As Filed with the Securities and Exchange Commission on May 9, 2005
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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GRAPHON CORPORATION
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE 6770 13-3899021
(State of Incorporation) Primary Standard Industrial (I.R.S. Employer
Classification Code Number) 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)
-------------
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) 768-6800
_____________
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the effective date of this Registration Statement.
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. [ ]
CALCULATION OF REGISTRATION FEE
- ---------------------------------------------- ------------------ ------------------- -------------------- ---------------
PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF AMOUNT TO BE AGGREGATE PRICE AGGREGATE OFFERING REGISTRATION
SECURITIES TO BE REGISTERED REGISTERED PER UNIT (1) PRICE FEE
- ---------------------------------------------- ------------------ ------------------- -------------------- ---------------
Common stock, par value $0.0001 per 35,296,293 $ 0.35 $ 12,353,702.55 $ 1,454.03
share (2) ...............................
- ---------------------------------------------- ------------------ ------------------- -------------------- ---------------
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(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, 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.
- -------------
Pursuant to Rule 429 promulgated under the Securities Act of 1933, the
prospectus forming a part of this Registration Statement on Form S-1 also
relates to (i) the Registrant's Registration Statement on Form S-1 to Form S-3
(Registration No. 333-112758), effective on May 14, 2004; (ii) the Registrant's
Registration Statement on Form S-3 (Registration No. 333-51420), effective on
December 20, 2000; and (iii) the Registrant's Registration Statement on Form S-4
(Registration No. 333-76333), effective on June 15, 1999.
- -------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THIS 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 in this prospectus is not complete and may be changed. The
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 and is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
* * * * * *
Subject to Completion, dated May 9, 2005
PRELIMINARY PROSPECTUS
GRAPHON CORPORATION
44,270,682 Shares of Common Stock
-----------------------
This prospectus relates to the offer and sale from time to time of up to
44,270,682 shares of our common stock by the persons described in this
prospectus, whom we call the "selling stockholders." Of such 44,270,682 shares,
29,414,793 shares are being offered for resale by current stockholders and
14,855,889 shares are being offered for resale upon exercise of warrants and
options held by certain of the selling stockholders. We are registering these
shares as required by the terms of registration rights agreements between the
selling stockholders and us. Such registration does not mean that the selling
stockholders will actually offer or sell any of these shares. We will receive no
proceeds from the sale of any of these shares if the selling stockholders sell
them.
Our common stock is currently traded on the OTC Bulletin Board under the
symbol "GOJO." The closing price of our common stock on April 29, 2005 was $0.37
per share.
THIS INVESTMENT INVOLVES RISKS. YOU SHOULD REFER TO THE DISCUSSION OF RISK
FACTORS, BEGINNING ON PAGE 4 OF THIS PROSPECTUS.
Neither the Securities and Exchange Commission nor any other regulatory
body has approved or disapproved of these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
-----------------------
, 2005
TABLE OF CONTENTS
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...................................................................22
MANAGEMENT.................................................................31
CERTAIN TRANSACTIONS.......................................................35
PRINCIPAL STOCKHOLDERS.....................................................37
SELLING STOCKHOLDERS.......................................................39
PLAN OF DISTRIBUTION.......................................................43
DESCRIPTION OF OUR SECURITIES..............................................45
LEGAL MATTERS..............................................................47
EXPERTS....................................................................47
WHERE CAN YOU FIND MORE INFORMATION........................................47
INDEX TO FINANCIAL STATEMENTS..............................................48
FORWARD LOOKING STATEMENTS
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 of 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 to release
publicly the results of any revisions to any such forward-looking statements
that may be made to reflect events or circumstances after the date of this
prospectus or to reflect the occurrence of unanticipated events. - 3 -
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY DOES NOT CONTAIN ALL THE INFORMATION THAT MAY BE
IMPORTANT TO YOU IN MAKING A DECISION TO ACQUIRE OUR COMMON STOCK. FOR A MORE
COMPLETE UNDERSTANDING OF OUR COMPANY AND OUR COMMON STOCK, YOU SHOULD READ THE
ENTIRE PROSPECTUS, INCLUDING THE RISKS 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 Windows server-based
software, with 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.
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. This centralized deployment and
management of applications reduces the complexity and total costs associated
with enterprise computing. Our software architecture provides application
developers with the ability to relocate 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.
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 offices in Concord, New Hampshire, Rolling Hills
Estates, California and Berkshire, England, United Kingdom.
RECENT DEVELOPMENTS
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 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 of newly authorized Series A
Preferred Stock and warrants to purchase newly authorized Series B Preferred
Stock (the 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, all outstanding shares of Series A Preferred Stock (148,148
shares) were converted into 14,814,800 shares of our common stock and all
outstanding warrants to purchase, respectively, 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 an aggregate of 9,629,200 shares
of our common stock.
THE OFFERING
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 issuable upon the exercise of
outstanding warrants and options, respectively, held by the selling
stockholders.
(2) Based upon our issued and outstanding shares of common stock as of March
31, 2005. This number excludes 4,361,268 shares of our common stock, which
are issuable upon exercise of our outstanding options. An additional
149,591 shares are reserved for future grants under our equity compensation
plans and 116,455 shares are reserved for purchase pursuant to our employee
stock purchase plan.
SUMMARY CONSOLIDATED FINANCIAL STATEMENTS
The following financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" 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.
STATEMENT OF OPERATIONS DATA:
Year Ended December 31,
2004 2003 2002 2001 2000
------------ -------------- ------------- ------------- --------------
(Amounts in thousands, except share and per share data)
--------------------------------------------------------------------------
Revenue $ 3,530 $ 4,170 $ 3,535 $ 5,911 $ 7,567
Costs of revenue 904 1,371 1,680 2,613 1,044
------------ -------------- ------------- ------------- --------------
Gross profit 2,626 2,799 1,855 3,298 6,523
------------ -------------- ------------- ------------- --------------
Operating expenses:
Selling and marketing 1,384 1,680 2,235 5,989 5,750
General and administrative 1,183 1,419 2,801 4,561 4,653
Research and development 1,501 1,515 2,831 4,134 4,060
Asset impairment loss - - 914 4,501 -
Restructuring charge - 80 1,943 - -
------------ -------------- ------------- ------------- --------------
Total operating expenses 4,068 4,694 10,724 19,185 14,463
------------ -------------- ------------- ------------- --------------
Loss from operations (1,442) (1,895) (8,869) (15,887) (7,940)
Other income (expense) 15 8 77 410 (1,434)
------------ -------------- ------------- ------------- ---------------
Loss before provision
for income taxes (1,427) (1,887) (8,792) (15,477) (9,374)
Provision for income taxes - - - 1 1
------------ -------------- ------------- ------------- --------------
Net loss $ (1,427) $ (1,887) $ (8,792) $ (15,478) $ (9,375)
============ ============== ============= ============= ==============
Basic and diluted loss per
common share $ (0.07) $ (0.11) $ (0.50) $ (0.97) $ (0.65)
============ ============== ============= ============= ===============
Weighted average common
shares outstanding 21,307,966 16,607,328 17,465,099 16,007,763 14,396,435
============ ============== ============= ============= ==============
BALANCE SHEET DATA:
As of December 31,
2004 2003 2002 2001 2000
------------ -------------- ------------- ------------- --------------
(Amounts in thousands)
Working capital (deficit) $ (213) $ 284 $ 668 $ 6,173 $ 12,879
Total assets 2,224 2,562 4,550 12,986 21,040
Total liabilities 1,858 1,715 1,820 1,660 1,983
Shareholders' equity 366 847 2,730 11,326 19,057
RISK FACTORS
YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS, AS WELL AS OTHER
INFORMATION APPEARING ELSEWHERE IN THIS PROSPECTUS, BEFORE YOU DECIDE WHETHER TO
PURCHASE SHARES OF OUR COMMON STOCK. THE RISKS AND UNCERTAINTIES DESCRIBED IN
THIS PROSPECTUS ARE NOT THE ONLY ONES FACING OUR COMPANY. ADDITIONAL RISKS AND
UNCERTAINTIES NOT PRESENTLY KNOWN TO US, OR RISKS THAT WE DO NOT CONSIDER
SIGNIFICANT, MAY ALSO IMPAIR OUR BUSINESS. THIS DOCUMENT ALSO CONTAINS
FORWARD-LOOKING STATEMENTS THAT INVOLVE RISKS AND UNCERTAINTIES, AND ACTUAL
RESULTS MAY DIFFER MATERIALLY FROM THE RESULTS WE DISCUSS IN THE FORWARD-LOOKING
STATEMENTS. IF ANY OF THE FOLLOWING RISKS ACTUALLY OCCUR, THEY COULD HAVE A
SEVERE NEGATIVE IMPACT ON OUR FINANCIAL RESULTS AND STOCK PRICE.
WE HAVE A HISTORY OF OPERATING LOSSES AND EXPECT THESE LOSSES TO CONTINUE,
AT LEAST FOR THE NEAR FUTURE.
We have experienced significant losses since we began operations. We expect
to continue to incur losses at least for the near future. We incurred net losses
of approximately $1,427,500, $1,886,600 and $8,792,500 for the years ended
December 31, 2004, 2003 and 2002, respectively. Our expenses will increase as we
begin our efforts to commercially exploit the patents we acquired in the NES
acquisition; however, we cannot give assurance that revenues will increase
sufficiently 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 INVESTORS.
Our operating results are likely to fluctuate significantly in the future
on a quarterly and on an annual basis due to a number of factors, many of which
are outside our control. Factors that could cause our revenues to fluctuate
include the following:
o The degree of success of our commercial exploitation of the NES
patents;
o The degree of success of our recently introduced products;
o Variations in the timing of and shipments of our products;
o Variations in the size of orders by our customers;
o Increased competition;
o The proportion of overall revenues derived from different sales
channels such as distributors, original equipment manufacturers (OEMs)
and others;
o Changes in our pricing policies or those of our competitors;
o The financial stability of major customers;
o New product introductions or enhancements by us or by competitors;
o Delays in the introduction of products or product enhancements by us
or by competitors;
o The degree of success of new products;
o Any changes in operating expenses; and
o General economic conditions and economic conditions specific to the
software industry.
In addition, our royalty and license revenues are impacted by fluctuations
in OEM licensing activity from quarter to quarter, which may involve one-time
royalty payments and license fees. Our expense levels are based, in part, on
expected future orders and sales; therefore, if orders and sales levels are
below expectations, our operating results are likely to be materially adversely
affected. Additionally, because significant portions of our expenses are fixed,
a reduction in sales levels may disproportionately affect our net income. Also,
we may reduce prices or increase spending in response to competition or to
pursue new market opportunities. Because of these factors, our operating results
in one or more future periods may fail to meet or exceed the expectations of
securities analysts or investors. In that event, the trading price of our common
stock would likely 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 US.
Our commercial success is dependent, in large part, upon our ability to
protect our proprietary rights. We rely on a combination of patent, copyright
and trademark laws, and on trade secrets and confidentiality provisions and
other contractual provisions to protect our proprietary rights. These measures
afford only limited protection. We cannot assure you that measures we have taken
will be adequate to protect us from misappropriation or infringement of our
intellectual property. 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:
o 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.
o Invalidation of their broadest claims could result in very narrow
claims that do not have the potential to produce meaningful license
revenues.
o 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.
o 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.
o 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 BUSINESS.
At any time, we may receive communications from third parties asserting
that features or content of our products may infringe upon their intellectual
property rights. Any such claims, with or without merit, and regardless of their
outcome, may be time consuming and costly to defend. We may not have sufficient
resources to defend such claims and they could divert management's attention and
resources, cause product shipment delays or require us to enter into new royalty
or licensing agreements. New royalty or licensing agreements may not be
available on beneficial terms, and may not be available at all. If a successful
infringement claim is brought against us and we fail to license the infringed or
similar technology, our business could be materially adversely affected.
OUR BUSINESS SIGNIFICANTLY BENEFITS FROM STRATEGIC RELATIONSHIPS AND THERE
CAN BE NO ASSURANCE THAT SUCH RELATIONSHIPS WILL CONTINUE IN THE FUTURE.
Our business and strategy relies to a significant extent on our strategic
relationships with other companies. There is no assurance that we will be able
to maintain or develop any of these relationships or to replace them in the
event any of these relationships are terminated. In addition, any failure to
renew or extend any licenses between any third party and us may adversely affect
our business.
WE RELY ON INDIRECT DISTRIBUTION CHANNELS FOR OUR PRODUCTS AND MAY NOT BE
ABLE TO RETAIN EXISTING RESELLER RELATIONSHIPS OR TO DEVELOP NEW RESELLER
RELATIONSHIPS.
Our products primarily are sold through several distribution channels. An
integral part of our strategy is to strengthen our relationships with resellers
such as 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, and intend to continue to invest, significant resources to
expand our sales and marketing capabilities. We cannot assure you that we will
be able to attract and/or retain resellers to market our products effectively.
Our inability to attract resellers and the loss of any current reseller
relationships could have a material adverse effect on our business, results of
operations and financial condition. Additionally, we cannot assure you that
resellers will devote enough resources to provide effective sales and marketing
support to our products.
THE MARKET IN WHICH WE PARTICIPATE IS HIGHLY COMPETITIVE AND HAS MORE
ESTABLISHED COMPETITORS.
The market we participate in is intensely competitive, rapidly evolving and
subject to technological changes. We expect competition to increase as other
companies introduce additional competitive products. In order to compete
effectively, we must continually develop and market new and enhanced products
and market those products at competitive prices. As markets for our products
continue to develop, additional companies, including companies in the computer
hardware, software and networking industries with significant market presence,
may enter the markets in which we compete and further intensify competition. A
number of our current and potential competitors have longer operating histories,
greater name recognition and significantly greater financial, sales, technical,
marketing and other resources than we do. We cannot assure you that our
competitors will not develop and market competitive products that will offer
superior price or performance features or that new competitors will not enter
our markets and offer such products. We believe that we will need to invest
increasing financial resources in research and development to remain competitive
in the future. Such financial resources may not be available to us at the time
or times that we need them, or upon terms acceptable to us. We cannot assure you
that we will be able to establish and maintain a significant market position in
the face of our competition and our failure to do so would adversely affect our
business.
PRICE RANGE OF COMMON STOCK
The following table sets forth, for the periods indicated, the high and low
reported sales price of our common stock. From August 9, 2000 to May 27, 2002,
our common stock was quoted on The Nasdaq National Market System. From May 28,
2002 to March 26, 2003, our common stock 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 2004 Fiscal 2003
------------------- -------------------
Quarter High Low High Low
-------- -------- -------- --------
1st $ 1.03 $ 0.20 $ 0.28 $ 0.13
2nd $ 0.93 $ 0.41 $ 0.34 $ 0.13
3rd $ 0.51 $ 0.25 $ 0.28 $ 0.18
4th $ 0.56 $ 0.25 $ 0.28 $ 0.15
On March 30, 2005, there were approximately 165 holders of record of our
common stock. On April 29, 2005, the last reported sales price was $0.37.
We have never declared or paid dividends on our common stock. We do not
anticipate paying any cash dividends for the foreseeable future. We currently
intend to retain future earnings, if any, to finance operations and the
expansion of our business. Any future determination to pay cash dividends will
be at the discretion of our Board of Directors and will be dependent upon the
earnings, financial condition, operating results, capital requirements and other
factors as deemed necessary by the Board of Directors.
SELECTED FINANCIAL DATA
The following selected financial data should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operation" 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.
STATEMENT OF OPERATIONS DATA:
Year Ended December 31,
2004 2003 2002 2001 2000
------------ -------------- ------------- ------------- --------------
(Amounts in thousands, except share and per share data)
--------------------------------------------------------------------------
Revenue $ 3,530 $ 4,170 $ 3,535 $ 5,911 $ 7,567
Costs of revenue 904 1,371 1,680 2,613 1,044
------------ -------------- ------------- ------------- --------------
Gross profit 2,626 2,799 1,855 3,298 6,523
------------ -------------- ------------- ------------- --------------
Operating expenses:
Selling and marketing 1,384 1,680 2,235 5,989 5,750
General and administrative 1,183 1,419 2,801 4,561 4,653
Research and development 1,501 1,515 2,831 4,134 4,060
Asset impairment loss - - 914 4,501 -
Restructuring charge - 80 1,943 - -
------------ -------------- ------------- ------------- --------------
Total operating expenses 4,068 4,694 10,724 19,185 14,463
------------ -------------- ------------- ------------- --------------
Loss from operations (1,442) (1,895) (8,869) (15,887) (7,940)
Other income (expense) 15 8 77 410 (1,434)
------------ -------------- ------------- ------------- ---------------
Loss before provision
for income taxes (1,427) (1,887) (8,792) (15,477) (9,374)
Provision for income taxes - - - 1 1
------------ -------------- ------------- ------------- --------------
Net loss $ (1,427) $ (1,887) $ (8,792) $ (15,478) $ (9,375)
============ ============== ============= ============= ==============
Basic and diluted loss per
common share $ (0.07) $ (0.11) $ (0.50) $ (0.97) $ (0.65)
============ ============== ============= ============= ===============
Weighted average common
shares outstanding 21,307,966 16,607,328 17,465,099 16,007,763 14,396,435
============ ============== ============= ============= ==============
BALANCE SHEET DATA:
As of December 31,
2004 2003 2002 2001 2000
------------ -------------- ------------- ------------- --------------
(Amounts in thousands)
Working capital (deficit) $ (213) $ 284 $ 668 $ 6,173 $ 12,879
Total assets 2,224 2,562 4,550 12,986 21,040
Total liabilities 1,858 1,715 1,820 1,660 1,983
Shareholders' equity 366 847 2,730 11,326 19,057
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
consolidated financial statements and accompanying notes provided elsewhere in
this prospectus.
CRITICAL ACCOUNTING POLICIES
The preparation 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 that affect the
amounts reported in the Consolidated Financial Statements and accompanying
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 arrangement 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:
o Persuasive evidence of an arrangement exists;
o Delivery has occurred or services have been rendered;
o Our price to the customer is fixed or determinable; and
o 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.
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.
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
impairment 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. See 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 2003, respectively, and calculates the dollar
change and percentage change from 2003 to 2004 in the respective line items. The
second table that follows presents the same information for the years ended
December 31, 2003 and 2002.
Year Ended
December 31,
------------------- Dollars Percentage
(Dollars in 000s) 2004 2003 Change Change
- ----------------- -------- -------- ------- -------
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 Percentage
(Dollars in 000s) 2003 2002 Change Change
- ----------------- -------- -------- -------- -------
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%
======== ======== ========
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 recognize the
revenue ratably over the initial term of 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, we do 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 2004 in the respective line item. The
second table that follows presents the same information for the years ended
December 31, 2003 and 2002, 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 $ (776,900) (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%
=========== =========== ==========
The majority of our product licensing fees has been realized from a limited
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 one-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.
Our customers' response to the release of the significantly upgraded
version of our Windows product, GO-Global for Windows, during the fourth quarter
of 2002 was a significant contributing factor to the increase in 2003 of Windows
product licensing fees from 2002.
During the fourth quarter of 2002, we entered into a 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.
During 2004, we recognized approximately $1,015,000 of revenue from service
fees, an increase of $184,100, or approximately 22.2% from the approximately
$830,900 recognized during 2003. This increase has primarily resulted 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 an increased
level of sales of 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 a three-year period. A
negligible amount of service fees from this transaction was recognized as
revenue during 2002 as compared with approximately $100,000, or one full-year's
worth, during 2003.
During 2003, we recognized approximately $167,300 of revenue from other
items, an increase of $16,500, or approximately 10.9%, from the approximately
$150,800 recognized during 2002. The increase was primarily due to the
recognition of private 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 the
life of the respective contract.
We anticipate that many of our customers will enter into, and periodically
renew, maintenance contracts to ensure continued product updates and support.
Revenue from maintenance contracts was approximately 28.8%, 19.9% and 12.5% of
revenue in 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.
COST OF REVENUE
Cost of revenue consists primarily of the amortization of acquired
technology and the amortization of capitalized 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, are recorded as capitalized software
on our balance sheet and subsequently amortized as cost of revenue over the
shorter of three years or the remaining estimated life of the products.
The decreases in cost of revenues in 2004 from 2003 and in 2003 from 2002
were due primarily to certain elements of our acquired technology becoming fully
amortized during 2003, additional elements becoming fully amortized during 2004
and the write-downs of the estimated remaining carrying values 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 our
intangible assets becoming fully amortized during 2004, we expect that our cost
of revenue will be significantly lower in 2005 as compared with 2004. Cost of
revenue was approximately 25.6%, 32.9% and 47.5% of total revenues for the years
2004, 2003 and 2002, respectively.
SALES AND MARKETING EXPENSES
Sales 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:
o The decrease in salaries, benefits and commissions was the result of
terminating two people during late 2003 and two during 2004.
o 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.
o 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:
o 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.
o 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.
o 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.
o 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.
We expect that cumulative sales and marketing expenses in 2005 will
approximate those incurred during 2004. Sales and marketing expenses were
approximately 39.2 %, 40.3% and 63.2% of total revenues for the years 2004, 2003
and 2002, respectively.
GENERAL AND ADMINISTRATIVE EXPENSES
General and administrative expenses primarily consist of salaries and
related benefits, legal and professional services, insurance, costs associated
with being a publicly held company and bad debts expense.
General and administrative expense 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:
o 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.
o 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 in 2003 from 2002 was
primarily caused by decreased outside services ($446,000), legal fees
($324,800), deferred compensation ($187,400), directors and officers
insurance ($158,600), travel and entertainment ($141,000) and human resources
costs ($173,100). The reasons for these decreases were as follows:
o We abandoned the merger talks we had conducted throughout 2002 with
three related entities in the telecommunications 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 the decrease in
outside consulting fees.
o As a result of the abandonment of the merger talks, we also reduced
the need for legal services.
o The decrease in deferred compensation expense was because the amounts
previously deferred became fully amortized during 2002.
o 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 June 2003.
o Travel and entertainment and human resource costs were lower in 2003
as a result of the reduction in headcount experienced as part of the
restructurings that occurred in 2002.
The ending balance of our allowance for doubtful accounts as of December
31, 2004, 2003 and 2002, was $46,800, $46,800 and $50,300, respectively. Bad
debts expense was $0, $16,300 and $31,600 for the years ended December 31, 2004,
2003 and 2002, 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.
RESEARCH AND DEVELOPMENT EXPENSES
Research and development expenses consist primarily of salaries and related
benefits paid to software engineers, payments to contract programmers, and
facility expenses related to our remotely located engineering offices.
Research and development expense 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 decreased human resources costs ($693,500), depreciation of
fixed assets ($130,100), rent ($113,000), the allocation of corporate overheads
($78,000), outside consultants ($38,100) and an increase in customer service
costs ($144,600). The reasons for these changes were as follows:
o 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 research
and development headcount during 2003.
o 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.
o The decrease in rent was primarily due to the negotiated settlement of
the lease on our former Bellevue, Washington engineering offices.
o 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.
o 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.
o 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.
We believe that a significant level of investment for research and
development is required to remain competitive. 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 that these 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.
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:
o A significant decrease in the market value of an asset;
o A significant change in the extent or manner in which an asset is
used;
o A significant adverse change in the business climate that could affect
the value of an asset; and
o 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:
o The challenges we faced in bringing our GO-Global for Windows and
GO-Global:XP products to maturity;
o The continued pervasive weakness in the world-wide economy;
o How we were incorporating and planning to incorporate each element of
the purchased technologies into our legacy technology;
o 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
be derived from these assets:
Net Book Value Impairment Net Book Value
Before Impairment Write Down After Impairment
------------------ -------------- ------------------
Purchased 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 reduce 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:
December 31, 2002
Ending Balance
Restructuring Cash Non-cash Restructuring
Category Charge Payments Charges Accrual
- -------- ------------- -------------- ------------ ---------------
Year 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:
December 31, 2003
Ending Balance
Restructuring Cash Non-cash Restructuring
Category Charge Payments Charges Accrual
- -------- ------------- ------------- ------------- --------------
Year 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 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 2004, 2003 and 2002, 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 lower cash and cash equivalents balance at year end 2004, as compared
with year end 2003, is primarily due to the outflow of approximately $863,000
resulting from operating activities. 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.
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.
PROVISION FOR INCOME TAXES
At December 31, 2004, we had approximately $41,464,000 in federal net
operating loss carryforwards. The federal net operating loss carryforwards will
expire at various times from 2007 through 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 fully utilized or expire.
LIQUIDITY AND CAPITAL RESOURCES
We are continuing to 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, we continue 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 items, 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 five-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
assumption of 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.
Our net proceeds from the 2005 private placement were approximately
$2,130,000, after giving effect to:
o our issuance of a $665,000 partial credit against the price of our
securities acquired by AIGH in the 2005 private placement;
o our assumption of approximately $232,800 of NES' indebtedness;
o our payment of NES' legal fees and expenses of approximately $108,000;
o our payment of professional fees and expenses of approximately
$498,500, which we incurred in the NES acquisition;
o our payment of the legal fees and expenses of Mr. Hirschman, AIGH and
the investors in the 2005 private placement of approximately $108,000;
o a fee paid to Griffin Securities Inc. in the amount of $50,000 in
connection with the 2005 private placement; and
o our payment of professional fees and expenses of approximately
$207,700, which we incurred in the 2005 private placement.
Pursuant to the terms of an 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 and the Series B preferred stock. In
addition, under the terms of an agreement entered into in connection with the
NES 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 amortization 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 placement of $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.
CASH AND CASH EQUIVALENTS
As of December 31, 2004, cash and cash equivalents were approximately
$675,300 as compared with $1,025,500 at December 31, 2003. The $350,200 decrease
was primarily due to the cash consumed by our operations, partially offset by
the net proceeds of the 2004 private placement. We anticipate that our cash and
cash equivalents as of December 31, 2004, and the net proceeds from the 2005
private placement, together with revenue from operations will be sufficient to
fund our anticipated 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 December 31, 2004, we had approximately $518,900 in accounts receivable,
net of allowances totaling $46,800. The net accounts receivable were virtually
the same as the approximately $521,000, net of the $46,800 allowance we reported
at December 31, 2003. We did not write off any receivables during 2004. 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. The following table discloses our contractual commitments for future
periods, which consist entirely of leases for office space, as previously
discussed and assumes that we will occupy all current leased facilities for the
full term of the underlying 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.
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, we will be required to expense all awards
granted, modified, cancelled or repurchased as well as the portion of prior
awards for which 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 increase cash flows from financing in
periods after adoption. The adoption of SFAS 123R will have an impact 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 financial position, results of operations and cash flows that
will result from the adoption of SFAS 123R.
BUSINESS
GENERAL
We are a Delaware corporation, founded in May of 1996. We are developers of
business connectivity software, including Unix, Linux and Windows server-based
software, with an immediate focus on web-enabling applications for use by ISVs,
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. This centralized deployment and
management of applications reduces the complexity and total costs associated
with enterprise computing. Our software architecture provides application
developers with the ability to relocate 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 warrants 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
website 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 and Berkshire, England, United Kingdom.
INDUSTRY BACKGROUND
HISTORY
In the 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 the 1980s, the PC
became the desktop of choice: empowering the user with flexibility, a graphical
user interface, and a multitude of productive and inexpensive applications. In
the 1990s, the desktop provided access to mainframe applications and databases,
which run on large, server computers. Throughout the computing evolution, the
modern desktop has become increasingly complex and costly to administer and
maintain. This situation is further worsened as organizations become more
decentralized with remote employees, and as 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. Industry analysts and enterprise users alike have
begun to recognize that the total cost of PC ownership, 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.
With increasing demands to control corporate computing costs, industry
leaders are developing technology to address total cost of ownership issues. One
approach, led by Sun Microsystems and IBM, utilizes Java-based network
computers, which operate by downloading small Java programs to the desktop,
which in turn are used for accessing server-based applications. Another approach
is Microsoft's Windows Terminal Services(TM), introduced in June 1998. It
permits server-based Windows applications to be accessed from Windows-based
network computers. Both initiatives are examples of server-based computing. 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 end user devices, each
with its particular operating system, processing power and connection type.
Consequently, it is becoming increasingly difficult to provide universal access
to business-critical applications across the enterprise. As a result,
organizations resort to emulation software, new hardware or costly application
rewrites in order to provide universal application access.
A common cross-platform problem for the enterprise is the need to access
Unix or Linux applications from a PC desktop. While Unix-based computers
dominate the enterprise applications market, Microsoft Windows-based PCs
dominate the enterprise desktop market. Since the early 1990s, enterprises have
been striving to connect desktop PCs to Unix applications over all types of
connections, including networks and standard phone lines. This effort, however,
is complex and costly. The primary solution to date is known as PC X Server
software. PC X Server software is a large software program that requires
substantial memory and processing resources on the desktop. Typically, PC X
Server software is difficult to install, configure and maintain. Enterprises are
looking for effective Unix connectivity software for PCs and non-PC desktops
that is easier and less expensive to administer and maintain.
Today 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, new operational models and
sales channels are emerging. Traditional high-end software packages that were
once too expensive for many companies are now available for rent over the
Internet. By servicing customers through a centralized operation, rather than
installing and maintaining applications at each customer's site, ASPs play an
important role in addressing an enterprise's computing requirements. Today, ASPs
are faced with the difficult task of creating, or rewriting, applications to
entertain the broader market.
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.
OUR APPROACH
Our server-based software deploys, manages, supports and executes
applications entirely on the server computer and publishes their user interface
efficiently and instantaneously to desktop 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:
o The server component runs alongside the server-based application and
is responsible for intercepting user-specific information for display
at the desktop.
o The desktop component is responsible only for sending keystrokes and
mouse motion to the server. 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.
o Our protocol enables efficient communication over fast networks or
slow dial-up connections and allows applications to be accessed from
remote locations with network-like performance and responsiveness.
We believe that the major benefits of our technology are as follows:
o LOWERS TOTAL COST OF OWNERSHIP. Reducing information technology costs
is a primary goal of our products. Today, installing enterprise
applications is time-consuming, complex and expensive. 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 only on the server, thereby avoiding desktop software
and operating system conflicts and minimizing at-the-desk support.
o 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.
o WEB ENABLES EXISTING APPLICATIONS. The Internet represents a
fundamental change in distributed computing. Organizations now benefit
from ubiquitous access to corporate resources by both local and remote
users. However, to fully exploit this opportunity, organizations need
to find a way 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 the need to rewrite
the application. This reduces application development costs while
preserving the rich user interface so difficult to replicate in a
native Web application.
o CONNECTS DIVERSE COMPUTING PLATFORMS. Today's computing
infrastructures are a mix of computing devices, network connections
and operating systems. Enterprise-wide application deployment is
problematic due to this heterogeneity, often requiring costly and
complex emulation software or application rewrites. For example,
Windows PCs typically may not access a company's Unix applications
without installing complex PC X Server software on each PC. Typical PC
X Servers are large and require an information technology professional
to properly install and configure each desktop. For Macintosh, the
choices are even fewer, requiring the addition of yet another vendor
product. For the newer technologies, such as tablet PCs or handheld
devices, application access will be challenging.
o To rewrite an application for each different display device (be that a
desktop PC or tablet PC) and each 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 all devices, utilizing their existing computing
infrastructure, without rewriting a single line of code or changing or
reconfiguring hardware. This means that enterprises can maximize their
investment in existing technology and allow users to work in their
preferred environment.
o 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
devices.
o EFFICIENT PROTOCOL. Applications typically are designed for
network-connected desktops, which can put tremendous strain on
congested networks and may yield poor, sometimes unacceptable,
performance over remote connections. For 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. Our protocol sends only
keystrokes, mouse clicks and display updates over the network,
resulting in minimal impact on bandwidth for application deployment,
thus lowering cost on a per user basis. Within the enterprise, our
protocol can extend the
reach of business-critical applications to many areas, including
branch offices, telecommuters and remote users over the Internet,
phone lines or wireless connections. This concept may be extended
further to include vendors and customers for increased flexibility,
time-to-market and customer satisfaction.
o We also intend to exploit the revenue potential of our NES patent
portfolio, summarized elsewhere herein, by:
o licensing such patents to companies that utilize the technology
covered by such patents in their products or services;
o initiating litigation against those companies who we believe are
infringing such patents and who are unwilling or who refuse to sign
license agreements which provide for royalty payments to us; and
o determining the extent to which the technology covered by the 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 deployed to develop additional patentable technology.
PRODUCTS
We are dedicated to creating business connectivity technology that brings
Windows, Unix, 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 from a very quick time to market,
overall cost savings via centralized computing, a client neutral cross-platform
solution, and high performance remote access.
Our product offerings include GO-Global for Windows and GO-Global for Unix.
GO-Global for Windows allows access to Windows applications from remote
locations and a variety of connections, including the Internet and dial-up
connections. GO-Global for Windows allows Windows applications to be run via a
browser from Windows 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 being used.
GO-Global for Unix web-enables individual Unix and Linux applications, or entire
desktops. When using Go-Global for Unix, Unix and Linux web enabling is achieved
without modifying the underlying applications' code or requiring costly add-ons.
TARGET MARKETS
The target market for our products comprises organizations that need to
access Windows, Unix and/or Linux applications from a wide variety of devices,
from remote locations, including over the Internet, dial-up lines, and wireless
connections. This includes organizations, such as small to medium-sized
companies, governmental and educational institutions, ISVs, VARs and ASPs. Our
software is designed to allow these enterprises to tailor the configuration 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:
o 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.
o ENTERPRISES EMPLOYING A MIX OF UNIX, LINUX, MACINTOSH AND WINDOWS.
Most major enterprises employ a heterogeneous mix of computing
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 applications from
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 to various applications.
o 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 enterprises' computing strategies. Our protocol is designed to
enable highly efficient low-bandwidth connections.
o ASPS. High-end software applications in the fields of human resources,
enterprise resource planning, enterprise relationship management and
others, historically have only been available to organizations able to
make large investments in capital and personnel. The Internet has
opened up global and mid-tier markets to vendors of this software who
may now offer it to a broader market on a rental basis. Our products
enable the vendors to provide Internet access to their applications
with minimal additional investment in development implementation.
o 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.
o EXTENDED ENTERPRISE SOFTWARE MARKET. Extended enterprises allow access
to their computing resources to customers, 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 via
just-in-time, vendor-managed inventory and related techniques.
The early adoption of extended enterprise solutions may be driven in part
by enterprises' need to exchange information over a wide variety of computing
platforms. We believe that our server-based software products, along with our
low-impact protocol, are well positioned to provide enabling solutions for
extended enterprise computing.
STRATEGIC RELATIONSHIPS
We believe it is important to maintain our current strategic alliances and
to seek suitable new alliances in order to enhance stockholder value, improve
our technology and/or enhance our ability to penetrate relevant target markets.
We also are focusing on strategic relationships that have immediate revenue
generating potential, strengthen our position in the server-based software
market, add complementary capabilities and/or raise awareness of our products
and 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 has licensed
our GoGlobal thin client PC X server software for inclusion with their Turn-key
Solution software, an optical networking system. Alcatel's customers are using
our server-based solution to access Alcatel's UNIX/X Network Management Systems
applications from T-based PCs. Alcatel has deployed GoGlobal internally to
provide their employees with high-speed network access to their own server-based
software over dial-up connections, local area networks (LANs) and 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, have included small to medium-sized enterprises,
ISVs, VARs and large governmental organizations. Sales to Alcatel, KitASP and
FrontRange represented approximately 20.9%, 14.9% and 14.1%, respectively, of
our revenues in 2004. Sales to FrontRange and Alcatel represented approximately
27.4% and 18.4%, respectively, of our revenues in 2003. We consider KitASP,
Alcatel and FrontRange to be our most significant customers.
Our sales and marketing efforts will be focused on increasing product
awareness and demand among ISVs, ASPs, small to medium-sized enterprises, and
VARs who have a vertical orientation or are focused on Unix, Linux or Windows
environments. Current marketing activities include direct mail, targeted
advertising campaigns, tradeshows, production of promotional materials, public
relations and maintaining an Internet presence for marketing and sales purposes.
RESEARCH AND DEVELOPMENT
Our research and development efforts currently are focused on developing
new products and further enhancing the functionality, performance and
reliability of existing products. We invested $1,500,900, $1,797,200 and
$3,129,800 in research and development in 2004, 2003 and 2002, respectively,
including capitalized software development costs of $0, $282,200 and $298,500,
respectively. We have made significant investments in our protocol and in the
performance and development of our server-based software. We expect investments
in research and development during 2005 to approximate 2004 levels.
COMPETITION
The server-based software market in which we participate is highly
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 of device and network connections. Our competitors include
manufacturers of conventional PC X server software. Competition is expected from
these and other companies in the server-based software market. Competitive
factors in our market space include; price, product quality, functionality,
product differentiation and breadth.
We believe our principal competitors for our current products include
Citrix Systems, Inc., Hummingbird Communications, Ltd., 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 X Servers. WRQ, Network Computing Devices, and NetManage also offer
traditional PC X Server software.
PROPRIETARY TECHNOLOGY
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. We do not believe our products infringe on the rights of any third
parties, but there can be no assurance that third parties will not assert
infringement claims against us in the future, or that any such assertion will
not result in costly litigation or require us to obtain a license to proprietary
technology rights of such parties.
In November 1999, we acquired a U.S. patent for the remote display of
Microsoft Windows applications on Unix and Linux desktops with X Windows. As a
result, we believe that we have acquired patent protection and licensing rights
for the deployment of all Windows applications remoted, or displayed, over a
network or any other type of connection to any X Windows systems. This patent,
which covers our Bridges for Windows (formerly jBridge) technology, was
originally developed by a team of engineers formerly with Exodus Technology and
hired by us in May 1998.
Upon 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 network
architectures to accomplish certain tasks. Generally, our patents describe:
o methods to collect, store and display information developed and
accessed by users and stored on host computer servers
o methods to provide multiple virtual websites on one computer
o methods to protect computers and computer networks from unauthorized
access
o 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 Date of Grant Scope of Coverage
Number
------------------ --------------------- ---------------------------------------------
5,778,367 July 7, 1998 Automated, network-accessible,
.................. ..................... user-populated database, particularly
6,324,538 November 27, 2001 for the World Wide Web.
.................. .....................
6,850,940 February 1, 2005 " "
(1) (1)
------------------ --------------------- ---------------------------------------------
------------------ --------------------- ---------------------------------------------
Patent Date of Grant Scope of Coverage
Number
------------------ --------------------- ---------------------------------------------
5,870,550 February 9, 1999 Network-accessible server that hosts
.................. ..................... multiple websites
6,647,422 November 11, 2003 " "
------------------ --------------------- ---------------------------------------------
5,826,014 October 20, 1998 Internet firewall application in which
a "proxy agent" screens incoming
.................. ..................... request from network users and
6,061,798 May 9, 2000 verifies the authority of the incoming
request before permitting access to a
network element.
------------------ --------------------- ---------------------------------------------
5,898,830 April 27, 1999 Firewall computers that act as intermediaries
.................. ..................... between pairs of other computers including
6,052,788 April 18, 2000 control of access to a virtual private
.................. ..................... network.
6,751,738 June 15, 2004 " "
.................. .....................
6,804,783 October 12, 2004 " "
------------------ --------------------- ---------------------------------------------
5,790,664 August 4, 1998 Technology for monitoring the license
status of software application(s)
installed on a client computer
------------------ --------------------- ---------------------------------------------
<FN>
(1) Patent granted on February 1, 2005, subsequent to the acquisition of NES,
thereby increasing the number of issued patents from 11 to 12.
</FN>
As of April 25, 2005, we have 55 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 55 applications, 53 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 March 15, 2005, we had a total of 23 employees, including five in
marketing, sales and support, 12 in research and development, four in
administration and finance and two 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 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.
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 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 since December 2002. Our current lease runs through December 2005. Rent
on this office, which can fluctuate depending on exchange rates, is
approximately $400 per month.
We believe our current facilities will be adequate to accommodate our needs
for the foreseeable future.
LEGAL PROCEEDINGS
We are currently not party to any legal proceedings that we believe will
have a material negative impact on our operations.
MANAGEMENT
EXECUTIVE OFFICERS AND DIRECTORS OF THE REGISTRANT
Set forth below is information concerning each of our directors and
executive officers.
NAME AGE POSITION
---- --- --------
Robert Dilworth 63 Chairman of the Board of Directors and
Chief Executive Officer (Interim)
William Swain 64 Chief Financial Officer and Secretary
August P. Klein 68 Director
Michael Volker 56 Director
Gordon Watson 69 Director
ROBERT DILWORTH has served as one of our directors since July 1998 and was
appointed Chairman in December 1999. In January 2002, Mr. Dilworth was 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., a
leading provider of wireless data communication and network solutions. Prior to
joining Metricom, from 1985 to 1988, Mr. Dilworth served as President of Zenith
Data Systems Corporation, a microcomputer manufacturer. Earlier positions
included Chief Executive Officer and President of Morrow Designs, Chief
Executive Officer of Ultramagnetics, Group 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 of eOn Communications, Sky Pipeline and Yummy
Interactive. Mr. Dilworth previously served as director of Mobility Electronics
and Get2Chip.com, Inc.
WILLIAM SWAIN has served as our Chief Financial Officer and Secretary since
March 2000. Mr. Swain was a consultant from August 1998 until February 2000,
working with entrepreneurs in the technology industry in connection with the
start-up and financing of new business opportunities. Mr. Swain was Chief
Financial Officer and Secretary of Metricom Inc., from January 1988 until June
1997, during which time he was instrumental in private financings as well as
Metricom's initial public offering and subsequent public financing activities.
He continued as Senior Vice President of Administration with Metricom from June
1997 until July 1998. Prior to joining Metricom, Mr. Swain held senior financial
positions with leading companies in the computer industry, including Morrow
Designs, Varian Associates and Univac. Mr. Swain holds a Bachelors degree in
Business Administration from California State University of Los Angeles and is a
Certified Public Accountant in the State of California.
AUGUST P. KLEIN has served as one of our directors since August 1998. Mr.
Klein has been, since 1995, the founder, Chief Executive Officer and Chairman of
the Board of JSK Corporation. From 1989 to 1993, Mr. Klein was founder and Chief
Executive Officer of Uniquest, Inc., an object-oriented application software
company. From 1984 to 1988, Mr. Klein served as Chief Executive Officer of
Masscomp, Inc., a developer of high performance real time mission critical
systems and Unix-based applications. Mr. Klein has served as Group Vice
President, Serial Printers at Data Products Corporation and President and Chief
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 and has served as a trustee of the Computer Museum in
Boston, Massachusetts since 1988. Mr. Klein holds a B.S. in Mathematics from St.
Vincent College.
MICHAEL VOLKER has served as one of our directors since July 2001. Mr.
Volker has been, since 1996, Director of Simon Fraser University's Industry
Liaison Office. From 1996 to 2001, Mr. Volker 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 Executive Officer and Chairman of the Board of Directors of RDM
Corporation, a publicly listed company. RDM is a developer of specialized
hardware and software products for both Internet electronic commerce and paper
payment processing. From 1988 to 1992, Mr. Volker was Executive Director of BC
Advanced Systems Institute, a hi-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 the
Province of British Columbia, holds a Bachelor's and Master's degree from the
University of Waterloo.
GORDON WATSON has served as one of our directors since 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. From 1996 to 1997 he served as Western Regional Director, Lotus
Consulting of Lotus Development Corporation. From 1988 to 1996, Mr. Watson held
various positions with Platinum Technology, Incorporated, most recently serving
as Vice President Business Development, Distributed Solutions. Earlier positions
include Senior Vice President of Sales for Local Data, Incorporated, President,
Troy Division, Data Card Corporation, and Vice President and General Manager,
Minicomputer Division, Computer Automation, Incorporated. Mr. Watson also held
various executive and director level positions with TRW, Incorporated, Varian
Data Machines, and Computer 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 of DPAC Technologies, PATH Communications and SoftwarePROSe,
Inc.
Our Board of Directors has an audit committee consisting of three
directors, all of whom are independent as defined by the listing standards of
The Nasdaq Stock Market. The current members of the audit committee are August
P. Klein (committee chairman), Michael Volker and Gordon Watson. Our Board of
Directors 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 all of
our employees, including our chief executive officer, chief financial officer
and controller. This code of ethics was filed as an exhibit to our annual report
on Form 10-K for the year ended December 31, 2003.
All executive officers serve at the discretion of the Board of Directors.
SUMMARY COMPENSATION TABLE
The following table sets forth information for the fiscal years ended
December 31, 2004, 2003 and 2002 concerning compensation we paid to our Chief
Executive Officer and our other executive officers whose total annual salary and
bonus exceeded $100,000 for the year ended December 31, 2004.
- ---------------------------------------------------------------- ------------------------------- ------------
LONG-TERM COMPENSATION
- ---------------------------------------------------------------- ------------------------------- ------------
ANNUAL COMPENSATION AWARDS PAYOUTS
- ---------------------------------------------------------------- ----------------------- ------- ------------
Restricted Securities
Other Annual Stock Underlying LTIP All Other
Name and Principal Position Year Salary Bonus Compensation Awards Options Payouts Compensation
- --------------------------- ------ ---------- ----- ------------ ---------- ------------ ------- ------------
Robert Dilworth 2004 $ 99,000 - - - 300,000 (2) - -
Chairman of the Board 2003 $ 129,000 - - - 40,000 - -
Chief Executive Officer 2002 $ 256,000 - - - 100,000 - -
(Interim) (1)
- --------------------------- ------ ---------- ----- ------------ ---------- ------------ ------- ------------
William Swain 2004 $ 123,100 - - - 380,000 (2) - $ 2,000 (3)
Chief Financial Officer 2003 $ 96,200 - - - 40,000 - $ 2,000 (3)
Secretary 2002 $ 147,700 - - - - - $ 2,000 (3)
- --------------------------- ------ ---------- ----- ------------ ---------- ------------ ------- ------------
- ---------------
(1) Mr. Dilworth began as Chief Executive Officer (Interim) during January
2002. As interim Chief Executive Officer, Mr. Dilworth is compensated as a
consultant and not an employee. Although he is eligible to receive
compensation 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 the quarterly 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 directors.
(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:
Number of Potential Realziable Value
Shares of Percent of Total at Assumed Annual Rates
Common Stock Options Granted of Stock Appreciation
Underlying to Employees Exercise Expiration for Option Term
Name Options Granted In Fiscal Year Price (1) Date 5% 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 Value of Unexercised
Unexercised Options In-The-Money Options at
at Fiscal Year-End (1) 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 the exercise of options are subject to our 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 rate of $1,000 for attendance at each
meeting of our board, $500 if their attendance is via telephone, $500 for
attendance at each meeting of a board committee, and a $1,500 quarterly
retainer. Additionally, outside directors are granted stock options
periodically, typically on a yearly basis. In the aggregate, our outside
directors received options to purchase 152,500 shares of our common stock during
2004 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 Robert Dilworth, our Interim Chief Executive Officer and Chairman
of the Board, and August Klein, a non-employee director.
CERTAIN TRANSACTIONS
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 and five-year warrants to acquire 2,500,000 shares of common stock at an
exercise price of $0.33 per share. We derived net proceeds of approximately
$931,400 from the 2004 private placement. We also issued to Griffin Securities
Inc., as a placement agent fee in respect to the 2004 private placement,
warrants to acquire 500,000 shares of common stock at an exercise price of $0.23
per share and warrants to acquire 250,000 shares of our common stock at an
exercise price of $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 $235,000 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 five-year warrants to 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 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 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 an exercise price of $0.27 per
share and five-year warrants to purchase 8,147,700 shares of our common stock at
an exercise price of $0.40 per share, respectively.
PRINCIPAL STOCKHOLDERS
The following table sets forth certain information, as of March 30, 2005,
with respect to the beneficial ownership of shares of our common stock held by:
(i) each director; (ii) each person known by us to beneficially own 5% or more
of our common stock; (iii) each executive officer named in the summary
compensation table; and (iv) all directors and executive officers as a group.
Unless otherwise indicated, the address for each stockholder is c/o GraphOn
Corporation, 3130 Winkle Avenue, Santa Cruz, California 95065.
NUMBER OF SHARES OF COMMON
STOCK BENEFICIALLY OWNED PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER (1)(2) CLASS
- ------------------------------------------------------------- -------------------------- ----------
Robert 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)........................................... 9,120,417 18.5
- -------------------------------------------------------------
6006 Berkeley Avenue
Baltimore, MD 21209
Ralph Wesinger (9)........................................... 5,046,491 10.9
IDT Capital, Inc. (10)....................................... 5,555,500 11.6
520 Broad Street
Newark, NJ 07102
Paul Packer (11)............................................. 3,821,278 8.2
c/o Globis Capital Partners
60 Broad Street, 38th Floor
New York, NY 10004
All current executive officers and directors as a group (5 2,336,780 4.8
persons)(12).................................................
- ---------------
* Denotes less than 1%.
(1) As used in this 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 named herein have sole voting power and
investment power with respect to their respective shares of our common
stock, except to the extent that authority is shared by spouses under
applicable law, and record and beneficial ownership with respect to their
respective shares of our common stock. With respect to each stockholder,
any shares issuable upon exercise of options and warrants held by such
stockholder that are currently exercisable or will become exercisable
within 60 days of March 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 46,147,047 shares of
common stock outstanding as of March 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 options.
(4) Includes 580,000 shares of common stock issuable upon the exercise of
outstanding options.
(5) Includes 295,000 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 1,518,400 shares of common stock issuable upon the
exercise of outstanding warrants held by AIGH. Mr. Hirschman is the
managing member of AIGH and has sole voting and dispositive power with
respect to shares held by AIGH.
(9) Based on information contained in a Schedule 13G filed by Mr. Wesinger on
February 10, 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 GraphOn of NES. For the duration of the
escrow, Mr. Wesinger has the right to vote, but not to dispose of, such
shares. Includes 83,333 shares of common stock issuable upon exercise of
outstanding options.
(10) Based on information contained in a Schedule 13D filed by IDT Capital, Inc.
on February 15, 2005. Includes 1,851,800 shares of common stock issuable
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 a Schedule 13G filed on February 10,
2004. Includes 587,791 shares of common stock and 293,896 shares of common
stock issuable upon the exercise of outstanding warrants held by Mr. Paul
Packer and 370,400 shares of common stock and 185,200 shares of common
stock issuable upon the exercise of outstanding warrants held by Globis
Overseas Fund Ltd. (Globis Overseas). Includes 1,589,361 shares of common
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.
SELLING STOCKHOLDERS
This prospectus relates to our registration, for the account of the selling
stockholders indicated below, of an aggregate of 44,270,682 shares of our common
stock, including 13,605,889 and 1,250,000 shares underlying certain of our
warrants and options, respectively, pursuant to registration rights granted by
us to the selling stockholders. 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:
o 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.
o 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.
o 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.
o On August 9, 2000, we issued warrants to purchase 300,000 shares of
common stock to EarlyBirdCapital, Inc. for financial consulting
services.
o Prior to its merger with us in July 1999, our predecessor issued
warrants in three private placements, of 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
Greene.
We believe that the persons named in this table have sole voting and
investment power with respect to all shares of common stock that they
beneficially own. The last column of 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 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
COMMON STOCK OWNED AFTER OFFERING
NUMBER OF SHARES OFFERED BY SELLING --------------------
BENEFICIALLY OWNED STOCKHOLDER NUMBER PERCENT
--------------------- --------------------- ------ -------
Ralph Wesinger (1) 5,830,207 (2) (3) 5,830,207 (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) 55,500 (43) 55,500 (43) -- --
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) -- --
SHARES BENEFICIALLY
COMMON STOCK OWNED AFTER OFFERING
NUMBER OF SHARES OFFERED BY SELLING --------------------
BENEFICIALLY OWNED STOCKHOLDER NUMBER PERCENT
--------------------- --------------------- ------ -------
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 Greene (54) 250,000 (55) 250,000 (55) -- --
- ---------------
(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 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 and 794,630 shares issuable upon exercise of
warrants held by Globis Capital Partners L.P. and 370,400 shares 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.
PLAN OF DISTRIBUTION
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
stockholders.
Sales of the shares may be effected by the selling stockholders from time
to time in one or more types of transactions (which may include block
transactions) on any securities exchange, in the over-the-counter market, in
negotiated transactions, through put or call option transactions relating to the
shares, through short sales of shares, short sales versus the box, or a
combination of such methods of sale, at fixed prices, market 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 selling stockholders 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 such transactions by selling the shares
directly to purchasers or to or through broker-dealers, which may act as agents
or principals. Such broker-dealers may receive compensation in the form of
discounts, concessions, or commissions from the selling stockholders and/or the
purchasers of the shares for whom such broker-dealers may act as agents or to
whom they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions). In effecting sales,
broker-dealers engaged by the selling stockholders may arrange for other
broker-dealers to participate.
The selling stockholders and any broker-dealers that act in connection with
the sale of the shares might be deemed to be "underwriters" within the meaning
of Section 2(11) of the Securities Act of 1933, and any commissions received by
such broker-dealers and any profit on the resale of the shares sold by them
while acting as principals might be deemed to be underwriting discounts or
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
informed the selling stockholders that the anti-manipulative provisions of
Regulation M promulgated under the Securities Exchange Act of 1934 may apply to
their sales in the market.
The selling stockholders also may resell all or a portion of the shares in
open market transactions in reliance upon Rule 144 under the Securities Act,
provided they meet the criteria and conform to the requirements of such Rule.
Sales of any shares of common stock by 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 or a post-effective amendment to the registration statement of
which this prospectus is a part under the Securities Act, disclosing:
o the name of each such selling stockholder and of the participating
broker-dealer(s);
o the number of shares involved;
o the price at which such shares were sold;
o the commissions paid or discounts or concessions allowed to such
broker-dealer(s), where applicable;
o that such broker-dealer(s) did not conduct any investigation to verify
the information set out or incorporated by reference in this
prospectus; and
o 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 SECURITIES
COMMON STOCK
We are currently authorized to issue up to 195,000,000 shares of our common
stock, $0.0001 par value. As of March 31, 2005, 46,147,047 shares of our common
stock were issued and outstanding, and held of record by approximately 165
persons. We estimate that there are in excess of 5,000 beneficial owners of our
common stock.
Holders of shares of our common stock are entitled to such dividends as may
be declared from time to time by the board in its discretion, on a ratable
basis, out of funds legally available therefrom, and to a pro rata share of all
assets available for distribution upon liquidation, dissolution or other winding
up of our affairs. All of the outstanding shares of our common stock are fully
paid and non-assessable.
WARRANTS
The material terms of the warrants issued to the selling stockholders are
as follows:
o warrants to purchase an aggregate of 2,750,000 shares of our common
stock are exercisable at $0.33 per share and expire on January 29,
2009;
o warrants to purchase an aggregate of 470,000 shares of our common
stock are exercisable at $0.23 per share and expire on January 29,
2009;
o warrants to purchase an aggregate of 1,481,500 shares of our common
stock are exercisable at $0.27 per share and expire on February 2,
2010;
o warrants to purchase an aggregate of 8,147,700 shares of our common
stock are exercisable at $0.40 per share and expire on February 2,
2010;
o warrants to purchase an aggregate of 456,689 shares of our common
stock are exercisable at $1.79 per share and expire on January 27,
2006; and
o warrants to purchase an aggregate of 300,000 shares of our common
stock are exercisable at $5.25 per share and expire on August 9, 2005.
The exercise price of the warrants is subject to adjustment upon the
occurrence of certain events, including the issuance of our common stock at a
price below the 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:
o for any breach of the director's duty of loyalty to us or our
stockholders;
o for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law;
o under section 174 of the Delaware law, relating to unlawful payment of
dividends or unlawful stock purchases or redemption of stock; and
o 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 indemnification
of our 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 that certain investors might be willing to pay in the future for shares of
our common stock.
TRANSFER AGENT
The transfer agent for our common stock is American Stock Transfer & Trust
Company.
LEGAL MATTERS
The validity of the shares of our common stock covered by this prospectus
has been passed upon by Sonnenschein Nath & Rosenthal LLP, New York, New York.
EXPERTS
The consolidated financial statements and schedule of GraphOn 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 the period set forth in their report 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.
The consolidated financial statements and schedule included in this
prospectus and in the registration statement have been audited by BDO Seidman,
LLP, 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 in the registration statement, and are included in reliance
upon such reports given on the authority of such firm as experts in accounting
and auditing.
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 INFORMATION
We have filed with the SEC a registration statement under the Securities
Act for the registration of the common stock offered 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 information with respect to our company and
the common stock offered 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 the reports, proxy statements and other information we file
with the SEC can be inspected and copied at prescribed rates at the SEC's Public
Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain
information regarding the Washington, D.C. Public Reference Room by calling the
SEC at 1-800-SEC-0330. In addition, the registration statement, the related
exhibits and the reports, proxy statements and other information we file with
the SEC is publicly available through the SEC's site on the Internet, located
at: http://www.sec.gov.
INDEX TO FINANCIAL STATEMENTS
GRAPHON CORPORATION Page
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........................................... F-3
Consolidated Statements of Operations and Comprehensive Loss for
the Years Ended December 31, 2004, 2003, and 2002............................................... F-4
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2004, 2003 and 2002................................................................ F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2004, 2003 and 2002................................................................ F-6
Summary of Significant Accounting Policies............................................................. F-7
Notes to Consolidated Financial Statements............................................................. F-11
Report of Independent Registered Public Accounting Firm on
Supplemental Schedule (BDO Seidman, LLP)........................................................ F-21
Supplemental Schedule II............................................................................... F-22
NETWORK ENGINEERING SOFTWARE, INC.
Independent Auditor's Report (Macias Gini & Company LLP)............................................... F-23
Balance Sheets as of October 31, 2004 and 2003......................................................... F-24
Statements of Operations for the Years Ended
October 31, 2004 and 2003....................................................................... F-25
Statements of Stockholders' Deficit for the Years Ended
October 31, 2004 and 2003....................................................................... F-26
Statements of Cash Flows for the Years Ended
October 31, 2004 and 2003....................................................................... F-27
Notes to Financial Statements.......................................................................... F-28
PRO FORMA FINANCIAL INFORMATION
Unaudited Condensed Pro Forma Balance Sheet as of December 31, 2004.................................... F-32
Unaudited Condensed Pro Forma Statement of Operations
for the Year Ended as of December 31, 2004...................................................... F-33
Notes to Unaudited Condensed Pro Forma Financial Statements ........................................... F-34
Report of Independent Registered Public Accounting Firm
To 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, 2004 and the
related statements of operations and comprehensive 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
(Remainder of page intentionally left blank)
F-1
Report of Independent Registered Public Accounting Firm
To 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 two years in the period ended December
31, 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 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 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 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 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, 2003, and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 2003
in conformity with accounting principles generally accepted 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
February 23, 2004
(Remainder of page intentionally left blank)
F-2
GraphOn Corporation
Consolidated Balance Sheets
---------------------------
December 31, 2004 2003
- ----------------------------------------------------------- ------------ ------------
CURRENT ASSETS
Cash and cash equivalents ................................. $ 675,300 $ 1,025,500
Accounts receivable, net of allowance for doubtful accounts
of $46,800 and $46,800 .................................. 518,900 521,100
Prepaid expenses and other current assets ................. 24,100 23,100
------------ ------------
TOTAL CURRENT ASSETS ...................................... 1,218,300 1,569,700
------------ ------------
Property and equipment, net ............................... 75,400 144,800
Purchased technology, net ................................. - 335,000
Capitalized software, net ................................. 273,700 500,600
Note Receivable - related party ........................... 350,000 -
Deferred acquisition costs ................................ 269,700 -
Other assets .............................................. 37,300 11,900
------------ ------------
TOTAL ASSETS .............................................. $ 2,224,400 $ 2,562,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable .......................................... $ 250,200 $ 52,300
Accrued liabilities ....................................... 231,400 164,600
Accrued wages ............................................. 260,100 306,200
Deferred revenue .......................................... 689,800 763,000
------------ ------------
TOTAL CURRENT LIABILITIES ................................. 1,431,500 1,286,100
------------ ------------
LONG TERM LIABILITIES
Deferred revenue .......................................... 426,600 429,000
------------ ------------
TOTAL LIABILITIES ......................................... 1,858,100 1,715,100
------------ ------------
Commitments and contingencies (Note 13)
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 shares
authorized, 21,716,765 and 16,618,459 shares
issued and outstanding ................................... 2,200 1,700
Additional paid-in capital ................................ 46,930,700 45,985,300
Notes receivable .......................................... (50,300) (50,300)
Accumulated other comprehensive loss ...................... (400) (1,400)
Accumulated deficit ....................................... (46,515,900) (45,088,400)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ................................ 366,300 846,900
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ................ $ 2,224,400 $ 2,562,000
============ ============
<FN>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements
</FN>
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F-3
GraphOn Corporation
Consolidated Statements of Operations and Comprehensive Loss
------------------------------------------------------------
Years Ended December 31, 2004 2003 2002
- --------------------------------------------- ------------ ------------ ------------
Revenue:
Product licenses ............................ $ 2,395,200 $ 3,172,100 $ 2,942,000
Service fees ................................ 1,015,000 830,900 442,200
Other ....................................... 119,600 167,300 150,800
------------ ------------ ------------
Total Revenue ............................... 3,529,800 4,170,300 3,535,000
------------ ------------ ------------
Cost of Revenue:
Product costs ............................... 572,100 1,017,300 1,470,200
Service costs ............................... 331,700 354,300 209,700
------------ ------------ ------------
Total Cost of Revenue ....................... 903,800 1,371,600 1,679,900
------------ ------------ ------------
Gross Profit ................................ 2,626,000 2,798,700 1,855,100
------------ ------------ ------------
Operating Expenses
Selling and marketing ....................... 1,383,700 1,679,800 2,235,100
General and administrative .................. 1,183,600 1,419,100 2,801,000
Research and development .................... 1,500,900 1,515,000 2,831,300
Asset impairment loss ....................... - - 914,000
Restructuring charges ....................... - 80,100 1,942,800
------------ ------------ ------------
Total Operating Expenses .................... 4,068,200 4,694,000 10,724,200
------------ ------------ ------------
Loss From Operations ........................ (1,442,200) (1,895,300) (8,869,100)
------------ ------------ ------------
Other Income (Expense)
Interest and other income ................... 14,700 13,000 152,500
Interest and other expense .................. - (4,300) (75,900)
------------ ------------ ------------
Total Other Income (Expense) ................ 14,700 8,700 76,600
------------ ------------ ------------
Net Loss .................................... (1,427,500) (1,886,600) (8,792,500)
Other Comprehensive Income (Loss), net of tax
Unrealized holding gain (loss)
on investment .............................. - - (7,500)
Foreign currency translation adjustment ..... 1000 1,000 3,600
------------ ------------ ------------
Comprehensive Loss .......................... $ (1,426,500) $ (1,885,600) $ (8,796,400)
============ ============ ============
Basic and Diluted Loss per Common Share ..... $ (0.07) $ (0.11) $ (0.50)
============ ============ ============
Weighted Average Common Shares Outstanding .. 21,307,966 16,607,328 17,465,099
============ ============ ============
<FN>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements
</FN>
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F-4
GraphOn Corporation
Consolidated Statements of Shareholders' Equity
-----------------------------------------------
Accum-
ulated
Other
Compre-
Additional Deferred Notes hensive
Common Stock Paid-in Compen- Receiv- Income Accumulated
Shares Amount Capital sation able (Loss) Deficit Totals
---------- ------- ------------ ---------- --------- ------- ------------- ------------
Balances, December 31, 2001 17,288,332 $ 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 purchases 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
========== ======= ============ ========= ========= ======= ============= ============
<FN>
See accompanying summary of significant accounting policies and notes to consolidated financial statements
</FN>
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F-5
GraphOn Corporation
Consolidated Statements of Cash Flows
-------------------------------------
Years ended December 31, 2004 2003 2002
- ---------------------------------------------------- ----------- ----------- -----------
Cash Flows From Operating Activities:
Net loss ........................................... $(1,427,500) $(1,886,600) $(8,792,500)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization ...................... 664,700 1,248,400 1,892,000
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
Charges to provision for doubtful accounts ......... - 16,300 31,600
Reductions to provision for doubtful accounts ...... - (19,800) (331,300)
Accrued interest on directors notes receivables .... (1,400) - -
Changes in operating assets and liabilities:
Accounts receivable ............................. 2,200 (179,700) 582,200
Prepaid expenses and other assets ............... (1,000) 168,900 59,300
Accounts payable ................................ 18,400 (176,400) (91,200)
Accrued liabilities.............................. 3,300 (366,700) 188,100
Accrued wages ................................... (46,100) 42,400 (128,500)
Deferred revenue ................................ (75,600) 395,900 218,300
----------- ----------- -----------
Net cash used in operating activities: ............. (863,000) (710,800) (4,606,000)
----------- ----------- -----------
Cash Flows From Investing Activities:
Capitalization of software
development costs ................................. - (282,200) (298,500)
Capital expenditures ............................... (33,400) (1,600) (82,900)
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
----------- ----------- -----------
Cash Flows From Financing Activities:
Employee stock purchases ........................... 9,000 2,800 6,400
Proceeds from exercise of warrants ................. 6,900 - -
Proceeds from private placement of common stock .... 1,150,000 - -
Costs of private placement of common stock ......... (218,600) - -
Repayment of note payable .......................... - - (26,600)
----------- ----------- -----------
Net cash provided by (used in) financing activities: 947,300 2,800 (20,200)
----------- ----------- -----------
Effect of exchange rate fluctuations on
cash and cash equivalents ......................... 1,000 1,000 3,600
Net Decrease in Cash
and Cash Equivalents .............................. (350,200) (932,700) (1,994,400)
Cash and Cash Equivalents:
Beginning of year .................................. 1,025,500 1,958,200 3,952,600
----------- ----------- -----------
End of year ........................................ $ 675,300 $ 1,025,500 $ 1,958,200
=========== =========== ===========
<FN>
See accompanying summary of significant accounting policies
and notes to consolidated financial statements
</FN>
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F-6
GraphOn Corporation
Summary of Significant Accounting Policies
- ------------------------------------------
The Company. GraphOn Corporation (the Company) was founded in May 1996 and is
incorporated in the state of Delaware. The Company's headquarters are currently
in Santa Cruz, California. The Company develops, markets, sells and supports
business connectivity software, including Unix, Linux and Windows server-based
software, with 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 Presentation and Use of Estimates. 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 accepted in 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.
Cash and Cash Equivalents. The Company considers all highly liquid investments
purchased with original maturities of three months or less to be cash
equivalents.
Marketable Securities. Under Statement of Financial Accounting Standards
(SFAS) No. 115, "Accounting for Certain Investments in Debt and Equity
Securities," securities are classified and accounted for as follows:
o 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.
o 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.
o 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 other comprehensive income.
Property and Equipment. Property and equipment are stated at cost. Depreciation
is calculated using the straight-line method over the estimated useful lives of
the respective assets, generally three to seven years. Amortization of leasehold
improvements is calculated using the straight-line method over the lesser of the
lease term or useful lives of the respective assets, generally seven years.
Purchased Technology. Purchased technology is amortized 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. Under the criteria set forth in SFAS No. 86,
"Accounting for the Cost of Computer Software to be Sold, Leased or Otherwise
Marketed," development costs incurred in 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, at which time such costs are
capitalized until the product is available for general release to customers.
Capitalized costs are amortized to cost of sales based on either estimated
current and future revenue for each product or straight-line amortization over
the shorter of three years or the remaining estimated life of the product,
whichever produces the higher expense for the period.
Revenue. 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.
F-7
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 arrangement is deferred until
such evidence exists or until all elements are delivered. The Company recognizes
revenue from the sale of software licenses when all the following conditions are
met:
o Persuasive evidence of an arrangement exists;
o Delivery has occurred or services have been rendered;
o The price to the customer is fixed or determinable; and
o 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. 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.
The Company recognizes revenue from service contracts ratably over the related
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 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 historical experience, the
allowance for doubtful accounts is increased.
Advertising Costs. The cost of advertising is expensed as incurred. Advertising
costs for the years ended December 31, 2004, 2003 and 2002, were approximately
$3,000, $4,000 and $114,300, respectively. Advertising consists primarily of
various printed material.
Income Taxes. Under SFAS No. 109, "Accounting for Income Taxes," deferred income
taxes are recognized for the tax consequences of temporary differences between
the financial statement and income tax bases of assets, liabilities and
carryforwards using enacted tax rates. Valuation allowances are established when
necessary, to reduce deferred tax assets to the amount expected to be realized.
Realization is dependent upon future pre-tax earnings, the reversal of temporary
differences between book and tax income, and the expected tax rates in effect in
future periods.
Fair Value of Financial Instruments. The Company used the following methods and
assumptions in estimating the fair value disclosures for financial instruments:
Cash and cash equivalents: The carrying amount reported on the balance
sheet for cash and cash equivalents approximates fair value.
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 are based on the Company's estimates of interest
rates on similar instruments.
As of December 31, 2004 and 2003, the fair values of the Company's financial
instruments approximate their historical carrying amounts.
Long-Lived Assets. Long-lived assets are assessed for possible impairment
whenever events or changes in circumstances indicate that the carrying amounts
may not be recoverable, or whenever the Company has committed to a plan to
dispose of the assets. Measurement of the impairment loss is based on the fair
value of 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.
F-8
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. The Company accounts for its stock-based
incentive programs using the intrinsic value method, as prescribed by Accounting
Principles Board (APB) Opinion No. 25, "Accounting for Stock Issued to
Employees" and interpretations thereof (collectively APB 25). Accordingly, the
Company records deferred compensation expense costs related to its employee
stock options when the market price of the underlying stock exceeds the exercise
price of each option on the date of grant. The Company records and measures
deferred compensation for stock options granted to non-employees, other than
members of the 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 Company did not grant any stock options at exercise prices below the fair
market value of the Company's common stock on the grant date during the years
ended December 31, 2004, 2003 and 2002.
As of December 31, 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.
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 followed the fair value approach, the
Company would be required to record deferred compensation based on the fair
value of the stock option at the date of grant. The fair value of the stock
option must be computed using an option-pricing model, such as the Black-Scholes
option valuation method, at the date of 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.
SFAS 123 requires the Company to provide pro forma information regarding net
income (loss) and earnings (loss) per share as if compensation cost for the
stock option plan had been determined in accordance with the fair value-based
method prescribed in SFAS 123 throughout the year. The Company estimated the
fair value of stock options at the grant date by using the Black-Scholes option
pricing-model with the following weighted average assumptions used for grants in
2004, 2003 and 2002, respectively: dividend yield (all years) of 0; expected
volatility (all years) of 60%; risk-free interest rate of 1.5%, 2.5% and 2.5%;
and expected lives (approximately, for all years) of five years, for all plan
options.
Under SFAS 123, the Company's pro forma net loss and the basic and diluted net
loss per common share would have been adjusted to the pro forma amounts below.
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)
============ ============ ============
F-9
Basic and diluted loss per share
As reported $ (0.07) $ (0.11) $ (0.50)
Pro forma $ (0.08) $ (0.13) $ (0.59)
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 available 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, 2004, 2003 and
2002, 6,641,957, 2,104,483 and 2,584,307 shares, respectively, of common 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, 2004, 2003 and 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.
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 year's presentation.
(Remainder of page intentionally left blank)
F-10
Notes to Consolidated Financial Statements
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.
Net proceeds from the 2005 private placement were approximately $2,000,000,
after giving effect to:
F-11
o issuance of a $665,000 partial credit against the price of the Company's
securities acquired by AIGH in the 2005 private placement;
o assumption of approximately $235,000 of NES' indebtedness;
o payment of NES' legal fees and expenses of approximately $108,000;
o payment of professional fees and expenses of approximately $692,000, which
were incurred in the NES acquisition;
o payment of legal fees and expenses of Mr. Hirschamn, AIGH and the
investors in the 2005 private placement of approximately $108,000;
o payment of a fee to Griffin Securities Inc. in the amount of $50,000 in
connection with the 2005 private placement; and
o payment of professional fees and expenses of approximately $142,000, which
were incurred in the 2005 private placement.
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 5) were replaced by 3,260,391 shares of the
Company's common stock upon the completion of the NES acquisition.
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.
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
========== ==========
3. Purchased Technology.
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
=========== ===========
F-12
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. Note Receivable - Related Party.
On October 6, 2004, the Company entered into a letter of intent to acquire NES
(see Note 1). 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 1), 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.
6. 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 1), these costs
were included in the acquisition costs and allocated to the fair values of the
assets and liabilities acquired.
7. 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 1). These amounts appear on the December 31, 2004 balance
sheet as components of other assets and deferred acquisition costs,
respectively.
8. 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:
o A significant decrease in the market value of an asset;
o A significant change in the extent or manner in which an asset is used;
o A significant adverse change in the business climate that could affect the
value of an asset; and
o Current and historical operating or cash flow losses.
F-13
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:
o The challenges faced in bringing the GO-Global for Windows and
Go-Global:XP products to maturity;
o The continued pervasive weakness in the world-wide economy;
o How the Company was incorporating and planning to incorporate each element
of the purchased technologies into its legacy technology; and
o 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:
Net Book Value Impairment Net Book Value
2002 Impairment Before Impairment Write Down After Impairment
-------------- ----------------- ---------- ----------------
Purchased 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.
9. 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:
December 31, 2002
Ending Balance
Restructuring Cash Non-cash Restructuring
Category Charge Payments Charges Accrual
- -------- --------------- ------------- ----------- --------------
Year 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:
December 31, 2003
Additional Ending Balance
Restructuring Cash Non-cash Restructuring
Category Charge Payments Charges Accrual
- -------- --------------- ---------- --------- ---------------
Year 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)
F-14
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.
10. Stockholders' Equity.
Common Stock. 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.
Stock Purchase Warrants. As of December 31, 2004, the following common stock
warrants were issued and outstanding:
Shares subject Exercise Expiration
Issued with respect to: to Warrant Price Date
- ----------------------- -------------- ------- ----------
Private 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
F-15
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.
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. 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.
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 is authorized to offer for
sale to participating employees 300,000 shares of common stock, of which,
168,056 shares have been purchased and 131,944 are 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
F-16
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
---------------------- ----------------------- -----------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ---------- ---------- ---------- ---------- ----------
Beginning 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 Weighted Weighted
Range of No. Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Price at 12/31/04 Life Price at 12/31/04 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
=========== ========== =========== =========
11. Income 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, 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 $ - $ - $ -
=========== =========== =============
F-17
Deferred income taxes and benefits result from temporary timing differences in
the recognition of certain expense and income items for tax and financial
reporting purposes, as follows:
December 31, 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 $41,464,000 and $14,795,000 for Federal
and California income tax purposes, respectively. The benefits from these
carryforwards expire at various times from 2005 through 2022. As of December 31,
2004, the Company cannot determine that it is more likely than not that these
carryforwards and other 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, utilization of the Company's
net operating loss carryforwards through 1998 will be limited to approximately
$400,000 per year until such carryforwards are fully utilized or expire.
12. Concentration of Credit Risk.
Financial instruments, which potentially subject the Company to concentration of
credit risk, consist principally of cash and cash equivalents, trade receivables
and note receivable-related party. The Company places cash and cash equivalents
with high quality financial institutions and, by policy, limits the amount of
credit exposure to any one financial institution. As of December 31, 2004, the
Company had approximately $575,300 of cash and cash equivalents with financial
institutions, in excess of FDIC insurance limits.
For the year ended December 31, 2004, sales to the Company's three largest
customers accounted for approximately 20.9%, 14.9% and 14.1% of total revenues,
respectively, with related accounts receivable as of December 31, 2004 of
$160,400, $15,000 and $0, respectively.
For the year ended December 31, 2003, sales 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 evaluations of customers' financial condition
whenever necessary, and generally does not require cash collateral or other
security to support customer receivables.
Approximately 52,039 shares of NES' common stock (See Note 5) collateralizes the
note 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.
13. 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.
F-18
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 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 2002. This operating lease runs through December 2005.
Rent on this office, which can fluctuate depending on exchange rates, is
approximately $400 per month.
Future minimum lease payments under all leases in effect as of December 31,
2004, assuming that neither the landlord nor the Company cancels the lease on
the New Hampshire facility, are as follows:
Year Payments
---- --------
2005 $ 62,600
2006 and thereafter $ -
Rent expense for the years ended December 31, 2004, 2003 and 2002 aggregated
approximately $95,700, $295,400 and $525,700, respectively.
Commitments. On January 29, 2004, the Company completed a private placement of
common stock and common stock purchase warrants in which Mr. Orin Hirschman
purchased 3,043,478 shares of common stock and warrants to purchase 1,521,739
shares of common stock (representing in the aggregate 19.7% of the Company's
outstanding shares of common stock as of March 18, 2004). As a condition of the
sale, the Company entered into an Investment Advisory Agreement with Mr.
Hirschman, pursuant to which it was agreed that in the event the Company
completes a transaction with a third party introduced by Mr. Hirschman, the
Company shall pay to Mr. Hirschman 5% of the value of that transaction. The
agreement, as amended, expires on January 29, 2008.
Contingencies. Under its Amended and Restated Certificate of Incorporation and
Amended and Restated Bylaws and certain agreements 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 not currently have a directors and
officers liability insurance policy that limits its exposure and enables it to
recover a portion of any future amounts paid. The Company believes the 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
other 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 to representations 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 applicable program documentation for a period of 90 days after
delivery. The Company also generally warrants that services that the Company
performs will be provided in a manner consistent with reasonably applicable
industry standards. To date, the Company has not incurred any material costs
associated with these warranties.
14. Employee 401(k) Plan.
In December 1998, the Company adopted a 401(k) Plan (the Plan) to provide
retirement benefits for employees. As allowed under Section 401(k) of the
Internal Revenue Code, the Plan provides tax-deferred salary deductions for
eligible employees. Employees may contribute up to 15% of their annual
compensation to the Plan, limited to a maximum annual amount as set periodically
by the Internal Revenue Service. In addition, the Company may 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, respectively.
F-19
15. Supplemental Disclosure of Cash Flow Information.
The following is supplemental disclosure for the statements of cash flows.
Years Ended December 31, 2004 2003 2002
- ------------------------ ----------- ----------- -----------
Cash Paid:
- ----------
Income Taxes $ - $ - $ -
Interest $ - $ - $ 200
During 2002, the Company accepted 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.
16. 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 recurring nature
necessary to present fairly the results of operations for the periods presented.
In thousands, except per share data.
Year ended First Second Third Fourth Full
December 31, 2004 Quarter Quarter Quarter Quarter Year
- ------------------------------- ------- ------- ------- ------- -------
Total 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 First Second Third Fourth Full
December 31, 2003 Quarter Quarter Quarter Quarter 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)
(Remainder of page intentionally left blank)
F-20
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, 2004
(Remainder of page intentionally left blank)
F-21
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
Balance Charged
At to costs Balance
Beginning and at end of
Description of period expenses Deductions period
- ----------- ----------- ----------- ----------- -----------
Allowance for
Doubtful accounts:
2004 $ 46,800 $ - $ - $ 46,800
2003 $ 50,300 $ 16,300 $ 19,800 $ 46,800
2002 $ 350,000 $ 31,600 $ 331,300 $ 50,300
(Remainder of page intentionally left blank)
F-22
Independent Auditor's Report
Board of Directors
Network Engineering Software, Inc.
San Jose, California
We 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 Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. 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 October 31, 2004
and 2003, and results of its operations and its cash flows for the years then
ended in conformity with accounting principles generally accepted in the United
States of 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 negative working capital of $5,674,500. These conditions raise
substantial doubt about its ability to continue as a going concern. As discussed
in Note 9, the Company was acquired on January 31, 2005. The financial
statements do not include any adjustments that may result from the outcome of
this uncertainty or the sale of the Company.
/s/ Macias Gini & Company LLP
Macias Gini & Company LLP
Sacramento, California
April 17, 2005
F-23
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
============ ===========
<FN>
The accompanying notes are an integral part of these financial statements
</FN>
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F-24
NETWORK ENGINEERING SOFTWARE, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED OCTOBER 31, 2004 AND 2003
2004 2003
------------ ------------
Revenue $ - $ -
------------ ------------
Operating Expenses:
Salary 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)
============ ============
<FN>
The accompanying notes are an integral part of these financial statements
</FN>
(Remainder of page intentionally left blank)
F-25
NETWORK ENGINEERING SOFTWARE, INC.
STATEMENTS OF STOCKHOLERS' DEFICIT
FOR THE YEARS ENDED OCTOBER 31, 2004 AND 2003
Common Stock
------------------------------- Accumulated
Shares Amount Deficit 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)
============= ============= ============= =============
<FN>
The accompanying notes are an integral part of these financial statements
</FN>
(Remainder of page intentionally left blank)
F-26
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
============= =============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
(Remainder of page intentionally left blank)
F-27
NETWORK ENGINEERING SOFTWARE, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED OCTOBER 31, 2004 AND 2003
Note 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.
F-28
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
--------------------------- ---------------------------
Accrued Accrued
Principal Interest Principal Interest
------------ ------------ ------------ ------------
Purchased 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 $ -
F-29
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 GraphOn 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 patent
advisory firm (see Note 8).
Note 8. Commitments and Contingencies
In 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 $46,000 for rental of these facilities in
2004 and 2003, respectively.
In July 2004, the Company entered into a Finder's Fee agreement with a patent
advisory firm whereby the patent advisory firm agreed to solicit a buyer for the
Company in consideration of a 20% commission from the gross proceeds of the sale
of the Company. In conjunction with the sale of the Company (see Note 9), the
patent 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 a value of $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.
F-30
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.
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F-31
GRAPHON CORPORATION
UNAUDITED CONDENSED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 2004
Restated
Pro Forma Restated
Assets GraphOn (1) NES (2) Adjustments Pro Forma
- ------------------------------- ------------- ------------- ------------- -------------
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 Current 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
============= ============= ============= =============
<FN>
See accompanying notes to the unaudited condensed pro forma financial statements
</FN>
F-32
GRAPHON CORPORATION
UNAUDITED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
Restated
Pro Forma Restated
Revenue: GraphOn (1) NES (2) Adjustments Pro Forma
- ------- ------------- ------------- ------------- -------------
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
============= ============= =============
<FN>
See accompanying notes to the unaudited condensed pro forma financial statements
</FN>
(Remainder of page intentionally left blank)
F-33
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 of NES' liabilities immediately
prior to, or in conjunction with, the consummation of the acquisition as if the
acquisition had occurred on October 31, 2004, as follows:
Pre-
Acquisition Cash Stock
NES Liability: Balance Settlement Settlement Written 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)
=========== ========== =========== ============
F-34
<FN>
** 500,000 shares of common stock, valued at $0.46 per share, were issued to
settle certain legal fees. All other NES liabilities that were not settled by
cash were written off prior to the acquisition.
</FN>
(8) Entry to common stock reflects the par value of the shares issued in the NES
acquisition and the 2005 private placement.
(9) Entry to additional paid-in capital gives effect to the approximate
$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
the reclassification of $2,500 to paid-in capital, reflecting the par value of
shares issued in connection with the NES acquisition and the 2005 private
placement.
(10) Entry eliminates NES' reported accumulated deficit as of October 31, 2004.
(11) Entry gives effect to the estimated 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 as a result of the common shares issued in conjunction with the NES
acquisition (see Note 5) and the conversion of the Series A preferred stock, to
common shares, that were issued in conjunction with the 2005 private placement
(see Note 3).
(Remainder of page intentionally left blank)
F-35
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth various expenses that will be incurred in
connection with this 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 Bylaws provide that any person made a party to an action
by or in the right of the Registrant to 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 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, by reason of the fact
that he, his testator or intestate, was a director or officer of the Registrant,
or served such other corporation in any capacity, shall be indemnified by the
Registrant against judgments, fines, amounts paid in settlement and reasonable
expenses, including attorneys fees actually and necessarily incurred as a result
of such action or proceeding, or any appeal therein, if such director or officer
acted in good faith for a purpose which he reasonably believed to be in the best
interests of the Registrant and, in criminal actions or proceedings, in which he
had no reasonable cause to believe that 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 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.
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 January 31, 2005, the Registrant acquired Network Engineering Software,
Inc. (NES) in exchange for 9,599,993 shares of common stock and other
consideration. Of such 9,599,993 shares, 4,963,158 were issued to NES' majority
shareholder, 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. 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 Griffin
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 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 an exercise price of $0.27 per share and 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 $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 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.
During the three years ended March 31, 2005, the Registrant issued options
to purchase 5,416,687 shares of its common stock, at exercise prices ranging
from $0.09 to $0.59 per share, to various employees and directors pursuant to
its various employee benefit plans. The granting of such stock options to the
employees and directors was not registered under the Securities Act of 1933
because the stock options either did not involve an offer or sale for purposes
of Section 2(a)(3) of the Securities Act of 1933, in reliance on the fact that
the stock options were granted for no consideration, or were offered and sold in
transactions not involving a public offering, exempt from registration under the
Securities Act of 1933 pursuant to Section 4(2) and in compliance with Rule 506
thereunder.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following is a list of Exhibits filed herewith as part of the
registration statement:
EXHIBIT
NUMBER DESCRIPTION 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 (1)
3.2 Amended and Restated Bylaws of Registrant (3)
4.1 Form of certificate evidencing shares of common stock of Registrant(4)
4.2 Form of Warrant issued by Registrant on January 29, 2004 (3)
4.3 Form of Warrant issued by Registrant on February 2, 2005 (4)
4.4 Investors Rights Agreement, dated January 29, 2004, by and among
Registrant and the investors named therein (5)
4.5 Investors Rights Agreement, dated February 2, 2005, by and among
Registrant and the investors named therein (6)
5.1 Opinion of Sonnenschein Nath & Rosenthal LLP, including consent*
10.1 1996 Stock Option Plan of Registrant (4)
10.2 1998 Stock Option/Stock Issuance Plan of Registrant (3)
10.3 Supplemental Stock Option Agreement, dated as of June 23, 2000 (7)
10.4 Employee Stock Purchase Plan of Registrant (7)
10.5 Lease Agreement between Registrant and Central United Life Insurance,
dated as of October 24, 2003 (5)
10.6 Financial Advisory Agreement, dated January 29, 2004, by and between
Registrant and Orin Hirschman (8)
10.7 Amendment to Financial Advisory Agreement, dated February 2, 2005, by
and between Registrant and Orin Hirschman (6)
10.8 Reimbursement Agreement, dated December 10, 2004, by and between
Registrant and AIGH Investment Partners LLC (8)
10.9 Holder Agreement, dated January 31, 2005, by and between Registrant
and the holders named therein (6)
10.10 Non-recourse Secured Promissory Note, dated October 6, 2004, by and
between Registrant and Ralph Wesinger (8)
10.11 Stock Pledge Agreement, dated October 6, 2004, by and between
Registrant and Ralph Wesinger (8)
10.12 Agreement, dated December 16, 2003, by and between Registrant and
Griffin Securities, Inc. (8)
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)
---------------
* To be filed by amendment to this Registration Statement
(1) Incorporated by reference from Registrant's Current Report on Form
8-K, dated December 3, 2004, filed with the SEC on December 9, 2004.
(2) Incorporated by reference from Registrant's Current Report on Form
8-K, dated January 28, 2005, filed with the SEC on February 3, 2005.
(3) Incorporated by reference from Registrant's Form S-4, file number
333-76333.
(4) Incorporated by reference from Registrant's Form S-1, file number
333-11165.
(5) Incorporated by reference from Registrant's Annual Report on Form 10-K
for the year ended December 31, 2003.
(6) Incorporated by reference from Registrant's Current Report on Form
8-K, dated January 31, 2005, filed with the SEC on February 4, 2005.
(7) Incorporated by reference from Registrant's Form S-8, file number
333-40174.
(8) Incorporated by reference from Registrant's Annual Report on Form 10-K
for the year ended December 31, 2004.
(b) Financial Statement Schedules
Schedule 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 registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed to be
the initial bona fide offering thereof.
(3) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(a) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(b) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent post-effective
amendment thereof) which, individually or in the aggregate, represent a
fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total Dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change in the
maximum aggregate offering price set forth in "Calculation of Registration Fee"
table in the effective registration statement;
(c) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement.
(4) That for the purpose of determining any liability under the Securities
Act of 1933, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial BONA
FIDE offering thereof.
(5) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of
this offering.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of Registrant as
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 for indemnification against such liabilities (other than the payment by
Registrant of expenses incurred or paid by a director, officer or controlling
person of Registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being
registered, Registrant will, unless in the opinion of its counsel the matter has
been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, Registrant has
duly caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Santa Cruz, State of
California, on the 9th day of May, 2005.
GRAPHON CORPORATION
By: /s/ William Swain
-------------------------------------
William Swain
Secretary and Chief Financial Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Robert Dilworth and William Swain, and each or
either of them, as his true and lawful attorney-in-fact and agent, with full
power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacities to approve, sign and file with the U.S.
Securities and Exchange Commission and any other appropriate authorities the
original of any and all amendments (including post-effective amendments) to this
Registration Statement and any other documents in connection therewith, granting
unto each said attorney-in-fact and agent full power and authority to do and
perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming all that said attorney-in-fact and
agent, or any of them, or his substitute or substitutes, may lawfully do or
cause to be done by virtue hereof.
---------------
In accordance with the requirements of the Securities Act of 1933, this
Registration Statement was signed by the following persons in the capacities and
on the dates stated.
SIGNATURE TITLE DATE
Chairman and Interim Chief Executive Officer
/s/ Robert Dilworth (Principal Executive Officer) May 9, 2005
- --------------------------
Robert Dilworth
Secretary and Chief Financial Officer
/s/ William Swain (Principal Financial and Accounting Officer) May 9, 2005
- --------------------------
William Swain
/s/ August P. Klein Director May 9, 2005
- --------------------------
August P. Klein
/s/ Michael Volker Director May 9, 2005
- --------------------------
Michael Volker
/s/ Gordon Watson Director May 9, 2005
- --------------------------
Gordon Watson