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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF
SMALL BUSINESS ISSUERS UNDER
SECTION 12(B) OR 12(G) OF THE
SECURITIES EXCHANGE ACT OF 1934
ESOFT, INC.
(Name of Small Business Issuer in its Charter)
COLORADO 84-0938960
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
5335 STERLING DRIVE, SUITE C, BOULDER, CO 80301
(Address of principal executive offices) (Zip Code)
(303) 444-1600
(Issuer's telephone number)
Securities to be registered pursuant to Section 12(b) of the Exchange Act:
Name of each exchange on
Title of each class to be so registered which each class is to be registered
None. Not applicable.
Securities to be registered pursuant to Section 12(g) of the Exchange Act:
COMMON STOCK, PAR VALUE $.01 PER SHARE
(Title of Class)
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
GLOSSARY
The following is a glossary of technical terms that appear in the
discussion of the Company's business in this prospectus:
"TBBS" means The Bulletin Board Software, a PC server software which
creates a multi-user host for direct dial-in access for multiple users for
ongoing messaging, file transfer and data access.
"CLOSED, PROPRIETARY OPERATING SYSTEM" means an operating system which is
not made available for open use and serves a specific purpose. A closed
proprietary operating system has an advantage in security.
"DNS (DOMAIN NAME SERVER)" is a server function on the Internet which acts
as a "Directory Assistance" service.
"FIREWALL" means a security function to prevent unauthorized access to a
network. Firewalls can be very simple allowing for basic security, or very
complex and involved for more advanced security needs.
"FTP SERVER" means a File Transfer Protocol server which is a server
function that allows you to offer access to files for transfer over the
Internet. They are normally linked to web servers to provide a graphical
interface.
"POP3 (POST OFFICE PROTOCOL 3) SERVER" is a server which stores local mail
to be accessed by the end users E-mail package e.g.; Eudora, Microsoft
Exchange, Netscape.
"ROUTER" means a device which acts as a "gateway" between network
segments. A router in its simplest form will examine the address of each
"information packet", determine its destination and send it down the appropriate
wire.
"SMTP (SIMPLE MAIL TRANSPORT PROTOCOL)" is a server that acts as the
sending and receiving server. It looks at the address and sends it on its way or
transfers it to the POP3 (Post Officer Protocol 3) server.
"TELNET" is the Internet protocol used to simulate a point to modem
(serial line) connection between two computers over the Internet.
"TERMINAL SERVER" means a device which allows for remote dial-up access to
a network.
CORPORATE HISTORY
eSoft, Inc. (the "Company") was incorporated under the laws of the State
of Colorado on March 3, 1984. The Board of Directors and shareholders of the
Company have approved the merger of the Company into a newly incorporated
Delaware corporation, to effect its reincorporation in the State of Delaware
prior to the effective date of this registration statement.
The Company is located at 5335 Sterling Drive, Suite C, Boulder, Colorado,
80301.
Through September 4, 1997, the Company had elected to be taxed as an
"S-corporation" for U.S. income tax purposes. Under this election the Company
was essentially taxed as a partnership. Accordingly, in lieu of corporate income
taxes, the shareholders were taxed on their proportional share of the Company's
taxable income individually. The Company withdrew the S-corporation election
after September 4, 1997 and is now subject to U.S. corporate income taxes.
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On August 27, 1997 the Company's board of directors authorized a stock
split of 63.1579 to 1. The Company has no subsidiaries.
BUSINESS HISTORY
In its early years, the focus of the Company was oriented towards the
development and sale of a computer bulletin board software product known as
TBBS. TBBS Software creates a multi-user host for direct dial-in access for
multiple users for on-going messaging, file transfer and data access. Concurrent
with the rapid rise of Internet related communications media, the demand for
TBBS software declined. In response, the Company designed a new product line of
Internet protocol adapters which are now being marketed under the acronym IPAD
(Internet Protocol Adapter Device). The Company launched its first IPAD product
in 1996.
The IPAD is designed to be a total Internet/Intranet connectivity solution
without the complexity and high cost of traditional solutions. It affords the
medium to small businesses, institutions, or educational sites a full
connectivity solution that is economical and easily installed and managed by
existing information systems' personnel. To complete the package for the
customer, the Company can provide leased line connectivity options through major
national access providers. The IPAD product line includes all other accessories
needed to complete the connection, such as turnkey web servers, line interface
devices, modems and rack equipment.
PRODUCT LINE AND SERVICES
THE IPAD 5000
The IPAD 5000 integrates Internet hardware and communications software
into a user friendly turnkey system, which does not require extensive technical
knowledge to support. Utilizing an Intel Pentium CPU, the device is typically
configured with 8 MB of RAM; a 1.2 GB hard drive; and a 1.44 MB floppy drive.
The hardware includes five open slots, and hence is designed to allow for
customized interface configuration. These interfaces may include an Ethernet
card, an ISDN terminal adapter, a V.35 leased line or Token Ring or extra serial
interfaces if desired. The software includes a basic Web Server, Telnet, an FTP
Server, an E-mail Server, a Finger Server, a DNS, and a Packet-Routing Firewall.
Unlike certain competing products in the marketplace, IPAD does not operate on a
UNIX platform but rather is a purpose built component, real time operating
system, which allows for a high degree of individual customization to better
address the needs of individual customers.
THE IPAD 2500
The IPAD 2500 was introduced to the marketplace in the second quarter of
1997. The IPAD 2500 is a desktop unit which contains a router with firewall
capabilities, a terminal server offering up to 8 serial ports, and the same
basic Internet connectivity provided by all of the Company's IPADs. Server
functions include a DNS, a POP3, E-mail, FTP, a SMTP, Telnet, a Finger Server,
and a basic WWW server. While less powerful than the Model 5000, it nonetheless
allows for more than one IP address and routing for up to two networks as well
as multiple web and FTP servers.
THE IPAD 1200
The IPAD 1200 was introduced to the marketplace in October 1997. This
system is also a desktop unit which can connect a business LAN of up to 150
users to the Internet using a single address. The hardware is an Intel Pentium
CPU with 8 MB of RAM, a 1.2 GB hard drive, a 1.44MB floppy drive, 2 serial ports
and a 10 MB Ethernet card. The IPAD 1200 comes standard with either a 56 KB
modem, ISDN terminal adaptor or integral 56 KB leased line CSU/DSU or its
Internet feed. The product is designed for mass production without significant
customization for specific client needs.
ACCESSORIES
In the case of the Model 5000 (and to a lesser degree with the IPAD 2500),
customers can order additional cards and accessories to more effectively
configure a device to suit their needs. Aside from an Ethernet card, users have
the
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option, with certain models, of purchasing an ISDN terminal adapter, interfaces
for T1 and fractional T1 leased lines, as well as extra serial interfaces. As
many as 96 serial ports can be accommodated within a Model 5000 with each card
being capable of connecting up to 16 modems or terminals.
SEMINARS
The Company also offers Internet training seminars. These comprehensive,
two day programs are offered in Colorado. They address issues related to end
user client set-up and trouble shooting; advanced Internet operations including
routing and domain name server operations; Internet service provider management
techniques, including guidance with respect to systems performance and
networking issues including questions relating to growth planning, multiple
networking interfacing, and connections with other routers; and specific
training with respect to IPAD applications and management techniques. The
Company expects to offer these seminars with greater frequency to supplement
revenues from IPAD product sales.
TECHNICAL SUPPORT SERVICES
Customers can also purchase a contract through which the Company offers
technical support services to address customers' specific application needs.
More focused than the general seminars, such technical support services are
designed to address concerns of individual clients for applications ranging from
the launching of their web presence, to the reconfiguration of their LAN to
optimize both efficiency and connectivity.
TBBS SOFTWARE
Until the mid-1990s, most of the Company's revenues were generated from
the sale of TBBS, its bulletin board system software package. As the life cycle
of this product aged, the Company found it essential to expand and diversify its
range of product offerings which in turn led to the development of the IPAD. The
Company expects to continue to generate residual revenues from the sale of TBBS
software at least through the 1998 fiscal year. However, no further development
or upgrading of the software is expected to be pursued by the Company, as TBBS
is progressively phased out of the market in favor of more sophisticated
communications products.
OPERATIONS
Currently, with respect to all models, the Company purchases
sub-assemblies from a variety of manufacturers and wholesalers, and undertakes
final assembly and software integration at its production facility in Colorado.
In the future, with respect to Models 1200 and 2500, the Company intends to
purchase the computers in essentially complete and finished form. Upon shipment
to its production facility, the Company would install an extra card in the case
of the Model 1200 and load its software. With respect to the somewhat higher
performing Model 2500, the modifications and degree of the Company's
customization which is undertaken, is less than that applicable to the Model
5000, but more vigorous than that carried out in the context of a typical Model
1200.
In all cases, the loading of the Company's IPAD software is what serves to
distinguish the Company's product line from competing products, and what
provides it with its key performance capabilities. Upon the insertion of the
additional boards and loading of the software, each unit is tested, certain
other quality assurance checks are undertaken, and the devices are packaged.
It is the intention of the Company to sell product both directly to
end-use purchasers, as well as to utilize Value Added Resellers ("VAR"s) and
distributors to assist in product dissemination.
INTELLECTUAL PROPERTY
The Company has no patents, but regards its software as proprietary and
attempts to protect it by relying upon copyrights, trade secret laws, internal
nondisclosure agreements and transferability restrictions incorporated into its
software license agreements. The Company provides its software products under a
perpetual paid-up license agreement. Title does not transfer to the customer.
Program source listings are not released, which the Company believes further
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protects unauthorized transfers of the Company's proprietary information, as
well as the confidentiality of the Company's trade secrets. The Company also
uses a combination of software programming and hardware devices to protect its
products from unauthorized use or duplication.
HISTORY AND COST OF PRODUCT DEVELOPMENT
Up until and including 1994, substantially all of the Company's revenues
were generated from the sale of TBBS software. IPAD product sales commenced in
1995 and the product was released to the general public with the introduction of
the IPAD 5000 in 1996. The precursors to the IPAD 5000 (the IPAD 4000 and IPAD
4500) had identical software as the IPAD 5000 but were installed on 66 MHZ Intel
486 CPUs. In 1996, when the 133 MHZ Intel Pentium CPU became available, all
installed units of Model 4000 and Model 4500 were replaced with Model 5000. The
IPAD 2500 was introduced to the marketplace in mid-1997. The IPAD 1200 was
introduced and was available for purchase in October 1997. Seminars,
accessories, and services are an ongoing activity designed to supplement and
enhance the Company's product offerings, reputation, reliability and industry
stature.
Research and development expenditures in 1995 totaled $384,000 of which
$130,481 were capitalized software development costs, while expenses amounted to
$253,290. All expenditures for research and development in the year ended
December 31, 1996 and the nine month period ended September 30, 1997 were
capitalized software development costs and amounted to approximately $440,000
and $197,000, respectively. As of September 30, 1997 the value of capitalized
software less accumulated amortization amounted to $646,227.
From time to time, the Company has entered into software development
consulting agreements. One such agreement is currently in force and provides for
the payment to John Patrick McMillan, a consultant, of a fee equal to 2.5
percent of gross licensing fees for software licenses to a maximum of $100 per
license, in consideration for the activities provided by the consultant with
respect to the development of IPAD software.
THE MARKET FOR THE PRODUCTS
The primary market being pursued by the Company consists of small to medium
size businesses which increasingly find it beneficial to host their own Internet
infrastructure rather than rely upon an Internet service provider for all of
their Internet access and connectivity needs. A secondary market consists of
Internet service providers which can benefit from the Company's IPAD integrated
software and hardware product line.
Most of these small to medium size businesses would continue to rely upon
an Internet service provider in order to gain high speed large diameter pipeline
access to the Internet. But with new advancements in Internet software,
individual companies, without a great deal of software expertise, can now assume
many of the responsibilities and functions which heretofore have been carried
out by Internet service providers on their behalf. This includes control over a
router, firewall, remote access server, a web server, and mail server. Most
importantly, rather than paying an Internet service provider substantial fees in
order to offer individual e-mail addresses plus Internet access to each of many
employees, the IPAD products can provide such services to a growing company and
their employees in a much more cost effective manner.
Because the Company purchases its computer hardware in the United States,
and because of requirements for FCC approval and UL certification, the Company
has historically limited most of its sales to the United States. Within the
United States, the market and the rate of market growth are both considered to
be sufficiently large as to be able to absorb all of the Company's projected
output through at least the next two years. Although the Company has not
acquired requisite product approvals and certification from appropriate agencies
that would permit marketing of its IPAD products in the European Union, it is
the intention of the Company to begin the process of obtaining such approvals
and certification and to promote sales in the European Union as well as Canada
in 1999. Failure to obtain requisite approval and certification to sell IPAD
units in the European Union and Canada will limit the Company's ability to
increase its market share.
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The Company has sold more than 400 IPAD units since the introduction of
its product line in 1995. In the first nine months of 1997, the Company
estimates that it sold approximately 50 IPAD units. No one customer has
accounted for as much as 10% of the Company's revenue in 1995, 1996 or the first
9 months of 1997.
Market analysts indicate that in 1997, fewer than 6,000 units of IPAD like
products are expected to be sold into the market. If one were to assume that the
average sale ranges from $3,000 - $5,000, this would place the total market
dimensions at $18 - $30 million excluding follow on accessories and services.
INDUSTRY TRENDS
At one time, the combination of hardware and software that are currently
incorporated within an IPAD device required several pieces of stand alone
equipment, and complex software skills. This in turn created barriers to market
entry among small to medium sized companies, seeking to host many of their own
Internet functions. Unless they maintained the requisite technical skills, it
was more cost effective for these companies to allow an Internet service
provider to host these services on their behalf.
Two trends within the marketplace are eroding this historical condition.
First, the burgeoning demand for e-mail and Internet access has had the effect
of increasing the costs borne by companies to provide widespread access to such
services among their employees, (notwithstanding general reductions in the unit
costs of Internet access as a whole). Second, the Company and its market
competitors have been able to take advantage of increasingly powerful and
flexible computer systems. Today, these flexible computer systems are readily
available at comparatively modest cost and with the integration of appropriate
software, they can provide an all in one solution to many of the software and
hardware requirements that had previously demanded a variety of pieces of
equipment and considerable software integration skills.
As a consequence, the current industry trend is to increasingly allow
companies to take control of certain key Internet management tools that have
previously been hosted by Internet service providers and to progressively limit
the role of the Internet service providers to that of offering high capacity
access to the Internet itself.
MARKETING PLAN
It is the intention of the Company to rely upon both direct sales and
distributors in order to disseminate its product line through the market. During
1998 and the first quarter of 1999, the Company plans to add regional sales
managers including a European Sales Director, Customer Service Representatives
and a Director of Marketing.
To assist in creating more customer awareness of the Company, the Company
has made provision for an advertising budget of over $100,000 in the forthcoming
year, with a further $80,000 for participation in trade shows. Through a
combination of reliance upon third party distributors as well as upon direct
sales, the Company believes that it can progressively establish a profile as a
major industry participant.
COMPETITION
The Company's competitors are comprised of both well-established and
recognized industry participants (such as Sun Microsystems, Inc.) and smaller
corporations in some respects similar to the Company. Both groups produce
products which in terms of fundamental connectivity attributes are similar to
those currently offered by the Company. Among the more prominent industry
participants at present are companies such as Whistle Communications, Inc. of
Foster City, California; Apexx Technologies, Corp. of Boise, Idaho; FreeGate
Corporation of Sunnyvale, California; and iPlanet, Inc. of Sunnyvale,
California.
iPlanet, Inc. is a private corporation reportedly established in January
1996. As is the case with the Company, iPlanet provides fully-integrated
turn-key Internet connectivity solutions. iPlanet has developed the IPS series
of products which provide small to medium sized businesses access to the
Internet and Web hosting capabilities.
The IP-168 is available in a variety of models to accommodate speeds
ranging from 28.8K dial-up to T1 dedicated lines. It incorporates router
capabilities, and supports a LAN print server. It includes a Web server, an
e-mail
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server (compatible with popular mail packages such as Eudora, and Microsoft
Mail), and standard mail protocols (POP2/3, IMAP3 and SMTP). The product is
compatible with both Microsoft's Windows and Unix operating systems. The IPS-PRO
is a rack mounted version of the IPS 168 which is designed for larger
organizations of about 200 people. The IPS PRO operates with a Pentium 133 MHZ
microprocessor, and offers 32 MB RAM and a dual Ethernet connection. In addition
to the standard e-mail and web servers, the IPS PRO supports a Domain Name
Service Protocol, and can also support remote access users and file sharing. It
also includes a firewall (and related software elements known as "proxies"). To
complement the IPS-168, iPlanet offers a variety of add-on modules to provide
fax, virtual private networking, and e-mail enhancing capabilities.
Sun Microsystems, Inc. offers Internet servers referred to as "Netra i" which
accommodates high-volume Web site management. Netra i software comes with Web
server (Netscape Enterprise) and Web authoring software. Electronic mail, a
Domain Name Server and FTP functions are also fully integrated, as is firewall
security. Netra Internet servers operate in conjunction with Solaris and Unix
operating systems. Until recently, Netra i was classified as a fully integrated
series of Internet servers. However, software and hardware components are now
sold separately.
As is the case with the Company, most industry competitors produce an
array of products. Some are relatively inexpensive entry level devices, which in
some respects can be compared to the IPAD 1200. Typically, these are designed
with no significant degree of individual customization. Some products are
similar to the IPAD 5000 in that they provide for a substantial degree of
customization, and can accommodate multiple interfaces, and more than one
hundred individual users on a LAN with little difficulty.
Cross-comparisons indicate that several competing products incorporate
features similar to those offered by IPAD products (in terms of hardware and
software components), although they may provide varying degrees of
functionality, which in turn accounts for pricing variances. For example, the
InterJet product series offered by Whistle Communications, Inc. ranges in price
from $1,995 to $3,495 depending upon product features and capability. Products
which would likely compete with either the IPAD or the IPAD 5000 can either cost
more or less in relation to the IPAD depending upon their technical
specifications.
Some competitors already possess well-established distribution networks or
have formed strategic collaborations with key industry players. Others such as
Sun Microsystems, Inc. have much greater technical and financial resources
compared to the Company. The ability of the Company to effectively compete
against such firms cannot be assured, as they are already well entrenched.
While many Internet connectivity devices are Unix-based systems designed
to support more complex operations generally required by larger corporations,
the Company's products emphasize use of a DOS based system which is thought by
management to be more user friendly as compared to those operating on Unix
platforms.
AVAILABILITY OF RAW MATERIALS AND SEMI-FINISHED GOODS
The computers which the Company utilizes to operate its software, whether
purchased in finished form, or as sub-assemblies, computer boards, software
programs and accessories which are assembled at the Company's production
facility from semi-finished goods, all represent widely available materials and
components in the marketplace. The Company has the ability to source such goods
from a wide range of prospective suppliers, depending upon pricing, delivery,
quality assurance and related considerations. In combination, the Company's IPAD
software represent a combination of "off the shelf" operating systems and
related software licensed from third parties, working in concert with what the
Company considers to be its own proprietary software, developed in-house. The
Company does not anticipate that the sourcing of such materials is likely to
become an impediment to its growth and expansion.
GOVERNMENT REGULATIONS
As the Company's products require access to telecommunications carriers, the
products are subject to regulation by the Federal Communications Commission
("FCC"). Since the components of the Company's products which are required by
FCC regulation to be tested and certified are purchased from other
manufacturers, however, the Company relies upon
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the certification of compliance furnished by those manufacturers and no testing
or certification of the final assembled products offered by the Company is
required.
Since the Company's products rely upon electrical power, certain standards
with respect to electrical safety must also be met. The manufacturers of
purchased components obtain the certification of testing laboratories such as
Underwriters Laboratories ("UL") and the Canadian Standards Association and the
Company again relies upon those certifications without the necessity for
certification of the final assembled products. In order for the IPAD products to
be marketed in the European Union, similar testing and product approvals are
required to be obtained from appropriate agencies. Although such approvals have
not yet been sought or obtained, the Company intends to use components in
markets other than the U.S. and Canada which have such approvals, and
anticipates that it may rely upon such approvals as it does in the U.S. without
being required to obtain separate approval or certification of the final
assembled products.
EMPLOYEES
At December 1, 1997, ten people were employed by the Company, all on a
full-time basis.
INITIAL PUBLIC OFFERING IN CANADA
The Company expects to make an initial public offering of 1,750,000 shares
of its Common Stock, at a price of $1.00 per share in British Columbia, Canada,
promptly after the effectiveness of this registration statement (the "Canadian
Offering"). Upon completion of the Canadian Offering, the Common Stock will be
listed on the Vancouver Stock Exchange. The gross proceeds from the Canadian
Offering will amount to $1,750,000, of which the Company will pay an aggregate
commission of $131,250 to C. M. Oliver Company Limited (the "Agent") and a
corporate finance fee of 75,000 shares of the Company's Common Stock for
underwriting the Offering. After deducting the commission payable to the Agent
and other expenses of the Canadian Offering, net proceeds from the Canadian
Offering are expected to amount to $1,400,000. The Company has also granted the
Agent an option (the "Over-Allotment Option"), exercisable for a period of 60
days from the date of the Closing of the Offering to solicit and accept
additional subscriptions of the Company for Common Stock up to an aggregate of
262,500 shares. If the Agent exercises this Over-Allotment Option in full, the
total price to the public and Agent commission will be $2,012,500 and
$150,937.50, respectively, and net proceeds to the Company are expected to
amount to approximately $1,600,000.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and accompanying notes included elsewhere in the Registration
Statement.
INTRODUCTION
The Company is a technology firm which develops and markets communication
products which integrate and simplify PC server connectivity to the Internet
market. In recent years, the Company has developed and brought to production the
IPAD.
The Company was incorporated in 1984 to develop and market its original
product, a computer bulletin board product, TBBS. TBBS integrated formerly
complex technology into products which were relatively simple for the consumer
to use. Through 1995, the Company generated substantially all of its revenues
through sales of TBBS.
In 1995, the Company foresaw the Internet becoming the technology of
choice for the next level of network access connectivity. The Company began
refocusing its efforts on making communications technology simple to use and
began its design of IPAD. The IPAD product line was test marketed in 1995 as a
response to the anticipated demand of the Internet market. The Company's
dependence upon the TBBS product line decreased during and after 1995 as the
Company increased its dependency upon sales of IPAD.
RESULTS OF OPERATIONS
REVENUES
The Company's revenues declined from the fiscal year ended December 31,
1995 through the fiscal year ended December 31, 1996, and the nine months ended
September 30, 1997. This decline was primarily a result of the decline in
revenue from sales of the Company's TBBS product, which accounted for $1,046,000
in revenue in 1995 (52% of total revenues) to $239,000 in 1996 (17% of
revenues). In the nine months ended September 30, 1997, total revenues were
$788,000 as compared with $1,136,000 in the comparable nine months of 1996. TBBS
products revenue in the nine months of 1996 amounted to $232,000, while there
was only $81,000 of TBBS revenue in the nine months of 1997. Offsetting the
decline in the TBBS sales was an increase from 1995 to 1996 in the revenue from
IPAD sale from $972,000 in 1995 to $1,167,000 in 1996. IPAD sales declined
somewhat in the first nine months of 1997 to $655,000, from $984,000 in the
comparable 1996 period, however, as marketing and sales activity were curtailed
in 1997 as a result of the Company's shortage of working capital.
The Company's gross profit margins declined from approximately 65% in 1995
to 57% in 1996 as start-up costs related to the production of the IPAD product
affected the margins. This trend was reversed in the first nine months of 1997
as margins expanded to nearly 70% from approximately 57% in the first nine
months of 1996.
Research and Development Expenditures
Research and development expenditures in 1995 were nearly $384,000, of
which approximately $130,000 was capitalized as software development costs while
the remaining $254,000 was expensed. In 1996, the software development
expenditures increased to approximately $440,000, all of which were capitalized.
The software development expenditures of $197,000 in the first nine months of
1997 were less than the $355,015 expended in the comparable period of 1996, but
were also capitalized.
Other Expenses
Selling, general and administrative costs ("SG&A") declined throughout the
period from the beginning of fiscal 1995 to September 30, 1997. SG&A expenses in
the fiscal year ended December 31, 1996, were approximately $631,000, nearly 35%
lower than comparable expenses in fiscal 1995. The SG&A expenses in the first
nine months of
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1997 of approximately $471,000 were 8% lower than the comparable expenses in the
year earlier. These expense savings reflected both lower costs of selling a
reduced volume of products, as well as cutbacks in administrative personnel
which were primarily effected from 1995 to 1996.
Net Income (Loss)
The Company realized net income in both the fiscal years ended December
31, 1995 and December 31, 1996, as well as for the nine months ended September
30, 1996. A loss of approximately $187,000 was reflected for the nine months
ended September 30, 1997, however, as a result of recording deferred taxes of
approximately $241,000, because the Company changed its federal income tax
status from an S Corporation to a C Corporation during that period.
CAPITAL RESOURCES AND LIQUIDITY
Historically the Company had funded its working capital requirements from
internal operations. During 1995, however, Philip Becker, the Chief Executive
Officer, loaned the Company approximately $112,000 to supplement the $46,000 of
cash provided by operating activities and assist it in funding the completion of
the IPAD product development and the related growth of its accounts receivable
caused by the introduction of the IPAD product line. During 1996, the Company
continued to fund a majority of its internal working capital needs from $260,000
of cash flow from operating activities, but it also received additional advances
from Mr. Becker, thus increasing the Company's indebtedness to him to 239,903 at
December 31, 996. This indebtedness is payable by the Company, at its option, in
shares of Common Stock of the Company valued at the public offering price per
share of the Canadian Offering. It is anticipated that the Company will elect to
pay that obligation, as well as $116,000 of notes payable to consultants by the
issuance of shares, thus improving the Company's financial position by reducing
its long term debt.
As of December 31, 1996, the Company received a binding commitment ,for a
$100,000 loan facility from the First National Bank of Arvada, Colorado to
support IPAD sales growth and the increase in capitalized software until longer
term financing could be arranged. During the first quarter of 1997, the Company
borrowed $100,000 under the interim loan facility from the First National Bank
of Arvada, Colorado, the proceeds of which were used to expand to a limited
degree, the Company's marketing activities and sales programs.
The completion in September of 1997 of the placement of $410,000 of
outside equity has permitted the Company to significantly advance its marketing
efforts and to attract additional management personnel. Working capital at
September 30, 1997 had increased to approximately 400,000 from less than $23,000
at December 31, 1997. Operating activities also continued to contribute cash
($100,000 for the first nine months of 1997) since the loss recorded for this
period was a result of the recording of deferred taxes, which did not affect
current cash flow.
In the fourth quarter of fiscal 1997, the Company has undertaken
preparations for its initial public offering, scheduled for the first quarter of
1998, through which it is anticipated that approximately $1,400,00 of working
capital will be generated, after payment of expenses and commissions. This
equity infusion, together with working capital generated from the Company's
internal operations, should advance the Company substantially towards
establishing and fortifying channels of distribution for its IPAD product line,
and is expected to be sufficient to meet the capital requirements of the Company
through 1998.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Statements of
Financial Accounting Standards that may affect the Company's financial
statements as follows:
The Financial Accounting Standards Board (FASB) has issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" (SFAS No. 128).
This pronouncement provides a different method of calculating earnings per share
than is currently used in accordance with Accounting Board Opinion No. 15,
"Earnings Per Share". SFAS No. 128 provides for the calculation of "Basic" and
"Dilutive" 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 that
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could share in the earnings of an entity, similar to fully diluted earnings per
share. The Company will adopt SFAS No. 128 in 1998 and its implementation is not
expected to have a material effect on the consolidated financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS 130 requires
that all items that are required to be recognized under current accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements.
Also, in June 1997, FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" which supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards for the way that public companies report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
SFAS 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Because of the recent issuance of the standards,
management has been unable to fully evaluate the impact, if any, the standards
may have on future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of these
standards.
In October 1997, Statement of Position 97-2, Software Revenue Recognition
(SOP 97-2) was issued. The SOP provides guidance on when revenue should be
recognized and in what amounts licensing, selling, leasing, or otherwise
marketing computer software. SOP 97-2 is effective for transactions entered into
in fiscal years after December 15, 1997. Because of the recent issuance of the
SOP, management has been unable to fully evaluate the impact, if any, the SOP
may have on future financial statement disclosure.
* * *
FORWARD-LOOKING STATEMENTS
The Registration Statement contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934 and the Company intends that such
forward-looking statements be subject to the safe harbors for such statements
under such sections. The forward-looking statements herein are based on current
expectations that involve a number of risks and uncertainties. Such
forward-looking statements are based on numerous assumptions, including, but not
limited to, the following: that significant increases in sales and marketing
personnel and expenditures will result in increased sales; that the recently
introduced IPAD 2500 and IPAD 1200 models will be readily accepted in the
market; that the industry trends perceived by the Company as described in Item 1
will continue to exist; that market segments targeted by the Company will
continue to grow and that the Company can successfully compete with larger, more
established competitors.
The foregoing assumptions are based on judgments with respect to, among
other things, future economic, competitive and market conditions, and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the Company's control. Accordingly,
although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any such assumption could prove to be
inaccurate and therefore there can be no assurance that the results contemplated
in forward-looking statements will be realized. The forward-looking statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by the forward-looking statements.
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ITEM 3. DESCRIPTION OF PROPERTY
The Company's office, production and warehouse facilities are located at
5335 Sterling Drive, Suite C, Boulder, Colorado 80301. The Company leases
approximately 5,300 square feet of space at this location pursuant to a lease
entered into in November 1997, which expires October 31, 2000, at a rent of
approximately $58,000 per year. The Company believes that this space will be
sufficient for the Company's operations for the foreseeable future.
The Company also remains obligated until November 1997 on a lease covering
1,300 out of 7,500 square feet of lease space that the Company formerly occupied
in Aurora, Colorado. Rental on that remaining 1,300 square feet is approximately
$13,347 per year. The Company does not occupy this space and it hopes to sublet
this space in the near future.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company has a total of 2,083,158 shares of Common Stock issued and
outstanding. The following table sets forth information regarding beneficial
ownership of Common Stock of the Company and options to purchase Common Stock
that are currently exercisable or exercisable within sixty days of the date of
this Registration Statement held by (i) each person or group of persons known by
the Company to own beneficially five percent (5%) or more of the outstanding
shares of the Company's Common Stock, (ii) each director of the Company, (iii)
each executive officer named in the Executive Compensation Table and (iv) all
executive officers and directors of the Company as a group. Unless otherwise
indicated, the shareholders listed below have sole voting and investment power
with respect to the shares reported as beneficially owned.
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------------------ ------------------- ----------------
Philip L. Becker.................... 950,000 38.03%
5335 Sterling Drive, Suite C
Boulder, CO 80301
Daryl Yurek(1)(4)................... 413,879 16.57%
1113 Spruce Street
Boulder, CO 80302
W. Terrance Schreier(2)(4).......... 216,939 8.69%
1942 Broadway, Suite 303
Boulder, CO 80302
Gene R. Copeland(3)(4).............. 196,940 7.88%
1942 Broadway, Suite 303
Boulder, CO 80302
Directors and Executive Officers.... 1,146,940 45.92%
as a group
(1)Includes 106,579 shares of Common Stock and options to purchase up to 207,300
shares of Common Stock of the Company within 60 days held by Pantheon Capital
Ltd. The options expire on the earlier of February 1, 1999 or one year and 15
days after the date of the Canadian Offering. Excludes 177,950 shares that
may be issued to Pantheon Capital Ltd., at the discretion of the Company, as
payment for amounts outstanding under three promissory notes issued by the
Company, each of which notes is payable on the earlier of January 2, 1999 or
30 days after the date of the Canadian Offering. Pantheon Capital Ltd. is
controlled by Mr. Yurek and he may be deemed to be the beneficial owner of
all shares and options held in the name of Pantheon Capital Ltd. Includes
100,000 shares beneficially owned by Mr. Yurek and held in the name of the
Daryl F. Yurek Self Employed Pension of which Smith Barney Inc. is custodian.
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(2)Includes 113,289 shares of Common Stock and options to purchase up to 103,650
shares of Common Stock of the Company within 60 days held by Transition
Partners, Ltd. The options expire on the earlier of February 1, 1999 or one
year and 15 days after the date of the Canadian Offering. Excludes 87,976
shares of Common stock that may be issued to Transition Partners, Ltd., at
the discretion of the Company, as payment for amounts outstanding under three
promissory notes issued by the Company, each of which notes is payable on the
earlier of January 2, 1999 or 30 days after the date of the Offering.
Transition Partners, Ltd. is controlled by Mr. Schreier and he may be deemed
to be the beneficial owner of all shares and options held in the name of
Transition Partners, Ltd.
(3)Includes 93,290 shares of Common Stock and options to purchase 103,650 shares
of Common Stock of the Company within 60 days held by the Copeland Consulting
Group, Inc. The options expire on the earlier of February 1, 1999 or one year
and 15 days after the date of the Canadian Offering. Excludes 87,976 shares
of Common Stock that may be issued to Copeland Consulting Group, Inc. at the
discretion of the Company, as payment for amounts outstanding under three
promissory notes issued by the Company, each of which notes is payable on the
earlier of January 2, 1999 or 30 days after the date of the Offering.
Copeland Consulting Group, Inc. is controlled by Mr. Copeland and he may be
deemed to be the beneficial owner of all shares and options held in the name
of Copeland Consulting Group, Inc.
(4)Pursuant to an agreement among Pantheon Capital, Ltd., Transition Partners
Ltd. and Copeland Consulting Group, Inc., those three consultants to the
Company share in all compensation or rights, including promissory notes and
options, as follows: 50% to Pantheon Capital and 25% to each of Transition
Partners and to Copeland Consulting. The promissory notes referenced above
are for an aggregate principal amount of $355,903 of which two notes for an
aggregate of $116,000 were issued by the Company as compensation for services
and the remaining $239,903 was originally issued to Philip L. Becker to
represent cash loaned to the Company. The latter note was sold by Mr. Becker
to Pantheon Capital.
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ITEM 5. DIRECTORS AND EXECUTIVE OFFICERS PROMOTERS AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS
The following is a list of the current directors and senior officers of
the Company, their addresses, current positions with the Company and principal
occupations during the past five years:
<TABLE>
<CAPTION>
NAME AND ADDRESS PRINCIPAL OCCUPATION FOR PREVIOUS FIVE YEARS
- -------------------------------------------------- -----------------------------------------------------------------
<S> <C>
PHILIP L. BECKER(1) Mr. Becker, age 51, Chairman, Chief Technology Officer and
Chairman, Chief Executive Officer and Chief Chief Executive Officer of the Company since September 1997;
Technology Officer and Director President of the Company from July 1985 to September, 1997;
Director of the Company from 1984 to present.
GENE R. COPELAND(1) Mr. Copeland, age 54; Managing Director of Transition Partners,
Director Ltd. from August 1996 to present; President of Copeland
Consulting Group, Inc. from January 1990 to August 1996;
President of InfoNow Corp. from October 1994 to June
1995; Chief Operating Officer of Amrion Corporation from
February 1992 to September 1993; Director of InfoNow
Corp. from September 1994 to present.
KENT NUZUM(1) Mr. Nuzum, age 31, Associate with Opus Capital, Inc. from
Secretary, Acting Chief Financial Officer and January 1997 to present; Assistant Vice-President, Commercial
Director Loans for Bank One, Colorado from August 1990 to January
1997.
JASON ROLLINGS(1) Mr. Rollings, age 36, was employed with Hi-Tech
Vice President - Operations Manufacturing as Director of Manufacturing from April 1995 to
November 1997; Director of Technology Inc. from September
1988 to March 1995; and Manufacturing Operations Manager for
Century Data Inc. from September 1983 to August 1988.
</TABLE>
- ------------------------------
(1) Address: 5335 Sterling Drive, Suite C, Boulder, Colorado 80301.
ELECTION OF DIRECTORS
The directors of the Company were elected by the shareholders at a special
meeting on September 2, 1997 and will hold office until the next annual meeting
at which time they may be re-elected or replaced.
The Articles of Incorporation of the Company permit the directors to
appoint new directors to fill any vacancies that may occur on the board.
Individuals appointed as directors to fill vacancies on the board or added as
additional directors hold office like any other director until the next annual
shareholder meeting at which time they may be re-elected or replaced. The
directors may also add additional directors to the board between successive
annual meetings.
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<PAGE>
ITEM 6. EXECUTIVE COMPENSATION
PHILIP L. BECKER EMPLOYMENT AGREEMENT
On September 2, 1997 the Company and Philip L. Becker, the founder,
Chairman, Chief Technology Officer, Chief Executive Officer and a director of
the Company, entered into an employment agreement (the "Becker Agreement") which
extends for a thirty six month period commencing on September 1, 1997. Under the
terms of the Becker Agreement the Company will pay to Mr. Becker the sum of
$8,333 per month until the completion of the Offering and thereafter the sum of
$10,000 per month plus incentive stock options to acquire 200,000 Common Shares
at a price of $1.00 for a period of five years from the date of the Canadian
Offering. The option will vest over a 36 month period. No options will be
exercisable initially, but 7/36 of the options will vest seven months after the
date of the Canadian Offering and 1/36 of the options will vest on the first day
of each month thereafter.
The Becker Agreement also provides that Philip Becker shall be eligible to
receive a quarterly performance bonus equal to 10% of the Company's earnings net
of adjustments for interest and taxes. In the event that the bonus exceeds 50%
of Mr. Becker's gross annual salary, the bonus will be capped at the amount of
Mr. Becker's salary for the quarter.
The Becker Agreement incorporates a non-competition agreement which
extends for 12 months after the termination of Philip Becker's employment with
the Company and confidentiality provisions which extend for five years following
the termination of Becker's employment with the Company. The Becker Agreement
may be terminated by either the Company or Mr. Becker on 30 days notice without
cause. If Mr. Becker's employment is terminated by the Company without cause,
the Company must pay Mr. Becker one month's salary for each year of employment
since 1992.
SEVERANCE AGREEMENT
Wayne Farlow was Chief Executive Officer of the Company from September 2,
1997 to November 11, 1997. On December 19, 1997 the Company and Wayne Farlow
entered into a Severance Agreement and a Mutual Release (the "Severance
Agreement") pursuant to which the Company and Mr. Farlow agreed to Mr. Farlow's
resignation as an officer and director effective November 7, 1997 and that the
Company would pay to Mr. Farlow $10,000 per month through March 7, 1998, payable
in equal semi-monthly instalments, together with the sum of $1,875 upon
execution of the Severance Agreement in lieu of accrued vacation.
The Company also agreed to allow Wayne Farlow to continue to participate
in the Company's health insurance program, with premiums paid by the Company,
until March 1998. The Company has also agreed to sell and Mr. Farlow has agreed
to purchase 60,000 shares of Common Stock of the Company at a price of $0.50 per
share, to be paid by cash ($600) with the balance secured by a non-recourse
promissory note, payable to the Company and due September 5, 1999.
EXECUTIVE COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------- ---------------------------- --------------
SECURITIES
NAME AND YEAR ENDED RESTRICTED UNDERLYING
PRINCIPAL DECEMBER OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
POSITION 31, SALARY($) BONUS($) COMPENSATION($) AWARDS(S)($) SARS(#) PAYMENTS($) COMPENSATION($)
<S> <C> <C> <C>
PHILIP L. BECKER, 1996 60,000 -- -- -- -- -- --
Chief Executive 1995 45,000 -- -- -- -- -- --
Officer 1994 100,000 -- -- -- -- -- --
</TABLE>
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<PAGE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Prior to the adoption of the Equity Compensation Plan described below, no
stock options were ever granted to or exercised by executive officers of the
Company.
In August 1997, the Board of Directors and shareholder of the Company
adopted an Equity Compensation Plan (the "Plan") which provides for incentive
stock options and non-statutory options to be granted to officers, employees,
directors and consultants to the Company. Options, to purchase up to 820,000
shares of the Company's Common Stock may be granted under the Plan. Terms of
exercise and expiration of Options granted under the Plan may be established in
the discretion of an Administrative Committee appointed to administer the Plan
or by the Board of Directors if no Committee is appointed, but no option may be
exercisable for more than ten (10) years. Grants of restricted stock and
supplemental bonuses may also be granted under the Plan.
In the fiscal year ending December 31, 1997, stock options to purchase
200,000 shares of the Company's Common Stock were issued to Philip Becker
pursuant to the Becker Agreement. In addition, options to purchase 60,000 shares
of the Company were granted to Wayne Farlow, and pursuant to the Severance
Agreement, he has agreed to purchase such shares.
DIRECTOR COMPENSATION
The directors of the Company are not currently compensated for serving as
directors. As set forth above, Mr. Becker receives compensation as an officer
and Kent Nuzum and Gene Copeland have each received compensation for services as
consultants to the Company.
ITEM 7CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into transactions with its officers and directors,
and with principal shareholders listed in Item 4 or affiliated entities as
described below.
EMPLOYMENT AGREEMENT - PHILIP BECKER
On September 2, 1997 the Company and Philip Becker ("Becker"), the
Chairman, Chief Technical Officer, Chief Executive Officer and a director of the
Company, entered into an employment agreement (the "Becker Agreement") which
extends for a thirty six month period commencing on September 1, 1997. Under the
terms of the Becker Agreement the Company will pay to Becker the sum of $8,333
per month until the completion of the Canadian Offering and thereafter the sum
of $10,000 per month plus incentive stock options to acquire 200,000 shares of
Common Stock at a price of $1.00 per share for a period of five years from the
date of the Canadian Offering. The option will vest over a 36 month period. No
options will be exercisable initially, but 7/36 of the options will vest seven
months after the date of the Canadian Offering and 1/36 of the options will vest
on the first day of each month thereafter.
The Becker Agreement also provides that Becker shall be eligible to
receive a quarterly performance bonus equal to 10% of the Company's earnings net
of adjustments for interest and taxes. In the event that the bonus exceeds 50%
of Becker's gross annual salary, the bonus will be capped at the amount of Mr.
Becker's salary for the quarter.
The Becker Agreement includes non-competition and confidentiality
provisions which extend for 12 months and five years following the termination
of Becker's employment with the Company, respectively. The Becker Agreement may
be terminated by either the Company or Becker on 30 days notice without cause.
If his employment is terminated by the Company without cause, the Company must
pay Becker one month's salary for each year of employment since 1992.
CONSULTING AGREEMENTS
On September 2, 1997, the Company and Kent Nuzum ("Nuzum"), the Secretary,
Interim Chief Financial Officer and a director of the Company, entered into a
consulting and non-competition agreement (the "Nuzum
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Agreement") which extends for an eleven month period ending July 31, 1998. Under
the terms of the Nuzum Agreement, Nuzum will provide certain consulting services
related to the management of the regulatory issues associated with the listing
of the Company's common shares with various stock exchanges in Canada and the
United States. As payment for his consulting services Nuzum shall receive the
sum of $3,500 per month (the "Consulting Fee") plus Nuzum's reasonable
out-of-pocket expenses. In consideration of the Consulting Fee Nuzum agrees not
to disclose any confidential information relating to the Company for a period of
twelve months following termination of the Nuzum Agreement.
The Company and Transition Partners, Ltd. ("TPL"), a Colorado corporation
with its principal place of business at 1942 Broadway, Suite 303, Boulder,
Colorado, U.S.A. 80302, entered into a letter consulting agreement (the "TPL
Agreement") on October 14, 1996, which was subsequently modified and extended on
May 6, 1997 and August 22, 1997. Under the terms of the TPL Agreement, as
amended, TPL provides certain consulting and advisory services related to
general corporate development, strategic planning and capital formation of the
Company. As payment for its consulting services TPL received a lump-sum payment
of $20,500, in addition to the $36,000 in fees received during the period
October 1996 to March 1997, and two promissory notes in the amounts of $41,000
and $75,000 respectively. Each of the promissory notes bears no interest until
due, and thereafter bears interest at the rate of 12% per annum, is due the
later of March 31, 1998 or the date of the Canadian Offering and may, at the
option of the Company, be satisfied by issuance of common shares of the Company
valued at the price of common shares issued under the Canadian Offering. The TPL
Agreement will terminate on May 21, 1998. [Copeland Consulting Group, Inc. is a
participant in TPL, and pursuant to an agreement is entitled to one-half of all
compensation secured from the Company.]
On August 22 ,1997 the Company and Pantheon Capital Ltd. ("Pantheon")
entered into a consulting and non-competition agreement (the "Pantheon
Agreement") which extends until May 21, 1998. Under the terms of the Pantheon
Agreement, as amended November 11, 1997, Pantheon provides certain consulting
services relating to a proposed interim private financing of up to $410,000 and
to the Canadian Offering. In consideration of its consulting services Pantheon
shall be entitled to options to acquire 264,600 shares of Common Stock of the
Company at $1.00 per share, expiring on the later of February 1, 1997 and the
day which is one year and fifteen days after the date of the Canadian Offering.
Pantheon is entitled to pay for the Common Shares on the exercise of the option
by granting a non-interest bearing 12-month promissory note to the Company.
Pantheon has agreed not to disclose confidential information of the Company for
a period of five years following the termination of the agreement.
Pantheon and TPL are acting jointly in providing consulting services to
the Company, and have agreed to share equally in all compensation or value
received from eSoft.
SEVERANCE AGREEMENT
On December 19, 1997 the Company and Wayne Farlow, the President of the
Company from September 2 to November 11, 1997 entered into the Severance
Agreement discussed in Item 6.
ITEM 8DESCRIPTION OF SECURITIES
Upon completion of its reincorporation in Delaware the Company will be
authorized to issue 50,000,000 shares of Common Stock, $.01 par value. The
holders of Common Stock are entitled to vote at all meeting of shareholders, to
receive dividends if, as and when declared by the board of directors, and to
participate ratably in any distribution of property or assets on the
liquidation, winding up or other dissolution of the Company. The shares have no
preemptive or conversion rights. As of the date of this Registration Statement,
2,083,158 shares are issued and outstanding.
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PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
COMMON STOCK
Prior to the effective time of this Registration Statement, there has been
no established public market for the Company's Common Stock. Soon after the
effectiveness of this Registration Statement, the Company expects to complete
its initial public offering of Common Stock in British Columbia, Canada. The
price to the public in the Offering is expected to be $1.00 per share. Upon
completion of the Offering, the Common Stock of the Company will be listed on
the Vancouver Stock Exchange and such exchange will be the primary market for
the Common Stock.
Currently, the Company has 2,083,158 shares of Common Stock issued and
outstanding, all of which are "restricted securities" under Rule 144 of the
Securities Act of 1933, as amended (the "Act"). As of the date of this
Registration Statement, only the 950,000 shares held by Philip Becker have been
held for the two-year period under Rule 144. The remaining shares will satisfy
the Rule 144 one-year and two year (as the case may be) holding period on
September 4, 1998 and 1999, respectively. The Company intends to file a
registration statement under the Securities Act of 1933 on Form SB-2 to register
shares of Common Stock held by certain of the present shareholders.
If all 1,750,000 shares of Common Stock are sold in the Canadian
Offering, 75,000 shares of Common Stock are issued to the Agent as compensation
for underwriting the Offering, 60,000 shares are sold to Wayne Farlow pursuant
to the Severance Agreement and 355,903 shares are issued upon conversion of
promissory notes issued by the Company, there will be 4,324,061 shares issued
and outstanding. Of such shares, 1,825,000 shares sold in the Offering will be
freely tradable in Canada and such shares will be subject to Regulation S under
the Act.
STOCK OPTIONS AND WARRANTS
As of the date of this Registration Statement, options to purchase 200,000
shares have been granted under the Company's Equity Compensation Plan (the
"Option Plan"), none of which are currently exercisable. In addition, the
Company has granted options to consultants to purchase an aggregate of 355,903
shares of Common Stock. All such options are exercisable at a stated price of
$1.00 per share at the price at which shares are offered to the public in the
Canadian Offering which is expected to be $1.00 per share.
The Company has granted to the Agent an option exercisable for a period of
60 days from the date of the Canadian Offering to solicit and accept additional
subscriptions up to an aggregate of 262,500 shares of Common Stock to cover
over-allotments, if any, in the Offering.
The Company has agreed to grant the Agent for the Offering a
non-transferable warrant (the "Agent's Warrant") to acquire up to 250,000 shares
of Common Stock. The Agent's Warrant will be exercisable at the price to the
public in the Offering, expected to be $1.00 per share, provided that it is
exercised within one year, and thereafter will be exercisable at an expected
price of $1.15 per share.
HOLDERS
There are approximately 27 holders of Common Stock of the Company.
DIVIDENDS
The Company intends, for the foreseeable future to retain all earnings, if
any, for the development of its business opportunities. The payment of future
dividends will be at the discretion of the Company's board of directors and will
depend upon, among other things, future earnings, capital requirements, the
Company's financial condition and general business conditions.
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<PAGE>
ITEM 2. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
PRIVATE PLACEMENT TRANSACTION
On September 4, 1997 the Company sold in a private placement transaction
820,000 shares of Common Stock to 25 investors, 14 of which were Canadian
investors, one of which was a Bahamian investor and one of which investor was
from Bermuda. The Company believes this sale was exempt from the registration
requirements of Section 5 of the Act by virtue of the exemptions provided by
Regulation D under the Act and Regulation S of the Act.
CONVERTIBLE PROMISSORY NOTES
The Company issued to Transition Partners, Ltd. an $18,750 promissory note
and a $10,250 promissory note, each payable on the earlier of January 2, 1999 or
30 days after the date of the Canadian Offering. The promissory notes are
payable at the option of the Company by issuance of such number of shares of
Common Stock, priced at the offering price to the public in the Canadian
Offering, that in the aggregate equals the amount outstanding under the
promissory note.
The Company issued to Copeland Consulting Group, Inc. an $18,750
promissory note and a $10,250 promissory note, each payable on the earlier of
January 2, 1999 or 30 days after the date of the Canadian Offering. The
promissory notes are payable, at the option of the Company by issuance of such
number of shares of Common Stock, priced at the offering price to the public in
the Canadian Offering, that in the aggregate equals the amount outstanding under
the promissory note.
The Company issued to Pantheon Capital Ltd. a $37,500 promissory note and
a $20,500 promissory note, each payable on the earlier of January 2, 1999 or 30
days after the date of the Canadian Offering. The promissory notes are payable,
at the option of the Company by issuance of such number of shares of Common
Stock, priced at the offering price to the public in the Canadian Offering, that
in the aggregate equals the amount outstanding under the promissory note.
The Company believes that the issuance of the promissory notes is exempt
from the registration requirements of Section 5 of the Act by virtue of the
exemption contained in Section 4(2) of the Act.
SEVERANCE AGREEMENT
Pursuant to the Severance Agreement, the Company has agreed to sell to
Wayne Farlow 60,000 shares of Common Stock of the Company at a price of $0.50
per share, the par value of which is to be paid in cash ($600) with the balance
to be paid by a non-recourse promissory note payable to the Company and due
September 5, 1999.
ITEM 5. INDEMNIFICATION OF DIRECTORS
Although the Company is currently incorporated in the state of Colorado,
the Company proposes to merge with a newly incorporated Delaware corporation to
effect reincorporation in the state of Delaware prior to the effective date of
this registration statement. Section 145 of the General Corporation Law of the
State of Delaware contains provisions permitting corporations organized
thereunder to indemnify directors, officers and other representatives from
liabilities
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in connection with any threatened, pending or completed action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact that such person was or is a director, officer, employee or agent of
the corporation, against liabilities arising in any such action, suit or
proceeding, expenses incurred in connection therewith, and against certain other
liabilities.
Article 8 of the Certificate of Incorporation of the Delaware corporation
described above provides that, to the furthest extent permitted by applicable
law in effect from time to time, no director of the Company shall have any
personal liability for monetary damages to the Company or its shareholders for
breach of his fiduciary duty as a director, except that indemnity is not
provided to a director whose conduct involves (i) a breach of the director's
duty of loyalty to the Company or its shareholders, (ii) acts or omissions not
in good faith or which involve intentional misconduct or a knowing violation of
the law, (iii) unlawful distributions as defined in Section 174 of the Delaware
General Corporation Law any transaction from which the director derived an
improper personal benefit.
Article 9 of the Certificate of Incorporation and the bylaws of the
Company will provide similar indemnification provisions as that provided by
Section 145 of the General Corporation Law of the state of Delaware. The Company
will also indemnify any person who is serving or has served the Company as an
officer to the same extent as a director.
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eSOFT, INCORPORATED
CONTENTS
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
BALANCE SHEETS AT SEPTEMBER 30, 1997 (UNAUDITED)
AND DECEMBER 31, 1996 4 - 5
STATEMENTS OF OPERATIONS FOR THE NINE MONTH PERIODS ENDED
SEPTEMBER 30, 1997 (UNAUDITED) AND 1996 (UNAUDITED)
AND FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 6
STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE NINE MONTH
PERIOD ENDED SEPTEMBER 30, 1997 (UNAUDITED),
AND THE YEARS ENDED DECEMBER 31, 1996 AND 1995 7
STATEMENTS OF CASH FLOWS FOR THE NINE MONTH PERIODS
ENDED SEPTEMBER 30, 1997 (UNAUDITED), AND 1996
(UNAUDITED), AND FOR THE YEARS
ENDED DECEMBER 31, 1996 AND 1995 8 - 9
SUMMARY OF ACCOUNTING POLICIES 10 - 14
NOTES TO FINANCIAL STATEMENTS 15 - 20
2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
eSoft, Incorporated
Aurora, Colorado
We have audited the accompanying balance sheet of eSoft, Incorporated as of
December 31, 1996 and the related statements of operations, stockholders' equity
and cash flows for each of the two years in the period ended December 31, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. 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 financial statements referred to above present fairly, in
all material respects, the financial position of eSoft, Incorporated at December
31, 1996 and the results of its operations and its cash flows for each of the
two years ended December 31, 1996 in conformity with generally accepted
accounting principles.
/s/BDO Seidman, LLP
Denver, Colorado --------------------------------------
November 26, 1997
3
<PAGE>
eSOFT, INCORPORATED
BALANCE SHEETS
SEPTEMBER 30, December 31,
1997 1996
- --------------------------------------------------------------------------------
(unaudited)
ASSETS
CURRENT:
Cash and cash equivalents $ 374,398 $ 20,750
Accounts receivable 71,120 34,665
Inventories 75,973 58,659
Prepaid expenses and other 127,595 2,561
- --------------------------------------------------------------------------------
Total current assets 649,086 116,635
- --------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Computer equipment 126,275 125,025
Furniture and equipment 137,848 135,821
- --------------------------------------------------------------------------------
264,123 260,846
Less accumulated depreciation 150,570 122,895
- --------------------------------------------------------------------------------
Net property and equipment 113,553 137,951
OTHER ASSETS:
Capitalized software development costs
net of accumulated amortization of
$121,369 and $35,761 646,227 534,957
Deferred offering costs 45,484 -
- --------------------------------------------------------------------------------
Total other assets 691,711 534,957
- --------------------------------------------------------------------------------
$ 1,454,350 $ 789,543
================================================================================
See accompanying summary of accounting policies and notes to financial
statements.
4
<PAGE>
eSOFT, INCORPORATED
BALANCE SHEETS
SEPTEMBER 30, December 31,
1997 1996
- --------------------------------------------------------------------------------
(unaudited)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Notes payable to a bank $ 80,826 $ -
Accounts payable and accrued expenses 83,878 29,728
Deferred revenue 13,236 57,970
Customer deposits 42,788 6,034
Notes payable, related party - current 20,000 -
- --------------------------------------------------------------------------------
Total current liabilities 240,728 93,732
Deferred tax liability 241,042 -
Convertible notes payable -
related parties 355,903 239,903
- --------------------------------------------------------------------------------
Total liabilities 837,673 333,635
- --------------------------------------------------------------------------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 3,000,000 shares
authorized, no shares issued and outstanding - -
Common stock, no par value, 50,000,000 shares
authorized, 2,083,158, 1,263,158
shares issued and outstanding 827,959 480,605
Accumulated deficit (211,282) (24,697)
- --------------------------------------------------------------------------------
Total stockholders' equity 616,677 455,908
- --------------------------------------------------------------------------------
$ 1,454,350 $ 789,543
================================================================================
See accompanying summary of accounting policies and notes to financial
statements.
5
<PAGE>
eSOFT, INCORPORATED
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine month
periods ended Years ended
September 30, December 31,
1997 1996 1996 1995
- -------------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
REVENUES $ 787,794 $ 1,136,003 $ 1,405,761 $ 2,017,252
- -------------------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of revenue 240,083 489,823 598,736 700,219
Research and development -- -- -- 253,290
Selling, general and
administrative 471,247 514,635 631,124 970,779
Interest expense 23,922 17,297 23,914 14,967
Loss on disposal of assets -- -- 27,739 383
Other (1,915) -- 4,899 (2,758)
- -------------------------------------------------------------------------------------------
Total costs and expenses 733,337 1,021,755 1,286,412 1,936,880
- -------------------------------------------------------------------------------------------
Income before income taxes 54,457 114,248 119,349 80,372
- -------------------------------------------------------------------------------------------
Income tax expense (241,042) -- -- --
- -------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (186,585) $ 114,248 $ 119,349 $ 80,372
===========================================================================================
Income (loss) per common share $ (.14) $ .12 $ .11 $ .09
===========================================================================================
Weighted-average number of
common shares outstanding 1,338,250 921,704 1,102,253 921,704
===========================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
6
<PAGE>
eSOFT, INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Total
------------------ Accumulated Stockholders'
Shares Amount Deficit Equity
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BALANCE, January 1, 1995 921,704 $350,050 $(224,418) $125,632
Net income for the year -- -- 80,372 80,372
- ----------------------------------------------------------------------------------------------
BALANCE, December 31, 1995 921,704 350,050 (144,046) 206,004
Debt exchange for
common stock 341,454 130,555 -- 130,555
Net income for the year -- -- 119,349 119,349
- ----------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 1,263,158 480,605 (24,697) 455,908
Issuance of common stock
pursuant to private place-
ment, net of issuance costs
of $62,646 (unaudited) 820,000 347,354 -- 347,354
Net loss for the period (unaudited) -- -- (186,585) (186,585)
- ----------------------------------------------------------------------------------------------
BALANCE, September 30, 1997 (unaudited) 2,083,158 $ 827,959 $(211,282) $ 616,677
==============================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
7
<PAGE>
eSOFT, INCORPORATED
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine month
periods ended Years ended
September 30, December 31,
---------------------- ----------------------
1997 1996 1996 1995
- -------------------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES:
Net income (loss) $(186,585) $ 114,248 $ 119,349 $ 80,372
Adjustments to reconcile net
income (loss) to net cash provided by
operating activities:
Depreciation and amortization 113,283 54,034 79,637 40,796
Loss on disposal of capital
assets -- -- 27,739 383
Deferred tax expense 241,042 -- -- --
Changes in operating assets
and liabilities:
Accounts receivable (36,455) (11,879) 12,173 (7,650)
Inventories (17,314) 28,273 37,734 (24,764)
Other current assets (54,518) 18,749 18,949 1,451
Accounts payable and accrued
expenses 54,150 (60,633) (58,667) 37,652
Customer deposits 7,202 (24,392) (35,122) (79,539)
Deferred revenue (15,182) 56,106 57,970 --
- -------------------------------------------------------------------------------------------------
Net cash provided by operating
activities 105,623 174,506 259,762 48,701
- -------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of property and
equipment (3,277) (17,542) (19,041) (36,522)
Additions to capitalized
software (196,878) (355,015) (440,237) (130,481)
- -------------------------------------------------------------------------------------------------
Net cash used in investing
activities (200,155) (372,557) (459,278) (167,003)
- -------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
eSOFT, INCORPORATED
STATEMENTS OF CASH FLOWS
(CONTINUED)
<TABLE>
<CAPTION>
Nine month
periods ended Years ended
September 30, December 31,
----------------------- -------------------
1997 1996 1996 1995
- --------------------------------------------------------------------------------------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
FINANCING ACTIVITIES:
Proceeds from issuance
of common stock - net 347,354 -- -- --
Proceeds from borrowings 100,000 -- -- --
Payments on debt (19,174) -- -- --
Proceeds from related
party borrowings 20,000 208,042 208,550 111,598
Payments on related party
notes payable -- (36,386) (36,386) (38,304)
- --------------------------------------------------------------------------------------------
Net cash provided by financing activities 448,180 171,656 172,164 73,294
- --------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS 353,648 (26,395) (27,352) (45,008)
CASH AND CASH EQUIVALENTS,
beginning of period 20,750 48,102 48,102 93,110
- --------------------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
end of period $ 374,398 $ 21,707 $ 20,750 $ 48,102
============================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to financial
statements.
9
<PAGE>
eSOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
BUSINESS eSoft, Incorporated (the "Company" or "eSoft"), a Colorado
corporation, develops and markets internet connectivity
solutions. The Company has developed software, which is
integrated with a hardware component, that allows local
area networks to connect with the internet. The software
also contains full access control for its remote access
features. The Company also resells related connectivity
accessories. The Company previously had developed and sold
software for the bulletin board market.
Prior to June 30, 1996, eSoft and Philip L. Becker, Ltd.
("PLB") operated as a combined entity due to common
ownership. eSoft, an S-corporation, acted as the general
partner of PLB, a limited partnership. eSoft, as general
partner, owned 10% of the partnership while the sole
stockholder of eSoft owned the other 90% individually. PLB
was dissolved on June 30, 1996 and the assets were
contributed to the Company in exchange for common stock.
The contribution of assets was accounted for in a manner
similar to a pooling-of-interests (the assets, liabilities
and partnership capital were contributed at book values)
and, accordingly, the Company's financial statements have
been presented to include the results of operations as
though the contribution of assets occurred as of January 1,
1995.
CONCENTRATIONS OF The Company's financial instruments that are exposed
CREDIT RISK to concentrations of credit risk consist primarily
of cash and cash equivalent balances in excess of the
insurance provided by governmental insurance authorities.
The Company's cash and cash equivalents are placed with
financial institutions and are primarily invested in money
market investments.
USE OF The preparation of financial statements in conformity with
ESTIMATES generally accepted accounting principles requires
management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and
disclosures of contingent assets and liabilities at the
date of the financial statements and revenues and expenses
during the reporting period. Actual results could differ
from those estimates and assumptions.
10
<PAGE>
eSOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
FAIR VALUE OF Unless otherwise specified, the Company believes the book
FINANCIAL value of financial instruments approximates their fair
INSTRUMENTS value.
INVENTORIES Inventories, consisting of purchased goods, are valued at
the lower of cost (first-in, first-out) or market.
PROPERTY AND Property and equipment are stated at cost. Depreciation is
EQUIPMENT computed using straight-line methods over the estimated
useful lives (generally five years) of the assets.
CAPITALIZED Costs incurred internally in creating software
SOFTWARE COSTS products for resale are charged to expense until
technological feasibility has been established upon
completion of a detail program design. Thereafter, all
software development costs are capitalized until the point
that the product is ready for sale and subsequently
reported at the lower of amortized cost or net realizable
value.
In accordance with Statement of Financial Accounting
Standard No. 86, the Company recognizes the greater amount
of annual amortization of capitalized software costs under
1) the ratio of current year revenues by product, to the
product's total estimated revenues method or 2) over the
products estimated economic useful life by the straight-
line method.
REVENUE Revenue from licensing of software products is recognized
RECOGNITION upon shipment. Revenue from support and update service
agreements is deferred at the time the agreement is
executed and recognized ratably over the contractual
period. The Company recognizes revenues from customer
training and consulting services when such services are
provided. All costs associated with licensing of software
products, support and update services, and training and
consulting services are expensed as incurred.
INCOME TAXES The Company with consent of its stockholder, through
September 4, 1997, elected under the Internal Revenue Code
to be an S-corporation. Subsequent to September 4, 1997,
the Company is taxed as a C-corporation. Philip L.
Becker, Ltd. elected to be taxed as a partnership.
11
<PAGE>
eSOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
In lieu of corporation income taxes, the stockholder and
partners were taxed on their proportional share of the
Company's or partnership's taxable income. Therefore
through September 4, 1997, no provision for income taxes
has been made in the accompanying financial statements.
The Company follows the provisions of Statement of
Financial Accounting Standards No. 109 - Accounting for
Income Taxes ("SFAS No. 109"), which requires use of the
"liability method." Accordingly, deferred tax liabilities
and assets are determined based on the temporary
differences between the financial statement and tax bases
of assets and liabilities, using the enacted tax rates in
effect for the year in which the differences are expected
to reverse. The provisions of SFAS No. 109 did not have an
impact until after September 4, 1997.
CASH EQUIVALENTS The Company considers cash and all highly liquid
investments purchased with an original maturity of
three months or less to be cash equivalents.
LONG-TERM The Company applies SFAS No. 121, "Accounting for the
ASSETS Impairment of Long-Lived Assets". Under SFAS No. 121,
long-lived assets and certain intangibles are reported at
the lower of the carrying amount or their estimated
recoverable amounts.
NET INCOME (LOSS) Net income (loss) per common and common equivalent
PER SHARE share is based on the weighted average number of shares
outstanding during each period presented. Options to
purchase stock are included as common stock equivalents,
when dilutive. Primary and fully diluted earnings are the
same for all periods presented.
STOCK OPTION PLANS The Company applies Accounting Principles Board
Opinion 25, "Accounting for Stock Issued to Employees,"
(APB Opinion 25) and related Interpretations in
accounting for all stock option plans. Under APB Opinion
25, no compensation cost has been recognized for stock
options granted as the option price equals or exceeds the
market price of the underlying common stock on the date of
grant.
12
<PAGE>
eSOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
Statement of Financial Accounting Standards No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123),
requires the Company to provide pro forma information
regarding net income as if compensation cost for the
Company's stock option plans had been determined in
accordance with the fair value based method prescribed in
SFAS No. 123.
DEFERRED OFFERING Costs incurred in connection with the Company's anticipated
COSTS public offering are deferred and will be charged against
stockholders' equity upon the successful completion of the
offering or charged to expense if the offering is not
consummated.
NEW ACCOUNTING The Financial Accounting Standards Board (FASB) has issued
PRONOUNCEMENTS Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" (SFAS No. 128). This pronouncement
provides a different method of calculating earnings per
share than is currently used in accordance with Accounting
Board Opinion No. 15, "Earnings Per Share". SFAS No. 128
provides for the calculation of "Basic" and "Dilutive"
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
that could share in the earnings of an entity, similar to
fully diluted earnings per share. The Company will adopt
SFAS No. 128 in 1998 and its implementation is not expected
to have a material effect on the consolidated financial
statements.
In June 1997, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 130,
Reporting Comprehensive Income (SFAS 130), which
establishes standards for reporting and display of
comprehensive income, its components and accumulated
balances. Comprehensive income is defined to include all
changes in equity except those resulting from investments
by owners and distributions to owners. Among other
disclosures, SFAS 130 requires that all items that are
required to be recognized under current accounting
standards as components of comprehensive income be reported
in a financial statement that is displayed with the same
prominence as other financial statements.
13
<PAGE>
eSOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
Also, in June 1997, FASB issued SFAS No. 131, "Disclosures
about Segments of an Enterprise and Related Information"
which supersedes SFAS No.14, "Financial Reporting for
Segments of a Business Enterprise." SFAS No. 131
establishes standards for the way that public companies
report information about operating segments in annual
financial statements and requires reporting of selected
information about operating segments in interim financial
statements issued to the public. It also establishes
standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines
operating segments as components of a company about which
separate financial information is available that is
evaluated regularly by the chief operating decision maker
in deciding how to allocate resources and in assessing
performance.
SFAS 130 and 131 are effective for financial statements for
periods beginning after December 15, 1997 and requires
comparative information for earlier years to be restated.
Because of the recent issuance of the standards, management
has been unable to fully evaluate the impact, if any, the
standards may have on future financial statement
disclosures. Results of operations and financial position,
however, will be unaffected by implementation of these
standards.
In October 1997, Statement of Position 97-2, Software
Revenue Recognition (SOP 97-2) was issued. The SOP provides
guidance on when revenue should be recognized and in what
amounts licensing, selling, leasing, or otherwise marketing
computer software. SOP 97-2 is effective for transactions
entered into in fiscal years after December 15, 1997.
Because of the recent issuance of the SOP, management has
been unable to fully evaluate the impact, if any, the SOP
may have on future financial statement disclosure.
UNAUDITED PERIODS The Financial information with respect to the nine months
ended September 30, 1997 and 1996 is unaudited. In the
opinion of management, such information contains all
adjustments, consisting only of normal recurring accruals
necessary for a fair presentation of the results for such
period. The results of operations for interim periods are
not necessarily indicative of the results of operations for
the full fiscal year.
<PAGE>
eSOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
1. CONVERTIBLE At December 31, 1994, the Company entered into an
NOTES unsecured note agreement with the initial
PAYABLE - stockholder in the amount of $125,000 with
RELATED interest at 9% per annum, maturing December 31,
PARTIES 1997.
The Company through December 31, 1995 borrowed an additional
$111,598 from the stockholder under various unsecured demand
note agreements with interest at 7% per annum.
On June 21, 1996, the stockholder converted in a noncash
transaction $130,555 of the above notes into 341,454 shares
of common stock. The remaining amounts outstanding and
additional advances from the stockholder during 1996 were
combined into a $239,903 unsecured demand note payable. The
note bears interest at 7% per annum and requires monthly
interest payments of $1,399. In October 1997, the note was
amended which provides the Company the option to convert the
note into equity at the price of the Company's contemplated
initial public offering. The note is payable in full on
January 2, 1999.
The Company has borrowed a total of $20,000 from the
stockholder in April and June 1997 (unaudited). The 7%
unsecured notes payable are due on demand and require
monthly interest payments.
The Company entered into an agreement on October 14, 1996
with a business consulting firm to provide services through
May 31, 1998 in exchange for convertible notes payable
totalling $116,000. The convertible notes payable bear
interest at a rate of 12% per annum and are payable on
January 2, 1999. The notes are convertible into common
stock, at the Company's option, at the price of the
Company's contemplated initial public offering.
2. COST OF REVENUE
<TABLE>
<CAPTION>
NINE-MONTH
PERIODS ENDED Years ended
SEPTEMBER 30, December 31,
---------------------- ------------------------
1997 1996 1996 1995
(unaudited) (unaudited)
<S> <C> <C> <C> <C>
Inventory, beginning 58,659 $ 96,392 $ 96,393 $ 71,629
Purchases 244,424 459,870 557,785 721,824
Other 12,973 1,681 3,217 3,159
Inventory, ending (75,973) (68,120) (58,659) (96,393)
- --------------------------------------- --------- --------- --------- ---------
Total $ 240,083 $ 489,823 $ 598,736 $ 700,219
======================================= ========= ========= ========= =========
</TABLE>
15
<PAGE>
eSOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
3. RESEARCH AND During the nine month periods ended September 30, 1997 and
DEVELOPMENT 1996 and the years ended December 31, 1996 and 1995, the
Company capitalized $196,878 (unaudited), $355,015
(unaudited), $440,237, and $130,481 of software development
costs. Amortization expense of capitalized software
development costs, included in depreciation and
amortization, for the nine months ended September 30, 1997
and 1996 was $85,608 (unaudited) and $22,350 (unaudited) for
the years ended December 31, 1996 and 1995 amounted to
approximately $35,761, and $0. Research and development
costs were $0 (unaudited), $0 (unaudited), $0, $253,290, for
the nine months ended September 30, 1997 and 1996 and the
years ended December 31, 1996, 1995.
Research and development expenditures during the following
periods were comprised as follows:
NINE-MONTH
PERIODS ENDED Years ended
SEPTEMBER 30, December 31,
-------------------- --------------------
1997 1996 1996 1995
- -------------------------------- -------- -------- -------- --------
(unaudited) (unaudited)
Payroll and related costs $ 151,954 $ 200,134 $ 266,845 $ 197,737
Internet and telephone
expenses 8,000 26,457 35,276 36,580
Beta testing -- 36,535 36,535 70,565
Other 36,924 91,889 101,581 78,889
- -------------------------------- -------- -------- -------- --------
196,878 355,015 440,237 383,771
Less capitalized
software costs 196,878 355,015 440,237 130,481
$ -- $ -- $ -- $253,290
================================ ======== ======== ======== ========
4. LEASE The Company leases certain of its facilities and equipment
COMMITMENTS under noncancellable operating lease agreements which expire
at various dates through 1998. Rent expense for the nine
months ended September 30, 1997 and 1996 was $37,578
(unaudited) and $38,198 (unaudited) and for the years ended
December 31, 1996 and 1995 was $31,160 and $65,101.
16
<PAGE>
eSOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
The Company has leased 5,295 square feet of office space in
Boulder, Colorado for its new corporate headquarters. The
lease commences on November 1, 1997 and with a term through
October 31, 2000. The annual lease rate is $58,245.
Future minimum lease payments under noncancellable operating
leases are as follows:
Year ending December 31,
--------------------------------------
1997 $ 55,000
1998 73,000
1999 58,000
2000 49,000
--------------------------------------
$235,000
======================================
5. INCOME As stated in the summary of accounting policies, the Company
TAXES had elected to be taxed as an S corporation. In lieu of the
corporation income taxes, the stockholders and partners were
taxed on their proportional share of the Company's taxable
income. The proforma income (loss) per common share if the
Company was subject to taxes (federal statutory rate of 34%
would be as follows:
<TABLE>
<CAPTION>
NINE-MONTH
PERIODS ENDED Years ended
SEPTEMBER 30, September 30, December 31,
---------------------------------------------
1997 1996 1996 1995
-------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C>
Income before income
taxes $ 54,457 $114,248 $119,349 $ 80,372
Proforma income taxes
expense 19,000 39,000 41,000 27,000
-------- -------- -------- --------
Proforma net income
(loss) $ 35,457 $ 75,248 $ 78,349 $ 53,372
======== ======== ======== ========
Proforma income (loss) $ .03 $ .08 $ .08 $ .06
per share
======== ======== ======== ========
</TABLE>
17
<PAGE>
eSOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
With the change in tax status from an S corporation to a C
corporation on September 4, 1997, the Company recorded an
expense to recognize a deferred tax liability. The deferred
tax liability primarily results from the capitalized
software development costs being expensed for income tax
purposes in the period such costs are incurred.
6. CAPITAL stock split of 63.1579 to 1. All references to common share
TRANSACTIONS and per share amounts in the accompanying financial
statements have been retroactively restated to reflect the
effect of the stock split.
The transactions occurring in September 1997 and detailed
below are unaudited.
On September 12, 1997, the Company sold 820,000 shares of
common stock for $410,000 in a private placement. The net
proceeds to the Company after stock issuance costs was
$347,354.
In September 1997 the Company granted various options to
purchase an aggregate of 614,600 shares of its common stock
to employees and consultants. The options vest over a
36-month period with no vesting until March 1998 or at such
later date as the proposed offering occurs.
Terms of the employee options are 200,000 shares at $1 per
share which expire September 2002.
Options to purchase 414,600 shares of common stock have been
issued to consultants. The options consist of 264,600 shares
at $1 per share expiring in September 1998 and 150,000
shares at $1 per share which expire in September 2002.
18
<PAGE>
eSOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
The Company also granted in September 60,000 options to an
employee at $.50 per share that were exercisable
immediately. The options expire in September 1998.
FASB Statement 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), requires the Company to
provide pro forma information regarding net income and net
income per share as if compensation costs for the Company's
stock option plans and other stock awards had been
determined in accordance with fair value based methods
prescribed in SFAS No. 123. The proforma net loss and net
loss per share for the nine month period ended September 30,
1997 would have been $(187,302) and ($.14).
A summary of the status of the Company's stock option plans
and outstanding options as of September 30, 1997 and changes
during the nine-month period ended is presented below:
Weighted
Average
Range of Exercise
Shares Price
------------------------------------------------- -------- --------
Outstanding, beginning of period $ -- $ --
Granted 674,600 .96
Cancelled -- --
Exercised -- --
------------------------------------------------- -------- --------
Outstanding, end of period 674,600 $ .96
================================================= ======== =======
Options exercisable, end of period 60,000 $ .50
Weighted average fair value of options granted
during the period $ .96
================================================= ======== =======
19
<PAGE>
eSOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
The following table summarizes information about stock
options outstanding at September 30, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- ----------------------------------------------- ---------------------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 9/30/97 Life Price at 9/30/97 Price
- -------------- --------------- -------------- -------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
$ .50 60,000 1 .50 60,000 .50
1.00 614,600 5 1.00 -- --
- -------------- --------------- -------------- -------------- --------------- --------------
$ .96 674,600 5 .96 60,000 .50
============== =============== ============== ============== =============== ==============
</TABLE>
7. NOTES PAYABLE The Company borrowed $100,000 from a bank on January 3,
1997. The note bears interest at 12% per annum and is
payable on January 3, 1998. The note is secured by the
assets of the Company.
8. EMPLOYMENT The Company entered into employment agreements with certain
AGREEMENTS members of management in September 1997. The agreements
(UNAUDITED) expire on August 31, 2000. Future commitments are
1997-$60,000, 1998-$120,000, 1999-$120,000, and
2000-$90,000.
Subsequent to September 30, 1997, the Company and its former
President entered into a severance agreement and mutual
release pursuant to which the Company would pay its former
president $10,000 per month through March 7, 1998.
9. PUBLIC The Company has entered into a letter of intent with
OFFERING an underwriter for a proposed public offering of 1,750,000
(UNAUDITED) shares of common stock on the Vancouver Stock Exchange.
There can be no assurance, however, that the offering will
be completed.
20
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
- ------- -----------------------
3.1 Articles of Incorporation
3.2 Bylaws
10.1 Severance Agreement And Mutual Release Dated December 19, 1997 Between
The Company And Wayne Farlow
10.2 Form Of Agency Agreement With C.M. Oliver Capital (To Be Filed By
Amendment)
10.3 Lease Agreement Dated September 18, 1997 Between The Company And Aspen
Industrial Park Partnership (To Be Filed By Amendment).
10.6 Voting Agreement Dated September 2, 1997 Between Philip Becker,
Pantheon Capital Ltd. And Transition Partners, Ltd.
10.7 Registration Rights Agreement Dated September 2, 1997 Between
Transition Partners, Ltd., Pantheon Capital Ltd. And The Company
10.8 Agreement Dated May 6, 1997 Between Transition Partners, Ltd. And The
Company
10.9 Agreement Dated October 14, 1996 Between Transition Partners, Ltd. And
The Company
10.10 Amendment To Agreement Dated August 22, 1997 Between Transition
Partners, Ltd. And The Company
10.11 Second Amendment To Agreement Dated November 11, 1997 Between
Transition Partners, Ltd. And The Company
10.12 Stock Option Agreement Dated November 11, 1997 Between Transition
Partners, Ltd. And The Company
10.13 Consulting Agreement Dated August 1, 1997 Between The Company And Kent
Nuzum
10.14 Consulting Agreement Dated August 22, 1997 Between Pantheon Capital
Ltd. And The Company
10.15 Amendment To Consulting Agreement Dated August 22, 1997 Between
Pantheon Capital Ltd. And The Company
10.16 Stock Option Agreement Dated November 11, 1997 Between Pantheon
Capital Ltd. And The Company
10.17 Stock Option Agreement Dated November 11, 1997 Between Copeland
Consulting Group, Inc. And The Company
10.18 Employment Agreement Dated September 2, 1997 Between Philip Becker And
The Company
27 Financial Data Schedule
-21-
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
eSOFT, INC.
Date: December 19, 1997
By: /s/ Philip L. Becker
-----------------------------------
Philip L. Becker, Chief Executive Officer
-22-
AMENDED AND RESTATED
ARTICLES OF INCORPORATION
OF
ESOFT, INC.
-----------------------------
ARTICLE I
NAME
The name of the Corporation is eSOFT, INC.
ARTICLE II
PURPOSE AND POWERS
2.1 PURPOSE. The purpose for which the Corporation is organized is to
transact all lawful business for which corporations may be incorporated pursuant
to the Colorado Business Corporation Act (the "Colorado Act").
ARTICLE III
CAPITAL STOCK
3.1 AUTHORIZED SHARES. The aggregate number of shares the Corporation
shall have authority to issue 53,000,000 shares of stock of which: (a)
50,000,000 shares shall be Common Stock, $.01 par value per share (b) 3,000,000
shares shall be preferred stock, $.01 par value per share.
3.2 PREFERRED STOCK. The shares of preferred stock authorized for
issuance, but not otherwise designated, may be divided into such number of
series as the board of directors may determine. The board of directors shall
have authority to determine and alter the rights, preferences, privileges and
restrictions granted to or imposed upon any wholly unissued series of preferred
stock and to fix the number of shares of any series of preferred stock and the
designation thereof. The board of directors, within the limits and restrictions
stated in any resolution or resolutions of the
<PAGE>
board of directors originally fixing the numbers of shares constituting any
series, may increase or decrease (but not below the number of shares of such
series then outstanding) the number of shares of any series subsequent to the
issue of that series.
3.3 PREEMPTIVE RIGHTS. Shareholders shall not have the preemptive right to
acquire additional unissued or treasury shares of the Corporation or securities
convertible into shares or carrying stock purchase warrants or privileges.
ARTICLE IV
BOARD OF DIRECTORS
4.1 GENERAL. The business and affairs of the Corporation shall be managed
by a board of directors.
4.2 NUMBER OF DIRECTORS. The number of directors shall be fixed in
accordance with the Corporation's Bylaws.
4.3 QUORUM. A quorum of the board of directors for the transaction of
business shall not consist of less than a majority of the total number of
directors, except as may be provided in the Corporation's Bylaws with respect to
filling vacancies.
ARTICLE V
LIABILITY OF DIRECTORS
No director of the Corporation shall have any personal liability for
monetary damages to the Corporation or its shareholders for breach of his or her
fiduciary duty as a director, except that this provision shall not eliminate or
limit the personal liability of a director to the Corporation or its
shareholders for monetary damages for: (i) any breach of the director's duty of
loyalty to the Corporation or its shareholders; (ii) acts or omissions not in
good faith or which involve intentional
-2-
<PAGE>
misconduct or a knowing violation of law; (iii) acts specified in Section
7-108-403 of the Colorado Corporation Code; or (iv) any transaction from which
the director directly or indirectly derives an improper personal benefit.
Nothing contained herein will be construed to eliminate or diminish the defenses
ordinarily available to a director or to deprive any director of any right he or
she may have for contribution from any other director or other person. If the
Colorado Business Act is hereafter amended to eliminate or limit further the
liability of a director, then, in addition to the elimination and limitation of
liability provided by the preceding sentence, the liability of each director
shall be eliminated or limited to the fullest extent permitted by the Colorado
Act as so amended. Any repeal or modification of this Article VII shall not
adversely affect any right or protection of a director of the Corporation under
this Article VII, as in effect immediately prior to such repeal or modification,
with respect to any liability that would have accrued, but for this Article VII
prior to such repeal or modification.
ARTICLE VI
INDEMNIFICATION
The Corporation shall indemnify, to the fullest extent permitted by
applicable law in effect from time to time, any person, and the estate and
personal representative of any such person, against all liability and expense
(including attorneys' fees) incurred by reason of the fact that such person is
or was a director or officer of the Corporation or, while serving as a director
or officer of the Corporation, such person is or was serving at the request of
the Corporation as a director, officer, partner, trustee, employee, fiduciary or
agent of, or in any similar managerial or fiduciary position of, another
domestic or foreign corporation or other individual or entity or of an employee
benefit plan. The Corporation shall also indemnify any person who is serving or
has served the Corporation
-3-
<PAGE>
as director, officer, employee, fiduciary, or agent, and that person's estate
and personal representative, to the extent and in the manner provided in any
bylaw, resolution of the shareholders or directors, contract, or otherwise, so
long as such provision is legally permissible.
ARTICLE VII
CONFLICTING INTEREST TRANSACTIONS
As used in this Article VII, "conflicting interest transaction" means any
of the following: (a) a loan or other assistance by the Corporation to a
director of the Corporation or to an entity in which a director of the
Corporation is a director or officer or has a financial interest; (b) a guaranty
by the Corporation of an obligation of a director of the Corporation or of an
obligation of an entity in which a director of the Corporation is a director or
officer or has a financial interest; or (c) a contract or transaction between
the Corporation and a director of the Corporation or between the Corporation and
an entity in which a director of the Corporation is a director or officer or has
a financial interest. No conflicting interest transaction shall be void or
voidable or be enjoined or set aside, or give rise to an award of damages or
other sanctions, in a proceeding by a shareholder or by or in the right of the
Corporation, solely because the conflicting interest transaction involves a
director of the Corporation or an entity in which a director of the Corporation
is a director or officer or has a financial interest or solely because the
director is present at or participates in the meeting of the Corporation's board
of directors or of the committee of the board of directors which authorizes,
approves or ratifies a conflicting interest transaction, or solely because the
director's vote is counted for such purpose, so long as such conflicting
interest transaction is authorized, approved or ratified in accordance with the
requirements explicitly set forth in the Colorado Act. Common or interested
directors may be
-4-
<PAGE>
counted in determining the presence of a quorum at a meeting of the board of
directors or of a committee which authorizes, approves or ratifies the
conflicting interest transaction.
ARTICLE VIII
SHAREHOLDER CLAIMS
Unless a person is recognized as a shareholder through procedures
established by the Corporation pursuant to Section 7-107-204 of the Colorado Act
or any similar law, the Corporation shall be entitled to treat the registered
holder of any shares of the Corporation as the owner thereof for all purposes
permitted by the Colorado Act, including without limitation all rights deriving
from such shares, and the Corporation shall not be bound to recognize any
equitable or other claim to, or interest in, such shares or rights deriving from
such shares on the part of any other person including without limitation, a
purchaser, assignee or transferee of such shares, unless and until such other
person becomes the registered holder of such shares or is recognized as such,
whether or not the Corporation shall have either actual or constructive notice
of the claimed interest of such other person. By way of example and not of
limitation, until such other person has become the registered holder of such
shares or is recognized pursuant to Section 7-107-204 of the Colorado Act or any
similar applicable law, he shall not be entitled: (i) to receive notice of the
meetings of the shareholders; (ii) to vote at such meetings; (iii) to examine a
list of the shareholders; (iv) to be paid dividends or other distributions
payable to shareholders; or (v) to own, enjoy and exercise any other rights
deriving from such shares against the Corporation. Nothing contained herein will
be construed to deprive any beneficial shareholder, as defined in Section
7-113-101(1) of the Colorado Act, of any right he may have pursuant to Article
113 of the Colorado Act or any successor thereof.
-5-
<PAGE>
ARTICLE IX
REGISTERED OFFICE AND REGISTERED AGENT
The address of the registered office of the Corporation is 15200 East
Girard Avenue, Suite 3000, Aurora, Colorado 80014. The name of the registered
agent of the Corporation at such address is Philip L. Becker. The address of the
principal office of the Corporation is 15200 East Girard Avenue, Suite 3000,
Aurora, Colorado 80014.
-6-
BYLAWS
OF
eSOFT, INC.
ARTICLE I
OFFICES
1.1 NAME. The name of the Corporation is eSOFT, INC.
1.2 SEAL. The President, the Secretary or other officer designated
by the Board of Directors shall have authority to affix the corporate seal to
any document requiring such seal and to attest the same. The seal of the
Corporation shall be substantially in the following form:
1.3 FISCAL YEAR. The Board of Directors may adopt for and on behalf
of the Corporation a fiscal year or a calendar year.
1.4 PRINCIPAL OFFICE. The principal offices of the Corporation shall
be 4122 South Parker Road, Aurora, Colorado 80014.
1.5 OTHER OFFICES. The Corporation may have such other offices
within or without the State of Colorado as the Board of Directors may, from time
to time, determine.
1.6 REGISTERED OFFICE AND REGISTERED AGENT. The registered office of
the Corporation is situated at 4122 South Parker Road, Aurora, Colorado 80014,
and the registered agent, whose business address is and shall be identical to
the address of the registered office, is David N. Ebert. The registered office,
registered agent, or the address thereof, may be changed from time to time by
the Board of Directors as provided by law.
ARTICLE II
CAPITAL STOCK
2.1 NUMBER OF SHARES. The aggregate number of shares of capital
stock is 50,000 shares, each share having no par value.
2.2 CONSIDERATION FOR SHARES. Shares shall be issued for such
consideration expressed in dollars as shall be fixed from time to time by the
Board of Directors. Treasury shares nay be disposed of by the Corporation for
such consideration expressed in dollars, but not less than the par value
thereof, as shall be fixed from time to time by the Board of Directors.
<PAGE>
2.3 PAYMENT FOR SHARES. The consideration for the issuance of shares
may be paid in whole or in part in money, in other property, tangible or
intangible, or in labor or in services actually performed for the Corporation.
When payment of the consideration for which shares are to be issued shall have
been received by the Corporation, such shares shall be deemed to be fully paid
and non-assessable. Neither promissory notes nor future services shall
constitute payment or part payment for shares of the Corporation. In the absence
of fraud in the transaction, the judgment of the Board of Directors or the
shareholders, as the case may be, as to the value of the consideration received
for shares, shall be conclusive. No certificate shall be issued for any share
until such share is fully paid.
2.4 STOCK CERTIFICATES. The shares of the Corporation shall be
represented by certificates signed by the President or a Vice-President and the
Secretary or Assistant Secretary of the Corporation and shall be sealed with the
seal of the Corporation or a facsimile thereof. In case any officer who has
signed shall have ceased to be such officer before such certificate is issued,
it may be issued by the Corporation with the same effect as if he were such
officer at the date of its issue.
There shall be set forth upon the face or back of every
certificate representing shares issued by the Corporation a full statement of
the designations, preferences, limitations, and relative rights of the shares of
each class authorized to be issued by the Articles of Incorporation.
Each certificate representing shares shall state upon the face
thereof:
(a) The Corporation is organized under the laws of the State
of Colorado,
(b) The name of the person to whom issued,
(c) The number and class of shares which such certificate
represents, and
(d) The par value of each share or that the share has no par
value, as the case may be.
No certificate shall be issued for any share until such share is
fully paid for.
2.5 TRANSFERS OF STOCK. The shares of the Corporation shall be
transferable only on the books of the Corporation upon surrender of the
certificate or certificates representing the same properly endorsed by the
registered holder or by his duly authorized attorney. Such endorsement or
endorsements shall be guaranteed by a commercial bank or stockbroker registered
on the New York Stock Exchange. The requirement for such guarantee may be waived
in writing upon the form of endorsement by the President of the Corporation
witnessing the signature.
-2-
<PAGE>
2.6 STOCK TRANSFER BOOK. The Secretary of the Corporation shall act
as transfer agent of the certificates representing the shares of capital stock
of the Corporation. The Secretary shall maintain, among other records, a stock
certificate book, the stubs in which shall set forth, among other things, the
names and addresses of the holders of all issued shares of the Corporation, the
number of shares held by each, the certificate numbers representing such shares,
the date of issue of the certificates representing such shares, and whether or
not such shares originate from original issue or from transfer. Such stock
certificate book is hereby identified as the stock transfer book of the
Corporation, and the names and addresses of shareholders as they appear on the
stock certificate book maintained by the Secretary shall be the official list of
"shareholders of record." The name and address of each shareholder of record, as
they appear on the stubs of the stock certificate book, shall be conclusive
evidence as to who are the holders entitled to receive notice of the meetings of
shareholders; to vote at such meetings; to examine a complete list of the
shareholders entitled to vote at meetings; and to own, enjoy and exercise any
other property or rights deriving from such shares against the Corporation.
Shareholders, but not the Corporation, its directors, officers, agents or
attorneys, shall be responsible for notifying the Secretary in writing of any
changes in their names or addresses from time to time, and failure to do so will
relieve the Corporation, the other shareholders, directors, officers, agents and
attorneys from liability for failure to direct notices or other documents to pay
over or transfer dividends or other property or rights to a name or address
other than the name and address appearing on the stubs of the stock certificate
book maintained by the Secretary.
2.7 LOST AND DESTROYED CERTIFICATES. The Board of Directors may
direct new certificate or certificates to be issued in place of any certificate
or certificates, theretofore issued by the Corporation, which have been
allegedly lost or destroyed, upon receipt of an affidavit of that fact by the
person claiming the certificate of stock to be lost or destroyed, and the Board
of Directors when authorizing such issue of a new certificate or certificates
may, in its discretion, require the owner of such lost or destroyed certificate
or certificates or his legal representative to advertise the same in such manner
as it shall require or give the Corporation a bond in such sum as it may direct
as indemnity against any claim that may be made against the Corporation or both.
Except as provided herein, no new certificate evidencing shares of stock shall
be issued until the old certificate or certificates for which the new
certificate is to be issued is surrendered for cancellation.
ARTICLE III
MEETINGS OF SHAREHOLDERS
3.1 PLACE OF MEETING. Meetings of the shareholders of the
Corporation shall be held at the place of business of the Corporation or at such
other place as the President may direct within the continental limits of the
United States.
3.2 ANNUAL MEETING. The annual meeting of the shareholders for the
election of directors and the transaction of such other business as may
properly come before the meeting
-3-
<PAGE>
shall be held on the first Monday in March of each year, but if such day be a
holiday, then on the first day thereafter which is not a holiday. Failure to
hold the annual meeting at the time designated herein shall not work a
forfeiture or dissolution of the Corporation.
3.3 SPECIAL MEETINGS. Special meetings of the shareholders may be
called by the President, a Vice-President, the Board of Directors, or the
holders of not less than one-tenth (l/l0th) of all the shares entitled to vote
at the meeting. Special meetings shall be held at the principal office of the
Corporation.
3.4 NOTICES OF MEETINGS. Written notice stating the place, day and
hour of the meeting and, in the case of a special meeting, the purpose or
purposes for which the meeting is called, shall be delivered not less than ten
(10) days nor more than fifty (50) days before the date of the meeting, either
personally or by mail, by or at the discretion of the President, the Secretary,
or the officer or person calling the meeting, to each shareholder of record
entitled to vote at such meeting; except that if the authorized capital stock is
to be increased, then at least thirty (30) days' notice shall be given.
3.5 GIVING OF NOTICE. If mailed, notice shall be deemed to be
delivered when deposited in the United States mail addressed to the shareholder
at his address as it appears on the stock transfer books of the Corporation,
with postage thereon paid. If three (3) successive letters mailed to the last
known address of any shareholder of record are returned as undeliverable, no
further notices to such shareholders shall be necessary until another address
for such shareholder is made known to the Corporation.
3.6 CLOSING OF TRANSFER BOOKS AND FIXING RECORD DATE. For the
purpose of determining shareholders entitled to notice of or to vote at any
meeting of shareholders or any adjournment thereof, or entitled to receive
payment of any dividend, or in order to make determination of shareholders for
any proper purpose, the Board of Directors of the Corporation may provide that
the stock transfer books shall be closed for a stated period not to exceed in
any case fifty (50) days immediately preceding such meeting. If the stock
transfer books are closed for the purpose of determining shareholders entitled
to notice of or to vote at a meeting of shareholders, such books shall be closed
for at least ten (10) days immediately preceding such meeting. In lieu of
closing the stock transfer books, the Board of Directors may fix in advance a
date as the record date for any such determination of shareholders, such date in
any case not to be more than fifty (50) days and, in case of a meeting of
shareholders, not less than ten (10) days prior to the date on which the
particular action requiring such determination of shareholders is to be taken.
If the stock transfer books are not closed and no record date is fixed for the
determination of shareholders entitled to notice of or to vote at a meeting of
shareholders, or of shareholders entitled to received payment of a dividend, the
date on which notice of the meeting is mailed or the date on which the
resolution of the Board of Directors declaring such dividend is adopted, as the
case may be, shall be the record date for such determination of shareholders.
When a determination of shareholders entitled to vote at any meeting of
shareholders has been made as provided in this paragraph, such determination
shall apply to any adjournment thereof.
-4-
<PAGE>
3.7 VOTING RECORD. The officer or agent having charge of the stock
transfer books for shares of the Corporation shall make, at least ten (10) days
before each meeting of shareholders, a complete record of the shareholders
entitled to vote at such meeting or any adjournment thereof, arranged in
alphabetical order, with the address of and the number of shares held by each.
The record, for a period of ten (10) days before such meeting, shall be kept on
file at the principal office of the Corporation and shall be subject to
inspection by any shareholder for any purpose germane to the meeting at any time
during usual business hours. Such record shall also be produced and kept open at
the time and place of the meeting and shall be subject to the inspection of any
shareholder for any purpose germane to the meeting during the whole time of the
meeting. The original stock transfer books shall be prima facie evidence as to
who are the shareholders entitled to examine such record or transfer books or to
vote at any meeting of shareholders. Failure to comply with these requirements
shall not affect the validity of any action taken at any such shareholders'
meeting.
3.8 QUORUM. A quorum at any meeting of the shareholders shall
consist of a majority of the shares entitled to vote, represented in person or
by proxy. If a quorum is present, the affirmative vote of the majority of the
shares represented at the meeting entitled to vote on the subject matter shall
be the act of the shareholders. If less than a majority of the shares entitled
to vote are represented at a meeting, a majority of the shares so represented
may adjourn the meeting for a period not to exceed sixty (60) days at any one
adjournment. At such later meeting at which a quorum shall be present or
represented, any business may be transacted which might have been transacted at
a meeting as originally notified.
3.9 PROXIES. At all meetings of shareholders a shareholder may vote
by proxy, executed in writing by the shareholder or by his duly authorized
attorney in fact. Such proxy shall be filed with the Secretary of the
Corporation before or at the time of the meeting. No proxy shall be valid after
eleven (11) months from the date of its execution, unless otherwise provided in
the proxy.
3.10 ADJOURNMENTS. Adjournments of any annual or special meeting of
shareholders may be taken without new notice being given unless a new record
date is fixed for the adjourned meeting, but any meeting at which directors are
to be elected shall be adjourned only from day to day until such directors shall
have been elected.
3.11 VOTING OF SHARES. Each outstanding share of common stock shall
be entitled to one (1) vote and each fractional share shall be entitled to a
corresponding fractional vote on each matter submitted to vote at a meeting of
shareholders. Cumulative voting of shares of stock is not authorized in the
election of directors.
3.12 VOTING OF SHARES BY CERTAIN HOLDERS. Neither treasury nor
shares held by another corporation, if the majority of the shares entitled to
vote for the election of directors of such other corporation is held by the
Corporation, shall be voted at any meeting or counted in determining the total
number of outstanding shares at any given time.
-5-
<PAGE>
Shares standing in the name of another corporation, domestic or
foreign, may be voted by such officer, agent or proxy as the bylaws of such
corporation may prescribe, or, in the absence of such provisions, as the Board
of Directors of such corporation may determine.
Shares held by an administrator, executor, guardian or conservator
may be voted by him, either in person or by proxy, without a transfer of such
shares into his name. Shares standing in the name of a trustee may be voted by
him, either in person or by proxy, but no trustee shall be entitled to vote
shares held by him without a transfer of such shares into his name.
Shares standing in the name of a receiver may be voted by such
receiver, and shares held by or under the control of a receiver may be voted by
such receiver without the transfer thereof into his name if authority so to do
be contained in an appropriate order of the Court by which such receiver was
appointed.
A shareholder whose shares are pledged shall be entitled to vote
such shares until the shares have been transferred into the name of the pledgee,
and thereafter the pledgee shall be entitled to vote the shares so transferred.
3.13 CHAIRMAN. The President of the Corporation or in his absence
the senior Vice-President present shall act as Chairman at all meetings of the
shareholders.
ARTICLE IV
THE BOARD OF DIRECTORS
4.1 GENERAL POWERS AND QUALIFICATIONS. The business and affairs of
the Corporation shall be managed by a Board of Directors, except as otherwise
provided by the Colorado Corporation Code, the Articles of Incorporation, or
these Bylaws. The members of the Board of Directors shall be persons of the age
of eighteen (18) years or older, but need not be residents of the State of
Colorado or shareholders of the Corporation.
4.2 NUMBER AND TENURE. Members of the initial Board of Directors
shall hold office until the first annual meeting of shareholders and until their
successors shall have been elected and qualified. At the first annual meeting of
shareholders, and at each annual meeting thereafter, the shareholders shall set
the number of directors to serve until the next succeeding annual meeting. Each
director shall hold office for the term for which he is elected and until his
successor has been elected and has qualified. Directors shall be removable in
the manner provided by the statutes of Colorado.
4.3 CHANGE OF NUMBER. The number of directors may be increased or
decreased from time to time by the shareholders at any regular or special
meeting, but no decrease shall have the effect of shortening the term of any
incumbent director.
-6-
<PAGE>
4.4 RESIGNATIONS. Any director may resign at any time by mailing or
delivering or by transmitting by telegram or cable written notice of his
resignation, which resignation shall take effect at the time specified therein,
or, if no time be specified, then at the time of receipt thereof.
4.5 VACANCIES. Any vacancy occurring in the Board of Directors may
be filled by the affirmative vote of a majority of the remaining directors
though less than a quorum of the Board of Directors. A director elected to fill
a vacancy shall be elected for the unexpired term of his predecessor in office.
Any directorship to be filled by reason of any increase in the number of
directors shall be filled by the affirmative vote of a majority of the directors
then in office or by an election at any annual meeting or at a special meeting
of shareholders called for that purpose.
4.6 PLACE OF MEETINGS. Meetings of the Board of Directors of the
Corporation, regular or special, may be held either within or without the State
of Colorado, but must always be held within the continental limits of the United
States.
4.7 ANNUAL MEETINGS. The annual meeting of the Board of Directors or
any committee designated by the Board shall be held without notice other than
this Bylaw, immediately after, and at the same place as, the annual meeting of
shareholders. The Board of Directors may provide, by resolution, the time and
place, either within or outside Colorado, for the holding of additional regular
meetings without other notice than such resolution.
4.8 REGULAR MEETING. The Board of Directors may provide, by
resolution, the time and place, either within or outside Colorado, for the
holding of additional regular meetings without other notice than such
resolution.
4.9 SPECIAL MEETING. Special meeting of the Board of Directors or
any committee designated by the Board may be called by or at the request of the
President or any director.
4.10 NOTICE. Notice of any special meeting of the Board of Directors
or any committee designated by the Board shall be given by written notice mailed
to each director at his business address at least five (5) days prior to the
meeting, or by notice given at least two (2) days previously by telegram,
telephone, or written notice delivered personally. If mailed, such notice shall
be deemed to be delivered when deposited in the United States mail so addressed,
with postage thereon prepaid. If notice be given by telegram, such notice shall
be deemed to be delivered when the telegram is delivered to the telegraph
company. Any director may waive notice of any meeting. The attendance of a
director at a meeting constitutes a waiver of notice of such meeting, except
where a director attends a meeting for the express purpose of objecting to the
transaction of any business because the meeting is not lawfully called or
convened Neither the business to be transacted at, nor the purpose of, any
special meeting of the Board of Directors or any committee designated by the
Board need be specified in the notice or waiver of notice of such meeting.
-7-
<PAGE>
4.11 TELEPHONE MEETINGS. Members of the Board of Directors or any
committee designated by such Board may participate in a meeting of the Board or
committee by means of conference telephone or similar communications equipment
by which all persons participating in the meeting can hear each other at the
same time.
4.12 QUORUM. A majority of the actual number of directors shall
constitute a quorum for the transaction of business. The act of the majority of
the directors present at a meeting in which a quorum is present shall be the act
of the Board of Directors.
4.13 WITHDRAWAL OF A QUORUM. If a quorum is present when the meeting
is convened, the directors present may continue to do business, taking action by
vote of a majority of a quorum as fixed in Section 4.12 hereof, until
adjournment, notwithstanding the withdrawal of enough directors to leave less
than a quorum as fixed in Section 4.12 hereof, or the refusal of any director
present to vote.
4.14 PRESUMPTION OF ASSENT. The assent of a director of the
Corporation who is present at a meeting of the Board of Directors at which
action on any corporate matter is taken shall be entered in the minutes of the
meeting or unless he shall file his written dissent to such action with the
person acting as the Secretary of the meeting before the adjournment thereof, or
shall forward such dissent by registered or certified mail to the Secretary of
the Corporation immediately after the adjournment of the meeting. Such right to
dissent shall not apply to a director who voted in favor of such action.
4.15 COMPENSATION. By resolution of the Board of Directors, any
director may be paid any one (1) or more of the following: his expenses, if any,
of attendance at meetings; a fixed sum for attendance at meetings; or a stated
salary as director. Nothing herein contained shall be construed to preclude any
director from serving the Corporation in any capacity as an officer, employee,
agent or otherwise, and receiving compensation therefor.
4.16 CHAIRMAN OF THE BOARD. The Chairman of the Board, if such
officer shall be chosen by the Board of Directors, shall preside at all meetings
of the Board of Directors at which he is present. He shall, subject to the
direction of the Board of Directors, have general oversight over the affairs of
the Corporation and shall, from time to time, consult and advise with the
President in the direction and management of the Corporation's business and
affairs and shall also do and perform such other duties as may, from time to
time, be assigned to him by the Board of Directors.
4.17 EXECUTIVE COMMITTEE. The Board of Directors, by resolution
adopted by a majority of the actual number of directors, may designate from
among its members an executive and one (1) or more other committees each of
which to the extent provided in such resolution shall have and may exercise all
of the authority of the Board of Directors, but no such committee shall have the
authority of the Board of Directors in reference to amending the Articles of
Incorporation, adopting a plan of merger or consolidation, recommending to the
shareholders the sale, lease, exchange or other disposition of all or
substantially all of the property and assets of
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<PAGE>
the Corporation, otherwise than in the usual and regular course of its business,
recommending to the shareholders a voluntary dissolution of the Corporation or a
revocation thereof, or amending the Bylaws of the Corporation. The designation
of such committees and the delegation thereto of authority shall not operate to
relieve the Board of Directors, or any member thereof, of any responsibility
imposed by law.
4.18 SPECIFIC AUTHORITY FOR BANK ACCOUNTS, DEEDS, CONTRACTS. All
checks, drafts, notes, bonds, bills of exchange, and orders for the payment of
money of the Corporation; all deeds, mortgages and other written contracts and
agreements to which the Corporation shall be a party; and all assignments or
endorsements of stock certificates, registered bonds or other securities owned
by the Corporation shall, unless otherwise directed by the Board of Directors,
or unless otherwise required by the law, be signed by the President and
Treasurer. The Board of Directors may, however, authorize any other officers or
officer without necessity of countersignature of such officer to sign any of
such instruments, for and on behalf of the Corporation, and may designate
officers or employees of the Corporation, other than those named above, who may,
in the name of the Corporation, sign such instruments.
4.19 GENERAL AUTHORITY FOR BANK ACCOUNTS. Anything herein to the
contrary notwithstanding, the Board of Directors may, except as otherwise be
required by law, authorize any officer or officers, agent or agents, in the name
of and on behalf of the Corporation, to sign checks, drafts or other orders for
the payment of money or notes or other evidences of indebtedness, to endorse for
deposit, deposit to the credit of the Corporation at any bank or trust company
or banking institution in which the Corporation may maintain an account or to
cash checks, notes, drafts or other bankable securities or instruments, and such
authority may be general or confined to specific instances, as the Board may
elect; but unless so authorized by the Board, no officer, agent or employee
shall have the power or authority to bind the Corporation by any contract or
engagement or to pledge its credit or to render pecuniarily liable for any
purpose or to any amount.
4.20 OTHER COMMITTEES AND AGENTS. Committees not having and
exercising the authority of the Board of Directors in the management of the
Corporation, including standing committees and working committees, may be
designated by a resolution adopted by a majority of the directors present at a
meeting at which a quorum is present. The Board of Directors may authorize any
officer or officers, agent or agents of the Corporation in addition to the
officers so authorized by these Bylaws to enter into any contract, or execute
and deliver any instrument in the name of and on behalf of the Corporation, and
such authority may be general or confined to specific instances; the Board of
Directors may appoint such agents and representatives of the Corporation with
such powers and to perform such acts or duties on behalf of the Corporation as
the Board of Directors may see fit.
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<PAGE>
ARTICLE V
OFFICERS AND AGENTS
5.1 OFFICERS. The officers of the Corporation shall consist of a
President, one (1) or more Vice-Presidents, a Secretary, and a Treasurer, each
of whom shall be natural persons of the age of eighteen (18) years or older and
elected by the Board of Directors. The Board of Directors may elect or appoint
such other officers and assistant officers and agents as may be deemed
necessary. All officers and agents of the Corporation shall have such authority
and perform such duties in the management of the Corporation as are provided in
these Bylaws. The Board of Directors shall fix the term of office and salaries
of all of the officers of the Corporation. Any (2) two or more offices may be
held by the same person, except the offices of President and Secretary. Officers
need not be directors or shareholders of the Corporation.
5.2 VACANCIES. Whenever any vacancy shall occur in any office by
death, resignation, increase in the number of offices of the Corporation, or
otherwise, the same shall be filled by the Board of Directors, and the officers
so elected shall hold until their successors are chosen and qualified.
5.3 REMOVAL OF OFFICERS. Any officer or agent may be removed by the
Board of Directors or by the Executive Committee, if any, whenever, in its
judgment, the best interests of the Corporation will be served thereby, but such
removal shall be without prejudice to the contract rights, if any, of the person
so removed. Election or appointment of an officer or agent shall not of itself
create contract rights.
5.4 PRESIDENT. The President shall be the chief executive officer of
the Corporation; he shall preside at any meeting of the shareholders at which he
is present, and in the absence of the Chairman of the Board shall preside at any
meeting of the Board of Directors at which he is present. He shall be in charge
of the management of the business of the Corporation and shall see that all
orders and resolutions of the Board are carried into effect, and he shall have
the authority and powers necessary to perform such duties. The President shall
have full authority to execute proxies on behalf of the Corporation, to vote
stock owned by it in any other corporation, and to execute with the Secretary
powers of attorney appointing other corporations, partnerships or individuals
the agent of this Corporation, all subject to the provisions of the statutes of
the State of Colorado, the Articles of Incorporation of this Corporation and the
Bylaws.
5.5 VICE-PRESIDENT. Any Vice-President shall, in the absence or
disability of the President, perform the duties and exercise the powers of the
President and shall perform such other duties as may, from time to time, be
prescribed by the Board of Directors.
5.6 SECRETARY. The Secretary shall attend all meetings of the
shareholders and of the Board of Directors and shall keep or cause to be kept in
a book provided for the purpose a
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<PAGE>
true and complete record of the proceedings of such meetings and shall perform a
like duty for all standing committees appointed by the Board of Directors when
required. He shall cause due notice to be given of all meetings of the
shareholders and Board Directors. He shall keep in safe custody the corporate
records and the seal of the Corporation and when authorized by the Board shall
affix the seal to any instrument requiring it, and when so affixed it shall be
attested by his signature. He shall in general perform all duties incident to
the office of Secretary, and such other duties as from time to time may be
assigned to him by the President or by the Board of Directors.
5.7 TREASURER. The Treasurer shall keep complete and correct records
of account showing accurately at all times the financial condition of the
Corporation. He shall be the legal custodian of all monies, notes, securities
and other valuables which may, from time to time, come into the possession of
the Corporation. He shall immediately deposit all funds of the Corporation
coming into his hands in some reliable bank or other depository to be designated
by the Board of Directors and shall keep such bank account(s) in the name of the
Corporation. He shall furnish at meetings of the Board of Directors or whenever
requested a statement of the financial condition of the Corporation and shall
perform such other duties as the Bylaws may require or the Board of Directors
may prescribe. The Treasurer may be required to furnish bond in such amount as
shall be determined by the Board of Directors.
5.8 ABSENCE. In case of the absence of any officer of the
Corporation or for any other reason that the Board may deem sufficient, the
Board may delegate the powers and duties of such officer to any other officer,
or to any Director or employee of the Corporation for the time being; provided a
majority of the entire Board concurs therein.
ARTICLE VI
INDEMNIFICATION
6.1 THIRD-PARTY ACTIONS. Any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action,
suit, or proceeding, whether civil, criminal, administrative, or investigative
(other than an action by or in the right of the Corporation), by reason of the
fact that he is or was a director, officer, employee, or agent of the
Corporation or is or was serving at the request of the Corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, shall be indemnified against expenses
(including attorneys' fees), judgments, fines, and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit, or
proceeding if he acted in good faith and in a manner he reasonably believed to
be in the best interests of the Corporation and, with respect to any criminal
action or proceeding, had no reasonable cause to believe his conduct was
unlawful. The termination of any action, suit, or proceeding by judgment, order,
settlement, or conviction or upon a plea of nolo contendere or its equivalent
shall not of itself create a presumption that the person did not act in good
faith and in a manner which he reasonably believed to be in the best interests
of the Corporation and, with
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<PAGE>
respect to any criminal action or proceeding, had reasonable cause to believe
that his conduct was unlawful.
6.2 DERIVATIVE ACTIONS. Any person who was or is a party or is
threatened to be made a party to any threatened, pending, or completed action or
suit by or in the right of the Corporation to procure a judgment in its favor by
reason of the fact that he is or was a director, officer, employee, or agent of
the Corporation or is or was serving at the request of the Corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust or other enterprise shall be indemnified against expenses
(including attorneys' fees) actually and reasonably incurred by him in
connection with the defense or settlement of such action or suit if he acted in
good faith and in a manner he reasonably believed to be in the best interests of
the Corporation; but no indemnification shall be made in respect of any claim,
issue, or matter as to which such person has been adjudicated to be liable for
negligence or misconduct in the performance of his duty to the Corporation,
unless and only to the extent that the court in which such action or suit was
brought determines upon application that, despite the adjudication of liability,
but in view of all circumstances of the case, such person is fairly and
reasonably entitled to indemnification for such expenses which such court deems
proper.
6.3 MANDATORY INDEMNIFICATION. To the extent that a director,
officer, employee, or agent of the Corporation has been successful on the merits
in defense of any action, suit, or proceeding referred to in paragraph 6.1 or
6.2 of this Article or in defense of any claim, issue, or matter therein, he
shall be indemnified against expenses (including attorneys' fees) actually and
reasonably incurred by him in connection therewith.
6.4 STANDARDS. Any indemnification under paragraph 6.1 or 6.2 of
this Article (unless ordered by a court) shall be made by the Corporation only
as authorized in the specific case upon a determination that indemnification of
the director, officer, employee, or agent is proper in the circumstances because
he has met the applicable standard of conduct set forth in said paragraph 6.1 or
6.2. Such determination shall be made by the Board of Directors by a majority
vote of a quorum consisting of directors who were not parties to such action,
suit, or proceeding, or, if such a quorum is not obtainable, a quorum of
disinterested directors, by independent legal counsel in a written opinion, or
by the shareholders.
6.5 EXPENSES. Expenses (including attorneys' fees) incurred in
defending a civil or criminal action, suit, or proceeding may be paid by the
Corporation in advance of the final disposition of such action, suit, or
proceeding as authorized in paragraph 6.4 of this Article upon receipt of an
undertaking by or on behalf of the director, officer, employee, or agent to
repay such amount unless it is ultimately determined that he is entitled to be
indemnified by the Corporation as authorized in this Article.
6.6 NON-EXCLUSIVE. The indemnification provided by this Article
shall not be deemed exclusive of any other rights to which those indemnified may
be entitled under the Articles of Incorporation, any bylaw, agreement, vote of
shareholders or disinterested directors, or otherwise, and any procedure
provided for by any of the foregoing, both as to action in his
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<PAGE>
official capacity and as to action in another capacity while holding such
office, and shall continue as to a person who has ceased to be a director,
officer, employee, or agent and shall inure to the benefit of heirs, executors,
and administrators of such a person.
6.7 INSURANCE. A corporation may purchase and maintain insurance on
behalf of any person who is or was a director, officer, employee, or agent of
the corporation or who is or was serving at the request of the corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise against any liability asserted against him
and incurred by him in any such capacity or arising out of his status as such,
whether or not the corporation would have the power to indemnify him against
such liability under the provisions of this Article.
ARTICLE VII
DIVIDENDS
7.1 GENERAL. The Board of Directors may, from time to time, declare,
and the Corporation may pay dividends in cash, property or its own shares,
except when the Corporation is insolvent or when the payment thereof would
render the Corporation insolvent, or when the payment or declaration thereof
would be contrary to any restrictions contained in the Articles of Incorporation
or the statutes of the State of Colorado. The Board of Directors shall have the
right and power, however, to accumulate and preserve so much of the net proceeds
and profits of the business of the company as a reserve or surplus fund as they
may, from time to time, deem necessary for the best interests of the
Corporation.
7.2 SPLIT-UP. A split-up or division of the issued shares of common
stock into a greater number of shares of the same class, without increasing the
stated capital of the Corporation, shall not be construed to be a dividend
within the meaning of this Article.
7.3 REFUNDS OF DIVIDENDS. Should payments, bonuses or salaries made
by the Corporation be determined to be in excess of efforts expended or for some
other reason be determined to be dividends and not compensation for services
rendered by such officer or employee of the Corporation, then, in that event,
such officer or employee of the Corporation shall be required to return and
reimburse to the Corporation all such sums.
ARTICLE VIII
MISCELLANEOUS
8.1 WAIVER AND EFFECTIVE DATE OF NOTICE. Whenever notice is required
to be given to any shareholder or director under the provisions of the Colorado
Corporation Act or under the provisions of the Articles of Incorporation or
these Bylaws, a waiver thereof in writing, signed by the person or persons
entitled to such notice, whether before, at, or after the time stated therein,
shall be equivalent to the giving of such notice.
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<PAGE>
8.2 ACTION BY DIRECTORS OR SHAREHOLDERS WITHOUT A MEETING. Any
action required to be taken at a meeting of the directors, executive committee
or other committee of the directors, or shareholders of the Corporation, or any
action which may be taken at a meeting of the directors, executive committee or
other committee of the directors, or shareholders, may be taken without a
meeting if a consent in writing, setting forth the action so taken, is signed by
all of the directors, executive or other committee members, or shareholders
entitled to vote with respect to the subject matter thereof. Such consent has
the same force and effect as a unanimous vote of the directors, executive or
other committee members, or shareholders, as the case may be, and may be stated
as such in any articles or document filed with the Secretary of State under this
code.
8.3 AMENDMENT OF BYLAWS. Subject to repeal or change by action of
the shareholders, the Bylaws may be altered, amended, or repealed, from time to
time, in whole or in part, by the affirmative vote of a majority of the Board of
Directors at a meeting called for that purpose, or by consent.
-------------------------------
Dated
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SEVERANCE AGREEMENT
The parties to this agreement are eSoft, Inc. ("eSoft") and Wayne
Farlow ("Employee"). This document describes the agreements of eSoft and
Employee concerning the resignation of Employee as officer and director of eSoft
and termination of his employment with eSoft. This agreement, and the payments
and other arrangements described below, give valuable consideration to both
eSoft and Employee.
1. EMPLOYMENT RELATIONSHIP. eSoft and Employee have agreed that Employee
has resigned as an officer and director of eSoft effective November 7, 1997, and
termination of his employment as provided herein.
2. PAYMENTS AND OTHER ARRANGEMENTS. eSoft has agreed to make the following
payments to Employee:
a. The amount of $10,000 per month as continued salary through March
7, 1998, payable in equal semi-monthly installments, in
accordance with eSoft's usual payroll practices, with the payment
for the final period through March 7 payable on that date.
b. Promptly after execution of this agreement eSoft shall pay to
Employee, in lieu of accrued vacation, the amount of $1,875.
eSoft also agrees to the following terms:
c. Employee shall be entitled to continue to participate under
eSoft's health insurance program with coverage for his family,
and with the premiums paid by eSoft through the month of March
1998. Thereafter, the Employee may obtain, at Employee's cost,
such health insurance as is permitted to a former employee under
COBRA or the Colorado Health Care Coverage Act and/or the
Company's health insurance program.
d. The employee is entitled to purchase, and has agreed to purchase,
60,000 shares of eSoft Common Stock at a price of $.50 per share,
pursuant to an incentive stock option granted to Employee by
eSoft. The purchase shall be made after eSoft is merged into a
newly created Delaware corporation for the purpose of
reincorporating eSoft under the Delaware Business Corporation
Law, which is planned to occur before January 31, 1998. Employee
shall have 15 business days after receipt of written notice from
eSoft of the effectiveness of the merger to purchase said 60,000
shares. In payment for such shares Employee will pay to the
Company $600 in cash or check and the Company shall accept a
non-interest bearing, non-recourse promissory note,
<PAGE>
payable to the Company and due on or before September 5, 1999.
The shares of stock purchased by the Employee shall be held by
eSoft as security for payment of the note.
e. The Employee shall be promptly reimbursed for all reasonable
out-of-pocket expenses incurred in connection with the
performance of his duties upon presentation to eSoft of an
itemized accounting of the expenses, including reasonable
supporting data.
3. PROPERTY. eSoft and the Employee each hereby acknowledge that neither
has possession of any tangible property which belongs to or is the property of
the other party.
4. OTHER AGREEMENTS. This agreement, together with a Mutual Release
entered into among eSoft, and three consultants to eSoft with the Employee of
even date herewith constitutes the entire agreement concerning the termination
of Employee's employment by eSoft, except that the Employment Agreement dated
September 2, 1997, between eSoft and the Employee shall remain in effect with
respect to the provisions of Sections 8 and 9 of said Employment Agreement.
5. AMENDMENT. This agreement can be modified only by an agreement in
writing signed by both parties.
6. SUCCESSORS. This agreement benefits and binds the parties' successors.
7. COLORADO LAW. This agreement will be interpreted in accordance with the
laws of the State of Colorado.
8. ENFORCEABILITY. If any portion of this agreement is unenforceable, the
remaining portions of the agreement will remain enforceable.
eSOFT, INC.
By:
- --------------------------------- ------------------------------------
Wayne Farlow Date Philip L. Becker, Chairman Date
and Chief Executive Officer
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<PAGE>
MUTUAL RELEASE
The parties to this agreement are eSoft, Inc. ("eSoft"), W. Terrance
Schreier, Gene R. Copeland and Daryl Yurek, consultants to eSoft, (together with
eSoft, the "eSoft Parties") and Wayne Farlow ("Employee"). The Employee and
eSoft have entered into a Severance Agreement dated this date (the "Severance
Agreement) that describes the agreements of eSoft and Employee concerning the
resignation of Employee as officer and director of eSoft and termination of his
employment with eSoft. This document sets forth the mutual releases between the
eSoft Parties and the Employee. This agreement, the payments and other
arrangements made pursuant to the Severance Agreement, and the mutual releases
contained herein give valuable consideration to both the eSoft Parties and
Employee.
9. RELEASE BY EMPLOYEE OF ESOFT PARTIES. In consideration of the premises,
the payments by eSoft to the Employee and the mutual agreements herein, Employee
releases and waives all claims against any of the eSoft Parties, and any
officers or directors of eSoft and any affiliates of the eSoft Parties for loss,
damage or injury (collectively referred to as "Claims") arising from or in
connection with the Employee's employment by eSoft, including the following:
o defamation based on statements made by directors, officers or
agents of eSoft or others;
o breach of an express or implied employment contract;
o compensation or reimbursement of Employee;
o unfair employment practices; and
o any act or omission by or on behalf of any eSoft Party.
The Claims released and waived by Employee include:
o those arising before the date of this agreement;
o those that are presently known, suspected, unknown or unsuspected;
o those for reinstatement or future employment;
o those for actual, consequential, punitive or special damages;
o those for attorney's fees, costs, experts' fees and other expenses
of investigating, litigating or settling Claims; and
o those against the eSoft Parties and/or eSoft's subsidiaries,
employees, officers, directors, agents and contractors, and
any affiliate of any eSoft Party.
Nothing herein is intended to release any Claims that may hereafter arise by
reason of Employee's status as a shareholder of eSoft, or by reason of any
breach of this Agreement or the Severance Agreement.
10. RELEASE BY ESOFT PARTIES OF THE EMPLOYEE. In consideration of the
agreements by the Employee herein, each of the eSoft Parties hereby releases the
Employee of any and all claims for loss, damage or injury ("Claims") or
obligations whatsoever arising out of or in any way connected with the
Employee's employment and any related activities, including his resignation and
the termination of the Employment Agreement dated September 2, 1997, between
eSoft and Employee
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<PAGE>
(the "Employment Agreement"), and including any claim of the kind or nature
described in Section 3 above, provided, however, that the Employee's obligations
under Sections 8 and 9 of the Employment Agreement, shall continue as provided
therein.
11. AGREEMENT NOT TO SUE. The eSoft Parties and the Employee each waive
any right to file suit for any Claims. The eSoft Parties will not sue Employee
and Employee will not sue the eSoft Parties for any Claims. Neither Employee nor
any of the eSoft Parties will initiate or proceed with any other action or
proceeding against each other that relates to any action or condition that could
give rise to Claims.
12. NO ADMISSION OF WRONG DOING. Neither the eSoft Parties nor the
Employee admit any wrong doing or liability of any kind and have entered into
this agreement voluntarily to establish the agreed rights of the parties with
respect to Employee's resignation and termination of the Employment Agreement
between eSoft and the Employee. Payments and other arrangements by eSoft to the
Employee hereunder compromise and settle any Claims by Employee against the
eSoft Parties.
13. COMMENTS. Employee will not criticize, disparage or ridicule eSoft or
its business, products or employment practices. The eSoft Parties will not
criticize, disparage or ridicule Employee with respect to his business or
leadership abilities, skills or the performance of his duties to eSoft. The
eSoft Parties and Employee represent that they have made no statements that
criticize, disparage or ridicule the other Party.
14. OTHER AGREEMENTS. This Agreement, together with the Severance
Agreement, constitutes the entire agreement concerning the termination of
Employee's employment by eSoft, except that the Employment Agreement dated
September 2, 1997, between eSoft and the Employee shall remain in effect with
respect to the provisions of Sections 8 and 9 of said Employment Agreement.
15. AMENDMENT. This agreement can be modified only by an agreement in
writing signed by both parties.
16. SUCCESSORS. This agreement benefits and binds the parties' successors.
17. COLORADO LAW. This agreement will be interpreted in accordance with
the laws of the State of Colorado.
18. ENFORCEABILITY. If any portion of this agreement is unenforceable, the
remaining portions of the agreement will remain enforceable.
EMPLOYEE UNDERSTANDS THAT THIS AGREEMENT IS A FINAL AND BINDING WAIVER OF
ANY CLAIMS AGAINST THE eSOFT PARTIES, INCLUDING CLAIMS FOR AGE
DISCRIMINATION UNDER THE AGE DISCRIMINATION IN EMPLOYMENT ACT AND CLAIMS
FOR SEX, RACE OR OTHER DISCRIMINATION UNDER TITLE VII OF THE CIVIL RIGHTS
ACT OF 1964.
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<PAGE>
THE ONLY PROMISES MADE TO CAUSE EMPLOYEE TO SIGN THIS
AGREEMENT ARE THOSE STATED IN THE SEVERANCE AGREEMENT
AND IN THIS AGREEMENT.
EMPLOYEE ACKNOWLEDGES THAT EMPLOYEE HAS BEEN TOLD BY THE
eSOFT PARTIES TO CONSULT WITH AN ATTORNEY PRIOR TO SIGNING
THIS AGREEMENT.
EMPLOYEE REPRESENTS THAT THIS AGREEMENT HAS BEEN FULLY
EXPLAINED BY EMPLOYEE'S ATTORNEYS, OR THAT EMPLOYEE HAS
WAIVED CONSULTATION WITH AN ATTORNEY, CONTRARY TO eSOFT'S
RECOMMENDATION.
EMPLOYEE REPRESENTS THAT EMPLOYEE WAS GIVEN THIS AGREEMENT AND ADVISED
THAT HE COULD CONSIDER THE AGREEMENT FOR AT LEAST TWENTY-ONE (21) DAYS
BEFORE SIGNING IT IF HE SO DESIRES. EMPLOYEE ACKNOWLEDGES THAT EMPLOYEE
HAS THE RIGHT TO REVOKE THIS AGREEMENT FOR SEVEN (7) DAYS AFTER SIGNING
IT. THIS AGREEMENT WILL NOT BE EFFECTIVE UNTIL THAT TIME HAS PASSED.
EMPLOYEE AGREES THAT THE PAYMENTS REFERENCED ABOVE WILL BE MADE AFTER THE
EXPIRATION OF THE SEVEN DAY REVOCATION PERIOD.
eSOFT, INC.
By:
- ------------------------------------ ----------------------------------
Wayne Farlow Date Philip L. Becker, Chairman, Date
and Chief Executive Officer
- ------------------------------------
Gene R. Copeland Date
- ------------------------------------
W. Terrance Schreier Date
- ------------------------------------
Daryl Yurek Date
-5-
FORM OF AGENCY AGREEMENT TO BE FILED BY AMENDMENT
LEASE AGREEMENT TO BE FILED BY AMENDMENT
VOTING AGREEMENT
This VOTING AGREEMENT (the "Agreement"), dated as of September , 1997,
---
is made and entered into by and among PHILIP L. BECKER, an individual person
("Becker"), TRANSITION PARTNERS, LTD., a Colorado corporation, and PANTHEON
CAPITAL LTD., (Transition Partners, Ltd. and Pantheon Capital Ltd. shall be
individually referred to as the "Shareholder" and collectively referred to as
the "Shareholders").
RECITALS
The Shareholders and eSoft, Inc. (the "Company") desire to act in concert
with regards to (i) the election of directors, (ii) matters relating to
financing the future growth of the Company's business operations and (iii) other
matters that may come before the vote of the shareholders of the Company during
the term of this Agreement.
IN CONSIDERATION of the mutual representations, warranties, covenants,
agreements, terms and conditions contained herein the parties hereby covenant
and agree as follows:
AGREEMENT
1. AGREEMENT TO VOTE. Becker agrees to vote all 950,000 shares of eSoft,
Inc. common stock owned and held by him (the "Shares") at any meeting of the
shareholders of the Company (a) for the election as directors of the Company
Messrs. Wayne Farlow, Gene Copeland, Kent Nuzum and Philip L. Becker and, upon
expansion of the size of the Board to five members for another director
recommended for election by a majority of the directors then acting and (b) in
any other
<PAGE>
matter brought before the shareholders in accordance with the proposal or
recommendation of the majority of the board of directors of the Company. This
agreement to vote shall be deemed irrevocable and coupled with an interest. This
agreement to vote shall be effective until the earlier of the consummation of an
Initial Public Offering of the Company' s common stock, 11:59 p.m. MST on
December 31, 1998 (the "Termination Date") or the termination of this Agreement
in accordance with its terms.
2. REPRESENTATIONS AND WARRANTIES OF BECKER. Becker hereby represents and
warrants to the Shareholders, as follows:
(a) Becker is the record and beneficial owner of the Shares. The
Shares are free and clear of any and all claims, liens, charges, encumbrances
and security interests and are not subject to any proxy, voting trust or other
agreement or arrangement with respect to the voting of the Shares, other than
pursuant to this Agreement; and
(b) Becker has all necessary power and authority to enter into this
Agreement and the execution of this Agreement by him does not, and the
performance by him of his obligations hereunder will not, constitute a violation
of, conflict with or result in a default under any contract, commitment,
agreement, understanding, arrangement, statute or restriction of any kind to
which he is a party or by which he or any of his property is bound or any
judgment, decree or order applicable to him.
3. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS. Each Shareholder
hereby represents and warrants to Becker, as to itself only, as follows:
-2-
<PAGE>
(a) This Agreement has been duly authorized by all necessary
corporate action or pursuant to the legal authority granted to the Shareholder
and is the valid and binding agreement of such Shareholder, enforceable against
it in accordance with its terms.
(b) The execution of this Agreement by such Shareholder does not,
and the performance by it of its obligations hereunder will not, constitute a
violation of, conflict with or result in a default under any contract,
commitment, agreement, understanding, arrangement, statute or restriction of any
kind to which the Shareholder is a party or by which the Shareholder or any of
its property is bound or any judgment, decree or order applicable to the
Shareholder.
4. COVENANT OF BECKER. Becker hereby agrees that he will not, during the
term of this Agreement, grant any proxies or enter into any voting trust or
other agreement or arrangement with respect to the voting of any Shares or any
shares of common stock of the Company subsequently acquired by Becker.
5. COVENANT OF THE SHAREHOLDERS. Each of the Shareholders hereby agrees,
as to itself only, that during the term of this Agreement, such Shareholder will
vote all of its shares of the Company's common stock at any shareholder meeting
for the election of the directors named and described in paragraph 1, above.
6. REMEDIES. The parties hereto agree that if for any reason Becker or any
Shareholder shall have failed to perform their obligations under this Agreement,
then any party hereto seeking to enforce this Agreement shall be entitled to
specific performance and injunctive and other equitable relief, and the parties
hereto further agree to waive any requirement for the securing or posting of any
bond in connection with obtaining such injunctive or other equitable relief.
This provision is without
-3-
<PAGE>
prejudice to any other rights that the parties hereto may have against each
other to perform their respective obligations under this Agreement.
7. MISCELLANEOUS.
(a) ASSIGNMENT. Neither this Agreement nor the rights and
obligations hereunder shall be assignable by the parties hereto. This Agreement
shall be binding upon each of the parties and such party's heirs, distributees,
successors and assigns by will or by the laws of descent.
(b) AMENDMENTS. This Agreement may not be modified, amended, altered
or supplemented, except upon the execution and delivery of a written agreement
executed by the parties hereto.
(c) TERMINATION. This Agreement shall terminate in its entirety upon
the earlier of the Termination Date or by written consent of all the parties.
(d) GOVERNING LAW. This agreement shall be governed by and construed
and enforced in accordance with the substantive laws of the state of Colorado
without giving effect to the principles of conflict of laws thereof.
-4-
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the parties have executed this Agreement on the date
first above written.
PHILIP L. BECKER:
/s/ Philip L. Becker
--------------------------------------------
Philip L. Becker
TRANSITION PARTNERS, LTD.:
By: /s/ W. Terrance Schreier
-----------------------------------------
W. Terrance Schreier, Managing Director
PANTHEON CAPITAL LTD.
By: /s/ Kent Nuzum
-----------------------------------------
Kent Nuzum, Director
RECEIPT OF NOTICE
eSoft, Inc. hereby acknowledges that it has received notice of the
execution of this Voting Agreement and agrees to take no action which would
interfere with the parties performance of the Agreement.
eSOFT, INC.
By: /s/ Philip L. Becker
-----------------------------------------
Philip L. Becker, President
-5-
REGISTRATION RIGHTS AGREEMENT
This Registration Rights Agreement is made and entered into this 2nd day of
September, 1997, between eSoft, Inc. (the "Company") and Transition Partners,
Limited ("Transition") and Pantheon Capital Ltd. ("Pantheon").
RECITALS
A. Transition and Pantheon have entered into agreements with the Company
pursuant to which Transition and Pantheon will provide consulting services to
the Company and be compensated therefore by receipt of shares of Common Stock
and/or options or warrants to purchase shares of Common Stock of the Company.
B. The Company intends to make a public offering of its shares of Common
Stock in Canada, and promptly after completion of that offering, to file a
registration statement covering its Common Stock under the Securities Exchange
Act of 1934 (the "1934 Act").
C. The Company has agreed to grant to Transition and Pantheon and to their
assigns certain rights relating to the registration of their shares of the
Company's Common Stock under the Securities Act of 1933 (the "1933 Act") after
the Company has registered its Common Stock under the 1934 Act.
IT IS THEREFORE AGREED:
1. Promptly after the completion of the public offering of shares of
Common Stock of the Company in Canada, the Company shall cause to be filed a
registration statement on Form 10-SB or other appropriate form to register the
Common Stock under the 1934 Act (the "1934 Act Registration").
2. At any time after the 1934 Act Registration has been filed with
the U.S. Securities and Exchange Commission ("SEC") either Pantheon or
Transition or their assigns may request that the Company file a registration
statement under the 1933 Act on Form S-3 or an equivalent form to register the
shares of the Company's Common Stock then held by said shareholder or issuable
to the shareholder pursuant to the exercise of options, warrants or other
rights, in order to permit the sale by such shareholder to the public of the
shares so registered.
3. Upon receipt of a request to register any of the shares under the
1933 Act on Form S-3, the Company shall immediately notify the other party to
this Agreement and all successors of the requesting shareholder or the other
party who own any of the shares of Common Stock or any of the options, warrants
or other securities under which shares of Common Stock are issuable that
<PAGE>
were originally acquired pursuant to agreements between the Company and
Transition or Pantheon, to inform such persons that a registration statement has
been requested to be filed and offering to such persons the opportunity to have
their share then held or subject to acquisition included within the S-3
registration statement. The Company shall include in such registration all
shares with respect to which written request for inclusion are received by the
Company within twenty (20) days after such notice.
4. As promptly as possible after the Company receives such request
for registration on Form S-3 and has received responses from the persons to whom
it has furnished the notice required by paragraph 3 (but in no event sooner than
90 days after the effectiveness of the registration of the Company shares under
the 1934 Act), the Company shall cause to be filed a registration statement
registering all of the shares requested by the requesting shareholder and by
those who have responded to the aforesaid notice. In the event that the
registration statement is not filed with the SEC within 60 days after the
shareholder request (or within 60 days after the expiration of the 90 days if
the request is received before that date) the Company shall issue to the
requesting party additional shares equal to 10% of the shares of the requesting
party which were requested to be registered and the same number of additional
shares for each 30-day period beyond such 60-day period that such registration
statement is not filed.
5. Upon filing the registration statement on Form S-3, the Company
shall use all reasonable efforts to cause said registration statement to become
effective, including causing such amendments to the registration statement as
may be reasonably required and such exhibits and other documents to be filed as
may be reasonably necessary to accomplish that result.
6. Upon request by the requesting shareholder, the Company shall
also cause applications to be filed for registration of the shares for sale in
up to five states selected by the requesting shareholder to permit the sale of
the shares in such states pursuant to the registration requirements or an
exemption from such registration requirements of the laws of such states.
7. In connection with the aforesaid registration, the Company shall
agree to indemnify the shareholders against liability for false or misleading
information contained in the S-3 registration statement in accordance with usual
indemnification provisions attendant to such registrations. Each selling
shareholder whose shares are included within such registration statement shall
also indemnify the Company against liability for false or misleading information
included in the registration statement that has been provided to the Company by
such selling shareholder.
8. This Agreement is entered into in the State of Colorado and shall
be construed in accordance with the laws of such state.
-2-
<PAGE>
In witness whereof the parties have caused this agreement to be duly
executed by their duly authorized officer as of this 2nd day of September 1997.
eSOFT, INC.
By: /s/Philip L. Becker
-----------------------------------------
Philip L. Becker, President
TRANSITION PARTNERS, LIMITED
By: /s/W. Terrance Schreier
-----------------------------------------
W. Terrance Schreier, President
PANTHEON CAPITAL LTD.
By: /s/Kent Nuzum
-----------------------------------------
Kent Nuzum, Director
-3-
[TRANSITION PARTNERS LETTERHEAD]
May 6, 1997
Mr. Philip L. Becker
President
eSoft, Inc.
15200 East Girard Avenue
Suite 3000
Aurora, CO 80014
Dear Phil:
You have advised Transition Partners, Limited ("TPL") that the original six
month engagement agreement with eSoft, Inc. ("the Company") dated October 14,
1996 has been paid in full for the time period ending April 15, 1997. You have
also advised Transition Partners, Limited that you will reimburse all reasonably
incurred out-of-pocket expenses incurred by TPL in connection with any aspect of
the original engagement. Per the engagement agreement dated October 14, 1996,
the engagement (except as to matters relating to the warrant and the contingent
advisory fees for transactions originating during the course of the engagement
completed within twelve months from the date of automatic termination)
terminated automatically on March 31, 1997. You have also expressed an interest
to extend the original agreement with terms that are sensitive to and
considerate of the current and projected working capital requirements of eSoft,
Inc. This letter will serve to advance your request for such a proposal and
confirm the extension of TPL's engagement as the Company's advisor in this
regard.
All aspects of the original October 14, 1996 engagement shall remain intact for
the duration of this engagement agreement extension ("extension"). The following
amendments shall be incorporated into the extension:
EFFECTIVENESS AND TERMINATION
The effective date of this extension shall be April 15, 1997. This extension
will automatically terminate on October 14, 1997 or 5 business days following
the receipt by the Company of permanent financing, whichever occurs first,
unless otherwise modified or extended by mutual written agreement. In the event
of such automatic termination, TPL shall be entitled to all compensation due
through the date of termination, including base and contingent advisory fees as
specified in the original agreement, all warrants, as well as all unpaid
out-of-pocket expenses. TPL shall also be entitled to contingent advisory fees,
as outlined above,
<PAGE>
for transactions originating during the course of this engagement and completed
within twelve months from the date of automatic termination.
COMPENSATION ARRANGEMENTS
All aspects (i.e. retainer fee, warrant, and transaction fees) of the original
October 14, 1996 engagement agreement shall remain intact for the duration of
the extension. In consideration of the Company's current strained cash position,
TPL acknowledges that the Company may not be able to pay its monthly retainer
fee in a timely fashion during the extension period. Further, TPL acknowledges
that the monthly retainer fee shall be due and payable only upon receipt of
bridge and/or permanent funds by the Company. The Company agrees that the
warrant(s) to TPL shall be in the form as Exhibits A and B, copies attached.
Further, TPL acknowledges that the warrant(s) shall vest only upon receipt of
bridge and/or permanent funds by the Company. Until the Company receives the
proceeds of anticipated bridge and/or permanent financing. TPL will, if
necessary for the good of the Company, accept delayed payment by the Company of
earned and invoiced retainer fees and transaction fees during the initial three
months of the extension. However, upon receipt of bridge and/or permanent funds
by the Company, the Company shall pay all amounts due to TPL and issue the
warrant(s) within 5 business days of the receipt of such funds.
This agreement may not be amended or modified except in writing and shall be
governed and construed in accordance with the laws of the State of Colorado.
Please confirm that the foregoing proposal is in accordance with our
understanding and is acceptable to you by signing and returning to me the
enclosed duplicate original extension letter. We look forward to a successful
completion of our assignment, culminating in the attainment of these mutually
desirable objectives on behalf of the Company.
Sincerely, Agreed to and accepted:
TRANSITION PARTNERS, LIMITED eSOFT, INC.
By: /s/ Gene R. Copeland By: /s/ Philip L. Becker
-------------------------------- --------------------------------------
Gene R. Copeland Philip L. Becker
Managing Director President
May 6, 1997 May 6, 1997
ATTACHMENTS: Copy of Original Engagement Agreement Between eSoft and
Transition Partners, Limited dated October 14, 1996
Exhibits A & B. Warrants for 1,052 Shares of eSoft
Common Stock to TPL and assigns
[TRANSITION PARTNERS LETTERHEAD]
VIA FACSIMILE
(303) 699-6872
October 14, 1996
Mr. Philip L. Becker
President
eSoft, Inc.
15200 East Girard Avenue
Suite 3000
Aurora, CO 80014
Dear Phil:
You have asked Transition Partners, Limited ("TPL") to submit a proposal
describing the basis on which it would serve as a corporate development and
financial advisor to eSoft, Incorporated ("the Company") for an initial period
of six (6) months, commencing October 1, 1996 through March 31, 1997. This
letter will serve to advance your request for such a proposal and confirm TPL's
engagement as the Company's advisor in this regard.
Corporate Development and Financial Advisory Services
TPL will be pleased to furnish general corporate development, as well as
financial and investment banking, services to the Company to assist it in the
implementation of a fiscal action plan geared to enhance the Company's financial
condition and performance as we have previously discussed. As its financial and
corporate development advisor, TPL will act on behalf of the Company and will
provide independent advice and counsel on issues of a financial nature
pertaining to this engagement. TPL will report directly to you and will keep you
apprised of our activities as you deem appropriate. In carrying out this
assignment, TPL will coordinate its efforts and work closely with other key
members of management and professionals retained to assist you and the Company
in its overall program to achieve various corporate objectives.
<PAGE>
The services and activities TPL anticipates performing over the course of this
engagement for the Company can be generally described as follows:
STRATEGIC PLANNING COORDINATION
TPL will coordinate an in-depth review of the Company's existing business
and strategic operating plan. TPL will not attempt to rewrite or recreate
this plan, but may provide suggestions for modification to it. In this
connection, TPL will interface with all current and future potential
resources of the Company as directed by you.
CAPITAL FORMATION PLAN
As part of the foregoing strategic operating plan process, TPL will
particularly focus upon the creation of a strategic capital formation plan
for the Company. This may be used by the Company in connection with
procurement of capital from debt, quasi-debt, equity, and other sources,
including corporate strategic alliances. As discussed below, capital may
be obtained through such strategic alliances and third party relationships
as ultimately determined by the Company with the assistance of TPL.
IMPLEMENTATION OF CAPITAL PLAN
TPL will directly assist the Company in implementing the capital plan as
determined by the Company. This may include assisting the Company in its
engagement of investment bankers, merchant bankers, or other financial
intermediaries and advisors on a selective basis and as required by the
Company in consultation specifically with you. TPL is prepared to direct
the capital formation process and requests that it be compensated on a
performance basis as TPL is directed by you, as noted later in this
engagement letter. Finally, TPL would serve as a financial advisor in the
execution of this strategy and implementation of the capital raising
effort required to sustain and progress the Company toward its short term,
intermediate, and long term goals.
CORPORATE DEVELOPMENT SERVICES
TPL will serve as an advisor to the Company in connection with strategic
and global corporate objectives as you so request. In addition, TPL will
provide executory services related to the accomplishment of these
strategic and global objectives including the creation of strategic
alliance strategies and implementation of such relationships, as well as
licensing, technology transfer, marketing, and/or distribution
arrangements which will allow the Company to fully exploit its technology
and services throughout the U.S. and on an international basis.
<PAGE>
The possible services and tasks listed above are reflective of the overall
commitment TPL is prepared to make to assist the Company through its next
critical growth phase. The list is representative of the type of work that will
have to be done by TPL, in order for the Company to achieve its business
objectives. It is based on TPL's present understanding of the Company's
circumstances, requirements and goals and, as such, is subject to modification
and adjustment in the event that those factors change. Many of the activities
outlined are interrelated, subject to iteration and continuing in nature, to be
sure. Consequently, significant effort and experience will be required to
organize, sequence and coordinate them to best advantage of the Company. We
believe TPL possesses such expertise and is prepared to dedicate the time and
resources required to do the job properly and professionally on a "best efforts"
basis.
COMPENSATION ARRANGEMENTS
In consideration for acting as financial advisor to the Company in this
engagement, TPL proposes to receive a monthly retainer of six thousand dollars
($6,000) throughout the duration of our engagement. In addition, because of the
anticipated intensity of commitment within this contemplated assignment and
relationship, TPL would also request that it be granted a warrant to acquire up
to five percent (5%) of the outstanding shares of common stock of the Company.
The exercise price of the warrant will be based upon the last relevant private
sale of shares of the Company's common stock prior to the effective date of our
engagement. The warrant will vest as of the effective date of this engagement
and will expire five years from the effective date of this engagement. Other
details pertaining to TPL's warrant arrangement will be delineated in a formal
agreement between the Company and TPL, the terms of which will be
_________________.
CONTINGENT ADVISORY FEES AND EXPENSE REIMBURSEMENT
Because the Company has requested TPL to directly procure capital on its behalf,
TPL will charge the Company contingent advisory fees tied to financing or
merger-related transactions arising in connection with this engagement. Fees for
such financing, payable to TPL by the Company, will be based upon the previously
discussed "Lehman" formula equal to five percent (5%) of the total capital,
whether debt and/or equity of any kind, procured for the Company by TPL.
Similarly, if the Company requests additional assistance from TPL to procure one
or more strategic alliances on its behalf, TPL would also be pleased to so
assist the Company. Strategic alliance efforts, undertaken by TPL, resulting in
any kind of exchange, receipt or procurement of any type of capital from
whatever source, as well as any asset or property of any kind by the Company,
shall result in the compensation of TPL utilizing the aforementioned "Lehman"
success fee formula.
<PAGE>
Finally, it is also contemplated that reimbursement for all reasonably incurred
out-of-pocket expenses incurred by TPL in connection with any aspect of this
engagement will be paid promptly by the Company to TPL as submitted.
CONFIDENTIALITY
In connection with TPL's services, the Company will furnish (or cause to be
furnished) to TPL such information and data as is within the Company's
possession or control relating to the Company as TPL reasonably deems necessary
or reasonably requests in order to complete its assignments for the Company. TPL
will keep and maintain all non-public information which it receives or develops
concerning the Company confidential and will disclose such information only as
is required in its reasonable judgement by this assignment or is required by
law. The Company recognizes and conforms that in the performance of its services
hereunder: (i) TPL may rely upon information provided by the Company without
independent verification; (ii) TPL shall incur no liability as a result of such
reliance; and (iii) TPL does not assume responsibility for the accuracy or
completeness of such information, whether or not it makes an independent
verification. TPL will cause any third party that reviews the Company's
information to sign and execute a Confidentiality Statement before delivering
such information to the third party as circumstances may require.
INDEMNIFICATION AND LIMITATION OF LIABILITY
In consideration of TPL's agreement to act on the Company's behalf in connection
with this advisory engagement, the Company agrees to indemnify and hold harmless
TPL and its officers, directors, agents and employees against any loss, claim,
damage, liability, or expense (including reasonable counsel fees and expenses)
arising out of or to which TPL may become subject in connection with this
engagement.
The Company agrees to promptly reimburse TPL for any legal or other expenses as
incurred in connection with investigation or defending any such loss, claim,
damage or liability (or action in respect thereof). In no event shall TPL be
liable for acting in accordance with instructions from the Company or any entity
authorized to act on its behalf.
EFFECTIVENESS AND TERMINATION
As recited above, the effective date of this engagement shall be October 1,
1996. This engagement (except as to matters relating to the warrant) will
terminate automatically on March 31, 1997 unless otherwise extended by mutual
written agreement. In the event of such automatic termination, TPL shall be
entitled to all compensation due through the date of termination, including base
and contingent advisory fees as specified earlier in this letter, all warrants,
as well as all unpaid out-of-pocket expenses.
<PAGE>
TPL shall also be entitled to contingent advisory fees, as outlined above, for
transactions originating during the course of this engagement and completed
within twelve months from the date of automatic termination.
MISCELLANEOUS
This agreement may not be amended or modified except in writing and shall be
governed and construed in accordance with the laws of the State of Colorado. The
warrant arrangement, as well as the indemnity and reimbursement provisions
contained herein, shall remain in full force and effect in the event of
termination. The invalidity, legality or enforceability of any provision of this
agreement shall in no way affect the validity, legality or enforceability of any
other provision. If any provision is held to be unenforceable as a matter of
law, the other provisions shall not be affected thereby and shall remain in full
force and effect.
Please confirm that the foregoing proposal is in accordance with our
understanding and is acceptable to you by signing and returning to me the
enclosed duplicate original engagement letter. We look forward to a successful
relationship, culminating in the attainment of these mutually desirable
objectives on behalf of the Company.
Sincerely, Agreed to and accepted:
TRANSITION PARTNERS, LIMITED eSOFT, INC.
By: /s/ Gene R. Copeland By: /s/ Philip L. Becker
--------------------------------- --------------------------------------
W. Terrance Schreier Philip L. Becker
Managing Director and President President
October 1, 1996 October 1, 1996
cc: Gene R. Copeland
Transition Partners, Limited
AMENDMENT TO AGREEMENT
This Amendment to Agreement is entered into as of the 22nd day of August,
1997, between eSoft, Inc., a Colorado corporation, with its principal place of
business at 15200 E. Girard Avenue, Suite 3000, Aurora, Colorado 80014 (the
"Company") and Transition Partners, Ltd., a Colorado corporation, with its
principal place of business at 1942 Broadway, Suite 303, Boulder, Colorado 80302
(the "Consultant").
RECITALS
A. The Company and the Consultant entered into a letter agreement dated
October 14, 1996 (the "Original Engagement Letter") which was amended by a
letter agreement dated May 6, 1997 extending the term of the Original Engagement
Letter for an additional six months, to October 15, 1997 (the Original
Engagement Letter as so extended is hereinafter referred to as the "Agreement").
B. The Company and the Consultant desire to extend the Agreement to
provide for continued consultation by the Consultant and revised compensation
arrangements.
IT IS THEREFORE AGREED AS FOLLOWS:
1. Extension of Agreement. The Agreement is hereby amended as of the date
hereof, and shall continue pursuant to the terms of the Original Engagement
Letter as amended hereby, until May 21, 1998 (the "Consulting Period").
2. Consulting Services. During the consulting period, the Consultant shall
continue to provide services of the type described in the Original Engagement
Letter and as has been performed by the Consultant under the Agreement prior to
this date, and shall be reasonably available to respond to requests by the
Company for consultation and advice.
3. Compensation. In lieu of all compensation of any kind provided for
under the Agreement, and in satisfaction of all existing and future obligations
for compensation to the Consultant either for past services or for services
rendered hereafter pursuant to the Agreement or this Amendment to Agreement the
Company shall provide the following compensation to the Consultant:
(a) The Company shall pay to the Consultant concurrent with the
execution of this Agreement the sum of $20,500.
(b) Concurrent with the execution of this Agreement, the Company
shall deliver a promissory note in the amount of $41,000, bearing no interest
until due, payable March 31, 1998, or such later date that the Company completes
an initial public offering of its common stock, but no later than December 31,
1998, and bearing interest at the rate of 12% per annum after maturity. The
Company may, at its option, satisfy the note by delivery to the Consultant of
shares of common
<PAGE>
stock, valued at the initial public offering price, equal to the face amount of
the note.
-2-
<PAGE>
(c) Concurrent with the execution of this Agreement, the Company
shall deliver a promissory note in the amount of $75,000, bearing no interest
until due, payable March 31, 1998, or such later date that the Company completes
an initial public offering of its common stock, and paying interest at the rate
of 12% per annum after maturity. The Company may, at its option, satisfy the
note by delivery to the Consultant of shares of common stock, valued at the
initial public offering price, equal to the face amount of the note.
4. Continuance of the Agreement. Except as provided herein, all terms of
the Agreement shall continue in effect until the end of the Consulting Period.
IN WITNESS WHEREOF, this Amendment to Agreement has been executed and
delivered as of the day and year first above set forth by duly authorized
officers of the Company and Consultant.
ESOFT, INC.
By /s/Philip L. Becker
------------------------------------
Philip L. Becker, President
TRANSITION PARTNERS, INC.
By /s/W. Terrance Schreier
------------------------------------
W. Terrance Schreier, President
-3-
SECOND AMENDMENT TO AGREEMENT
This amendment to the Amendment to Agreement dated August 22, 1997 between
eSoft, Inc. (the "Company") and Transition Partners, Ltd. ("Consultant") is
entered into as of the 11th day of November, 1997 (the "Second Amendment")
RECITALS
A. The Company and Consultant entered into a letter of agreement dated
October 14, 1996 (the "Original Agreement Letter") which was amended by a letter
of agreement dated May 6, 1997 extending the term of the Original Engagement
Letter for an additional six months, to October 15, 1997 and was further amended
by the Amendment to Agreement dated August 22, 1997 between the Company and
Consultant pursuant to which promissory notes were issued by the Company to
Consultant (the "Amendment to Agreement")
B. The Company and Consultant desire to modify the terms of said
promissory notes, including extending the dates when the promissory notes are
due.
AGREEMENT
The undersigned parties hereby agree as follows:
1. Amendments.
(a) Section 3(b) of the Amendment to Agreement is hereby deleted in
its entirety and in replace thereof is the following:
"(b) Concurrent with the execution of this Agreement, the
Company shall deliver a promissory note in the amount of $41,000,
bearing no interest until due, payable on January 2, 1999 and paying
interest at the rate of 12 percent per annum after maturity. If an
initial public offering of the Company's Common Stock is consummated
with proceeds of at least one million dollars to the Company, the
$41,000 promissory note shall be due 30 days after the offering. The
Company may, at its option, satisfy the note by delivery to
Consultant of shares of common stock, valued at the initial public
offering price, equal to the face amount of the note.
(b) Section 3(c) of the Amendment to Agreement is hereby deleted in
its entirety and in replace thereof is the following:
"(c) Concurrent with the execution of this Agreement, the
Company shall deliver a promissory note in the amount of $75,000,
bearing no interest until due,
<PAGE>
payable on January 2, 1999 and paying interest at the rate of 12
percent per annum after maturity. If an initial public offering of
the Company's Common Stock is consummated with proceeds of at least
one million dollars to the Company, the $75,000 promissory note
shall be due 30 days after the offering. The Company, may at its
option, satisfy the note by delivery to Consultant of shares of
common stock, valued at the initial public offering price, equal to
the face amount of the note.
2. Acknowledgments. The Company and Consultant acknowledge that the
foregoing amendments supersede and replace Sections 3(b) and 3(c) of the
Amendment to Agreement as if the foregoing amendments had been included in the
Amendment to Agreement when executed.
3. Governing Law. This Second Amendment shall be interpreted and construed
in accordance with the laws of the State of Colorado.
SIGNATURES
IN WITNESS WHEREOF, Consultant and the Company have caused this Second
Amendment to be executed and delivered as of the first date mentioned above.
THE COMPANY:
eSOFT, INC.
By: /s/Philip L. Becker
-----------------------------------------
Philip L. Becker, President
THE CONSULTANT:
TRANSITION PARTNERS, LTD.
By: /s/W. Terrance Schreier
-----------------------------------------
W. Terrance Schreier, President
ESOFT, INC.
STOCK OPTION AGREEMENT
This Option Agreement is made and entered into by and between eSoft, Inc.,
a Colorado corporation (the "Company"), and Pantheon Capital Ltd. (the
"Optionee"), as of the 11th day of November, 1997.
WITNESSETH:
WHEREAS, pursuant to a Consulting Agreement between the Company and
Pantheon Capital Ltd., dated September 2, 1997, as amended November 11, 1997,
the Company has agreed to grant to Pantheon Capital Ltd. options to purchase
150,000 shares of the Company's Common Stock; and
WHEREAS, Pantheon Capital Ltd. has assigned its rights to 75,000 of such
options to other parties;
NOW, THEREFORE, in consideration of the mutual covenants and conditions
hereinafter set forth, and for other good and valuable consideration, the
Company and Optionee agree as follows:
1. GRANT OF OPTION. The Company hereby grants to Optionee the right and
option (the "Option") to purchase an aggregate of 75,000 shares (such number
being subject to adjustment as provided in paragraph 9 hereof) of the common
stock of eSoft, Inc. (the "Stock") on the terms and conditions herein set forth.
This Option may be exercised in whole or in part and from time to time as
hereinafter provided.
2. PURCHASE PRICE. The price at which Optionee shall be entitled to
purchase the Stock covered by the Option shall be the price per share at which
shares of the Stock are first offered to the public in an initial public
offering of the Stock in Canada.
3. TERM OF OPTION. The Option hereby granted shall become exercisable
immediately after such an initial public offering is complete and remain in
force and effect until the normal close of business of the Company on the date
five years after the date that the Option becomes exercisable (the "Expiration
Date").
4. EXERCISE OF OPTION. The Option may be exercised as to all or any part
thereof immediately after the closing of a public offering of the Company's
common stock, provided that such an offering is completed on or before December
31, 1998, and thereafter the Option may be exercised as to all or any part of
such shares (in not less than one hundred (100) share increments) at any time
and from time to time through the Expiration Date by delivery to the Company of
written notice of exercise and payment of the purchase price as provided in
paragraph 5 hereof.
<PAGE>
5. METHOD OF EXERCISING OPTION. Subject to the terms and conditions of this
Option Agreement, the Option may be exercised by timely delivery to the Company
of written notice, which notice shall be effective on the date received by the
Company (the "Effective Date"). The notice shall state Optionee's election to
exercise the Option, the number of shares in respect of which an election to
exercise has been made, and the exact name or names in which the shares will be
registered. Such notice shall be signed by the Optionee and shall be accompanied
by payment of the purchase price of such shares in cash or certified or
cashier's check in the amount of the full purchase price (the number of shares
being purchased multiplied by the price per share). In the event the Option
shall be exercised by a person or persons other than Optionee, such notice shall
be signed by such other person or persons and shall be accompanied by proof
acceptable to the Company of the legal right of such person or persons to
exercise the Option. All shares delivered by the Company upon exercise of the
Option as provided herein shall be fully paid and nonassessable upon delivery.
6. TRANSFERABILITY. The Option shall be transferable by Optionee only upon
presentation to the Company of this Option Agreement with a written assignment
duly executed by the Optionee, and such evidence of compliance with applicable
securities laws of the United States or Canada or any state or province thereof
as the Company shall reasonably require.
7. ADJUSTMENTS IN NUMBER OF SHARES AND OPTION PRICE. If any change is made
to the Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding stock as a class without the Company's receipt of consideration,
appropriate adjustments shall be made to the number and the purchase price per
share in effect under the Option. Such adjustments to the Option shall be
effected in a manner that shall preclude the enlargement or dilution of rights
and benefits under such options. Any adjustments determined by the Committee
shall be final, binding and conclusive.
If the Company shall be the surviving or resulting corporation in any
merger or consolidation, the Option granted hereunder shall pertain to and apply
to the securities or rights to which a holder of the number of shares of Stock
subject to the Option would have been entitled. The Optionee shall be entitled
to at least 20 days' prior written notice of any dissolution or liquidation of
the Company, or a merger or consolidation in which the Company is not the
surviving or resulting corporation.
8. DELIVERY OF SHARES. No shares of Stock shall be delivered upon exercise
of the Option until (i) the purchase price shall have been paid in full in the
manner herein provided; (ii) applicable taxes required to be withheld, if any,
have been paid or withheld in full; (iii) approval of any governmental authority
required in connection with the Option, or the issuance of shares thereunder,
has been received by the Company; and (iv) if required by the Company, Optionee
has delivered to the Company an investment letter in form and content
satisfactory to the Company as provided in paragraph 9 hereof.
9. GOVERNING LAW. This Option Agreement shall be interpreted and
administered under the laws of the State of Colorado.
-2-
<PAGE>
10. AMENDMENTS. This Option Agreement may be amended only by a written
agreement executed by the Company and Optionee.
IN WITNESS WHEREOF, the Company and the Optionee have caused this Option
Agreement to be duly executed by their respective officers thereunto duly
authorized, and Optionee has hereunto set his hand as of the day and year first
above written.
eSoft, Inc.
By: /s/Philip L. Becker
-----------------------------------------
President
Pantheon Capital Ltd.
By: Kent Nuzum
-----------------------------------------
President
CONSULTING AGREEMENT
This Consulting and Non-Competition Agreement ("Agreement") is entered
into as of the second day of September, 1997 between eSoft, Inc., a Colorado
corporation, with its principal place of business at 15200 East Girard Avenue,
Suite 3000, Aurora, Colorado, 80014 (the "Company"), and Kent Nuzum, an
individual person (the "Consultant").
RECITALS
A. The Company desires to consult with and receive advice from the
Consultant and to have the Consultant agree not to compete with the Company. The
Consultant has agreed to provide such consulting services to the Company,
subject to and upon the terms and conditions set forth in this Agreement and has
also agreed not to compete with the Company during the term of this Agreement.
B. The Consultant acknowledges that throughout the term of this Agreement
the Consultant will receive or be exposed to certain confidential information
and trade secrets (collectively referred to as "Confidential Information") of
the Company. The Consultant also acknowledges that this Confidential Information
is among the Company's most important business assets and that the value of this
Confidential Information would be diminished or extinguished by disclosure.
AGREEMENT
In consideration of the mutual promises contained herein, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Effective Date. As of the date hereof (the "Effective Date"), this
Agreement shall become effective and shall supersede any other agreements
between the Consultant and the Company relating to the employment and/or
contract for services of the Consultant by the Company and such previous
agreement shall thereafter be deemed terminated for all purposes.
2. Consultation by the Consultant.
(a) The Consultant shall be reasonably available during the period
beginning on the Effective Date and ending on July 31, 1998 (the "Consulting
Period") to perform such assignments as may be reasonably requested by the
Company from time to time, which assignments may include, but shall not be
limited to, managing all aspects of the regulatory issues associated with the
Vancouver Stock Exchange, the NASDAQ Stock Market, the Securities and Exchange
Commission, the FASB, the State of Colorado, the Province of British Columbia,
the Province of Ontario, and other jurisdictions; directing and coordinating the
legal and accounting activities to insure timely completion of major milestone
dates associated with taking the Company to public company status; supporting
Private Placement and Initial Public Offering activities by communicating with
investors, underwriters, by the timely preparation and
<PAGE>
distribution of offering memorandums, prospectuses, and press communications;
and monitoring the Company's cash position and cash flow of the Company for the
officers and directors of the Company.
(b) THE CONSULTANT IS NOT ENTITLED TO WORKERS' COMPENSATION BENEFITS
OR UNEMPLOYMENT INSURANCE BENEFITS HEREUNDER AND SHALL NOT RECEIVE SUCH BENEFITS
UNLESS SUCH BENEFITS ARE PROVIDED BY THE CONSULTANT OR SOME PERSON OR ENTITY
OTHER THAN THE COMPANY. THE CONSULTANT AGREES TO PAY AND FILE ALL REPORTS WITH
RESPECT TO LOCAL, STATE AND FEDERAL TAXES, INCLUDING WITHHOLDING AND FICA TAXES,
AND UNEMPLOYMENT AND WORKERS' COMPENSATION INSURANCE, ON ANY MONEYS EARNED
PURSUANT TO THIS AGREEMENT.
3. Consulting Fee.
(a) Upon receipt by the Company of an invoice that details the
services provided by the Consultant to the Company, the Consultant shall be paid
the sum of $3,500 per month, payable in equal bi-weekly installments beginning
on the Effective Date (the "Consulting Fee") in consideration of the services to
be provided by the Consultant hereunder and the agreements of the Consultant set
forth herein not to compete with the Company. The Consulting Fee shall be paid
to Consultant irrespective of the number of hours actually spent by the
Consultant in providing services hereunder; PROVIDED, HOWEVER, that the
Company's obligation to pay the Consulting Fee shall terminate upon termination
of the Consultant's services hereunder pursuant to Section 8, except to the
extent otherwise provided in Section 8.
(b) The Company shall reimburse the Consultant, in accordance with
the Company's expense reimbursement policies, for reasonable out-of-pocket
expenses incurred in connection with the services provided pursuant to this
Agreement; provided that the Consultant presents to the Company an itemized
accounting of such expenses including reasonable supporting data.
4. Trade Secrets and Confidential Information. During the term of this
Agreement and for a period of five (5) years following the termination of
Consultant's services hereunder, the Consultant shall not, directly or
indirectly, use, disseminate, or disclose for any purpose other than at the
specific written request of the Company, any of the Company's Confidential
Information, unless such disclosure is compelled in a judicial or governmental
proceeding or is required by law; PROVIDED, HOWEVER, that the Consultant shall
give the Company written notice of the Confidential Information to be so
disclosed or produced as far in advance of its disclosure or production as is
practicable and shall use his best efforts to obtain, to the greatest extent
practicable, an order or other reliable assurance that confidential treatment
will be accorded to such Confidential Information so required to be disclosed or
produced. All documents, records, notebooks, and similar repositories of records
containing information relating to any Confidential Information now in the
Consultant's possession or control, whether prepared by him or by others, shall
be left with the Company or returned to the Company upon its request.
-2-
<PAGE>
5. Injunctive Relief. Consultant agrees that any violation by him of the
agreements contained in Sections 4 are likely to cause irreparable damage to the
Company and the Consultant therefore agrees that if there is a breach or
threatened breach by the Consultant of the provisions of said sections, the
Company shall be entitled to an injunction restraining the Consultant from such
breach. Nothing herein shall be construed as prohibiting the Company from
pursuing any other remedies for such breach or threatened breach.
6. Representations of the Consultant. The Consultant represents and
warrants that he has full and complete legal capacity to enter into this
Agreement.
7. Indemnification. The Company acknowledges that in the performance of
the services hereunder, the Consultant may rely upon information provided by the
Company without independent verification and the Consultant does not assume
responsibility for the accuracy or completeness of such information, whether or
not he makes an independent verification. In consideration of the Consultant's
agreement to act on the Company's behalf in connection with the services
provided hereunder, the Company agrees to indemnify and hold harmless the
Consultant against any loss, claim, damage, liability, or expense ("Loss"),
arising out of or to which the Consultant may become subject in connection with
this Agreement, unless such Loss results from the Consultant's gross negligence
or unlawful misconduct. The Company agrees to promptly reimburse the Consultant
for any legal or other expenses as incurred in connection with investigation or
defending any such Loss (or action in respect thereof), unless such Loss results
from the Consultant's gross negligence or unlawful misconduct. In no event shall
the Consultant be liable for acting in accordance with instructions from the
Company or any entity authorized to act on its behalf.
8. Termination.
(a) TERMINATION UPON EXPIRATION OF CONSULTING PERIOD. The
Consultant's services hereunder shall terminate at the end of the Consulting
Period unless sooner terminated as provided below.
(b) Notwithstanding anything to the contrary contained herein, the
Company may, by delivering two week's notice, terminate the Consultant's
services hereunder anytime after six months from the date hereof, if the Company
employs a full time Chief Financial Officer.
(c) TERMINATION BY THE COMPANY WITHOUT CAUSE. Notwithstanding
anything to the contrary contained herein, the Company may, by delivering thirty
(30) days' prior written notice to the Consultant, terminate the Consultant's
services hereunder at any time without Cause (as hereinafter defined).
(d) TERMINATION BY THE CONSULTANT WITHOUT CAUSE. Notwithstanding
anything to the contrary contained herein, the Consultant may, by delivering
prior written notice to the Company, terminate the Consultant's services
hereunder.
-3-
<PAGE>
(e) TERMINATION BY THE COMPANY FOR CAUSE. The Company may terminate
the Consultant's services hereunder for Cause immediately upon written notice
stating the basis for such termination. "Cause" for termination of the
Consultant's services shall only be deemed to exist if the Consultant has (i)
materially breached this Agreement and if such breach continues or recurs more
than thirty (30) days after notice from the Company specifying the action which
constitutes the breach and demanding its discontinuance, (ii) exhibited willful
disobedience to the Board of Directors or the President of the Company or (iii)
committed gross malfeasance in performance of his duties hereunder or acts
resulting in an indictment charging the Consultant with the commission of a
felony; provided that the commission of acts resulting in such an indictment
shall constitute Cause only if a majority of the directors who are not also
subject to any such indictment determine that the Consultant's conduct has
substantially adversely affected the Company or its reputation.
(f) DISABILITY. In the event of disability of the Consultant during
the term hereof, the Company shall, during the continuance of his disability but
only for a maximum of ninety (90) days, pay to the Consultant his monthly
installments under the provision of Section 3 and continue to provide the
Consultant all other benefits provided hereunder. As used herein, the term
"disability" shall mean the complete and total inability of the Consultant, due
to illness, physical or comprehensive mental impairment, to substantially
perform all of his duties as described herein for a consecutive period of ninety
(90) days or more.
(g) DEATH. In the event of the death of the Consultant, except with
respect to any benefits which have accrued and have not been paid to the
Consultant hereunder, the provisions of this Agreement shall terminate
immediately. The Consultant's estate shall have the right to receive
compensation due to the Consultant as of and to the date of his death and shall
have the right to receive an additional amount equal to $3,500.
(h) SEVERANCE. In the event that the Consultant's services are
terminated by the Company other than pursuant to Section 8(b), or for Cause or
death of the Consultant, the Consultant shall be entitled to continue to receive
the Consulting Fee in monthly installments of $3,500.
9. Irrevocability and Amendment. The obligations of the Company and the
Consultant hereunder are irrevocable. This Agreement may be terminated only
pursuant to Section 8 hereof and may be amended only pursuant to a written
agreement signed and executed by both the Consultant and the Company.
10. Nonassignability; Successors. This Agreement provides for personal
services by the Consultant and its obligations hereunder may not be assigned or
delegated. The rights and obligations of the Company, and the rights of the
Consultant hereunder, shall bind and inure to the benefit of the successors of
the Consultant and the Company (including, in the case of the Company, any
successor to the business of the Company, whether by merger, consolidation,
acquisition of assets or any other transaction).
-4-
<PAGE>
11. Entire Agreement. This Agreement is the entire agreement between the
parties and no representations, warranties or other statements or promises have
been made by either party to the other in connection with this Agreement.
12. Severability. If any provision of this Agreement is held to be
illegal, invalid or unenforceable, such provision(s) shall be fully severable.
In lieu thereof, there shall be added a provision as similar in terms to such
illegal, invalid or unenforceable provision as may be possible, and legal, valid
and enforceable. In particular, it is the desire and intent of the parties that
the provisions of Section 4 shall be enforced to the fullest extent permissible
under the laws of each jurisdiction in which enforcement is sought.
13. Applicable Law. This Agreement shall be interpreted and construed in
accordance with the laws of the State of Colorado.
14. Enforcement Expenses. In any action for breach or enforcement of the
terms of this Agreement, the prevailing party shall be entitled to all costs of
enforcement including, without limitation, his/its attorneys' fees and costs.
SIGNATURES
IN WITNESS WHEREOF, the Consultant and the Company have caused this
Agreement to be executed and delivered as of the first date mentioned above.
THE COMPANY:
eSoft, Inc.
By: /s/Philip L. Becker
-----------------------------------------
Philip L. Becker, President
THE CONSULTANT:
/s/Kent Nuzum
--------------------------------------------
Kent Nuzum
-5-
CONSULTING AGREEMENT
This Consulting Agreement ("Agreement") is entered into as of the 22nd day
of August, 1997 between eSoft, Inc., a Colorado corporation, with its principal
place of business at 15200 East Girard Avenue, Suite 3000, Aurora, Colorado (the
"Company"), and Pantheon Capital Ltd. (the "Consultant").
RECITALS
A. The Company desires to consult with and receive advice from the
Consultant and the Consultant has agreed to provide such consulting services to
the Company, subject to and upon the terms and conditions set forth in this
Agreement.
B. In the performance of its services under this Agreement the Consultant
will receive or be exposed to certain confidential information and trade secrets
(collectively referred to as "Confidential Information") of the Company. This
Confidential Information is among the Company's most important business assets
and the value of this Confidential Information would be diminished or
extinguished if it were disclosed in contravention of those provisions of this
Agreement.
AGREEMENT
In consideration of the mutual promises contained herein, the receipt and
sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Effective Date. As of the date hereof (the "Effective Date"), this
Agreement shall become effective and shall supersede any other agreements
between the Consultant and the Company relating to the employment and/or
contract for services of the Consultant by the Company and such previous
agreement shall thereafter be deemed terminated for all purposes.
2. Consultation by the Consultant. The Consultant shall be reasonably
available during the period beginning on the Effective Date and ending on May
21, 1998 (the "Consulting Period") unless renewed pursuant to Section 6, to
perform such assignments as may be reasonably requested by the Company from time
to time, which assignments may include, but shall not be limited to, the
following:
(a) Interim Financing. The Consultant shall advise and assist with
respect to the completion of a proposed interim private financing of up to
$410,000 with respect to which the Company acknowledges that the Consultant has
been a principal advisor during the period immediately preceding the date of
this Agreement. The Consultant shall assist in finalizing an updated business
plan to be furnished to investors in such private placement, shall assist in
coordinating the
<PAGE>
Company's contacts with investors participating in the private placement, and
otherwise assist in that offering.
(b) Canadian Public Offering. The Consultant shall advise and assist
the Company in its preparation for a public offering of its common stock in
Canada and the listing of the stock for trading upon the Vancouver Stock
Exchange in Vancouver, British Columbia. In this connection the Consultant will
assist the Company in selecting and engaging legal counsel to advise the Company
with respect to the Offering and independent accountants to serve as the
Company's auditors in the preparation of financial statements that are necessary
to be furnished to prospective investors in connection with such public
offering. The Consultant shall also assist the Company in selecting and engaging
investment bankers to represent the Company as underwriter or agent in
connection with the public offering of its common stock.
(c) Other Duties; Coordination and Reporting. The Consultant shall
be available at reasonable times for consultation with respect to strategic
planning for the Company, including financial and capital raising matters, both
related to and in addition to those specific consulting assignments described in
the preceding paragraphs of this Section 2. In performing its services
hereunder, the Consultant shall coordinate closely with the officers and
directors and other agents and advisors of the Company and shall keep the
officers of the Company fully advised at all times about the status of all
discussions with third parties concerning any of the services provided to the
Company hereunder. The Consultant shall furnish such reports concerning its
consulting activities at such intervals as the Company may, from time to time,
reasonably request.
3. Independent Contractor. The parties acknowledge that the Consultant is
acting as an independent contractor in furnishing the services provided for
hereunder and that neither the consultant nor any of its officers or agents is
an employee of the Company or subject to the supervision and direction of the
Company in the performance of its services. Nothing herein shall be deemed to
create a partnership, joint venture or other relationship between the Consultant
and the Company other than the consulting relationship described above.
4. Consulting Fee and Expenses.
(a) Consulting Fee. In consideration for the services to be provided
by the Consultant hereunder, the Consultant shall receive options to purchase up
to 240,000 shares of common stock of the Company (the "Consulting Fee") in the
following manner:
(i) Concurrently with the execution of this Agreement, the
Company shall grant to the Consultant options to purchase up to 90,000 shares of
common stock of the Company at an exercise price of $.50 per share. The options
shall be immediately exercisable, and expire on September 2, 1998. If requested
by the Consultant, the Company shall accept a non-interest bearing, 12 month
Promissory Note payable to the Company in payment of the exercise price of said
options. The Note shall be secured by the shares underlying the options if
requested by the Company.
-2-
<PAGE>
(ii) In consideration of services to be performed hereunder,
concurrently with the execution of this Agreement the Company shall grant to the
Consultant options to purchase 150,000 shares of common stock of the Company
with an exercise price equal to the price per share received by the Company in
its Initial Public Offering scheduled for early 1998. The options shall be
exercisable immediately after the Initial Public Offering is completed and shall
expire five (5) years after that date.
(iii) The options provided for in the preceding paragraphs
shall be granted pursuant to the Company's Equity Compensation Plan, and shall
be evidenced by option agreements in form satisfactory to the Company and
Consultant.
(b) Expense Reimbursement. The Company shall reimburse the
Consultant, in accordance with the Company's expense reimbursement policies, for
reasonable out-of-pocket expenses incurred in connection with the services
provided pursuant to this Agreement upon presentation of an itemized accounting
of such expenses with reasonable supporting data.
5. Trade Secrets and Confidential Information. During the term of this
Agreement and for a period of five (5) years following the termination of
Consultant's services hereunder, the Consultant shall not, directly or
indirectly, use, disseminate, or disclose for any purpose other than at the
specific written request of the Company, any of the Company's Confidential
Information, unless such disclosure is compelled in a judicial or governmental
proceeding or is required by law; provided, however, that the Consultant shall
give the Company written notice of the Confidential Information to be so
disclosed or produced as far in advance of its disclosure or production as is
practicable and shall use his best efforts to obtain, to the greatest extent
practicable, an order or other reliable assurance that confidential treatment
will be accorded to such Confidential Information so required to be disclosed or
produced. All documents, records, notebooks, and similar repositories of records
containing information relating to any Confidential Information now in the
Consultant's possession or control, whether prepared by him or by others, shall
be left with the Company or returned to the Company upon its request.
Consultant agrees that any violation by the Consultant of the agreements
contained in Section 5 are likely to cause irreparable damage to the Company and
the Consultant therefore agrees that if there is a breach or threatened breach
by the Consultant of the provisions of said sections, the Company shall be
entitled to an injunction restraining the Consultant from such breach. Nothing
herein shall be construed as prohibiting the Company from pursuing any other
remedies for such breach or threatened breach.
6. Reliance on Company Information; Indemnification and Limitation of
Liability. The Company recognizes and confirms that in the performance of its
services hereunder: (i) Consultant may rely upon information provided by the
Company without independent verification and (ii) Consultant Does not assume
responsibility for the accuracy or completeness of such information, whether or
not it makes an independent verification.
-3-
<PAGE>
In consideration of Consultant's agreement to act on the Company's behalf,
as provided herein, the Company agrees to indemnify and hold harmless Consultant
and its officers, directors, agents and employees against any loss, claim,
damage, liability, or expense, including reasonable counsel fees and expenses
("Losses") arising out of or to which Consultant may become subject in
connection with this engagement, unless such Loss results from Consultant's
gross negligence to wilful misconduct. The Company agrees to promptly reimburse
Consultant for any legal or other expenses as incurred in connection with
investigation or defending any such loss, claim, damage or liability (or action
in respect thereof). In no event shall Consultant be liable for acting in
accordance with instructions from the Company or any entity authorized to act on
its behalf..
7. Termination; Renewal. This Agreement and the Consultant's obligations
to perform services hereunder shall terminate at the end of the Consulting
Period unless renewed as provided hereafter. In the event the Company has not
consummated its Initial Public Offering of common stock by May 21, 1998 (the
"Termination Date"), this Agreement shall automatically be extended for such
period of time as is reasonably necessary to consummate the Initial Public
Offering; provided, however, that if an Initial Public Offering is not completed
by December 31, 1998, this Agreement may only be subsequently extended by the
written consent of both the Consultant and the Company.
8. Nonassignability; Successors. This Agreement provides for personal
services by the Consultant and its obligations hereunder may not be assigned or
delegated. The rights and obligations of the Company, and the rights of the
Consultant hereunder, shall bind and inure to the benefit of the successors of
the Consultant and the Company (including, in the case of the Company, any
successor to the business of the Company, whether by merger, consolidation,
acquisition of assets or any other transaction).
9. Entire Agreement. This Agreement is the entire agreement between the
parties and no representations, warranties or other statements or promises have
been made by either party to the other in connection with this Agreement.
10. Applicable Law. This Agreement shall be interpreted and construed in
accordance with the laws of the State of Colorado.
-4-
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the Consultant and the Company have caused this
Agreement to be executed and delivered as of the first date mentioned above.
THE COMPANY:
eSOFT, INC.
By: /s/Philip L. Becker
-----------------------------------
Philip L. Becker, President
THE CONSULTANT:
PANTHEON CAPITAL LTD.
By: /s/Kent Nuzum
-----------------------------------
Kent Nuzum, Director
-5-
AMENDMENT TO CONSULTING AGREEMENT
This amendment to the Consulting Agreement between eSoft, Inc. (the
"Company") and Pantheon Capital Ltd. (the "Consultant") dated as of August 22,
1997, is entered into as of the 11th of November, 1997 (the "Amendment").
RECITALS
A. The Company and the Consultant entered into a Consulting Agreement
dated as of August 22, 1997 (the "Original Agreement") relating to consulting
services to be provided to the Company by the Consultant.
B. The undersigned parties desire to modify certain provisions of the
Original Agreement that entitled the Consultant to receive options to purchase
90,000 shares of Common Stock of the Company at an exercise price of $0.50 per
share so that options of comparable value with an exercise price of $1.00 per
share may be substituted for the $0.50 options.
C. Pursuant to a calculation using the Black-Scholes method of option
valuation, the Company and the Consultant have now agreed that upon cancellation
of the options to purchase 90,000 shares of Common Stock at $0.50 per share, the
Consultant shall be issued options to purchase 264,600 shares of Common Stock of
the Company at $1.00 per share in lieu thereof.
AGREEMENT
The undersigned parties hereby agree as follows:
1. Amendments. Section 4(a)(i) of the Original Agreement is hereby deleted
in its entirety and in place thereof the following is included:
"(i) The Company shall grant to the Consultant options to purchase up to
264,600 shares of Common Stock of the Company at a per option exercise
price of $1.00. The options shall be immediately exercisable and
expire on the later of February 1, 1999 or one year and fifteen days
after an initial public offering of the Company's Common Stock is
consummated. If requested by the Consultant, the Consultant shall pay
cash in an amount equal to the par value of the Common Stock and the
Company shall accept a non-interest bearing 12-month promissory note
for all but the par value in payment of the exercise price of said
options. The Note shall be secured by the shares underlying the
options if requested by the Company."
<PAGE>
2. Acknowledgments. The Company and the Consultant acknowledge that the
foregoing amendment supersedes and replaces Section 4(a)(i) of the Original
Agreement as if the foregoing amendment had been included in the Original
Agreement when executed.
3. Governing Law. This Amendment shall be interpreted and construed in
accordance with the laws of the State of Colorado.
SIGNATURES
IN WITNESS WHEREOF, the Consultant and the Company have caused this
Amendment to be executed and delivered as of the first date mentioned above.
THE COMPANY:
eSOFT, INC.
By: /s/Philip L. Becker
-----------------------------------------
Philip L. Becker, Chairman and Chief
Executive Officer
THE CONSULTANT:
PANTHEON CAPITAL LTD.
By: /s/Kent Nuzum
-----------------------------------------
Kent Nuzum, Director
ESOFT, INC.
STOCK OPTION AGREEMENT
This Option Agreement is made and entered into by and between eSoft, Inc.,
a Colorado corporation (the "Company"), and Pantheon Capital Ltd. (the
"Optionee"), as of the 11th day of November, 1997.
WITNESSETH:
WHEREAS, pursuant to a Consulting Agreement between the Company and
Pantheon Capital Ltd., dated September 2, 1997, as amended November 11, 1997,
the Company has agreed to grant to Pantheon Capital Ltd. options to purchase
264,600 shares of the Company's Common Stock; and
WHEREAS, Pantheon Capital Ltd. has assigned its rights to 132,300 of such
options to other parties;
NOW, THEREFORE, in consideration of the mutual covenants and conditions
hereinafter set forth, and for other good and valuable consideration, the
Company and Optionee agree as follows:
1. GRANT OF OPTION. The Company hereby grants to Optionee the right and
option (the "Option") to purchase an aggregate of 132,300 shares (such number
being subject to adjustment as provided in paragraph 9 hereof) of the common
stock of eSoft, Inc. (the "Stock") on the terms and conditions herein set forth.
This Option may be exercised in whole or in part and from time to time as
hereinafter provided.
2. PURCHASE PRICE. The price at which Optionee shall be entitled to
purchase the Stock covered by the Option shall be $1.00 per share.
3. TERM OF OPTION. The Option hereby granted shall be and remain in force
and effect until the normal close of business of the Company, the later of
February 1, 1999 or one year and 15 days after the date that an initial public
offering of the Stock is completed (the "Expiration Date").
4. EXERCISE OF OPTION. The Option may be exercised as to all or any part
thereof immediately after the closing of a public offering of the Company's
common stock, provided that such an offering is completed on or before December
31, 1998, and thereafter the Option may be exercised as to all or any part of
such shares (in not less than one hundred (100) share increments) at any time
and from time to time through the Expiration Date by delivery to the Company of
written notice of exercise and payment of the purchase price as provided in
paragraph 5 hereof.
5. METHOD OF EXERCISING OPTION. Subject to the terms and conditions of this
Option Agreement, the Option may be exercised by timely delivery to the Company
of written notice, which notice shall be effective on the date received by the
Company (the "Effective Date").
<PAGE>
The notice shall state Optionee's election to exercise the Option, the number of
shares in respect of which an election to exercise has been made, and the exact
name or names in which the shares will be registered. Such notice shall be
signed by the Optionee and shall be accompanied by payment of the purchase price
of such shares. Such payment may be in the form of cash or certified or
cashier's check in the amount of the full purchase price (the number of shares
being purchased multiplied by the price per share) or the Company shall, at the
request of the Optionee, accept as payment of the purchase price a non-interest
bearing, 12-month promissory note for all of the purchase price except the par
value (which amount shall be paid in cash) of the shares purchased. Such note
shall be secured by the shares purchased upon exercise of the option. In the
event the Option shall be exercised by a person or persons other than Optionee,
such notice shall be signed by such other person or persons and shall be
accompanied by proof acceptable to the Company of the legal right of such person
or persons to exercise the Option. All shares delivered by the Company upon
exercise of the Option as provided herein shall be fully paid and nonassessable
upon delivery.
6. TRANSFERABILITY. The Option shall be transferable by Optionee only upon
presentation to the Company of this Option Agreement with a written assignment
duly executed by the Optionee, and such evidence of compliance with applicable
securities laws of the United States or Canada or any state or province thereof
as the Company shall reasonably require.
7. ADJUSTMENTS IN NUMBER OF SHARES AND OPTION PRICE. If any change is made
to the Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding stock as a class without the Company's receipt of consideration,
appropriate adjustments shall be made to the number and the purchase price per
share in effect under the Option. Such adjustments to the Option shall be
effected in a manner that shall preclude the enlargement or dilution of rights
and benefits under such options. Any adjustments determined by the Committee
shall be final, binding and conclusive.
If the Company shall be the surviving or resulting corporation in any
merger or consolidation, the Option granted hereunder shall pertain to and apply
to the securities or rights to which a holder of the number of shares of Stock
subject to the Option would have been entitled. The Optionee shall be entitled
to at least 20 days' prior written notice of any dissolution or liquidation of
the Company, or a merger or consolidation in which the Company is not the
surviving or resulting corporation.
8. DELIVERY OF SHARES. No shares of Stock shall be delivered upon exercise
of the Option until (i) the purchase price shall have been paid in full in the
manner herein provided; (ii) applicable taxes required to be withheld, if any,
have been paid or withheld in full; (iii) approval of any governmental authority
required in connection with the Option, or the issuance of shares thereunder,
has been received by the Company; and (iv) if required by the Company, Optionee
has delivered to the Company an investment letter in form and content
satisfactory to the Company as provided in paragraph 9 hereof.
-2-
<PAGE>
9. GOVERNING LAW. This Option Agreement shall be interpreted and
administered under the laws of the State of Colorado.
10. AMENDMENTS. This Option Agreement may be amended only by a written
agreement executed by the Company and Optionee.
IN WITNESS WHEREOF, the Company and the Optionee have caused this Option
Agreement to be duly executed by their respective officers thereunto duly
authorized, and Optionee has hereunto set his hand as of the day and year first
above written.
eSoft, Inc.
By: /s/Philip L. Becker
-----------------------------------------
President
Pantheon Capital Ltd.
By: /s/Kent Nuzum
-----------------------------------------
President
eSoft, Inc.
STOCK OPTION AGREEMENT
This Option Agreement is made and entered into by and between eSoft, Inc.,
a Colorado corporation (the "Company"), and Copeland Consulting Group, Inc. (the
"Optionee"), as of the 11th day of November, 1997.
WITNESSETH:
WHEREAS, pursuant to a Consulting Agreement between the Company and
Pantheon Capital Ltd., dated September 2, 1997, as amended November 11, 1997,
the Company has agreed to grant to Pantheon Capital Ltd. options to purchase
150,000 shares of the Company's Common Stock; and
WHEREAS, Pantheon Capital Ltd. has assigned its rights to 37,500 of such
options to other parties;
NOW, THEREFORE, in consideration of the mutual covenants and conditions
hereinafter set forth, and for other good and valuable consideration, the
Company and Optionee agree as follows:
1. Grant of Option. The Company hereby grants to Optionee the right and
option (the "Option") to purchase an aggregate of 37,500 shares (such number
being subject to adjustment as provided in paragraph 9 hereof) of the common
stock of eSoft, Inc. (the "Stock") on the terms and conditions herein set forth.
This Option may be exercised in whole or in part and from time to time as
hereinafter provided.
2. Purchase Price. The price at which Optionee shall be entitled to
purchase the Stock covered by the Option shall be the price per share at which
shares of the Stock are first offered to the public in an initial public
offering of the Stock in Canada.
3. Term of Option. The Option hereby granted shall become exercisable
immediately after such an initial public offering is complete and remain in
force and effect until the normal close of business of the Company on the date
five years after the date that the Option becomes exercisable (the "Expiration
Date").
4. Exercise of Option. The Option may be exercised as to all or any part
thereof immediately after the closing of a public offering of the Company's
common stock, provided that such an offering is completed on or before December
31, 1998, and thereafter the Option may be exercised as to all or any part of
such shares (in not less than one hundred (100) share increments) at any time
and from time to time through the Expiration Date by delivery to the Company of
written notice of exercise and payment of the purchase price as provided in
paragraph 5 hereof.
<PAGE>
5. Method of Exercising Option. Subject to the terms and conditions of this
Option Agreement, the Option may be exercised by timely delivery to the Company
of written notice, which notice shall be effective on the date received by the
Company (the "Effective Date"). The notice shall state Optionee's election to
exercise the Option, the number of shares in respect of which an election to
exercise has been made, and the exact name or names in which the shares will be
registered. Such notice shall be signed by the Optionee and shall be accompanied
by payment of the purchase price of such shares in cash or certified or
cashier's check in the amount of the full purchase price (the number of shares
being purchased multiplied by the price per share). In the event the Option
shall be exercised by a person or persons other than Optionee, such notice shall
be signed by such other person or persons and shall be accompanied by proof
acceptable to the Company of the legal right of such person or persons to
exercise the Option. All shares delivered by the Company upon exercise of the
Option as provided herein shall be fully paid and nonassessable upon delivery.
6. Transferability. The Option shall be transferable by Optionee only upon
presentation to the Company of this Option Agreement with a written assignment
duly executed by the Optionee, and such evidence of compliance with applicable
securities laws of the United States or Canada or any state or province thereof
as the Company shall reasonably require.
7. Adjustments in Number of Shares and Option Price. If any change is made
to the Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding stock as a class without the Company's receipt of consideration,
appropriate adjustments shall be made to the number and the purchase price per
share in effect under the Option. Such adjustments to the Option shall be
effected in a manner that shall preclude the enlargement or dilution of rights
and benefits under such options. Any adjustments determined by the Committee
shall be final, binding and conclusive.
If the Company shall be the surviving or resulting corporation in any
merger or consolidation, the Option granted hereunder shall pertain to and apply
to the securities or rights to which a holder of the number of shares of Stock
subject to the Option would have been entitled. The Optionee shall be entitled
to at least 20 days' prior written notice of any dissolution or liquidation of
the Company, or a merger or consolidation in which the Company is not the
surviving or resulting corporation.
8. Delivery of Shares. No shares of Stock shall be delivered upon exercise
of the Option until (i) the purchase price shall have been paid in full in the
manner herein provided; (ii) applicable taxes required to be withheld, if any,
have been paid or withheld in full; (iii) approval of any governmental authority
required in connection with the Option, or the issuance of shares thereunder,
has been received by the Company; and (iv) if required by the Company, Optionee
has delivered to the Company an investment letter in form and content
satisfactory to the Company as provided in paragraph 9 hereof.
9. Securities Act. The Company shall not be required to deliver any shares
of Stock pursuant to the exercise of all or any part of the Option if, in the
opinion of counsel for the
-2-
<PAGE>
Company, such issuance would violate the Securities Act of 1933 (the "1933 Act")
or any other applicable federal or state securities laws or regulations. The
Committee may require that Optionee, prior to the issuance of any such shares
Pursuant to exercise of the Option, sign and deliver to the Company a written
statement ("Investment Letter") stating (i) that Optionee is purchasing the
shares for investment and not with a view to the sale or distribution thereof;
(ii) that Optionee will not sell any shares received upon exercise of the Option
except pursuant to an effective registration statement under the 1933 Act or an
applicable exemption from the requirements for such registration; and (iii)
containing such other terms and conditions as counsel for the Company may
reasonably require to assure compliance with the 1933 Act or other applicable
federal or state securities laws and regulations. Such Investment Letter shall
be in form and content acceptable to the Company in its sole discretion.
If shares of Stock or other securities issuable pursuant to the
exercise of the Option have not been registered under the 1933 Act or other
applicable federal or state securities laws or regulations, such shares shall
bear a legend restricting the transferability thereof, such legend to be
substantially in the following form:
The shares represented by this certificate have not been registered
or qualified under federal or state securities laws. The shares may
not be offered for sale, sold, pledged or otherwise disposed of
unless so registered or qualified, unless an exemption exists or
unless such disposition is not subject to the federal or state
securities laws, and the availability of any exemption or the
inapplicability of such securities laws must be established by an
opinion of counsel, which opinion and counsel shall both be
reasonably satisfactory to the Company.
10. Governing Law. This Option Agreement shall be interpreted and
administered under the laws of the State of Colorado.
11. Amendments. This Option Agreement may be amended only by a
written agreement executed by the Company and Optionee.
-3-
<PAGE>
IN WITNESS WHEREOF, the Company and the Optionee have caused this
Option Agreement to be duly executed by their respective officers thereunto duly
authorized, and Optionee has hereunto set his hand as of the day and year first
above written.
eSoft, Inc.
By: /s/Philip L. Becker
-----------------------------------------
President
Copeland Consulting Group, Inc.
By: /s/Gene Copeland
-----------------------------------------
President
-4-
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into as
of this 2nd day of September, 1997 between eSoft, Inc., a Colorado corporation
(the "Company"), and Philip L. Becker, an individual person (the "Executive").
RECITAL
A. The Company desires to employ the Executive as Chief Technology
Officer, and the Executive desires to be employed by the Company in such
position upon the terms and conditions set forth in this Agreement.
B. The Executive acknowledges that during the course of the
Executive's employment the Executive will receive or be exposed to certain
confidential information and trade secrets (collectively referred to as
"Confidential Information") of the Company. The Executive also acknowledges that
this Confidential Information is among the Company's most important assets and
that the value of this Confidential Information would be diminished or
extinguished by disclosure.
AGREEMENT
In consideration of the mutual promises contained herein, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Employment; Position; Term. The Company hereby employs the
Executive and the Executive hereby accepts employment with the Company in the
capacity of Chief Technology Officer. Subject to Section 4, the term of
Executive's employment under this Agreement (the "Term") shall be for 36 months,
beginning September 1, 1997 and ending August 31, 2002.
2. Duties, Responsibilities and Authority. In his capacity as Chief
Technology Officer of the Company, the Executive shall have primary
responsibility for the development and exploitation of personal computer
communications software. In his capacity as Chief Technology Officer, the
Executive shall report to and be subject to the direction and control of the
President of the Company. The Executive shall devote his full professional and
managerial time and effort to the performance of his duties as Chief Technology
Officer and he shall not engage in any other business activity or activities
which, in the judgment of the President of the Company, conflict with the
performance of his duties under this Agreement.
3. Compensation.
(a) Salary. For services rendered under this Agreement, the
Company shall pay the Executive a salary at the rate of $8,333 per month,
payable in equal bi-weekly installments, until such time as the Company
completes an Initial Public Offering of its common stock. After the successful
completion of the Initial Public Offering, the Executive shall be paid a salary
at the rate of
<PAGE>
$10,000 per month, payable in equal bi-weekly installments, the first of which
such adjusted payment will be pro-rated for the month in which the Initial
Public Offering occurs.
(b) Bonuses. The Executive shall be eligible to receive a
performance bonus for each fiscal quarter of the Company completed during the
term of this Agreement beginning with the fiscal quarter commencing October 1,
1997. The aggregate amount of the bonuses shall be equal to the sum of ten
percent (10%) of the earnings net of adjustments for interest and taxes of the
Company for said fiscal quarter ("EBIT"). In the event the bonus exceeds fifty
percent (50%) of the Executive's gross annual salary, prorated for the
equivalent months in said fiscal quarter (the "Quarterly Salary"), the Executive
shall receive a bonus in the amount that equals the Quarterly Salary. The
payment of the Executive's performance bonus shall be made as soon as
practicable after the determination by the Company of its EBIT. The Executive
shall not be entitled to a minimum performance bonus.
(c) Annual Review. The Executive's salary and terms of the
severance in Section 7 of this Agreement shall be reviewed annually beginning
September 1, 1998 and may be increased as the Board deems appropriate.
(d) Stock Options. Concurrently with the effectiveness of this
Agreement and pursuant to action of the Board, the Executive shall be granted
incentive stock options pursuant to the Company's Equity Compensation Plan to
purchase up to 200,000 shares of the Company's common stock at an exercise price
equal to the offering price of the Company's common stock in the Initial Public
Offering scheduled for early 1998. The option shall vest over a 36 month period
with no vesting until the end of the seventh month. Seven-thirty-sixths (7/36)
of the options shall vest at the end of the seventh month or at such later date
as the Initial Public Offering is consummated and one-thirty-sixths (1/36) after
the end of each month thereafter. Vesting shall occur as long as the Executive
remains an employee of the Company. The options, once vested shall have an
expiration date of 5 years from the date of the consummation of the Initial
Public Offering. In addition, the Executive may participate in stock option
programs of the Company upon such terms as the administrators of such programs
in their discretion determine.
(e) Benefits and Vacation. The Executive shall be eligible to
participate in such insurance programs (health, disability or life) or such
other health, dental, retirement or similar employee benefits programs as the
Board may approve, on a basis comparable to that available to other officers and
executive employees of the Company. The Executive shall be entitled to four (4)
weeks of paid vacation. Vacation time may be accumulated for up to one year
beyond the year for which it is accrued and may be used any time during such
year. Any vacation time not used during such additional year shall be forfeited.
The value of any accrued but unused and unforfeited vacation time shall be paid
in cash to the Executive upon termination of his employment for any reason.
(f) Reimbursement of Expenses. The Company shall reimburse the
Executive for all reasonable out-of-pocket expenses incurred by the Executive in
connection with the
-2-
<PAGE>
performance of his duties under this Agreement; provided that the Executive
presents to the Company an itemized accounting of such expenses including
reasonable supporting data.
4. Termination.
(a) Termination by the Company without Cause. Notwithstanding
anything to the contrary contained herein but subject to Section 7 hereof, the
Company may, by delivering thirty (30) days' prior written notice to the
Executive, terminate the Executive's employment at any time without Cause (as
hereinafter defined).
(b) Termination by the Executive without Cause.
Notwithstanding anything to the contrary contained herein but subject to Section
7 hereof, the Executive may, by delivering thirty (30) days' prior written
notice to the Company, terminate the Executive's employment hereunder.
(c) Termination by the Company for Cause. The Company may
terminate the Executive's employment for Cause immediately upon written notice
stating the basis for such termination. "Cause" for termination of the
Executive's employment shall only be deemed to exist if the Executive has (i)
breached this Agreement and if such breach continues or recurs more than thirty
(30) days after notice from the Company specifying the action which constitutes
the breach and demanding its discontinuance, (ii) exhibited willful disobedience
of directions of the President or of the Board, or (iii) committed gross
malfeasance in performance of his duties hereunder or acts resulting in an
indictment charging the Executive with the commission of a felony; provided that
the commission of acts resulting in such an indictment shall constitute Cause
only if a majority of the directors who are not also subject to any such
indictment determine that the Executive's conduct has substantially adversely
affected the Company or its reputation. A material failure to perform his duties
hereunder that results from the disability of the Executive shall not be
considered Cause for his termination.
5. Disability. In the event of disability of the Executive during
the term hereof, the Company shall, during the continuance of his disability but
only for a maximum of 90 days, pay the Executive his then current salary, as
provided for in Section 3(a), and adjusted pursuant to Section 3(b), and
continue to provide the Executive all other benefits provided hereunder. As used
herein, the term "disability" shall mean the complete and total inability of the
Executive, due to illness, physical or comprehensive mental impairment, to
substantially perform all of his duties as described herein for a consecutive
period of thirty (30) days or more.
6. Death. In the event of the death of the Executive, except with
respect to any benefits which have accrued and have not been paid to the
Executive hereunder, the provisions of this Agreement shall terminate
immediately. The Executive's estate shall have the right to receive compensation
due to the Executive as of and to the date of his death and shall have the right
to
-3-
<PAGE>
receive an additional amount equal to one-twelfth (1/12th) of the Executive's
annual compensation then in effect.
7. Severance. In the event that the Executive's employment is
terminated by the Company other than for Cause or death of the Executive, or in
the event there is either a material change in the responsibilities of the
Executive or a loss of position within three months after a Change of Control
(as defined in Section 12 of this Agreement), the Executive shall be entitled to
receive his then current salary, as provided for in Section 3(a), and adjusted
pursuant to Section 3(b), payable in bi-weekly installments, for that number of
months which equals the number of years that have elapsed from January 1, 1992
until the date of the Executive's termination by the Company; provided, however,
that if any of such payments would (i) constitute a "parachute payment" within
the meaning of Section 280G of the Internal Revenue Code of 1986 (the "Code")
and (ii) but for this provision, be subject to the excise tax imposed by Section
4999 of the Code (the "Excise Tax"); the amount payable hereunder shall be
reduced to the largest amount which the Executive determines would not result in
any portion of the payments hereunder being subject to the Excise Tax. If the
Executive voluntarily resigns his employment hereunder or if his employment is
terminated for Cause, the Executive shall not be entitled to any severance pay
or other compensation beyond the date of termination of his employment.
8. Covenant Not to Compete.
(a) During the continuance of the Executive's employment
hereunder and for a period of twelve (12) months after termination of the
Executive's employment hereunder, the Executive shall not engage in any business
which competes with the Company or its affiliates anywhere in the United States
or Canada during the Executive's employment hereunder or at the time of
termination.
(b) The Executive shall not, for a period of twelve (12)
months after termination of the Executive's employment hereunder, employ, engage
or seek to employ or engage for himself or any other person or entities, any
individual who is or was employed or engaged by the Company or any of its
affiliates until the expiration of six (6) months following the termination of
such person's or entity's employment or engagement with the Company or any of
its affiliates.
9. Trade Secrets and Confidential Information. During his employment
by the Company and for a period of five (5) years thereafter, the Executive
shall not, directly or indirectly, use, disseminate, or disclose for any purpose
other than for the purposes of the Company's business, any Confidential
Information of the Company or its affiliates, unless such disclosure is
compelled in a judicial proceeding. Upon termination of his employment, all
documents, records, notebooks, and similar repositories of records containing
information relating to any Confidential Information then in the Executive's
possession or control, whether prepared by him or by others, shall be left with
the Company or, if requested, returned to the Company.
-4-
<PAGE>
10. Severability. It is the desire and intent of the undersigned
parties that the provisions of Sections 8 and 9 shall be enforced to the fullest
extent permissible under the laws in each jurisdiction in which enforcement is
sought. Accordingly, if any particular sentence or portion of either Section 8
or 9 shall be adjudicated to be invalid or unenforceable, the remaining portions
of such section nevertheless shall continue to be valid and enforceable as
though the invalid portions were not a part thereof. In the event that any of
the provisions of Section 8 relating to the geographic areas of restriction or
the provisions of Sections 8 or 9 relating to the duration of such Sections
shall be deemed to exceed the maximum area or period of time which a court of
competent jurisdiction would deem enforceable, the geographic areas and times
shall, for the purposes of this Agreement, be deemed to be the maximum areas or
time periods which a court of competent jurisdiction would deem valid and
enforceable in any state in which such court of competent jurisdiction shall be
convened.
11. Injunctive Relief. The Executive agrees that any violation by
him of the provisions contained in Sections 8 and 9 are likely to cause
irreparable damage to the Company, and therefore he agrees that if there is a
breach or threatened breach by the Executive of the provisions of said sections,
the Company shall be entitled to an injunction restraining the Executive from
such breach. Nothing herein shall be construed as prohibiting the Company from
pursuing any other available remedies for such breach or threatened breach.
12. Miscellaneous.
(a) Notices. Any notice required or permitted to be given
under this Agreement shall be directed to the appropriate party in writing and
mailed or delivered, if to the Company, to eSoft, Inc., to the attention of the
President, at 15200 East Girard Avenue, Suite 3000, Aurora, Colorado 80014, and
if to the Executive, to 15200 East Girard Avenue, Suite 3000, Aurora, Colorado
80014.
(b) Binding Effect. This Agreement is a personal service
agreement and may not be assigned by the Company or the Executive, except that
the Company may assign this Agreement to a successor of the Company by merger,
consolidation, sale of substantially all of the Company's assets or other
reorganization (a "Change of Control"). Subject to the foregoing, this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors, assigns, and legal representatives.
(c) Amendment. This Agreement may not be amended except by an
instrument in writing executed by each of the undersigned parties.
(d) Applicable Law. This Agreement is entered into in the
State of Colorado and for all purposes shall be governed by the laws of the
State of Colorado.
(e) Entire Agreement. This Agreement supersedes and replaces
all prior agreements between the parties related to the employment of the
Executive by the Company.
-5-
<PAGE>
SIGNATURES
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the first date mentioned above.
THE COMPANY:
eSOFT, INC.
By: /s/Wayne Farlow
-----------------------------------------
Wayne Farlow, President and Chief
Executive Officer
THE EXECUTIVE:
/s/Philip L. Becker
----------------------------------------------
Philip L. Becker
-6-
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