INVESTOR RIGHTS AGREEMENT
This
INVESTOR RIGHTS AGREEMENT (this "Agreement") is made as of
February
2, 2005 by and among GraphOn Corporation, a Delaware corporation
(the "Company")
and 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 148,148 shares of Series A Stock
of the
Company (the "Shares") and 5-year warrants, exercisable to purchase
an aggregate
of 74,074 shares of Series B Stock of the Company (the "Warrant
Shares") at
$40.00 per share (the "Series B 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");
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; and
WHEREAS,
at the Closing, Griffin Securities, Inc. ("Griffin") is
receiving
warrants in substantially the same form as the Warrants,
exercisable to purchase
an aggregate of 14,815 shares of Series A Stock and 7,407 shares of
Series B
Stock, (the "Griffin Warrants"), and Griffin is entitled to share
the Investors'
rights under this Agreement;
WHEREAS,
capitalized terms used herein and not otherwise defined are
defined in the Unit Subscription 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
conversion of the
Shares or Series B Stock or 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, a Griffin Warrant, Shares or
Warrant Shares,
as a result of anti-dilution provisions of a Purchased Warrant, a
Griffin
Warrant, Shares or otherwise.
"Board of Directors" shall mean the board of directors 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.
"Demand Registrable Shares" shall mean the Shares, the Warrant
Shares
and all Other Securities and Additional Shares.
<PAGE>
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as
amended, and all of the rules and regulations promulgated
thereunder.
"Exchange Warrants" shall mean 5-year warrants, exercisable as of
the
date hereof to purchase an aggregate of 7,407,400 shares of Common
Stock at
$0.40 per share, subject to adjustment.
"Exchange Shares" shall mean shares of Common Stock from time to
time
issuable upon exercise of Exchange Warrants.
"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 or directors in the form of a hiring bonus, (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 Shares, Purchased Warrants, Exchange Warrants or
other
Convertible Securities outstanding on the date hereof.
"Griffin Exchange Shares" shall mean shares of Common Stock from
time
to time issuable upon exercise of Griffin Exchange Warrants.
"Griffin Exchange Warrants" shall mean 5-year warrants exercisable
to
purchase 1,481,400 shares of Common Stock at $.27 per share and
740,700 shares
of Common Stock at $.40 per share.
"Griffin Warrants" shall mean warrants issued to Griffin
Securities
Inc. ("Griffin") in substantially the same form as the Series B
Warrants to
purchase an aggregate of 14,815 shares of Series A Stock at $27.00
per share and
7,407 shares of Series B Stock at $40.00 per share.
"Holder" shall mean the Investors and Griffin or any transferee
of
the Purchased Warrants, Registrable Shares or Demand Registrable
Shares that
were held by Investors or Griffin.
"Majority Holders" shall mean, at the relevant time of
reference
thereto, those Holders holding more than fifty percent (50%) of the
Registrable
Shares (or Demand Registrable Shares, to the extent that the
Holders have a
right to make a Demand Registration Request pursuant to Section 3A
hereof) Owned
by all of the Holders.
"Other Stockholders" refers to stockholders of the Company other
than
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)
2
<PAGE>
that the Holders of the Shares or Purchased Warrants at any time
shall be
entitled to receive, or shall have received, upon conversion of the
Shares, the
exercise of the Purchased Warrants or conversion of the Warrant
Shares, 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 Shares, Purchased
Warrants,
Warrant Shares or otherwise.
"Own" shall mean to own beneficially, as that term is defined in
the
rules and regulations of the SEC.
"Purchased Warrants" shall mean the Series B Warrants and any
securities into which the Series B Warrants may be converted (other
than by
exercise of the Purchased Warrants by the holder thereof),
including without
limitation, the Exchanged Warrants.
"Registrable Shares" shall mean any shares of Common Stock or
Other
Securities issued or issuable from time to time upon conversion of
the Shares,
the Warrant Shares, the Exchange Shares, the Griffin Exchange
Shares or the
exercise of a Purchased Warrant, or a distribution with respect to,
in exchange
for, or in replacement of Shares, the Warrant Shares, the Exchange
Shares, the
Griffin Warrants or Purchased Warrants, 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.
"Selling Expenses" shall mean all underwriting discounts,
brokerage
and selling commissions applicable to the sale of Registrable
Shares or Demand
Registrable Shares, including standard underwriters' cutbacks.
"Series A Stock" means the Series A Participating Convertible
Preferred Stock, par value $.01 per share, of the Company.
"Series B Stock" means the Series B Participating Convertible
Preferred Stock, par value $.01 per share, of the Company.
2.
Effectiveness. This Agreement shall become effective upon the
Closing.
3.
Mandatory Registration. (a) No later than sixty (60) days after
the
Closing, the Company will prepare and file with the SEC a
registration statement
on Form S-1 for the purpose of registering (such registration, the
"Mandatory
Registration") under the Securities Act all of the Registrable
Shares for resale
by, and for the account of, the Investors and Griffin 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
3
<PAGE>
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
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 other than rights granted pursuant to
the
transactions contemplated by the Reorganization Agreement.
3A. Demand Registration
(a) Request for Registration. In the event that the Company has
not
adopted the Certificate of Amendment on or prior to July 1, 2005,
any Holder
shall have the right to make a written request to the Company (such
request, a
"Demand Registration Request") that the Company effect a
registration with
respect to all or a part of the Demand Registrable Shares held by
such Holder
(such Holder, an "Initiating Holder"). In response to such Demand
Registration
Request, the Company shall:
(i) promptly give written notice of the proposed
registration ("Demand Registration") to all other Holders (such
notice, a
"Demand
Registration Notice"); and
(ii) use its best efforts to file a registration statement
on Form
S-3, if the Company is eligible for Form S-3, or, if not so
eligible,
on Form S-1 (it being understood that the Company shall use
commercially reasonable efforts to qualify for registration on Form
S-3
for
secondary sales) (such registration statement filed pursuant to
this
Section
3A, a "Demand Registration Statement") as soon as practicable,
but
not later than
thirty (30) days following receipt of the Demand
4
<PAGE>
Registration Notice in order to permit or facilitate the sale
and
distribution of all or such portion of such Demand Registrable
Shares as
are
specified in the Demand Registration Request, together with all
or
such
portion of the Demand Registrable Shares of any Holder or
Holders
joining in
such request (each such Holder, a "Requesting Holder") as are
specified
in a written request received by the Company from such Holder
or
Holders
within ten (10) days after the Demand Registration Notice is
given
by the
Company. In the event any Holder requests a Demand Registration
pursuant
to this Section 3A in connection with a distribution of Demand
Registrable Shares to its partners or other beneficial owners,
the
registration shall provide for the resale by such partners or
beneficial
owners,
assuming such distribution was effected in accordance with
applicable
securities laws.
(b) Limitations on Demand Registration. The Company shall not
be
obligated to effect, or take any action to effect, any Demand
Registration
pursuant to this Section 3A:
(i) if the
Company has effected three (3) Demand
Registrations, provided that each of such Demand Registration
Statements
has been
declared or ordered effective in accordance with the terms of
this
Agreement and provided that the Demand Registrable Shares subject
to
the
current Demand Registration Request could have been included
for
registration, sale and distribution in connection with such
previous two
effective
registrations, but were not, for reasons other than the
marketing
limitations connected to the underwriting of such previous
Demand
Registrations, as described in Section 3A(c)(iii) below;
(ii) if the Demand
Registrable Shares included in the
written
registration requests of all Requesting Holders pursuant to
Section
3A(a) above (including the Demand Registrable Shares of the
Initiating
Holder) do not have an anticipated aggregate public offering
price
(before any underwriting discounts and commissions) of at least
US$3,000,000;
(iii)for a period of time not to exceed 90 days following
receipt of
a Demand Registration Request if, in the discretion of the
Company's
Board of Directors, effecting such Demand Registration at the
time of
receipt of such Demand Registration Request would be seriously
detrimental to the Company;
(iv) if the Demand Registration Request is received by the
Company
after February 2, 2009; or
(v) if the Certificate of Amendment is filed in Delaware
prior to
the date which is thirty (30) days after receipt of the Demand
Registration Request.
(c) Underwriting.
(i) Request Regarding Underwriting. If the Requesting
Holders
intend to distribute the Demand Registrable Shares covered by
their
Demand Registration Request by means of an underwriting, they
shall
so advise
the Company as a part of such Demand Registration Request or
their
response to any Demand Registration Notice given pursuant to
Section
3A(a)(i).
5
<PAGE>
(ii) Participation of Other Stockholders and the Company in
Underwritten Offering. The Demand Registration Statement may,
subject to
the
provisions described herein, include securities of the Company
which
are held
by Other Stockholders. If Other Stockholders request such
inclusion,
Requesting Holders with more than 50% in interest of the Demand
Registrable Shares to be included in the Demand Registration
Statement may
in their
discretion offer to include the securities of such Other
Stockholders in the underwriting and may condition such offer on
their
acceptance
of the further applicable provisions of this Section 3A. If the
underwriter has not limited the number of Demand Registrable Shares
to be
underwritten, the Company may include its or their securities for
its own
account in
such Demand Registration if the Underwriter Representative (as
defined
below) so agrees and if the number of Demand Registrable Shares
will not
thereby be limited.
(iii)Underwriting Agreement; Exclusion of Shares from
Offering.
All Requesting Holders whose shares are to be included in an
underwriting pursuant to this Section 3A and the Company shall
(together
with all
Other Stockholders proposing to distribute their securities
through
such underwriting) enter into an underwriting agreement in
customary
form with the representative of the underwriter or underwriters
selected
for such underwriting by the vote of the Holders of a majority
of
the Demand
Registrable Shares subject to the Demand Registration Request
(and
reasonably acceptable to the Company) (such representative, the
"Underwriter Representative"). Notwithstanding any other provision
of this
Section
3A, if the Underwriter Representative advises the Requesting
Holders in
writing that marketing factors require a limitation on the
number of
shares to be underwritten, the securities of the Company held
by
Other
Stockholders and then the Company shall be excluded from such
Demand
Registration to the extent so required by such limitation. If,
after the
exclusion
of such shares, further reductions are still required, the
number of
Demand Registrable Shares included in the registration by each
Requesting
Holder (other than the Initiating Holder) shall be reduced on a
pro rata
basis (based on the number of Demand Registrable Shares
requested
to be so
registered by each such Requesting Holder) by such minimum
number
of shares
as is necessary to comply with the requisite reduction. If,
after the
exclusion of such shares, further reductions are still
required,
the number
of shares included in the registration by the Initiating Holder
shall be
reduced by such minimum number of shares as is necessary to
comply
with the requisite reduction; provided, however, that any
Demand
Registrable Shares proposed to be included by any Requesting Holder
in a
given
registration that are excluded due to marketing limitations of
the
underwriter shall not be subject to exclusion from future
Demand
Registration Requests on the basis of Section 3A(i) above. No
Demand
Registrable Shares or any other securities excluded from an
underwriting
by reason
of the underwriter's marketing limitation shall be included in
the Demand
Registration related to such underwriting. If any Requesting
Holder, or
Other Stockholder who has requested inclusion in such Demand
Registration as provided above disapproves of the terms of the
underwriting, such person may elect to withdraw therefrom by
written
notice to
the Company, the underwriter and the Initiating Holder. Any
securities
so withdrawn shall also be withdrawn from the Demand
Registration.
6
<PAGE>
(d) Expenses of Registration. Expenses related to the
registration
and sale of the Demand Registrable Shares pursuant to this Section
3A shall be
borne as provided by Section 6 hereof.
(e) Termination of Demand Registration Statement. At its expense,
the
Company will keep any Demand Registration Statement effective for a
period of
one hundred twenty (120) days or until the Holders (or in the case
of a
distribution to the partners of such Holder, such partners), as
applicable, have
completed the distribution described in the Demand Registration
Statement
relating thereto, whichever first occurs (such date on which the
Demand
Registration Statement need no longer be kept effective, subject to
the further
provisions of this Section 3A(e), the "Demand Registration
Termination Date");
provided, however, that (i) such 120-day period shall be extended
for a number
of days equal to the number of days of all suspensions (as defined
in Section
9(b)) occurring during such 120-day period; and (ii) in the case of
any Demand
Registrations on Form S-3 (which are intended to be offered on a
continuous or
delayed basis), such 120-day period shall be extended to the
earlier of one year
from the date of the Demand Registration Statement's effectiveness
or until all
Demand Registrable Shares registered pursuant to such Form S-3 are
sold,
provided that Rule 415 under the Securities Act, or any successor
rule under the
Securities Act, permits an offering on a continuous or delayed
basis, and
provided further that applicable rules under the Securities Act
governing the
obligation to file a post-effective amendment permit, in lieu of
filing a
post-effective amendment that (y) includes any prospectus required
by Section
10(a) of the Securities Act or (z) reflects facts or events
representing a
material or fundamental change in the information set forth in the
registration
statement, the incorporation by reference of information required
to be included
in (y) and (z) above to be contained in periodic reports filed
pursuant to
Section 12 or 15(d) of the Exchange Act in the Demand Registration
Statement.
4.
Obligations of
the Company. In connection with the Company's
obligations (i) under Sections 3 and 3A hereof to file the
Registration
Statement and Demand Registration Statements, respectively, with
the SEC and to
use its reasonable efforts to cause the Registration Statement and
Demand
Registration Statement to become effective as soon as practicable
after filing,
the Company shall, as expeditiously and as reasonably as possible,
subject to
Section 9 hereof:
(a) prepare and file with the SEC such amendments and supplements
to
the Registration Statement or Demand Registration Statement, as the
case may be,
and the prospectus used in connection therewith, as may be
necessary, and, in
the case of the Mandatory Registration or a Demand Registration, as
necessary to
keep the Registration Statement or Demand Registration Statement
effective until
the Mandatory Registration Termination Date or Demand Registration
Termination
Date, as the case may be;
(b) furnish to the selling Holders such reasonable number of
copies
of the Registration Statement or Demand Registration Statement, as
the case may
be, and a 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 Holders may
reasonably
7
<PAGE>
request, in order to facilitate the public or other disposition of
such selling
Holders' Registrable Shares and Demand Registrable Shares;
(c) use reasonable efforts to register and qualify the
Registrable
Shares and Demand Registrable Shares covered by the Registration
Statement or
Demand Registration Statement under such other securities laws or
blue sky
("Blue Sky") laws of all states r
