UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
Form 8-K/A-1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 31, 2005
GRAPHON CORPORATION
-------------------
(Exact name of registrant as specified in its charter)
Delaware 0-21683 13-3899021
(State or other jurisdiction of (Commission file (IRS Employer
incorporation or organization) Number) Identification Number)
3130 Winkle Avenue, Santa Cruz, CA 95065
(Address of principal executive offices) (Zip Code)
Registrant's telephone number: (800) 472-7466
N/A
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to
simultaneously satisfy the filing obligation of the registrant under any of the
following provisions (see General Instruction A.2. below):
[ ] Written communication pursuant to Rule 425 under the Securities Act (17
CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17
CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the
Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c)) under the
Exchange Act (17 CFR 240.13e-4(c))
Item 9.01. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial Statements of the Business Acquired
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 audits.
We conducted our audits 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 audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 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 8, 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
1
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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2
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>
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3
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) (1,173,200)
------------- ------------- ------------- -------------
Balance, October 31, 2004 80,142 2,696,400 $ (8,370,900) $ (5,674,600)
============= ============= ============= =============
<FN>
The accompanying notes are an integral part of these financial statements
</FN>
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4
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>
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5
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.
6
Recent Pronouncements - In December 2004, the Financial Accounting Standards
Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 123R,
"Share-Based Payment", which replaces SFAS No. 123 and supercedes APB Opinion
No. 25. SFAS No. 123R requires all share-based payments to employees, including
grants of employee stock options, to be recognized in the financial statements
based on their fair values beginning with the first interim or annual period
after December 15, 2005, with early adoption encouraged. The pro forma
disclosures previously permitted under SFAS No. 123 no longer will be an
alternative to financial statement recognition. Management of the Company does
not expect that the adoption of SFAS No. 123R will have a material impact on its
results of operations or financial condition.
In December 2004, the FASB issued SFAS No. 153, "Exchange of Nonmonetary
Assets-An Amendment of APB Opinion No. 29, Accounting for Nonmonetary
Transactions". SFAS No. 153 eliminates the exception from fair value measurement
for nonmonetary exchanges of similar productive assets in paragraph 21(b) of APB
Opinion No. 29, "Accounting for Nonmonetary Transactions," and replaces it with
an exception for exchanges that do not have commercial substance. SFAS No. 153
specifies that a nonmonetary exchange has commercial substance if the future
cash flows of the entity are expected to change significantly as a result of the
exchange. SFAS No. 153 is effective for the fiscal periods beginning after June
15, 2005. Management of the Company does not expect that the adoption of SFAS
No. 153 will have a material impact on its results of operations or financial
condition.
Note 3. Fixed Assets
The Company did not have significant fixed assets as of November 1, 2002. As the
assets have been fully depreciated and are not significant, they are not
presented in the financial statements.
Note 4. Notes Payable, Related Party
In 1997, the Company's president and majority shareholder purchased a note
payable of the Company held by a bank in exchange for a promissory note
(Purchased Note) from the Company. The Purchased Note bears interest at 10.25%
per annum and has no stated maturity. The Purchased Note is secured by the
assets of the Company. In connection with the sale of the Company (see Note 9),
the Company's president and majority shareholder agreed to forgive the
outstanding balance on the Purchased Note and related accrued interest totaling
$1,445,800 at January 31, 2005.
A significant shareholder (Shareholder) in the Company has provided financing
for the Company's operations (Shareholder Note). The Shareholder Note bears
interest at 9% per annum and does not have a stated maturity date. In 2004, the
Shareholder filed an action against the Company in an attempt to obtain payment
for this note. In connection with the sale of the Company (see Note 9), a third
party investor in GraphOn Corporation (Investor) made a payment of $665,000 to
settle this litigation and obtain a release of any further claim against the
Company.
At October 31, 2004 and 2003, the balance of the related party notes payable and
related party accrued interest consisted of the following:
2004 2003
--------------------------- ---------------------------
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.
7
Note 6. Other Liabilities
Other liabilities consist of the following at October 31:
2004 2003
--------- ---------
Licensing Arrangement $ 330,000 $ -
Litigation Settlement 20,000 20,000
Other 6,600 2,400
--------- ---------
$ 356,600 $ 22,400
========= =========
In February 2002, the Company entered into an arrangement (Licensing
Arrangement) with a law firm to assist the Company in its efforts to license its
intellectual property. Under the Licensing Arrangement, the law firm agreed to
incur certain costs related to negotiating licensing arrangements on behalf of
the Company in exchange for a share of future license revenues resulting from
its efforts. The law firm was unable to effect any such licensing arrangements.
In connection with the sale of the Company (see Note 9), the law firm accepted
500,000 shares of 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 aggreed 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.
8
Note 9. Subsequent Event
In December 2004, the Company entered into an agreement to be acquired by
GraphOn Corporation (GraphOn) in exchange for 10,000,000 shares of GraphOn
common stock, less the number of shares issued to settle certain pre-existing
claims and contingent liabilities of the Company (see Note 8) and the number of
shares with a value equivalent to the expense incurred by GraphOn in effecting
the acquisition.
On January 31, 2005 the sale closed, and the Company's shareholders received a
total of 7,402,500 shares of GraphOn common stock, net of 2,197,500 shares
issued to settle various Company liabilities, including 1,697,500 shares that
were issued to the patent advisory firm (see Note 8) and 400,000 shares with a
value approximating the expenses incurred by GraphOn in effecting the
acquisition. The Company's shareholders and patent advisory firm (see Note 8)
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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9
(b) Pro Forma Financial Information
On January 31, 2005, GraphOn Corporation (the "Company") acquired all of
the outstanding common stock of Network Engineering Software, Inc. ("NES") in
exchange for 9,600,000 shares of the Company's stock and $900,000 in cash. The
acquisition was pursuant to an agreement between the Company and NES dated
December 3, 2004.
The unaudited pro forma balance sheet as of December 31, 2004, and the
unaudited pro forma statement of operations for the year then ended give effect
to the acquisition of NES as if it had occurred on January 1, 2004. The
acquisition was accounted for using the purchase method. Accordingly, the assets
acquired have been recorded at their estimated fair value, which is subject to
adjustment. There were no liabilities acquired.
The pro forma financial information may not be indicative of the results
that actually would have occurred had the transaction been in effect on the
dates indicated, nor does it purport to indicate the results that may be
obtained in the future. The pro forma information should be read in conjunction
with the financial statements and notes thereto of the audited NES financial
statements for the years ended October 31, 2004 and 2003 and our Annual Report
on Form 10-K for the year ended December 31, 2004.
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10
GRAPHON CORPORATION
UNAUDITED CONDENSED PRO FORMA BALANCE SHEET
AS OF DECEMBER 31, 2004
Pro Forma
Assets GraphOn (1) NES (2) Adjustments Pro Forma
- ------------------------------- ------------- ------------- ------------- -------------
Current Assets:
Cash and cash equivalents $ 675,300 $ - $ 2,050,000 (3) $ 2,725,300
Accounts receivable 518,900 - - 518,900
Other current assets 24,100 - - 24,100
------------- ------------- ------------- -------------
Total Current Assets 1,218,300 - 2,050,000 3,268,300
------------- ------------- ------------- -------------
Property and equipment, net 75,400 - - 75,400
Capitalized software, net 273,700 - - 273,700
Patents, net - - 5,454,500 (4) 5,454,500
Related party note receivable 350,000 - - 350,000
Deferred acquisition costs 269,700 - - 269,700
Other assets 37,300 - - 37,300
------------- ------------- ------------- -------------
Total Assets $ 2,224,400 $ - $ 7,504,500 $ 9,728,900
============= ============= ============= =============
Liabilities and Shareholders
Equity (Deficit)
- -------------------------------
Current Liabilities:
Accounts Payable $ 250,200 $ 81,200 $ (53,600) (5) $ 277,800
Accrued liabilities 231,400 - - 231,400
Accrued wages 260,100 3,100,000 (3,100,000) (5) 260,100
Accrued interest - 791,600 (791,600) (5) -
Notes payable - 1,345,100 (1,345,100) (5) -
Deferred revenue 689,800 - - 689,800
Other liabilities - 356,600 (356,600) (5) -
------------- ------------- ------------- -------------
Total Current Liabilities 1,431,500 5,674,500 (5,646,900) 1,459,100
------------- ------------- ------------- -------------
Long Term Liabilities:
Deferred revenue 426,600 - - 426,600
------------- ------------- ------------- -------------
Total Liabilities 1,858,100 5,674,500 (5,646,900) 1,885,700
------------- ------------- ------------- -------------
Commitments and contingencies
Shareholders Equity (Deficit):
Preferred stock - - - -
Common stock 2,200 - 2,500 (6) 4,700
Additonal paid-in capital 46,930,700 2,696,400 5,351,100 (6) 54,978,200
Notes receivable (50,300) - - (50,300)
Accumulated other
comprehensive loss (400) - - (400)
Accumulated deficit (46,515,900) (8,370,900) 7,797,800 (7) (47,089,000)
------------- ------------- ------------- -------------
Total Shareholders
Equity (Deficit) 366,300 (5,674,500) 13,151,400 7,843,200
------------- ------------- ------------- -------------
Total Liabilities and
Shareholders Equity (Deficit) $ 2,224,400 $ - $ 7,504,500 $ 9,728,900
============= ============= ============= =============
<FN>
See accompanying notes to the unaudited condensed pro forma financial statements
</FN>
11
GRAPHON CORPORATION
UNAUDITED CONDENSED PRO FORMA STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2004
Pro Forma
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 1,034,900 165,800 (8) 2,384,300
Research and development 1,500,900 - - 1,500,900
------------- ------------- ------------- -------------
Total Operating Expenses 4,068,200 1,034,900 165,800 5,268,900
------------- ------------- ------------- -------------
Loss From Operations (1,442,200) (1,034,900) (165,800) (2,642,900)
------------- ------------- ------------- -------------
Other Income (Expense)
Interest and other income 14,700 - - 14,700
Interest and other expense - (138,200) 138,200 (9) -
------------- ------------- ------------- -------------
Total Other Income (Expense) 14,700 (138,200) 138,200 14,700
------------- ------------- ------------- -------------
Net Loss $ (1,427,500) $ (1,173,100) $ (27,600) $ (2,628,200)
============= ============= ============= =============
Basic and diluted loss
per common share $ (0.07) $ (0.07) $ 0.00 $ (0.06)
============= ============= ============= =============
Weighted average common
shares outstanding 21,307,966 80,142 25,143,457 (10) 42,550,979
============= ============= ============= =============
<FN>
See accompanying notes to the unaudited condensed pro forma financial statements
</FN>
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12
GRAPHON CORPORATION
NOTES TO UNAUDITED CONDENSED PRO FORMA FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 2004
(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 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, 2004, as if the private placement had occurred on
January 1, 2004.
The aggregate purchase price of the preferred stock and warrants sold was
approximately $4,000,000, of which GraphOn has expended, or expects to expend,
approximately $1,584,000 in conjunction with the acquisition of NES (see Note 4)
and approximately $366,000 related to the costs of the private placement,
respectively.
(4) Entry records the estimated fair value (which is subject to adjustment) of
the assets acquired in the NES acquisition (patents). There were no liabilities
acquired in the transaction. The pro forma adjustment gives effect to one year
of amortization, assuming an estimated life of 11 years and the use of the
straight line method of amortization. The estimated fair value and net balance
of the patents was calculated as follows:
Shares of GraphOn common stock issued 9,600,000
Price per share $ 0.46
-----------
$ 4,416,000
NES liabilities settled with cash:
Accounts payable $ 81,200
Note payable (shareholder) * 665,000
Other liabilities 153,800
----------
Total NES cash settlements 900,000
Transaction costs 684,000
----------
Total amounts expended, or to be expended
in conjunction with the NES acquisition 1,584,000
-----------
Purchase price and estimated fair
value of patents 6,000,000
Less: one year's amortization (545,500)
-----------
Patents, net at December 31, 2004 $ 5,454,500
===========
* Includes $88,500 of accrued interest.
(5) Entry gives effect to the settlement of all NES' liabilities upon the
consummation of the acquisition as if the acquisition had occurred on January 1,
2004, as follows:
Written
Pre- Off
Acquisition Cash Stock Upon
NES Liability: Balance Settlement Settlement Acquisition
- ------------- ----------- ---------- ---------- ------------
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 (603,700) - (741,400)
Other liabilities 356,600 (126,600) (230,000)** -
----------- ---------- ---------- ------------
$ 5,674,500 $ (900,000) $ (230,000) $ (4,544,500)
=========== ========== =========== ============
<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>
13
(6) Entries to common stock and additional paid in capital give effect to the
$3,634,000 in net proceeds from the Series A preferred stock offering (see Note
3) and common shares valued at $4,416,000 issued to effect the NES acquisition
(see Note 4), less the $2,696,400 of additional paid-in capital of NES
eliminated upon acquisition, less $2,500 reclassified to common stock,
reflecting the par value of the common shares issued to effect the NES
acquisition and the conversion of the Series A preferred shares to common shares
(see Note 3).
(7) Reflects the elimination of NES' accumulated shareholders' deficit of
$8,370,900 adjusted for one year's amortization expense on the patents (see Note
4).
(8) Entry gives effect to the estimated net 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 $ (254,100)
Amortization (see Note 4) 545,500
Legal (138,600)
Other 13,000
-----------
$ 165,800
===========
(9) 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.
(10) Entry gives effect to the increase in weighted avereage common shares
outstanding as a result of the common shares issued in conjunciton with the
NES acquisition (see Note 4) and the conversion of the Series A preferred stock,
to common shares, that were issued in conjunstion with the 2005 private
placement (see Note 3).
14
(c) Exhibits
Exhibit
Number Description of Exhibits
2.1* Agreement and Plan of Merger and Reorganization dated December 3,
2004, by and among the Company, GraphOn Via Sub III Inc., GraphOn NES
Sub, LLC, NES and Ralph Wesinger.
4.1** Form of Warrant to purchase shares of Series B Preferred Stock.
4.2** Investor Rights Agreement, dated as of February 2, 2005, by and among
the Company and the persons listed on Exhibit A thereto.
4.3** Holder Agreement, dated as of January 31, 2005, by and among the
Company and the persons listed on Schedule A thereto.
10.1** Unit Subscription Agreement, dated as of February 2, 2005, by and
among the Company and the persons listed on Exhibit A thereto.
10.2** Amendment to Financial Advisory Agreement, dated as of February 2,
2005, by and between the Company and Orin Hirschman.
- ------------------------------------------------------------------------
* Incorporated by reference from the Company's Current Report on Form
8-K filed with the Securities and Exchange Commission on December 9,
2004.
** Filed with this Form 8-K.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
GraphOn Corporation
(Registrant)
By: /s/ William Swain
-----------------------
William Swain
Chief Financial Officer
Date: April 18, 2005