SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
Annual Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003 Commission file
number: 0-21683
GRAPHON CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 13-3899021
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
105 Cochrane Circle
Morgan Hill, California 95037
(Address of principal executive offices)
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Registrant's telephone number: (800) 472-7466
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.0001 Par Value
(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2)
Yes [ ] No [X]
The aggregate market value of the common equity of registrant held by non-affiliates of the registrant as of June 30, 2003 was approximately $3,480,200.
Number of shares of Common Stock outstanding as of March 19, 2004: 21,638,097 shares of Common Stock.
GRAPHON CORPORATION
FORM 10-K
Table of Contents
Page
PART I.
Item 1. Business 2
Item 2. Properties 8
Item 3. Legal Proceedings 8
Item 4. Submission of Matters to a Vote of Security Holders 8
PART II.
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters 9
Item 6. Selected Financial Data 9
Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operation 10
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk 21
Item 8. Financial Statements and Supplementary Data 21
Item 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 43
Item 9A. Controls and Procedures 43
PART III.
Item 10. Directors and Executive Officers of the Registrant 44
Item 11. Executive Compensation 45
Item 12. Security Ownership of Certain Beneficial Owners
and Management 46
Item 13. Certain Relationships and Related Transactions 48
Item 14. Principal Accounting Fees and Services 48
PART IV.
Item 15. Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 50
SIGNATURES 51
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FORWARD LOOKING INFORMATION
This report includes, in addition to historical information, "forward-looking statements" within the meaning of the Private Securities Litigation Reform Act of 1995. This Act provides a "safe harbor" for forward-looking statements to encourage companies to provide prospective information about themselves so long as they identify these statements as forward-looking and provide meaningful cautionary statements identifying important factors that could cause actual results to differ from the projected results. All statements other than statements of historical fact we make in this report or in any document incorporated by reference are forward-looking statements. In particular, the statements regarding industry prospects and our future results of operations or financial position are forward-looking statements. Such statements are based on management's current expectations and are subject to a number of uncertainties and risks that could cause actual results to differ significantly from those described in the forward looking statements. Factors that may cause such a difference include, but are not limited to, those discussed in "Management's Discussion and Analysis of Financial Condition and Results of Operation," as well as those discussed elsewhere in this report.
PART I
ITEM 1. BUSINESS
General
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 105 Cochrane Circle, Morgan Hill, California, 95037 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 annual report. We also have offices in Concord, New Hampshire, Rolling Hills Estates, California and Berkshire, England, United Kingdom.
You may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC also maintains an Internet website (http://www.sec.gov) that contains reports, proxy and information statements, and other information that we file electronically with the SEC from time to time. Our filings with the SEC are linked to the Investors section of our Internet website.
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 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.
Of course, businesses that run Linux or Unix on their end user devices require access to 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 GoGlobal client software, including: Linux, Unix, Windows and Macintosh desktops and devices.
Application Service Providers (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 independent software vendors (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 (IT) 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 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 GoGlobal, 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.
To rewrite an application for each different display device (be that a desktop PC or tablet PC) and their many diverse operating systems is often a difficult and time-consuming task. In addition to the development expense, issues of desktop performance, data compatibility and support costs often make this option prohibitive. 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 emerging 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.
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, Value-Added Resellers (VARs) and Fortune 1000 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 GoGlobal for Windows and GoGlobal for Unix.
GoGlobal for Windows allows access to Windows applications from remote locations and a variety of connections, including the Internet and dial-up connections. GoGlobal 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 GoGlobal for Windows, web enabling is achieved without modifying the underlying Windows applications' code or requiring costly add-ons.
GoGlobal 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. GoGlobal for Unix web-enables individual Unix and Linux applications, or entire desktops. When using GoGlobal 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 Fortune 1000 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. Companies that utilize a mixed computing environment require cross-platform connectivity solutions, like GoGlobal, 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 shareholder 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). We anticipate renewing this agreement during 2004.
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.
In December 2002, we agreed to an eighteen-month extension of our exclusive 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. Pursuant to the original agreement, KitASP was granted an exclusive right, within Japan, to distribute our web-enabling technology, bundled with their ASP services, and to resell our software. The original agreement provided for an optional second year, which was exercisable at our discretion. As a result of the extension, KitASP's one-year exclusivity period has been extended for an additional 18 months in lieu of the optional second year that we had formerly held. We anticipate renewing the KitASP distribution agreement during 2004.
In March 2003, we entered into a fourth consecutive one-year, non-exclusive agreement with FrontRange, an international software and services company. Pursuant to the 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 the 2003 renewal, we have licensed our GoGlobal for Windows server-based software for integration with both FrontRange's HEAT and its Client Relationship Management software package Goldmine. We anticipate renewing the FrontRange agreement during 2004.
In September 2003, we amended our non-exclusive agreement with Compuware, an international software and services company. Pursuant to this amendment, we licensed, for three years, our GoGlobal for Windows server-based software for inclusion 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 GoGlobal for Windows into its UNIFACE deployment architecture as UNIFACE Jti. Negotiations are currently underway with Compuware on a renewal involving our latest Windows-based product, GoGlobal for Windows.
Sales, Marketing and Support
Our customers, to date, include Fortune 1000 enterprises, ISVs, VARs and large governmental organizations. Sales to FrontRange and Alcatel generated approximately 27.4% and 18.4%, respectively, of our revenues in 2003. Sales to FrontRange, Verizon and Alcatel generated approximately 28.0%, 24.4% and 13.1%, respectively, of our revenues in 2002. We consider FrontRange to be our most significant customer.
Our sales and marketing efforts will be focused on increasing product awareness and demand among ISVs, Global 10,000 enterprises, and VARs who have a vertical orientation or are focused on Unix, Linux or Windows environments. Current marketing activities include direct mail, a targeted advertising campaign, 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 $1,797,200, $3,129,800 and $4,530,900 in research and development in 2003, 2002 and 2001, respectively, including capitalized software development costs of $282,200, $298,500 and $396,500, respectively. We expect research and development expenditures in 2004 to approximate 2003 levels. We have made significant investments in our protocol and in the performance and development of our server-based software.
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.
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.
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.
Employees
As of March 18, 2004, we had a total of 25 employees, including six in marketing, sales and support, 15 in research and development and four in administration and finance. We believe our relationship with our employees is good. No employees are covered by a collective bargaining agreement.
ITEM 2. PROPERTIES
We currently occupy approximately 500 square feet of office space in Morgan Hill, California. The office space is rented pursuant to an oral month-to-month lease, which became effective in September 2003. Rent on the Morgan Hill facility is approximately $1,200 per month, which is inclusive of various fees proportioned to us under the terms of the lease agreement.
During October 2003 we entered into a one-year lease for approximately 3,300 square feet of office space in Concord, New Hampshire. Rent on the Concord facility is approximately $5,000 per month.
We also occupy leased facilities in Rolling Hills Estates, California and Berkshire, England, United Kingdom. The Rolling Hills Estates and Berkshire offices are very small and each are leased on a month-to-month basis. Rent on the Rolling Hills Estates office is approximately $1,000 per month and the rent on the Berkshire, England office, which fluctuates slightly 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.
ITEM 3. LEGAL PROCEEDINGS
We are currently not party to any legal proceedings that we believe will have a material negative impact on our operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY-HOLDERS
Our 2003 Annual Meeting of Stockholders was held on December 30, 2003. At the meeting, one director was reelected. The vote was as follows:
For Withheld
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Michael Volker 13,346,253 1,403,615
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The following individuals continue in their capacity as directors: Robert Dilworth, August Klein and Gordon Watson. Their current terms expire during 2004, 2004 and 2005, respectively.
The shareholders approved the increase in our stock option plan. The result of the vote for the amendment of our 1998 Stock Option/Stock Issuance Plan to increase the number of shares of common stock available thereunder from 3,655,400 to 4,455,400 was as follows:
For Against Abstain --- ------- ------- 3,553,848 1,879,947 11,831 |
Also at the meeting, the shareholders ratified the reappointment of BDO Seidman, LLP as our independent auditors for fiscal 2003. The vote was as follows:
For Against Abstain
--- ------- -------
14,616,890 112,837 20,141
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS
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 2003 Fiscal 2002
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Quarter High Low High Low
----- ------ ------ -----
1st $0.28 $0.13 $ 0.80 $0.24
2nd $0.34 $0.13 $ 0.37 $0.15
3rd $0.28 $0.18 $ 0.52 $0.08
4th $0.28 $0.15 $ 0.29 $0.12
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On March 18, 2004, there were approximately 148 holders of record of our common stock. On March 18, 2004, the last reported sales price was $0.77.
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.
ITEM 6. SELECTED FINANCIAL DATA
The following selected historical financial data should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operation" and our historical financial statements and the notes thereto included elsewhere herein. Our selected historical financial data as of December 31, 2003, 2002, 2001, 2000, and 1999, and for the years ended December 31, 2003, 2002, 2001, 2000, and 1999 have been derived from our financial statements which have been audited by BDO Seidman LLP, independent public accountants.
Statement of Operations Data:
Year Ended December 31,
2003 2002 2001 2000 1999
------------- -------------- ------------- ------------- --------------
(Amounts in thousands, except share and per share data)
Revenues $ 4,170 $ 3,535 $ 5,911 $ 7,567 $ 3,635
Costs of revenues 1,371 1,680 2,613 1,044 2,800
------------ -------------- ------------- ------------- --------------
Gross profit 2,799 1,855 3,298 6,523 835
------------ -------------- ------------- ------------- --------------
Operating expenses:
Selling and marketing 1,680 2,235 5,989 5,750 3,279
General and administrative 1,419 2,801 4,561 4,653 2,265
Research and development 1,515 2,831 4,134 4,060 2,467
Asset impairment loss - 914 4,501 - -
Restructuring charge 80 1,943 - - -
------------ -------------- ------------- ------------- --------------
Total operating expenses 4,694 10,724 19,185 14,463 8,011
------------ -------------- ------------- ------------- --------------
Loss from operations (1,895) (8,869) (15,887) (7,940) (7,176)
Other income (expense) net 8 77 410 (1,434) 144
------------ -------------- ------------- -------------- --------------
Loss before provision
for income taxes (1,887) (8,792) (15,477) (9,374) (7,032)
Provision for income taxes - - 1 1 1
------------ -------------- ------------- ------------- --------------
Net loss $ (1,887) $ (8,792) $ (15,478) $ (9,375) $ (7,033)
============ ============== ============= ============= ==============
Basic and diluted loss per share $ (0.11) $ (0.50) $ (0.97) $ (0.65) $ (0.71)
============ ============== ============= ============= ===============
Weighted average common
shares outstanding 16,607,328 17,465,099 16,007,763 14,396,435 9,950,120
============ ============== ============= ============= ==============
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As of December 31,
2003 2002 2001 2000 1999
------------ -------------- ------------- ------------- --------------
(Amounts in thousands)
Working capital $ (145) $ 668 $ 6,173 $ 12,879 $ 11,701
Total assets 2,562 4,550 12,986 21,040 15,224
Total liabilities 1,715 1,820 1,660 1,983 842
Shareholders' equity 847 2,730 11,326 19,057 14,382
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
The following discussion should be read in conjunction with the consolidated financial statements provided under Part II, ITEM 8 of this Annual Report on Form 10-K.
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 effect the amounts reported in the Consolidated Financial Statements and accompanying notes. The Summary of Significant Accounting Policies appears in Part II, Item 8 - Financial Statements and Supplementary Data, of this Form 10-K, which describes the significant accounting polices and methods used in the preparation of the Consolidated Financial Statements. 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.
The recognition of revenue is based on our assessment of the facts and circumstances of the sales transaction. In general, 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.
Under Statement of Position (SOP) 97-2, "Software Revenue Recognition," 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. In accordance with SOP 97-2, 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.
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.
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 and 2001 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, GoGlobal for Windows, into marketable condition. The engineering delays we encountered resulted in a substantial decrease in our revenue in both 2002 and 2001, which ultimately caused us to consume almost all of our cash balances in our day-to-day operations.
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.
Results of Operations
The first table that follows sets forth our income statement data for the years ended December 31, 2003 and 2002, respectively, and calculates the dollar change and percentage change from 2002 to 2003 in the respective line items. The second table that follows presents the same information for the years ended December 31, 2002 and 2001.
Year Ended
December 31,
------------------- Dollars Percentage
(Dollars in 000s) 2003 2002 Change Change
----------------- -------- -------- -------- -------
Revenue $ 4,170 $ 3,535 $ 635 18.0%
Cost of sales 1,371 1,680 (309) (18.4)
-------- -------- -------- -------
Gross Profit 2,799 1,855 944 50.9
-------- -------- -------- -------
Operating expenses:
Selling & marketing 1,680 2,235 (555) (24.8)
General & administrative 1,419 2,801 (1,382) (49.3)
Research & development 1,515 2,831 (1,316) (46.5)
Fixed assets impairment - 914 (914) (100.0)
Restructuring charge 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 & other income 13 153 (140) (91.5)
Interest & other expense (5) (76) 71 93.4
-------- -------- -------- -------
Total other income (expense) 8 77 (69) (89.6)
-------- -------- -------- -------
Loss before provision
for income taxes (1,887) (8,792) 6,905 78.5
Provision for income taxes - - - -
-------- -------- -------- -------
Net loss $ (1,887) $ (8,792) $ 6,905 78.5%
======== ======== ======== =======
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Year Ended
December 31,
------------------- Dollars Percentage
(Dollars in 000s) 2002 2001 Change Change
----------------- -------- -------- -------- -------
Revenue $ 3,535 $ 5,911 $ (2,376) (40.2%)
Cost of sales 1,680 2,613 (933) (35.7)
-------- -------- -------- -------
Gross Profit 1,855 3,298 (1,433) (43.8)
-------- -------- -------- -------
Operating expenses:
Selling & marketing 2,235 5,989 (3,754) (62.7)
General & administrative 2,801 4,561 (1,760) (38.6)
Research & development 2,831 4,134 (1,303) (31.5)
Fixed assets impairment 914 4,501 (3,587) (79.7)
Restructuring charge 1,943 - 1,943 n/a
-------- -------- -------- -------
Total operating expenses 10,724 19,185 (8,461) (44.1)
-------- -------- -------- -------
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Loss from operations (8,869) (15,887) 7,018 44.2
-------- -------- -------- -------
Other income (expense):
Interest & other income 153 516 (363) (70.4)
Interest & other expense (76) (65) (11) (16.9)
Loss on long-term investment - (41) 41 100.0
-------- -------- -------- -------
Total other income (expense) 77 410 (333) (81.2)
-------- -------- -------- -------
Loss before provision
for income taxes (8,792) (15,477) 6,685 43.2
Provision for income taxes - 1 (1) (100.0)
-------- -------- -------- -------
Net loss $ (8,792) $(15,478) $ 6,686 43.2%
======== ======== ======== =======
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Revenues. Our revenues are primarily derived from product licensing fees. Other sources of revenues include service fees from maintenance contracts and private labeling fees. Private labeling fees are derived when we contractually agree to allow a customer to brand our product with their name. 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 during 2004. The increase in revenues in 2003 from 2002 was due primarily to increases in product licensing fees and the revenue recognized from items previously deferred, principally deferred maintenance revenue.
The decrease in revenues in 2002 from 2001 was due primarily to a decrease in licensing fees derived from licensing our patented technology. During 2002 we recognized $0 in patent licensing revenue as compared to approximately $2,200,000 during 2001. We believe that the market for licensing our patented technology is very limited, accordingly, we wrote the carrying value of our patent down to $0 as part of our year end 2001 asset impairment write off. We do not anticipate recognizing licensing revenue from our patent in the future.
We recognized approximately $1,649,000 of revenue from product licensing fees for our Windows-based products during 2003 as compared with approximately $1,394,200 during 2002, an increase of $254,800, or 18.3%. The increase was primarily due to our customers' response to the release of the significantly upgraded version of our Windows product, GoGlobal for Windows, during the fourth quarter of 2002. We expect 2004 product licensing fee revenue from our Windows-based products to exceed 2003 levels as we enhance and introduce additional features to GoGlobal for Windows and increase our overall sales and marketing efforts during 2004.
The amount of revenue we recognized from product licensing fees for our Windows-based products in 2002 decreased from 2001, to approximately $1,394,200 as compared with $2,203,700, respectively, a decrease of $809,500, or 36.7%. The decrease was principally due to the overall decrease in corporate spending pervasive throughout the economy as well as the delay in releasing the upgraded version of our Windows-based product, until the fourth quarter of 2002.
We recognized approximately $1,523,100 of revenue from product licensing fees for our Unix-based products during 2003 as compared with approximately $1,547,800 during 2002, a decrease of $24,700, or 1.6%. 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 has come from one long-standing Unix ISV customer. We expect 2004 product licensing fee revenue from our Unix-based products to exceed 2003 levels as we enhance our Unix-based products and increase our overall sales and marketing efforts during 2004.
We recognized approximately $1,547,800 of product licensing fees revenue from our Unix-based products during 2002 as compared with approximately $1,222,300 during 2001, an increase of $325,500, or 26.6%. Net of the one-time transaction described in the preceding paragraph, 2002 revenue from Unix product licensing fees decreased by approximately $227,000, or 18.6%, from 2001 levels. This decrease was principally due to the delay in introducing our GoGlobal for Unix product until the second quarter of 2002, as well as the continued weakness in the overall economy.
Our licensing fees have been realized from a limited number of customers. As such, revenues from these products have varied from quarter to quarter reflecting the aggregate demand of the individual customers. We expect our quarterly licensing fees to continue to vary during 2004.
During 2003, we recognized approximately $830,900 of revenue from service fees that had previously been deferred, an increase of $388,700, or 87.9%, from the approximately $442,200 recognized during 2002. The $442,200 of revenue from service fees that we recognized during 2002 was an increase of $158,200, or 55.7%, from the $284,000 we recognized during 2001. The main factor contributing to the 2003 increase was the large Unix transaction that we entered into during the fourth quarter of 2002, which was discussed elsewhere within this section. That transaction included approximately $300,000 worth of service fees that are being amortized over a three-year period. A negligible amount of deferred service fees was recognized as revenue from this transaction during 2002 as compared with approximately $100,000, or one full-year's worth, during 2003.
A general factor contributing to both the 2003 and 2002 increases in revenue from service fees sold was the steady increase in their sales since December 31, 2001. Deferred revenue, as reported on our balance sheet, was $1,192,000, $796,100 and $577,800 as of December 31, 2003, 2002 and 2001, respectively. Growth in our deferred revenue balance is primarily indicative of the sale of maintenance contracts. Revenue from maintenance contracts is recognized ratably over the underlying service periods, which, in our case and depending on the respective contract, can be either one, two, three or five years in length. Although the deferred revenue balance reported as of December 31, 2001, 2002 and 2003, respectively, has continued to increase, the amount of revenue recognized from service fees has also increased because of the high amount of maintenance contracts carrying one-year service terms.
We anticipate that many of our customers will enter into, and periodically renew, maintenance contracts to ensure continued product updates and support. Revenue from deferred items was approximately 19.9%, 12.5% and 4.8% of revenue in 2003, 2002 and 2001, respectively. We expect revenue from deferred items in 2004 to exceed 2003 levels.
Revenues from our three largest customers for 2003 represented approximately 27.4%, 18.4% and 9.2%, respectively, of total revenues. 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. Revenues from our three largest customers for 2002 represented approximately 26.9%, 23.4% and 12.5%, respectively, of total revenues. These three customers' December 31, 2002 year-end accounts receivable balances represented approximately 0.0%, 0.0%, and 15.1% of reported net accounts receivable. By March 21, 2003, we had collected the substantial majority of this outstanding balance.
Cost of Revenues. Cost of revenues consists primarily of the amortization of acquired technology and the amortization of capitalized technology developed in-house. 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 revenues over the shorter of three years or the remaining estimated life of the products.
The decreases in cost of revenues in 2003 from 2002 and in 2002 from 2001 were due to the write-downs of the estimated remaining carrying values of our intangible assets that were recorded during the third quarter of 2002 as well as the fourth quarter of 2001.
As more fully explained below under Asset Impairment Loss, during September 2002 and December 2001, 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 Revenues. As a result of these write-downs and that certain components of our intangible assets will become fully amortized during 2004, we expect that our cost of revenues will be significantly lower in 2004 as compared with 2003. Cost of revenues were approximately 32.9%, 47.5% and 44.2%, of total revenues for the years 2003, 2002 and 2001, respectively.
Sales and Marketing Expenses. Sales and marketing expenses primarily consist of salaries, sales commissions, non-cash compensation, travel expenses, trade show related activities and promotional costs.
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 in 2002.
o The decrease in trade shows activities and promotional costs was part
of our decision 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 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.
The decrease in sales and marketing expense in 2002 from 2001 was primarily caused by decreased human resources costs ($2,057,200), public relations ($399,300), the allocation of corporate overheads ($390,900), travel and entertainment ($236,300), outside services ($197,400), recruitment, including relocation ($155,500), and deferred compensation expense ($80,200). The reasons for these decreases were as follows:
o The decreased human resources costs were the result of the
restructurings undertaken during 2002 and 2001. We reduced sales and
marketing headcount from 24 at year-end 2001 to nine at the end of
2002.
o Public relations costs were reduced as we elected not to renew our
contract with a public relations firm, upon its expiration during
2001.
o The allocation of corporate overheads was reduced as a result of the
headcount decrease as well as the overall lowered cost structure.
o Travel and entertainment expenses decreased primarily due to the
reduction in headcount.
o The decrease in outside services resulted from electing to not renew
a contract with a marketing services firm.
o The decrease in recruitment, including relocation, was a result of
the headcount reductions.
o The decrease in deferred compensation expense was because the amounts
previously deferred became fully amortized during 2002.
We expect that cumulative sales and marketing expenses in 2004 will be higher than those incurred during 2003. Driving the higher expected costs during 2004 are planned expansions of the sales force and marketing efforts, including trade show participation, direct mail campaigns and other advertising efforts. Sales and marketing expenses were approximately 40.3%, 63.2% and 101.3% of total revenues for the years 2003, 2002 and 2001, respectively.
General and Administrative Expenses. General and administrative expenses primarily consist of salaries, legal and professional services, non-cash compensation, insurance and bad debts expense.
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), 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. Also contributing to lower outside consulting fees
during 2003 were lower fees charged by our Interim Chief Executive
Officer.
o As a result of the abandonment of the merger talks, we also reduced
the need for legal services.
o The decrease in deferred compensatin expense was because the amounts
previously deferred became fully amortized during 2002.
o We discontinued our director's and officer's liability insurance
policy during 2003, hence insurance expense decreased.
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 decrease in general and administrative expense in 2002 from 2001 was primarily caused by decreased compensation expense ($823,700), human resources costs ($593,300), legal fees ($216,200), the allocation of corporate overheads ($179,800) and a decrease in the bad debts reserve ($299,700). Offsetting these decreases was an increase in outside service ($592,200). The reasons for these changes were as follows:
o Deferred compensation decreased in 2002 as the amounts that had been
previously deferred became fully amortized during 2002.
o Human resources costs decreased as a result of the 2002
restructurings. We reduced general and administrative headcount from
nine at year-end 2001 to four at year-end 2002.
o Lower legal fees were the result of settling the lawsuit with Citrix
during 2001, which was partially offset by legal fees incurred as
part of the merger negotiations that occurred during 2002.
o The allocation of corporate overheads reflected an overall lower cost
base and fewer employees in the allocation pool, both resulting from
the 2002 and 2001 restructurings.
o The decrease in the bad debts reserve was due to an overall lower
accounts receivable level as well as the collection of previously
written off accounts.
o These decreases were offset by increased outside services, which
resulted from consulting fees associated with the merger that was
under consideration in 2002 as well as the commencement of fees being
paid to our Interim Chief Executive Officer.
The ending balance of our allowance for doubtful accounts as of December 31, 2003, 2002 and 2001, was $46,800, $50,300 and $350,000, respectively. Bad debts expense was $16,300, $31,600 and $250,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
We anticipate that cumulative general and administrative expense in 2004 will be lower than those incurred during 2003. General and administrative expenses were approximately 34.0%, 79.2% and 77.2% of 2003, 2002 and 2001 total revenues, respectively.
Research and Development Expenses. Research and development expenses consist primarily of salaries and benefits paid to software engineers, payments to contract programmers, and facility expenses related to our remotely located engineering offices.
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 services ($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 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 overheads 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 services 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. More engineering
time was spent providing customer service during 2003, as compared to
2002, consequently, more costs were charged to cost of sales than to
research and development.
The decrease in research and development expense in 2002 from 2001 was primarily caused by decreased human resources costs ($839,100), outside services ($379,400) and an increase in customer service costs ($132,400). These decreases were partially offset by a decrease in capitalized software development costs ($98, 100). The reasons for these changes were as follows:
o Human resources were decreased as a result of the 2002 and 2001
restructurings. We began 2001 with 35 research and development
employees and ended the year with 28. During 2002, we reduced
headcount further, to 15.
o The decrease in outside services resulted primarily from the
non-renewal of an engineering contract with an engineering consulting
firm that had completed the task for which they were engaged.
o Customer service costs increased, resulting from an increase in
maintenance contracts being purchased by our customers.
o Partially offsetting these decreases was a decrease in capitalized
software development costs. When these costs are capitalized, there
are reclassified from research and development expense to the
capitalized software account on the balance sheet. Consequently, a
reduction in capitalization causes expense to increase. We only
capitalize our software development costs when certain criteria are
met.
We believe that a significant level of investment for research and development is required to remain competitive. Accordingly, during 2004 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. Research and development expense was approximately 36.3%, 80.1% and 70.0% of total revenues for the years 2003, 2002 and 2001, respectively.
Asset Impairment Loss. During 2002 and 2001, we recorded impairment charges of $914,000 and $4,500,900, respectively, 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 current carrying values 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 GoGlobal for Windows and
GoGlobal: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
---------------- ------------- ---------------
2002 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
================ ============= ===============
2001 Impairment
Purchased Technology $ 7,283,300 $ 4,150,900 $ 3,132,400
Patent 350,000 350,000 -
---------------- ------------- ---------------
Totals $ 7,633,300 $ 4,500,900 $ 3,132,400
================ ============= ===============
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We do not anticipate recording an asset impairment charge during 2004. The asset impairment charges were approximately 0.0%, 25.9% and 76.2% of total revenues for the years 2003, 2002 and 2001, respectively.
Restructuring charge. 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 charges recorded during 2002 is as follows:
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) -
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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
============= ============= ============= ==============
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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 EITF 94-3 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 charges recorded during 2003 is as follows:
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) $ -
============= ============= ============ ==============
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(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 what would have been the remainder of the 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 what would have been the remainder of the lease term.
The net aggregate amount of the annual lease payments made under all of our leases in the years 2003, 2002 and 2001 was approximately $295,400, $525,700 and $558,700, respectively.
Interest and Other Income. During 2003, 2002 and 2001, 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 decreases in interest income in 2003 from 2002 and 2002 from 2001, was due to lower average cash and cash equivalents, and available-for-sale securities balances in 2003 as compared with 2002, and 2002 as compared with 2001. Additionally, the decreases were 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 average cash and cash equivalents and available-for-sale securities balances at year end 2003, 2002 and 2001, as compared with each respective preceding year, is primarily due to the outflow of approximately $712,500, $4,606,000 and $6,752,700, during each year, respectively, resulting from our operations. 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 0.3%, 4.3% and 8.7% of total revenues for the years 2003, 2002 and 2001, respectively.
Interest and Other Expense. Interest and other expense consists primarily of the cost of accrued interest on bonds and other investments that we purchased with our excess cash. The decrease in 2003 from 2002 was primarily due to our discontinuance of purchasing bonds with our excess cash. The increase in 2002 from 2001 was primarily due to faster rollovers of investments, as we required more readily available cash to finance our operations. The faster rollovers were
reflective of the shorter time frame that we decided to keep the excess cash invested. These increases were partially offset by cumulative marked-to-market gains recorded on the value of the securities held in our investment account.
Interest and other expense was approximately 0.1%, 2.2% and 1.1% of total revenues for the years 2003, 2002 and 2001, respectively.
Provision for Income Taxes. At December 31, 2002, we had approximately $36,625,000 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 have suffered recurring losses and have absorbed significant cash in our operating activities. Further, we have limited alternative sources of financing available to fund any additional cash required for our operations or otherwise. These matters raise substantial doubt about our ability to continue as a going concern. Our plan in regard to these matters is described below. The consolidated financial statements included in this report do not include any adjustments that might result from the outcome of this uncertainty.
In January 2004, we raised $1,150,000 through the private placement of 5,000,000 shares of our common stock and five-year warrants to purchase 2,500,000 shares of our common stock at an exercise price of $0.33 per shares (the "private placement"). Net proceeds of approximately $975,000 were available for operating needs after the payment of commissions, legal and other fees associated with the private placement.
We are continuing to operate the business on a cash basis 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 shareholders, we will pursue that merger opportunity. We anticipate increasing our sales and marketing and research and development expenditures during 2004 as we believe further development of these areas are critical to our ability to continue our business as a going concern. We believe that improving or maintaining our current revenue stream, coupled with our cash on hand, including the cash raised in the private placement, will support these planned increases during 2004.
During 2003 we used $712,500 of cash from our operating activities that related primarily to our net loss of $1,886,600, offset by non-cash items including depreciation and amortization, totaling $1,248,400, and the non-cash portion of the restructuring charge of $42,200. Operating cash outflow was generated by an aggregate decrease in cash from operating assets and liabilities of $115,600, which was partially offset by a $3,500 decrease in our provision for doubtful accounts.
Depreciation and amortization primarily relates to our purchased technology, as outlined above in Costs of Revenues. Also included in depreciation and amortization is the amortization of deferred compensation expense related to non-cash compensation paid to various third parties, primarily consultants, who provide us services. This amortization is recorded as sales and marketing expense or general and administrative expense, depending on the nature of the underlying services provided.
The cash outflow generated from aggregated operating assets and liabilities was primarily due to the reductions in both accounts payable and accrued expenses as of year-end 2003 as compared to year-end 2002. These decreases both primarily resulted from the continued cost-cutting measures we enacted throughout 2003.
We are exploring options available to increase revenues and to find alternative sources of financing our operations. If we were unsuccessful in identifying and implementing such options, we would face a severe constraint on our ability to sustain operations in a manner that would create future growth and viability, and we may need to cease operations entirely.
During 2003 we consumed $225,700 of cash in our investing activities that included the capitalization of software development costs, totaling $282,200, which were partially offset by a decrease in other assets of $58,100. The decrease in other assets was primarily attributable to the approximate $40,000 and $16,000 deposits we forfeited upon the settlement of our lease obligations for our former engineering facility in Bellevue, Washington, and corporate offices in Morgan Hill, California, respectively, as explained elsewhere within this section.
The capitalized software development costs were incurred in the development of GoGlobal for Windows, our latest Windows-based product upgrade.
As of December 31, 2003, cash and cash equivalents were approximately $1,025,500. We anticipate that our cash and cash equivalents as of December 31, 2003, together with anticipated revenue from operations, cost savings from the 2003 and 2002 restructuring charges, the 2002 asset impairment charges and the approximate $975,000 we raised in the private placement will be sufficient to meet our working capital and capital expenditure needs through the next twelve months. We have no material capital expenditure commitments for the next twelve months. However, due to the inherent uncertainties associated with predicting future operations, there can be no assurances that such anticipated revenue and cumulative operational savings will ultimately be realized during the next twelve months.
During October 2003 we entered into a one-year lease for the period November 1, 2003 through October 31, 2004, for approximately 3,300 square feet of office space in Concord, New Hampshire. Rent on the Concord facility is approximately $5,000 per month, consequently, we are committed to making rental payments on this facility totaling approximately $50,000 in 2004.
New Accounting Pronouncements
In November 2002, the Financial Accounting Standards Board (FASB) issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, including Indirect Guarantees of Indebtedness of Others," (FIN 45) which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December 31, 2002 and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The application of the requirements of FIN 45 did not have a material impact on our financial position or results of operations.
In December 2002, the FASB issued Statement No. 148, " Accounting for Stock-Based Compensation - Transition and Disclosure." (SFAS 148) This Statement amends SFAS 123, "Stock-Based Compensation," (SFAS 123) to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for financial statements for fiscal years ended after December 31, 2002. In compliance with SFAS 148 we have elected to continue to follow the intrinsic value method in accounting for our stock-based employee compensation arrangement as defined by Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employee" (APB 25).
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities," (FIN 46) which addresses consolidation by a business of variable interest entities in which it is the primary beneficiary. FIN 46 is effective immediately for certain disclosure requirements and for variable interest entities created after January 1, 2003, and in the first fiscal year or interim period beginning after June 15, 2003 for all other variable interest entities. It is expected that the adoption of FIN 46 will not have a material impact on our consolidated results of operations or financial position.
In April 2003, the FASB issued Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" (SFAS 149). This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities" (SFAS 133). This statement is effective for contracts entered into or modified after June 30, 2003, for hedging relationships designated after June 30, 2003, and to certain preexisting contracts. It is expected that the adoption of SFAS 149 will not have a material impact on our consolidated results of operations or financial position.
In May 2003, the FASB issued Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" (SFAS 150). This statement establishes standards for how an issuer classifies and measures in its financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with this standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS 150 generally is effective for financial instruments created or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. It is expected that the adoption of SFAS 150 will not have a material impact on our consolidated results of operations or financial position.
In December 2003, the SEC issued Staff Accounting Bulletin ("SAB") No. 104, "Revenue Recognition," (SAB 104) which codifies, revised and rescinds certain sections of SAB No. 101, "Revenue Recognition," (SAB 101) in order to make this interpretive guidance consistent with current authoritative guidance. The changes noted in SAB 104 did not have a material impact on our consolidated results of operations or financial position.
Risk Factors
The risks and uncertainties described below 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 $1,886,600, $8,792,500 and $15,478,000 for the years ended December 31, 2003, 2002 and 2001, respectively. We expect our expenses to increase as we have planned to increase our sales and marketing efforts, however, we cannot give assurance that revenues will increase sufficiently to exceed costs. 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.
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 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.
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.
Because Our Market Is New And Emerging, We Cannot Accurately Predict Its Future Growth Rate Or Its Ultimate Size, And Widespread Acceptance Of Our Products Is Uncertain.
The market for business infrastructure software, which enables programs to be accessed and run with minimal memory resident on a desktop computer or remote user device, still is emerging, and we cannot assure you that our products will receive broad-based market acceptance or that this market will continue to grow. Additionally, we cannot accurately predict our market's future growth rate or its ultimate size. Even if business infrastructure software products achieve market acceptance and the market for these products grows, we cannot assure you that we will have a significant share of that market. If we fail to achieve a significant share of the business infrastructure software market, or if such market does not grow as anticipated, our business, results of operations and financial condition may be adversely affected.
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, 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.
Our Failure To Manage Expanding Operations Could Adversely Affect Us.
To exploit the emerging business infrastructure software market, we must rapidly execute our business strategy and further develop products while managing our anticipated growth in operations. To manage our growth, we must:
o Continue to implement and improve our operational, financial and
management information systems;
o Hire and train additional qualified personnel;
o Continue to expand and upgrade core technologies; and
o Effectively manage multiple relationships with various licensees,
consultants, strategic and technological partners and other third
parties.
We cannot assure you that our systems, procedures, personnel or controls will be adequate to support our operations or that management will be able to execute strategies rapidly enough to exploit the market for our products and services. Our failure to manage growth effectively or execute strategies rapidly could have a material adverse effect on our business, financial condition and results of operations.
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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are currently not exposed to any significant financial market risks from changes in foreign currency exchange rates or changes in interest rates and do not use derivative financial instruments. A substantial majority of our revenue and capital spending is transacted in U.S. dollars. However, in the future, we may enter into transactions in other currencies. An adverse change in exchange rates would result in a decline in income before taxes, assuming that each exchange rate would change in the same direction relative to the U.S. dollar. In addition to the direct effects of changes in exchange rates, such changes typically affect the volume of sales or foreign currency sales price as competitors' products become more or less attractive.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
Report of Independent Certified Public Accountants........................... 23
Consolidated Balance Sheets as of December 31, 2003 and 2002................. 24
Consolidated Statements of Operations and Comprehensive Loss for
the Years Ended December 31, 2003, 2002, and 2001...........................25
Consolidated Statements of Shareholders' Equity for the Years Ended
December 31, 2003, 2002 and 2001................. ..........................26
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2003, 2002 and 2001............................................27
Summary of Significant Accounting Policies....................................28
Notes to Consolidated Financial Statements....................................31
Report of Independent Certified Public Accountants on
Supplemental Schedule.......................................................41
Supplemental Schedule II......................................................42
|
Report of Independent Certified Public Accountants
To the Board of Directors and Shareholders of GraphOn Corporation
We have audited the accompanying consolidated balance sheets of GraphOn Corporation and Subsidiary (the Company) as of December 31, 2003 and 2002, and the related consolidated statements of operations and comprehensive loss, shareholders' equity, and cash flows for each of the three 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 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. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the 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 2002, and the results of their operations and their cash flows for each of the three 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 |
GraphOn Corporation
Consolidated Balance Sheets
December 31, 2003 2002
------------ ------------ ------------
CURRENT ASSETS
Cash and cash equivalents ................................. $ 1,025,500 $ 1,958,200
Accounts receivable, net of allowance for doubtful accounts
of $46,800 and $50,300 ................................... 521,100 337,900
Prepaid expenses and other current assets ................. 23,100 192,000
------------ ------------
TOTAL CURRENT ASSETS ........................................... 1,569,700 2,488,100
------------ ------------
Property and equipment, net .................................... 144,800 421,900
Purchased technology, net ...................................... 335,000 1,163,100
Capitalized software, net ...................................... 500,600 406,500
Other assets ................................................... 11,900 70,000
------------ ------------
TOTAL ASSETS ................................................... $ 2,562,000 $ 4,549,600
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable .......................................... $ 52,300 $ 228,700
Accrued liabilities ....................................... 470,800 795,100
Deferred revenue .......................................... 1,192,000 796,100
------------ ------------
TOTAL CURRENT LIABILITIES ...................................... 1,715,100 1,819,900
------------ ------------
Commitments and contingencies
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, 16,618,459 and 16,580,719 shares
issued and outstanding ................................. 1,700 1,700
Additional paid-in capital ................................ 45,985,300 45,982,500
Notes receivable .......................................... (50,300) (50,300)
Accumulated other comprehensive loss ...................... (1,400) (2,400)
Accumulated deficit ....................................... (45,088,400) (43,201,800)
------------ ------------
TOTAL SHAREHOLDERS' EQUITY ..................................... 846,900 2,729,700
------------ ------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..................... $ 2,562,000 $ 4,549,600
============ ============
See accompanying summary of significant accounting policies and
notes to consolidated financial statements
|
GraphOn Corporation
Consolidated Statements of Operations and Comprehensive Loss
Years Ended December 31, 2003 2002 2001
------------------------ ------------ ------------ -------------
Revenue:
Product licenses ......................... $ 3,172,100 $ 2,942,000 $ 3,426,000
Service fees ............................. 830,900 442,200 284,000
Other .................................... 167,300 150,800 2,200,700
------------ ------------ ------------
Total Revenue ............................ 4,170,300 3,535,000 5,910,700
------------ ------------ ------------
Cost of Revenue:
Product costs ............................ 1,017,300 1,470,200 2,510,800
Service costs ............................ 354,300 209,700 101,800
------------ ------------ ------------
Total Cost of Revenue .................... 1,371,600 1,679,900 2,612,600
------------ ------------ ------------
Gross Profit ............................. 2,798,700 1,855,100 3,298,100
------------ ------------ ------------
Operating Expenses
Selling and marketing .................... 1,679,800 2,235,100 5,989,400
General and administrative ............... 1,419,100 2,801,000 4,560,800
Research and development ................. 1,515,000 2,831,300 4,134,400
Asset impairment loss .................... - 914,000 4,500,900
Restructuring charges .................... 80,100 1,942,800 -
------------ ------------ ------------
Total Operating Expenses ............... 4,694,000 10,724,200 19,185,500
------------ ------------ ------------
Loss From Operations ........................ (1,895,300) (8,869,100) (15,887,400)
------------ ------------ ------------
Other Income (Expense)
Interest and other income ................ 13,000 152,500 516,100
Interest and other expense ............... (4,300) (75,900) (64,800)
Loss on long-term investment.............. - - (41,100)
------------ ------------ ------------
Total Other Income (Expense) ........... 8,700 76,600 410,200
------------ ------------ ------------
Loss Before Provision for Income Taxes ...... (1,886,600) (8,792,500) (15,477,200)
Provision for Income Taxes .................. - - 800
------------ ------------ ------------
Net Loss .................................... (1,886,600) (8,792,500) (15,478,000)
Other Comprehensive Income (Loss), net of tax
Unrealized holding gain (loss)
on investment .......................... - (7,500) 200
Foreign currency translation adjustment .. 1,000 3,600 (600)
------------ ------------ ------------
Comprehensive Loss .......................... $ (1,885,600) $ (8,796,400) $(15,478,400)
============ ============ ============
Basic and Diluted Loss per Common Share ..... $ (0.11) $ (0.50) $ (0.97)
============ ============ ============
Weighted Average Common Shares Outstanding .. 16,607,328 17,465,099 16,007,763
============ ============ ============
See accompanying summary of significant accounting policies and
notes to consolidated financial statements
|
GraphOn Corporation
Consolidated Statements of Shareholders' Equity
Accumulated
Additional Other
Common Stock Paid-in Deferred Notes Comprehensive Accumulated
Shares Amount Capital Compensation Receivable Income(Loss) Deficit Totals
---------- ------- ----------- ------------ ---------- ------------ ------------ -----------
Balances, December 31, 2000.... 14,671,175 $ 1,500 $39,116,000 $(1,131,600) $ - $ 1,900 $(18,931,300) $19,056,500
Issuance of common stock due to
the exercise of options....... 52,199 - 37,000 - - - - 37,000
Employee stock purchases....... 64,958 - 152,900 - - - - 152,900
Issuance of common stock to
acquire technology............ 2,500,000 200 6,499,800 - - - - 6,500,000
Deferred compensation related to
stock options and warrants.... - - 120,200 (120,200) - - - -
Amortization of deferred
compensation.................. - - - 1,058,000 - - - 1,058,000
Change in market value of
available-for-sale securities. - - - - - 200 - 200
Foreign currency translation
adjustment.................... - - - - - (600) - (600)
Net Loss....................... - - - - - - (15,478,000) (15,478,000)
---------- ------- ----------- ------------ ---------- ------------ ------------ -----------
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
the 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
========== ======= =========== ============ ========== ============ ============ ===========
See accompanying summary of significant accounting policies and notes to consolidated financial statements
|
GraphOn Corporation
Consolidated Statements of Cash Flows
Years ended December 31, 2003 2002 2001
------------------------ ------------ ------------ ------------
Cash Flows From Operating Activities:
Net loss ...................................... $ (1,886,600) $ (8,792,500) $(15,478,000)
Adjustments to reconcile net loss to
net cash used in operating activities:
Depreciation and amortization ................. 1,248,400 1,892,000 3,051,800
Non-cash restructuring charges................. 42,200 657,800 -
Asset impairment loss ......................... - 914,000 4,500,900
Loss on disposal of fixed assets .............. 4,300 400 110,000
Amortization of deferred compensation ......... - 193,800 1,058,000
Charges to provision for doubtful accounts .... 16,300 31,600 250,000
Reductions to provision for doubtful accounts.. (19,800) (331,300) -
Loss on long-term investment .................. - - 41,100
Changes in operating assets and liabilities:
Accounts receivable ......................... (179,700) 582,200 (121,200)
Prepaid expenses and other assets ........... 168,900 59,300 94,500
Accounts payable ............................ (176,400) (91,200) (41,600)
Accrued expenses ............................ (324,300) 59,600 (647,000)
Deferred revenue ............................ 395,900 218,300 428,800
------------ ------------ ------------
Net cash used in operating activities: ........... (710,800) (4,606,000) (6,752,700)
------------ ------------ ------------
Cash Flows From Investing Activities:
Capitalization of software
development costs ........................... (282,200) (298,500) (396,500)
Capital expenditures .......................... (1,600) (82,900) (596,500)
Other assets .................................. 58,100 1,600 (37,200)
Purchase of available-for-sale securities ..... - (768,300) (4,779,900)
Proceeds from sale of available-
for-sale securities ......................... - 3,776,300 7,338,900
Investment in related party ................... - - (103,700)
Proceeds from dissolution of joint
venture - related party ..................... - - 954,500
------------ ------------ ------------
Net cash provided by (used in) investing
activities: ................................... (225,700) 2,628,200 2,379,600
------------ ------------ ------------
Cash Flows From Financing Activities:
Net proceeds from issuance of
common stock ................................ 2,800 - 189,900
Proceeds from note payable .................... - - 131,200
Repayment of note payable ..................... - (26,600) (194,900)
------------ ------------ ------------
Net cash provided by financing activities: ....... 2,800 (20,200) 126,200
------------ ------------ ------------
Effect of exchange rate fluctuations on
cash and cash equivalents ................... 1,000 3,600 (600)
------------ ------------ ------------
Net Decrease in Cash
and Cash Equivalents .......................... (932,700) (1,994,400) (4,247,500)
Cash and Cash Equivalents:
Beginning of year ........................... 1,958,200 3,952,600 8,200,100
------------ ------------ ------------
End of year ................................. $ 1,025,500 $ 1,958,200 $ 3,952,600
============ ============ ============
See accompanying summary of significant accounting policies
and notes to consolidated financial statements
|
GraphOn Corporation
Summary of Significant Accounting Policies
The Company. GraphOn Corporation (the Company) was incorporated in the state of Delaware in July of 1999. The Company's headquarters are currently in Morgan Hill, California. The Company develops, markets, sells and supports business infrastructure software that empowers a diverse range of desktop computing devices (desktops) to access server-based Windows, Unix and Linux applications from any location, over network or Internet connections. The Company has a wholly owned inactive subsidiary in the United Kingdom.
Basis of Presentation and Use of Estimates. 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. 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 a separate component of
shareholders' equity.
Property and Equipment. Property and equipment are stated at cost. Depreciation is calculated using the straight-line method over the estimated useful lives of the respective assets, generally three to seven years. Amortization of leasehold improvements is calculated using the straight-line method over the lesser of the lease term or useful lives of the respective 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.
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," (SFAS 86) 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. As of December 31, 2003 and 2002, capitalized costs aggregated $719,500 and $1,198,100, with accumulated amortization of $218,200 and $791,600, respectively.
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.
Statement of Position (SOP) 97-2, "Software Revenue Recognition," (SOP 97-2), as amended, generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on the relative fair values of the elements. Revenue recognized from multiple-element arrangements is
allocated to undelivered elements of the arrangement, such as maintenance, support and professional services, based on the relative fair values of the elements specific to the Company. The Company's determination of fair value of each element in multi-element arrangements is based on vendor-specific objective evidence ("VSOE"). The Company limits its assessment of VSOE 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.
The Company allocates revenue to each element in a multiple-element arrangement based on the element's respective fair value, with the fair value determined by the price charged when that element is sold separately. Specifically, the Company determines the fair value of the maintenance portion of the arrangement based on the normal pricing of the maintenance charged to clients and the professional services portion of the arrangement based on hourly rates which the Company charges for these services when sold separately from software. 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 proportion of revenue recognized upon delivery may vary from quarter to quarter depending upon the mix of licensing arrangements, perpetual or term-based, and the determination of VSOE of fair value for undelivered elements.
Service revenues consists of fees generated from the sale of maintenance contracts and are recognized as revenue ratably over the term of the maintenance contract.
Advertising Costs. The cost of advertising is expensed as incurred. Advertising costs for the years ended December 31, 2003, 2002 and 2001, were approximately $4,000, $114,300 and $94,900, respectively. Advertising consists primarily of various printed material.
Income Taxes. Under SFAS No. 109, "Accounting for Income Taxes," (SFAS 109) 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.
Available-for-sale securities: The fair values of available-for-sale securities are based on quoted market prices.
Short-term debt: The fair value of short-term debt is estimated based on current interest notes available to the Company for debt instruments with similar terms and maturities.
As of December 31, 2003 and 2002, 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.
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 EITF 94-3 for restructuring plans entered into prior to January 1, 2003. The Company currently follows FASB No. 146, "Accounting for Costs Associated with Exit or Disposal Activities," (SFAS 146) 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 APB 25 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, 2003, 2002 and 2001.
As of December 31, 2003, the Company's deferred compensation balance was $0. The accompanying statement of operations reflects stock-based compensation expense of $0, $193,800 and $1,058,000 for the years ended December 31, 2003, 2002 and 2001, respectively.
An alternative to the intrinsic value method of accounting for stock-based compensation is the fair value approach prescribed by SFAS 123, 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.
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.
2003 2002 2001
-------------- -------------- --------------
Net loss:
As reported $ (1,886,600) $ (8,792,500) $ (15,478,000)
Add: stock-based compensation
expense included in reported net loss,
net of related tax effects
Non-employees - 193,800 1,058,000
Employees - - -
-------------- -------------- --------------
Subtotal - 193,800 1,058,000
-------------- -------------- --------------
Deduct: total stock-based compensation
determined under fair value-based
method for all accounts,
net of related tax effects
Non-employees - (193,800) (1,058,000)
Employees (265,300) (1,531,400) (2,694,000)
-------------- -------------- --------------
Pro forma $ (2,151,900) $ (10,323,900) $ (18,172,000)
-------------- -------------- --------------
Basic and diluted loss per share
As reported $ (0.11) $ (0.50) $ (0.97)
Pro forma $ (0.13) $ (0.59) $ (1.14)
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Earnings Per Share of Common Stock. SFAS No. 128, "Earnings Per Share," (SFAS 128) 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, 2003, 2002 and 2001, 2,104,483, 2,584,307 and 3,765,232 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," (SFAS 130) 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 unrealizable 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, 2003, 2002 and 2001, accumulated other comprehensive loss was comprised of
foreign currency translation loss and the cumulative change in the market value
of the available-for-sale securities.
Adoption of New Accounting Pronouncements. In November 2002, the FASB issued FIN 45, which clarifies disclosure and recognition/measurement requirements related to certain guarantees. The disclosure requirements are effective for financial statements issued after December 31, 2002 and the recognition/measurement requirements are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The application of the requirements of FIN 45 did not have a material impact on financial position or results of operations.
In November 2002, the FASB's EITF reached a final consensus on Issue No. 00-21, which is effective for revenue arrangements entered into in fiscal periods beginning after June 15, 2003. Under EITF Issue No. 00-21, revenue arrangements with multiple deliverables are required to be divided into separate units of accounting under certain circumstances. The adoption of EITF Issue No. 00-21 did not have a material impact on the Company's consolidated results of operations or financial position.
In December 2002, the FASB issued SFAS 148. This Statement amends SFAS 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. Additionally, SFAS 148 amends the disclosure requirements of SFAS 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. SFAS 148 is effective for financial statements for fiscal years ended after December 31, 2002. In compliance with SFAS 148 the Company has elected to continue to follow the intrinsic value method in accounting for its stock-based employee compensation arrangement as defined by APB 25 and has made the applicable disclosure in Note 8 to the financial statements.
In January 2003, the FASB issued FIN 46, which addresses consolidation by a business of variable interest entities in which it is the primary beneficiary. FIN 46 is effective immediately for certain disclosure requirements and for variable interest entities created after January 1, 2003, and in the first fiscal year or interim period beginning after June 15, 2003 for all other variable interest entities. It is expected that the adoption of FIN 46 will not have a material impact on the Company's consolidated results of operations or financial position.
In April 2003, the FASB issued SFAS 149. This statement amends and clarifies accounting for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities under SFAS 133. This statement is effective for contracts entered into or modified after June 30, 2003, for hedging relationships designated after June 30, 2003, and to certain preexisting contracts. It is expected that the adoption of SFAS 149 will not have a material impact on the Company's consolidated results of operations or financial position.
In May 2003, the FASB issued SFAS 150. This statement establishes standards for how an issuer classifies and measures in its financial position certain financial instruments with characteristics of both liabilities and equity. In accordance with this standard, financial instruments that embody obligations for the issuer are required to be classified as liabilities. SFAS 150 generally is effective for financial instruments created or modified after May 31, 2003, and otherwise effective at the beginning of the first interim period beginning after June 15, 2003. It is expected that the adoption of SFAS 150 will not have a material impact on the Company's consolidated results of operations or financial position.
In December 2003, the SEC issued SAB 104 that codified, revised and rescinded certain sections of SAB 101 in order to make this interpretive guidance consistent with current authoritative guidance. The changes noted in SAB 104 did not have a material impact on the Company's consolidated results of operations or financial position.
Reclassifications. Certain amounts in the prior years' financial statements have been reclassified to conform to the current year's presentation.
Notes to Consolidated Financial Statements
1. Future Prospects.
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. 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. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
The Company continues to operate the business on a cash basis by striving to bring cash expenditures in line with revenues. The Company is simultaneously looking at ways to improve or maintain its revenue stream. Additionally, the Company continues to review potential merger opportunities as they present themselves and at such time as a merger might make financial sense and add value for the shareholders, the Company will pursue that merger opportunity. The Company anticipates increasing its sales and marketing and research and development expenditures during 2004 as it believes further development of these areas are critical to its ability to continue its business as a going concern. The Company believes that improving or maintaining its current revenue stream, coupled with its cash on hand, including the cash raised in the private placement (Note 2), will support these planned increases during 2004.
On March 19, 2003, the Company received a Nasdaq Staff Determination letter indicating that it fails to comply with the $1.00 minimum closing bid price per share requirement for continued listing as set forth in Marketplace Rule 4310(c)(4) and that its securities are, therefore, subject to delisting from the Nasdaq SmallCap Market. The Company's shares were ultimately delisted from the Nasdaq SmallCap Market on March 26, 2003 and have been quoted on the Over-the-Counter Bulletin Board since March 27, 2003.
2. Subsequent Event.
On January 29, 2004, the Company raised in a private offering a total of $1,150,000 through the sale of 5,000,000 shares of common stock and 5-year warrants to purchase 2,500,000 shares of common stock at an exercise price of $0.33 per share. The Company estimates that commissions and professional services fees, including legal fees, associated with the private offering would approximate $175,000, thus netting proceeds of approximately $975,000 for operating purposes.
3. Property and Equipment.
Property and equipment consisted of the following:
December 31, 2003 2002
------------ ------------ ------------
Equipment $ 875,000 $ 976,100
Furniture and fixtures 231,500 266,200
Leasehold improvements 30,400 30,400
------------ ------------
1,136,900 1,272,700
Less: accumulated depreciation
and amortization 992,100 850,800
------------ ------------
$ 144,800 $ 421,900
============ ============
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The Company substantially reduced its operations during 2002, including the removal from service and write-off of significant portions of its property and equipment as part of its restructuring charges. (See Note 7).
4. Purchased Technology.
Purchased technology consisted of the following:
December 31, 2003 2002
------------ ------------ ------------
Purchased technology (Note 6) $ 1,370,100 $ 7,915,700
Less: accumulated amortization 1,035,100 6,752,600
------------ ------------
$ 335,000 $ 1,163,100
============ ============
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The decreases in the balances of purchased technology and related accumulated amortization in 2003 from 2002 is the result of the asset impairment charges (Note 6) recorded during 2002 and 2001. Purchased technology will be fully amortized during 2004.
Pursuant to SFAS No. 142, "Goodwill and Other Intangible Assets," (SFAS 142) during 2003 the Company conducted periodic tests for asset impairment. As of December 31, 2003 the Company does not have any intangible assets with indefinite useful lives, or any goodwill on its balance sheet. Intangible assets are comprised of acquired technology and technology developed in-house, both of
which have been incorporated into one or more products. As such, all intangible assets are being amortized to cost of revenues over the estimated useful lives of the underlying products, or three years, whichever is shorter.
5. Accrued Liabilities.
Accrued liabilities consisted of the following:
December 31, 2003 2002
------------ ---------- ----------
Payroll and related liabilities $ 305,200 $ 304,500
Professional fees 118,300 123,800
Restructuring charge (Note 7) - 282,200
Accrued taxes 24,400 18,700
Other 22,900 65,900
---------- ----------
$ 470,800 $ 795,100
========== ==========
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6. Asset Impairment Charge.
During 2002 and 2001, the Company recorded impairment charges of $914,000 and $4,500,900, respectively, 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.
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 GoGlobal for Windows and
GoGlobal: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
================== ============= ================
2001 Impairment
--------------------
Purchased Technology $ 7,283,300 $ 4,150,900 $ 3,132,400
Patent 350,000 350,000 -
------------------ ------------- ----------------
Totals $ 7,633,300 $ 4,500,900 $ 3,132,400
================== ============= ================
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The Company reassessed the carrying values of its intangible assets as of December 31, 2003 and determined that no further impairment of those assets had occurred. The asset impairment charges were approximately 0.0%, 25.9%, and 76.2% of total revenues for the years 2003, 2002, and 2001, respectively.
7. Restructuring Charges.
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:
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
============ ============= =========== ==============
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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:
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) $ -
============= ============= =========== ==============
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(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.
8. Stockholders' Equity.
Common Stock. During 2003, the Company issued 37,740 shares of common stock to employees in connection with the Employee Stock Purchase Plan, resulting in net cash proceeds of $2,800.
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. The notes are for a term of three years, are due on or before March 5, 2005 and bear 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 can take back all 100,000 of the shares of common stock so issued. Additionally, during 2002, the Company issued 25,720 shares of common stock to employees in connection with the Employee Stock Purchase Plan, resulting in net cash proceeds of $6,400.
During 2001, the Company issued options and warrants to various third parties in exchange for services provided. Using the Black-Scholes option-pricing model, the Company capitalized $120,200 as deferred compensation. The following assumptions were used for pricing the options and warrants: dividend yield of 0, expected volatility of 60%, risk-free interest rate of 5.25%, and expected life of one year. During 2002 and 2001, the Company amortized $23,900 and $96,300, respectively, of deferred compensation related to the issuance of the options and warrants to these various third parties.
In June 2001, the Company issued 2,500,000 shares of common stock to Menta Software in connection with the acquisition of software technology, which was assigned a historical cost of $6,500,000 based on the then fair market value of the common stock. In an extemporaneous transaction in June of 2001, the Company licensed its patented technology to Menta Software in a transaction valued at $2,000,000, of which $600,000 was paid in cash. In December 2002, the Company accepted 933,333 shares of its common stock from Menta Software in full settlement of the outstanding $1,400,000 due the Company from Menta Software under the terms of the June 2001 patented technology licensing agreement. Also during 2001, the Company issued 64,958 shares of common stock to employees in connection with the Employee Stock Purchase Plan resulting in net cash proceeds of $152,900.
Stock Purchase Warrants. As of December 31, 2003, the following common stock warrants were issued and outstanding:
Shares subject Exercise Expiration
Issued with respect to: to Warrant Price Date
----------------------- ---------- ----- ----
Convertible notes 83,640 $ 1.79 01/06
Private placement 373,049 $ 1.79 01/06
IPO Directors Class A 111,667 $ 5.50 07/04
IPO Directors Class B 180,000 $ 7.50 07/04
Consulting Services 50,000 $ 1.00 04/04
Consulting Services 125,000 $ 1.75 04/04
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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, 2003 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, 2003, options to purchase 27,625 shares of common stock were outstanding, 538 options had been exercised and options to purchase 159,337 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, 2003 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, 2003, options to purchase 2,067,358 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 1,856,539 shares remained available for grant/issuance. The Company did not issue any direct shares under the 98 Plan in 2003, 2002, or 2001 and does not anticipate issuing shares in 2004.
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, 2003 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, 2003, options to purchase 9,500 shares of common stock were outstanding, no options had been exercised and options to purchase 390,500 shares of common stock remained available for further issuance under the 96 Plan.
Employee Stock Purchase Plan. In February 2000, the Employee Stock Purchase Plan (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, 2003, 128,418 shares of common stock have been purchased through the ESPP and 71,582 are available for future purchase.
Employee Stock Option Exchange Program. On June 24, 2003, the Company announced a voluntary stock option exchange program for its employees who were not executive officers or members of its Board of Directors. Under the terms of the exchange program, eligible employees had the opportunity, if they so chose, to cancel any of their outstanding unexercised options to purchase Company common stock that had an exercise price greater than or equal to $0.50 in exchange for an equal number of new options to be granted at a future date. As of July 23, 2003, the closing date of the exchange program, 578,935 options were exchanged by eligible employees and cancelled. All options so cancelled were considered available for reissuance on December 31, 2003, as reported elsewhere in this footnote. On January 26, 2004 participating employees were granted new options in an amount equal to the amount they had tendered for exchange. All the new options were granted at an exercise price of $0.41, the fair market value on the grant date.
A summary of the status of the Company's stock option plans as of December 31, 2003, 2002, and 2001, and changes during the years then ended is presented in the following table:
Options Outstanding
----------------------------------------------------------------------
December 31, 2003 December 31, 2002 December 31, 2001
--------------------- ---------------------- -----------------------
Wtd. Avg. Wtd. Avg. Wtd. Avg.
Shares Ex. Price Shares Ex. Price Shares Ex. Price
--------- ---------- ---------- ---------- ----------- ----------
Beginning 2,584,307 $ 3.05 2,541,200 $ 4.32 2,179,489 $ 5.42
Granted 207,500 $ 0.18 1,193,000 $ 0.17 1,045,150 $ 1.30
Exercised - $ - (200,000) $ 0.25 (23,627) $ 1.51
Forfeited (687,324) $ 3.95 (949,893) $ 3.45 (659,812) $ 3.27
--------- ---------- ---------- ---------- ----------- ----------
Ending 2,104,483 $ 2.47 2,584,307 $ 3.05 2,541,200 $ 4.32
========= ========== ========== ========== =========== ==========
Exercisable at
year-end 2,104,483 $ 2.47 2,584,307 $ 3.05 2,541,200 $ 4.32
========= ========== ========== ========== =========== ==========
Weighted-average fair value
of options granted during
the period: $ 0.10 $ 0.09 $ 0.73
========== ========== ==========
|
The following table summarizes information about stock options outstanding as of December 31, 2003:
Options Outstanding
------------------------------------- Options Exercisable
Wtd. Avg. ----------------------
Number Remaining Number
Range of Outstanding Contractual Wtd. Avg. Exercisable Wtd. Avg.
Ex. Price at 12/31/03 Life Ex. Price at 12/31/03 Ex. Price
-------------- ----------- ----------- --------- ----------- ---------
$ 0.01 - 3.00 1,612,595 8.19 yrs. $ 0.52 1,612,595 $ 0.52
$ 3.01 - 7.00 306,888 5.83 yrs. $ 6.13 306,888 $ 6.13
$ 7.01 - 10.00 50,000 6.29 yrs. $ 7.31 50,000 $ 7.31
$10.01 - 16.00 135,000 6.13 yrs. $ 15.62 135,000 $ 15.62
----------- --------- ----------- ---------
2,104,483 $ 2.47 2,104,483 $ 2.47
=========== ========= =========== =========
|
SFAS No. 123 requires the Company to provide pro forma information regarding net
(loss) income and (loss) earnings 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 No.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
2003, 2002 and 2001, respectively: dividend yield (all years) of 0; expected
volatility of 60%, 60%, and 60%; risk-free interest rate of 2.50%, 2.50% and
5.25 %; and expected lives of five, five, and five years, respectively, for all
plan options.
9. Income Taxes.
The provision for income taxes for the year ended December 31, 2001 consists of minimum state taxes. There is no provision for income taxes for either of the years ended December 31, 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, 2003 2002 2001
------------ ----------- ----------- -----------
Federal income tax at
statutory rate $ (641,400) $(2,989,400) $(5,262,500)
State income taxes, net
of federal benefit (97,100) (556,200) (902,400)
Tax benefit not
currently recognizable 706,300 3,475,800 6,260,300
Research and development
Credit - (100,000) (100,000)
Other 32,200 30,200 5,400
----------- ----------- -----------
Provision for income taxes $ - $ - $ 800
=========== =========== ===========
|
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, 2003 2002
------------ ------------ ------------
Net operating loss carryforwards $ 15,402,700 $ 13,376,300
Tax credit carryforwards 654,500 627,500
Capitalized software (199,700) (161,900)
Depreciation and amortization 593,200 1,886,800
Reserves not currently deductible 404,800 420,600
Deferred compensation 1,202,700 1,202,600
------------ ------------
Total deferred tax asset 18,058,200 17,351,900
Valuation allowance (18,058,200) (17,351,900)
------------ ------------
Net deferred tax asset $ - $ -
============ ============
|
The Company has net operating loss carryforwards available to reduce future taxable income, if any, of approximately $42,627,000 and $15,586,000 for Federal and California income tax purposes, respectively. The benefits from these carryforwards expire at various times from 2004 through 2022. As of December 31, 2003, 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. Furthermore,
approximately $1,202,700 of the valuation allowance related to the amortization of deferred compensation will be credited to equity upon its reversal.
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.
10. Concentration of Credit Risk.
Financial instruments, which potentially subject the Company to concentration of credit risk, consist principally of cash and cash equivalents, and trade receivables. 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, 2002, the Company had approximately $925,500 of cash and cash equivalents with financial institutions, in excess of FDIC insurance limits.
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. Approximately $0, $139,200 and $150,000 of the outstanding balances, respectively, had been collected through March 17, 2004. For the year ended December 31, 2002, these three customers accounted for approximately 26.9%, 12.5% and 3.0% of total revenues, respectively, with related accounts receivable as of December 31, 2002 of $0, $58,800 and $4,600, respectively. Approximately $0, $52,400 and $0,000 outstanding balance was collected by March 21, 2003, 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. Approximately $52,400 of the outstanding balance had been collected through March 21, 2003. For the year ended December 31, 2001, these three customers accounted for approximately 24.5%, 0.0% and 6.1% of total revenues, respectively, with related accounts receivable as of December 31, 2001 of $270,000, $0, and $182,900, respectively. The $270,000 outstanding balance was collected during January 2001 and approximately $143,200 of the $182,900 outstanding balance was collected by March 31, 2002.
For the year ended December 31, 2001, sales to the Company's three largest customers accounted for approximately 25.2%, 24.5% and 9.5% of total revenues, respectively, with related accounts receivable as of December 31, 2001 of $0, $270,000, and $0, respectively. The outstanding balance was collected during February 2002. For the year ended December 31, 2000, these three customers accounted for approximately 0.0%, 14.4% and 0.0% of total revenues, respectively, with related accounts receivable as of December 31, 2000 of $0, $150,000, and $0, respectively. The outstanding balance was collected during January 2001.
Accounts receivable are derived from many customers in various industries. The Company believes any risk of loss is reduced due to the diversity of customers and geographic sales areas. 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.
11. Commitments and Contingencies.
Operating Leases. In October 2003, the Company entered into a one-year operating lease for an approximate 3,300 square foot facility in New Hampshire. Monthly rental payments for this facility are approximately $5,000.
During 2003, the Company successfully negotiated settlement of the underlying leases to its previously vacated facilities in Bellevue, Washington and Morgan Hill, California. The Company no longer leases office space in Washington. The Company has leased space in Morgan Hill since September 1, 2003, the effective date of the settlement of the previous lease, on a month-to-month basis. Monthly rental payments for this facility, inclusive of shared occupancy costs, are approximately $1,200.
The Company also occupies leased facilities in Rolling Hills Estates, California and Berkshire, England, United Kingdom. The Rolling Hills Estates and Berkshire offices are very small and each are leased on a month-to-month basis. Rent on the Rolling Hills Estates office is approximately $1,000 per month and the rent on the Berkshire, England office, which fluctuates slightly depending on exchange rates, is approximately $400 per month.
Future minimum lease payments under all leases in effect as of December 31, 2003 are as follows:
Year Payments ---- -------- 2004 $ 50,000 2005 and thereafter $ - |
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 expires on January 29, 2007.
Prior Bankruptcy. GraphOn Corporation (a predecessor company) filed a Voluntary Petition for Relief under Chapter 11 of the Bankruptcy Code in November 1991 and may be required to pay up to $964,000 to a creditor. To date, the Company has not received any claims related to the bankruptcy. There can be no assurance that future claims will not arise from the predecessor company's creditors or that a former creditor may assert a claim relating to royalties earned from subsequent licenses, which could be costly and could have a material effect on the Company's business, financial condition and/or results of operations.
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, 2003.
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, 2003.
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.
12. 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 2003, 2002 and 2001, the Company contributed a total of $27,200, $52,400 and $44,700 to the Plan, respectively.
13. Supplemental Disclosure of Cash Flow Information.
The following is supplemental disclosure for the statements of cash flows.
Years Ended December 31, 2003 2002 2001
------------------------ ------ ------ -----------
Cash Paid:
----------
Income Taxes $ - $ - $ 800
Interest $ - $ 200 $ 5,800
39
|
Noncash Investing and Financing Activities:
-------------------------------------------
Stock and warrants issued for
purchased technology and
other assets $ - $ - $ 6,500,000
|
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.
14. Quarterly Information (Unaudited).
The summarized quarterly financial data presented below reflect all adjustments, which, except as discussed below, 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 2002 and 2001, the Company recorded asset impairment charges of $914,000 and $4,500,000, respectively, against several of its intangible assets, as discussed in Note 6. Also, during 2003 and 2002, the Company recorded non-recurring restructuring charges of $80,100 and $1,942,800 related to the closure of certain office locations and other cost reduction measures, as discussed in Note 7.
In thousands, except per share data.
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 - - (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) |
Year ended First Second Third Fourth Full December 31, 2002 Quarter Quarter Quarter Quarter Year ----------------- ------- ------- ------- ------- ------- Total revenues $ 586 $ 525 $ 837 $ 1,587 $ 3,535 Gross profit 131 64 382 1,278 1,855 Asset impairment charge - - (914) - (914) Restructuring charge (1,490) - (453) - (1,943) Operating loss (3,625) (2,174) (2,992) (78) (8,869) Net loss (3,591) (2,148) (2,981) (73) (8,793) Basic and diluted loss per common share (0.21) (0.12) (0.17) (0.00) (0.50) |
Report of Independent Certified Public Accountants 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 Item 8 of this Form 10-K, 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 such consolidated financial statement schedule presents fairly, in all material respects, the information set forth therein.
/s/ BDO Seidman, LLP BDO Seidman, LLP San Jose, California February 23, 2004 |
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:
2003 $ 50,300 $ 16,300 $ 19,800 $ 46,800
2002 $ 350,000 $ 31,600 $ 331,300 $ 50,300
2001 $ 100,000 $ 250,000 $ - $ 350,000
|
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Our management carried out an evaluation, with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of December 31, 2003. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the rules and forms of the Securities and Exchange Commission.
There has not been any change in our internal control over financial reporting in connection with the evaluation required by Rule 13a-15(d) under the Exchange Act that occurred during the quarter ended December 31, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Executive Officers and Directors of the Registrant
Set forth below is information concerning each of our directors and executive officers as of March 18, 2004.
Name Age Position
--------------- --- --------------------------------------
Robert Dilworth 62 Chairman of the Board of Directors and
Chief Executive Officer (Interim)
William Swain 63 Chief Financial Officer and Secretary
August P. Klein 67 Director
Michael Volker 55 Director
Gordon Watson 68 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, Mobility Electronics, Transcept Corporation, Yummy Interactive 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's College.
Michael Volker has served as one of our directors since July 2001. Mr. Volker has been, since 1996, Director of the Industry Liaison Office, which has primary responsibility for the transfer of technology at Simon Fraser University. 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 1991 to 1996, Mr. Volker was Chief Executive Officer and Chairman of the Board of Directors of RDM Corporation, a publicly listed company Mr. Volker founded in 1987. 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 Advances Systems Institute, a hi-tech research institute, and currently continues as a Trustee of BC as well a member of various charitable and educational boards. Prior to 1988, Mr. Volker had been active in various early stage businesses as a founder, investor, director and officer. Mr. Volker holds a Master of Applied Science and a Professional Engineer designation from the University of Waterloo.
Gordon 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. Prior to joining 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 BS degree in electrical engineering from the University of California at Los Angeles. Mr. Watson is also a director of DPAC Technologies, 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 has been filed as an exhibit to this annual report on Form 10-K.
All executive officers serve at the discretion of the Board of Directors.
Compliance With Section 16(a) of the Securities Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires our officers and directors, as well as those persons who own more than 10% of our common stock, to file reports of ownership and changes in ownership with the SEC. These persons are required by SEC rule to furnish us with copies of all Section 16(a) forms they file.
Based solely on our review of the copies of such forms, or written representations from certain reporting persons that no such forms were required, we believe that during the year ended December 31, 2003, all filing requirements applicable to our officers, directors and greater than 10% owners of our common stock were complied with.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation Table. The following table sets forth information for the fiscal years ended December 31, 2003, 2002 and 2001 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, 2003.
Long-term Compensation
-----------------------------------
Annual Compensation Awards Payouts
-------------------------------- ------------------------- ---------
Name and Other Restricted Securities All
Principal Annual Stock Underlying LTIP Other
Position Year Salary Bonus Compensation Awards Options Payouts Compensation
------------------------ ------ --------- ------- -------------- ------------ ------------ ---------- --------------
Robert Dilworth 2003 $ 129,000 - - - 40,000 - -
Chairman of the Board 2002 $ 256,000 - - - 100,000 - -
Chief Executive Officer 2001 - - - - 60,000 - -
(Interim) (1)
------------------------ ------ --------- ------- -------------- ------------ ------------ ---------- --------------
|
(1) Mr. Dilworth began as Chief Executive Officer (Interim) during January 2002. As an interim Chief Executive Officer, Mr. Dilworth is compensated as a consultant and not an employee, consequently; he is eligible to receive compensation for his services as a director.
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 2003 fiscal year:
Potential Realizable Value
at Assumed Annual Rates
Number of Shares of Percent of Total of Stock Appreciaiton for
Common Stock Underlying Options Granted to Exercise Expiration Option Term
Name Options Granted Employees in Fiscal Year Price (1) Date 5% 10%
---------------- ------------------------- ------------------------- ----------- ------------ --------------------------
Robert Dilworth 40,000 88.9% $ 0.18 05/05/13 $ 93,600 $ 122,400
----------------- ------------------------ ------------------------- ----------- ------------ --------------------------
|
(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.
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, 2003. No options held by such individuals were exercised during 2003.
Number of Securities Underlying Value of Unexercised In-The-Money
Unexercised Options at Fiscal Options at Fiscal
Year-End (1) Year-End (2)
------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
----------------- ------------------------------- ---------------------------------
Robert Dilworth 400,000 - $ 8,000 -
----------------- ------------------------------- ---------------------------------
|
(1) Shares issued upon exercise of the options are subject to our repurchase,
which right lapses in 33 equal monthly installments beginning three months
after the date of the grant.
(2) The value of the in-the-money options was calculated as the difference
between the exercise price of the options and $0.20, the fair market value
of our common stock as of December 31, 2003, multiplied by the number of
in-the-money options outstanding.
Compensation of Directors. During the year ended December 31, 2003, directors who were not otherwise our employees were compensated at the rate of $1,000 for attendance at each meeting of our board, $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 120,000 shares of our common stock during 2003 at an average exercise price of $0.18 per share.
Compensation Committee Interlocks and Insider Participation. During the year ended December 31, 2003, 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.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information, as of March 18, 2004, with respect to the beneficial ownership of shares of our common stock held by:
o each director;
o each person known by us to beneficially own 5% or more of our
common stock;
o each executive officer named in the summary compensation table; and
o all directors and executive officers as a group:
Unless otherwise indicated, the address for each stockholder is c/o GraphOn Corporation, 105 Cochrane Circle, Morgan Hill, California 95023.
------------------------------------ ------------------------------------ --------------------
Number of Shares of Common Stock
Name and Address Beneficial Owner Beneficially Owned (1) Percent of Class
------------------------------------ ------------------------------------ --------------------
Orin Hirschman 4,565,217 (2) 19.7%
6006 Berkeley Avenue
Baltimore, MD 21209
------------------------------------ ------------------------------------ --------------------
Corel Corporation 1,193,824 (3) 5.5%
1600 Carling Avenue
Ottawa, Ontario
K1Z 8R7, Canada
------------------------------------ ------------------------------------ --------------------
Robert Dilworth 453,820 (4) 2.1%
------------------------------------ ------------------------------------ --------------------
August P. Klein 223,260 (5) 1.0%
------------------------------------ ------------------------------------ --------------------
Michael Volker 140,700 (6) *
------------------------------------ ------------------------------------ --------------------
Gordon Watson 80,000 (7) *
------------------------------------ ------------------------------------ --------------------
William Swain 435,000 (8) 2.0%
------------------------------------ ------------------------------------ --------------------
All current executive officers and 1,340,780 (9) 5.9%
Directors as a group (5 persons)
------------------------------------ ------------------------------------ --------------------
|
* 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, 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 within 60 days of all
options held by such stockholder as of March 18, 2004 are deemed
outstanding for computing the percentage of the person holding such
options, but are not deemed outstanding for computing the percentage of
any other person. Percentage ownership of our common stock is based on
21,638,097 shares of our common stock outstanding as of March 18, 2004.
(2) Based on information contained in a Schedule 13D filed by Orin Hirschman
on February 10, 2004. Includes 1,521,739 shares of common stock issuable
upon the exercise of outstanding options.
(3) Based on information contained in a Schedule 13D filed by Corel
Corporation on June 26, 2000.
(4) Includes 400,000 shares of common stock issuable upon the exercise of
outstanding options.
(5) Includes 72,500 shares of common stock issuable upon the exercise of
outstanding options.
(6) Includes 50,000 shares of common stock issuable upon the exercise of
outstanding options.
(7) Includes 80,000 shares of common stock issuable upon the exercise of
outstanding options.
(8) Includes 420,000 shares of common stock issuable upon the exercise of
outstanding options.
(9) Includes 1,022,500 shares of common stock issuable upon the exercise of
outstanding options.
Equity Compensation Plan Information. The following table sets forth information related to all of our equity compensation plans as of December 31, 2003:
Number of Securities to be
Issued Upon Exercise of Weighted Average Exercise Number of Securities
Outstanding Options, Price of Outstanding Remaining Available for
Plan Category Warrants and Rights Options, Warrants and Rights Future Issuance
------------------------------- --------------------------- ------------------------------ -------------------------
Equity compensation plans
approved by security holders:
Stock option plans 2,094,983 $ 2.47 2,015,876
Employee stock purchase plan (1) (1) (1)
------------------------------- --------------------------- ------------------------------ -------------------------
Equity compensation plans not
approved by security holders:
Stock option plan (2) 9,500 $ 1.32 390,500
------------------------------- --------------------------- ------------------------------ -------------------------
Total 2,104,483 $ 2.47 2,406,376
------------------------------- --------------------------- ------------------------------ -------------------------
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(1) Under terms of the employee stock purchase plan ( ESPP), employees who
participate in the plan are eligible to purchase shares of common stock.
As of December 31, 2003, 128,418 shares had been purchased through the
ESPP, at an average cost of $1.28 per share and 71,582 shares are
available for future purchase.
(2) On April 30, 2000 our board approved a supplemental stock option plan.
Participation in the supplemental plan is limited to those employees who
are, at the time of the option grant, neither officers nor directors. The
supplemental plan was initially authorized to issue options for up to
400,000 shares of common stock. The exercise price per share is subject to
the following provisions:
o The exercise price per share shall not be less than 85% of the fair
market value per share of common stock on the option grant date.
o If the person to whom the option is granted is a 10% shareholder,
then the exercise price per share shall not be less than 110% of the
fair market value per share of common stock on the option grant date.
All options granted are immediately exercisable by the optionee. The
options vest, ratably, over a 33-month period, however no options vest
until after three months from the date of the option grant. The exercise
price is immediately due upon exercise of the option. The supplemental
plan shall terminate no later than April 30, 2010.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On January 29, 2004, we completed a private placement of our common stock and common stock purchase warrants in which Mr. Orin Hirschman purchased 3,043,478 shares of our common stock and warrants to purchase 1,521,739 shares of our common stock (representing in the aggregate 19.7% of our outstanding shares of common stock as of March 18, 2004). As a condition of the sale, we entered into an Investment Advisory Agreement with Mr. Hirschman, pursuant to which we agreed that in the event we complete a transaction with a third party introduced by Mr. Hirschman, we shall pay to Mr. Hirschman 5% of the value of that transaction. The agreement expires on January 29, 2007.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Fees for professional services provided by our independent auditors in each of the last two fiscal years, in each of the following categories are as follows:
Category 2003 2002
-------- ------------- -------------
Audit fees $ 105,000 $ 103,000
Audit - related fees - 4,700
Tax fees 25,500 12,800
Other fees - -
------------- -------------
Totals $ 130,500 $ 120,500
============= =============
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Fees for audit services include fees associated with our annual audit, the annual statutory audit of our UK subsidiary, the reviews of our quarterly reports on Form 10-Q, and assistance with and review of documents filed with the Securities and Exchange Commission. Audit-related fees were incurred for consultations regarding revenue recognition rules and interpretations as they related to the financial reporting of certain transactions. Tax fees included tax compliance and tax consultations.
The audit committee has adopted a policy that requires advance approval of all audit, audit-related, tax services and other services performed by our independent auditor. The policy provides for pre-approval by the audit committee of specifically defined audit and non-audit services. Unless the specific service has been previously pre-approved with respect to that year, the audit committee must approve the permitted service before the independent auditor is engaged to perform it.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report:
(1) Financial statements filed as part of this report are listed on the
"Index to Consolidated Financial Statements" at page 22 herein.
(2) Financial Statement Schedules. The applicable financial statement
schedules required under Regulation S-X have been included
beginning on page 23 of this report, as follows:
i. Report of Independent Certified Public Accountants on Financial
Statement Schedule: page 23
ii. Schedule II - Valuation and Qualifying Accounts: page 42
(b) Reports on Form 8-K: The Company filed no reports with the Securities and
Exchange Commission on Form 8-K during the fourth quarter of the year ended
December 31, 2003.
(c) Exhibits.
Exhibit
Number Description of Exhibit
------- ----------------------
2.1 Agreement and Plan of Merger and Reorganization dated as of
February 1, 1999, between registrant and GraphOn Corporation, a
California corporation (1)
3.1 Amended and Restated Certificate of Incorporation of Registrant (1)
3.2 Amended and Restated Bylaws of Registrant (1)
4.1 Form of certificate evidencing shares of common stock of
Registrant (2)
4.2 Form of Warrant issued by Registrant on January 29, 2004
4.3 Investors Rights Agreement, dated January 29, 2004, by and among
Registrant and the investors named therein
10.1 1996 Stock Option Plan of Registrant (2)
10.2 1998 Stock Option/Stock Issuance Plan of Registrant (1)
10.3 Supplemental Stock Option Agreement, dated as of June 23, 2000 (3)
10.4 Employee Stock Purchase Plan of Registrant (3)
10.5 Lease Agreement between Registrant and Central United Life Insurance,
dated as of October 24, 2003
10.6 Financial Advisory Agreement, dated January 29, 2004, by and between
Registrant and Orin Hirschman
14.1 Code of Ethics
23.1 Consent of BDO Seidman, LLP
31.1 Rule 13a-14(a)/15d-14(a) Certifications
32.1 Section 1350 Certifications
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(1) Incorporated by reference from Registrant's Form S-4, file number
333-76333.
(2) Incorporated by reference from Registrant's Form S-1, file number
333-11165.
(3) Incorporated by reference from Registrant's Form S-8, file number
333-40174.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
GRAPHON CORPORATION
Date: March 30, 2004 By: /s/ William Swain
-----------------
William Swain
Chief Financial Officer
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Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Name Title /s/ Robert Dilworth Chairman of the Board and ------------------- Interim Chief Executive Officer Robert Dilworth (Principal Executive Officer) March 30, 2004 /s/ William Swain Chief Financial Officer and Secretary ----------------- (Principal Financial Officer and William Swain Principal Accounting Officer) March 30, 2004 /s/ August P. Klein Director ------------------- August P. Klein March 30, 2004 /s/ Michael Volker Director ------------------ Michael Volker March 30, 2004 /s/ Gordon Watson Director ----------------- Gordon Watson March 30, 2004 |
Void after January 29, 2009 Warrant No. ________
This Warrant and any shares acquired upon the exercise of this Warrant have not been registered under the Securities Act of 1933. This Warrant and such shares may not be sold or transferred in the absence of such registration or an exemption therefrom under said Act. This Warrant and such shares may not be transferred except upon the conditions specified in this Warrant, and no transfer of this Warrant or such shares shall be valid or effective unless and until such conditions shall have been complied with.
GRAPHON CORPORATION
COMMON STOCK PURCHASE WARRANT
GraphOn Corporation. (the "Company"), having its principal office at 105 Cochrane Circle, Suite L, Morgan Hill, California 95037 hereby certifies that, for value received, [_____], or assigns, is entitled, subject to the terms set forth below, to purchase from the Company at any time on or from time to time after January 29, 2004 and before 5:00 P.M., New York City time, on January 29, 2009, or as extended in accordance with the terms hereof (the "Expiration Date"), [_____] ([_____]) fully paid and non-assessable shares of Common Stock of the Company, at the initial Purchase Price per share (as defined below) of $[__]. The number and character of such shares of Common Stock and the Purchase Price per share are subject to adjustment as provided herein.
Background. The Company agreed to issue warrants to purchase an aggregate of 2,500,000 shares of Common Stock (subject to adjustment as provided herein) in connection with the Company's private placement of 250 units ("Units") each Unit consisting of (i) 20,000 shares of Common Stock and (ii) 10,000 5-year warrants to purchase Common Stock at $0.33 per share (the "Warrants"), each Warrant entitling the Holder thereof to purchase one share of Common Stock.
As used herein the following terms, unless the context otherwise requires, have the following respective meanings:
The term "Company" includes the Company and any corporation which shall succeed to or assume the obligations of the Company hereunder. The term "corporation" shall include an association, joint stock company, business trust, limited liability company or other similar organization.
The term "Common Stock" includes all stock of any class or classes (however designated) of the Company, authorized upon the Original Issue Date or thereafter, the Holders of which shall have the right, without limitation as to amount, either to all or to a share of the balance of current dividends and liquidating dividends after the payment of dividends and distributions on any shares entitled to preference, and the Holders of which shall ordinarily, in the absence of contingencies, be entitled to vote for the election of a majority of directors of the Company (even though the right so to vote has been suspended by the happening of such a contingency).
The term "Convertible Securities" means (i) options to purchase or rights to subscribe for Common Stock, (ii) securities by their terms convertible into or exchangeable for Common Stock or (iii) options to purchase or rights to subscribe for such convertible or exchangeable securities.
The term "Exchange Act" means the Securities Exchange Act of 1934 as the same shall be in effect at the time.
"Excluded Stock" shall mean (i) all shares of Common Stock issued or issuable to employees, directors or consultants pursuant to any equity compensation plan that is in effect on the date of this Agreement, (ii) all shares of Common Stock issued or issuable to employees or directors pursuant to any equity compensation approved by the stockholders of the Company after the date of this Agreement, (iii) all shares of Common Stock issued or issuable to employees, directors or consultants in the form of a hiring bonus, (iv) the warrants issued to Griffin Securities Inc. ("Griffin") on the date hereof, (iv) all shares of Common Stock issued or issuable to bona fide leasing companies, strategic partners, or major lenders, (v) all shares of Common Stock issued or issuable as the purchase price in a bona fide acquisition or merger (including reasonable fees paid in connection therewith), or (vi) all shares of Common Stock issued upon conversion or exercise of the Purchased Warrants or other Convertible Securities outstanding on the date hereof.
"Fair Market Value" shall mean the fair market value of assets or securities as reasonably determined by the Board of Directors of the Corporation in good faith in accordance with generally accepted accounting principles.
The term "Holder" means any record owner of Warrants or Underlying Securities.
The "Original Issue Date" means January 29, 2004.
The term "Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the Holders of the Warrants at any time shall be entitled to receive, or shall have received, upon the exercise of the Warrants, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to Section 6 or otherwise.
The term "Purchase Price per share" means $[__] per share, as adjusted from time to time in accordance with the terms hereof.
The terms "registered" and "registration" refer to a registration effected by filing a registration statement in compliance with the Securities Act, to permit the disposition of Common Stock (or Other Securities) issued or issuable upon the exercise of Warrants, and any post-effective amendments and supplements filed or required to be filed to permit any such disposition.
The term "Securities Act" means the Securities Act of 1933 as the same shall be in effect at the time.
The term "Underlying Securities" means any Common Stock or Other Securities issued or issuable upon exercise of Warrants.
The term "Warrant" means, as applicable, this Warrant or each right as set forth in this Warrant to purchase one share of Common Stock, as adjusted.
1. Registration, etc. The Holder shall have the rights to registration of Underlying Securities issuable upon exercise of the Warrants that are set forth in the Investor Rights Agreement, dated the Original Issue Date, between the Company and the Holder (the "Investor Rights Agreement").
2. Sale or Exercise Without Registration. If, at the time of any exercise, transfer or surrender for exchange of a Warrant or of Underlying Securities previously issued upon the exercise of Warrants, such Warrant or Underlying Securities shall not be registered under the Securities Act, the Company may require, as a condition of allowing such exercise, transfer or exchange, that the Holder or transferee of such Warrant or Underlying Securities, as the case may be, furnish to the Company an opinion of counsel, reasonably satisfactory to the Company, to the effect that such exercise, transfer or exchange may be made without registration under the Securities Act, provided that the disposition thereof shall at all times be within the control of such Holder or transferee, as the case may be, and provided further that nothing contained in this Section 2 shall relieve the Company from complying with any request for registration pursuant to the Investor Rights Agreement.
3. Exercise of Warrant.
3.1. Exercise in Full. Subject to the provisions hereof, this Warrant may be exercised in full by the Holder hereof by surrender of this Warrant, with the form of subscription at the end hereof duly executed by such Holder, to the Company at its principal office accompanied by payment, in cash or by certified or official bank check payable to the order of the Company, in the amount obtained by multiplying the number of shares of Common Stock issuable upon exercise of this Warrant by the Purchase Price per share, after giving effect to all adjustments through the date of exercise.
3.2. Partial Exercise. Subject to the provisions hereof, this Warrant may be exercised in part by surrender of this Warrant in the manner and at the place provided in Section 3.1 except that the amount payable by the Holder upon any partial exercise shall be the amount obtained by multiplying (a) the number of shares of Common Stock (without giving effect to any adjustment therein) designated by the Holder in the subscription at the end hereof by (b) the Purchase Price per share. Upon any such partial exercise, the Company at its expense will forthwith issue and deliver to or upon the order of the Holder hereof a new Warrant or Warrants of like tenor, in the name of the Holder hereof or as such Holder (upon payment by such Holder of any applicable transfer taxes) may request, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock equal (without giving effect to any adjustment therein) to the number of such shares called for on the face of this Warrant minus the number of such shares designated by the Holder in the subscription at the end hereof.
3.3. Exercise by Surrender of Warrant or Shares of Common Stock. In addition to the method of payment set forth in Sections 3.1 and 3.2 and in lieu of any cash payment required thereunder, the Holder(s) of the Warrants shall have the right at any time and from time to time to exercise the Warrants in full or in part by surrendering shares of Common Stock, this Warrant or other securities issued by the Company in the manner and at the place specified in Section 3.1 as payment of the aggregate Purchase Price per share for the Warrants to be exercised. The number of Warrants or shares of Common Stock to be surrendered in payment of the aggregate Purchase Price for the Warrants to be exercised shall be determined by multiplying the number of Warrants to be exercised by the Purchase Price per share, and then dividing the product thereof by an amount equal to the Market Price (as defined below) . The number of shares of Common Stock or such other securities to be surrendered in payment of the aggregate Purchase Price for the Warrants to be exercised shall be determined in accordance with the preceding sentence as if the other securities had been converted into Common Stock immediately prior to exercise or, in the case the Company has issued other securities which are not convertible into Common Stock, at the Market Price thereof.
3.4. Definition of Market Price. As used herein, the phrase "Market Price" at any date shall be deemed to be (i) if the principal trading market for such securities is an exchange, the average of the high reported sale prices per share for the last five previous trading days in which a sale was reported, as officially reported on any consolidated tape, (ii) if the principal market for such securities is the over-the-counter market, the average of the high reported sale prices per share on such trading days as set forth by such market or, (iii) if the security is not quoted by such over-the-counter market, the average of the average of the mean of the bid and asking prices per share on such trading days as set forth in the National Quotation Bureau sheet listing such securities for such days. Notwithstanding the foregoing, if there is no reported high sale price, as the case may be, reported on any of the ten trading days preceding the event requiring a determination of Market Price hereunder, then the Market Price shall be the average of the high bid and asked prices for such days; and if there is no reported high bid and asked prices, as the case may be, reported on any of the ten trading days preceding the event requiring a determination of Market Price hereunder, then the Market Price shall be determined in good faith by resolution of the Board of Directors of the Company, based on the best information available to it.
3.5. Company to Reaffirm Obligations. The Company will, at the time of any exercise of this Warrant, upon the request of the Holder hereof, acknowledge in writing its continuing obligation to afford to such Holder any rights (including, without limitation, any right to registration of the Underlying Securities) to which such Holder shall continue to be entitled after such exercise in accordance with the provisions of this Warrant, provided that if the Holder of this Warrant shall fail to make any such request, such failure shall not affect the continuing obligation of the Company to afford such Holder any such rights.
3.6. Certain Exercises. If an exercise of a Warrant or Warrants is to be made in connection with a registered public offering or sale of the Company, such exercise may, at the election of the Holder, be conditioned on the consummation of the public offering or sale of the Company, in which case such exercise shall not be deemed effective until the consummation of such transaction.
4. Delivery of Stock Certificates, etc., on Exercise. As soon as practicable after the exercise of this Warrant in full or in part, and in any event within three business days thereafter, the Company at its own expense (including the payment by it of any applicable issue taxes) will cause to be issued in the name of and delivered to the Holder hereof, or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct, a certificate or certificates for the number of fully paid and non-assessable shares of Common Stock or Other Securities to which such Holder shall be entitled upon such exercise, plus, in lieu of any fractional share to which such Holder would otherwise be entitled, cash equal to such fraction multiplied by the then current Market Price of one full share, together with any other stock or other securities and property (including cash, where applicable) to which such Holder is entitled upon such exercise pursuant to Section 5 or otherwise.
5. Adjustment for Dividends in Other Stock, Property, etc.; Reclassification, etc. In case at any time or from time to time after the Original Issue Date the holders of Common Stock (or, if applicable, Other Securities) shall have received, or (on or after the record date fixed for the determination of stockholders eligible to receive) shall have become entitled to receive, without payment therefor
(i) other or additional stock or other securities or property (other than cash) by way of dividend, or
(ii) any cash paid or payable (including, without limitation, by way of dividend), or
(iii) other or additional stock or other securities or property (including cash) by way of spin-off, split-up, reclassification, recapitalization, combination of shares or similar corporate rearrangement,
then, and in each such case the Holder of this Warrant, upon the exercise hereof
as provided in Section 3, shall be entitled to receive the amount of stock and
other securities and property (including cash in the cases referred to in
subdivisions (ii) and (iii) of this Section 5(a)) which such Holder would hold
on the date of such exercise if on the Original Issue Date such Holder had been
the Holder of record of the number of shares of Common Stock called for on the
face of this Warrant and had thereafter, during the period from the Original
Issue Date to and including the date of such exercise, retained such shares and
all such other or additional stock and other securities and property (including
cash in the cases referred to in subdivisions (ii) and (iii) of this Section
5(a)) receivable by such Holder as aforesaid during such period, giving effect
to all adjustments called for during such period by Sections 6 and 7 hereof. If
the number of shares of Common Stock outstanding at any time after the date
hereof is decreased by a combination or reverse stock split of the outstanding
shares of Common Stock, the Purchase Price per share shall be increased, and the
number of shares of Common Stock purchasable under this Warrant shall be
decreased in proportion to such decrease in outstanding shares of Common Stock.
6. Reorganization, Consolidation, Merger, etc. In case the Company after the Original Issue Date shall (a) effect a reorganization, (b) consolidate with or merge into any other person, or (c) transfer all or substantially all of its properties or assets to any other person under any plan or arrangement contemplating the dissolution of the Company, then, in each such case, the Holder of this Warrant, upon the exercise hereof as provided in Section 3 at any time after the consummation of such reorganization, consolidation or merger or the effective date of such dissolution, as the case may be, shall be entitled to receive (and the Company shall be entitled to deliver), in lieu of the Underlying Securities issuable upon such exercise prior to such consummation or such effective date, the stock and other securities and property (including cash) to which such Holder would have been entitled upon such consummation or in connection with such dissolution, as the case may be, if such Holder had so exercised this Warrant immediately prior thereto, all subject to further adjustment thereafter as provided in Sections 5 and 7 hereof. The Company shall not effect any such reorganization, consolidation, merger or sale, unless prior to or simultaneously with the consummation thereof, the successor corporation resulting from such consolidation or merger or the corporation purchasing such assets or the appropriate corporation or entity shall assume, by written instrument, the obligation to deliver to each Holder the shares of stock, cash, other securities or assets to which, in accordance with the foregoing provisions, each Holder may be entitled to and all other obligations of the Company under this Warrant. In any such case, if necessary, the provisions set forth in this Section 6 with respect to the rights thereafter of the Holders shall be appropriately adjusted so as to be applicable, as nearly as may reasonably be, to any Other Securities or assets thereafter deliverable on the exercise of the Warrants.
7. Other Adjustments.
7.1. General. Other than as set forth in Sections 5 and 6, if the Company shall issue any Common Stock other than Excluded Stock for a consideration per share (determined as set forth below) less than the Purchase Price per share in effect immediately prior to the issuance of such Common Stock (the "New Issuance"), the Purchase Price per share in effect immediately prior to each issuance shall forthwith be reduced to a new Purchase Price per share determined by dividing (x) the sum of (I) the consideration received by the Company in such issue less (II) the Fair Market Value of any securities or other assets transferred by the Company in units or otherwise together with such Common Stock ("Additional Assets"), by (y) the number of shares of Common Stock (not including shares issuable upon conversion or exercise of Additional Assets) issued in the New Issuance (the "New Purchase Price"). The number of shares of Common Stock for which this Warrant is exercisable shall be increased to a new number of shares determined by multiplying the number of shares of Common Stock for which this Warrant is exercisable prior to the New Issuance by a fraction, the numerator of which is the Purchase Price per share in effect prior to the New Issuance and the denominator is the New Purchase Price per share.
7.2. Convertible Securities. (a) In case the Company shall issue or sell any Convertible Securities (including without limitation Additional Assets), other than Excluded Stock, after the date hereof, there shall be determined the price per share for which Common Stock is issuable upon the conversion or exchange thereof, such determination to be made by dividing (i) the total amount received or receivable by the Company as consideration for the issue or sale of such Convertible Securities, plus the then current aggregate amount of additional consideration, if any, payable to the Company upon the conversion or exchange thereof, by (ii) the maximum number of shares of Common Stock of the Company issuable upon the conversion or exchange of all of such Convertible Securities.
(b) If the price per share so determined shall be less than the applicable Purchase Price per share, then such issue or sale shall be deemed to be an issue or sale for cash (as of the date of issue or sale of such Convertible Securities) of such maximum number of shares of Common Stock at the price per share so determined, provided that, if such Convertible Securities shall by their terms provide for an increase or increases or decrease or decreases, with the passage of time, in the amount of additional consideration, if any, to the Company, or in the rate of exchange, upon the conversion or exchange thereof, the adjusted Purchase Price per share shall, forthwith upon any such increase or decrease becoming effective, be readjusted to reflect the same, and provided further, that upon the expiration of such rights of conversion or exchange of such Convertible Securities, if any thereof shall not have been exercised, the adjusted Purchase Price per share shall forthwith be readjusted and thereafter be the price which it would have been had an adjustment been made on the basis that the only shares of Common Stock so issued or sold were issued or sold upon the conversion or exchange of such Convertible Securities, and that they were issued or sold for the consideration actually received by the Company upon such conversion or exchange, plus the consideration, if any, actually received by the Company for the issue or sale of all of such Convertible Securities which shall have been converted or exchanged.
7.3. Rights and Options. (a) In case the Company shall grant any rights or options to subscribe for, purchase or otherwise acquire Common Stock, other than Excluded Stock, there shall be determined the price per share for which Common Stock is issuable upon the exercise of such rights or options, such determination to be made by dividing (i) the total amount, if any, received or receivable by the Company as consideration for the granting of such rights or options, plus the then current amount of additional consideration payable to the Company upon the exercise of such rights or options, by (ii) the maximum number of shares of Common Stock of the Company issuable upon the exercise of such rights or options.
(b) If the price per share so determined shall be less than the applicable Purchase Price per share, then the granting of such rights or options shall be deemed to be an issue or sale for cash (as of the date of the granting of such rights or options) of such maximum number of shares of Common Stock at the price per share so determined, provided that, if such rights or options shall by their terms provide for an increase or increases or decrease or decreases, with the passage of time, in the amount of additional consideration payable to the Company upon the exercise thereof, the adjusted Purchase Price per share shall, forthwith upon any such increase or decrease becoming effective, be readjusted to reflect the same, and provided, further, that upon the expiration of such rights or options, if any thereof shall not have been exercised, the adjusted Purchase Price per share shall forthwith be readjusted and thereafter be the price which it would have been had an adjustment been made on the basis that the only shares of Common Stock so issued or sold were those issued or sold upon the exercise of such rights or options and that they were issued or sold for the consideration actually received by the Company upon such exercise, plus the consideration, if any, actually received by the Company for the granting of all such rights or options, whether or not exercised.
7.4. Other Securities. If any event occurs as to which the provisions of this Warrant are strictly applicable and the application thereof would not fairly protect the rights of the Holders in accordance with the essential intent and principles of such provisions, then the Company shall make such adjustments in the application of such provisions, in accordance with such essential intent and principles, as the Board of Directors, in good faith, determines to be reasonably necessary to protect such rights as aforesaid. In case at any time or from time to time the Company shall take any action in respect of its Common Stock, other than any action described in Sections 5, 6 and 7, then, unless such action will not have a materially adverse effect upon the rights of the Holders, the number of shares of Common Stock or other stock for which this Warrant is exercisable and the Purchase Price per share shall be adjusted in such manner as the Board of Directors, in good faith, determines to be equitable in the circumstances. In furtherance and not in limitation of the foregoing, if any event occurs of the type contemplated by Section 7 but not expressly provided for by such Section (including, without limitation, the granting of stock appreciation rights, phantom stock rights or other rights or arrangements with equity features), then the Company's Board of Directors shall make an appropriate adjustment in the Purchase Price per share and the number of shares of Common Stock or Other Securities issuable upon the exercise of a Warrant so as to protect the rights of the Holders of such Warrants. No adjustment made pursuant to this Section 7 shall increase the Purchase Price per share or decrease the number of shares of Common Stock or Other Securities issuable upon exercise of the Warrants.
8. Further Assurances. The Company will take all such action as may be necessary or appropriate in order that the Company may validly and legally issue fully paid and non-assessable shares of stock upon the exercise of all Warrants from time to time outstanding.
9. Accountants' Certificate as to Adjustments. In each case of any adjustment or readjustment in the shares of Common Stock (or Other Securities) issuable upon the exercise of the Warrants, the Company at its expense will promptly cause the Company's regularly retained auditor to compute such adjustment or readjustment in accordance with the terms of the Warrants and prepare a certificate setting forth such adjustment or readjustment and showing in detail the facts upon which such adjustment or readjustment is based, and the number of shares of Common Stock outstanding or deemed to be outstanding. The Company will forthwith mail a copy of each such certificate to each Holder.
10. Notices of Record Date, etc. In the event of
(a) any taking by the Company of a record of its stockholders for the purpose of determining the stockholders thereof who are entitled to receive any dividend or other distribution, or any right to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities or property, or to receive any other right, or for the purpose of determining stockholders who are entitled to vote in connection with any proposed capital reorganization of the Company, any reclassification or recapitalization of the capital stock of the Company or any transfer of all or substantially all the assets of the Company to or consolidation or merger of the Company with or into any other person, or
(b) any voluntary or involuntary dissolution, liquidation or winding-up of the Company, or
(c) any proposed issue or grant by the Company of any Common Stock, Convertible Securities or any other securities, or any right or option to subscribe for, purchase or otherwise acquire any shares of stock of any class or any other securities (other than the issue of Common Stock on the exercise of the Warrants),
then and in each such event the Company will mail or cause to be mailed to each Holder of a Warrant a notice specifying (i) the date on which any such record is to be taken for the purpose of such dividend, distribution or right, and stating the amount and character of such dividend, distribution or right, (ii) the date on which any such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up is to take place, and the time, if any, as of which the Holders of record of Underlying Securities shall be entitled to exchange their shares of Underlying Securities for securities or other property deliverable upon such reorganization, reclassification, recapitalization, transfer, consolidation, merger, dissolution, liquidation or winding-up, and (iii) the amount and character of any stock or other securities, or rights or options with respect thereto, proposed to be issued or granted, the date of such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant and the persons or class of persons to whom such proposed issue or grant is to be offered or made. Such notice shall be mailed at least 20 days prior to the date therein specified.
11. Reservation of Stock, etc., Issuable on Exercise of Warrants. The Company will at all times reserve and keep available, solely for issuance and delivery upon the exercise of the Warrants, all shares of Common Stock (or Other Securities) from time to time issuable upon the exercise of the Warrants.
12. Listing on Securities Exchanges. Listing on Securities Exchanges; Registration; Issuance of Certain Securities.
12.1. In furtherance and not in limitation of any other provision of this Warrant, if the Company at any time shall list any Common Stock on any national securities exchange or Nasdaq, the Company will, at its expense, simultaneously list on such exchange or Nasdaq, upon official notice of issuance upon the exercise of the Warrants, and maintain such listing of all shares of Common Stock from time to time issuable upon the exercise of the Warrants; and the Company will so list on any national securities exchange or Nasdaq, will so register and will maintain such listing of, any Other Securities if and at the time that any securities of like class or similar type shall be listed on such national securities exchange or Nasdaq by the Company.
12.2. The Company shall not issue any (a) Convertible Securities or similar securities that contain a provision that provides for any change or determination of the applicable conversion price, conversion rate, or exercise price (or a similar provision which might have a similar effect) based on the Market Price or any other determination of the market price or value of the Company's securities or any other market based or contingent standard, or (b) any preferred stock, debt instruments or similar securities or investment instruments providing for (i) preferences or other payments substantially in excess of the original investment by purchasers thereof or (ii) dividends, interest or similar payments other than dividends, interest or similar payments computed on an annual basis and not in excess, directly or indirectly, of the lesser of a rate equal to (A) twice the interest rate on 10 year US Treasury Notes and (B) 20%.
13. Exchange of Warrants. Subject to the provisions of Section 2 hereof, upon surrender for exchange of any Warrant, properly endorsed, to the Company, as soon as practicable (and in any event within three business days) the Company at its own expense will issue and deliver to or upon the order of the Holder thereof a new Warrant or Warrants of like tenor, in the name of such Holder or as such Holder (upon payment by such Holder of any applicable transfer taxes) may direct, calling in the aggregate on the face or faces thereof for the number of shares of Common Stock called for on the face or faces of the Warrant or Warrants so surrendered.
14. Replacement of Warrants. Upon receipt of evidence reasonably satisfactory to the Company of the loss, theft, destruction or mutilation of any Warrant and, in the case of any such loss, theft or destruction, upon delivery of an indemnity agreement reasonably satisfactory in form and amount to the Company or, in the case of any such mutilation, upon surrender and cancellation of such Warrant, the Company at its expense will execute and deliver, in lieu thereof, a new Warrant of like tenor.
15. Warrant Agent. The Company may, by written notice to each Holder of a Warrant, appoint an agent having an office in New York, New York, for the purpose of issuing Common Stock (or Other Securities) upon the exercise of the Warrants pursuant to Section 3, exchanging Warrants pursuant to Section 13, and replacing Warrants pursuant to Section 14, or any of the foregoing, and thereafter any such issuance, exchange or replacement, as the case may be, shall be made at such office by such agent.
16. Remedies. The Company stipulates that the remedies at law of the Holder of this Warrant in the event of any default or threatened default by the Company in the performance of or compliance with any of the terms of this Warrant are not and will not be adequate, and that such terms may be specifically enforced by a decree for the specific performance of any agreement contained herein or by an injunction against a violation of any of the terms hereof or otherwise.
17. Negotiability, etc. Subject to Section 2 above, this Warrant is issued upon the following terms, to all of which each Holder or owner hereof by the taking hereof consents and agrees:
(a) subject to the provisions hereof, title to this Warrant may be transferred by endorsement (by the Holder hereof executing the form of assignment at the end hereof) and delivery in the same manner as in the case of a negotiable instrument transferable by endorsement and delivery;
(b) subject to the foregoing, any person in possession of this Warrant properly endorsed is authorized to represent himself as absolute owner hereof and is empowered to transfer absolute title hereto by endorsement and delivery hereof to a bona fide purchaser hereof for value; each prior taker or owner waives and renounces all of his equities or rights in this Warrant in favor of each such bona fide purchaser and each such bona fide purchaser shall acquire absolute title hereto and to all rights represented hereby; and
(c) until this Warrant is transferred on the books of the Company, the Company may treat the registered Holder hereof as the absolute owner hereof for all purposes, notwithstanding any notice to the contrary.
18. Notices, etc. All notices and other communications from the Company to the Holder of this Warrant shall be mailed by first class registered or certified mail, postage prepaid, at such address as may have been furnished to the Company in writing by such Holder, or, until an address is so furnished, to and at the address of the last Holder of this Warrant who has so furnished an address to the Company.
19. Miscellaneous. This Warrant and any term hereof may be changed, waived, discharged or terminated only by an instrument in writing signed by the party against which enforcement of such change, waiver, discharge or termination is sought. This Warrant is being delivered in the State of New York and shall be construed and enforced in accordance with and governed by the laws of such State. The headings in this Warrant are for purposes of reference only, and shall not limit or otherwise affect any of the terms hereof.
20. Assignability. Subject to Section 2 hereof, this Warrant is fully assignable at any time.
Dated: ____________, 2004
GRAPHON CORPORATION
By:________________________________
Name:
Title:
Attest:___________________________
FORM OF SUBSCRIPTION
(To be signed only upon exercise of Warrant)
To: GRAPHON CORPORATION
The undersigned, the Holder of the within Warrant, hereby irrevocably
elects to exercise the purchase right represented by such Warrant for, and to
purchase thereunder, shares of Common Stock of GraphOn Corporation, and herewith
makes payment therefor:
(i) of $ * or
(ii) by surrender of the number of Warrants included in the within
Warrant required for full exercise pursuant to Section 3.3 of the Warrant, and
requests that the certificates for such shares be issued in the name of, and
delivered to, ___________________, whose address is
-----------------------.
Dated:
* Insert here the number of shares called for on the face of the Warrant (or, in the case of a partial exercise, the portion thereof as to which the Warrant is being exercised), in either case without making any adjustment for additional Common Stock or any other stock or other securities or property or cash which, pursuant to the adjustment provisions of the Warrant, may be deliverable upon exercise.
FORM OF ASSIGNMENT
(To be signed only upon transfer of Warrant)
For value received, the undersigned hereby sells, assigns and transfers unto _________________________ the right represented by the within Warrant to purchase _________ of Common Stock of GraphOn Corporation to which the within Warrant relates, and appoints ______________________________ Attorney to transfer such right on the books of GraphOn Corporation with full power of substitution in the premises. The Warrant being transferred hereby is one of the Warrants issued by GraphOn Corporation as of January __, 2004 to purchase an aggregate of 2,500,000 shares of Common Stock.
Dated:_______________
(Signature must conform in all respects to name of Holder as specified on the face of the Warrant)
(Address)
Signature guaranteed by a Bank or Trust Company having its principal office in New York City or by a Member Firm of the New York or American Stock Exchange
INVESTOR RIGHTS AGREEMENT
This INVESTOR RIGHTS AGREEMENT (this "Agreement") is made as of January 29, 2004 by and among GraphOn Corporation, a Delaware corporation (the "Company") and (ii) the investors listed on Exhibit A hereto (collectively the "Investors")
WHEREAS, the Company desires to sell to the Investors, and the Investors desire to purchase an aggregate of 5,000,000 shares of Common Stock of the Company (the "Shares") and 5-year warrants, exercisable to purchase an aggregate of 2,500,000 shares of Common Stock at $0.33 per share (the "Purchased Warrants"), upon the terms and conditions set forth in that certain Unit Subscription Agreement, dated of even date herewith, between the Company and the Investors (the "Unit Subscription Agreement"); and
WHEREAS, the terms of the Unit Subscription Agreement provide that it shall be a condition precedent to the closing of the transactions thereunder for the Company and the Investors to execute and deliver this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants contained herein, the parties hereto hereby agree as follows:
1. Definitions. The following terms shall have the meanings provided below:
"Additional Shares" shall mean any additional shares of Common Stock which may be issued or become issuable from time to time upon the exercise of a Purchased Warrant or a Griffin Warrant, or a distribution with respect to, or in exchange for, or in replacement of a Purchased Warrant or a Griffin Warrant, as a result of anti-dilution provisions of a Purchased Warrant or a Griffin Warrant or otherwise.
"Board of Directors" shall mean the board of directors of the Company.
"Closing" shall have the meaning ascribed to such term in the Unit Subscription Agreement.
"Common Stock" shall mean the common stock, $.0001 par value per share, of the Company.
"Convertible Securities" means (i) options to purchase or rights to subscribe for Common Stock, (ii) securities by their terms convertible into or exchangeable for Common Stock or (iii) options to purchase or rights to subscribe for such convertible or exchangeable securities.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as amended, and all of the rules and regulations promulgated thereunder.
"Excluded Stock" shall mean (i) all shares of Common Stock issued or issuable to employees, directors or consultants pursuant to any equity compensation plan that is in effect on the date of this Agreement, (ii) all shares of Common Stock issued or issuable to employees or directors pursuant to any equity compensation approved by the stockholders of the Company after the date of this Agreement, (iii) all shares of Common Stock issued or issuable to employees, directors or consultants in the form of a hiring bonus, (iv) the Griffin Warrants, (iv) all shares of Common Stock issued or issuable to bona fide leasing companies, strategic partners, or major lenders, (v) all shares of Common Stock issued or issuable as the purchase price in a bona fide acquisition or merger (including reasonable fees paid in connection therewith), or (vi) all shares of Common Stock issued upon conversion or exercise of the Purchased Warrants or other Convertible Securities outstanding on the date hereof.
"Griffin Warrants" shall mean warrants issued to Griffin Securities Inc. ("Griffin") in substantially the same form as the Purchased Warrants (A) to purchase an aggregate of 500,000 shares of Common Stock at $.23 per share and (B) 250,000 shares of Common Stock at $.33 per share
"Holder" shall mean the Investors or any transferee of the Purchased Warrants or Registrable Shares.
"Majority Holders" shall mean, at the relevant time of reference thereto, those Holders holding more than fifty percent (50%) of the Registrable Shares held by all of the Holders.
"Other Securities" refers to any stock (other than Common Stock) and other securities of the Company or any other person (corporate or otherwise) which the Holders of the Purchased Warrants or the Griffin Warrants at any time shall be entitled to receive, or shall have received, upon the exercise of the Purchased Warrants or the Griffin Warrants, in lieu of or in addition to Common Stock, or which at any time shall be issuable or shall have been issued in exchange for or in replacement of Common Stock or Other Securities pursuant to the terms of the Purchased Warrants or the Griffin Warrants or otherwise.
"Registrable Shares" shall mean any Shares or any shares of Common Stock or Other Securities issued or issuable from time to time upon the exercise of a Purchased Warrant or a Griffin Warrant, or a distribution with respect to, in exchange for, or in replacement of a Purchased Warrant or a Griffin Warrant, including without limitation Additional Shares.
"Rule 144" shall mean Rule 144 promulgated under the Securities Act and any successor or substitute rule, law or provision.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended, and all of the rules and regulations promulgated thereunder.
2. Effectiveness. This Agreement shall become effective upon the Closing.
3. Mandatory Registration. (a) No later than thirty (30) days after the Closing, the Company will prepare and file with the SEC a registration statement on Form S-3 (or, if Form S-3 is not then available to the Company, on such form of registration statement that is then available to effect a registration of all Registrable Shares) for the purpose of registering under the Securities Act all of the Registrable Shares for resale by, and for the account of, the Investors as selling stockholders thereunder (the "Registration Statement"). The Registration Statement shall permit the Investors to offer and sell, on a delayed or continuous basis pursuant to Rule 415 under the Securities Act, any or all of the Registrable Shares. Such Registration Statement also shall cover, to the extent allowable under the Securities Act and the rules promulgated thereunder (including Rule 416), such indeterminate number of additional shares of Common Stock resulting from stock splits, stock dividends or similar transactions with respect to the Registrable Shares.
(b) The Company agrees to use commercially reasonable efforts to cause the Registration Statement to become effective as soon as practicable after filing, but in no event later than one hundred twenty (120) days after filing.
(c) The Company shall be required to keep the Registration Statement, as amended, effective until such date that is the earlier of (i) two years after the Closing, (ii) the date when all of the Registrable Shares registered thereunder shall have been sold, or (iii) such time as all the Registrable Shares held by the Investors can be sold pursuant to Rule 144(k) and without compliance with the registration requirements of the Securities Act (such date is referred to herein as the "Mandatory Registration Termination Date"). Thereafter, the Company shall be entitled to withdraw the Registration Statement and the Investors shall have no further right to offer or sell any of the Registrable Shares pursuant to the Registration Statement (or any prospectus relating thereto).
(d) The Company shall not grant any registration rights that are pari passu with or senior to the registration rights of the Investors under this Agreement if such registration rights would adversely affect the Investors' ability to sell Registrable Shares pursuant to the Registration Statement. The Company represents that no stockholders other than the Investors and Griffin have the right to sell any Common Stock or other securities of the Company pursuant to the Registration Statement.
4. Obligations of the Company. In connection with the Company's obligation under Section 3 hereof to file a Registration Statement with the SEC and to use its reasonable efforts to cause the Registration Statement to become effective as soon as practicable after filing, the Company shall, as expeditiously and as reasonably possible, subject to Section 9 hereof:
(a) Prepare and file with the SEC such amendments and supplements to the Registration Statement and the prospectus used in connection therewith as may be necessary to keep the Registration Statement effective until the Mandatory Registration Termination Date;
(b) Furnish to the selling Investors such reasonable number of copies of the Registration Statement, prospectus and preliminary prospectus, in conformity with the requirements of the Securities Act, and such other documents (including, without limitation, prospectus amendments and supplements as are prepared by the Company in accordance with Section 4(a) above) as the selling Investors may reasonably request, in order to facilitate the public or other disposition of such selling Investors' Registrable Shares;
(c) Use reasonable efforts to register and qualify the Registrable Shares covered by the Registration Statement under such other securities or Blue Sky laws of all states requiring such securities or Blue Sky registration or qualification, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions; and
(d) Use reasonable efforts to cause all such Registrable Shares registered hereunder to be listed on each securities exchange (including without limitation any Nasdaq market) on which securities of the same class issued by the Company are then listed.
5. Furnish Information. (a) It shall be a condition precedent to the obligations of the Company to take any action pursuant to this Agreement that the selling Investors shall furnish to the Company such information regarding them and the securities held by them as the Company shall reasonably request and as shall be required in order to effect any registration by the Company pursuant to this Agreement.
(b) The Registration Statement will provide for a plan of distribution with respect to the Registrable Shares substantially as follows: The Registrable Shares may be sold from time to time by the Investors, or by pledgees, donees, transferees or other successors in interest. Such sales may be made on one or more exchanges or in the over-the-counter market, or otherwise at prices and at terms then prevailing or at prices related to the then-current market price, or in negotiated transactions. The Registrable Shares may be sold by one or more of the following: (a) a block trade in which the broker or dealer so engaged will attempt to sell the shares as agent but may position and resell a portion of the block as principal to facilitate the transaction; (b) purchases by a broker or dealer as principal and resale by such broker or dealer for its account pursuant to the resale registration statement; (c) an exchange distribution in accordance with the rules of such exchange; (d) ordinary brokerage transactions and transactions in which the broker solicits purchasers; and (e) transactions between sellers and purchasers without a broker/dealer. In addition, any securities covered by the Registration Statement which qualify for sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to the Registration Statement. From time to time the selling Investors may engage in short sales, short sales versus the box, puts and calls and other transactions in securities of the issuer or derivatives thereof, and may sell and deliver the shares in connection therewith. In effecting sales, brokers or dealers engaged by the selling Investors may arrange for other brokers or dealers to participate. Brokers or dealers will receive commissions or discounts from selling Investors in amounts to be negotiated immediately prior to the sale.
6. Expenses of Registration. All expenses incurred in connection with the registration of the Registrable Shares pursuant to this Agreement (excluding underwriting, brokerage and other selling commissions and discounts), including without limitation all registration and qualification and filing fees, printing expenses, fees and disbursements of counsel for the Company, and the reasonable fees and disbursements of one counsel for the selling Investors selected by the selling Investors, shall be borne by the Company.
7. Indemnification.
(a) To the extent permitted by law, the Company will indemnify and hold harmless each selling Investor (including the partners or officers, directors and stockholders of such Investor), and each person, if any, who controls such selling Investor within the meaning of the Securities Act, against any losses, claims, damages or liabilities, joint or several, to which they may become subject under the Securities Act, the Exchange Act, and other federal or state securities laws, or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) (i) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statement, in any preliminary prospectus or final prospectus relating thereto or in any amendments or supplements to the Registration Statement or any such preliminary prospectus or final prospectus, (ii) arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading or (iii) arise out of any violation or alleged violation by the Company of the Securities Act, the Exchange Act, any other federal or state securities law or any rule or regulation promulgated under the Securities Act, the Exchange Act or any other federal or state securities law; and will reimburse such selling Investor, or such officer, director or controlling person for any legal or other expenses reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 7(a) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld or delayed), nor shall the Company be liable in any such case for any such loss, damage, liability or action to the extent that it arises out of or is based upon an untrue statement or alleged untrue statement or omission made in connection with the Registration Statement, any preliminary prospectus or final prospectus relating thereto or any amendments or supplements to the Registration Statement or any such preliminary prospectus or final prospectus, in reliance upon and in conformity with written information furnished expressly for use in connection with the Registration Statement or any such preliminary prospectus or final prospectus by the selling Investors, any broker/dealer acting on their behalf or controlling person with respect to them.
(b) To the extent permitted by law, each selling Investor will severally and not jointly indemnify and hold harmless the Company, each of its directors, each of its officers who have signed the Registration Statement, each person, if any, who controls the Company within the meaning of the Securities Act, or any selling Investors, and all other selling Investors against any losses, claims, damages or liabilities to which the Company or any such director, officer, controlling person or such other selling Investor may become subject to, under the Securities Act or otherwise, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any untrue or alleged untrue statement of any material fact contained in the Registration Statement or any preliminary prospectus or final prospectus, relating thereto or in any amendments or supplements to the Registration Statement or any such preliminary prospectus or final prospectus, or arise out of or are based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent and only to the extent that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, in any preliminary prospectus or final prospectus relating thereto or in any amendments or supplements to the Registration Statement or any such preliminary prospectus or final prospectus, in reliance upon and in conformity with written information furnished by the selling Investor expressly for use in connection with the Registration Statement, or any preliminary prospectus or final prospectus; and such selling Investor will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, or other selling Investor in connection with investigating or defending any such loss, claim, damage, liability or action, provided, however, that the liability of each selling Investor hereunder (when aggregated with amounts contributed, if any, pursuant to Section 7(d)) shall be limited to the difference (the "Difference") between the amount received by such Investor from the sale of the Registrable Securities pursuant to the Registration Statement and the amount paid by such Investor to the Company for such Registrable Securities pursuant to the Unit Subscription Agreement, and provided further, however, that the indemnity agreement contained in this Section 7(b) shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of those selling Investor(s) against which the request for indemnity is being made (which consent shall not be unreasonably withheld or delayed).
(c) Promptly after receipt by an indemnified party under this
Section 7 of notice of the commencement of any action, such indemnified party
will, if a claim in respect thereof is to be made against any indemnifying party
under this Section 7, notify the indemnifying party in writing of the
commencement thereof and the indemnifying party shall have the right to
participate in and, to the extent the indemnifying party desires, jointly with
any other indemnifying party similarly noticed, to assume at its expense the
defense thereof with counsel mutually satisfactory to the indemnifying parties
with the consent of the indemnified party which consent will not be unreasonably
withheld, conditioned or delayed. In the event that the indemnifying party
assumes any such defense, the indemnified party may participate in such defense
with its own counsel and at its own expense, provided, however, that the counsel
for the indemnifying party shall act as lead counsel in all matters pertaining
to such defense or settlement of such claim and the indemnifying party shall
only pay for such indemnified party's reasonable legal fees and expenses for the
period prior to the date of its participation in such defense, and provided
further, however, that the indemnified party (together with all indemnified
parties which may be represented without conflict by one counsel) shall have the
right to retain one separate counsel, with the fees and expenses to be paid by
the indemnifying party, if the representation of the indemnified party by the
counsel retained by the indemnifying party would be inappropriate due to actual
or potential differing interests between the indemnified party and any other
party represented by such counsel in such proceeding. Notwithstanding the
foregoing, the indemnifying party shall not be obligated to pay the fees of more
than one separate counsel. The failure to notify an indemnifying party of the
commencement of any such action will not relieve such indemnifying party of any
liability to the indemnified party under this Section 7 (except to the extent
that such failure materially and adversely affects the indemnifying party's
ability to defend such action), nor shall the omission so to notify an
indemnifying party relieve such indemnifying party of any liability which it may
have to any indemnified party otherwise other than under this Section 7. No
indemnifying party shall, without the consent of the indemnified party, consent
to entry of any judgment or enter into any settlement which does not include as
an unconditional term thereof the giving by the claimant or plaintiff to such
indemnified party of a release from all liability in respect to such claim or
litigation and otherwise in form and substance reasonably satisfactory to the
indemnified party.
(d) If the indemnification provided in this Section 7 is held by a
court of competent jurisdiction to be unavailable to an indemnified party with
respect to any loss, liability, claim, damage or expense referred to herein,
then the indemnifying party, in lieu of indemnifying such indemnified party
hereunder, shall contribute to the amount paid or payable by such indemnified
party as a result of such loss, liability, claim, damage or expense in such
proportion as is appropriate to reflect the relative fault of the indemnifying
party on the one hand and of the indemnified party on the other in connection
with the statements or omissions that shall have resulted in such loss,
liability, claim, damage or expense, as well as any other relevant equitable
considerations; provided that in no event shall any contribution by an Investor
under this Section 7(d), when aggregated with amounts paid, if any, pursuant to
Section 7(b), exceed the Difference. The relative fault of the indemnifying
party and of the indemnified party shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission to state a material fact relates to information supplied by the
indemnifying party or by the indemnified party and the parties' relative intent,
knowledge, access to information, and opportunity to correct or prevent such
statement or omission.
(e) The obligations of the Company and Investors under this Section 7
shall survive the completion of any offering of Registrable Shares in a
Registration Statement under Section 3, and otherwise.
8. Reports Under the Exchange Act. With a view to making available to the Investors the benefits of Rule 144 and any other rule or regulation of the SEC that may at any time permit the Investors to sell the Registrable Shares to the public without registration, the Company agrees to use reasonable efforts: (i) to make and keep public information available, as those terms are understood and defined in the General Instructions to Form S-3, or any successor or substitute form, and in Rule 144, (ii) to file with the SEC in a timely manner all reports and other documents required to be filed by an issuer of securities registered under the Securities Act or the Exchange Act and (iii) undertake any additional actions reasonably necessary to maintain the availability of the Registration Statement or the use of Rule 144.
9. Selling Procedures. Any sale of Registrable Shares pursuant to the registration statement filed in accordance with Section 3 hereof shall be subject to the following conditions and procedures:
(a) Updating the Prospectus.
(i) If the Company informs the selling Investor that the Registration Statement or final prospectus then on file with the SEC is not current or otherwise does not comply with the Securities Act, the Company shall use its best efforts to provide to the selling Investor a current prospectus that complies with the Securities Act as soon as practicable, but in no event later than three (3) business days after delivery of such notice.
(ii) If the Company requires more than three (3) business days to update the prospectus under Section 9(a)(i) above, the Company shall have the right to delay the preparation of a current prospectus that complies with the Securities Act without explanation to such Investor, subject to the limitations set forth in Section 9(b) below, for a period of not more than forty-five (45) days (or two periods which total not more than ninety (90) days in the aggregate) during any twelve-month period.
(b) General. Notwithstanding the foregoing, upon receipt of any
notice from the Company of (i) any request by the SEC or any other federal or
state governmental authority during the period of effectiveness of the
Registration Statement for amendments or supplements to the Registration
Statement or related prospectus or for additional information relating to the
Registration Statement, (ii) the issuance by the SEC or any other federal or
state governmental authority of any stop order suspending the effectiveness
of the Registration Statement or the initiation of any proceedings for that
purpose, (iii) the receipt by the Company of any notification with respect to
the suspension of the qualification or exemption from qualification of any of
the Registrable Shares for sale in any jurisdiction or the initiation or
threatening of any proceeding for such purpose, (iv) the happening of any
event which makes any statement made in the Registration Statement or related
prospectus or any document incorporated or deemed to be incorporated therein
by reference untrue in any material respect or which requires the making of
any changes in the Registration Statement or prospectus so that, in the case
of the Registration Statement, it will not contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein
or necessary to make the statements therein not misleading, and that in the
case of the prospectus, it will not contain an untrue statement of a material
fact or omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading or (v) that, in the judgment of the Company's Board of
Directors, it is advisable to suspend use of the prospectus for a discrete
period of time due to pending corporate developments, public filings with the
Commission or that there exists material nonpublic information about the
Company that the Board of Directors, acting in good faith, determines not to
disclose in a registration statement, then the Company may suspend use of the
prospectus (each a "Suspension"), in which case the Company shall promptly so
notify each Investor and each Investor shall not dispose of Registrable
Shares covered by the Registration Statement or prospectus until copies of a
supplemented or amended prospectus are distributed to the Investors or until
the Investors are advised in writing by the Company that the use of the
applicable prospectus may be resumed; provided, however, that,
notwithstanding the foregoing, the Company may suspend use of the prospectus
pursuant to Sections 9(a)(ii), 9(b)(iv) and 9(b)(v), and an Investor may be
prohibited from selling or otherwise disposing of the Registrable Shares
covered by the Registration Statement or prospectus, on not more than two
occasions in total during any twelve-month period and for no more than ninety
(90) days in the aggregate during any such twelve-month period. The Company
shall use its best efforts to ensure the use of the prospectus may be resumed
as soon as practicable. The Company shall use its best efforts to obtain the
withdrawal of any order suspending the effectiveness of the Registration
Statement, or the lifting of any suspension of the qualification (or
exemption from qualification) of any of the securities for sale in any
jurisdiction, at the earliest practicable moment. The Company shall, upon the
occurrence of any event contemplated by clause (iv), prepare a supplement or
post-effective amendment to the Registration Statement or a supplement to the
related prospectus or any document incorporated therein by reference or file
any other required document so that, as thereafter delivered to the
purchasers of the Registrable Shares being sold thereunder, such prospectus
will not contain an untrue statement of a material fact or omit to state a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading.
10. Pre-emptive Rights. In the event that at any time after the date
hereof the Company proposes to issue additional shares of Common Stock or
Convertible Securities, other than Excluded Stock, the Company shall send a
notice (an "Additional Share Notice") to the Holder setting forth the terms of
such proposed issuance. The Holder shall be entitled to purchase the proposed
number of shares of Common Stock or Convertible Securities, proposed to be
issued in proportion to the Holder's Proportionate Percentage (as hereafter
defined) on substantially the same terms set forth in the Additional Share
Notice by (a) notice to the Company (the "Purchase Notice") within 10 days of
the date of the Additional Share Notice and (b) payment of the price for such
shares of Common Stock or Convertible Securities, by wire transfer of
immediately available funds or such other method of payment as the Company may
approve, within 10 days after delivery to the Company of the Purchase Notice.
The "Proportionate Percentage" of the Holder means the percentage obtained by
dividing (a) the aggregate number shares of Common Stock held by the Holder by
(b) the aggregate number of shares of Common Stock of the Company then issued
and outstanding.
11. Issuance of Certain Securities. The Company shall not issue any (a) Convertible Securities or similar securities that contain a provision that provides for any change or determination of the applicable conversion price, conversion rate, or exercise price (or a similar provision which might have a similar effect) based on any determination of the Market Price or other value of the Company's securities or any other market based or contingent standard, (b) any preferred stock, debt instruments or similar securities or investment instruments providing for (i) preferences or other payments substantially in excess of the original investment by purchasers thereof or (ii) dividends, interest or similar payments other than dividends, interest or similar payments computed on an annual basis and not in excess, directly or indirectly, of the lesser of a rate equal to (A) twice the interest rate on 10 year US Treasury Notes and (B) 20%.
12. Assignment. This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors and assigns. In addition, and whether or not any express assignment shall have been made, the provisions of this Agreement which are for the benefit of the Investors shall also be for the benefit of and enforceable by any subsequent holder of any Registrable Securities who has executed a copy of this Agreement or otherwise indicated its agreement to be bound hereby. Without limitation on the Investors' rights to transfer Registrable Securities, the Company acknowledges that any Investor may, at any time, transfer any of the Registrable Securities which they may own, beneficially or of record, to (a) their affiliates, or (b) their partner(s), investor(s), security holder(s) or beneficial holder(s) pursuant to their organization documents or other agreements, and that, upon the consummation of any such transfer, the provisions of this Agreement shall be binding upon and inure to the benefit of each transferee of such Registrable Securities.
13. Entire Agreement. This Agreement (including the exhibits hereto), the Unit Subscription Agreement and the Purchased Warrants constitute and contain the entire agreement and understanding of the parties with respect to the subject matter hereof, and such agreements also supersede any and all prior negotiations, correspondence, agreements or understandings with respect to the subject matter hereof.
14. Miscellaneous.
(a) Amendments. This Agreement may not be amended, modified or terminated, and no rights or provisions may be waived, except with the written consent of the Majority Holders and the Company.
(b) Governing Law. This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of New York. Each party hereby irrevocably consents and submits to the jurisdiction of any New York State or United States Federal Court sitting in the State of New York, County of New York, over any action or proceeding arising out of or relating to this Agreement and irrevocably consents to the service of any and all process in any such action or proceeding by registered mail addressed to such party at its address specified herein (or as otherwise noticed to the other party). Each party further waives any objection to venue in New York and any objection to an action or proceeding in such state and county on the basis of forum non conveniens. Each party also waives any right to trial by jury.
(c) Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties hereto and their respective heirs, personal representatives, successors or assigns. This Agreement shall also be binding upon and inure to the benefit of any transferee of any of the Registrable Shares. Notwithstanding anything in this Agreement to the contrary, if at any time any Investor shall cease to own any Registrable Shares, all of such Investor's rights under this Agreement shall immediately terminate.
(d) Notices
(i) Any notices, reports or other correspondence (hereinafter collectively referred to as "correspondence") required or permitted to be given hereunder shall be sent by mail, courier (overnight or same day) or fax or delivered by hand to the party to whom such correspondence is required or permitted to be given hereunder (except that notices of Suspensions or stop orders must be made by fax). The date of giving any notice shall be the date of its actual receipt.
(ii) All correspondence to the Company shall be addressed as follows:
GraphOn Corporation
105 Cochrane Circle, Suite L
Morgan Hill, California 95037
Attention: Chief Executive Officer
Fax number: (408) 776-8448
with a copy to:
Sonnenschein Nath & Rosenthal LLP 1221 Avenue of the Americas New York, New York 10020-1089 Attention: Ira I. Roxland Fax number: (212) 768-6800
(iii) All correspondence to any Investor shall be sent to the most recent address furnished by the Investor to the Company. (iv) Any Investor may change the address to which correspondence to it is to be addressed by notification as provided for herein.
(e) Injunctive Relief. The parties acknowledge and agree that in the event of any breach of this Agreement, remedies at law may be inadequate, and each of the parties hereto shall be entitled to seek specific performance of the obligations of the other parties hereto and such appropriate injunctive relief as may be granted by a court of competent jurisdiction.
(f) Attorney's Fees. If any action at law or in equity is necessary to enforce or interpret any of the terms of this Agreement, the prevailing party shall be entitled to reasonable attorneys' fees, costs and necessary disbursements in addition to any other relief to which such party may be entitled.
(g) Severability. If any provision of this Agreement is held by a court of competent jurisdiction to be unenforceable under applicable law, such provision shall be replaced with a provision that accomplishes, to the extent possible, the original business purpose of such provision in a valid and enforceable manner, and the balance of the Agreement shall be interpreted as if such provision were so modified and shall be enforceable in accordance with its terms.
(h) Aggregation of Shares. Registrable Shares held or acquired by affiliated entities or persons shall be aggregated together for the purpose of determining the availability of any rights under this Agreement.
(i) Counterparts. This Agreement may be executed in a number of counterparts, any of which together shall for all purposes constitute one Agreement, binding on all the parties hereto notwithstanding that all such parties have not signed the same counterpart.
[Remainder of Page Intentionally Left Blank]
IN WITNESS WHEREOF, the parties hereto have executed this Investor Rights Agreement as of the date and year first above written.
GRAPHON CORPORATION
By: /s/ ROBERT P. DILWORTH ----------------------------------- Name: Robert P. Dilworth Title: Chief Executive Officer |
INVESTOR
[ ]
By: /s/ ---------------------------------- Name: Title: |
LEASE AGREEMENT
THIS LEASE AGREEMENT ("Lease") made as of the _____ day of _______, 2003,
between Central United Life Insurance Company, a Texas corporation with its
principal place of business at Wortham Tower, 2727 Allen Parkway, Houston, Texas
sometimes hereinafter referred to as "Lessor" and GraphOn Corporation, a
Delaware corporation of 105 Cochrane Circle, Morgan Hill, CA 95037 sometimes
referred to herein-after as "Lessee."
W I T N E S S E T H:
WHEREAS, Lessor currently owns the entire five-story office building
containing 65,000 square feet located at 6 Loudon Road, Concord, New Hampshire,
on a parcel of land consisting of approximately 3.96 acres shown as Lot #2 on a
certain plan entitled "Survey for Earl Flanders, Location Concord, New
Hampshire" dated October 6, 1975, prepared by Rayco Engineering recorded at
Merrimack County Registry of Deeds as Plan #4160 (the "Premises");
WHEREAS, Lessor and Lessee desire that a portion of the 2nd floor of the Office Building be leased to Lessee for its exclusive occupancy ("Lessee's Quarters"), and that portions of the Office Building shall be used in common by Lessee and other tenants ("Quarters Used in Common");
WHEREAS, portions of the Premises have been designed for the parking of motor vehicles ("Parking Facilities"); and
WHEREAS, the Lessee's Quarters, Quarters Used in Common and Parking Facilities are together hereinafter sometimes referred to as the "Leased Premises".
NOW THEREFORE, in consideration of the covenants and agreements contained herein, and other good and valuable consideration, receipt of which is hereby acknowledged, the parties hereby agree as follows:
1. Term The initial term of this Lease shall be for a period of one (1) year commencing on November 01, 2003 and ending October 31, 2004 payable on a month to month basis. Lessee shall give Lessor a one (1) month advance written notice of any changes in the lease within this term.
2. Leased Premises.
A. Lessee's Quarters. Lessor does hereby lease to Lessee for its
exclusive use the Lessee's Quarters which are designated by red
diagonal lines on the plan of the 2nd Floor Office Building (the "2nd
Floor Plan") attached hereto. The area so designated shall be
occupied exclusively by the Lessee.
B. Quarters Used in Common. Lessor grants to Lessee the right (i) to
use in common with Lessor and other tenants, the Quarters Used in
Common designated by green diagonal lines on the 2nd Floor Plan and
(ii) to use in common with other tenants, certain portions of the
Office Building necessary for access to Lessee's Quarters which shall
include, without limiting the generality of the foregoing, the common
hallway, stairways, stairwells, lobby, rest room facilities,
elevators and certain pipes, ducts, conduits and wires.
C. Parking Facilities. Lessee agrees that its use, and the use of the Parking Facilities by its employees, agents and invitees, shall be limited solely to the Parking Facility located directly south of the Office Building and in accordance with the markings and use restrictions generally applicable from time to time to the Parking Facility. Lessor shall permit Lessee to use the driveways and walkways for access to and from the Office Building.
D. Smoking Area. Lessee agrees that smoking is not permitted on the Premises except in certain areas or facilities designated by Lessor from time to time ("Smoking Area"). Lessee agrees that its use of the Premises, and the use by its employees, agents and invitees, for smoking shall be limited solely to the Smoking Area(s) designated from time to time.
3. Base Rent. Lessee shall pay to Lessor annual rent in the amount of
($60,027.00) the "Base Rent", which Base Rent is calculated at Seventeen Dollars
($17.00) per square foot for Three Thousand Five Hundred and Thirty One (3,531)
square feet (except for any fractional months at the beginning and end of each
term which shall be prorated). Lessee shall make payments in equal monthly
installments of Five Thousand Two Dollars and Twenty Five Cents ($5,002.25)in
advance on the first day of each month.
4. Utilities. Lessor shall pay all utility charges with respect to the Lessee's Quarters and Quarters Used in Common (except telephone charges) and shall at its expense provide heat, water, interior lighting, air conditioning and electricity for Lessee's Quarters in quantities reasonably appropriate for standard office occupancy.
5. Repairs, Cleaning and Other Services. Lessor shall at its own expense maintain in good repair and state of cleanliness the Office Building (including without limitation, the roof, exterior walls, foundation, doors and windows, and utility systems) the walkways, driveways, Parking Facilities and the Quarters Used in Common, including without limiting the generality of the foregoing, all plumbing and air conditioning, elevators, and standpipe fire prevention system. Lessor shall maintain the unattended elevator service and remove snow from the Parking Facilities, driveways and walkways.
6. Condition of Lessee's Quarters. Lessee shall at its own expense maintain the Lessee's Quarters in good repair and state of cleanliness. Lessee, accompanied by Lessor, may enter the Lessee's Quarters in advance of the term of this Lease for the purpose of inspection. Lessee may install in the Lessee's Quarters at its own expense fixtures, equipment, window coverings, furnishings and other effects for the purpose of decorating the interior of the Lessee's Quarters.
7. Right of Entry. The Lessor may enter Lessee's Quarters for the reasonable purposes, such as but not limited to, the making of repairs or renovations to, or the showing of the Lessee's Quarters to prospective tenants, at any reasonable time during normal business hours and upon 24 hours prior notice and in a manner that does not interfere with Lessee's use thereof.
8. Restrictions. Lessee agrees that it shall not permit any portion of the Lessee's Quarters to be used (i) so as to cause unreasonable noise or other nuisance; (ii) so as to consume unreasonable amounts of heat, electricity or water; or (iii) for the conduct of activities involved in the promotion, distribution or sale of alcohol, tobacco, gambling or pornographic materials or activities, (iv) for the performance of medical or related procedure for abortion or euthanasia; (v) for the use, storage, generation, transportation or disposal of hazardous waste; or (vi) for the conduct of any acts prohibited by law. Lessee shall not make or permit to be made any structural alteration, improvement or addition in or to the Lessee's Quarters unless approved in writing by the Lessor or sublease Lessee's Quarters or assign this Lease without Lessor's consent, which consent shall not be unreasonably withheld. Lessor's consent to any such assignment or sublease shall not be deemed a waiver with regard to the requirement for its consent to any future assignment or subleases.
9. Eminent Domain or Destruction. If the Leased Premises or any substantial portion thereof shall be taken by the exercise of the right of eminent domain or shall be destroyed or damaged by fire, water or other unavoidable casualty or by action of any public authority, or shall suffer any direct consequential damage for which Lessor and Lessee, or either of them, shall be entitled to compensation by reason of anything done in pursuance to any public or other authority during this Lease or any extension thereof, then this Lease shall terminate at the election of either party hereto which election may be made, whether or not Lessor's entire interest has been divested; and if neither party shall so elect, then in case of such taking, destruction or damage rendering the premises unfit for use and occupation, a just proportion of said rent according to the nature and extent of the injury shall be abated until the Leased Premises, or in the case of a partial taking that portion which may remain thereof, shall have been put by Lessor at its sole cost and expense in proper condition for use and occupation. Lessor reserves and excepts all rights to damages to the Leased Premises by reason of anything lawfully done in pursuance of any public or other authority; and by way of confirmation, Lessee grants to Lessor all Lessee's rights to such damages and covenants to execute and deliver such further instruments of assignment thereof as Lessor may from time to time request. Lessor or Lessee shall give the other party notice of its decision to terminate this Lease within ninety (90) days after any such occurrence giving rise to such party's right to so terminate. If the Lease is not terminated, Lessor shall promptly commence to restore the Leased Premises.
10. Waste. Lessee agrees that it will not suffer any waste on the Leased Premises and that it will peaceably quit and deliver to Lessor the Lessee's Quarters when required to do so under the terms of this Lease in as good order and condition, reasonable wear and tear and unavoidable casualties excepted, as the same were delivered to Lessee on the date hereof.
11. Default and Termination. If Lessee shall neglect or fail to make any rental payment within ten (10) days after its due date or if Lessee shall fail to cure (or to commence to cure) a default in the performance of any of the other of Lessee's covenants within thirty (30) days after date of notice of such default by Lessor, or if Lessee, having commenced to cure a default within the thirty (30) days period, shall fail to complete the curing of the default without unreasonable delay, Lessor lawfully may immediately or any time thereafter and without demand or notice or the necessity of compliance with any statute in any manner relating to summary process, enter the Lessee's Quarters and repossess the same and expel Lessee and those claiming through or under Lessee and remove their effects forcibly if necessary, without being deemed guilty of any manner of trespass and without prejudice to any rights or remedies Lessor may be entitled to in law or at equity. Upon such entry all rights of Lessee under this Lease shall terminate. Lessor shall have all rights described herein and this Lease shall also terminate if (i) the leasehold hereby created shall be taken on execution or by other process of law, (ii) any assignment shall be made of Lessee's property for the benefit of creditors, (iii) a receiver, guardian, conservator, trustee in bankruptcy or similar officer shall be appointed by a court of competent jurisdiction to take charge of all or part of Lessee's property, or (iv) Lessee commits any act of bankruptcy, or if a petition is filed by Lessee under any bankruptcy or insolvency law and the same shall not be dismissed within thirty (30) days from the date upon which it is filed. Lessee covenants that if the Lease is terminated, Lessee shall be liable to Lessor for payment of a sum equal to the amount of the rent and other payments called for hereunder for the remainder of the original term and any extensions thereof, less any amounts received by Lessor as a result of Lessor's lease of the Lessee's Quarters to a third party. Lessor shall make reasonable efforts to lease the Lessee's Quarters at rent equal to the prevailing local rate. In addition, Lessee shall pay Lessor's expenses, including, but not limited to, court costs and attorneys' fees, incurred in enforcing any obligation of this Lease with which Lessee has not complied.
12. Indemnification. Lessee shall indemnify and save Lessor harmless from any and all liability, loss, damage, expenses, causes of action, suits, claims or judgments arising from loss of life, injury to person or property resulting from or based upon the actual injury to person or property resulting from or based upon the actual or alleged use, operation, delivery to or transportation from any or all of the Leased Premises or their location or condition, except for any such liability arising from Lessor's acts of negligence; or from any loss or damage from Lessee's failure to perform its obligations under this Lease; and shall, at its own cost and expense, defend any and all suits which may be brought against Lessor, either alone or in conjunction with others, upon any such liability or claim or claims and shall satisfy, pay and discharge any and all judgments and fines that may be recovered against Lessor, and pay Lessor's expenses, including reasonable attorneys' fees, incurred in enforcing any obligation of this Lease which has not been complied with by Lessee. In alike manner, the lessor shall indemnify and hold harmless the Lessee from any and all liability and claims which are the lessor's responsibility and shall pay all expenses, including reasonable attorney's fees, to defend and or settle claims which are judged the responsibility of the Lessor.
13. Successors. The conditions, agreements, covenants and provisions contained herein shall extend to and be binding upon the successors and assigns of Lessor and Lessee; provided, however, that Lessee shall not assign this Lease or sublease the Lessee's Quarters without written consent of Lessor. No "for lease" sign or advertisement of any type shall be placed by Lessee on the Premises without the advance written consent of Lessor, which consent may be withheld by Lessor in Lessor's absolute discretion. No sublease rental amount below the then current standard price quoted by Lessor for comparable space shall be publicized by Lessee or shall be communicated by Lessee to any real estate agent or broker.
14. Notices. All notices which may be given under the terms of this instrument shall be in writing and, if mailed, shall be sent by registered or certified mail, return receipt required, or by a nationally recognized express delivery service, to the respective parties at the addresses shown below or to such other address as the parties have notified each other of by such written notice.
Central United Life Insurance Company GraphOn Corporation ATTENTION: Douglas G. Noyes ATTENTION: William D. Swain, CFO 6 Loudon Road, Suite 503 105 Cochrane Circle Concord, NH 03301 Morgan Hill, CA 95037 |
15. Entire Agreement. This Lease contains the entire agreement between the parties and may be amended only by a written instrument executed by the parties to this Lease.
IN WITNESS WHEREOF, Central United Life Insurance Company, Lessor, and GraphOn Corporation, Lessee, have executed this Lease in original counterparts on the date written above.
Witness:
CENTRAL UNITED LIFE INSURANCE CO., LESSOR
By:_____________________________________
Douglas G. Noyes
Its: Duly authorized individual
Witness:
GRAPHON CORPORATION, LESSEE
By:______________________________________
William D. Swain
Its: CFO
STATE OF NEW HAMPSHIRE
County of Merrimack
The foregoing instrument was acknowledged before me this _____,day of ______________, 2003 by Douglas G. Noyes, duly authorized individual of Central United Life Insurance Company.
STATE OF CALIFORNIA
County of ___________
The foregoing instrument was acknowledged before me this _____ day of ______________, 2003 by William D. Swain, CFO of GraphOn Corporation.
Orin Hirschman
January 29, 2004
GraphOn Corporation
105 Cochrane Circle, Suite L
Morgan Hill, California 95037
Attention: Chief Executive Officer
Fax Number: (408) 776-8448
Greetings:
1. This letter sets forth the terms of our agreement (the
"Agreement") concerning the compensation of Orin Hirschman ("Hirschman") for
services from time to time on a non-exclusive basis to GraphOn Corporation or
any of its direct or indirect affiliates ("GraphOn") in connection with the
introduction of GraphOn to any potential acquisitions (of assets or of or by
companies), strategic partners, merger partners or investors, or any direct or
indirect affiliate thereof (the "Targets"). GraphOn hereby agrees that in the
event a Transaction (as defined below) is consummated with or through a Target
introduced by Hirschman, GraphOn shall pay to Hirschman compensation (the
"Compensation") consisting of cash equal to 5% of the Value. A "Transaction"
shall mean any of various transactions in which a Target may be involved,
including, but not limited to, financings, acquisitions, mergers, joint
ventures, significant licenses and other business combinations or transactions,
but not including transactions in the ordinary course of GraphOn's business.
"Value" shall mean the aggregate purchase price or other consideration paid to
or by a Target or person introduced by the Target (each a "Transaction Partner")
in any Transaction including without limitation (i) the amount of any cash or
cash equivalents, (ii) the fair market value of any stock or the stated
principal amount of any securities issued by GraphOn or the Transaction Partner,
(iii) the stated principal amount of any debt issued or assumed by GraphOn or
the Transaction Partner in connection with the Transaction, (iv) the fair market
value of any non-competition, employment, consulting or similar arrangements
entered into in connection with the Transaction to the extent the compensation
provided therein exceeds reasonable compensation for services actually provided,
(v) the fair market value of any commission, licensing, royalty or similar
arrangements accruing as a result of a Transaction and (vi) the fair market
value of any other property exchanged by GraphOn and the Transaction Partner in
connection with the Transaction. The fair market value shall be determined in
good faith by the Board of Directors of GraphOn.
2. The Compensation shall be paid at the time GraphOn closes any Transaction, except that any portion of Compensation due in respect of installments or contingent payments of Value shall be paid to Hirschman upon receipt of such installment or contingent payment.
3. This Agreement shall be effective on the date hereof and shall expire on the third anniversary of the date hereof. Notwithstanding anything herein to the contrary, if GraphOn shall, within such period or within180 days immediately following the termination of the three-year period provided above, pay any consideration to, receive any consideration from, or consummate any Transaction(s) with or through, any Transaction Partner, GraphOn shall also pay Hirschman Compensation as determined above.
4. Hirschman shall be permitted full and complete access during normal business hours and with reasonable prior notice to GraphOn to all books and records of GraphOn necessary to permit Hirschman to audit or verify the accuracy of any Compensation. Hirschman shall be responsible for any and all costs of such verification or audit and for review of any determination of fair market value, unless such verification, audit or review reveals that GraphOn has underpaid Hirschman by two percent or more for any applicable determination, in which case GraphOn shall reimburse Hirschman for all reasonable costs incurred in connection with such verification, audit or review (including fees and costs of independent accountants). In the event GraphOn disputes such verification, audit or review, GraphOn shall retain a valuation expert to audit or verify the accuracy of any Compensation and shall be responsible for any and all costs of such expert. If Hirschman disagrees with such expert's verification, audit or review, such expert and Hirschman shall designate a third, mutually acceptable independent expert to audit or verify the accuracy of any Compensation, and the determination of such third expert shall be binding on all parties. GraphOn and Hirschman shall each be responsible for fifty-percent of the costs of such third expert. GraphOn shall pay to Hirschman all amounts that are determined to be payable to Hirschman after such verification, audit or review within five (5) days after the completion of such verification, audit or review. In addition, GraphOn shall bear any costs of collection (including reasonable legal fees) of Compensation and such fees.
5. Neither any advice rendered by Hirschman nor any communication from Hirschman in connection with the services performed by Hirschman pursuant to this Agreement will be quoted, in whole or in part, nor will any such advice or communication or the name of Hirschman be referred to, in any report, document release or other communication, whether written or oral, prepared, issued or transmitted by GraphOn or any officer, director, stockholder, employee, agent or representative of GraphOn without the prior written authorization of Hirschman.
6. (a) GraphOn agrees to indemnify and hold harmless Hirschman, his employees, legal counsel, agents and affiliates, (all of such persons being hereinafter collectively referred to as the "Indemnified Parties") against any and all losses, claims, damages, obligations, penalties, judgments, awards, liabilities, costs, expenses and disbursements (and any and all actions, suits, proceedings and investigations in respect thereof and any and all legal and other costs, expenses and disbursements reasonably incurred in giving testimony or furnishing documents in response to a subpoena or otherwise), including, without limitation, the reasonable costs, expenses and disbursements, as and when incurred, of investigating, preparing or defending any such action, suit, proceeding or investigation (whether or not in connection with litigation in which an Indemnified Party is a party), directly or indirectly caused by, relating to, based upon, arising out of or in connection with (i) Hirschman's acting for GraphOn, including, without limitation, any act or omission by an Indemnified Party in connection with acceptance of or the performance or nonperformance of obligations under this Agreement, as it may be amended from time to time; (ii) any untrue statement or alleged untrue statement of material fact contained in, or omissions or alleged omissions from, any information furnished to an Indemnified Party, an investor, lender, provider of funding to GraphOn or any party to a Transaction; or (iii) any Transaction, provided, however, the foregoing indemnity shall not apply to any portion of any such loss, claim, damage, obligation, penalty, judgment, award, liability, cost, expense or disbursement to the extent it is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) to have resulted primarily and directly from the willful misconduct or gross negligence of the particular Indemnified Party. GraphOn also agrees that an Indemnified Party shall not have any liability (whether direct or indirect, in contract or tort or otherwise) to GraphOn or to any person claiming through GraphOn for or in connection with the engagement of Hirschman, except to the extent that any such liability is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) to have resulted primarily and directly from Hirschman's willful misconduct or gross negligence.
(b) The indemnity provisions of this Section 6 shall be in addition to any liability GraphOn may otherwise have to any of the Indemnified Parties.
(c) If any action, suit, proceeding or investigation is commenced, as to which an Indemnified Party proposes to demand indemnification, such Indemnified Party shall notify GraphOn with reasonable promptness; provided, however, that any failure by an Indemnified Party to notify GraphOn shall not relieve GraphOn from its obligations hereunder. Each Indemnified Party shall have the right to retain counsel of his or its own choice to represent him or it, and GraphOn shall pay the fees, expenses and disbursements of such counsel; and such counsel shall to the extent consistent with its professional responsibilities cooperate with GraphOn and any counsel designated by GraphOn. GraphOn shall be liable for any settlement of any claim against an Indemnified Party made with GraphOn 's written consent, which consent shall not be unreasonably withheld. GraphOn shall not, without the prior written consent of an Indemnified Party, settle or compromise any claim, or permit a default or consent to the entry of any judgment in respect thereof, unless such settlement, compromise or consent includes, as an unconditional term thereof, the giving by the claimant to the respective Indemnified Party of an unconditional release from all liability in respect of such claim.
(d) In order to provide for just and equitable contribution, if a claim for indemnification pursuant to these indemnification provisions is made but it is found in a final judgment by a court of competent jurisdiction (not subject to further appeal) that such indemnification may not be enforced in such case, even though the express provisions hereof provide for indemnification in such case, then GraphOn, on the one hand, and the respective Indemnified Party or Indemnified Parties, as applicable on the other hand, shall contribute to the losses, claims, damages, obligations, penalties, judgments, awards, liabilities, costs, expenses and disbursements to which the indemnified persons may be subject in accordance with the relative benefits received by GraphOn, on the one hand, and the respective Indemnified Party or Indemnified Parties, as applicable on the other hand, and also the relative fault of GraphOn, on the one hand, and the respective Indemnified Party or Indemnified Parties, as applicable on the other hand, in connection with the statements, acts or omissions which resulted in such losses, claims, damages, obligations, penalties, judgments, awards, liabilities, costs, expenses and disbursements and the relative equitable considerations shall also be considered. No person found liable for a fraudulent misrepresentation shall be entitled to contribution from any person who is not also found liable for such fraudulent misrepresentation. Notwithstanding the foregoing, the respective Indemnified Party or Indemnified Parties, as applicable, shall not be obligated to contribute any amount hereunder that exceeds the amount of fees previously received by the respective Indemnified Party or Indemnified Parties, as applicable, in connection with the foregoing.
(e) Neither termination nor completion of the engagement of Hirschman pursuant to the Agreement shall affect the provisions of this Section 6, which shall remain operative and in full force and effect.
7. Upon completion of a Transaction, GraphOn shall pay or reimburse Hirschman's reasonable expenses incurred in connection with performance of his services hereunder, including without limitation travel expenses and the reasonable fees and expenses of his outside counsel and experts; provided that Hirschman will obtain GraphOn's prior approval before incurring expenses in excess of $2,000 in the aggregate for a single project for travel or retaining experts or counsel.
8. Neither GraphOn nor Hirschman shall make any public statement about this Agreement or any transactions or services described herein mentioning the other party without the prior written consent of the other party, unless that party determines in good faith, on the advice of legal counsel, that public disclosure is required by law, in which case that party shall consult with the other party prior to making a statement.
9. GraphOn represents and warrants to Hirschman that Hirschman's engagement hereunder has been duly authorized and approved by GraphOn, and that this Agreement has been duly executed and delivered by GraphOn and constitutes a legal, valid and binding obligation of GraphOn. Hirschman shall not be under any legal obligation to introduce a Transaction. GraphOn shall not be under any legal obligation to accept any Transaction initiated by Hirschman and it may refuse, in its sole discretion, for any reason or for no reason whatsoever, to accept or close any such Transaction.
10. The parties hereto acknowledge and agree that Hirschman is not acting as an agent or a fiduciary of GraphOn or its stockholders in connection with any services that may be performed hereunder.
11. Any advice rendered by Hirschman hereunder is solely for the benefit of GraphOn 's board of directors and may not be relied upon by any other person.
12. This Agreement has been executed and delivered in the State of New York and shall be governed by the laws of such state, without giving effect to the conflict of laws rules thereunder. Each party hereby irrevocably consents and submits to the jurisdiction of any New York State or United States Federal Court sitting in the State of New York, County of New York, over any action or proceeding arising out of or relating to this Agreement and irrevocably consents to the service of any and all process in any such action or proceeding by registered mail addressed to such party at his or its address set forth above (or as otherwise noticed to the other party). Each party further waives any objection to venue in New York and any objection to an action or proceeding in such state and county on the basis of forum non conveniens. Each party also waives any right to trial by jury.
13. This Agreement shall be binding upon, and enforceable against, the successors and assigns of each of the undersigned; provided that this Agreement may not be assigned by Hirschman. Notwithstanding the foregoing, Hirschman may assign a portion of his Compensation as he determines in his sole discretion.
14. This Agreement may be executed in counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.
Please signify your agreement to the foregoing at the place indicated below.
Cordially,
/s/ ORIN HIRSCHMAN ------------------ Orin Hirschman |
Agreed to and accepted:
GRAPHON CORPORATION
By:/s/ R.P. DILWORTH
-----------------
|
March 2004
CODE OF ETHICS
GraphOn Corporation expects all of its employees, including its principal executive officer, principal financial officer and principal accounting officer, as well as the members of its board of directors, to act in accordance with the highest standards of personal and professional integrity in all aspects of their activities, to comply with all applicable laws, rules and regulations, to deter wrongdoing and to abide by other policies and procedures adopted by GraphOn that govern the conduct of its employees and directors. This Code of Ethics is intended to supplement any other policies and procedures adopted by GraphOn.
You agree to:
(a) Engage in and promote honest and ethical conduct, including the ethical handling of actual or apparent conflicts of interest between personal and professional relationships;
(b) Take all reasonable measures to protect the confidentiality of non-public information about GraphOn and its subsidiaries and their customers obtained or created in connection with your activities and to prevent the unauthorized disclosure of such information unless required by applicable law or regulation or legal or regulatory process;
(c) Produce full, fair, accurate, timely, and understandable disclosure in reports and documents that GraphOn and its subsidiaries files with, or submits to, the Securities and Exchange Commission and other regulators and in other public communications made by GraphOn and its subsidiaries;
(d) Comply with applicable governmental laws, rules and regulations, as well as the rules and regulations of self-regulatory organizations of which GraphOn or its subsidiaries is a member; and
(e) Promptly report any possible violation of this Code of Ethics to GraphOn's Audit Committee.
You are prohibited from directly or indirectly taking any action to fraudulently influence, coerce, manipulate or mislead GraphOn's or its subsidiaries' independent public auditors for the purpose of rendering the financial statements of GraphOn or its subsidiaries misleading.
You understand that you will be held accountable for your adherence to this Code of Ethics. Your failure to observe the terms of this Code of Ethics may result in disciplinary action, up to and including termination of employment. Violations of this Code of Ethics may also constitute violations of law and may result in civil and criminal penalties for you, your supervisors and/or GraphOn.
If you have any questions regarding the best course of action in a particular situation, you should promptly contact GraphOn's Audit Committee.You may choose to remain anonymous in reporting any possible violation of this Code of Ethics.
Exhibit 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Shareholders
GraphOn Corporation
We hereby consent to the incorporation by reference in the Registration Statements on Form S-3 (No. 333-65806 and 333-51420) and Form S-8 (No. 333-107336, 333-88255 and No. 333-40174) of GraphOn Corporation of our report dated February 23, 2004, relating to the consolidated financial statements, which appears in this Form 10-K. We also consent to the incorporation by reference of our report dated February 23, 2004, relating to the financial statement schedule, which appears in this Form 10-K. Our report on the consolidated financial statements contains an explanatory paragraph regarding the Company's ability to continue as a going concern.
/s/ BDO Seidman, LLP BDO Seidman, LLP San Jose, California March 30, 2004 |
Exhibit 31
I, Robert Dilworth, certify that:
1. I have reviewed this annual report on Form 10-K of GraphOn Corporation ("registrant");
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 30, 2004
/s/ Robert Dilworth
---------------------
Robert Dilworth
Chief Executive Officer
(Interim) and Chairman of the
Board
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I, William Swain, certify that:
1. I have reviewed this annual report on Form 10-K of GraphOn Corporation ("registrant");
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have:
(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
(b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
(c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and
5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):
(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.
Date: March 30, 2004
/s/ William Swain
-------------------
William Swain
Chief Financial Officer
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Exhibit 32
(a) Certification of Annual Report by Chief Executive Officer.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of GraphOn Corporation (the "Company") on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Robert Dilworth, Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ Robert Dilworth -------------------- Robert Dilworth Chief Executive Officer March 30, 2004 |
(b) Certification of Annual Report by Chief Financial Officer.
CERTIFICATION PURSUANT TO
18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO
SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Annual Report of GraphOn Corporation (the "Company") on Form 10-K for the period ending December 31, 2003 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, William Swain, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.
/s/ William Swain ----------------- William Swain Chief Financial Officer March 30, 2004 |