendments, exhibits, schedules and supplements thereto,under the Securities Actand the rules and regulations thereunder for the regulations thereunder,for the registration of theourcommon stock offeredhereby.by this prospectus. Although this prospectus, which forms a part of the registration statement, contains all material information included in the registration statement, parts of the registration statement have been omitted as permitted by the rules and regulations of the SEC. For further informationabout uswith respect to our company and the common stock offeredin this prospectus,hereby, you should refer to the registration statement.We are subject to the informational reporting requirements of the Securities Exchange Act of 1934 and, under that Act, we file reports, proxy statements and other information with the SEC. The registration statement, the related exhibits and
its exhibits. You may readthe reports, proxy statements andcopy any documentother information we file with theSecuritiesSEC can be inspected andExchange Commissioncopied at prescribed rates at thepublic reference facilities maintainedSEC's Public Reference Room at 100 F Street, N.E., Washington, D.C. 20549. You may obtain information regarding the Washington, D.C. Public Reference Room by calling the SEC atRoom 1024, 450 Fifth Street, N.W., Washington, D.C. 20549,1-800-SEC-0330. In addition, the registration statement, the related exhibits andattheSEC's regional offices at 3475 Lenox Road, N.E., Suite 1000, Atlanta, Georgia 30326- 1232. Copies of such material may be obtained from the Public Reference Section of the SEC at 450 Fifth Street, NW, Washington, D.C. 20549, at prescribed rates. You can also review such material by accessing the SEC's Internet web site at http://www.sec.gov. This site containsreports, proxyand informationstatements and other informationregarding issuers thatwe fileelectronicallywith theSEC. 69SEC is publicly available through the SEC's site on the Internet, located at: http://www.sec.gov.
Page GraphOn Corporation Report of Independent Registered Public Accounting Firm (Macias Gini & Company LLP) F-1 Report of Independent Registered Public Accounting Firm (BDO Seidman, LLP) F-2 Consolidated Balance Sheets as of December 31, 2004 and 2003 and March 31, 2005 (Unaudited) F-3 Consolidated Statements of Operations and Comprehensive Loss for the Years Ended December 31, 2004, 2003, and 2002 and the Three Months Ended March 31, 2005 and 2004 (Unaudited) F-4 Consolidated Statements of Shareholders' Equity for the Years Ended December 31, 2004, 2003 and 2002 and the Three Months Ended March 31, 2005 (Unaudited) F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2004, 2003 and 2002 and the Three Months Ended March 31, 2005 and 2004 (Unaudited) F-6 Summary of Significant Accounting Policies F-7 Notes to Consolidated Financial Statements F-12
Network Engineering Software, Inc.Independent Auditors Report (Macias Gini & Company LLP) F-28 Balance Sheets as of October 31, 2004 and 2003 F-29 Statements of Operations for the Years Ended October 31, 2004 and 2003 F-30 Statements of Stockholders' Deficit for the Years Ended October 31, 2004 and 2003 F-31 Statements of Cash Flows for the Years Ended October 31, 2004 and 2003 F-32 Notes to Financial Statements F-33
Pro Forma Financial InformationUnaudited Condensed Pro Forma Balance Sheet as of December 31, 2004 F-38 Unaudited Condensed Pro Forma Statement of Operations F-39 Notes to Unaudited Condensed Pro Forma Financial Statements F-40
Report of IndependentAuditors' Report................................. F-2 Balance Sheets as of December 31, 1998 and 1997.............. F-3 Statements of Operations and Comprehensive Income as of December 31, 1998 and 1997............................. F-4 Statements of Stockholders' Equity forRegistered Public Accounting FirmTo the
years ended December 31, 1998, 1997 and 1996............................. F-5 Statements of Cash Flows as of December 31, 1998 and 1997.... F-6 Summary of Accounting Policies............................... F-7 Notes to Financial Statements................................ F-10 Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998............................................ F-20 Statements of Operations and Comprehensive Income as of September 30, 1999 and September 30, 1998 (unaudited).. F-21 Statements of Stockholders' Equity for the nine months ended September 30, 1999 (unaudited)......................... F-22 Statements of Cash Flows as of September 30, 1999 and September 30, 1998 (unaudited)............................... F-23 Notes to Financial Statements (unaudited).................... F-24 F-1Independent Auditors' Report Stockholders andBoard of Directors and Shareholders of GraphOn CorporationCampbell, CaliforniaWe have audited the accompanying consolidated balance
sheetssheet of GraphOn Corporation and subsidiary (the "Company") as of December 31,1998 and 19972004 and the related statements of operations and comprehensiveincome, stockholders'loss, shareholders' equity and cash flows for the year then ended. We have also audited the financial statement schedule listed in the accompanying index. These financial statements and schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedule based on our audit.We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements and schedule are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements and schedule, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement and schedule presentation. We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the 2004 consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of GraphOn Corporation and subsidiary as of December 31, 2004, and the consolidated results of its operations and its cash flows for the year then ended in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, the related financial statement schedule presents fairly in all material respects the information set forth therein.
/s/ Macias Gini & Company LLP
Macias Gini & Company LLP
Sacramento, California
March 29, 2005
(August 1, 2005 as to the third paragraph of Note 15)
Report of Independent Registered Public Accounting FirmTo the Board of Directors and Shareholders of GraphOn Corporation
We have audited the accompanying consolidated balance sheet of GraphOn Corporation and Subsidiary (the Company) as of December 31, 2003 and the related consolidated statements of operations and comprehensive loss, shareholders' equity, and cash flows for each of the
threetwo years in the period ended December 31,1998.2003. 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. Thesethe standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and performour auditsthe audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financialstatements. An audit also includesstatements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overallpresentation of thefinancialstatements.statement presentation. We believe that our audits provide a reasonable basis for our opinion.In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of GraphOn Corporation and Subsidiary as of December 31,
1998 and 1997,2003, and the results ofitstheir operations anditstheir cash flows for each of thethreetwo years in the period ended December 31,19982003 in conformity with accounting principles generally acceptedaccounting principles. /s/in the United States of America.The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. As discussed in Note 1 to the financial statements, the Company has suffered recurring losses and has absorbed significant cash in its operating activities. Further, the Company has limited alternative sources of financing available to fund any additional cash required for its operations or otherwise. These matters raise substantial doubt about the ability of the Company to continue as a going concern. Management's plan in regard to these matters is also described in Note 1. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
San Jose, California
February25, 1999, except with respect to matters discussed in Note 6 as to which the date is May 30, 1999. F-223, 2004
GraphOn Corporation
Consolidated Balance Sheets
December 31, ---------------------------- 1998 1997 ----------- ----------Assets Current Assets: Cash and cash equivalents (Note 8).......................................... $ 1,798,400 $ 302,800 Accounts receivable, net of allowance for doubtful accounts of $25,000, $25,000 and $0, respectively (Notes 8 and 9)...................... 564,700 308,100 Available-for-sale securities (Notes 1 and 8)............................... -- 8,600 Prepaid expenses and other assets........................................... 32,100 18,300 ------------ ---------- Total Current Assets......................................................... 2,395,200 637,800 ------------ ---------- Property and Equipment, net (Notes 2 and 3).................................. 423,300 50,300 Purchased Technology, net (Note 3)........................................... 3,645,400 -- Capitalized Software, net.................................................... 74,200 43,200 Deferred Compensation Expense (Note 6)....................................... 566,000 -- Other Assets................................................................. 6,400 2,000 ------------ ---------- $ 7,110,500 $ 733,300 ============ ========== Liabilities And Stockholders' Equity Current Liabilities: Convertible note payable (Notes 5, 6 and 13)................................ $ 475,000 $ -- Accounts payable............................................................ 115,700 28,400 Accrued expenses (Note 4)................................................... 498,900 142,900 Deferred revenue............................................................ 112,600 443,800 ------------ ---------- Total Current Liabilities..................................................... 1,202,200 615,100 Commitments, Contingencies and Subsequent Events (Notes 5, 6, 10, 11, and 13)..................................................................... Stockholders' Equity (Notes 5, 6, and 13)..................................... Preferred stock, no par value, 5,000,000 shares authorized, no shares issued and outstanding............................................. -- -- Common stock, no par value, 50,000,000 shares authorized, 16,363,959, 14,294,003 and 6,000,000 shares issued and outstanding............................................................... 8,431,500 505,000 Accumulated other comprehensive income (Notes 1 and 8)...................... -- (12,100) Accumulated deficit......................................................... (2,523,200) (374,700) ------------ ---------- Stockholders' Equity.......................................................... 5,908,300 118,200 ------------ ---------- $ 7,110,500 $ 733,300 ============ ==========
December 31,
2004December 31,
2003March 31,
2005(Unaudited) CURRENT ASSETS Cash and cash equivalents $ 675,300 $ 1,025,500 $ 3,171,300 Accounts receivable, net of allowance for doubtful accounts of $46,800, $46,800 and $46,800 518,900 521,100 975,900 Prepaid expenses and other current assets 24,100 23,100 10,800 TOTAL CURRENT ASSETS 1,218,300 1,569,700 4,158,000
Property and equipment, net
75,400
144,800
73,700
Purchased technology, net — 335,000 — Capitalized software, net 273,700 500,600 225,200 Patents, net — — 5,231,800 Note receivable—related party 350,000 — — Deferred acquisition costs 269,700 — — Other assets 37,300 11,900 4,800 TOTAL ASSETS $ 2,224,400 $ 2,562,000 $ 9,693,500 LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES Accounts payable $ 250,200 $ 52,300 $ 198,100 Accrued liabilities 231,400 164,600 285,200 Accrued wages 260,100 306,200 339,100 Deferred revenue 689,800 763,000 1,018,300 TOTAL CURRENT LIABILITIES 1,431,500 1,286,100 1,840,700 LONG TERM LIABILITIES Deferred revenue 426,600 429,000 492,700 TOTAL LIABILITIES 1,858,100 1,715,100 2,333,400
Commitments and contingencies (Note 14)
SHAREHOLDERS' EQUITY
Preferred stock, $0.01 par value, 5,000,000 shares authorized, no shares issued and outstanding — — — Common stock, $0.0001 par value, 45,000,000, 45,000,000 and 195,000,000 shares authorized, 21,716,765, 16,618,459 and 46,147,047 shares issued and outstanding 2,200 1,700 4,600 Additional paid-in capital 46,930,700 45,985,300 54,545,800 Notes receivable—directors (50,300 ) (50,300 ) — Note receivable—related party — — (347,400 ) Deferred compensation — — (8,400 ) Accumulated other comprehensive loss (400 ) (1,400 ) — Accumulated deficit (46,515,900 ) (45,088,400 ) (46,834,500 ) TOTAL SHAREHOLDERS' EQUITY 366,300 846,900 7,360,100 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 2,224,400 $ 2,562,000 $ 9,693,500 See accompanying summary of significant accounting policies and notes to consolidated financial
statements. F-3statements
GraphOn Corporation
Consolidated Statements of Operations and ComprehensiveIncome For the Years Ended December 31, 1998, 1997 and 1996Loss
Years ended December 31, --------------------------------------- 1998 1997 1996 ----------- ----------- -----------Revenues (Notes 8 and 9): Product sales........................................... $ 608,700 $ 480,000 $ 505,000 Maintenance............................................. 320,300 8,200 75,000 OEM licenses............................................ 1,184,800 1,437,900 14,800 Training................................................ 10,400 -- -- ----------- ----------- ----------- Total Revenues........................................... 2,124,200 1,926,100 594,800 Cost of Revenues (Note 10): Product sales........................................... 28,500 43,500 261,300 Maintenance............................................. 22,200 16,600 12,800 OEM licenses............................................ 293,500 403,200 61,500 ----------- ----------- ----------- Total Cost of Revenues................................... 344,200 463,300 335,600 Gross Profit............................................. 1,780,000 1,462,800 259,200 ----------- ----------- ----------- Operating Expenses: Selling and marketing................................... 1,440,300 827,300 192,700 General and administrative (Notes 6 and 10)............. 1,118,600 324,700 218,900 Research and development................................ 840,200 190,500 41,700 ----------- ----------- ----------- Total Operating Expenses................................. 3,399,100 1,342,500 453,300 ----------- ----------- ----------- (Loss) Income From Operations............................ (1,619,100) 120,300 (194,100) Other Income (Expense): Interest and other income............................... 9,800 7,200 6,400 Interest expense (Note 6)............................... (521,900) (2,100) -- Loss on sale of available-for-sale securities (Note 1)............................................... (16,500) -- -- ----------- ----------- ----------- (Loss) Income Before Provision for Income Taxes ................................................ (2,147,000) 125,400 (187,700) Provision for Income Taxes (Note 7) ..................... 800 900 800 ----------- ----------- ----------- Net (Loss) Income........................................ (2,148,500) 124,500 (188,500) ----------- ----------- ----------- Other Comprehensive Income (Loss), net of tax Unrealized holding gain (loss) on investment (Note 1) .............................................. 12,100 (8,100) 7,500 ----------- ----------- ----------- Comprehensive (Loss) Income.............................. $(2,136,400) $ 116,400 $ (181,000) =========== =========== =========== Basic and Diluted (Loss) Earnings per Common Share............................................ $ (0.32) $ 0.02 $ (0.03) =========== =========== =========== Weighted Average Common Shares Outstanding............... 6,762,667 6,000,000 6,000,000 =========== =========== ===========
Year Ended December 31, Three Months Ended March 31, 2004 2003 2002 2005 2004 (Unaudited) (Unaudited) Revenue: Product licenses $ 2,395,200 $ 3,172,100 $ 2,942,000 $ 887,700 $ 646,200 Service fees 1,015,000 830,900 442,200 286,700 252,100 Other 119,600 167,300 150,800 6,000 4,600 Total Revenue 3,529,800 4,170,300 3,535,000 1,180,400 902,900
Cost of Revenue:
Product costs 572,100 1,017,300 1,470,200 50,400 226,300 Service costs 331,700 354,300 209,700 70,700 83,900 Total Cost of Revenue 903,800 1,371,600 1,679,900 121,100 310,200 Gross Profit 2,626,000 2,798,700 1,855,100 1,059,300 592,700
Operating Expenses
Selling and marketing 1,383,700 1,679,800 2,235,100 334,800 358,100 General and administrative 1,183,600 1,419,100 2,801,000 727,100 249,700 Research and development 1,500,900 1,515,000 2,831,300 323,700 419,600 Asset impairment loss — — 914,000 — — Restructuring charges — 80,100 1,942,800 — — Total Operating Expenses 4,068,200 4,694,000 10,724,200 1,385,600 1,027,400 Loss From Operations (1,442,200 ) (1,895,300 ) (8,869,100 ) (326,300 ) (434,700 )
Other Income (Expense)
Interest and other income 14,700 13,000 152,500 8,800 3,600 Interest and other expense — (4,300 ) (75,900 ) (1,100 ) — Total Other Income (Expense) 14,700 8,700 76,600 7,700 3,600
Net Loss
(1,427,500
)
(1,886,600
)
(8,792,500
)
(318,600
)
(431,100
)
Other Comprehensive Income (Loss), net of tax
Unrealized holding loss on investment — — (7.200 ) — — Foreign currency translation adjustment 1,000 1,000 3,600 — 600 Comprehensive Loss $ (1,426,500 ) $ (1,885,600 ) $ (8,796,400 ) $ (318,600 ) $ (430,500 )
Basic and Diluted Loss per Common Share
$
(0.07
)
$
(0.11
)
$
(0.50
)
$
(0.01
)
$
(0.02
)
Weighted Average Common Shares Outstanding
21,307,966
16,607,328
17,465,099
28,620,913
20,036,876
See accompanying summary of significant accounting policies and notes to consolidated financial statements
F-4GraphOn Corporation
GRAPHON CORPORATION
Consolidated Statements ofStockholders'Shareholders' EquityFor the Years Ended December 31, 1998, 1997 and 1996 (Notes 1,2,3,6 and 13)
Common Stock Accumulated ------------------------ Comprehensive Accumulated Shares Amount Income Deficit Total ---------- ---------- ------------- ----------- -----------Balances, December 31, 1995................... 6,000,000 $ 505,000 $ (11,500) $ (310,700) $ 182,800 Change in market value of available-for- sale securities............................. -- -- 7,500 -- 7,500 Net loss...................................... -- -- -- (188,500) (188,500) ---------- ---------- ------------ ----------- ----------- Balances, December 31, 1996................... 6,000,000 505,000 (4,000) (499,200) 1,800 Change in market value of available-for- sale securities............................ -- -- (8,100) -- (8,100) Net income.................................... -- -- -- 124,500 124,500 ---------- ---------- ------------ ----------- ----------- Balances, December 31, 1997................... 6,000,000 505,000 (12,100) (374,700) 118,200 Change in market value of available-for- sale securities............................ -- -- 12,100 -- 12,100 Compensation expense related to issuance of common stock and granted options.................................... -- 667,600 -- -- 667,600 Interest expense related to issuance of common stock............................... -- 475,000 -- -- 475,000 Proceeds from employee stock purchase......... 508,500 38,100 -- -- 38,100 Proceeds from sale of common stock, net of offering costs of $564,700.......... 3,699,000 2,659,300 -- -- 2,659,300 Issuance of common stock and warrants for property and equipment and purchased technology....................... 3,886,503 3,886,500 -- -- 3,886,500 Exchange of convertible notes payable......... 200,000 200,000 -- -- 200,000 Net loss...................................... -- -- -- (2,148,500) (2,148,500) ---------- ---------- ------------ ----------- ----------- Balances, December 31, 1998................... 14,294,003 $8,431,500 $ -- $(2,523,200) $ 5,908,300 ========== ========== ============ =========== ===========
Common Stock Accumulated
Other
Comprehensive
Income (Loss)Additional
Paid-In
CapitalDeferred
CompensationNotes
ReceivableAccumulated
DefecitShares Amount Totals Balances, December 31, 2001 17,288,322 $ 1,700 $ 45,925,900 $ (193,800 ) $ — $ 1,500 $ (34,409,300 ) $ 11,326,000 Issuance of common stock due to exercise of options 200,000 200 50,000 — (50,000 ) — — 200 Employee stock purchases 25,720 — 6,400 — — — — 6,400 Noncash redemption of common Stock (933,333 ) (200 ) 200 — — — — — Amortization of deferred Compensation — — — 193,800 — — — 193,800 Accrued interest receivable — — — — (300 ) — — (300 ) Change in market value of available-for-sale securities — — — — — (7,500 ) — (7,500 ) Foreign currency translation — — — — — 3.600 — 3,600 Net Loss — — — — — — (8,792,500 ) (8,792,500 ) Balances, December 31, 2002 16,580,719 1,700 45,982,500 — (50,300 ) (2,400 ) (43,201,800 ) 2,729,700 Employee stock purchases 37,740 — 2,800 — — — — 2,800 Foreign currency translation — — — — — 1,000 — 1,000 Net Loss — — — — — — (1,886,600 ) (1,886,600 ) Balances, December 31,2003 16,618,459 1,700 45,985,300 — (50,300 ) (1,400 ) (45,088,400 ) 846,900 Proceeds from private placement of common stock 5,000,000 500 1,149,500 — — — — 1,150,000 Costs of private placement of common stock — — (218,600 ) — — — — (218,600 ) Employee stock purchase 37,638 — 9,000 — — — — 9,000 Accrued interest receivable — — (1,400 ) — — — — (1,400 ) Issuance of common stock due to exercise of warrants 30,000 — 6,900 — — — — 6,900 Restricted stock repurchase—certificate not surrendered 30,668 — — — — — — — Foreign currency translation — — — — — 1,000 — 1,000 Net Loss — — — — — — (1,427,500 ) (1,427,500 ) Balances, December 31, 2004 21,716,765 2,200 46,930,700 — (50,300 ) (400 ) (46,515,900 ) 366,300 Proceeds from private placement of common stock(1) 14,814,800 1,500 3,998,500 — — — — 4,000,000 Costs of private placement of common stock(1) — — (314,800 ) — — — — (314,800 ) Proceeds from interest paid on notes receivable(1) — — 4,000 — — — — 4,000 Proceeds from repayment of notes receivable(1) — — — — 50,300 — — 50,300 Reclassification of note receivable(1) — — — — (350,000 ) — — (350,000 ) Proceeds from repayment of note receivable(1) — — — 2,600 — — 2,600 Accrued interest on note receivable(1) — — (2,000 ) — — — — (2,000 ) Issuance of stock to acquire patents—NES(1) 9,599,993 900 3,915,900 — — — — 3,916,000 Proceeds from employee stock purchase(1) 15,489 — 4,600 — — — — 4,600 Issuance of options to consultant(1) — — 8,900 (8,900 ) — — — — Amortization of deferred compensation(1) — — — 500 — — — 500 Closure of foreign subsidiary(1) — — — — — 400 — 400 Net loss(1) — — — — — — (318,600 ) (318,600 ) Balances, March 31, 2005(1) 46,147,047 $ 4,600 $ 54,545,800 $ (8,400 ) $ (347,400 ) $ — $ (46,834,500 ) $ 7,360,100
- (1)
- Unaudited
See accompanying summary of significant accounting policies and notes to consolidated financial
statements. F-5Graphonstatements
GraphOn Corporation
Consolidated StatementsOfof Cash FlowsFor The Years Ended December 31, 1998, 1997 and 1996 (Note 12)
Years Ended December 31, ------------------------------------- 1998 1997 1996 ---------- ---------- -----------Increase (Decrease) In Cash and Cash Equivalents Cash Flows From Operating Activities: Net (loss) income........................................... $(2,148,500) $ 124,500 $(188,500) Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization............................... 65,200 31,000 1,100 Allowance for doubtful accounts............................. 25,000 -- -- Loss (gain) on sale of available-for-sale securities................................................. 16,500 -- (4,400) Compensation expense (Note 6)............................... 101,600 -- -- Interest expense (Note 6)................................... 475,000 -- -- Changes in operating assets and liabilities: Accounts receivable........................................ (281,600) 232,000 (461,700) Related party receivable................................... -- 34,400 (8,500) Prepaid expenses and other assets.......................... (13,900) (400) 28,900 Accounts payable........................................... 87,300 12,900 (1,800) Accrued expenses........................................... 356,000 137,000 (19,500) Deferred revenue........................................... (331,200) (358,300) 802,100 ----------- --------- --------- Net Cash (Used In) Provided By Operating Activities.......... (1,648,600) 213,100 147,700 ----------- --------- --------- Cash Flows From Investing Activities: Proceeds from sale of available-for-sale securities................................................. 4,300 -- 40,500 Purchase of available-for-sale securities................... -- -- (20,700) Capitalization of software development costs................ (53,100) (24,000) (35,900) Capital expenditures........................................ (179,400) (39,300) (28,500) Other assets................................................ -- -- -- ----------- --------- --------- Net Cash Used In Investing Activities........................ (228,200) (63,300) (44,600) ----------- --------- --------- Cash Flows From Financing Activities: Proceeds from convertible notes payable..................... 775,000 -- -- Repayment of convertible notes payable...................... (100,000) -- -- Net proceeds from issuance of common stock.................. 2,697,400 -- -- Purchase and retirement of stock............................ -- -- -- ----------- --------- --------- Net Cash Provided By Financing Activities.................... 3,372,400 -- -- ----------- --------- --------- Net Increase in Cash and Cash Equivalents.................... 1,495,600 149,800 103,100 Cash and Cash Equivalents, beginning of the period........... 302,800 153,000 49,900 ----------- --------- --------- Cash and Cash Equivalents, end of the period................. $ 1,798,400 $ 302,800 $ 153,000 =========== ========= =========
Year Ended December 31, Three Months Ended March 31, 2004 2003 2002 2005 2004 (Unaudited) (Unaudited) Cash Flows From Operating Activities: Net loss $ (1,427,500 ) $ (1,886,600 ) $ (8,792,500 ) $ (318,600 ) $ (431,100 ) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 664,700 1,248,400 1,892,000 206,800 258,800 Non-cash restructuring charges — 42,200 657,800 — — Asset impairment loss — — 914,000 — — Loss on disposal of fixed assets — 4,300 400 — — Amortization of deferred compensation — — 193,800 500 — Charges to provision for doubtful accounts — 16,300 31,600 — — Reductions to provision for doubtful accounts — (19,800 ) (331,300 ) — — Interest accrued on notes receivable—directors (1,400 ) — — (300 ) (700 ) Interest accrued on note receivable—shareholder — — — (2,000 ) — Proceeds from interest accrued on notes receivable—directors — — — 4,300 — Proceeds from notes receivable—directors — — — 50,300 — Proceeds from note receivable—shareholder — — — 2,600 — Changes in operating assets and liabilities: Accounts receivable 2,200 (179,700 ) 582,200 (457,000 ) 152,300 Prepaid expenses and other assets (1,000 ) 168,900 59,300 13,300 (4,600 ) Accounts payable 18,400 (176,400 ) (91,200 ) 55,800 72,100 Accrued expenses 3,300 (366,700 ) 188,100 (5,700 ) 38,200 Accrued wages (46,100 ) 42,400 (128,500 ) 79,000 (178,900 ) Deferred revenue (75,600 ) 395,900 218,300 394,600 (180,500 ) Net cash used in operating activities: (863,000 ) (710,800 ) (4,606,000 ) 23,600 (274,400
Cash Flows From Investing Activities:
Capitalization of software development costs — (282,200 ) (298,500 ) — — Cash paid for NES acquisition — — — (612,200 ) — Capital expenditures (33,400 ) (1,600 ) (82,900 ) (10,300 ) (6,600 ) Other assets 7,100 58,100 1,600 — — Note receivable—related party (350,000 ) — — — — Deferred acquisition costs (59,200 ) — — — — Purchase of available-for-sale securities — — (768,300 ) — — Proceeds from sale of available-for-sale securities — — 3,776,300 — — Net cash provided by (used in) investing activities: (435,500 ) (225,700 ) 2,628,200 (622,500 ) (6,600 )
Cash Flows From Financing Activities:
Employee stock purchases 9,000 2,800 6,400 4,600 3,600 Proceeds from exercise of warrants 6,900 — — — — Proceeds from private placement of common stock 1,150,000 — — 3,335,000 1,150,000 Costs of private placement of common stock (218,600 ) — — (244,600 ) (179,100 ) Repayment of note payable — — (26,600 ) — — Net cash provided by (used in) financing activities: 947,300 2,800 (20,200 ) 3,095,000 974,500
Effect of exchange rate fluctuations on cash and cash equivalents
1,000
1,000
3,600
(100
)
600
Net Decrease in Cash and Cash Equivalents Cash and Cash Equivalents: (350,200 ) (932,700 ) (1,994,400 ) 2,496,000 694,100 Beginning of year 1,025,500 1,958,200 3,952,600 675,300 1,025,500 End of year $ 675,300 $ 1,025,500 $ 1,958,200 $ 3,171,300 $ 1,719,600 See accompanying summary of significant accounting policies and notes to consolidated financial
statements. F-6statements GraphOn Corporation
Summary of Significant Accounting PoliciesOrganization(Information as of March 31, 2005 andBusinessfor the three months ended March 31, 2005 and 2004 is unaudited)The Company. GraphOn Corporation (the Company) was founded in May 1996 and is incorporated in the state of
CaliforniaDelaware. The Company's headquarters are currently inMay 1982 and has headquarters in Campbell,Santa Cruz, California. The Company develops, markets, sells and supports business connectivity software, including Unix, Linux and Windows server-based software,that empowers a diverse rangewith an immediate focus on web-enabling applications for use by Independent Software Vendors (ISVs), Application Service Providers (ASPs), corporate enterprises, governmental and educational institutions, and others, primarily in the United States, Asia and Europe.Basis of
desktop computing devices (desktops) to access server-based WindowsPresentation andUNIX applications from any location, over network or Internet connections.Use ofEstimatesEstimates. The consolidated financial statements include the accounts of the Company and its subsidiaries (collectively, the "Company"), significant intercompany accounts and transactions are eliminated upon consolidation. In the Company's opinion, the consolidated financial statements presented herein include all necessary adjustments, consisting of only normal recurring adjustments, except for the restructuring and asset impairment charges, as discussed below, to fairly state the Company's financial position, results of operations and cash flows for the periods indicated. The preparation of financial statements in conformity with accounting principles generally acceptedaccounting principlesin the United States 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. These estimates include the allowance for doubtful accounts, the estimated lives of intangible assets, depreciation of fixed assets and accrued liabilities, among others. Actual results could differ materially from those estimates.The Company's consolidated financial statements as of March 31, 2005 and for the three months ended March 31, 2004 and 2005 are unaudited and in the opinion of management, contain all adjustments that are of a normal and recurring nature necessary to present fairly the financial position at such date and results of operations and cash flows for the periods then ended.
Cash and Cash
EquivalentsEquivalents. 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 StatementsSecurities. Under Statement of Financial Accounting Standards (SFAS) No. 115,Accounting"Accounting for Certain Investments in Debt and EquitySecurities. Under SFAS No. 115,Securities," securities are classified and accounted for as follows:-
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- 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.
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- 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.other comprehensive income.Property and
EquipmentEquipment. 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 respectiveasset,assets, generally seven years.Purchased
TechnologyTechnology. Purchased technology isto beamortized on a straight-line basis over the expected life of the related technology or five years, whichever is less.Shipping and Handling. Shipping and handling costs are included in cost of revenue for all periods presented.
Capitalized Software
Costs Costs incurred internallyCosts. Under the criteria set forth increating computer software productsSFAS No. 86, "Accounting for the Cost of Computer Software to besold, leased,Sold, Leased orotherwise marketed are charged to expense whenOtherwise Marketed," development costs incurredasin the research and development of new software products are expensed as incurred until technological feasibility, in the form of a working model, has been established,for the product. Thereafter,at which time such costs are capitalized until the product is available for general release tocustomers andcustomers. Capitalized costs are amortized to cost of sales based on either estimated current and futureF-7revenue 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. AsPatents. The estimated cost of
December 31, 1998the patents acquired in the January 2005 acquisition (See Note 5) is being amortized over a 6-year period using the straight-line method. The estimated cost of the patents may change as a result of the completion of a valuation study and1997, capitalizedas all direct acquisition costsaggregated $113,000are finalized. The final adjustments to the estimated costs of the patents are not expected to be material.Revenue. Software license revenues are recognized when a non-cancelable license agreement has been signed and
$59,800, with accumulated amortizationthe customer acknowledges an unconditional obligation to pay, the software product has been delivered, there are no uncertainties surrounding product acceptance, the fees are fixed or determinable and collection is considered probable. Delivery is considered to have occurred when title and risk of$38,800 and $16,600. Forloss have been transferred to thethree months ended March 31, 1999, no additional costs had been capitalized and accumulated amortization aggregated $48,200. Revenue Recognition and Deferred Revenue In October 1997, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) 97-2, Software Revenue Recognition,customer, which generallyrequiresoccurs when the media containing the licensed programs is provided to a common carrier. In the case of electronic delivery, delivery occurs when the customer is given access to the licensed programs. If collectibility is not considered probable, revenue is recognized when the fee is collected.Revenue earned on software arrangements involving multiple elements
to beis allocated to each element arrangement based on the relative fair values of the elements. If there is no evidence of the fair value for all the elements in amultiple elementmultiple-element arrangement, all revenue from the arrangement is deferred until such evidence exists or until all elements are delivered.In accordance with SOP 97-2, theThe Company recognizes revenue from the sale of software licenses when all the following conditions are met:the software
- •
- Persuasive evidence of an arrangement exists;
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- Delivery has occurred or services have been
shippedrendered;- •
- The price to the customer
no significant obligations remain,is fixed or determinable; andcollection- •
- Collectibility is
probable. Revenuereasonably assured.Revenues recognized from
salemultiple-element software arrangements are allocated to each element of the arrangement based on the fair values of the elements, such as licenses for software products, maintenance,agreementsconsulting services or customer training. The determination of fair value is based on objective evidence. The Company limits its assessment of objective evidence for each element to either the price charged when the same element is sold separately or the price established by management having the relevant authority to do so, for an element not yet sold separately. If evidence of fair value of all undelivered elements exists but evidence does not exist for one or more delivered elements, then revenue is recognized using the residual method. Under the residual method, the fair value of the undelivered elements is deferred and the remaining portion of the arrangement fee is recognized as revenue.Certain of the Company's ISV, VAR or ASP customers (who the Company refers to as "resellers") prepay for licenses they intend to resell. Upon receipt of the prepayment, if all other revenue recognition criteria outlined above have been met, the Company recognizes licensing revenue when the reseller is given access to the licensed programs. The resellers provide monthly sell-through reports that detail, for the respective month, the number of licenses purchased from the Company, the number they have sold to other parties, the ending balance of licenses they hold as inventory available for future sale and certain information pertaining to their customers such as customer name, licenses purchased, purchase date and contact information. The Company monitors and reconciles the resellers' inventory records to its records via the monthly sell-through reports.
Other resellers will only purchase licenses from the Company when they have already closed a deal to sell the Company's product(s) to another party. These resellers will typically submit a purchase order to the Company in order to receive product that they can deliver to their customer. In these cases, assuming all other revenue recognition criteria, as set forth above, have been satisfied, the Company recognize licensing revenue when the reseller has been given access to the licensed programs. There are no rights of return granted to resellers or other purchasers of the Company's software programs.
The Company recognizes revenue from service contracts ratably over the
termrelated contract period, which generally ranges from 1-5 years.Segment information. The Company operates in one business segment.
Allowance for Doubtful Accounts. The allowance for doubtful accounts is based on assessments of the
agreement. OEM (Original Equipment Manufacturer) licenses revenuecollectibility of specific customer accounts and the aging of the accounts receivable. If there isgenerally recognized as deliveriesa deterioration of a major customer's credit worthiness or actual defaults aremade or athigher than historical experience, thecompletion of contractual billing milestones. Deferred revenue, resulting from maintenance and license agreements, aggregated $112,600 and $443,800 as of December 31, 1998 and 1997.allowance for doubtful accounts is increased.Advertising
CostsCosts. The cost of advertising is expensed as incurred. Advertising costs for the years ended December 31,1998, 19972004, 2003 and19962002, were approximately $3,000, $4,000 and $114,300, respectively, and approximately $0 and $3,000 for the threemonth periodmonths ended March 31,1999, were approximately $58,400, $60,000, $0,2005 and$109,600,2004, respectively. Advertising consists primarily of various printed material.Income
Taxes Income taxes are calculated using the liability method of accounting for income taxes specified byTaxes. Under SFAS No. 109,Accounting"Accounting for IncomeTaxes. DeferredTaxes," deferred income taxes are recognized for the tax consequences of temporary differences between the financialstatementsstatement 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
InstrumentsInstruments. The Company used the following methods and assumptionswere used by the Companyin estimatingitsthe fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported
inon the balance sheet for cash and cash equivalentsapproximateapproximates fair value.Investment securities:Notes receivable: The carrying amounts reported on the balance sheet for the note receivable—related party and the note receivable reflect the current principal balances remaining to be repaid to the Company. The estimated fair values
of marketable debt and equity securitiesare based onquoted market prices. Short-term debt: The fair valuethe Company's estimates ofshort-term debt is estimated basedinterest rates oncurrent interest notes available to the Company for debt instruments withsimilarterms and maturities. F-8instruments. As of December 31,
19982004 and1997,2003 and March 31, 2005 and 2004, the fair values of the Company's financial instrumentsapproximateapproximated their historical carrying amounts.Long-Lived
AssetsAssets. Long-lived assets are assessed for possible impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable, or whenevermanagementtheCompany has committed to a plan to dispose of the assets.
Such assets are carried atMeasurement of thelower of book value orimpairment loss is based on the fair valueas estimated by managementof the assets. Generally, the Company determines fair value 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.Restructuring Charges. Charges related to the restructuring of the Company's operations are estimated, accrued and expensed in the period in which the Board of Directors has committed to and approved a restructuring plan. The restructuring accrual is reduced in any period in which one or more of the planned restructuring activities occur. The restructuring accrual is adjusted for material differences between the actual cost of a restructuring activity and the estimated cost of the restructuring activity in the period the actual cost becomes known. The Company followed Emerging Issues Task Force (EITF) 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (Including Certain Costs Incurred in a Restructuring)" for restructuring plans entered into prior to January 1, 2003. The Company currently follows SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," for restructuring plans entered into on, or after, January 1, 2003.
Stock-Based Incentive
Programs SFAS No. 123, AccountingPrograms. The Company accounts forStock-Based Compensation, encourages entities to recognize compensation costs forits stock-basedemployee compensation plansincentive programs usingthe fair value based method of accounting defined in SFAS No. 123, but allows for the continued use ofthe intrinsic valuebasedmethod,of accountingas prescribed by Accounting Principles Board (APB) Opinion No. 25,Accounting"Accounting for Stock Issued toEmployees. The Company continues to use the accounting prescribed byEmployees" and interpretations thereof (collectively APBOpinion No. 25 and as such is required to disclose pro forma net income and earnings per share as if the fair value based method of accounting had been applied. Adoption of New Accounting Pronouncements In February 1998, the Financial Accounting Standards Board (FASB) issued SFAS No. 132, Employer's Disclosure about Pensions and Other Postretirement Benefits, which standardizes the disclosure requirements for pension and other postretirement benefits. The adoption of SFAS No. 132 did not have a material impact the Company's current disclosures. In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivatives contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain or loss is recognized in income in the period of change. SFAS No. 133 is effective for all fiscal years beginning June 15, 2000. Historically, the Company has not entered into derivatives contracts either to hedge existing risks or for speculative purposes.25). Accordingly, the Companydoes not expect adoptionrecords deferred compensation expense costs related to its employee stock options when the market price of thenew standardunderlying stock exceeds the exercise price of each option onJuly 1, 1999 to affect its financial statements. Earnings Per Common Share In February 1997,theFASB issued SFAS No. 128, Earnings Per Share, which was effective December 28, 1997. Conforming to SFAS No. 128, thedate of grant. The Companychanged its method of computing earnings per sharerecords andrestated all prior periods included in the financial statements. Under SFAS No. 128, the dilutive effect ofmeasures deferred compensation for stock optionsis excluded from the calculation of basic earnings per share. Reclassifications Certain amounts in the 1997 financial statements have been reclassifiedgranted toconform with the 1996 and 1998 presentation. F-9GraphOn 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 consistednon-employees, other than members of thefollowing:
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,board, at their fair value. Deferred compensation is expensed on a straight-line basis over the vesting period of the related stock option for options issued to employees. Deferred compensation is expensed on a straight-line basis over the shorter of the vesting period of the related stock option or the contractual period of service for option grants to non-employees. The Companyissued 3,886,503 shares of commondid not grant any stockand 388,650 warrants to Corel Corporation in exchange for certain fixed assets and technology for the deployment of Windows NT applications through server based computing (Note 6). Based onoptions at exercise prices below the fair market value of thesecurities issued, as determined by the prices associated with the Private Placement Offering (Note 6), the aggregate purchase price was $3,886,500, which was allocated to the following respective assets based on their fair market value at the time of the transaction:
Equipment................................................................... $ 77,100 Furniture................................................................... 164,000 Purchased technology........................................................ 3,645,400 ---------- $3,886,500 ==========F-10GraphOn Corporation Notes to Financial Statements (Continued) 3. Purchased Technology (Continued)
December 31, 1998 --------------Purchased technology........................... $3,645,400 Less accumulated amortization.................. -- ---------- $3,645,400 ==========4. Accrued Expenses Accrued expenses consisted of the following:
December 31, ----------------------- 1998 1997 ---------- ----------Payroll and related expenses................... $ 140,600 $ 34,400 Professional fees.............................. 180,000 35,000 Accrued payroll taxes.......................... 76,700 -- Royalties...................................... 65,300 46,100 Other.......................................... 36,300 27,400 ---------- ---------- $ 498,900 $ 142,900 ========== ==========5. Convertible Note Payable In March 1998 the Company issued a convertible note payable for $475,000 to an affiliate (the Agent Affiliate) of the placement agent dated September 2, 1998 for theCompany'ssubsequent private placement offering ofcommon stock(the Offering). The convertible note bears interest at 10% and is due uponon theearliergrant dateofduring theCompany raising between $2,500,000 and $3,000,000 in the Offering or six months after its commencement. The note is convertible into shares of common stock at $1.00 per share at the option of the note holder (Note 13). In September 1998, the Agent Affiliate and the Company's CEO loaned $200,000 and $100,000, respectively, to the Company pursuant to convertible promissory notes bearing interest at 8% per annum, which mature at the earlier of the first closing of the Offering or 12 months from the date of the notes. Such notes, at the option of the lender, may be converted into shares of common stock at $1.00 per share. In connection with this transaction, the Agent Affiliate and CEO were issued warrants to purchase 100,000 and 50,000 shares, respectively, at $1.00 per share (Note 6). Onyears ended December 31,1998,2004, 2003 and 2002, or during theloan by the Agent Affiliate was converted into 200,000 shares of common stock. Also on Decemberthree-month period ended March 31,1998, the Company repaid the $100,000 loan from the CEO, plus accrued interest. F-11GraphOn Corporation Notes to Financial Statements (Continued) 6. Stockholders' Equity Prior Bankruptcy In November 1991, the Company filed a Voluntary Petition for Relief under Chapter 11 of the Bankruptcy Code. At that time, the Company had indebtedness in excess of $2.3 million and had 1,624,940 voting shares of common stock outstanding. In July 1994, the Company's plan of reorganization under Chapter 11 (the Reorganization Plan) was confirmed. At the time of the confirmation of the Reorganization Plan, all shares of stock, options, and warrants outstanding were canceled. In addition, the Reorganization Plan provided for the issuance of 100 shares of the Company's reorganized common stock in exchange for waiver of certain unsecured claims against the Company by its then, and current, CEO. In addition, all administrative claims, priority claims, and allowed claims in the administrative convenience class (generally, those under $200) were paid in full. Unsecured creditors are to receive payment of 50% of the gross royalties received by the Company from certain licensees up to the amount of their total liability, through the year 2000. However, the largest unsecured creditor will receive payments of 50% of the gross royalties received by the Company from the revenue from certain licensees until its claim is paid in full. The remaining 50% of the gross royalties received by the Company from these certain licensees was available to the Company to conduct its ongoing operations.2005.As of December 31,
1998,2004, the Company's deferred compensation balance was $0. The accompanying statement of operations reflects stock-based compensation expense of $0, $0 and $193,800 for the years ended December 31, 2004, 2003 and 2002, respectively. As of March 31, 2005, the Company's deferred compensation balance was $8,400 and the Companydoes not expect to pay any additional significant amounts under the Reorganization Plan. Accordingly, the amounts are treated as included in the relief of debt as part of the bankruptcy confirmed in 1994. The Company believes that its royalty payment obligations under the bankruptcy court order relate only to licenses in place as of July 11, 1994. However, there is no assurance that the court will not interpret the obligation of the Company to include making payments from royalties earned from subsequent licenses or licenses that it may secure in the future, or that its current technology will not be deemed derivative of its technology existing at July 11, 1994. Consequently, there can be no assurance that the Company will not be required to repay the creditors referenced in the bankruptcy proceedings to the full amount of its liability of approximately $2,230,000. In addition, there is no guarantee that a creditor will not attempt to assert a claim for royalties from subsequent licenses, which could be costly and could have a material adverse effect on the Company's business, financial condition, and/or results of operations. Common Stock In January 1998, the CEO personally sold 440,016 shares of his stock to various employees and directors of the Company at a price of $0.02, the then fair market value of the stock, and in May and August, 193,238 additional shares at $0.075. The ownership of these shares vest over approximately four years with the CEO having the right to repurchase non-vested shares upon termination of employment. In May 1998, the Company issued and sold 508,500 shares under the Stock Grant Program, at $0.075 and granted 20,000 options, under Stock Option Plan, at $0.075 to employees of the Company which also vest over a four year period. The shares sold and options granted from March 1998 forward were ascribed a fair market value of $1.00 per share, the price at which the Company offered its shares through a private placement stock offering in September 1998. The Company recognized $667,600 inrecorded deferred compensation expenseassociated with the saleofthe above securities, to be amortized over the vesting period of the underlying securities. F-12GraphOn Corporation Notes to Financial Statements (Continued) 6. Stockholders' Equity (Continued) In accordance with APB Opinion No. 25, Accounting for Stock Issued to Employees, the Company recorded, in General and Administrative expense, $101,600 of compensation costs for the year ended December 31, 1998 and $41,700 for the three months period ended March 31, 1999. In March 1998, the Company sold 500,000 shares of common stock for cash proceeds of $25,000 to the Agent Affiliate, concurrent with the issuance of convertible notes for $475,000. During 1998, the Company recognized interest expenses of $475,000 relating to this transaction. In July 1998, the Company's Board of Directors declared a 60,000 to 1 stock split. All references to number of shares and per share data in the financial statements have been adjusted to reflect the stock split on a retroactive basis. In September 1998, the Company offered shares of its common stock through a private placement stock offering (the Offering). The Offering established a minimum and maximum offering of 2,500,000 and 4,500,000 shares of common stock, respectively, at $1.00 per share, plus an additional 675,000 shares in the event of over-subscriptions. As part of the Offering, the placement agent received warrants to purchase 20,000 shares of common stock at $1.00 per share for each 100,000 shares sold through the Offering. Pursuant to a Subscription Agreement, executed by each investor who purchased shares of the Company's common stock in connection with the first closing of the Offering (the First Closing Investors), each First Closing Investor holds the right to purchase his pro rata portion of any securities issued by the Company for cash at an amount equal to the price, or other consideration, for which such securities were issued until such time as there is an initial public offering of the Company's securities. Such preemptive rights do not apply to any securities issued pursuant to options, warrants and rights and option plans existing at the time of the first closing. The investors who purchased common stock in connection with the second closing of the Offering, as well as certain of the First Closing Investors who agreed to amend their rights, hold the same right except that such right does not apply to securities issued by the Company in connection with, or in consideration of, (i) the Company's acquisition of another corporation or entity by consolidation, merger, purchase of all or substantially all of the assets or other business combination in which the Company is the surviving entity, provided such issuance is approved by a majority of the Board of Directors or (ii) any equipment or real property lease, loan, credit line, guaranty of indebtedness or acquisition of assets, other than cash but including intellectual property or other intangible assets. Additionally, in March 1998, the CEO and Executive Vice President of the Company entered into a contingent sale arrangement with respect to the sale of 3,500,000 shares of their common stock in the Company to the Agent Affiliate under non-recourse installment notes. Under the terms of the notes, $200,000 was due and paid with the commencement of the Offering, with $800,000; $1,000,000; and $1,500,000 being due and payable January 1999, July 1999 and January 2000, respectively (Note 13). The notes bear interest at 6%, payable quarterly, and are secured by the underlying pledged shares. The CEO and Executive Vice President retained voting privilege on these shares until fully paid for, and said shares revert back to the CEO and Executive Vice President in case of default by the Agent Affiliate. In December 1998, the Company issued 3,886,503 shares of common stock with an ascribed value of $3,886,500, and granted warrants to purchase 388,650 shares of common stock at $1.00 in exchange for certain fixed assets and technology. The terms of this purchase agreement also require that the F-13GraphOn Corporation Notes to Financial Statements (Continued) 6. Stockholders' Equity (Continued) Company shall issue an additional 1,607,000 shares of common stock, for no additional consideration, on June 30, 2000, if the Company at that date has not completed an initial public offering of any of its equity securities or a merger or sale of all, or substantially all, of its assets. Should these contingent shares be issued, they will be valued at their fair market value at the time of such issuance with a resulting charge to the statement of operations. Stock Purchase Warrants As of December 31, 1998, the following common stock warrants were issued and outstanding:
Shares Subject Exercise Expiration Issued with respect to: to Warrant Price Date ----------------------- -------------- -------- ------------Convertible notes............................ 150,000 $1.00 (A) Private placement............................ 639,800 $1.00 (A) Purchased technology......................... 388,650 $1.00 12/2003 ======= ===== =======- -------------------- (A) The warrants issued with respect to the convertible notes and the private placement expire upon earlier of three years after the closing date of a merger (Note 13), three years after the closing date of an IPO, or January 2006. Stock Grant Program In July 1998, the Company adopted a stock grant program (Stock Grant Program), which is restricted to employees, officers, and consultants of the Company. The Company has authorized the issuance of up to 1,300,000 shares of the Company's common stock in connection with the Stock Grant Program and the Stock Option Plan, discussed below. In May 1999, the number of shares authorized under the plan was increased by 2,700,000 shares to 4,000,000 shares. Under the Stock Grant Program, eligible individuals may, at the Plan Administrator's discretion, be issued shares of common stock directly, either through (a) the purchase of shares at a price not less than 85% of the estimated fair market value of the stock at the time of the issuance, or (b) as a bonus for past services rendered. Ownership of such shares generally vest over a four year period. During August 1998, the Company issued 508,500 shares under the Stock Grant Program. Stock Option Plan In July 1998, the Company adopted a Stock Option Plan (The Plan). The Plan is restricted to employees, officers, and consultants of the Company. Options granted under the Plan generally vest over four years and are exercisable over ten years. Non-satutory options are granted at prices not less than 85% of the estimated fair value of the stock on the date of grant as determined by the Board of Directors. Incentive options are granted at prices not less than 100% of the estimated fair value of stock on the date of grant. However, options granted to shareholders who own greater than 10% of the outstanding stock are established at no less than 110% of the estimated fair value of the stock on the date of grant. F-14GraphOn Corporation Notes to Financial Statements (Continued) 6. Stockholders' Equity (Continued) A summary of status of the Company's Stock Option Plan as of December 31, 1998, and changesapproximately $500 duringthe 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 =========Duringthe three months ended March 31,1999,2005.An alternative to the intrinsic value method of accounting for stock-based compensation is the fair value approach prescribed by SFAS No. 123, "Accounting for Stock-Based Compensation" as amended by SFAS 148 (hereinafter collectively referred to as SFAS 123). If the Company
granted 748,500 stock options at an average exercise price of $0.85 per share, which represented 85% offollowed theestimatedfairmarketvalue approach, the Company would be required to record deferred compensation based on the fair value of thestock.stock option at the date of grant. Thefollowing table summarizes information aboutfair value of the stockoptions outstandingoption must be computed using an option-pricing model, such as the Black-Scholes option valuation method, at the date ofDecember 31, 1998:grant. The deferred compensation calculated under the fair value method would then be amortized over the respective vesting period of the stock option. See New Accounting Pronouncements.
Options Outstanding Options Exerccisable - ---------------------------------------------------------------------------- -------------------------------- Weighted- Average Weighted- Weighted- Remaining Average Average Range of Exercise Number Contractual Life Exercise Price Number Exercise Price Price Outstanding (Years) per Share Exercisable per Share - ------------------- ------------- ------------------ ----------------- ------------- -------------$0.075 - $1.00 20,000 9.67 $0.075 2,664 $0.075SFAS
No.123Accounting for Stock-based Compensation,requires the Company to provide pro forma information regarding net income (loss)incomeand earnings (loss)earningsper share as if compensation cost for theCompany'sstock option plan had been determined in accordance with the fairvalue basedvalue-based method prescribed in SFASNo.123.123 throughout the year. The Companyestimatesestimated 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 in1998:the years endedDecember 31, 2004, 2003 and 2002, and in the three months ended March 31, 2005 and 2004, respectively: dividend yield (all periods) of 0; expected volatility (all periods) of
112%60%; risk-free interest rate of5.7%1.5%, 2.5%, 2.5%, 1.5% and 2.5%; and expected lives (approximately, for all periods) ofthreefive years, for all plan options.Under
the accounting provisions ofSFASNo.123, the Company's pro forma net losswould have been $2,137,900,and the basic and diluted net loss per common share would haveremained unchanged at $0.32. 7. Income Taxes The provisionbeen adjusted to the pro forma amounts below.
Year Ended December 31, 2004 2003 2002 Net loss: As reported $ (1,427,500 ) $ (1,886,600 ) $ (8,792,500 ) Add: stock-based compensation expense included in reported net loss, net of related tax effects: — — — Deduct: total stock-based compensation determined under fair value-based method for all accounts, net of related tax effects: (191,700 ) (265,300 ) (1,531,400 ) Pro forma $ (1,619,200 ) $ (2,151,900 ) $ (10,323,900 ) Basic and diluted loss per share As reported $ (0.07 ) $ (0.11 ) $ (0.50 ) Pro forma $ (0.08 ) $ (0.13 ) (0.59 )
Three months ended March 31,
2005 2004 Unaudited Unaudited Net loss: As reported: $ (318,600 ) $ (431,100 ) Add: stock-based compensation expense included in net loss, net of related tax effects 500 — Deduct: total stock-based compensation expense determined under fair-value method for all awards, net of related tax effects (83,500 ) (28,600 ) Pro forma net loss $ (401,600 ) $ (459,700 ) Basic and diluted loss per share: As reported $ (0.01 ) $ (0.02 Pro forma $ (0.01 ) $ (0.02 Earnings Per Share of Common Stock. SFAS No. 128, "Earnings Per Share," provides for the calculation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing income
taxesavailable to common shareholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities by adding other common stock equivalents, including common stock options, warrants and redeemable convertible preferred stock, in the weighted average number of common shares outstanding for a period, if dilutive. Potentially dilutive securities have been excluded from the computation, as their effect is antidilutive. For the years ended December 31,1998, 19972004, 2003 and19962002, 6,641,957, 2,104,483 and 2,584,307 shares, respectively, and for the three months ended March 31,19992005 and1998 consist2004, 19,217,157 and 6,796,405 shares, respectively ofminimum state taxes. F-15GraphOn Corporationcommon stock equivalents were excluded from the computation of diluted earnings per share since their effect would be antidilutive.Comprehensive Income. SFAS No. 130, "Reporting Comprehensive Income," establishes standards for reporting comprehensive income and its components in a financial statement that is
displayed with the same prominence as other financial statements. Comprehensive income, as defined, includes all changes in equity (net assets) during the period from non-owner sources. Examples of items to be included in comprehensive income, which are excluded from net income, include foreign currency translation adjustments and unrealized gain/loss of available-for-sale securities. The individual components of comprehensive income (loss) are reflected in the statements of shareholders' equity. As of December 31, 2002 accumulated other comprehensive income (loss) was comprised of foreign currency translation gains and the cumulative change in the market value of the available-for-sale securities. As of December 31, 2004 and 2003 and for the three-month periods ended March 31, 2005 and 2004, accumulated other comprehensive income (loss) was comprised of foreign currency translation gains (losses).
The Company closed its sole foreign subsidiary effective March 31, 2005. The subsidiary held a limited amount of cash as its sole asset and had no liabilities. As a result, there was no significant gain or loss recorded upon its closure. Concurrent with the closure, the remaining portion of the accumulated other comprehensive income (loss) was reduced to zero.
New Accounting Pronouncements. In December 2004, the Financial Accounting Standards Board (FASB) issued SFAS No. 123R, "Share-Based Payment," which requires companies to expense the value of employee stock options and similar awards. SFAS No. 123R is effective as of the beginning of the first annual reporting period that begins after June 15, 2005. As of the effective date, the Company will be required to expense all awards granted, modified, cancelled or repurchased as well as the portion of prior awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards as calculated for pro forma disclosures under SFAS No. 123. The Company will apply SFAS No. 123R using a modified version of prospective application. Under this method, compensation cost is recognized on or after the required effective date for the portion of outstanding awards for which the requisite service has not yet been rendered, based on the grant-date fair value of those awards calculated under SFAS No. 123 for either recognition or pro forma disclosures.
Benefits of tax deductions in excess of recognized compensation cost are required by SFAS No. 123R to be reported as a financing cash flow, rather than as an operating cash flow as required under current literature. This requirement will reduce net cash flows from operations and increase cash flows from financing in periods after adoption. The adoption of SFAS No. 123R will have an impact on the Company's results of operations, however management cannot currently estimate what the impact will be because, among other things, it will depend on the levels of share-based payments granted in the future. The Company is currently in the process of determining the effects on its financial position, results of operations and cash flows that will result from the adoption of SFAS No. 123R.
Reclassifications. Certain amounts in the prior years' financial statements have been reclassified to conform to the current period's presentation.
Notes to Consolidated Financial Statements
(Continued)(Information as of March 31, 2005 and for the three months ended March 31, 2005 and 2004 is unaudited)1. Subsequent Events.
On February 2, 2005, the Company completed a private placement (the "2005 private placement"), which raised a total of $4,000,000 (inclusive of a $665,000 credit as described below) through the sale of 148,148 shares of Series A preferred stock and five-year warrants to purchase 74,070 shares of Series B preferred stock. In a contemporaneous transaction, the Company acquired Network Engineering Software, Inc. ("NES"), for 9,600,000 shares of common stock, the assumption of approximately $235,000 of NES' indebtedness and the reimbursement to AIGH Investment Partners, LLC ("AIGH"), an affiliate of a principal stockholder (Orin Hirschman), of $665,000 for its advance on
the Company's behalf of a like sum in December 2004 to settle certain third party litigation against NES. This reimbursement was effected by a partial credit against the price of the securities acquired by AIGH in the 2005 private placement.
As of March 31, 2005 the Company had consumed approximately $244,600 and $671,400 of the cash raised paying for expenses related to the 2005 private placement and the NES acquisition, respectively. The Company estimates that it will disburse an additional $121,100 and $167,900 of cash paying for expenses related to the 2005 private placement and the NES acquisition, respectively, however, there can be no guarantees that these amounts will be final. The Company estimates that once all aggregate costs associated with the 2005 private placement and NES acquisition have been paid, there will be net proceeds of approximately $2,130,000 remaining from the 2005 private placement available for general corporate purposes.
The Company expects such net proceeds along with revenues derived from operations and the cash and cash equivalents reported as of December 31, 2004 to fund anticipated expenses, inclusive of those that will be attributable to taking steps to realize the maximum value of the patents acquired from NES, during the next 12 months.
The 52,039 shares of NES common stock collateralizing the note receivable-related party (See Note 12) were replaced by 3,260,391 shares of the Company's common stock upon the completion of the NES acquisition (See Note 5).
Under the terms of the 2005 private placement, upon the effectiveness of an amendment to the Company's Certificate of Incorporation to increase the authorized number of shares of Common Stock from, all shares of Series A Stock and Series B Stock would automatically convert into shares of Common Stock at a rate of 100 shares of Common Stock for each share of Preferred Stock, and all Warrants issued in the 2005 private placement would automatically become exercisable for shares of Common Stock at a rate of 100 shares of Common Stock for each share of Preferred Stock underlying such Warrants.
At the special meeting of the Company's stockholders, held on March 29, 2005, the stockholders approved the amendment to the Company's Certificate of Incorporation to increase the authorized number of common shares from 45,000,000 to 195,000,000. Consequently, an aggregate of 148,148 shares of Series A Stock were converted into 14,814,800 shares of common stock and warrants to purchase an aggregate of 74,070 Series B Stock were converted into warrants to purchase an aggregate 7,407,000 shares of common stock. In addition, the warrants issued pursuant to the finder's agreement discussed above, converted as follows: the warrants to purchase 14,815 shares of Series A Stock and the warrants to purchase 7,407 shares of Series B Stock converted into warrants to purchase 1,481,500 and 740,700 shares of common stock, respectively.
During the first quarter of 2005, the Company deferred approximately $200,000 of Windows-based product revenue, derived from a transaction entered into with a significant distributor because not all of the Company's criteria necessary for revenue recognition had been met. During April 2005, all such criteria were satisfied. Consequently, deferred revenue—current portion was reduced and the Company recognized the revenue.
2. Property and Equipment.
Property and equipment consisted of the following:
December 31, 2004 2003 Equipment $ 903,200 $ 875,000 Furniture and fixtures 236,700 231,500 Leasehold improvements 30,400 30,400 1,170,300 1,136,900
Less: accumulated depreciation and amortization
1,094,900
992,100$ 75,400 $ 144,800 Purchased technology consisted of the following:
December 31, 2004 2003 Purchased technology $ 1,370,100 $ 1,370,100 Less: accumulated amortization 1,370,100 1,035,100 $ — $ 335,000 4. Capitalized Software.
Capitalized software consisted of the following:
December 31, 2004 2003 Capitalized software development costs $ 719,500 $ 719,500 Less: accumulated amortization 445,800 218,900 $ 273,700 $ 500,600 5. Patents (NES Acquisition).
On January 31, 2005, the Company acquired all of the outstanding common stock of NES in exchange for 9,599,993 shares of the Company's common stock, valued at $3,916,800, and approximately $897,800 in cash payments to settle various claims against NES prior to the acquisition. The Company incurred $563,500 of transaction costs, resulting in a purchase price of $5,378,100. The acquisition was accounted for as a business combination. Accordingly, the assets acquired (primarily consisting of patents, patent applications, and in-process patent applications) have been recorded at their estimated fair value. In connection with the acquisition, the Company recorded a deferred tax liability of $2,151,200, resulting from a difference between the tax basis and financial statement basis of the assets acquired (see Note 13).
The estimated cost of the patent related assets is being amortized over a 6-year period using the straight-line method. The estimated cost of these assets may change as a result of the completion of a valuation study and as all direct acquisition costs are finalized. The final adjustments to the estimated costs of these assets are not expected to be material.
As of December 31, 2004, prior to the consummation of the acquisition, the Company had deferred approximately $269,700 of the acquisition costs. These deferred acquisition costs are included in the transaction costs above.
6. Pro Forma Results.
The following unaudited pro forma information presents the consolidated results of the Company as if the NES acquisition had occurred at the beginning of the respective period. The pro forma information is not necessarily indicative of what would have occurred had the acquisition been made as
of such period, nor is it indicative of future results of operations. The pro forma amounts give effect to appropriate adjustments for the fair value of the patents, amortization and income taxes.
Three Months Ended March 31, 2005 2004 Revenue $ 1,180,400 $ 902,900 Net loss (424,700 ) (869,200 ) Loss per share—basic and diluted (0.01 ) (0.04 ) The Company held no such patents as of December 31, 2004 or 2003, respectively.
7. Note Receivable—Related Party.
On October 6, 2004, the Company entered into a letter of intent to acquire NES. The Company contemporaneously loaned $350,000 to Ralph Wesinger, NES' majority shareholder, to fund his purchase of all the NES common stock then owned by another person. The Company received Mr. Wesinger's 5-year promissory note, which bears interest at a rate of 3.62% per annum and which was secured by his approximately 65% equity interest in NES, to evidence this loan. Mr. Wesinger also agreed that the Company would receive 25% of the gross proceeds of any sale or transfer of any of Mr. Wesinger's NES shares, which shall be applied in reduction of the then outstanding balance of his note, until the note is paid in full or becomes due, whichever occurs first. The Company has the option to accelerate the maturity date of this note upon the occurrence of certain events.
Upon completion of the Company's acquisition of NES (See Note 5), the 52,039 shares of NES common stock collateralizing the note receivable were replaced by 3,260,391 shares of the Company's common stock (See Note 12).
8. Deferred Acquisition Costs.
At December 31, 2004, the Company had deferred acquisition costs of $269,700. Deferred acquisition costs consisted of legal fees associated with the NES acquisition that were incurred between October 6, 2004, the date the Company entered into the letter of intent to acquire NES, and December 31, 2004. In conjunction with the closing of the NES acquisition (See Note 5), these costs were included in the acquisition costs and allocated to the fair values of the assets and liabilities acquired.
9. Accrued Liabilities.
Accrued liabilities consisted of the following:
December 31, 2004 2003 Professional fees $ 212,200 $ 118,300 Accrued taxes 4,600 24,400 Other 14,600 21,900 $ 231,400 $ 164,600 Accrued professional fees as of December 31, 2004 includes approximately $32,500 of deferred financing costs, related to the 2005 private placement, and approximately $31,000 of deferred acquisition costs, related to the NES acquisition (See Note 5). These amounts appear on the December 31, 2004 balance sheet as components of other assets and deferred acquisition costs, respectively.
10. Asset Impairment Charge.
During 2002 the Company recorded an impairment charge of $914,000 against several intangible assets, primarily capitalized technology assets. The review of long-lived assets for impairment occurs whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Examples of events or changes in circumstances that indicate that the recoverability of the carrying amount of an asset should be addressed include the following:
- •
- A significant decrease in the market value of an asset;
- •
- A significant change in the extent or manner in which an asset is used;
- •
- A significant adverse change in the business climate that could affect the value of an asset; and
- •
- Current and historical operating or cash flow losses.
The Company believed that a review of the current carrying values to evaluate whether the value of any of its long-lived technology assets had been impaired was warranted, due to several factors, including:
- •
- The challenges faced in bringing the GO-Global for Windows and Go-Global:XP products to maturity;
- •
- The continued pervasive weakness in the world-wide economy;
- •
- How the Company was incorporating and planning to incorporate each element of the purchased technologies into its legacy technology; and
- •
- The Company's continued and historical operating and cash flow losses.
Based on studies of the various factors affecting asset impairment, as outlined above, the following asset impairment charges were determined to be necessary in order to reduce the carrying value of certain of these assets to the Company's current estimate of the present value of the expected future cash flows to be derived from these assets:
2002 Impairment Net Book Value
Before ImpairmentImpairment
Write DownNet Book Value
After ImpairmentPurchased Technology $ 2,145,200 $ 775,100 $ 1,370,100 Capitalized Software 277,800 138,900 138,900 Totals $ 2,423,000 $ 914,000 $ 1,509,000 The Company reassessed the carrying values of its intangible assets as of December 31, 2004 and 2003 and determined that no further impairment of those assets had occurred. The asset impairment charges were approximately 0.0%, 0.0% and 25.9% of total revenues for the years 2004, 2003 and 2002, respectively.
11. Restructuring Charge.
During 2002 the Company closed its Morgan Hill, California and Bellevue, Washington office locations as part of its strategic initiatives to reduce operating costs. In conjunction with these closures, headcount was reduced in all operating departments and the costs of leasehold improvements and
other assets that were abandoned were written off. A summary of the restructuring charges recorded during 2002 is as follows:
Category Restructuring
ChargeCash
PaymentsNon-cash
ChargesDecember 31, 2002
Ending Balance
Restructuring
AccrualYear ended December 31, 2002: Employee severance $ 831,000 $ (831,000 ) $ — $ — Fixed assets abandonment 657,800 — (657,800 ) — Minimum lease payments 443,800 (161,600 ) — 282,200 Other 10,200 (10,200 ) — — Totals $ 1,942,800 $ (1,002,800 ) $ (657,800 ) $ 282,200 During 2003 the Company negotiated settlements of the leases for its former offices in Bellevue, Washington and Morgan Hill, California, which completed the restructuring activities that had been approved under EITF 94-3 during 2002 and had begun in 2002, as explained above. Additionally, the Company relocated its Morgan Hill, California offices from 400 Cochrane Circle to 105 Cochrane Circle and further disposed of certain assets that were no longer in service. To the extent that the December 31, 2002 ending restructuring charge accrual balance was less than the costs incurred for these activities, an additional restructuring charge was recorded during 2003. A summary of the restructuring charges recorded during 2003 is as follows:
Category Additional
Restructuring
ChargeCash
PaymentsNon-cash
ChargesDecember 31, 2003
Ending Balance
Restructuring
AccrualYear ended December 31, 2003: Opening accrual balance $ — $ — $ — $ 282,200 Fixed assets abandonment 42,200 — (42,200 ) — Leases settlements—rent 36,800 (269,000 ) — (232,200 ) Deposits forfeited 16,000 — (56,000 ) (40,000 ) Commissions 12,000 (22,000 ) — (10,000 ) Other(1) (26,900 ) — 26,900 — Totals $ 80,100 $ (291,000 ) $ (71,300 ) $ —
- (1)
- Includes the write-off of deferred rent associated with the Morgan Hill lease and other miscellaneous items.
During June 2003, the Company negotiated a buy out of the lease for its former engineering offices in Bellevue, Washington. The total buy out price was approximately $184,000 and consisted of a lump-sum cash payment of $144,000, the forfeiture of an approximate $40,000 security deposit and a $10,000 commission to the real estate broker who was involved in the transaction. It is estimated that the buy out saved approximately $355,800 over what would have been the remainder of the lease term.
During August 2003, the Company negotiated a buy out of the lease for its former corporate offices in Morgan Hill, California. The total buy out price was approximately $153,000 and consisted of a lump-sum cash payment of $125,000, the forfeiture of an approximate $16,000 security deposit and a $12,000 commission to the real estate broker who was involved in the transaction. It is estimated that the buy out saved approximately $270,000 over what would have been the remainder of the lease term.
12. Stockholders' Equity.
Common Stock. On February 2, 2005, the Company completed the 2005 private placement, which raised a total of $4,000,000 (inclusive of the $665,000) credit through the sale of 148,148 shares of Series A preferred stock and five-year warrants to purchase 74,070 shares of Series B preferred stock.
Under the terms of the 2005 private placement, upon the effectiveness of an amendment to the Company's Certificate of Incorporation to increase the authorized number of shares of Common Stock from 45,000,000 to 195,000,000, all shares of Series A Stock and Series B Stock would automatically convert into shares of Common Stock at a rate of 100 shares of Common Stock for each share of Preferred Stock, and all Warrants issued in the 2005 private placement would automatically become exercisable for shares of Common Stock at a rate of 100 shares of Common Stock for each share of Preferred Stock underlying such Warrants.
At the special meeting of the Company's stockholders, held on March 29, 2005, the stockholders approved the amendment to the Company's Certificate of Incorporation to increase the authorized number of common shares from 45,000,000 to 195,000,000. Consequently, an aggregate of 148,148 shares of Series A Stock were converted into 14,814,800 shares of common stock and warrants to purchase an aggregate of 74,070 Series B Stock were converted into warrants to purchase an aggregate 7,407,000 shares of common stock. In addition, the warrants issued in the 2005 private placement pursuant to the finder's agreement, which had been entered into with the agent who arranged the Company's January 2004 private placement and was still effective at the time of the 2005 private placement, converted as follows: the warrants to purchase 14,815 shares of Series A Stock and the warrants to purchase 7,407 shares of Series B Stock converted into warrants to purchase 1,481,500 and 740,700 shares of common stock, respectively.
The following table summarizes the common stock warrants issued upon conversion of the preferred warrants, as discussed above, all of which were outstanding as of March 31, 2005:
Warrant holder Shares subject
to warrantExercise
PriceExpiration
DateInvestors 7,407,000 $ 0.40 02/10 Agent 1,481,500 $ 0.27 02/10 Agent 740,700 $ 0.40 02/10 During 2004 the Company issued 5,000,000 shares of common stock as part of a private placement that resulted in gross proceeds of $1,150,000, which were offset by costs associated with the private placement aggregating approximately $218,600. The Company issued 30,000 shares of common stock upon the exercise of warrants that had been issued in conjunction with the 2004 private placement, resulting in gross proceeds of $6,900.
During 2004, 2003 and 2002, the Company issued 37,638, 37,740 and 25,720 shares of common stock to employees in connection with the Employee Stock Purchase Plan, resulting in net cash proceeds of $9,000, $2,800 and $6,400, respectively.
The Company increased the number of its common shares outstanding during 2004 by 30,668 shares, related to restricted shares that had been repurchased for which the shareholder has not yet surrendered the stock certificate to the Company's transfer agent for cancellation. The Company believes the risk of these shares being traded is negligible as the share certificate carries a restrictive legend on its face and cannot be traded without prior consent of the Company's counsel. The Company believed that a more conservative accounting treatment should be afforded theses shares, after consultations with its transfer agent, and decided to add back these shares to its issued and outstanding totals.
During 2002 the Company issued 100,000 shares of common stock to each of two directors who exercised options granted under the Company's 1998 Stock Option/Stock Issuance Plan. Each of the two directors exercising the options issued a $25,000 promissory note to the Company to pay for the options. Each of the promissory notes is for a term of three years, due on or before March 5, 2005 and bears semi-annual interest at 2.67% per annum, which is equal to the applicable federal short-term interest rate in effect at the time the promissory notes were signed. In the event of default, the Company has full recourse to the assets of the directors and can take back all 100,000 of the shares of common stock so issued. Accrued interest income recognized on the promissory notes was $1,400, $0 and $300 for 2004, 2003 and 2002, respectively. Each of these notes was repaid in full, plus accrued interest, to the Company, during March 2005.
During 2002 the Company accepted 933,333 shares of its common stock from Menta Software in full settlement of the then outstanding $1,400,000 due the Company from Menta Software under the terms of the June 2001 patented technology licensing agreement.
During 2002 the Company recognized $193,800 of deferred compensation expense related to options and warrants it had issued in previous years to various third parties in exchange for services provided. The following assumptions were used for pricing the options and warrants using the Black-Scholes option-pricing model: dividend yield of 0, expected volatility of 60%, risk-free interest rate of 5.25%, and expected life of one year.
Notes Receivable—Directors. During the first quarter of 2005, the Company received an aggregate of approximately $54,600 as payment in full of the principal and accrued interest due from the notes receivable—directors.
Note Receivable—Shareholder. During the first quarter of 2005, the Company reclassified note receivable—third party from the long-term assets section of its balance sheet to the equity section under the title note receivable—shareholder to reflect the replacement of the NES stock that had been collateralizing the note, as of December 31, 2004, with Company stock, upon the consummation of the acquisition of NES on January 31, 2005. (See Notes 5 and 7)
Stock Purchase Warrants. As of December 31, 2004, the following common stock warrants were issued and outstanding:
Issued with respect to: Shares subject
to WarrantExercise
PriceExpiration
DatePrivate placement 2,750,000 $ 0.33 01/09 Private placement 470,000 $ 0.23 01/09 Convertible notes 83,640 $ 1.79 01/06 Private placement 373,049 $ 1.79 01/06 Consulting services 300,000 $ 5.25 08/05 As of March 31, 2005, the following common stock warrants, which were issued during the three-month period then ended, were also outstanding:
(Unaudited): Private placement 1,481,500 $ 0.27 02/10 Private placement 8,147,700 $ 0.40 02/10 1996 Stock Option Plan. In May 1996 the Company's 1996 Stock Option Plan (the "96 Plan") was adopted by the board and approved by the stockholders. The 96 Plan is restricted to employees, including officers, and to non-employee directors. As of December 31, 2004, the Company is authorized to issue up to 187,500 shares of its common stock in accordance with the terms of the 96 Plan.
Under the 96 Plan the exercise price of options granted is either at least equal to the fair market value of the Company's common stock on the date of the grant or, in the case when the grant is to a holder of more than 10% of the Company's common stock, at least 110% of the fair market value of the Company's common stock on the date of the grant. As of December 31, 2004, options to purchase 24,625 shares of common stock were outstanding, 538 options had been exercised and options to purchase 162,337 shares of common stock remained available for further issuance under the 96 Plan. As of March 31, 2005, options to purchase 159,625 shares of common stock were outstanding, 538 options had been exercised and options to purchase 27,337 shares of common stock remained available for further issuance under the 96 Plan.
1998 Stock Option/Stock Issuance Plan. In June 1998 the Company's 1998 Stock Option/Stock Issuance Plan (the "98 Plan") was adopted by the board and approved by the stockholders. Pursuant to the terms on the 98 Plan, options or stock may be granted and issued, respectively, to officers and other employees, non-employee board members and independent consultants who render services to the Company. As of December 31, 2004 the Company is authorized to issue up to 4,455,400 options or stock in accordance with the terms of the 98 Plan, as amended.
Under the 98 Plan the exercise price of options granted is to be not less than 85% of the fair market value of the Company's common stock on the date of the grant. The purchase price of stock issued under the 98 Plan shall also not be less than 85% of the fair market value of the Company's stock on the date of issuance or as a bonus for past services rendered to the Company. As of December 31, 2004, options to purchase 2,940,643 shares of common stock were outstanding, 323,904 options had been exercised, 248,157 shares of common stock had been issued directly under the 98 Plan and 942,696 shares remained available for grant/issuance. As of March 31, 2005, options to purchase 3,920,643 shares of common stock were outstanding, 323,904 options had been exercised, 248,157 shares of common stock had been issued directly under the 98 Plan, of which 40,558 shares had been repurchased and 3,254 shares remained available for grant/issuance. The Company did not issue any direct shares under the 98 Plan in 2004, 2003 or 2002 and does not anticipate issuing shares in 2005.
Supplemental Stock Option Plan. In May 2000, the board approved a supplement (the "Supplemental Plan") to the 98 Plan. Pursuant to the terms of the Supplemental Plan, options are restricted to employees who are neither Officers nor Directors at the grant date. As of December 31, 2004 the Company is authorized to issue up to 400,000 shares in accordance with the terms of the Supplemental Plan.
Under the Supplemental Plan the exercise price of options granted is to be not less than 85% of the fair market value of the Company's common stock on the date of the grant or, in the case when the grant is to a holder of more than 10% of the Company's common stock, at least 110% of the fair market value of the Company's common stock on the date of the grant. As of December 31, 2004, options to purchase 400,000 shares of common stock remained available for issuance under the Supplemental Plan. As of March 31, 2005, options to purchase 281,000 shares of common stock were outstanding and 119,000 shares remained available for further issuance under the Supplemental Plan.
Other Stock Option Plans. During the first quarter of 2005, the board approved two individual option plans. Pursuant to each plan, options are restricted to the respectively named employees, neither of who are Officers or Directors at the grant date. Under the Other Stock Option Plans the exercise price of options granted is to be not less than 85% of the fair market value of the Company's common stock on the date of the grant or, in the case when the grant is to a holder of more than 10% of the Company's common stock, at least 110% of the fair market value of the Company's common stock on the date of the grant. As of March 31, 2005, options to purchase an aggregate 1,250,000 shares of common stock were outstanding and no shares remained available for further issuance under the plans.
Employee Stock Purchase Plan. In February 2000, the Employee Stock Purchase Plan (the "ESPP") was adopted by the board and approved by the stockholders in June 2000. The ESPP provides for the purchase of shares of the Company's common stock by eligible employees, including officers, at semi-annual intervals through payroll deductions. No participant may purchase more than $25,000 worth of common stock under the ESPP in one calendar year or more than 2,000 shares on any purchase date. Purchase rights may not be granted to an employee who immediately after the grant would own or hold options or other rights to purchase stock and cumulatively possess 5% or more of the total combined voting power or value of common stock of the Company.
Pursuant to the terms of the ESPP, shares of common stock are offered through a series of successive offering periods, each with a maximum duration of six months beginning on the first business day of February and August each year. The purchase price of the common stock purchased under the ESPP is equal to 85% of the lower of the fair market value of such shares on the start date of an offering period or the fair market value of such shares on the last day of such offering period. As of December 31, 2004, the ESPP was authorized to offer for sale to participating employees 300,000 shares of common stock, of which, 168,056 shares had been purchased and 131,944 shares were available for future purchase. During the three months ended March 31, 2005, 15,489 shares were purchased and as of March 31, 2005, 116,455 shares were available for future purchase.
Option Exchange Programs. On January 26, 2004, 578,935 options were granted to employees who were not executive officers or directors and who chose to participate in a voluntary stock option exchange program that closed on July 23, 2003. Employees could choose to cancel any of their outstanding unexercised options to purchase Company common stock that had exercise prices greater than or equal to $0.50 in exchange for an equal number to be granted at a future date. All options so cancelled were considered forfeited as of December 31, 2003, as reported elsewhere in this footnote.
On May 14, 2004, the Company's Chief Executive Officer and Chairman of the Board and Chief Financial Officer voluntarily cancelled 260,000 and 380,000 outstanding unexercised options to purchase Company common stock in accordance with a voluntary stock option exchange program for the Company's executive officers and directors. Options that had exercise prices greater than or equal to $0.50 were eligible to be exchanged for an equal number to be granted at a future date. New options grants equal to the number cancelled were made on November 15, 2004.
A summary of the status of the Company's stock option plans as of December 31, 2004, 2003 and 2002, and changes during the years then ended is presented in the following table:
Options Outstanding December 31, 2004 December 31, 2003 December 31, 2002 Shares Weighted
Average
Exercise
PriceShares Weighted
Average
Exercise
PriceShares Weighted
Average
Exercise
PriceBeginning 2,104,483 $ 2.47 2,584,307 $ 3.05 2,541,200 $ 4.32 Granted 1,803,187 $ 0.45 207,500 $ 0.18 1,193,000 $ 0.17 Exercised — $ — — $ — (200,000 ) $ 0.25 Forfeited (942,402 ) $ 4.60 (687,324 ) $ 3.95 (949,893 ) $ 3.45 Ending 2,965,268 $ 0.56 2,104,483 $ 2.47 2,584,307 $ 3.05 Exercisable at year-end 2,965,268 $ 0.56 2,104,483 $ 2.47 2,584,307 $ 3.05 Weighted-average fair value of options granted during the period: $ 0.56 $ 0.10 $ 0.09 The following table summarizes information about stock options outstanding as of December 31, 2004:
Options Outstanding Options Exercisable Weighted
Average
Remaining
Contractual
LifeRange of Exercise Price Number
Outstanding
at 12/31/04Weighted
Average
Exercise
PriceNumber
Exercisable
at 12/31/04Weighted
Average
Exercise
Price$0.01 - 0.18 942,500 7.77 yrs. $ 0.13 942,500 $ 0.13 $0.19 - 0.34 860,000 9.31 yrs. $ 0.32 860,000 $ 0.32 $0.35 - 0.56 903,382 7.02 yrs. $ 0.48 903,382 $ 0.48 $0.57 - 7.31 259,386 5.55 yrs. $ 3.23 259,386 $ 3.23 2,965,268 $ 0.56 2,965,268 $ 0.56 A summary of the status of the Company's stock option plans as of March 31, 2005 and 2004, and changes during the three month periods then ended is presented in the following table:
Options Outstanding March 31, 2005 March 31, 2004 Shares Weighted
Average
Exercise
PriceShares Weighted
Average
Exercise
PriceBeginning 2,965,268 $ 0.56 2,104,483 $ 2.47 Granted 2,646,000 $ 0.50 560,687 $ 0.41 Exercised — $ — — $ — Forfeited — $ — (12,121 ) $ 0.25 Ending 5,611,268 $ 0.53 2,653,049 $ 2.04 Exercisable at period-end 5,611,268 $ 0.53 2,653,049 $ 2.04 Weighted-average fair value of options granted during the period: $ 0.50 $ 0.41 The following table summarizes information about stock options outstanding as of March 31, 2005:
Options Outstanding Options Exercisable Weighted
Average
Remaining
Contractual
LifeRange of Exercise Price Number
Outstanding
at 03/31/05Weighted
Average
Exercise
PriceNumber
Exercisable
at 03/31/05Weighted
Average
Exercise
Price$0.09 - 0.34 1,802,500 8.26 yrs. $ 0.22 1,802,500 $ 0.22 $0.19 - 0.34 2,129,882 8.68 yrs. $ 0.44 2,129,882 $ 0.44 $0.35 - 0.56 1,491,500 9.45 yrs. $ 0.60 1,491,500 $ 0.60 $0.57 - 7.31 187,386 5.04 yrs. $ 4.12 187,386 $ 4.12 5,611,268 $ 0.53 5,611,268 $ 0.53 13. Income
Taxes (Continued)Taxes.There is no provision for income taxes for any of the years ended December 31, 2004, 2003 or 2002. 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 ========= =========== ========
December 31, 2004 2003 2002 Federal income tax at statutory rate $ (485,200 ) $ (641,400 ) $ (2,989,400 ) State income taxes, net of federal benefit (83,300 ) (97,100 ) (556,200 ) Tax benefit not currently recognizable 560,600 706,300 3,475,800 Research and development Credit — — (100,000 ) Other 7,900 32,200 30,200 Provision for income taxes $ — $ — $ — Deferred income taxes and benefits result from temporary timing differences in the recognition of certain
expensesexpense 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 $ -- $ -- ========== =========
December 31, 2004 2003 Net operating loss carryforwards $ 14,961,000 $ 15,402,700 Tax credit carryforwards 654,000 654,500 Capitalized software (261,000 ) (199,700 ) Depreciation and amortization 760,000 593,200 Reserves not currently deductible 585,000 404,800 Deferred compensation — 1,202,700 Total deferred tax asset 16,700,000 18,058,200 Valuation allowance (16,700,000 ) (18,058,200 ) Net deferred tax asset $ — $ — The Company has net operating loss carryforwards available to reduce future taxable income, if any, of approximately
$2,780,800$41,464,000 and $14,795,000 for Federal and California income taxpurposes.purposes, respectively. The benefits from these carryforwards expire at various times from 2005 through2018.2022. As of December 31,1998, management believes it2004, the Company cannotbe determineddetermine that it is more likely than not that these carryforwards anditsother deferred tax assets will be realized, and accordingly, the Company has fully reserved for these deferred tax assets. The change in valuation allowance was $1,358,200, $(706,300) and $(3,475,000) for the years ended December 31, 2004, 2003 and 2002, respectively.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'sutilization ofitsthe Company's net operating loss carryforwards through 1998 will be limited to approximately $400,000 per year until such carryforwards are fullyutilized. F-16GraphOn Corporation Notesutilized or expire.In connection with the NES Acquisition that closed during the three month period ended March 31, 2005 (See Note 5), the Company has recorded a deferred tax liability of $2,151,200 as of March 31, 2005 to
Financial Statements (Continued) 8.reflect the tax effects of the different financial statement versus tax bases in the assets acquired. Furthermore, the Company has recorded a corresponding $2,151,200 reduction in its valuation allowance on its deferred tax assets as of March 31, 2005 to reflect management's estimate that it is more likely than not that the Company will realize the tax benefits from utilization of certain of its tax net operating loss carryforwards from future reversals of the taxable temporary differences arising from the NES acquisition.14. Concentration of Credit
RiskRisk.Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and cash equivalents,
investmentstrade receivables andtrade receivables.note receivable-related party. The Company placesitscash and cash equivalents with high quality financial institutions and, by policy, limits theamountsamount of credit exposure to any one financial institution.Available-for-sale securities are heldAs of March 31, 2005 and December 31, 2004, the Company had approximately $3,071,300 and $575,300, respectively, of cash and cash equivalents with financial institutions, inpublic companiesexcess of FDIC insurance limits.For the three months ended March 31, 2005, sales to the Company's three largest customers accounted for
which there is a ready market. The Company'sapproximately 41.1%, 23.3% and 19.1%, respectively, of total revenues, with related accounts receivableare derived from many customers in various industries. The Company believes any riskas ofaccounting loss is significantly reduced dueMarch 31, 2005 of $250,000, $520,400 and $0, respectively.For the year ended December 31, 2004, sales to the
diversityCompany's three largest customers accounted for approximately 20.9%, 14.9% and 14.1% ofits end-customerstotal revenues, respectively, with related accounts receivable as of December 31, 2004 of $160,400, $15,000 andgeographic$0, respectively.For the year ended December 31, 2003, sales
areas.to the Company's three largest customers accounted for approximately 27.4%, 18.4% and 9.2% of total revenues, respectively, with related accounts receivable as of December 31, 2003 of $0, $145,900 and $230,000, respectively.For the year ended December 31, 2002, sales to the Company's three largest customers accounted for approximately 26.9%, 23.4% and 12.5% of total revenues, respectively, with related accounts receivable as of December 31, 2002 of $0, $0 and $58,800, respectively.
The Company performs credit
evaluationevaluations ofitscustomers' financial condition whenever necessary, and generally does not require cash collateral or other security to support customer receivables.9. Major Customers ForApproximately 52,039 shares of NES' common stock (See Note 5) collateralizes the
year endednote receivable-related party, which bears interest at 3.62% per annum and matures in 2009. The Company reviews the collectibility of the note on a regular basis.15. Commitments and Contingencies.
Operating Leases. In October 2004, the Company renewed its operating lease for an approximate 3,300 square foot facility in New Hampshire. This lease is cancelable by the landlord or the Company upon 30-days written notice. Monthly rental payments for this facility are approximately $5,300.
The Company currently occupies approximately 1,000 square feet of office space in Santa Cruz, California. The office space is rented pursuant to a one-year operating lease, which became effective August 1, 2004. Rent on the Santa Cruz facility is approximately $1,400 per month. The Company recently signed a three-year operating lease to occupy approximately 1,500 square feet of office space in Santa Cruz, California, commencing August 1, 2005 and plans on moving into this facility during August 2005 and vacating its current premises by the end of August 2005. Rent on the new facility, inclusive of the estimated share of pro rata utilities, facilities maintenance and other costs will average approximately $3,600 per month over the three-year term. The Company also has an option to renew for an additional three-year term upon the original lease's expiration on August 1, 2008.
The Company has been occupying leased facilities in Rolling Hills Estates, California on a month-to-month basis since October 2002. Rent on this office is approximately $1,000 per month.
The Company has also been renting a small office in Berkshire, England, United Kingdom since December
31, 1998, three customers accounted for2002. This operating lease runs through December 2005. Rent on this office, which can fluctuate depending on exchange rates, is approximately29%, 21% and 17% of revenues, respectively with related accounts receivable$400 per month.Future minimum lease payments under all leases in effect as of December 31,
1998 of $0, $500,000 and $0, respectively. For2004, assuming that neither theyear 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,landlord nor the Companyentered into an operatingcancels the leasefor its current headquarters facility, which is renewable in one-year increments for ten years. In June 1998,on theCompany 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 inNew Hampshirewhich is cancelablefacility, are asof October 31, 2001. The facility leases require the Company to pay certain maintenance and operating expenses, such as taxes, insurance, and utilities.follows:
Year ending December 31, 2005 $ 62,600 2006 and thereafter $ — Rent expense for the years ended December 31,
1998, 19972004, 2003 and19962002 aggregated$48,300, $17,120approximately $95,700, $295,400 and$14,900, respectively. Rent expense$525,700, respectively, and $27,700 and $24,600 for thethree months ended March 31, 1999first quarters of 2005 and1998 aggregated $76,4002004, respectively.Commitments. On January 29, 2004, the Company completed a private placement of common stock and
$12,100, respectively. Future minimum annual lease payments for these leases are as follows:
Year Ending December 31, ------------------------1999.......................................................... $261,600 2000.......................................................... 256,900 2001.......................................................... 194,000 -------- $712,500 ========F-17GraphOn Corporation Notescommon stock purchase warrants in which Mr. Orin Hirschman purchased 3,043,478 shares of common stock and warrants toFinancial Statements (Continued) 10. Commitments (Continued) Royalty Agreements The Company licenses essential components (Developed Technology)purchase 1,521,739 shares ofits 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 elementscommon stock (representing in the aggregate 19.7% of the Company'stechnology (Nonexclusive Technology) are also licensed fromoutstanding shares of common stock as of March 18, 2004). As a condition of theSoftware Developerssale, the Company entered into an Investment Advisory Agreement with Mr. Hirschman, pursuant tonon-exclusive agreements (Nonexclusive Agreements). The Technology Agreements andwhich it was agreed that in theNonexclusive Agreements call for royalty payments to the Software Developers. Such royalty payments are based on a percentage of net revenues (Royalty Rate) received byevent the Companyfor salescompletes a transaction with a third party introduced by Mr. Hirschman, the Company shall pay to Mr. Hirschman 5% of theCompany's productsvalue of thatcontain the Developed Technology.transaction. TheRoyalty Rate is 4.8%agreement, as amended, expires on January 29, 2008.Contingencies. Under its Amended and
2.9% for 1999Restated Certificate of Incorporation and2000, respectively. The Company also holds an option to purchase the Developed Technology,Amended andto 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 dateRestated Bylaws and certainminimum royalty payments. Ifagreements with officers and directors, the Company has agreed to indemnify its officers and directors for certain events or occurrences arising as a result of the officer or director's serving in such capacity. Generally, the term of the indemnification period is for the officer's or director's lifetime. The maximum potential amount of future payments the Company could be required to make under these indemnification agreements is unlimited as the Company does notexercisecurrently have a directors and officers liability insurance policy that limits itsoption,exposure and enables it to recover a portion of any future amounts paid. The Company believes theRoyalty Rate would continue at 2.0%estimated fair value of these indemnification agreements is minimal and has no liabilities recorded for these agreements as of December 31, 2004.The Company enters into indemnification provisions under (i) its agreements with
respectother companies in its ordinary course of business, including contractors and customers and (ii) its agreements with investors. Under these provisions, the Company generally indemnifies and holds harmless the indemnified party for losses suffered or incurred by the indemnified party as a result of the Company's activities or, in some cases, as a result of the indemnified party's activities under the agreement. These indemnification provisions often include indemnifications relating tothe Developed Technology. The Technology Agreements and the Nonexclusive Agreements also call for lump sum paymentsrepresentations made by the Company with regard to intellectual property rights, and often survive termination of the underlying agreement. The maximum potential amount of future payments the Company could be required to make under these indemnification provisions is unlimited. The Company has not incurred material costs to defend lawsuits or settle claims related to these indemnification agreements. As a result, the Company believes the estimated fair value of these agreements is minimal. Accordingly, the Company has no liabilities recorded for these agreements as of December 31, 2004.The Company's software license agreements also generally include a performance guarantee that the Company's software products will substantially operate as described in the
eventapplicable program documentation for a period ofa 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 entity90 days afterwhich the shareholders ofdelivery. The Company also generally warrants that services that the Companyhold 50% or less of the total equity or voting power of the surviving entity. The payments are based uponperforms will be provided in apercentage of the total consideration received bymanner consistent with reasonably applicable industry standards. To date, the Companyor payable to its shareholders in such a transaction (Transaction Rate). The Transaction Rate would be 4.8% and 2.9% if the change in control transaction occurs in 1999 or 2000, respectively. Each of the Technology and Nonexclusive Agreements, unless terminated earlier pursuant to the terms of the Agreements, will terminate on September 6, 2006 (Note 13). 11.has not incurred any material costs associated with these warranties.16. Employee 401(k)
PlanPlan.In December 1998, the Company adopted a 401(k) Plan
("the Plan")(the Plan) to provide retirementbenefitbenefits foritsemployees. 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.TheIn addition, the Companymade no contributionsmay make discretionary/matching contributions. During 2004, 2003 and 2002, the Company contributed a total of $23,000, $27,200 and $52,400 to the Plan,in 1998. F-18GraphOn Corporation Notesrespectively. During the three months ended March 31, 2005 and 2004, the Company contributed a total of $6,100 and $14,900 toFinancial Statements (Continued) 12.the Plan, respectively.17. Supplemental Disclosure of Cash Flow
InformationInformation.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,
Years Ended December 31, 2004 2003 2002 Cash Paid: Income Taxes $ — $ — $ — Interest $ — $ — $ 200 The Company disbursed no cash for the payment of either income taxes or interest expense during the quarter ended March 31, 2005 or the similar period in 2004.
During 2002, the Company
completedaccepted 933,333 shares of its common stock from Menta Software as full settlement of the outstanding $1,400,000 due the Company under the terms of the patent license agreement the Company entered into with Menta Software in May 2001.During 2004, the Company capitalized approximately $179,500 and $31,000 of deferred acquisition costs, related to the NES acquisition, that were included in accounts payable and accrued liabilities, respectively, as of December 31, 2004. Additionally, during 2004, the Company accrued approximately $32,500 of deferred financing costs, related to the 2005 private placement, as other assets, as of December 31, 2004.
During the first quarter of 2005, the Company capitalized approximately $72,100 and $106,000 of costs related to the NES acquisition that were included in accounts payable and accrued expenses, respectively. Additionally, the Company accrued approximately $17,000 of costs related to the 2005 private placement.
18. Quarterly Information (Unaudited).
The summarized quarterly financial data presented below reflect all adjustments, which, except for the restructuring charge recorded during the third quarter of fiscal 2003, in the opinion of
management, are of a normal and
final closingrecurring nature necessary to present fairly the results of operations for the periods presented.In thousands, except per share data.
Year ended
December 31, 2004First
QuarterSecond
QuarterThird
QuarterFourth
QuarterFull
YearTotal revenues $ 903 $ 677 $ 932 $ 1,018 $ 3,530 Gross profit 593 373 784 876 2,626 Operating income (loss) (435 ) (735 ) (295 ) 23 (1,442 ) Net income (loss) (431 ) (732 ) (293 ) 29 (1,427 ) Income (loss) per common share: Basic (0.03 ) (0.03 ) (0.01 ) 0.00 (0.07 ) Diluted na na na 0.00 na
Year ended
December 31, 2003
First
Quarter
Second
Quarter
Third
Quarter
Fourth
Quarter
Full
Year
Total revenues $ 1,044 $ 1,175 $ 1,086 $ 865 $ 4,170 Gross profit 720 832 773 474 2,799 Restructuring charge (Note 9) — — (80 ) — (80 ) Operating loss (386 ) (416 ) (514 ) (579 ) (1,895 ) Net loss (380 ) (418 ) (511 ) (578 ) (1,887 ) Basic and diluted loss per common share (0.02 ) (0.03 ) (0.03 ) (0.03 ) (0.11 ) Board of Directors
Network Engineering Software, Inc.
San Jose, CaliforniaWe have audited the accompanying balance sheets of Network Engineering Software, Inc. (the "Company") as of October 31, 2004 and 2003, and the related statements of operations, stockholders' deficit, and cash flows for the years then ended. These financial statements are the responsibility of the
Offering,Company's management. Our responsibility is to express an opinion on these financial statements based on our audit.We conducted our audit in
which it sold 1,963,868 sharesaccordance with auditing standards generally accepted in the United States ofcommon stockAmerica. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides 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 the Company at
$1.00 per share,October 31, 2004 and 2003, and the results of its operations and its cash flows fornet proceedsthe years then ended in conformity with accounting principles generally accepted in the United States of$1,708,600,America.The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. The Company has an accumulated deficit of $8,370,900 and
granted additional warrantsnegative working capital of $5,674,500. These conditions raise substantial doubt about its ability topurchase 392,774 shares of common stock. Incontinue as a going concern. As discussed in Note 9, the Company was acquired on January1999, the convertible note payable for $475,000 to the Agent Affiliate was retired from proceeds31, 2005. The financial statements do not include any adjustments that may result from thethird closingoutcome ofthe Offering. In January 1999, the CEO and Executive Vice President received $800,000 forthis uncertainty or the sale of800,000the Company./s/ MACIAS GINI & COMPANY LLP
Macias Gini & Company LLP
Sacramento, California
April 17, 2005
NETWORK ENGINEERING SOFTWARE, INC.
BALANCE SHEETS
OCTOBER 31, 2004 AND 2003
2004 2003 Assets Cash $ — $ 5,900
Liabilities and Stockholders' Deficit
Accounts payable $ 81,200 $ — Accrued payroll 3,100,000 2,550,000 Notes payable, related party 1,320,100 1,266,500 Accrued interest, related party 771,600 635,900 Notes payable 25,000 25,000 Accrued interest 20,000 17,500 Other liabilties 356,600 22,400 Total Current Liabilities 5,674,500 4,517,300
Stockholders' Deficit
Common stock, no par value, 100,000 shares authorized, 80,142 and 67,182 shares issued and outstanding at October 31, 2004 and 2003, respectively 2,696,400 2,686,400 Accumulated deficit (8,370,900 ) (7,197,800 ) Total Stockholders' Deficit (5,674,500 ) (4,511,400 ) Total Liabilities and Stockholders' Deficit $ — $ 5,900 The accompanying notes are an integral part of these financial statements
NETWORK ENGINEERING SOFTWARE, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 2004 AND 2003
2004 2003 Revenue $ — $ —
Operating Expenses:
Salaries and wages 550,000 550,000 General and administrative 484,900 192,100 Total Operating Expenses 1,034,900 742,100
Interest Expense
(138,200
)
(216,800
)Net Loss $ (1,173,100 ) $ (958,900 ) The accompanying notes are an integral part of these financial statements
NETWORK ENGINEERING SOFTWARE, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
FOR THE YEARS ENDED OCTOBER 31, 2004 AND 2003
Common Stock Accumulated
DeficitShares Amount Total Balance, November 1, 2002 67,182 $ 2,686,400 $ (6,238,900 ) $ (3,552,500 ) Net loss — — (958,900 ) (958,900 ) Balance, October 31, 2003 67,182 2,686,400 (7,197,800 ) (4,511,400 ) Stock issued 12,960 10,000 — 10,000 Net loss — — (1,173,100 ) (1,173,100 ) Balance,October 31, 2004 80,142 $ 2,696,400 $ (8,370,900 ) $ (5,674,500 ) The accompanying notes are an integral part of these financial statements
NETWORK ENGINEERING SOFTWARE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED OCTOBER 31, 2004 AND 2003
2004 2003 Cash Flows From Operating Activities: Net Loss $ (1,173,100 ) $ (958,900 ) Adjustments to reconcile net loss to cash used in operating activities: Changes in: Accounts payable 81,200 — Accrued payroll 550,000 550,000 Accrued interest, related party 135,700 214,900 Accrued interest 2,500 2,500 Other liabilities 334,200 (8,200 ) Net Cash Used in Operating Activities (69,500 ) (199,700 ) Cash Flows From Financing Activities: Proceeds from related party notes payable 124,500 302,000 Repayment of related party notes payable (70,900 ) (108,500 ) Proceeds from issuance of shares 10,000 — Net Cash Provided by Financing Activities 63,600 193,500 Net Change in Cash Flows (5,900 ) (6,200 )
Cash and Cash Equivalents, beginning of year
5,900
12,100
Cash and Cash Equivalents, end of year $ — $ 5,900 The accompanying notes are an integral part of these financial statements.
NETWORK ENGINEERING SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2004 AND 2003Note 1. Description of Business
Network Engineering Software, Inc. (the "Company") develops and licenses proprietary Internet based intellectual property. The Company was originally incorporated in California in 1980 as Scientific Research Management Corporation. It changed its name to Network Engineering Technologies, Inc. in August 1996 and to Network Engineering Software, Inc. in April 1997.
Note 2. Significant Accounting Policies
Basis of Accounting—The accompanying financial statements have been presented on the accrual basis of accounting in accordance with accounting principles generally accepted in the United States of America.
Use of Estimates—In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect certain reported amounts and disclosures. Actual results could materially differ from those estimates under different assumptions or conditions.
Revenue Recognition—The Company recognizes license revenue when persuasive evidence of an arrangement exists, delivery occurs or services are rendered, the sales price or fee is fixed or determinable and collectibility is reasonably assured. The Company did not generate any revenue for the years ended October 31, 2004 and 2003 from its licensing activities.
Cash and Cash Equivalents—Cash equivalents are investments with maturities of three months or less at the time of purchase.
Stock Based Compensation—The Company accounts for stock-based awards using the intrinsic value method of accounting in accordance with Accounting Principles Board Opinion ("APB") No. 25, "Accounting for Stock Issued to Employees" and related interpretations. As such, compensation is recorded on the date of issuance or grant as the excess of the current estimated fair value of the underlying stock over the purchase or exercise price. Any deferred compensation is amortized over the respective vesting periods of the equity instruments, if any. The Company has adopted the disclosure provisions of Statement of Financial Accounting Standards No. 123 (SFAS No. 123), "Accounting for Stock-Based Compensation" which permits nonpublic entities to provide pro forma net loss and net loss per share disclosure for stock-based compensation as if the minimum value method defined in SFAS No. 123 had been applied. The Company had no stock options outstanding during the years ended October 31, 2004 and 2003.
As required by SFAS No. 123, transactions with nonemployees, in which goods or services are the consideration received for the issuance of equity instruments, are accounted for under the fair value basis in accordance with SFAS No. 123. There were no such transactions during the years ended October 31, 2004 and 2003.
Income Taxes—The Company has elected to be taxed for both federal and state income tax purposes under the provisions of subchapter S of the Internal Revenue Code and corresponding state provisions. Under such provisions, the shareholders report their share of the Company's taxable earnings on their personal income tax returns. The Company is subject to a 1.5% income tax on its taxable income.
Income taxes are computed using the asset and liability method for income taxes specified by Statement of Financial Accounting Standard (SFAS) No. 109, "Accounting for Income Taxes," under
which deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of assets and liabilities and are measured using the currently enacted tax rates and laws. Deferred income taxes are insignificant.
Recent Pronouncements—In December 2004, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R, "Share-Based Payment", which replaces SFAS No. 123 and supercedes APB Opinion No. 25. SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements based on their fair values beginning with the first interim or annual period after December 15, 2005, with early adoption encouraged. The pro forma disclosures previously permitted under SFAS No. 123 no longer will be an alternative to financial statement recognition. Management of the Company does not expect that the adoption of SFAS No. 123R will have a material impact on its results of operations or financial condition.
In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary Assets-An Amendment of APB Opinion No. 29, Accounting for Nonmonetary Transactions". SFAS No. 153 eliminates the exception from fair value measurement for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB Opinion No. 29, "Accounting for Nonmonetary Transactions," and replaces it with an exception for exchanges that do not have commercial substance. SFAS No. 153 specifies that a nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. SFAS No. 153 is effective for the fiscal periods beginning after June 15, 2005. Management of the Company does not expect that the adoption of SFAS No. 153 will have a material impact on its results of operations or financial condition.
Note 3. Fixed Assets
The Company did not have significant fixed assets as of November 1, 2002. As the assets have been fully depreciated and are not significant, they are not presented in the financial statements.
Note 4. Notes Payable, Related Party
In 1997, the Company's president and majority shareholder purchased a note payable of the Company held by a bank in exchange for a promissory note (Purchased Note) from the Company. The Purchased Note bears interest at 10.25% per annum and has no stated maturity. The Purchased Note is secured by the assets of the Company. In connection with the sale of the Company (see Note 9), the Company's president and majority shareholder agreed to forgive the outstanding balance on the Purchased Note and related accrued interest totaling $1,445,800 at January 31, 2005.
A significant shareholder (Shareholder) in the Company has provided financing for the Company's operations (Shareholder Note). The Shareholder Note bears interest at 9% per annum and does not have a stated maturity date. In 2004, the Shareholder filed an action against the Company in an attempt to obtain payment for this note. In connection with the sale of the Company (see Note 9), a third party investor in GraphOn Corporation (Investor) made a payment of $665,000 to settle this litigation and obtain a release of any further claim against the Company.
At October 31, 2004 and 2003, the balance of the related party notes payable and related party accrued interest consisted of the following:
2004 2003 Principal Accrued
InterestPrincipal Accrued
InterestPurchased Note $ 743,600 $ 683,100 $ 814,500 $ 600,600 Shareholder Note 576,500 88,500 452,000 35,300 $ 1,320,100 $ 771,600 $ 1,266,500 $ 635,900 Note 5. Note Payable
In January 1997, the Company entered into a $25,000 note payable. The note bears interest at 10% per annum, matured in October 1999 and is payable on demand. Accrued interest on the note was $20,000 and $17,500 at October 31, 2004 and 2003, respectively.
In exchange for payment of the outstanding principal of $25,000 made on behalf of the Company by the Investor subsequent to year-end, the holder of the Note Payable agreed to forgive all interest accrued on the note and release the Company from any related claims.
Note 6. Other Liabilities
Other liabilities consist of the following at October 31:
2004 2003 Licensing Arrangement $ 330,000 $ — Litigation Settlement 20,000 20,000 Other 6,600 2,400 $ 356,600 $ 22,400 In February 2002, the Company entered into an arrangement (Licensing Arrangement) with a law firm to assist the Company in its efforts to license its intellectual property. Under the Licensing Arrangement, the law firm agreed to incur certain costs related to negotiating licensing arrangements on behalf of the Company in exchange for a share of future license revenues resulting from its efforts. The law firm was unable to effect any such licensing arrangements. In connection with the sale of the Company (see Note 9), the law firm accepted 500,000 shares of
their commonGraphOn Corporation stock valued at $230,000 and $100,000 in cash as settlement for any and all amounts potentially due it under the Licensing Arrangement.In August 2001, a legal judgment (Litigation Settlement) was entered against the Company related to litigation over the usage of a domain name. In conjunction with the sale of the Company (see Note 9), the plaintiff accepted $20,000 in settlement of amounts due it.
Note 7. Related Party Transaction
In 1997, the Company's president and majority shareholder purchased a note payable of the Company in exchange for a promissory note (Purchased Note) from the Company. At October 31, 2004
and 2003, $743,600 and $814,500 was due under this note and accrued interest of $683,100 and $600,600, respectively, was recorded by the Company.
At October 31, 2004 and 2003 accrued payroll of $3,100,000 and $2,550,000, respectively, was due the Company's president. The Company recorded $550,000 and $550,000 in salary expense for salary due the president during the years ended October 31, 2004 and 2003, respectively. In connection with the sale of the Company (see Note 9), the president agreed to forgive amounts due him related to the Purchased Note and accrued payroll.
A significant shareholder in the Company provided financing to the Company (see Note 4) in exchange for a promissory note. At October 31, 2004 and 2003, $576,500 and $452,000 in principal, and accrued interest of $88,500 and $35,300 was due under this note, respectively. In conjunction with the sale of the Company (see Note 9), the shareholder received full payment on the note and accrued interest from the Investor.
In conjunction with the sale of the Company (see Note 9), its president and majority shareholder transferred 35,000 shares of GraphOn Corporation stock received by him in connection with the sale of the Company to the
Agent Affiliate.patent advisory firm (see Note 8).Note 8. Commitments and Contingencies
In
February 1999,January 2004, the Company's board of directors granted its president the option to convert all or any portion of accrued payroll due him into the Company's common stock at the fair market value of the Company's common stock at the time of conversion. No portion of accrued payroll was converted during 2004.The Company occupied office facilities under a month-to-month rental agreement until June 2004. Rent for these facilities is approximately $3,000 per month.
The Company occupies storage facilities under a month-to-month rental agreement. Rent for these facilities is approximately $1,100 per month.
In total, the Company paid $33,500 and
its shareholders entered into a merger agreement with Unity First Acquisition Corporation (UFAC), a publicly-traded holding company$46,000 for rental of these facilities inNew 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 merger2004 andchanging 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.2003, respectively.In
March 1999,July 2004, the Company entered into anon-bindingFinder's Fee agreement with a patent advisory firm whereby theSoftware Developerspatent advisory firm agreed to solicit a buyer for the Company in consideration of a 20% commission from the gross proceeds of theTechnology Agreements (Note 10) whereby on the successful consumationsale of theUFAC merger,Company. In conjunction with the sale of the Companywould pay(see Note 9), theSoftware Developerspatent advisory firm accepted 1,697,500 shares of GraphOn Corporation common stock, including 35,000 shares from the Company's president and majority shareholder (see Note 7), with alump sumvalue of$520,400$764,700 in connection with this agreement. In accordance with the settlement of its agreement, the patent advisory firm placed 175,000 of the shares into escrow, pending resolution of certain contingencies, for 18 months.Note 9. Subsequent Event
In December 2004, the Company entered into an agreement to be acquired by GraphOn Corporation (GraphOn) in exchange for 10,000,000 shares of GraphOn common stock, less the number of shares issued to settle certain pre-existing claims and contingent liabilities of the Company (see Note 8) and the number of shares with a value equivalent to the expense incurred by GraphOn in effecting the acquisition.
On January 31, 2005 the sale closed, and the Company's shareholders received a total of 7,402,500 shares of GraphOn common stock, net of 2,197,500 shares issued to settle various Company liabilities, including 1,697,500 shares that were issued to the patent advisory firm (see Note 8) and 400,000 shares with a value approximating the expenses incurred by GraphOn in effecting the acquisition. The Company's shareholders and the patent advisory firm have placed 1,825,000 and 175,000 shares of GraphOn common stock, respectively, into escrow to be used to settle any post-acquisition contingencies. The shares will be released from escrow on two separate dates. Any of the first 1,750,000 shares not returned to GraphOn under the terms of the acquisition agreement will be distributed to the shareholders eighteen months after the close of the sale. Any of the remaining 250,000 shares held not returned to GraphOn will be released at the later of thirty-six months after the close of the sale or the expiration of the statute of limitations applicable to certain tax matters as stated in the acquisition agreement.
GRAPHON CORPORATION
UNAUDITED CONDENSED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 2004
GraphOn(1) NES(2) (Restated)
Pro Forma
Adjustments(Restated)
Pro FormaAssets Current Assets: Cash and cash equivalents $ 675,300 $ — $ 2,130,000 (3) $ 2,805,300 Accounts receivable 518,900 — — 518,900 Other current assets 24,100 — (3,000 )(4) 21,100 Total Current Assets 1,218,300 — 2,127,000 3,345,300
Property and equipment, net
75,400
—
—
75,400
Capitalized software, net 273,700 — — 273,700 Patents, net — — 5,447,800 (5) 5,447,800 Related party note receivable 350,000 — (350,000 )(6) — Deferred acquisition costs 269,700 — — 269,700 Other assets 37,300 — — 37,300 Total Assets $ 2,224,400 $ — $ 7,224,800 $ 9,449,200
Liabilities and Shareholders' Equity (Deficit)
Current Liabilities: Accounts payable $ 250,200 $ 81,200 $ (81,200 )(7) $ 250,200 Accrued liabilities 231,400 — — 231,400 Accrued wages 260,100 3,100,000 (3,100,000 )(7) 260,100 Accrued interest — 791,600 (791,600 )(7) — Notes payable — 1,345,100 (1,345,100 )(7) — Deferred revenue 689,800 — — 689,800 Other Liabilities — 356,600 (356,600 )(7) — Total Liabilities 1,431,500 5,674,500 (5,674,500 ) 1,431,500 Long Term Liabilities: Deferred revenue 426,600 — — 426,600 Total Liabilities 1,858,100 5,674,500 (5,674,500 ) 1,858,100
Commitments and contingencies
—
—
—
—
Shareholders' Equity (Deficit)
Preferred stock — — — — Common stock 2,200 — 2,500 (8) 4,700 Additional paid-in capital 46,930,700 2,696,400 4,875,900 (9) 54,503,000 Notes receivable—directors (50,300 ) — — (50,300 ) Note receivable—shareholder — — (350,000 )(6) (350,000 ) Accumulated other comprehensive loss (400 ) — — (400 ) Accumulated deficit (46,515,900 ) (8,370,900 ) 8,370,900 (10) (46,515,900 ) Total Shareholders' Equity (Deficit) 366,300 (5,674,500 ) 12,899,300 7,591,100 Total Liabilities and Shareholders' Equity (Deficit) $ 2,224,400 $ — $ 7,224,800 $ 9,449,200 See accompanying notes to the unaudited condensed pro forma financial statements
GRAPHON CORPORATION
UNAUDITED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
GraphOn(1) NES(2) (Restated)
Pro Forma
Adjustments(Restated)
Pro FormaRevenue: Product licenses $ 2,395,200 $ — $ — $ 2,395,200 Service fees 1,015,000 — — 1,015,000 Other 119,600 — — 119,600 Total Revenue 3,529,800 — — 3,529,800
Cost of Revenue:
Product costs 572,100 — — 572,100 Service costs 331,700 — — 331,700 Total Cost of Revenue 903,800 — — 903,800
Gross Profit
2,626,000
—
—
2,626,000
Operating Expenses:
Selling and marketing 1,383,700 — — 1,383,700 General and administrative 1,183,600 1,034,900 513,300 (11) 2,731,800 Research and development 1,500,900 — — 1,500,900 Total Operating Expenses 4,068,200 1,034,900 513,300 5,616,400 Loss From Operations (1,442,200 ) (1,034,900 ) (513,300 ) (2,990,400 )
Other Income (Expense)
Interest and other income 14,700 — — 14,700 Interest and other expense — (138,200 ) 138,200 (12) — Total Other Income (Expense) 14,700 (138,200 ) 138,200 14,700
Net Loss
$
(1,427,500
)
$
(1,173,100
)
$
(375,100
)
$
(2,975,700
)
Basic and diluted loss per common share
$
(0.07
)
$
(0.06
)
Weighted average common shares outstanding
21,307,966
24,814,400
(13)
46,122,366
See accompanying notes to the unaudited condensed pro forma financial statements
GRAPHON CORPORATION
NOTES TO UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS(1) Derived from the audited financial statements of GraphOn Corporation for the year ended December 31, 2004.
(2) Derived from the audited financial statements of NES for the year ended October 31, 2004. Certain amounts have been reclassified to conform to GraphOn's basis of presentation.
(3) Entry gives effect to the net proceeds of the February 2, 2005 private placement of 148,148 shares of GraphOn's Series A preferred stock, five-year warrants to purchase 74,070 shares of Series B preferred stock, and subsequent conversion of the Series A preferred stock into 14,814,800 shares of common stock, as of March 30, 2005, as if the private placement and conversion had occurred on December 31, 2004.
The aggregate purchase price of the preferred stock and warrants sold was $4,000,000, of which, GraphOn has expended, or expects to expend, approximately $1,533,200 in conjunction with the acquisition of NES (see Note 5) and approximately $336,800 related to the costs of the private placement, respectively.
(4) Entry reclassifies accrued interest receivable related to the note receivable—shareholder (see Note 6) to additional paid-in capital (see Note 9).
(5) Entry records the cost (which is subject to adjustment) of the assets (consisting primarily of patents and patent applications) acquired in the NES acquisition. There were no liabilities acquired in the transaction. The estimated cost of the patents was calculated as follows:
Shares of GraphOn common stock issued 9,600,000 Price per share $ 0.408 $ 3,916,800 NES liabilities settled with cash: Accounts payable $ 81,200 Note payable (shareholders)* 665,000 Other liabilities 151,600 Total NES cash settlements 897,800 Transaction costs 633,200 Total amounts expended, or to be expended in Conjunction with the NES acquisition 1,531,000 Cost of patents $ 5,447,800
- *
- Includes $88,500 of accrued interest. The cash payment for this note was made by an affiliate of one of the investors in the 2005 private placement and was reimbursed via a credit against the investor's investment in the 2005 private placement.
(6) Entry reclassifies the related party note receivable to equity, reflecting the exchange of company common stock for the NES common stock that had been collateralizing the note, upon the acquisition of NES (see Note 4).
(7) Entry gives effect to the settlement of all
future royalties due underof NES' liabilities immediately prior to, or in conjunction with, theTechnology Agreements. In May 1999,consummation of theCompany granted 50,000acquisition as if the acquisition had occurred on October 31, 2004, as follows:
Pre-acquisition
BalanceCash
SettlementStock
SettlementWritten off Accounts payable $ 81,200 $ (81,200 ) $ — $ — Accrued wages 3,100,000 — — (3,100,000 ) Accrued interest 791,600 (88,500 ) — (703,100 ) Notes payable 1,345,100 (601,500 ) — (743,600 ) Other liabilities 356,600 (126,600 ) (230,000 )** — $ 5,674,500 $ (897,800 ) $ (230,000 ) $ (4,546,700 )
- **
- 500,000 shares of common stock,
optionsvalued atan average exercise price of $3.26$0.46 per share,which representedwere issued to settle certain legal fees. All other NES liabilities that were not settled by cash were written off immediately prior to, or in conjunction with, theestimated fair marketacquisition.(8) Entry to common stock reflects the par value of the
stock. F-19PART I--FINANCIAL INFORMATION ITEM I Financial Statements GRAPHON CORPORATION BALANCE SHEETS
September 30, December 31, 1999 1998 ------------- ------------ (Unaudited)ASSETS ------ Current Assets: Cash and cash equivalents....................... $ 2,795,200 $ 1,798,400 Accounts receivable, net of allowance for doubtful accounts of $25,000 and $25,000....... 1,322,800 564,700 Available for sale securities................... 999,000 -- Prepaid expenses and other assets............... 554,100 32,100 ----------- ----------- Total Current Assets........................ 5,671,100 2,395,200 ----------- ----------- Property and Equipment, net....................... 548,200 423,300 Purchased Technology , net........................ 1,301,400 3,645,400 Capitalized Software, net......................... 231,500 74,200 Deferred Compensation Expense..................... 440,800 566,000 Other Assets...................................... 6,400 6,400 ----------- ----------- $ 8,199,400 $ 7,110,500 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current Liabilities: Convertible note payable........................ $ -- $ 475,000 Accounts payable................................ 382,000 115,700 Accrued expenses................................ 494,500 498,900 Deferred revenue................................ 75,400 112,600 ----------- ----------- Total Current Liabilities................... 951,900 1,202,200 Commitments and Contingencies Stockholders' Equity Preferred stock, $0.01 par value, 5,000 shares authorized, no shares issued and outstanding... -- -- Common stock, $0.0001 par value, 20,000,000 shares authorized, 10,969,471 and 7,970,336 shares issued and outstanding.................. 1,100 800 Additional paid in capital...................... 15,399,800 8,430,700 Accumulated other comprehensive income........ 300 -- Accumulated deficit........................... (8,153,700) (2,523,200) ----------- ----------- Stockholders' Equity........................ 7,247,500 5,908,300 ----------- ----------- $ 8,199,400 $ 7,110,500 =========== ===========See accompanying summary of accounting policiesshares issued in the NES acquisition andnotesthe 2005 private placement.(9) Entry to
financial statements. F-20GRAPHON CORPORATION STATEMENTS OF OPERATIONS
Nine Months Ended Three Months Ended September 30, September 30, ------------------------ ----------------------- 1999 1998 1999 1998 ----------- ----------- ----------- ---------- (Unaudited)Revenues Product sales.............. $ 602,600 $ 447,700 $ 225,700 $ 207,400 Maintenance................ 131,900 76,300 36,900 28,400 OEM license................ 1,115,000 964,600 240,000 100,000 OEM license--related party..................... 600,000 -- 600,000 -- Training................... -- 10,400 -- -- ----------- ----------- ----------- ---------- Total Revenues......... 2,449,500 1,499,000 1,102,600 335,800 Cost of Revenues Product sales.............. 10,400 20,900 3,600 5,100 Maintenance................ 28,200 15,000 9,400 5,000 OEM license................ 251,900 215,500 79,300 60,000 ----------- ----------- ----------- ---------- Total Cost of Revenues.............. 290,500 251,400 92,300 70,100 Gross Profit........... 2,159,000 1,247,600 1,010,300 265,700 ----------- ----------- ----------- ---------- Operating Expenses: Selling and marketing...... 2,359,200 860,000 783,800 335,600 General and administrative............ 3,725,500 782,800 1,340,500 441,700 Research and development... 1,771,800 634,400 517,000 299,500 ----------- ----------- ----------- ---------- Total Operating Expenses.............. 7,856,500 2,277,200 2,641,300 1,076,800 ----------- ----------- ----------- ---------- Loss From Operations....... (5,697,500) (1,029,600) (1,631,000) (811,100) Other Income (Expense): Interest and other income.................. 76,900 8,800 49,900 1,700 Interest expense......... (9,100) (368,000) (1,700) (166,600) ----------- ----------- ----------- ---------- Loss Before Provision for Income Taxes.............. (5,629,700) (1,388,800) (1,582,800) (976,000) Provision for Income Taxes..................... 800 800 -- -- ----------- ----------- ----------- ---------- Net Loss................... $(5,630,500) $(1,389,600) $(1,582,800) $ (976,000) =========== =========== =========== ========== Basic and Diluted Loss per Common Share.............. $ (0.59) $ (0.39) $ (0.15) $ (0.26) =========== =========== =========== ========== Weighted Average Common Shares Outstanding........ 9,540,148 3,583,798 10,712,629 3,750,418 =========== =========== =========== ==========See accompanying summary of accounting policies and notes to financial statements. F-21GRAPHON CORPORATION STATEMENTS OF CASH FLOWS
Nine Months Nine Months Ended Ended September 30, 1999 September 30, 1998 ------------------ ------------------ (Unaudited)Cash Flows From Operating Activities: Net (loss) income....................... $(5,630,500) $(1,389,600) Adjustments to reconcile net (loss) income to net cash (used in) provided by operating activities: Depreciation and amortization......... 2,473,900 41,700 Loss on available-for-sale securities........................... -- 16,500 Non-cash compensation expense......... 125,200 59,900 Interest expense...................... -- 323,100 Changes in operating assets and liabilities: Accounts receivable................. (758,100) 149,900 Available for sale securities....... (998,700) -- Prepaid expenses and other assets... (522,000) (31,600) Accounts payable.................... 266,300 204,000 Accrued expenses.................... (4,400) 202,100 Deferred revenue.................... (37,200) (398,100) ----------- ----------- Net Cash Used In Operating Activities....................... (5,085,500) (822,100) ----------- ----------- Cash Flows From Investing Activities: Other assets............................ -- (4,500) Capital expenditures.................... (412,100) (158,600) ----------- ----------- Net Cash Used In Investing Activities....................... (412,100) (163,100) ----------- ----------- Cash Flows From Financing Activities: Proceeds from convertible notes payable................................ -- 775,000 Repayment of convertible notes payable.. (475,000) -- Net proceeds from issuance of common stock.................................. 6,975,100 63,100 Purchase and retirement of common stock.................................. (5,700) -- ----------- ----------- Net Cash Provided By Financing Activities....................... 6,494,400 838,100 ----------- ----------- Net Increase (Decrease) in Cash and Cash Equivalents............................ 996,800 (147,100) Cash and Cash Equivalents, beginning of period................................. 1,798,400 302,800 ----------- ----------- Cash and Cash Equivalents, end of period................................. $ 2,795,200 $ 155,700 =========== ===========See accompanying summary of accounting policies and notes to financial statements. F-22GRAPHON CORPORATION STATEMENT OF EQUITY
Common Stock Unrealized ------------------ Additional Paid Gain on Accumulated Shares Amount in Capital Securities Deficit Total ---------- ------ --------------- ----------- ----------- -----------Balances, December 31, 1998................... 7,970,336 $ 800 $ 8,430,700 $ -- $(2,523,200) $ 5,908,300 Balance of information is unaudited through September 30,1999: Proceeds from sale of common stock.......... 62,525 -- 97,200 -- -- 97,200 Net proceeds from sale of common stock, net of offering costs of $255,300.............. 1,095,053 100 1,708,500 -- -- 1,708,600 Repurchase and retirement of common stock................. (40,952) -- (5,700) -- -- (5,700) Recapitalization of company through merger, net of merger costs of $255,700..... 1,875,000 200 5,169,100 -- -- 5,169,300 Unrealized gain on available for sale securities............ -- -- -- 300 -- 300 Issuance of common stock due to the exercise of warrants.. 7,509 -- -- -- -- -- Net loss............... -- -- -- -- (5,630,500) (5,630,500) ---------- ------ ----------- ----- ----------- ----------- Balances, September 30, 1999.................. 10,969,471 $1,100 $15,399,800 $ 300 $(8,153,700) $ 7,247,500 ========== ====== =========== ===== =========== ===========F-23GRAPHON CORPORATION NOTES TO FINANCIAL STATEMENTS 1. Merger with Unity First Acquisition Corp. and Basis of Presentation On July 12, 1999, GraphOn Corporation, a California corporation ("GraphOn- CA"), merged with and into Unity First Acquisition Corp., a Delaware corporation ("Unity"). Unity, as the surviving entityadditional paid-in capital gives effect to themergerapproximate $5,447,800 cost of the patents (see Note 5), the net $2,130,000 cash from the 2005 private placement and is offset by the elimination of NES' paid-in capital of $2,696,400, the $3,000 reclassification of accrued interest (see Note 4) and theRegistrant, then changed its namereclassification of $2,500 toGraphOn Corporation ("GraphOn"),paid-in capital, reflecting the par value of shares issued in connection with the NES acquisition and theGraphOn-CA management team continued in their existing roles at GraphOn. Pursuant2005 private placement.(10) Entry eliminates NES' reported accumulated deficit as of October 31, 2004.
(11) Entry gives effect to the
merger, eachestimated additional costs that would have been incurred if the NES acquisition had occurred on January 1, 2004, as follows:
Increase
(Decrease)Wages and related costs $ (255,000 ) Amortization (see below) 908,300 Legal expense (140,000 ) $ 513,300 The patents are being amortized over an estimated useful life of 6 years using the straight-line method.
(12) Entry reduces interest expense to zero, assuming all interest-bearing obligations of NES would have been settled on January 1, 2004 upon the acquisition and no interest would have been incurred, or paid, during the year ended December 31, 2004.
(13) Entry gives effect to the increase in weighted average common shares outstanding
share of GraphOn-CA common stock was exchanged for 0.5576 shares of Unity common stock and each outstanding option and warrant to purchase shares of GraphOn-CA common stock was exchanged for 0.5576 options or warrants to purchase shares of Unity common stock. Additionally, GraphOn received $5,425,000 in cash which was placed into trust upon Unity's initial public offering in November 1996 and released from trust upon consummation of the merger. As of July 12, 1999, GraphOn-CA had outstanding 16,296,559 shares of common stock. Asas a result of themerger,common shares issued in conjunction with theGraphOn-CA shareholders acquired approximately 9,086,961 shares of Unity common stock, or approximately 82.9%NES acquisition (see Note 5) and the conversion of thethen outstanding UnitySeries A preferred stock, to commonstock. The merger was accounted for as a capital transaction which is equivalent to the issuance of stock by GraphOn-CA for Unity's net monetary assets of approximately $5,425,000, accompanied by a recapitalization of GraphOn-CA. The unaudited historical financial statements of GraphOn-CA included herein have been preparedshares, that were issued inaccordanceconjunction with theinstructions for Form 10-Q and, therefore, do not include all information and footnotes necessary for a complete presentation of GraphOn-CA's results of operations, financial position and cash flows. We filed audited financial statements that included all information and footnotes necessary for a complete presentation for each of the years in the two-year period ended December 31, 1998 in the Unity Registration Statement on Form S-4 filed on June 15, 1999. The unaudited financial statements included herein reflect all adjustments (which include only normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the three and nine months ended September 30, 1999. The results for the three and nine months ended September 30, 1999 are not necessarily indicative of the results expected for the full fiscal year. 2. Earnings Per Share Basic earnings per share is calculated using the weighted average number of shares outstanding during the period. Dilutive earnings per share is computed on the basis of the weighted average number of common shares outstanding plus the dilutive effect of outstanding stock options and warrants using the "treasury stock" method and are not included since they are antidilutive. As noted above, in July 1999, GraphOn-CA merged with and into Unity. All references to share and per-share data for all periods presented have been adjusted to give effect to the .5576 exchange of GraphOn-CA stock (See2005 private placement (see Note 3).3. Stockholders' Equity In January 1999, GraphOn-CA completed the third and final closing of a private placement offering, in which it sold 1,095,053 shares of its common stock at $1.79 per share and granted warrants to purchase an additional 219,010 shares of common stock for net proceeds of $1,708,600. In January 1999, a convertible note payable for $475,000 to Spencer Trask Investors, an affiliate of GraphOn-CA, was retired from proceeds from the third closing of the private placement offering. In February 1999, GraphOn-CA sold 62,525 shares of its common stock and warrants to purchase an additional 676 shares for gross proceeds of $97,200. F-24GRAPHON CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) In July 1999, GraphOn-CA merged with and into Unity. As discussed above, each share of GraphOn-CA common stock was exchanged for .5576 shares of Unity common stock and each outstanding GraphOn-CA option and warrant was exchanged for .5576 options and warrants of Unity. Additionally, GraphOn received $5,425,000 in cash and the merger was accounted for as a capital transaction giving effect to the 1,875,000 shares of Unity. All references to share and per-share data for all periods presented have been adjusted to give effect to this .5576 exchange of GraphOn-CA stock. 4. Recent Accounting Pronouncements In June 1998, the FASB issued SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. SFAS No. 133 requires companies to recognize all derivative contracts as either assets or liabilities in the balance sheet and to measure them at fair value. If certain conditions are met, a derivative may be specifically designated as a hedge, the objective of which is to match the timing of gain or loss recognition on the hedging derivative with the recognition of (i) the changes in the fair value of the hedged assets or liability that are attributable to the hedged risk or (ii) the earnings effect of the hedged forecasted transaction. For a derivative not designated as a hedging instrument, the gain and loss is recognized in income in the period of change. In June 1999, the FASB issued SFAS No. 137, "Accounting for Derivative instruments and Hedging Activities--Deferring the Effective Date of FASB Statement No. 133," which amends SFAS No. 133 to be effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. Historically, the Company has not entered into derivative contracts either to hedge existing risks or for speculative purposes. Accordingly, the Company does not expect adoption of the new standard to have a material impact on the Company's results of operations, financial position or cash flows. 5. Litigation On October 4, 1999, Insignia Solutions plc, a British company with a California subsidiary, filed a complaint against GraphOn Corporation in the Superior Court of the State of California, Santa Clara County, alleging the GraphOn intentionally disrupted Insignia's sale to Citrix Systems, Inc., on February 5, 1998, of assets related to Insignia's NTRIGUE software product line. The complaint alleges that, as a result of GraphOn's conduct in connection with that sale of assets, Insignia was required by Citrix to place $8.75 million in escrow to enable Citrix to deal with potential claims by GraphOn of proprietary rights in the assets being sold. The complaint seeks unspecified damages from GraphOn. The complaint also names Citrix and its subsidiary in the United Kingdom ("Citrix UK") as defendants, alleging that these companies breached the February 5, 1998 contract with Insignia. The complaint seeks compensatory damages from Citrix related to that company's refusal to release purchase money from escrow for payment to Insignia. Insignia's California state court complaint makes reference to a declaratory judgment lawsuit that Citrix filed against GraphOn, on November 23, 1998, in the United States District Court for the Southern District of Florida, seeking a declaration of Citrix's right to use software purchased from Insignia, free and clear of any claim by GraphOn that such software may incorporate proprietary information owned by GraphOn. On May 14, 1999, Citrix's Florida- based lawsuit against GraphOn was dismissed for lack of subject matter jurisdiction. Essentially, the Florida court held that GraphOn has not threatened Citrix with litigation, and there is no existing dispute between GraphOn and Citrix. Citrix has filed an appeal from this ruling, which is presently pending. At the request of Citrix and Insignia, GraphOn has agreed to participate in mediation aimed at resolving the dispute. In light of that effort, the parties to the California state court case have agreed to extend GraphOn's time to respond to the complaint until early December. GraphOn has not yet filed an answer or other responsive pleading in the California state court action, but GraphOn presently intends to deny the principal allegations made by Insignia in the complaint. GraphOn views the matter as a dispute between Citrix and Insignia, in which GraphOn is not directly involved. F-25
PART II
INFORMATION NOT REQUIRED IN PROSPECTUSItem 13. Other Expenses of Issuance and Distribution
The following table sets forth various expenses
other than underwriting discounts, whichthat will be incurred in connection with thisoffering: SEC registration fee...................... $ 1,584.00 Printing and engraving expenses........... 12,500.00 Legal fees and expenses................... 35,000.00 Accounting fees and expenses.............. 10,000.00 Miscellaneous expenses.................... 916.00 ---------- Total $60,000.00 ==========offering as it relates to this Registration Statement:
Filing Fee $ 1,454 Legal Fees and Expenses 25,000 * Accounting Fees and Expenses 35,000 * Printing Expenses 1,000 * Miscellaneous Expenses 2,546 * Total $ 65,000 *
- *
- Estimated
Item 14. Indemnification of Directors and Officers
Section 145 of the Delaware General Corporation Law provides that a corporation may indemnify directors and officers as well as other employees and individuals against expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with any threatened, pending or completed actions, suits or proceedings in which such person is made a party by reason of such person being or having been a director, officer, employee of or agent to the Registrant. The statute provides that it is not exclusive of other rights to which those seeking indemnification may be entitled under any by-law, agreement, vote of stockholders or disinterested directors or otherwise.
The Registrant's
by-laws provides for indemnificationBylaws provide that any person made a party to an action bythe Registrant of any directororofficer (as such term is definedin theby-laws)right of the Registrantwhoto procure a judgment in its favor by reason of the fact that he, his testator or intestate, is or was a director or officer of the Registrant shall be indemnified by the Registrant against the reasonable expenses, including attorneys fees, actually and necessarily incurred by him in connection with the defense of such action or in connection with an appeal therein, to the fullest extent permitted by the General Corporation Law or any successor thereto.The Registrant's Bylaws provide that any person made or threatened to be made a party to an action or proceeding other than one by or in the right of the Registrant to procure a judgment in its favor, whether civil or criminal, including an action by or in the right of any other corporation of
its subsidiaries,any type or kind, domestic or foreign, which any director or officer of the Registrant served in any capacity at the request of the Registrant,isby reason of the fact that he, his testator or intestate, wasserving asa director or officer of the Registrant, or served such other corporation in anyothercapacity,for, any other enterprise, to the fullest extent permittedshall be indemnified bylaw. The by-laws also provide thatthe Registrantshall advanceagainst judgments, fines, amounts paid in settlement and reasonable expenses,toincluding attorneys fees actually and necessarily incurred as adirector or officer and, if reimbursementresult of suchexpenses is demanded in advance of the final disposition of the matter with respect to which such demand is being made, upon receipt of an undertaking byaction oron behalf ofproceeding, or any appeal therein, if such director or officerto repay such amount if it is ultimately determined that the director or II-1officer is not entitledacted in good faith for a purpose which he reasonably believed to beindemnified byin theRegistrant. To the extent authorized from time to time by the board of directorsbest interests of the Registrantthe Registrant may provideand, in criminal actions or proceedings, in which he had no reasonable cause toany one or more employees of the Registrant, one or more officers, employees and other agents of any subsidiary or one or more directors, officers, employees and other agents of any other enterprise, rights of indemnification and to receive payment or reimbursement of expenses, including attorneys' fees,believe thatare similar to the rights conferred in the by- laws of the Registrant on directors and officers of the Registrant or any subsidiary or other enterprise. The by-laws do not limit the power of the Registrant or its board of directors to provide other indemnification and expense reimbursement rights to directors, officers, employees, agents and other persons otherwise than pursuant to the by-laws. The Registrant intends to enter into agreements with certain directors, officers and employees who are asked to serve in specified capacities at subsidiaries and other entities.his conduct was unlawful.Section 102(b)(7) of the Delaware General Corporation Law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability (i) for any breach of the director's duty of loyalty to the corporation or its stockholders, (ii) for acts or omissions not in good faith or which involve intentional misconduct or a knowing
II-1
violation of law, (iii) for payments of unlawful dividends or unlawful stock repurchases or redemptions, or (iv) for any transaction from which the director derived an improper personal benefit. The Registrant's certificate of incorporation provides for such limitation of liability.
The Registrant maintains policies of insurance under which its directors and officers are insured, within the limits and subject to the limitations of the policies, against certain expenses in connection with the defense of, and certain liabilities which might be imposed as a result of, actions, suits or proceedings to which they are parties by reason of being or having been such directors or officers.Item 15. Recent Sales of Unregistered Securities
Since April 1, 2002, the Registrant has issued the following securities that were not registered under the Securities Act of 1933:
On
July 12, 1999,January 31, 2005, the Registrant acquired Network Engineering Software, Inc. (NES) in exchange for 9,599,993 shares of common stock, the assumption of approximately $232,800 of NES' indebtedness and the reimbursement to AIGH, an affiliate of a principal shareholder (Orin Hirschman), of $665,000 for its advance on behalf of the Registrant of a like sum in December 2004 to settle certain third party litigation against NES. The advance was reimbursed through a partial credit against the price of the Registrant's securities acquired by AIGH in the 2005 private placement.Of such 9,599,993 shares, 4,963,158 were issued to NES' majority shareholder, an aggregate 2,474,335 shares were issued to NES' nine other shareholders and an aggregate 2,162,500 shares to two of NES' remaining creditors. The securities were not registered under the Securities Act of 1933 because such securities were offered and sold in transactions not involving a public offering, exempt from registration under the Securities Act pursuant to Section 4(2) and in compliance with Rule 506 thereunder.
On February 2, 2005, the Registrant issued in a private placement for $4,000,000, 148,148 shares of newly authorized Series A preferred stock at a price of $27.00 per share and five-year warrants to acquire 74,070 shares of newly authorized Series B preferred stock at an exercise price of $40.00 per share (the 2005 private placement). After payment of fees, expenses and other consideration related to the NES Acquisition and the 2005 private placement, the Registrant derived net proceeds of approximately $2,130,000. Pursuant to an agreement dated December 16, 2003 with Griffin Securities Inc., placement agent for Registrant's 2004 private placement, the Registrant issued to
Spencer Trask 250,000 ClassGriffin Securities five-year warrants to purchase 14,815 shares of Series A preferred stock at an exercise price of $27.00 per share and five-year warrants to purchase 7,407 shares of Series B preferred stock at an exercise price of $40.00 per share as a finder's fee in respect of Registrant's 2005 private placement. The securities were not registered under the Securities Act because such securities were offered and sold in transactions not involving a public offering, exempt from registration under the Securities Act pursuant to Section 4(2) and in compliance with Rule 506 thereunder.On March 29, 2005, the Registrant's stockholders approved an amendment to the Registrant's certificate of incorporation increasing the Registrant's authorized but unissued common stock from 45,000,000 to 195,000,000 shares. Upon the effectiveness of the certificate of amendment to the Registrant's certificate of incorporation implementing this increase, each share of Series A preferred stock was automatically converted into 100 shares of our common stock and each warrant was automatically converted into a warrant to purchase that number of shares of common stock equal to the number of shares of preferred stock subject to the warrant multiplied by 100. As a result, upon the effectiveness of the certificate of amendment, all outstanding shares of Series A Preferred Stock (148,148 shares) were converted into 14,814,800 shares of our common stock. In addition, upon the effectiveness of the certificate of amendment, all outstanding warrants
exercisableto purchase shares of Series A preferred stock (14,815 shares) and Series B preferred stock (81,477 shares) were converted into five-year warrants to purchase 1,481,500 shares of our common stock at$5.50an exercise price of $0.27 per shareintoand five-year warrants to purchase 8,147,700 shares of our common stock at an exercise price of $0.40 per share, respectively.On January 29, 2004, the Registrant completed a private placement of its securities raising $1,150,000 in gross proceeds. A total of 5,000,000 shares were sold to accredited investors at a price of
II-2
$0.23 per share. The Registrant also issued warrants to these accredited investors to purchase up to 2,500,000 shares at $0.33 per share on or before January 29, 2009. Griffin Securities, Inc., who acted as a placement agent with respect to the placement, and its affiliates, received as a placement agent's fee warrants to purchase an aggregate of 500,000 shares of common stock at $0.23 per share on or before January 29, 2009 and warrants to purchase an aggregate of 250,000 shares of common stock at $0.33 per share on or before January 29, 2009. The securities were not registered under the Securities Act because such securities were offered and sold in
consideration for consulting services performedtransactions not involving a public offering, exempt from registration under the Securities Act pursuant to Section 4(2) and inconnectioncompliance with Rule 506 thereunder.During the
merger of GraphOn Corporation, a California corporation, with and into the Registrant that was consummated on that date. On October 14, 1999,three years ended March 31, 2005, the Registrant issued options toSuperTech Holdings Ltd.purchase 5,416,687 shares of its common stock,purchase warrants exercisableat$8.50exercise prices ranging from $0.09 to $0.59 per share,into 300,000 sharesto various employees and directors pursuant to its various employee benefit plans. The granting ofcommonsuch stockin consideration for consulting services relatedoptions to thegenerationemployees and directors was not registered under the Securities Act ofbusiness opportunities1933 because the stock options either did not involve an offer or sale for purposes of Section 2(a)(3) of theRegistrantSecurities Act of 1933, in reliance on thePeople's Republic of China. II-2Each of thesefact that the stock options were granted for no consideration, or were offered and sold in transactionswerenot involving a public offering, exempt from registration under the Securities Act of 1933by reason of the provisions ofpursuant to Section 4(2)thereof.and in compliance with Rule 506 thereunder.II-3
Item
21.16. Exhibits and Financial StatementSchedules.Schedules
- (a)
Exhibits- The following
exhibits areis a list of Exhibits filed herewith as part of the registration statement:
Exhibit
NumberDescription of Exhibit 2.1 Agreement and Plan of Merger and Reorganization dated as of December 3, 2004, between registrant and GraphOn NES Sub, LLC, a California limited liability company, GraphOn Via SUB III Inc., a Delaware corporation, Network Engineering Software, Inc., a California corporation, and Ralph Wesinger(1) 3.1 Amended and Restated Certificate of Incorporation of Registrant(2) 3.2 Amended and Restated Bylaws of Registrant(2) 4.1 Form of certificate evidencing shares of common stock of Registrant(3) 4.2 Form of Warrant issued by Registrant on January 29, 2004(4) 4.3 Form of Warrant issued by Registrant on February 2, 2005(5) 4.4 Investors Rights Agreement, dated January 29, 2004, by and among Registrant and the investors named therein(4) 4.5 Investors Rights Agreement, dated February 2, 2005, by and among Registrant and the investors named therein(5) 5.1 Opinion of Sonnenschein Nath & Rosenthal LLP, including consent 10.1 1996 Stock Option Plan of Registrant(3) 10.2 1998 Stock Option/Stock Issuance Plan of Registrant(2) 10.3 Supplemental Stock Option Agreement, dated as of June 23, 2000(6) 10.4 Employee Stock Purchase Plan of Registrant(6) 10.5 Lease Agreement between Registrant and Central United Life Insurance, dated as of October 24, 2003(4) 10.6 Financial Advisory Agreement, dated January 29, 2004, by and between Registrant and Orin Hirschman(7) 10.7 Amendment to Financial Advisory Agreement, dated February 2, 2005, by and between Registrant and Orin Hirschman(5) 10.8 Reimbursement Agreement, dated December 10, 2004, by and between Registrant and AIGH Investment Partners LLC(7) 10.9 Holder Agreement, dated January 31, 2005, by and between Registrant and the holders named therein(5) 10.10 Non-recourse Secured Promissory Note, dated October 6, 2004, by and between Registrant and Ralph Wesinger(7) 10.11 Stock Pledge Agreement, dated October 6, 2004, by and between Registrant and Ralph Wesinger(7) 10.12 Agreement, dated December 16, 2003, by and between Registrant and Griffin Securities, Inc.(7) 23.1 Consents of Macias Gini & Company LLP 23.2 Consent of BDO Seidman, LLP 23.3 Consent of Sonnenschein Nath & Rosenthal LLP (contained in their opinion included under Exhibit 5.1) 24.1 Power of Attorney (comprises a portion of the signature page of this Registration Statement)*
- *
- Previously filed with this Registration
Statement: Exhibit Description of Exhibit Number ---------------------- - ------- 2.1 Agreement and Plan of Merger and ReorganizationStatement- (1)
- Incorporated by reference from Registrant's Current Report on Form 8-K, dated
as of February 1, 1999, between Registrant and GraphOn Corporation, a California corporation(1) 3.1 Amended and Restated Certificate of Incorporation of Registrant(1) 3.2 Amended and Restated Bylaws of Registrant(1) 4.1 Form of certificate evidencing shares of common stock of Registrant(2) 4.2 Form of certificate evidencing Class A Redeemable Warrants of Registrant(2) 4.3 Form of certificate evidecing Class B Redeemable Warrants of Registrant(2) 4.4 Warrant Agreement dated November 12, 1996 between Registrant and GKN Securities Corp. and Gaines, Berland, Inc.(2) 4.5 Redeemable Warrant Agreement dated November 12, 1996 between Registrant and American Stock Transfer & Trust Company(2) 4.6 Registration Rights Agreement dated October 28, 1998 between Registrant, Spencer Trask Investors, Walter Keller andDecember 3, 2004, filed with theinvestors purchasing units in Registrant's private placement(1) 4.7 Amendment to Registration Rights Agreement(1) 4.8 Amendment to Registration Rights Agreement(1) 4.9 Common Stock Purchase Warrant dated October 14, 1999 issued to SuperTech Holdings Limited 5.1 Opinion of Cooperman Levitt Winikoff Lester & Newman, P.C. 10.1 1996 Stock Option Plan of Registrant(2) 10.2 1998 Stock Option/Stock Issuance Plan of Registrant(1) 10.3 Placement Agency Agreement by and between Registrant and Spencer Trask Securities, Inc., dated as of September 2, 1998(1) 10.4 Asset Purchase Agreement by and among Registrant, Corel Corporation, Corel Corporation Limited and Corel, Inc. (collectively, "Corel"), dated as of December 18, 1998(1) II-310.5 Securities Purchase Agreement by and among Registrant and Corel, dated as of December 18, 1998(1) 10.6 Standard Industrial Lease between Registrant and Mildred K. Dibona, dated April 14, 1995, as amended on October 2, 1998(1) 10.7 Hidden Valley Office Park Lease Agreement between Registrant and ASA Properties, Inc., dated June 5, 1998(1) 10.8 Lease Agreement between Corel Inc. and CML Realty Corp., dated September, 1998 and assumed by RegistrantSEC on December31, 1998(1) 10.9 Consulting Agreement dated October 14, 1999 between Registrant and SuperTech Holdings Limited 23.1 Consent of BDO Seidman, LLP 23.2 Consent of Cooperman Levitt Winikoff Lester & Newman, P.C. (included in Exhibit 5.1) 24.1 Power of Attorney (included on the Signature Page of Part II of this Registration Statement) ___________ (1)9, 2004.- (2)
- Incorporated by reference from Registrant's Form S-4, file number
333- 76333, filed with the SEC on April 15, 1999. (2)333-76333.II-4
- (3)
- Incorporated by reference from Registrant's Form S-1, file number
333- 11165,333-11165.- (4)
- Incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended December 31, 2003.
- (5)
- Incorporated by reference from Registrant's Current Report on Form 8-K, dated January 31, 2005, filed with the SEC on
August 30, 1996.February 4, 2005.- (6)
- Incorporated by reference from Registrant's Form S-8, file number 333-40174.
- (7)
- Incorporated by reference from Registrant's Annual Report on Form 10-K for the year ended December 31, 2004.
- (b)
- Financial Statement
Schedules. None.SchedulesSchedule II—Valuation and Qualifying Accounts.
Item 17. Undertakings
The undersigned registrant hereby undertakes:
(1) That for purposes of determining any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) That for the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new
II-4registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. (3) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement:
(a) To include any prospectus required by Section 10(a)(3) of the Securities Act;
(b) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent
post- effectivepost-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the totaldollarDollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the changes in volume and price represent no more than 20 percent change in the maximum aggregate offering price set forth in "Calculation of Registration Fee" table in the effective registration statement;(c) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement.
(4) That for the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initialbona fide offering thereof.
II-5
(5) To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of this offering.
(6) To provide to the representatives at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the representatives to permit prompt delivery to each purchaser. (7)Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of Registrant
pursuant toas described in Item 14 of this Part II to the registration statement, or otherwise, Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act, and is, therefore, unenforceable. In the event that a claim forII-5indemnification against such liabilities (other than the payment by Registrant of expenses incurred or paid by a director, officer or controlling person of Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-6
Report of Independent Registered Public Accounting Firm on Supplemental Schedule
To the Board of Directors and Shareholders of GraphOn Corporation
The audits referred to in our report dated February 23, 2004 (which report contains an explanatory paragraph regarding the ability of GraphOn Corporation and Subsidiary to continue as a going concern) relating to the consolidated financial statements of GraphOn Corporation and Subsidiary, which is contained in this prospectus, included the audit of the financial statement schedule listed in the accompanying index. This financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion on this financial statement schedule based upon our audits.
In our opinion, the consolidated financial statement schedule as of December 31, 2003 and 2002 and for each of the two years in the period ended December 31, 2003, presents fairly, in all material respects, the information set forth therein.
/s/ BDO SEIDMAN, LLP
BDO Seidman, LLP
San Jose, California
February 23, 2004II-7
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
Description Balance
At Beginning
of periodCharged
to costs and
expensesDeductions Balance
at end of
periodAllowance for Doubtful accounts: 2005(1) $ 46,800 $ — $ — $ 46,800 2004 $ 46,800 $ — $ — $ 46,800 2003 $ 50,300 $ 16,300 $ 19,800 $ 46,800 2002 $ 350,000 $ 31,600 $ 331,300 $ 50,300
- (1)
- Unaudited—as of March 31, 2005 and for the three-month period then ended.
II-8
Pursuant to the requirements of the Securities Act of 1933,
theRegistrant has duly caused thisRegistration Statementregistration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City ofCampbell,Santa Cruz, State of California, onDecember 21, 1999. GRAPHON CORPORATION By: /s/ Walter Keller ------------------------------------------- Walter Keller, President POWER OF ATTORNEY KNOW ALL PERSONS BY THESE PRESENTS that each person whose signature appears below constitutes and appoints Walter Keller and Edmund Becmer as such person's true and lawful attorney-in-fact and agent, acting alone,the 10th day of August, 2005.
GRAPHON CORPORATION
By:
/s/ WILLIAM SWAIN
William Swain
Secretary and Chief Financial OfficerIn accordance with
full powers of substitution and revocation, for such person and in such person's name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement and to file the same with all exhibits thereto, and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorney-in-fact and agent, acting alone, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as such person might or could do in person, hereby ratifying and confirming all that said attorney-in-fact and agent, acting alone, or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof. Pursuant tothe requirements of the Securities Act of 1933, this Registration Statementhas beenwas signed by the following persons in the capacities and on the datesindicated.stated.
Signature Title Date --------- ----- ----/s/SIGNATURE TITLE DATE *
Robert DilworthChairman of the Board December 21, 1999 - ------------------------- Robert Dilworth /s/ Walter Keller Presidentand Interim Chief Executive Officer (Principal Executive Officer)December 21, 1999 - -------------------------August 10, 2005
/s/ WILIAM SWAIN
William Swain
Secretary andDirector Walter Keller /s/ Edmund BecmerChief Financial Officer (PrincipalDecember 21, 1999 - -------------------------Financial and Accounting Officer)Edmund Becmer /s/ Robin Ford Executive Vice President, December 21, 1999 - ------------------------- Marketing and Sales Robin Ford and Director /s/ Lawrence Burstein Director December 21, 1999 - ------------------------- Lawrence Burstein /s/
August 10, 2005
*
August P. Klein
Director
August 10, 2005
*
Michael Volker
Director
August 10, 2005
*
Gordon Watson
Director
August 10, 2005
- *
- William Swain, pursuant to Powers of Attorney (executed by each of the officers and directors listed above) by signing his name hereto does hereby sign and execute this Amendment to the Registration Statement on behalf of each of the persons referenced above
Date: August 10, 2005 /s/ WILLIAM SWAIN
William SwainII-9
Exhibit
NumberDescription of Exhibit 2.1 Agreement and Plan of Merger and Reorganization dated as of December 21, 1999 - ------------------------- August P. Klein _________________________ Director Michael P. O'Reilly _________________________ Director Marshall C. Phelps, Jr.3, 2004, between registrant and GraphOn NES Sub, LLC, a California limited liability company, GraphOn Via SUB III Inc., a Delaware corporation, Network Engineering Software, Inc., a California corporation, and Ralph Wesinger(1)3.1 Amended and Restated Certificate of Incorporation of Registrant(2) 3.2 Amended and Restated Bylaws of Registrant(2) 4.1 Form of certificate evidencing shares of common stock of Registrant(3) 4.2 Form of Warrant issued by Registrant on January 29, 2004(4) 4.3 Form of Warrant issued by Registrant on February 2, 2005(5) 4.4 Investors Rights Agreement, dated January 29, 2004, by and among Registrant and the investors named therein(4) 4.5 Investors Rights Agreement, dated February 2, 2005, by and among Registrant and the investors named therein(5) 5.1 Opinion of Sonnenschein Nath & Rosenthal LLP, including consent 10.1 1996 Stock Option Plan of Registrant(3) 10.2 1998 Stock Option/Stock Issuance Plan of Registrant(2) 10.3 Supplemental Stock Option Agreement, dated as of June 23, 2000(6) 10.4 Employee Stock Purchase Plan of Registrant(6) 10.5 Lease Agreement between Registrant and Central United Life Insurance, dated as of October 24, 2003(4) 10.6 Financial Advisory Agreement, dated January 29, 2004, by and between Registrant and Orin Hirschman(7) 10.7 Amendment to Financial Advisory Agreement, dated February 2, 2005, by and between Registrant and Orin Hirschman(5) 10.8 Reimbursement Agreement, dated December 10, 2004, by and between Registrant and AIGH Investment Partners LLC(7) 10.9 Holder Agreement, dated January 31, 2005, by and between Registrant and the holders named therein(5) 10.10 Non-recourse Secured Promissory Note, dated October 6, 2004, by and between Registrant and Ralph Wesinger(7) 10.11 Stock Pledge Agreement, dated October 6, 2004, by and between Registrant and Ralph Wesinger(7) 10.12 Agreement, dated December 16, 2003, by and between Registrant and Griffin Securities, Inc.(7) 23.1 Consents of Macias Gini & Company LLP 23.2 Consent of BDO Seidman, LLP 23.3 Consent of Sonnenschein Nath & Rosenthal LLP (contained in their opinion included under Exhibit 5.1) 24.1 Power of Attorney (comprises a portion of the signature page of this Registration Statement)* II-7