- --------------------------------------------------------------------------------
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)
DELAWARE 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)
- --------------------------------------------------------------------------------
<PAGE>
TABLE OF CONTENTS
PAGE
PART I
INTRODUCTION..................................................................1
Item 1. DESCRIPTION OF BUSINESS...............................................1
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS................................................10
Item 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.......13
Item 5. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS.....16
Item 6. EXECUTIVE COMPENSATION...............................................17
Item 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.......................18
Item 8. DESCRIPTION OF SECURITIES............................................19
PART II
Item 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS............................................21
Item 2. LEGAL PROCEEDINGS....................................................21
Item 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS........................22
Item 4. RECENT SALES OF UNREGISTERED SECURITIES..............................22
Item 5. INDEMNIFICATION OF DIRECTORS.........................................22
-i-
<PAGE>
PART I
INTRODUCTION
This registration statement has been voluntarily filed by eSoft, Inc.
(the "Company"). The Company presently has only 31 shareholders and it is not
required to register any of its securities under the Securities Act of 1934 (the
"Exchange Act") unless and until it has at least (500) shareholders. The Company
has chosen to register its common stock by filing this registration statement
with the Securities and Exchange Commission ("SEC") in anticipation of a public
offering of its common stock that is proposed to be made in Canada (the
"Canadian Offering") (see: "Initial Public Offering in Canada" at page 10), soon
after the effectiveness of this registration statement (about February 20,
1998). Upon the effectiveness of this registration statement, the Company will
be obligated to file with the SEC annual and quarterly reports containing
financial statements reflecting the operations and the financial condition of
the Company and to file current reports to report certain material events
affecting the Company. As a result of the filing of this registration statement,
and the fact that the Company will be a reporting company, required to file such
reports with the SEC, certain requirements of Regulation S under the Securities
Act of 1933 (the "1933 Act"), which exempts offering of securities made outside
of the United States and not to U.S. persons will be less restrictive than if
the Company were not such a reporting company.
No market for the common stock of the Company presently exists in either
the United States or Canada, moreover, even after the Canadian Offering, the
Company does not expect that any trading market in the Company's shares will
develop in the United States because none of the shares sold in the Canadian
Offering will be sold in the U.S. or to U.S. persons. There is also no assurance
that any market in the Company's stock will arise in Canada, although the shares
will be listed on the Vancouver Stock Exchange before the Canadian Offering is
completed.
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:
"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.
"CPU" means Central Processing Unit. The computational engine of a
computer.
"CSU/DSU" means Customer Service Unit/Digital Service Unit. A device
which converts the signals on a high speed leased line circuit to the digital
signals required to connect to a computer interface.
"DNS (DOMAIN NAME SERVER)" is a server function on the Internet which
acts as a "Directory Assistance" service.
"DOS" means Disk Operating System.
"ETHERNET" is a high speed transmission medium which allows direct
connection of computers in a local area at data transmission speeds of either
10Mhz or 100Mhz.
"FCC" means Federal Communications Commission (US).
"FINGER SERVER" is software which provides responses to queries using
the standard Finger protocol.
"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.
<PAGE>
"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.
"GB" means Gigabyte. One billion bytes.
"INTEGRAL 56 KB LEASED LINE CSU/DSU" is a complete interface to allow
direct connection to a particular type of leased line known as a 56KB leased
line. Includes both the digital interface and the CSU/DSU required for this type
of connection.
"ISDN" means Integrated Services Digital Network. A special type of
telephone circuit which allows direct digital connections.
"KB" means Kilobyte. One thousand bytes.
"LAN" means Local Area Network. A group of computers in a local area
(usually within a single building) which are connected together to share data.
"MB" means Megabyte. One million bytes.
"MHZ" means Megahertz. One million cycles per second.
"MICROPROCESSOR" is a computer on a single integrated circuit chip.
"PACKET ROUTING FIREWALL" is a security system based on applying rules
to each packet which enters a router to determine if it should be allowed to
continue onward or by rejected.
"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.
"RAM" means Random Access Memory. A computer's working program and data
memory.
"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.
"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.
"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.
"UL" means Underwriter's Laboratories, Inc.
"UNIX" is a multiuser computer operating system.
"VPN (VIRTUAL PRIVATE NETWORK)" is the result of using encryption and
special protocols to create a private network using public data transmission
lines to promote lower cost and easy mobile access.
"WWW" means World Wide Web.
-2-
<PAGE>
CORPORATE HISTORY
eSoft, Inc. was incorporated under the laws of the State of Colorado on
March 3, 1984. On February 17, 1998, pursuant to approval by the Board of
Directors and shareholders of the Company, the Company merged into a newly
incorporated Delaware corporation, and has thus become reincorporated in the
State of Delaware.
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.
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,
-3-
<PAGE>
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 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.
PLANNED NEW SOFTWARE PRODUCT
The Company proposes to develop an IPAD-supported virtual private
network ("VPN") product. This product will require the development and
integration into the IPAD product of encryption software. The Company expects to
license the encryption software from a firm or firms specializing in this
technology. The Company has identified encryption software which it believes
will meet the needs of this proposed new product and has begun negotiating the
terms of a license. The Company has also begun research to identify the
important characteristics of a future VPN product offering. The Company believes
that the inclusion of the VPN technology in an IPAD product will have
-4-
<PAGE>
considerable market appeal for prospective customers that require secure network
connections from remote locations. Development of this proposed new product is
in a very early stage and there can be no assurance that the Company will be
able to license the necessary technology at a reasonable cost, or at all, nor
that the Company will be able to satisfactorily integrate the encryption
technology into the IPAD product in a timely manner or at a cost which will
permit the Company to effectively compete with other products offering similar
technology.
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.
If and when the sales volume increases to a level beyond the capacity of
the Company's facilities, presently anticipated to be in six to nine months, the
Company expects to outsource the assembly of the product to a contract
manufacturer in the U.S. and one in Europe.
It is the intention of the Company to sell its products 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
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.
-5-
<PAGE>
From time to time, the Company has entered into software development
consulting agreements. Two agreements entered into with John Patrick McMillan, a
consultant, provided for the Company to pay percentages of gross software
licensing fees on certain of its products, including the IPAD software. The
Company and the consultant have entered into a Termination Agreement terminating
those consulting arrangements in consideration of payment of $60,000, one-half
on execution of the Termination Agreement and one-half after completion of the
Canadian IPO, and a warrant to purchase 20,000 shares of the Company's Common
Stock at $1.00 per share for one year and $1.15 per year for a second year.
THE MARKET FOR THE PRODUCTS
The primary market being pursued by the Company consists of small to
medium size businesses. The Company believes these businesses 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.
The Company believes that for most small to medium size businesses, high
speed large diameter pipeline access to the Internet is sufficiently important
that the businesses would continue to rely upon an Internet service provider in
order to gain that advantage if it were not available in Internet connectivity
products such as the Company's IPAD products. With new advancements in Internet
software, however, 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. Perhaps 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.
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.
In an article entitled "All-In-One Net Boxes to the Rescue," published
in the September 8 1997 edition of Inter@ctive Week, an Internet industry trade
publication, market analysts indicate that in 1997, fewer than 6,000 units of
IPAD like products were 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.
-6-
<PAGE>
The Company believes that 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 Company has observed a current industry trend 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
Competition among the industry participants is based upon a number of
factors including product features, type of user primarily serviced, reputation
of the Company, ease of installation or use, reliability, cost, service
availability and other factors. The Company believes that its principal
competitive advantages are the product features, simplicity and ease of
installation and the availability of technical support for the product and the
customer. The Company's products are also designed to meet the specific needs of
the smaller to mid-sized companies that are the Company's target market. For
example, 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.
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 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
-7-
<PAGE>
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 established.
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"). The Company's IPAD products use components purchased from other
manufacturers which have the required FCC approvals and the Company relies upon
the certification of compliance furnished by those manufacturers . 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. The Company believes there are no
other material U.S. federal or state regulations which must be satisfied to
permit the sale of its products in the U.S.
The Company has not acquired requisite product approvals and
certification from appropriate agencies which would permit the marketing of IPAD
products in the European Union. At this time the Company is investigating which
agencies need to be involved in granting such approvals in various markets. Part
of this effort involves creating necessary product documentation including
product mechanical drawings necessary for most such approvals and
-8-
<PAGE>
certifications. In parallel the Company is investigating the possibility of
producing the product in the various markets using previously approved
components to create an approved final assembly without the need for new testing
and certification. There can be no assurance that the necessary approvals will
be obtained without extended delays, or at all.
EMPLOYEES
At February 18, 1998, 17 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 1,550,000
shares of its Common Stock at a price of $1.00 per share in British Columbia,
Canada, soon after the effectiveness of this registration statement (the
"Canadian Offering"). The offering will be made by C.M. Oliver Company Limited
(the "Agent") pursuant to an Agency Agreement under which the Agent has
guaranteed the sale of all of the shares. The shares sold in such offering will
not be registered under the Securities Act of 1933 (the "1933 Act") and will be
offered pursuant to an exemption from the registration requirements of the 1933
Act provided by Regulation S under the 1993 Act. The Shares in the Canadian
Offering will not be offered or sold to U.S. persons. The Agent will also
receive 75,000 shares of Common Stock as a corporate finance fee as additional
compensation and a warrant to purchase up to 250,000 shares of Common Stock for
up to two years at a price of $1.00 per share for the first year after the
offering and for $1.15 per share during the second year after the offering.
Pursuant to a Sponsorship Agreement between the Company and the Agent, dated
November 26, 1997, the Company also paid to the Agent a sponsorship fee of
$15,000.
The net proceeds to the Company from the offering are expected to be
$1,168,200 after payment of $131,750 commissions to the Agent (8.5% of the
offering price) and the payment of other expenses of the offering, estimated to
amount to $250,000. The proceeds of the offering are proposed to be used as
follows:
Capital Equipment Purchases $ 196,000
Research and Development 300,000
Sales and Marketing Expenditures 550,000
Payment of Loan to First National Bank of Arvada 70,000
Working Capital $ 152,200
----------
Total $1,168,200
In the event that the proceeds of the offering, together with cash flow from
operations, if any, is insufficient to meet all of the expenses to which the
proceeds have been allocated, the Company will be required to re-evaluate its
planned expenditures and allocate its total resources in such manner as the
Board of Directors and management deems to be in the best interest of the
Company. Moreover, the Board and Directors and Management may, for business
reasons, reallocate funds among these or other uses in order to achieve the
Company's operating objectives.
-9-
<PAGE>
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. The margin improvement results primarily from producing the
IPAD product internally instead of being outsourced to contract manufacturers.
As described under Business-Operations, the Company expects again to outsource
its product assembly operations within six to nine months when it is anticipated
that sales volumes will exceed the capacity of the Company's facilities, when
this occurs, the Company anticipates that margins will decline to the range of
56% to 60%.
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.
-10-
<PAGE>
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 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.
On December 22, 1997, the Company sold 350,000 shares of Common Stock
and warrants to purchase an additional 87,500 shares to Opus Capital Fund, LLC,
for a total purchase price of $350,438. In February 1998, the Company sold and
issued an additional 190,000 shares, and accepted subscriptions for an
additional 200,000 shares, all at a price of $1.00 per share in private
transactions to officers, directors, key employees and consultants of the
Company.
On January 3, 1998, the loan from First National Bank of Arvada,
Colorado, described above, was extended to April 3, 1998 for the payment of the
outstanding balance of $73,363, with monthly installment payments of $3,325 in
February and March 1998. On January 23, 1998, the Company received from the
Colorado National Bank (the "Bank") a preliminary loan proposal that calls for a
borrowing commitment of up to $825,000.00. Of this total, $75,000.00 would be a
term loan bearing interest at 1-1/2% over the Bank's reference rate, payable in
monthly installments and maturing March 1, 2000. This loan would be used to pay
the indebtedness to First National Bank of Arvada. The balance of the commitment
would be for a $300,000.00 working capital line of credit, to be increased to
$750,000.00 upon completion of the Canadian Offering. Advances under the line of
credit may not exceed 80% of
-11-
<PAGE>
eligible accounts receivable and 25% of eligible inventory to a maximum of
$150,000.00. This loan will bear interest at 1/2% over the Bank's reference
rate. The borrowings will be secured by a lien or all of the corporation's
assets. The proposed loan has not been approved by the Bank and there is no
assurance that it will be obtained. The Company believes that this line of
credit, if obtained, will assist in the Company in financing its anticipated
growth of sales if the growth is achieved.
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 $1,170,00 of offering
proceeds will be generated, after payment of expenses and commissions. This
equity infusion, together with working capital generated from the Company's
internal operations and the Bank loan, if obtained, are expected to advance the
Company substantially towards establishing and fortifying channels of
distribution for its IPAD product line, and are expected to be sufficient to
meet the capital requirements of the Company for the next 12 months.
YEAR 2000 EFFECT
The Company's TBBS product line has one deficiency associated with year
2000 for which a correction is being developed that is scheduled for a revision
release in October 1998. The IPAD product line has no known susceptibility to
year 2000 issues. The cost of the revision to the TBBS product is not expected
to be material.
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 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
-12-
<PAGE>
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.
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 1998 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 this 1,300 square feet is approximately
$13,347 per year. The Company hopes to sublet this space in the near future, but
at present the Company is using that space for storage.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company has a total of 2,951,110 shares of Common Stock issued and
outstanding at February 18, 1998. 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.
-13-
<PAGE>
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ---------------------------------------- ---------------------- -------------------
<S> <C> <C>
Philip L. Becker, Director, Chairman and 1,091,139(1) 35.3%
CEO...................................
5335 Sterling Drive, Suite C
Boulder, CO 80301
Regis A. Frank, President, Chief Operating 46,500(2) 1.5%
Officer and Director .................
5335 Sterling Drive, Suite C
Boulder, CO 80301
16,500(3) 0.6%
Michael W. Johnson, Director ...........
1875 Lawrence Street
Denver, CO 80302
8,500(4) 0.3%
Robert B. Louthan, Director ............
P. O. Box 4966
Vail, CO 81658
Daryl Yurek(4).......................... 296,579(5) 9.7%
1113 Spruce Street
Boulder, CO 80302
W. Terrance Schreier(5)................. 252,265(6) 8.5%
1942 Broadway, Suite 303
Boulder, CO 80302
Gene R. Copeland(6)..................... 232,266(7) 7.9%
5373 Lookout Ridge Drive
Boulder, CO 80301
Directors and Executive Officers........ 1,272,633(8) 40.8%
as a group
</TABLE>
(1) Includes 100,000 shares subscribed for but not yet purchased, and 41,139
options exercisable presently or within 60 days.
(2) Includes 21,500 options exercisable presently or within 60 days.
(3) Includes 1,500 options exercisable within 60 days.
(4) Reflects options exercisable presently or within 60 days.
(5) 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, 96,579 shares of Common Stock held by Pantheon Capital Ltd. and
100,000 shares subscribed for but not yet purchased. Excludes warrants held
by Pantheon Capital Ltd. to purchase 207,300 shares of Common Stock
exercisable beginning six months after the completion of the Canadian
Offering and expiring the later of February 1, 1999 or one year and 15 days
after the date of the Canadian Offering and 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.
-14-
<PAGE>
is controlled by Mr. Yurek and he is therefore the beneficial owner of all
shares and options held in the name of Pantheon Capital Ltd.
(6) Includes 41,500 shares owned by Mr. Schreier and held in the name of W.
Terrance Schreier Simplified Employee Pension (SEP), and 202,265 shares held
by Transition Partners, Ltd. Transition Partners, Ltd. is controlled by Mr.
Schreier and he is therefore the beneficial owner of all shares and options
held in the name of Transition Partners, Ltd. Excludes warrants held by
Transition Partners, Ltd. to purchase up to 103,650 shares of Common Stock
of the Company exercisable beginning six months after completion of the
Canadian Offering and expiring the later of February 1, 1999 or one year and
15 days after the date of the Canadian Offering.
(7) Shares are held by Copeland Consulting Group, Inc. which is controlled by
Mr. Copeland and he is therefore the beneficial owner of all shares and
options held in the name of Copeland Consulting Group, Inc. Excludes
warrants held by the Copeland Consulting Group, Inc. options to purchase
103,650 shares of Common Stock of the Company exercisable beginning six
months, after completion of the Canadian Offering and expiring on the later
of February 1, 1999 or one year and 15 days after the date of the Canadian
Offering.
(8) Includes 65,639 options exercisable presently or within 60 days.
-15-
<PAGE>
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) Age 51, Chairman, Chief Technology Officer and Chief
Chairman, Chief Executive Officer and 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.
REGIS A. FRANK(1) Age 52, President and Chief Operating Officer of the Company
President, Chief Operating Officer and since January 1998; Vice-President, Marketing and Sales, of
Director Sigmacom Corporation, a software developer and integration services
company, from May 1997 to December 1997; President of Team Advisors, a
business and marketing consulting company, from November 1995 to April
1997; President and Chief Executive Officer for SecaGraphics, Inc., a
software development company; from September 1986 to October 1995.
MICHAEL W. JOHNSON Age 36, President and CEO, INFONOW Corporation, Denver,
Director Colorado, since 1995; Engagement Manager, McKinsey &
1875 Lawrence Street Company, Inc., consultants, Dallas, Texas and Amsterdam,
Denver, CO 80302 Netherlands from 1990 to 1995.
ROBERT B. LOUTHAN Age 56, President of RBL Management Sciences, a management
Director marketing and sales consulting company, since 1986.
P.O. Box 4966
Vail, CO 81658
KENT NUZUM(1) Age 31, Employed by Daryl Yurek since January 1997; Assistant
Secretary and Acting Chief Financial Vice-President, Commercial Loans for Bank One, Colorado from
Officer August 1990 to January 1997.
ROBERT B. HARTMAN(1) Age 37, Vice-President, Engineering of the Company since
Vice President-Engineering January 1993; Senior Software Engineer for the Company from
1990 to 1993; President of Spark Software, a computer consulting
company from 1986 to 1990; Senior Software Engineer and Project Leader
for Automatrix, Inc., a software development company, from 1983 to
1986.
JASON M. ROLLINGS(1) Age 36, Vice-President, Operations of the Company since
Vice President - Operations November 1997; Director of Factory Operations for Micromotion
Inc., an electronics manufacturer, from July 1997 to October 1997;
Director of Manufacturing for Hi-Tech Manufacturing, a printed circuit board
and computer manufacturer, from April 1995 to July 1997; Director of
Manufacturing for Codar Inc., a military computer manufacturer, from
September 1988 to March 1995.
- ------------------------------
</TABLE>
(1) Address: 5335 Sterling Drive, Suite C, Boulder, Colorado 80301.
-16-
<PAGE>
Messrs. Becker, Frank, Hartman and Rollings are all full-time employees
of the Company. Mr. Nuzum is a consultant serving as Secretary and acting Chief
Financial Officer on a part-time basis.
ELECTION OF DIRECTORS
The directors of the Company were elected by the shareholders at a
meeting on February 10, 1998 and will hold office until the next annual meeting
at which time they may be re-elected or replaced. The Certificate of
Incorporation of the Company permits 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.
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 ($600) with the balance secured by a non-recourse
promissory note, payable to the Company and due September 5, 1999.
-17-
<PAGE>
EXECUTIVE COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
-------------------------------------------------------------------- ----------------
SECURITIES
NAME AND YEAR ENDED RESTRICTED UNDERLYING
PRINCIPAL DECEMBER OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
POSITION 31, SALARY($) BONUS($) COMPENSATION($) AWARDS(S)($) SARS(#) PAYMENTS($) COMPENSATION($)
<S> <C> <C> <C> <C> <C> <C> <C> <C?
PHILIP L. BECKER, 1997 100,000 -- -- -- -- -- --
Chief Executive 1996 60,000 -- -- -- -- -- --
Officer 1995 45,000 -- -- -- -- -- --
</TABLE>
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Prior to the adoption of the Stock Option Plan described below, no stock
options were ever granted to or exercised by executive officers of the Company.
In February 1998, the Board of Directors and shareholders of the Company
approved an amended Stock Option Plan, originally adopted in August 1997 (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 900,000 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 five (5)
years.
In the fiscal year ending December 31, 1997, stock options to purchase
200,000 shares of the Company's Common Stock were granted 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, but each director has been granted an option to purchase 18,000
shares of Common Stock at $1.00 per share. As set forth above, Mr. Becker and
Mr. Frank also receive compensation as officers.
ITEM 7. CERTAIN 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.
-18-
<PAGE>
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 and Interim Chief Financial Officer of the Company, entered into a
consulting and non-competition agreement (the "Nuzum 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 Sates. 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
and one-half of each of the promissory notes has been paid by the issuance of
Common Stock at a price of $1.00 per share. The TPL Agreement will terminate on
May 21, 1998.
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.
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 8. DESCRIPTION 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
-19-
<PAGE>
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.
-20-
<PAGE>
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
the Canadian IPO. 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. There are no proposals, arrangements or
understandings with any U.S. broker dealers or other person to establish a
market for the Common Stock in the United States, and no market is expected to
develop in the near future.
Upon completion of the Canadian Offering and the issuance of all shares
presently subscribed for, the Company will have outstanding 4,836,110 shares of
Common Stock. All of the approximately 2,800,000 shares held by U.S. persons are
restricted securities as defined in Rule 144 under the 1933 Act and 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 holding periods on September 4, 1998 and 1999, respectively. The
Company has filed a registration statement under the 1933 Act to register these
restricted shares to permit their sale by the holders of the shares but the
registration statement is not yet effective and there is no assurance as to
whether or when it will become effective. In addition to the Rule 144
restrictions on sales under the U.S. securities laws, in accordance with
requirements of the Vancouver Stock Exchange, 440,000 shares which were sold at
$.50 per share are subject to a "hold" so that they may not be sold by the
owners until at least three months after the completion of the Canadian IPO.
STOCK OPTIONS AND WARRANTS
As of the date of this amended Registration Statement, options to
purchase 662,000 shares have been granted under the Company's Stock Option Plan
(the "Option Plan"), 123,889 of which are currently exercisable. In addition,
the Company has granted warrants to purchase an aggregate of 522,100 shares of
Common Stock. All such options and warrants are exercisable at a price of $1.00
per share for one year and at a price of $1.15 per share thereafter.
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 a price of
$1.15 per share.
HOLDERS
There are approximately 33 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.
ITEM 2. LEGAL PROCEEDINGS
The Company is not involved in any material legal proceedings.
-21-
<PAGE>
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
PRIVATE PLACEMENT TRANSACTIONS
In September 1997 the Company sold in a private placement transaction
820,000 shares of Common Stock at $.50 per share to 25 investors, nine of which
were U.S. persons. In December, the Company sold to a venture capital fund
350,000 shares of Common Stock at $1.00 per share and warrants to purchase
87,500 shares of Common Stock at $1.00 per share for one year and $1.15 per
share for a second year. The price paid for these warrants was $438.00. In
February 1998, the Company sold 190,000 shares and accepted subscriptions for
200,000 additional shares at $1.00 per share. The purchasers are all officers,
directors, key employees and consultants of the company. All of the sales to
U.S. persons were made in reliance upon exemptions from the registration
requirements of Section 5 of the 1933 Act provided by Rule 505 of Regulation D
under the 1933 Act, and sales to non-U.S. persons were made in reliance upon
Regulation S under the Act.
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
were 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, and the Company has paid the notes by the issuance of 29,000
shares of common stock at $1.00 per share.
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, and the Company has paid the notes by the issuance of
29,000 shares of common stock at $1.00 per share.
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
-22-
<PAGE>
permitting corporations organized thereunder to indemnify directors, officers
and other representatives from liabilities 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.
-23-
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
3.1 Articles Of Incorporation*
3.1A Certificate Of Incorporation Of New Esoft, Inc.
3.1B Certificate Of Merger Of Esoft, Inc. Into New Esoft, Inc.
3.2 Bylaws Of Esoft*
3.2A Bylaws Of New Esoft, Inc.
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**
10.6 Voting Agreement Dated September 2, 1997 Between Philip Becker,
Pantheon Capital Ltd. And Transition Partners, Ltd.*
10.6A Termination Agreement
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*
10.12A Amended Stock Warrant Agreement Dated January 29, 1998
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*
-24-
<PAGE>
10.16A Amended Stock Warrant Agreement Dated January 29, 1998
10.17 Stock Option Agreement Dated November 11, 1997 Between Copeland
Consulting Group, Inc. And The Company*
10.17A Amended Stock Warrant Agreement Dated January 29, 1998
10.18 Employment Agreement Dated September 2, 1997 Between Philip Becker And
The Company*
10.19 Form Of Employee Confidentiality Agreement
10.20 Termination Agreement Terminating Software Development And Consulting
Agreements
10.21 Promissory Note To First National Bank Of Arvada, Colorado
10.22 Proposal For Financing Arrangement From Colorado National Bank
27 Financial Data Schedule
- -------------------------------
* Filed With Registration Statement On Form 10-SB On December 22, 1997.
** Filed With Registration Statement On Form SB-2 On December 24, 1997.
-25-
<PAGE>
SIGNATURES
In accordance with Section 12 of the Securities Exchange Act of 1934,
the registrant caused this amended registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized.
eSOFT, INC.
Date: February 18, 1998
By: /s/ Philip L. Becker
------------------------------------
Philip L. Becker, Chief Executive Officer
-26-
EXHIBIT 3.1a
CERTIFICATE OF INCORPORATION
OF
NEW ESOFT, INC.
ARTICLE 1
The name of the corporation is New eSoft, Inc. (the "Corporation").
ARTICLE 2
The address of the Corporation's registered office in the State of Delaware
is 1209 Orange Street, Wilmington, County of New Castle, Delaware 19801. The
name of its registered agent at such address is The Corporation Trust Company.
ARTICLE 3
The nature of the business of the Corporation and the purposes for which it
is organized are to engage in any business and in any lawful act or activity for
which corporations may be organized under the Delaware General Corporation Law
(the "GCL") and to possess and employ all powers and privileges now or hereafter
granted or available under the laws of the State of Delaware to such
corporations. ARTICLE 4
Section 4.1 AUTHORIZED SHARES. The total number of shares that the
Corporation shall have authority to issue is 50,000,000, all of which shall be
designated common stock, with a par value of $.01 per share.
Section 4.2 COMMON STOCK. Each holder of common stock shall be entitled to
one vote for each share of common stock held on all matters as to which holders
of common stock shall be entitled to vote. Except as may be provided by the laws
of the State of Delaware, the holders of common stock shall have exclusively all
other rights of stockholders of the Corporation, including, but not by way of
limitation: (i) the right to receive dividends, when, as and if declared by the
board of directors out of assets lawfully available therefor and (ii) in the
event of any distribution of assets upon the dissolution and liquidation of the
Corporation, the right to receive ratably and equally all of the assets of the
Corporation.
<PAGE>
ARTICLE 5
Section 5.1 NUMBER OF DIRECTORS. The number of directors of the Corporation
shall be fixed from time to time in the manner provided in the bylaws and may be
increased or decreased from time to time in the manner provided in the bylaws.
Section 5.2 ELECTION AND TERM. Election of directors need not be by written
ballot except and to the extent provided in the bylaws of the Corporation.
Section 5.3 VACANCIES. Newly created directorships resulting from any
increase in the number of directors and any vacancies on the board of directors
resulting from death, resignation, disqualification, removal or other cause
shall be filled solely by the affirmative vote of a majority of the remaining
directors then in office or a sole remaining director, even if less than a
quorum of the board of directors. Any director elected in accordance with the
preceding sentence shall hold office for the remainder of the full term of the
new directorship which was created or in which the vacancy occurred and until
such director's successor shall have been elected and qualified.
ARTICLE 6
The board of directors of the Corporation is expressly authorized to make,
alter, or repeal the bylaws of the Corporation, but such authorization shall not
divest or limit the stockholders' power to adopt, amend or repeal bylaws.
ARTICLE 7
Section 7.1 SPECIAL MEETINGS. Except as otherwise required by law, special
meetings of the stockholders may be called only by the chairman of the board of
directors, the president, a vice president or the board of directors pursuant to
a resolution approved by a majority of the entire board of directors or a sole
remaining director.
ARTICLE 8
No director of the Corporation shall be personally liable to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except as to liability for: (i) any breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) acts or omissions
not in good faith or which involve intentional misconduct or a knowing violation
of law, (iii) violations of Section 174 of the GCL or (iv) any transaction from
which the director derived any improper personal benefit. If the GCL hereafter
is 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 provided or permitted by the amended GCL. Any
repeal or modification of this Article shall not adversely affect any right or
protection of a director under this Article, as in effect immediately prior to
such repeal or modification, with respect to any liability that would have
accrued, but for this Article, prior to such repeal or modification.
- 2 -
<PAGE>
ARTICLE 9
Section 9.1 GENERAL. The Corporation shall indemnify, to the fullest extent
permitted by applicable law as from time to time may be in effect, any person
against all liability and expense (including, but not limited to, attorneys'
fees and settlement costs) incurred by reason of the fact that he is or was a
director or officer of the Corporation, or while serving as a director or
officer of the Corporation, he is or was serving at the request of the
Corporation as a director, officer, partner or trustee of, or in any similar
managerial or fiduciary position of, or as an employee or agent of, another
corporation, partnership, joint venture, trust, association or other entity, or
by reason of any action alleged to have been taken or omitted in such capacity.
Expenses (including attorneys' fees) incurred in defending an action, suit or
proceeding shall be paid by the Corporation in advance of the final disposition
of such action, suit or proceeding to the fullest extent and under the
circumstances permitted by the laws of the State of Delaware. The right to
indemnification conferred upon such persons by this Article 9 shall be a
contract right. The Corporation may purchase and maintain insurance on behalf of
any person who is or was a director, officer, employee, fiduciary or agent of
the Corporation against any liability asserted against and incurred by such
person in any such capacity or arising out of such person's position, whether or
not the Corporation would have the power to indemnify against such liability
under the provisions of this Article. The indemnification provided by this
Article shall not be deemed exclusive of any other rights to which those
indemnified may be entitled under this Certificate of Incorporation, any bylaw,
agreement, vote of stockholders or disinterested directors, statute or otherwise
and shall inure to the benefit of their heirs, executors and administrators. The
provisions of this Article shall not be deemed to preclude the Corporation from
indemnifying other persons from similar or other expenses and liabilities as the
board of directors or the stockholders may determine in a specific instance or
by resolution of general application.
Section 9.2 PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS.
A. In making a determination with respect to entitlement to
indemnification, the person or persons or entity making such determination shall
presume that such person is entitled to indemnification under this Article and
the Corporation shall have the burden of proof to overcome that presumption in
connection with the making by any person, persons or entity of any determination
contrary to that presumption.
B. The termination of any proceeding or of any claim, issue or matter
therein, by judgment, order, settlement or conviction, or upon a plea of NOLO
CONTENDERE or its equivalent, shall not (except as otherwise expressly provided
in this Certificate of Incorporation or in the Corporation's bylaws) of itself
adversely affect the right of any person to indemnification or create a
presumption that such person did not act in good faith and in a manner which he
reasonably believed to be in or not opposed to the best interests of the
Corporation or, with respect to any criminal proceeding, that such person had
reasonable cause to believe that his conduct was unlawful.
Neither the amendment nor the repeal of this Article, nor the adoption
of any provision of the Certificate of Incorporation or bylaws or of any statute
inconsistent with this Article 9, shall eliminate or reduce the effect of this
Article, in respect of any acts or omissions occurring prior to such amendment,
repeal or adoption of an inconsistent provision.
- 3 -
<PAGE>
ARTICLE 10
The Corporation shall have authority, to the fullest extent now or
hereafter permitted by the GCL, or by any other applicable law, to enter into
any contract or transaction with one or more of its directors or officers, or
with any corporation, partnership, joint venture, trust, association, or other
entity in which one or more of its directors or officers are directors or
officers, or have a financial interest, notwithstanding such relationships and
notwithstanding the fact that the director or officer is present at or
participates in the meeting of the board of directors or committee thereof which
authorizes the contract or transaction.
ARTICLE 11
The names and mailing address of the person who will serve as director of
the Corporation until his successors are elected and qualified or until his
earlier resignation or removal is:
NAME MAILING ADDRESS
Philip L. Becker 15200 East Girard Ave., Suite 3000
Aurora, Colorado 80014
IN WITNESS WHEREOF, I have executed this Certificate of Incorporation on
the 10th day of February, 1998.
/s/ Joy C. Lloyd
-----------------------------------
Joy C. Lloyd, Incorporator
370 Seventeenth Street, Suite 4700
Denver, Colorado 80201-0185
- 4 -
EXHIBIT 3.1b
CERTIFICATE OF MERGER
ESOFT, INC.
A COLORADO CORPORATION
INTO
NEW ESOFT, INC.
A DELAWARE CORPORATION
Pursuant to the provisions of Section 252 of the Delaware General
Corporation Law and Section 7-111-107 of the Colorado Business Corporation Act,
the undersigned corporations certify that each has approved, adopted, certified,
executed and acknowledged the following Certificate of Merger for the purpose of
merging eSoft, Inc., a Colorado corporation ("Colorado Company"), with and into
New eSoft, Inc., a Delaware corporation ("Delaware Company").
1. On November 11, 1997, the Agreement and Plan of Merger (the "Merger
Agreement"), attached as EXHIBIT A hereto, was approved, adopted, certified and
acknowledged by the board of directors of Colorado Company. On November 21, 1997
the Merger Agreement was approved, adopted, certified and acknowledged by the
board of directors of Delaware Company in the manner prescribed by the Delaware
General Corporation Law. On February 10, 1998 the Merger Agreement was approved
by the stockholders of Colorado Company in the manner prescribed by the Colorado
Business Corporation Act.
2. The Certificate of Incorporation of Delaware Company shall be the
Certificate of Incorporation of the surviving corporation without change or
amendment, except that the name of New eSoft, Inc. shall, upon effectiveness of
the merger be changed to eSoft, Inc.
3. The name of the surviving corporation, therefore, shall be eSoft,
Inc., a Delaware corporation.
4. The executed Merger Agreement is on file at the principal place of
business of Delaware Company, 5335 Sterling Drive, Suite C, Boulder, Colorado
80301.
5. A copy of the Merger Agreement will be furnished by Delaware Company
upon request and without costs, to any stockholder of Delaware Company or
Colorado Company.
6. The authorized capital of Colorado Company consists of 50,000,000
shares of Common Stock, $0.01 par value and 3,000,000 shares of preferred stock,
$0.01 par value.
<PAGE>
Dated this 13th day of February, 1998.
ATTEST: eSOFT, INC., a Colorado corporation
/s/ Kent Nuzum
- ---------------------------------- By: /s/ Philip L. Becker
Kent Nuzum, Secretary -------------------------------------
Philip L. Becker, Chairman and
Chief Executive Officer
ATTEST: NEW eSOFT, INC., a Delaware corporation
/s/ Kent Nuzum
- ----------------------------------- By: /s/ Philip L. Becker
Kent Nuzum, Secretary -------------------------------------
Philip L. Becker, Chairman and
Chief Executive Officer
-2-
<PAGE>
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
This Agreement and Plan of Merger ("Agreement") dated February
10, 1998, is entered into between eSoft, Inc., a Colorado corporation
("Company") and New eSoft, Inc., a Delaware corporation ("Newcorp").
RECITALS
A. Company is a corporation duly organized and existing under the
laws of the State of Colorado, having an authorized capitalization of 50,000,000
shares of common stock, $0.01 par value per share (the "Company Common Stock")
and 3,000,000 shares of preferred stock, $0.01 par value per share.
B. Newcorp is a corporation duly organized and existing under the
laws of the State of Delaware, having authorized capitalization of 50,000,000
shares of common stock, $0.01 par value per share ("Newcorp Common Stock").
C. 3,083,158 shares of Company Common Stock are issued and
outstanding.
D. The Boards of Directors of Company and Newcorp have determined
that it is advisable and in the best interests of Company and Newcorp that
Company merge with and into Newcorp, as authorized by the statutes of the States
of Delaware and Colorado, which permit such merger, and upon the terms and
subject to the conditions of this Agreement.
E. By resolutions duly adopted, the shareholders of Company have
approved this Agreement and the Boards of Directors of Company and Newcorp have,
by resolutions duly adopted, approved this Agreement.
AGREEMENT
NOW, THEREFORE, in consideration of the foregoing and the mutual
promises, representations, warranties and covenants herein contained, IT IS
AGREED as follows:
1. Merger. On the terms set forth in this Agreement, Company
shall be merged with and into Newcorp (the "Merger"), and Newcorp shall be the
surviving corporation (sometimes hereinafter referred to as the "Surviving
Corporation").
2. Converting Shares. Each share of Company Common Stock shall be
converted into one fully paid and nonassessable share of Newcorp Common Stock.
After the effective date of the Merger, each owner of an outstanding certificate
or certificates representing shares of Company Common Stock shall be entitled,
upon surrendering such certificate or certificates to the Surviving Corporation,
to receive in exchange therefor a certificate or certificates representing an
equivalent number of shares of stock of the Surviving Corporation. Until so
surrendered, each outstanding certificate which, prior to the effective date of
the merger, represented Company Common Stock shall be deemed, for all corporate
purposes, to represent the ownership of Common Stock of the Surviving
Corporation on the basis hereinbefore provided.
3. Governing Documents. The Certificate of Incorporation of
Newcorp, as in effect immediately prior to the Effective Date, shall be the
Certificate of Incorporation of the Surviving Corporation without change or
amendment except that the name of the Surviving Corporation shall, upon
effectiveness of the merger be changed to eSoft, Inc. The bylaws of Newcorp, as
in effect immediately prior to the
-1-
<PAGE>
Effective Date, shall be the bylaws of the Surviving Corporation without change
or amendment until thereafter amended in accordance with such bylaws, the
Certificate of Incorporation and Delaware law.
4. Succession; Officers and Directors. On the effectiveness of
the Merger, the separate corporate existence of Company shall cease and Newcorp,
as the Surviving Corporation, shall possess all the rights, privileges, powers
and franchises of a public and private nature and be subject to all
restrictions, disabilities and duties of Company. All rights, privileges, powers
and franchises of Company, and all property, real, personal and mixed, and all
debts due to Company on whatever account, as well as for share subscriptions and
all other things belonging to Company, shall be vested in the Surviving
Corporation; and all property, rights, privileges, powers and franchises, and
all and every other interest shall be thereafter as effectively the property of
the Surviving Corporation as they were of Company. The title to any real
property or real estate vested by deed or otherwise in Company, shall not revert
or be in any way impaired by reason of the Merger but shall be preserved
unimpaired and all debts, liabilities and duties of Company shall thenceforth
attach to the Surviving Corporation and may be enforced against it to the same
extent as if such debts, liabilities and duties had been incurred or contracted
by the Surviving Corporation. The members of the Board of Directors and the
officers of Newcorp shall be those persons who were members of the Board of
Directors and the officers, respectively, of the Company immediately prior to
the effectiveness of the Merger, and such persons shall serve in such offices,
respectively, for the terms provided by law or in the bylaws, or until their
respective successors are elected and qualified. All corporate acts, plans,
policies, agreements, arrangements, approvals and authorizations of Company, its
shareholders, Board of Directors and committees thereof, officers and agents
which were valid and effective immediately prior to the Effective Date, shall be
taken for all purposes as the acts, plans, policies, agreements, arrangements,
approvals and authorizations of Newcorp and shall be as effective and binding
thereon as the same were with respect to Company.
5. Further Assurances. From time to time, as and when required by
Newcorp, or by its successors and assigns, there shall be executed and delivered
on behalf of Company such deeds and other instruments, and there shall be taken
or caused to be taken by it all such further and other actions as shall be
appropriate or necessary in order to vest, perfect or confirm, of record or
otherwise, in Newcorp the title to and possession of all property, interests,
assets, rights, privileges, immunities, powers, franchises and authority of
Company, and otherwise to carry out the purposes of this Agreement, and the
officers and directors of Newcorp are fully authorized in the name and on behalf
of Company or otherwise, to take any and all such actions and to execute and
deliver any and all such deeds and other instruments.
6. Amendment. Subject to applicable law, this Agreement may be
amended, modified or supplemented at any time prior to the effectiveness of the
Merger with respect to any of the terms contained in this Agreement.
7. Termination. At any time prior to the Effective Date, this
Agreement may be terminated and the Merger may be abandoned by the Board of
Directors of Newcorp if circumstances arise which, in the opinion of the Board
of Directors of Newcorp, make the Merger inadvisable.
8. Governing Law. This Agreement and the legal relations between
the parties shall be governed by and construed in accordance with the laws of
the State of Delaware.
9. Acknowledgments. By executing his signature below, the
Secretary of Newcorp hereby acknowledges that no vote of the stockholders of
Newcorp is required under Section 251(f) of the
-2-
<PAGE>
Delaware General Corporation Law and that no shares of stock of Newcorp were
issued prior to the adoption by the board of directors of Newcorp approving this
Agreement
IN WITNESS WHEREOF, Company and Newcorp have caused this
Agreement to be signed by their respective duly authorized officers as of the
date first above written.
ATTEST: eSOFT, INC., a Colorado corporation
By: /s/ Regis Frank By:/s/ Philip L. Becker
------------------------------- -------------------------------------
Regis Frank, President Philip L. Becker, Chairman and Chief
Executive Officer
ATTEST: New eSOFT, INC., a Delaware corporation
By: /s/Regis Frank By: /s/ Philip L. Becker
-------------------------------- ------------------------------------
Regis Frank, President Philip L. Becker, Chairman and Chief
Executive Officer
-3-
EXHIBIT 3.2a
NEW ESOFT, INC.
BYLAWS
Article I
OFFICES
The registered office of eSoft, Inc. (the "Corporation") in the State of
Delaware shall be in the City of Wilmington, County of New Castle, State of
Delaware. The Corporation shall have offices at such other places as the board
of directors may from time to time determine.
Article II
STOCKHOLDERS
Section 1. ANNUAL MEETINGS.
The annual meeting of stockholders for the election of directors and for
the transaction of such other business as may properly come before the meeting
shall be held on the date and at the time fixed, from time to time, by the board
of directors. Each such annual meeting shall be held at such place, within or
without the State of Delaware, as shall be determined by the board of directors.
The day, place and hour of each annual meeting shall be specified in the notice
of such annual meeting. Any annual meeting of stockholders may be adjourned from
time to time and place to place until its business is completed.
Section 2. SPECIAL MEETINGS.
Except as otherwise required by law or by the certificate of incorporation,
special meetings of stockholders may be called by the chairman of the board, the
president, a vice president or the board of directors, and shall be called by
the president or secretary at the written request of stockholders owning a
majority in amount of the entire capital stock of the Corporation issued and
outstanding and entitled to vote.
Section 3. STOCKHOLDER ACTION.
Any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special meeting of such
stockholders and may be effected without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by all of the stockholders entitled to vote.
Section 4. NOTICE OF MEETING.
Written notice stating the place, date and hour of the meeting and, in case
of a special meeting, the purpose or purposes for which the meeting is called,
shall be given not less than ten nor more than sixty days before the date of the
meeting, except as otherwise required by statute or the certificate of
incorporation, either personally or by mail, prepaid telegram, telex, facsimile
transmission, cablegram, or radiogram, to each stockholder of record entitled to
vote at such meeting. If mailed, such notice shall be deemed to be given when
deposited in the United States mail, postage prepaid, addressed to the
stockholder at his address as it appears on the stock records of the
Corporation. If given personally or otherwise than by
<PAGE>
mail, such notice shall be deemed to be given when either handed to the
stockholder or delivered to the stockholder's address as it appears on the stock
records of the Corporation.
Section 5. WAIVER.
Attendance of a stockholder of the Corporation, either in person or by
proxy, at any meeting, whether annual or special, shall constitute a waiver of
notice of such meeting, except where a stockholder attends a meeting for the
express purpose of objecting, at the beginning of the meeting, to the
transaction of any business because the meeting is not lawfully called or
convened. A written waiver of notice of any such meeting signed by a stockholder
or stockholders entitled to such notice, whether before, at or after the time
for notice or the time of the meeting, shall be equivalent to notice. Neither
the business to be transacted at, nor the purposes of, any meeting need be
specified in any written waiver of notice.
Section 6. VOTING LIST.
The secretary shall prepare and make available, at least ten days before
every meeting of stockholders, a complete list of the stockholders entitled to
vote at the meeting, arranged in alphabetical order and showing the address and
the number of shares registered in the name of each stockholder. Such list shall
be open to the examination of any stockholder for any purpose germane to the
meeting, during ordinary business hours, for a period of at least ten days prior
to the meeting, either at a place within the city where the meeting is to be
held, which place shall be specified in the notice of the meeting or, if not so
specified, at the place where the meeting is to be held. The list shall be
produced and kept at the place of the meeting during the whole time thereof and
may be inspected by any stockholder who is present.
Section 7. QUORUM.
Except as otherwise required by law, the certificate of incorporation or
these bylaws, the holders of not less than one-half of the shares entitled to
vote at any meeting of the stockholders, present in person or by proxy, shall
constitute a quorum, and the act of the majority of such quorum shall be deemed
the act of the stockholders. If a quorum shall fail to attend any meeting, the
chairman of the meeting may adjourn the meeting from time to time, without
notice if the time and place are announced at the meeting, until a quorum shall
be present. At such adjourned meeting at which a quorum is present, any business
may be transacted which might have been transacted at the original meeting. If
the adjournment is for more than thirty days or if after the adjournment a new
record date is fixed for the adjourned meeting, a notice of the adjourned
meeting shall be given to each stockholder of record entitled to vote at the
meeting.
Section 8. RECORD DATE.
In order that the Corporation may determine the stockholders entitled to
notice of or to vote at any meeting, or at any adjournment of a meeting of
stockholders; or entitled to receive payment of any dividend or other
distribution or allotment of any rights; or entitled to exercise any rights in
respect of any change, conversion or exchange of stock; or for the purpose of
any other lawful action; the board of directors may fix, in advance, a record
date, which record date shall not precede the date upon which the resolution
fixing the record date is adopted by the board of directors. The record date for
determining the stockholders entitled to notice of or to vote at any meeting of
stockholders or any adjournments thereof shall not be more than sixty nor less
than ten days before the date of such meeting. The record date for any other
action shall not be more than sixty days prior to such action. If no record date
is fixed: (i) the record date for determining stockholders entitled to notice of
or to vote at any meeting shall be the close of business on the day on which
-2-
<PAGE>
notice is given or, if notice is waived by all stockholders, at the close of
business on the day next preceding the day on which the meeting is held; and
(ii) the record date for determining stockholders for any other purpose shall be
at the close of business on the day on which the board of directors adopts the
resolution relating to such other purpose. A determination of stockholders of
record entitled to notice of or to vote at a meeting of stockholders shall apply
to any adjournment of the meeting; PROVIDED, HOWEVER, that the board of
directors may fix a new record date for the adjourned meeting.
Section 9. VOTING AND PROXIES.
At every meeting of the stockholders, each stockholder shall be entitled to
one vote, in person or by proxy, for each share of the capital stock having
voting power held by such stockholder, but no proxy shall be voted on after
three years from its date unless the proxy provides for a longer period. When a
quorum is present at any meeting, the vote of the holders of a majority of the
stock having voting power present in person or represented by proxy shall decide
any question brought before such meeting, unless the question is one upon which,
by express provision of the statutes or of the certificate of incorporation, a
different vote is required, in which case such express provision shall govern.
Section 10. PROCEDURE.
The order of business and all other matters of procedure at every meeting
of the stockholders may be determined by the presiding officer.
Article III
DIRECTORS
Section 1. NUMBER.
Except as otherwise fixed pursuant to the provisions of the certificate of
incorporation, the number of directors shall be fixed from time to time
exclusively by resolutions adopted by the board of directors; PROVIDED, HOWEVER,
that the number of directors shall at no time be less than one and further
provided that no decrease in the number of directors constituting the board of
directors shall shorten the term of any incumbent director.
Section 2. ELECTION AND TERMS.
A director shall hold office until the annual meeting for the year in which
his term expires and until his successor shall be elected and qualified,
subject, however, to such director's prior death, resignation, retirement,
disqualification or removal from office.
Section 3. NEWLY CREATED DIRECTORSHIPS AND VACANCIES.
Except as otherwise fixed pursuant to the provisions of the certificate of
incorporation, newly created directorships resulting from any increase in the
number of directors and any vacancies on the board of directors resulting from
death, resignation, disqualification, removal or other cause shall be filled
solely by the affirmative vote of a majority of the remaining directors then in
office or a sole remaining director. Any director elected in accordance with the
preceding sentence shall hold office for the remainder of the full
-3-
<PAGE>
term of the new directorship which was created or in which the vacancy occurred
and until such director's successor shall have been elected and qualified.
Section 4. REGULAR MEETINGS.
The first meeting of each newly elected board of directors elected at the
annual meeting of stockholders shall be held immediately after and at the same
place as, the annual meeting of the stockholders, provided a quorum is present,
and no notice of such meeting shall be necessary in order to legally constitute
the meeting. Regular meetings of the board of directors shall be held at such
times and places as the board of directors may from time to time determine.
Section 5. SPECIAL MEETINGS.
Special meetings of the board of directors may be called at any time, at
any place and for any purpose by the chairman of the board, the president, or by
any officer of the Corporation upon the request of a majority of the directors.
Section 6. NOTICE OF MEETINGS.
Notice of regular meetings of the board of directors need not be given.
Notice of every special meeting of the board of directors shall be given to
each director at his usual place of business or at such other address as shall
have been furnished by him for such purpose. Such notice shall be properly and
timely given if it is: (a) deposited in the United States mail not later than
the third calendar day preceding the date of the meeting or (b) personally
delivered, telegraphed, sent by facsimile transmission or communicated by
telephone at least twenty-four hours before the time of the meeting. Such notice
need not include a statement of the business to be transacted at, or the purpose
of, any such meeting.
Section 7. WAIVER.
Attendance of a director at a meeting of the board of directors shall
constitute a waiver of notice of such meeting, except where a director attends a
meeting for the express purpose of objecting, at the beginning of the meeting,
to the transaction of any business because the meeting is not lawfully called or
convened. A written waiver of notice signed by a director or directors entitled
to such notice, whether before, at, or after the time for notice or the time of
the meeting, shall be equivalent to the giving of such notice.
Section 8. QUORUM.
Except as may be otherwise provided by law, in the certificate of
incorporation, or in these bylaws, the presence of a majority of the directors
shall be necessary and sufficient to constitute a quorum for the transaction of
business at any meeting of the board of directors, and the act of a majority of
the directors present at a meeting at which a quorum is present shall be deemed
the act of the board of directors. Less than a quorum may adjourn any meeting of
the board of directors from time to time without notice.
-4-
<PAGE>
Section 9. PARTICIPATION IN MEETINGS BY TELEPHONE.
Members of the board of directors, or of any committee thereof, may
participate in a meeting of such board or committee by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other and such participation shall
constitute presence in person at such meeting.
Section 10. POWERS.
The business, property and affairs of the Corporation shall be managed by
or under the direction of its board of directors, which shall have and may
exercise all the powers of the Corporation to do all such lawful acts and things
as are not by law, by the certificate of incorporation or by these bylaws,
directed or required to be exercised or done by the stockholders.
Section 11. ACTION WITHOUT A MEETING.
Unless otherwise restricted by the certificate of incorporation or these
bylaws, any action required or permitted to be taken at any meeting of the board
of directors or any committee thereof may be taken without a meeting if written
consent thereto is signed by all members of the board of directors or of such
committee, as the case may be, and such written consent is filed with the
minutes of proceedings of the board or committee. Any such consent may be in
counterparts and shall be effective on the date of the last signature thereon
unless otherwise provided therein.
Article IV
COMMITTEES
Section 1. DESIGNATION OF COMMITTEES.
The board of directors may establish committees for the performance of
delegated or designated functions to the extent permitted by law, each committee
to consist of one or more directors of the Corporation. In the absence or
disqualification of a member of a committee, the member or members thereof
present at any meeting and not disqualified from voting, whether or not he or
they constitute a quorum, may unanimously appoint another member of the board of
directors to act at the meeting in the place of such absent or disqualified
member.
Section 2. COMMITTEE POWERS AND AUTHORITY.
The board of directors may provide, by resolution or by amendment to these
bylaws, that a committee may exercise all the power and authority of the board
of directors in the management of the business and affairs of the Corporation,
and may authorize the seal of the Corporation to be affixed to all papers which
may require it; PROVIDED, HOWEVER, that a committee may not exercise the power
or authority of the board of directors in reference to amending the certificate
of incorporation, adopting an agreement of merger or consolidation, recommending
to the stockholders the sale, lease or exchange of all or substantially all of
the Corporation's property and assets, recommending to the stockholders a
dissolution of the Corporation or a revocation of a dissolution, or amending
these bylaws; and, unless the resolution expressly
-5-
<PAGE>
so provides, no such committee shall have the power or authority to declare a
dividend or to authorize the issuance of stock.
Section 3. COMMITTEE PROCEDURES.
To the extent the board of directors or the committee does not establish
other procedures for the committee, each committee shall be governed by the
procedures established in Article III, Section 4 (except as they relate to an
annual meeting of the board of directors) and Article III, Sections 5, 6, 7, 9,
10, and 11 of these bylaws, as if the committee were the board of directors.
Article V
OFFICERS
Section 1. NUMBER.
The officers of the Corporation shall be appointed or elected by the board
of directors. The officers shall be a chairman of the board, a president and
chief executive officer, such number of vice presidents as the board of
directors may from time to time determine, a secretary, and a treasurer. Any
person may hold two or more offices at the same time.
Section 2. ADDITIONAL OFFICERS.
The board of directors may appoint such other officers as it shall deem
appropriate.
Section 3. TERM OF OFFICE, RESIGNATION.
All officers, agents and employees of the Corporation shall hold their
respective offices or positions at the pleasure of the board of directors and
may be removed at any time by the board of directors with or without cause. Any
officer may resign at any time by giving written notice of his resignation to
the chief executive officer, the president or to the secretary, and acceptance
of such resignation shall not be necessary to make it effective unless the
notice so provides. Any vacancy occurring in any office shall be filled by the
board of directors.
Section 4. DUTIES.
The officers of the Corporation shall perform the duties and exercise the
powers as may be assigned to them from time to time by the board of directors or
the president and chief executive officer. In the absence of such assignment,
the officers shall have the duties and powers described in Sections 5 through 10
of this Article.
Section 5. CHAIRMAN OF THE BOARD.
The chairman of the board shall preside at all meetings of the stockholders
and directors at which he is present. In the event of a vacancy in the office of
president, or in the event of the absence, disability or inability or refusal to
act of the president, the chairman of the board shall perform the duties and
-6-
<PAGE>
exercise the powers of the president, including the duties and powers of the
chief executive officer of the Corporation. The board of directors may delegate
such other authority and assign such additional duties to the chairman of the
board as it may from time to time determine.
Section 6. PRESIDENT AND CHIEF EXECUTIVE OFFICER.
The president shall be the chief executive officer of the Corporation and,
subject to the direction and control of the board of directors shall manage the
business of the Corporation. The president may execute contracts, deeds and
other instruments on behalf of the Corporation. In the absence of the chairman
of the board or in the event of his disability, inability or refusal to act, the
president shall perform the duties and exercise the power of the chairman of the
board. The president shall have full authority on behalf of the Corporation to
attend any meeting, give any waiver, cast any vote, grant any discretionary or
directed proxy to any person, and exercise any other rights of ownership with
respect to any shares of capital stock or other securities held by the
Corporation and issued by any other corporation or with respect to any
partnership, trust or similar interest held by the Corporation.
Section 7. VICE PRESIDENT.
Each vice president, if any, shall perform such functions as may be
prescribed by the board of directors, the chairman of the board, the president
or any executive vice president. Each vice president may execute contracts,
deeds and other instruments on behalf of the Corporation. In the event of
vacancies in the offices of chairman of the board and president, or in the event
of the absence, disability or inability or refusal to act of the chairman of the
board and the president, the vice president, or in the event that there is more
than one vice president, the vice presidents in order of designation by the
board of directors, shall perform the duties and exercise the powers of the
president.
Section 8. SECRETARY.
The secretary shall give, or cause to be given, notice of all meetings of
the stockholders and, upon the request of a person entitled to call a special
meeting of the board of directors, he shall give notice of any such special
meeting. He shall keep the minutes of all meetings of the stockholders, the
board of directors or any committee established by the board of directors. The
secretary shall be responsible for the maintenance of all records of the
Corporation and may attest documents on behalf of the Corporation. The secretary
shall perform such other duties as the board, the chairman of the board, the
president or any vice president may from time to time prescribe or delegate to
him.
Section 9. TREASURER.
The treasurer shall be responsible for the control of the funds of the
Corporation and the custody of all securities owned by the Corporation. The
treasurer shall perform such other duties as the board, the chairman of the
board, the president or any vice president may from time to time prescribe or
delegate to him.
Section 10. ASSISTANT OFFICERS.
The board of directors or the president may appoint such assistant
officers, including assistant secretary and assistant treasurer as the board of
directors or the president deem appropriate, and each such person may be
authorized to perform the duties and exercise the powers of the officer to which
the person
-7-
<PAGE>
is a designated assistant, with such limitations therein as the board of
directors or the president, as applicable, shall designate, and shall have such
other powers as the board of directors or the president shall prescribe in
writing.
Section 11. COMPENSATION.
Officers shall receive such compensation, if any, for their services as may
be authorized or ratified by the board of directors. Election or appointment as
an officer shall not of itself create a right to compensation for services
performed as such officer.
Article VI
INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
Section 1. DIRECTORS AND OFFICERS.
Subject to the certificate of incorporation and the other sections of this
Article, the Corporation shall indemnify, to the fullest extent permitted by,
and in the manner permissible under, the laws of the State of Delaware in effect
on the date hereof and as amended from time to time, any person who was or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether criminal, civil, administrative or investigative, by
reason of the fact that he is or was a director or officer 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,
association or other enterprise, against expenses (including attorneys' fees),
judgments, fines, ERISA excise taxes or penalties and amounts paid in settlement
actually and reasonably incurred by him in connection with such action, suit or
proceeding, including any action, suit or proceeding by or in the right of the
Corporation (a "Proceeding"). The Corporation shall advance all reasonable
expenses incurred by or on behalf of any such person in connection with any
Proceeding within ten days after the receipt by the Corporation of a statement
or statements from such person requesting such advance or advances from time to
time, whether prior to or after final disposition of such Proceeding. Such
statement or statements shall reasonably evidence the expenses incurred by such
person and, if such person is an officer or director of the Corporation, shall
include or be preceded or accompanied by an undertaking by or on behalf of such
person to repay any expenses advanced if it shall ultimately be determined that
such person is not entitled to be indemnified against such expenses. Costs,
charges or expenses of investigating or defending Proceedings for which
indemnity shall be sought hereunder may be incurred without the Corporation's
consent provided that no settlement of any such Proceeding may be made without
the Corporation's consent, which consent shall not be unreasonably withheld.
Section 2. DETERMINATION OF RIGHT TO INDEMNIFICATION.
a. Any indemnification requested by any person under Section 1 of this
Article shall be made no later than forty-five days after receipt of the written
request of such person unless a determination is made within said forty-five day
period: (i) by a majority vote of directors who are not parties to such
Proceedings, or (ii) in the event a quorum of non-involved directors is not
obtainable, at the election of the Corporation, by independent legal counsel in
a written opinion, that such person is not entitled to indemnification
hereunder.
-8-
<PAGE>
b. Notwithstanding a determination under Section 2(a) above that any
person is not entitled to indemnification with respect to a Proceeding, such
person shall have the right to apply to any court of competent jurisdiction for
the purpose of enforcing such person's right to indemnification pursuant to
these bylaws. Neither the failure of the Corporation (including its board of
directors or independent legal counsel) to have made a determination prior to
the commencement of such action that such person is entitled to indemnification
hereunder, nor an actual determination by the Corporation (including its board
of directors or independent legal counsel) that such person is not entitled to
indemnification hereunder, shall be a defense to the action or create any
presumption that such person is not entitled to indemnification hereunder.
c. The Corporation shall indemnify any person against all expenses
incurred in connection with any hearing or Proceeding under this Section 2 if
such person prevails on the merits or otherwise in such Proceeding.
Section 3. SUBROGATION.
In the event of payment under these bylaws, the indemnifying party or
parties shall be subrogated to the extent of such payment to all of the rights
of recovery of the indemnified person therefor and such indemnified person shall
execute all papers required and shall do everything that may be necessary to
secure such rights, including the execution of such documents necessary to
enable the indemnifying party or parties to effectively bring suit to enforce
such rights.
Section 4. PRESUMPTIONS AND EFFECT OF CERTAIN PROCEEDINGS.
a. In making a determination with respect to entitlement to
indemnification hereunder, the person or persons or entity making such
determination shall presume that such person is entitled to indemnification
under this Article, and the Corporation shall have the burden of proof to
overcome that presumption in connection with the making by any person, persons
or entity of any determination contrary to that presumption.
b. The termination of any Proceeding or of any claim, issue or matter
therein, by judgment, order, settlement or conviction, or upon a plea of NOLO
CONTENDERE or its equivalent, shall not (except as otherwise expressly provided
in these Bylaws) of itself adversely affect the right of any person to
indemnification or create a presumption that such person did not act in good
faith and in a manner which he reasonably believed to be in or not opposed to
the best interests of the Corporation or, with respect to any criminal
Proceeding, that such person had reasonable cause to believe that his conduct
was unlawful.
Section 5. EXCEPTION TO RIGHT OF INDEMNIFICATION OR ADVANCEMENT OF EXPENSES.
Notwithstanding any other provision of these bylaws, no person shall be
entitled to indemnification or advancement of expenses under these bylaws with
respect to any Proceeding brought by such person, unless the bringing of such
Proceeding or making of such claim shall have been approved by the board of
directors.
Section 6. CONTRACT.
The foregoing provisions of this Article shall be deemed to be a contract
between the Corporation and each director and officer who serves in such
capacity at any time while this bylaw is in effect, and any repeal or
modification thereof shall not affect any rights or obligations then existing
with
-9-
<PAGE>
respect to any state of facts then or theretofore existing or any Proceeding
theretofore or thereafter brought based in whole or in part upon any such state
of facts.
The foregoing rights of indemnification shall not be deemed exclusive of
any other rights to which any director or officer may be entitled apart from the
provisions of this Article.
Section 7. SURVIVING CORPORATION.
The board of directors may provide by resolution that references to "the
Corporation" in this Article shall include, in addition to this Corporation, all
constituent corporations absorbed in a merger with this Corporation so that any
person who was a director or officer of such a constituent corporation or is or
was serving at the request of such constituent corporation as a director,
employee or agent of another corporation, partnership, joint venture, trust,
association or other entity shall stand in the same position under the
provisions of this Article with respect to this Corporation as he would if he
had served this Corporation in the same capacity or is or was so serving such
other entity at the request of this Corporation, as the case may be.
Section 8. INUREMENT.
The indemnification and advancement of expenses provided by, or granted
pursuant to, this Article shall continue as to a person who has ceased to be a
director or officer and shall inure to the benefit of the heirs, executors and
administrators of such person.
Section 9. EMPLOYEES AND AGENTS.
To the same extent as it may do for a director or officer, the Corporation
may indemnify and advance expenses to a person who is not and was not a director
or officer of the Corporation but who is or was an employee or agent of the
Corporation.
Article VII
CAPITAL STOCK
Section 1. CERTIFICATES.
Each stockholder of the Corporation shall be entitled to a certificate or
certificates signed by or in the name of the Corporation by the chairman of the
board, the president or a vice president, and by the secretary or an assistant
secretary, certifying the number of shares of stock of the Corporation owned by
such stockholder. Any or all the signatures on the certificate may be a
facsimile.
Section 2. FACSIMILE SIGNATURES.
In case any officer, transfer agent or registrar who has signed or whose
facsimile signature has been placed upon a certificate shall have ceased to be
such officer, transfer agent or registrar before such certificate is issued, it
may be issued by the Corporation with the same effect as if he, she or it was
such officer, transfer agent or registrar at the date of issue.
-10-
<PAGE>
Section 3. REGISTERED STOCKHOLDERS.
The Corporation shall be entitled to treat the holder of record of any
share or shares of stock of the Corporation as the holder in fact thereof and,
accordingly, shall not be bound to recognize any equitable or other claim to or
interest in such share or shares on the part of any other person, whether or not
it has actual or other notice thereof, except as provided by law.
Section 4. CANCELLATION OF CERTIFICATES.
All certificates surrendered to the Corporation shall be cancelled and,
except in the case of lost, stolen or destroyed certificates, no new
certificates shall be issued until the former certificate or certificates for
the same number of shares of the same class of stock have been surrendered and
cancelled.
Section 5. LOST, STOLEN OR DESTROYED CERTIFICATES.
The board of directors may direct a new certificate or certificates to be
issued in place of any certificate or certificates theretofore issued by the
Corporation alleged to have been lost, stolen or destroyed upon the making of an
affidavit of that fact by the person claiming the certificate or certificates to
be lost, stolen or destroyed. In its discretion, and as a condition precedent to
the issuance of any such new certificate or certificates, the board of directors
may require that the owner of such lost, stolen or destroyed certificate or
certificates, or such person's legal representative, give the Corporation and
its transfer agent or agents, registrar or registrars a bond in such form and
amount as the board of directors may direct as indemnity against any claim that
may be made against the Corporation and its transfer agent or agents, registrar
or registrars on account of the alleged loss, theft or destruction of any such
certificate or the issuance of such new certificate.
Section 6. TRANSFER OF SHARES.
Shares of stock shall be transferable on the books of the Corporation by
the holder thereof, in person or by duly authorized attorney, upon the surrender
of the certificate or certificates representing the shares to be transferred,
properly endorsed, with such proof or guarantee of the authenticity of the
signature as the Corporation or its agents may reasonably require.
Section 7. TRANSFER AGENTS AND REGISTRARS.
The Corporation may have one or more transfer agents and one or more
registrars of its stock, whose respective duties the board of directors may,
from time to time, define. No certificate of stock shall be valid until
countersigned by a transfer agent, if the Corporation shall have a transfer
agent, or until registered by the registrar, if the Corporation shall have a
registrar. The duties of transfer agent and registrar may be combined.
-11-
<PAGE>
Article VIII
SEAL
The board of directors may adopt and provide a seal which shall be circular
in form and shall bear the name of the Corporation and the words "Seal" and
"Delaware," and which, when adopted shall constitute the corporate seal of the
Corporation.
Article IX
FISCAL YEAR
The fiscal year for the Corporation shall be established by resolution of
the board of directors.
Article X
AMENDMENTS
Subject to the provisions of the certificate of incorporation, these bylaws
may be altered, amended or repealed at any annual meeting of the stockholders
(or at any special meeting thereof duly called for that purpose) by a majority
vote of the shares represented and entitled to vote at such meeting, provided
that in the notice of such special meeting, notice of such purpose shall be
given. Subject to the laws of the State of Delaware, the certificate of
incorporation and these bylaws, the board of directors may, by majority vote of
those present at any meeting at which a quorum is present, amend these bylaws or
enact such other bylaws as in their judgment may be advisable for the regulation
of the conduct of the affairs of the Corporation.
/s/ Kent Nuzum
---------------------------------
Kent Nuzum, Secretary
-12-
EXHIBIT 10.6a
TERMINATION AGREEMENT
This Agreement is entered into as of the 22nd day of January, 1998
between Philip L. Becker, Transition Partners, Ltd., a Colorado corporation, and
Pantheon Capital Ltd.
WHEREAS, the parties hereto have entered into a Voting Agreement dated
September , 1997 ("Voting Agreement"); and
WHEREAS, the parties hereto desire to terminate the Voting Agreement;
IT IS THEREFORE AGREED:
That, pursuant to Section 7(c) of the Voting Agreement, such agreement
be, and hereby is, terminated. No provisions of such agreement shall survive
this termination.
PHILIP L. BECKER
/s/ Philip L. Becker
----------------------------------
Philip L. Becker
TRANSITION PARTNERS, LIMITED
By /s/ W. Terrance Schreier
--------------------------------
W. Terrance Schreier, President
PANTHEON CAPITAL LTD.
By /s/ Kent Nuzum
--------------------------------
Kent Nuzum, Director
EXHIBIT 10.12a
ESOFT, INC.
WARRANT AGREEMENT
This Warrant Agreement is made and entered into by and between eSoft, Inc.,
a Colorado corporation (the "Company"), and Transition Partners Ltd. ("TPL"), as
of the 29th day of January, 1998.
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. rights to purchase
264,600 shares of the Company's Common Stock as compensation for services
rendered under the Consulting Agreement;
WHEREAS, Pantheon Capital Ltd. has assigned its rights to purchase 66,150
of such shares to TPL;
WHEREAS, TPL has agreed to the modification of such rights so that they
shall not become exercisable until six months after the completion of an initial
public offering of the Company's Common Stock; and
WHEREAS, the Board of Directors of the Company has authorized the issuance
of this Stock Purchase Warrant to evidence the aforesaid rights as so modified;
NOW, THEREFORE, in consideration of the mutual covenants and conditions
hereinafter set forth, and for other good and valuable consideration, the
Company and TPL agree as follows:
1. GRANT OF WARRANTS. The Company hereby confirms the grant to TPL of the
right to purchase an aggregate of 66,150 shares (such number being subject to
adjustment as provided in paragraph 6 hereof) (the "Warrants") of the Common
Stock of eSoft, Inc. (the "Stock") on the terms and conditions herein set forth.
The Warrants may be exercised in whole or in part and from time to time as
hereinafter provided.
2. PURCHASE PRICE. The price at which TPL shall be entitled to purchase the
Stock covered by the Warrants shall be $1.00 per share during the first year the
Warrants are outstanding and increase 15 percent per share for the remainder of
the term of the Warrants.
3. TERM OF WARRANTS. The Warrants 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 Company's shares are listed
for trading, as defined in paragraph 4 below (the "Expiration Date").
-1-
<PAGE>
4. EXERCISE OF WARRANTS. The Warrants may be exercised as to all or any
part thereof six months after the date on which the Company's shares are listed,
posted and called for trading on the Vancouver Stock Exchange (the "Listing
Date"), provided that the Listing Date is on or before December 31, 1998, and
thereafter the Warrants 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 WARRANTS. Subject to the terms and conditions of
this Warrant Agreement, the Warrants 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 TPL's election to
exercise the Warrants, 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 TPL 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 TPL, 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 Warrants shall be exercised by a person or persons
other than TPL, 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 Warrants. All shares delivered by the
Company upon exercise of the Warrants as provided herein shall be fully paid and
nonassessable upon delivery.
6. ADJUSTMENTS IN NUMBER OF SHARES AND WARRANT 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 Warrants. Such adjustments to the Warrants 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 Company shall
be final, binding and conclusive.
If the Company shall be the surviving or resulting corporation in any
merger or consolidation, the Warrants 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 Warrants would have been entitled. TPL 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.
7. DELIVERY OF SHARES. No shares of Stock shall be delivered upon exercise
of the Warrants 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 Warrants, or the issuance of shares
-2-
<PAGE>
thereunder, has been received by the Company; and (iv) if required by the
Company, TPL has delivered to the Company an investment letter in form and
content satisfactory to the Company as provided in paragraph 8 hereof.
8. 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 Warrants, if, in the
opinion of counsel for the 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 Company may require that TPL, prior to the issuance of
any such shares pursuant to exercise of the Warrants, sign and deliver to the
Company a written statement ("Investment Letter") stating (i) that TPL is
purchasing the shares for investment and not with a view to the sale or
distribution thereof; (ii) that TPL will not sell any shares received upon
exercise of the Warrants 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 Warrants 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.
9. NONTRANSFERABILITY. No Warrants granted by this Warrant Agreement shall
be transferable by the grantee other than by will or pursuant to applicable laws
of descent and distribution. The Warrants, and any rights and privileges in
connection therewith, shall not be transferred, assigned, pledged or
hypothecated by the grantee, or by any person or persons, in any way, whether by
operation of law, or otherwise, and shall not be subject to execution,
attachment, garnishment or similar process. In the event of any such occurrence,
this Warrant Agreement shall automatically be terminated and shall thereafter be
null and void.
10. GOVERNING LAW. This Warrant Agreement shall be interpreted and
administered under the laws of the State of Colorado.
-3-
<PAGE>
11. AMENDMENTS. This Warrant Agreement may be amended only by a written
agreement executed by the Company and TPL.
IN WITNESS WHEREOF, the Company and TPL have caused this Warrant Agreement
to be duly executed by their respective officers thereunto duly authorized as of
the day and year first above written.
eSoft, Inc.
By: /s/ Philip Becker
---------------------------
President
Transition Partners Ltd.
By: /s/ W. Terrance Schreier
---------------------------
-4-
EXHIBIT 10.16a
ESOFT, INC.
WARRANT AGREEMENT
This Warrant Agreement is made and entered into by and between eSoft, Inc.,
a Colorado corporation (the "Company"), and Pantheon Capital Ltd. ("Pantheon"),
as of the 29th day of January, 1998.
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. rights to purchase
264,600 shares of the Company's Common Stock as compensation for services
rendered under the Consulting Agreement;
WHEREAS, Pantheon Capital Ltd. has assigned its rights to purchase 132,300
of such shares to other parties;
WHEREAS, Pantheon has agreed to the modification of such rights so that
they shall not become exercisable until six months after the completion of an
initial public offering of the Company's Common Stock; and
WHEREAS, the Board of Directors of the Company has authorized the issuance
of this Stock Purchase Warrant to evidence the aforesaid rights as so modified;
NOW, THEREFORE, in consideration of the mutual covenants and conditions
hereinafter set forth, and for other good and valuable consideration, the
Company and Pantheon agree as follows:
1. GRANT OF WARRANTS. The Company hereby grants to Pantheon the right to
purchase an aggregate of 132,300 shares (such number being subject to adjustment
as provided in paragraph 6 hereof) (the "Warrants") of the Common Stock of
eSoft, Inc. (the "Stock") on the terms and conditions herein set forth. The
Warrants may be exercised in whole or in part and from time to time as
hereinafter provided.
2. PURCHASE PRICE. The price at which Pantheon shall be entitled to
purchase the Stock covered by the Warrants shall be $1.00 per share during the
first year the Warrants are outstanding and increase 15 percent per share for
the remainder of the term of the Warrants.
3. TERM OF WARRANTS. The Warrants 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 Company's shares are listed
for trading, as defined in paragraph 4 (the "Expiration Date").
-1-
<PAGE>
4. EXERCISE OF WARRANTS. The Warrants may be exercised as to all or any
part thereof six months after the date on which the Company's shares are listed,
posted and called for trading on the Vancouver Stock Exchange (the "Listing
Date"), provided that the Listing Date is on or before December 31, 1998, and
thereafter the Warrants 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 WARRANTS. Subject to the terms and conditions of
this Warrant Agreement, the Warrants 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 Pantheon's
election to exercise the Warrants, 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 Pantheon 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 Pantheon, 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 Warrants shall be exercised by a person
or persons other than Pantheon, 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 Warrants. All shares
delivered by the Company upon exercise of the Warrants as provided herein shall
be fully paid and nonassessable upon delivery.
6. ADJUSTMENTS IN NUMBER OF SHARES AND WARRANT 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 Warrants. Such adjustments to the Warrants 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 Company shall
be final, binding and conclusive.
If the Company shall be the surviving or resulting corporation in any
merger or consolidation, the Warrants 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 Warrants would have been entitled. Pantheon 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.
7. DELIVERY OF SHARES. No shares of Stock shall be delivered upon exercise
of the Warrants 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
-2-
<PAGE>
of any governmental authority required in connection with the Warrants, or the
issuance of shares thereunder, has been received by the Company; and (iv) if
required by the Company, Pantheon has delivered to the Company an investment
letter in form and content satisfactory to the Company as provided in paragraph
8 hereof.
8. 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 Warrants if, in the
opinion of counsel for the 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 Company may require that Optionee, prior to the
issuance of any such shares pursuant to exercise of the Warrants, sign and
deliver to the Company a written statement ("Investment Letter") stating (i)
that Pantheon is purchasing the shares for investment and not with a view to the
sale or distribution thereof; (ii) that Pantheon will not sell any shares
received upon exercise of the Warrants 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 Warrants 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.
9. NONTRANSFERABILITY. No Warrants granted by this Warrant Agreement shall
be transferable by the grantee other than by will or pursuant to applicable laws
of descent and distribution. The Warrants, and any rights and privileges in
connection therewith, shall not be transferred, assigned, pledged or
hypothecated by the grantee, or by any person or persons, in any way, whether by
operation of law, or otherwise, and shall not be subject to execution,
attachment, garnishment or similar process. In the event of any such occurrence,
this Warrant Agreement shall automatically be terminated and shall thereafter be
null and void.
10. GOVERNING LAW. This Warrant Agreement shall be interpreted and
administered under the laws of the State of Colorado.
-3-
<PAGE>
11. AMENDMENTS. This Warrant Agreement may be amended only by a written
agreement executed by the Company and Pantheon.
IN WITNESS WHEREOF, the Company and Pantheon have caused this Warrant
Agreement to be duly executed by their respective officers thereunto duly
authorized as of the day and year first above written.
eSoft, Inc.
By: /s/ Philip Becker
---------------------------
President
Pantheon Capital Ltd.
By: /s/ Daryl Yurek
---------------------------
-4-
EXHIBIT 10.17a
ESOFT, INC.
WARRANT AGREEMENT
This Warrant Agreement is made and entered into by and between eSoft, Inc.,
a Colorado corporation (the "Company"), and Copeland Consulting Group, Inc.
("Copeland"), as of the 29th day of January, 1998.
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. rights to purchase
264,600 shares of the Company's Common Stock as compensation for services
rendered under the Consulting Agreement;
WHEREAS, Pantheon Capital Ltd. has assigned its rights to purchase 66,150
of such shares to Copeland;
WHEREAS, Copeland has agreed to the modification of such rights so that
they shall not become exercisable until six months after the completion of an
initial public offering of the Company's Common Stock; and
WHEREAS, the Board of Directors of the Company has authorized the issuance
of this Stock Purchase Warrant to evidence the aforesaid rights as so modified;
NOW, THEREFORE, in consideration of the mutual covenants and conditions
hereinafter set forth, and for other good and valuable consideration, the
Company and Copeland agree as follows:
1. GRANT OF WARRANTS. The Company hereby confirms the grant to Copeland of
the right to purchase an aggregate of 66,150 shares (such number being subject
to adjustment as provided in paragraph 6 hereof) (the "Warrants") of the Common
Stock of eSoft, Inc. (the "Stock") on the terms and conditions herein set forth.
The Warrants may be exercised in whole or in part and from time to time as
hereinafter provided.
2. PURCHASE PRICE. The price at which Copeland shall be entitled to
purchase the Stock covered by the Warrants shall be $1.00 per share during the
first year the Warrants are outstanding and increase 15 percent per share for
the remainder of the term of the Warrants.
3. TERM OF WARRANTS. The Warrants 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 Company's shares are listed
for trading, as defined in paragraph 4 below (the "Expiration Date").
-1-
<PAGE>
4. EXERCISE OF WARRANTS. The Warrants may be exercised as to all or any
part thereof six months after the date on which the Company's shares are listed,
posted and called for trading on the Vancouver Stock Exchange (the "Listing
Date"), provided that the Listing Date is on or before December 31, 1998, and
thereafter the Warrants 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 WARRANTS. Subject to the terms and conditions of
this Warrant Agreement, the Warrants 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 Copeland's
election to exercise the Warrants, 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 Copeland 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 Copeland, 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 Warrants shall be exercised by a person
or persons other than Copeland, 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 Warrants. All shares
delivered by the Company upon exercise of the Warrants as provided herein shall
be fully paid and nonassessable upon delivery.
6. ADJUSTMENTS IN NUMBER OF SHARES AND WARRANT 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 Warrants. Such adjustments to the Warrants 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 Company shall
be final, binding and conclusive.
If the Company shall be the surviving or resulting corporation in any
merger or consolidation, the Warrants 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 Warrants would have been entitled. Copeland 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.
7. DELIVERY OF SHARES. No shares of Stock shall be delivered upon exercise
of the Warrants until (i) the purchase price shall have been paid in full in the
manner herein
-2-
<PAGE>
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 Warrants, or the issuance of shares thereunder, has been
received by the Company; and (iv) if required by the Company, Copeland has
delivered to the Company an investment letter in form and content satisfactory
to the Company as provided in paragraph 8 hereof.
8. 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 Warrants if, in the
opinion of counsel for the 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 Company may require that Copeland, prior to the
issuance of any such shares Pursuant to exercise of the Warrants, sign and
deliver to the Company a written statement ("Investment Letter") stating (i)
that Copeland is purchasing the shares for investment and not with a view to the
sale or distribution thereof; (ii) that Copeland will not sell any shares
received upon exercise of the Warrants 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 Warrants 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.
9. NONTRANSFERABILITY. No Warrants granted by this Warrant Agreement shall
be transferable by the grantee other than by will or pursuant to applicable laws
of descent and distribution. The Warrants, and any rights and privileges in
connection therewith, shall not be transferred, assigned, pledged or
hypothecated by the grantee, or by any person or persons, in any way, whether by
operation of law, or otherwise, and shall not be subject to execution,
attachment, garnishment or similar process. In the event of any such occurrence,
this Warrant Agreement shall automatically be terminated and shall thereafter be
null and void.
-3-
<PAGE>
10. GOVERNING LAW. This Warrant Agreement shall be interpreted and
administered under the laws of the State of Colorado.
11. AMENDMENTS. This Warrant Agreement may be amended only by a written
agreement executed by the Company and Copeland.
IN WITNESS WHEREOF, the Company and Copeland have caused this Warrant
Agreement to be duly executed by their respective officers thereunto duly
authorized as of the day and year first above written.
eSoft, Inc.
By: /s/ Philip Becker
--------------------------
President
Copeland Consulting Group, Inc.
By: /s/ Gene Copeland
--------------------------
President
-4-
EXHIBIT 10.19
ESOFT, INC.
5335 Sterling Drive, Suite C
Boulder, Colorado 80301
EMPLOYEE CONFIDENTIALITY AGREEMENT
THIS AGREEMENT is between eSoft, Inc. (the "Company") and
----------------,
an individual residing at
----------------------------------------------------
(the "Employee"), based on the following circumstances:
A. WHEREAS, the Company owns and is developing several proprietary software
products and services which are and will be maintained as trade secrets and
unpublished copyrighted materials (the "Company's products"), and
B. WHEREAS, the Employee is employed as a for
-----------------------------
the Company, and will be given access to and substantial assistance from the
Company's staff in understanding many of the Company's products and plans,
including many of the Company's trade secrets and other confidential
information, and
C. WHEREAS, the Company's products are developed at substantial expense and
give the Company an advantage over its competitors, but only so long as they
remain the secret and proprietary information of the Company, and
D. WHEREAS, the Employee agreed to enter into this Agreement as a condition
of his/her employment by the Company, understands that he/she will not be given
access to confidential information concerning the Company's products and plans
until he/she enters into this Agreement and acknowledges that this Agreement is
reasonable and necessary for the protection of the Company's trade secrets and
other secret and confidential information, the protection of which allows the
Company to continue in business and to continue to employ the Employee,
THEREFORE
THE COMPANY AND THE EMPLOYEE agree to the following:
1. DEFINITIONS.
a. COMPETITIVE BUSINESS. As used in this Agreement, "competitive
business" means any business or enterprise engaged in the business of providing
any product or service then or historically provided by the Company, including,
but not limited to, computer software or systems for LAN and WAN connectivity to
the Internet within the geographical areas of the United States, including
Alaska and Hawaii, Puerto Rico, and Canada, as well as within the geographical
area of any other country, territory or sovereignty in which the Company has a
presence by virtue of having established a dealership for its products at the
time under consideration.
b. CONFIDENTIAL INFORMATION. As used in this Agreement, the term
"confidential information" means all of the following, whether now or later
existing, concerning the business, products, programs and activities of the
Company: (a) financial and pricing information,
<PAGE>
including, but not limited to budgets, budget projections and plant information,
(b) customer account lists, (c) prospective customers identified by the Company,
(d) internal customer data, (e) creations, including, but not limited to,
computer code and programming materials, (f) any corporate strategy or plan,
including, but not limited to, pricing, marketing, manufacturing and data
processing plans strategies, and (g) any information marked or otherwise
identified by the Company as confidential, including information identified as
confidential in any published Company policy.
c. CREATION. As used in this Agreement, the term "creation" means any:
(a) computer program or code, (b) arithmetic, logarithmic, analog, digital or
other formula, (c) product, marketing or business plan composition, writing or
work, writings, and compositions of words, numbers or analogs, including any
combination of them, (d) any other computer programming material in any form or
medium or expression, and (e) computer hardware structures and configurations,
which concern or relate to any present or prospective, product, program or
activity of the Company.
d. PROSPECTIVE CUSTOMER. As used in this Agreement, the "phrase
"prospective customer of the Company" means any person or firm directly
solicited by the Company, other than through general advertising, within the six
(6) month period prior to the date under consideration.
2. PROPRIETARY RIGHTS OF THE COMPANY. The Employee may participate in the
development of the Company's products, marketing materials, and/or business
plans due to the Employee's involvement in the creative process with the
Company's technical, development, marketing and/or management staff, and, to the
extent of the Employee's participation and contribution, all resulting products
and product enhancements, marketing and/or business plan materials shall be
deemed to be made for hire, free from any claim or right of the Employee. The
Employee shall promptly inform the Company of any product or literature, or any
component of either or both of them, in the development or creation of which
he/she participated and shall cooperate with the Company, even after the
termination of his/her employment by the Company, in securing the product or
literature as the Company's sole property; the Employee's cooperation shall be
without further compensation, although the Company shall reimburse the Employee
for any reasonable, documented out-of-pocket expenses incurred by the Employee
in so cooperating.
3. CONFIDENTIALITY. The Employee acknowledges that all confidential
information, as defined in this Agreement, is made available in the strictest
confidence solely for the benefit and purposes of the Company and that
unauthorized disclosure of confidential information would harm the Company's
interests. Accordingly, the Employee agrees that during his/her employment by
the Company he/she will not, directly or indirectly, use for himself or to the
detriment of the Company or disclose to any party, other than as directed or
authorized by any officer of the Company, any confidential information. At the
termination of the Employee's employment by the Company, the Employee shall
promptly deliver all records and copies of confidential information to the
Company.
-2-
<PAGE>
4. COMPETITIVE ACTIVITY.
a. AS AN EMPLOYEE OF ANOTHER. The Employee agrees that during his/her
employment by the Company he/she shall not engage in a competitive business as
an employee of or otherwise on behalf of any person, firm, partnership,
corporation or other entity.
b. AS AN OWNER OR OTHERWISE. The Employee agrees that during his/her
employment by the Company he/she shall not engage, directly or indirectly, in a
competitive business as an owner, officer, partner, joint venture, principal or
otherwise for himself.
5. PURPOSE. The Employee acknowledges that the protective provisions of
this Agreement are necessary for the Company to maintain its competitive
position and to preserve its trade secrets and proprietary information from
becoming public knowledge when it is the intent of both the Employee and the
Company that the Company's trade secrets, proprietary information and other
confidential information remain the sole and exclusive property of the Company.
6. REMEDIES; ENFORCEMENT. The Company's remedies for any breach of this
Agreement are in addition to any other rights of remedies it may have against
the Employee arising from his/her fiduciary duties as an employee of the
Company. The Employee acknowledges that any violation of the terms of this
Agreement would naturally result in irreparable harm to the Company and agrees
that a violation of the obligations respecting confidentiality, solicitation and
competition will entitle the Company to enjoin the Employee's conduct and seek
an accounting of profits realized by the Employee, in addition to any other
remedies that may be available to the Company. The Company shall be entitled to
recover all of its costs, including its reasonable attorney's fees, in enforcing
its rights and remedies under this Agreement.
7. POLICIES. In addition to other Company policies, the Employee agrees to
act in accordance with all Company policies and procedures concerning
confidential information and employee cooperation in protecting and securing
Company property.
8. EMPLOYMENT. The Employee acknowledges that entering into this Agreement
is a condition of employment with the Company. This Agreement gives the Employee
no greater or lessor rights to continued employment with the Company than the
Employee otherwise has and shall remain in effect after the Employee's
employment with the Company terminates, regardless of the reason, or lack of
reason, for that termination.
9. SEVERABILITY. The provisions of this Agreement are severable and to the
extent any provision is found unenforceable, the remaining provisions of this
Agreement shall be enforced as if the unenforceable provision were omitted.
10. LAW. This Agreement is to be governed by Colorado law.
-3-
<PAGE>
DATED this day of , 19 .
---- ----------------- --
EMPLOYEE: COMPANY:
eSoft, Inc.
a Colorado Corporation
By: /s/ Philip Becker
- -------------------------------- ---------------------------------
President
-4-
EXHIBIT 10.20
TERMINATION AGREEMENT
This Termination Agreement is made and entered into this 29th day of
January, 1998 between eSoft, Inc., a Colorado corporation (the "Company"),
Philip L. Becker, Ltd. (the "Partnership") and Philip L. Becker ("Becker"),
general partner of the Partnership (together, the "First Parties") and John
Patrick McMillan d/b/a Lateral Software ("Consultant").
RECITALS
A. Pursuant to two Software Development and Consulting Agreement (the
"Consulting Agreements") dated November 28, 1988 and May 24, 1994, respectively,
between the Partnership and the Consultant, the Consultant has provided
development and consulting services with respect to computer software packages
known as the "TDBS" and the "IPAD", respectively (together the "Software"). All
rights of the Partnership under the Consulting Agreements have subsequently been
transferred by the Partnership to the Company, and the Consultant has continued
to perform development and consulting services related to the Software to the
Company.
B. Pursuant to each of the Consulting Agreements, the Consultant is
entitled to compensation based upon specified percentages of gross licensing
fees that are received by the Partnership from the leasing of the respective
Software, and the Company has assumed the Partnership's obligation to pay such
sums to the Consultant.
C. The Company and the Consultant have agreed to terminate all obligations
of all parties under the Consulting Agreements in consideration of the
agreements contained herein.
AGREEMENT
In consideration of the foregoing, it is agreed as follows:
1. CONSIDERATION TO CONSULTANT. The Company shall pay and deliver the
following consideration to the Consultant at the following times:
a. Thirty Thousand Dollars ($30,000.00) payable by check upon
execution of this Termination Agreement by the parties;
b. Thirty Thousand Dollars ($30,000.00) payable by check not later
than fifteen (15) days after the Company completes a public offering of its
Common Stock, presently expected to be completed about February 28, 1998,
provided, however, that if a public offering of the Company's Common Stock has
not been completed on or before December 31, 1998, such payment shall be made on
that date.
c. Stock Purchase Warrants, deliverable upon execution of this
Termination Agreement, entitling the Consultant to purchase from the Company,
for a period of two years from
<PAGE>
the date hereof, up to 20,000 shares of the Company's Common Stock at a price of
$1.00 per share until one year after the closing of the public offering of the
Company's common stock, and thereafter, until the warrant expires, at the price
of $1.15 per share. Said Stock Purchase Warrants shall be in the form of Exhibit
A attached to this Termination Agreement.
2. TERMINATION OF CONSULTANT'S RESPONSIBILITIES. All responsibilities and
obligations of the Consultant under the Consulting Agreements shall expire and
terminate and be released and discharged forever upon the execution of this
Termination Agreement, except that those obligations set forth in paragraphs 7
and 8 of each of the Consulting Agreements shall continue and shall not
terminate.
3. TERMINATION OF COMPANY'S OBLIGATIONS. All obligations of any of the
First Parties to the Consultant under the Consulting Agreements, or either of
them, including any obligation to pay any compensation to the Consultant whether
as a result of licensing the Software in the past, present or hereafter, and any
obligation to reimburse the Consultant for any costs, and all other obligations
of any kind whatsoever, shall expire and terminate and be released and
discharged forever upon execution of this Termination Agreement.
4. ENTIRE AGREEMENT. The First Parties and the Consultant acknowledge that
they have no agreements or understandings, written or oral concerning any matter
other than the Consulting Agreements and this Termination Agreement and that all
obligations of any kind whatsoever of First Parties to the Consultant or of the
Consultant to any of the First Parties are canceled and terminated, except as
set forth in this Termination Agreement.
5. LEGAL EXPENSES UPON ENFORCEMENT. In the event that any party seeks to
enforce the terms of this Termination Agreement in any court of competent
jurisdiction, the prevailing party shall be entitled to reimbursement for his
costs and reasonable attorney fees in addition to any other recovery to which he
may be entitled.
6. APPLICABLE LAW. This Termination Agreement is made and entered into in
Colorado and shall be interpreted in accordance with the laws of the State of
Colorado.
[The rest of this page left intentionally blank.]
-2-
<PAGE>
This Termination Agreement is executed the day and year first above
written.
CONSULTANT eSOFT, INC.
/s/ John Patrick McMillan /s/ Philip Becker
- ---------------------------------- --------------------------------------
John Patrick McMillan Chairman and CEO
d/b/a Lateral Software
PHILIP L. BECKER, LTD.
By: /s/ Philip L. Becker
-----------------------------------
Philip L. Becker, Partner
/s/ Philip L. Becker
--------------------------------------
Philip L. Becker, individually
-3-
<TABLE>
<CAPTION>
1ST NATIONAL BANK OF ARVADA BORROWER
7530 GRANDVIEW AVENUE
ARVADA, COLORADO 80002 ESOFT, INC.
"LENDER"
ADDRESS FIXED RATE
COMMERCIAL
5335 STERLING DR. SUITE C PROMISSORY
BOULDER, CO 80301 NOTE
TELEPHONE NO. IDENTIFICATION NO.
699-6565 84-0938960
Officer Initials Interest Rate Principal Amount Funding Date Maturity Date Customer Loan Number
Number
<S> <C> <C> <C> <C> <C> <C> <C>
CLT 12.000% $73,363.08 01/03/98 04/03/98 511153
</TABLE>
For value received, Borrower promises to pay to the order of Lender indicated
above the principal amount of SEVENTY-THREE THOUSAND THREE HUNDRED SIXTY-THREE
AND 08/100 Dollars ($73,363.08) plus interest on the unpaid principal balance at
the rate and in the manner described below. All amounts received by Lender shall
be applied first to the payment charges and expenses, then to accrued interest,
and then to principal.
INTEREST RATE: Interest shall be computed on the basis of 360 days and the
actual number of days per year. As long as there is no default under this Note,
interest on this Note shall be calculated at the fixed rate of TWELVE AND
NO/1000 percent (12.000%) per annum or at the maximum rate of interest permitted
by law, whichever is less.
DEFAULT RATE: In the event of any default under this Note, the Lender may in its
discretion, determine that all amounts owed to Lender shall bear interest
-----
the lesser of: N/A or the maximum interest rate Lender is permitted to
--------
charge by law.
PAYMENT SCHEDULE: Borrower shall pay the principal and interest according to the
following schedule:
2 PAYMENTS OF $3,328.52 BEGINNING FEBRUARY 3, 1998 AND CONTINUING AT
MONTHLY TIME INTERVALS THEREAFTER. A FINAL PAYMENT OF THE UNPAID PRINCIPAL
BALANCE PLUS ACCRUED INTEREST IS DUE AND PAYABLE ON APRIL 3, 1998.
All payments will be made to Lender at its address described above and in lawful
currency of the United States of America.
RENEWAL: If checked, [X] this Note is a renewal of Loan Number 511153.
SECURITY: To secure the payment and performance of obligations incurred under
this Note, Borrower grants Lender a security interest in, and pledges and
assigns to Lender all of Borrower's rights, title, and interest, in all monies,
instruments, savings, checking and other deposit accounts of Borrower's,
(excluding IRA, Keogh and trust accounts and deposits subject to tax penalties
if so assigned) that are now or in the future in Lender's custody or control.
Upon default, and to the extent permitted by applicable law, Lender may exercise
its security interest in all such property which shall be in addition to
Lender's common law right of setoff. [X] If checked, the obligations under this
Note are also secured by a lien and/or security interest in the property
described in the documents executed in connection with this Note as well as any
other property designated as security now or in the future.
PREPAYMENT: This Note may be prepaid in part or in full on or before its
maturity date. If this Note contains more than one installment, all prepayments
will be credited as determined by Lender and as permitted by law. If this Note
is prepaid in full, there will be: [X] No minimum finance charge or prepayment
penalty. [ ] A minimum finance charge of $ . [ ] A prepayment
---------------
penalty of % of the principal prepaid.
------------
LATE PAYMENT CHARGE: If a payment is received more than N/A days late,
--------
Borrower will be charged a later payment charge of $ N/A or N/A % of
-------- --------
the payment amount, whichever is [ ] greater [ ] less, as permitted by law.
- -------------------------------------------------------------------------------
BORROWER ACKNOWLEDGES THAT BORROWER HAS READ, UNDERSTANDS, AND AGREES TO THE
TERMS AND CONDITIONS OF THIS NOTE INCLUDING THE PROVISIONS ON THE REVERSE SIDE.
BORROWER ACKNOWLEDGES RECEIPT OF AN EXACT COPY OF THIS NOTE.
NOTE DATE: JANUARY 3, 1998
<PAGE>
BORROWER: ESOFT, INC. BORROWER:
/s/ Philip L. Becker
- --------------------------------- ------------------------------------
PHILIP L. BECKER
PRESIDENT
BORROWER: BORROWER:
- --------------------------------- ------------------------------------
BORROWER: BORROWER:
- --------------------------------- ------------------------------------
BORROWER: BORROWER:
- --------------------------------- ------------------------------------
6. REPRESENTATIONS, WARRANTIES, AND COVENANTS. Owner represents, warrants and
covenants to Lender that:
(a) Owner is and shall remain the sole owner of the Collateral;
(b) Neither Owner nor, to the best of Owner's knowledge, any other party
has used, generated, released, discharged, stored, or disposed of any
hazardous waste, toxic substance, or related material (cumulatively
"Hazardous Materials") or transported any Hazardous Materials across
the property. Owner shall not commit or permit such actions to be
taken in the future. The term "Hazardous Materials" shall mean any
substance, material, or waste which is or becomes regulated by any
governmental authority, including, but not limited to, (i) petroleum;
(ii) asbestos; (iii) polychlorinated biphenyls; (iv) those substances,
materials or wastes designated as a "hazardous substance" pursuant to
Section 311 of the Clean Water Act or listed pursuant to Section 307
of the Clean Water Act or any amendments or replacements to these
statutes; (v) those substances, materials or wastes defined as a
"hazardous waste" pursuant to Section 1004 of the Resource
Conservation and Recovery Act or any amendments or replacements to
that statute; or (vi) those substances, materials or wastes defined as
a "hazardous substance" pursuant to Section 101 of the Comprehensive
Environmental Response, Compensation and Liability Act, or any
amendments or replacements to that statute;
(c) Owner's chief executive office, chief place of business, office where
its business records are located, or residence is the address
identified above. Owner's other executive offices, places of business,
locations of its business records, or domiciles are described on
Schedule C attached hereto and incorporated herein by this reference.
Owner shall immediately advise Lender in writing of any change in or
addition to the foregoing addresses;
(d) Owner shall not become a party to any restructuring of its form of
business or participate in any consolidation, merger, liquidation or
dissolution without providing Lender with thirty (30) or more days'
prior written notice of such change;
(e) Owner shall notify Lender of the nature of any intended change of
Owner's name, or the use of any trade name, and the effective date of
such change.
(f) The Collateral is and shall at all times remain free of all tax and
other liens, security interests, encumbrances and claims of any kind
except for those belonging to Lender and those described on Schedule D
attached hereto and incorporated herein by this reference. Without
waiving the event of default as a result thereof, Owner shall take any
action and execute any document needed to discharge the foregoing
liens, security interests, encumbrances and claims;
(g) Owner shall defend the Collateral against all claims and demands of
all persons at any time claiming any interest therein; (h) All of the
goods, fixtures, minerals or the like, and the standing timber
constituting the Collateral is and shall be located at Owner's
executive offices, places of business, residence and domiciles
specifically described in this Agreement. Owner shall not change the
location of any Collateral without the prior written consent of
Lender;
(i) Owner shall provide Lender with possession of all chattel paper and
instruments constituting the Collateral, and Owner shall promptly mark
all chattel paper, instruments, and documents constituting the
Collateral to show that the same are subject to Lender's security
interest;
(j) All of Owner's accounts or contract rights; chattel paper; documents;
general intangibles; instruments; and federal, state, county, and
municipal government and other permits and licenses; trusts, liens,
contracts, leases, and agreements constituting the Collateral are and
shall be valid, genuine and legally enforceable obligations and rights
belonging to Owner against one or more third parties and not subject
to any claim, defense, set-off or counterclaim of any kind;
(k) Owner shall not amend, modify, replace, or substitute any account or
contract right; chattel paper; document; general intangible; or
instrument constituting the Collateral without the prior written
consent of Lender;
-2-
<PAGE>
(l) Owner has the right and is duly authorized to enter into and perform
its obligations under this Agreement. Owner's execution and
performance of these obligations do not and shall not conflict with
the provisions of any statute, regulation, ordinance, rule of law,
contract or other agreement which may now or hereafter be binding on
Owner;
(m) No action or proceeding is pending against Owner which might result in
any material or adverse change in its business operations or financial
condition or materially affect the Collateral;
(n) Owner has not violated and shall not violate any applicable federal,
state, county or municipal statute, regulation or ordinance (including
but not limited to those government Hazardous Materials) which may
materially and adversely affect its business operations or financial
condition or the Collateral;
(o) Owner shall, upon Lender's request, deposit all proceeds of the
Collateral into an account or accounts maintained by Owner or Lender
at Lender's institution; and
(p) This Agreement and the obligations described in this Agreement are
executed and incurred for business and not consumer purposes.
7. SALE OF COLLATERAL. Owner shall not assign, convey, lease, sell or transfer
any of the Collateral to any third party without the prior written consent of
Lender except for sales of inventory to buyers in the ordinary course of
business.
8. FINANCING STATEMENTS AND OTHER DOCUMENTS. Owner shall take all actions and
execute all documents required by Lender to attach, perfect and maintain
Lender's security interest in the Collateral and establish and maintain Lender's
right to receive the payment of the proceeds of the Collateral including, but
not limited to, executing any financing statements, fixture filings,
continuation statements, notices of security interest and other documents
required by the Uniform Commercial Code and other applicable law. Owner shall
pay the costs of filing such documents in all offices wherever filing or
recording is deemed by Lender to be necessary or desirable. Lender shall be
entitled to perfect its security interest in the Collateral by filing carbon,
photographic or other reproductions of the aforementioned documents with any
authority required by the Uniform Commercial Code or other applicable law.
Lender may execute and file any financing statements, as well as extensions,
renewals and amendments of financing statements in such form as Lender may
require to perfect and maintain perfection of any security interest granted in
this Agreement.
9. INQUIRIES AND NOTIFICATION TO THIRD PARTIES. Owner hereby authorizes Lender
to contact any third party and make any inquiry pertaining to Owner's financial
condition or the Collateral. In addition, Lender is authorized to provide oral
or written notice of its security interest in the Collateral to any third party.
10. COLLECTION OF INDEBTEDNESS FROM THIRD PARTIES. Lender shall be entitled to
notify, and upon the request of Lender, Owner shall notify any account debtor or
other third party (including, but not limited to, insurance companies) to pay
any indebtedness or obligation owing to Owner and constituting the Collateral
(cumulatively "Indebtedness") to Lender whether or not a default exists under
this Agreement. Owner shall diligently collect the Indebtedness owing to Owner
from its account debtors and other third parties until the giving of such
notification. In the event that Owner possesses or receives possession of any
instruments or other remittances with respect to the indebtedness following the
giving of such notification or if the instruments or other remittances
constitute the prepayment of any indebtedness or the payment of any insurance
proceeds, Owner shall hold such instruments and other remittances in trust for
Lender apart from its other property, endorse the instruments and other
remittances to Lender, and immediately provide Lender with possession of the
instruments and other remittances. Lender shall be entitled, but not required,
to collect (by legal proceedings or otherwise), extend the time for payment,
compromise, exchange or release any obligor or collateral upon, or otherwise
settle any of the Indebtedness whether or not an event of default exists under
this Agreement. Lender shall not be liable to Owner for any action, error,
mistake, omission or delay pertaining to the actions described in this paragraph
or any damages resulting therefrom.
11. POWER OF ATTORNEY. Owner hereby appoints Lender as its attorney-in-fact to
endorse Owner's name on all instruments and other remittances payable to Owner
with respect to the Indebtedness or other documents pertaining to Lender's
actions in connection with the Indebtedness. In addition, Lender shall be
entitled, but not required, to perform any action or execute any document
required to be taken or executed by Owner under this Agreement. Lender's
performance of such action or execution of such documents shall not relieve
Owner from any obligation or cure any default under this Agreement. The powers
of attorney described in this paragraph are coupled with an interest and are
irrevocable.
12. USE AND MAINTENANCE OF COLLATERAL. Owner shall use the Collateral solely in
the ordinary course of its business, for the usual purposes intended by the
manufacturer (if applicable), with due care, and in compliance with the laws,
ordinances, regulations, requirements and rules of all federal, state, county
and municipal authorities including environmental laws and regulations and
insurance policies. Owner shall not make any alterations, additions or
improvements to the Collateral without the prior written consent of Lender.
Without limiting the foregoing, all alterations, additions and improvements made
to the Collateral shall be subject to the security interest belonging to Lender,
shall not be removed without the prior written consent of Lender, and shall be
made at Owner's sole expense. Owner shall take all actions and make any repairs
or replacements needed to maintain the Collateral in good condition and working
order.
13. LOSS OR DAMAGE. Owner shall bear the entire risk of any loss, theft,
destruction or damage (cumulatively "Loss or Damage") to all or any part of the
Collateral. In the event of any Loss or Damage, Owner will either restore the
Collateral to its previous condition, replace the Collateral with similar
property acceptable to Lender in its sole discretion, or pay or cause to be paid
to Lender the decrease in the fair market value of the affected Collateral.
14. INSURANCE. The Collateral will be kept insured for its full value against
all hazards including loss or damage caused by fire, collision, theft or other
casualty. If the Collateral consists of a motor vehicle, Owner will obtain
comprehensive and collision coverage amounts at least equal to the actual cash
value of the vehicle with deductibles not to exceed $ N/A . Insurance coverage
------
obtained by Owner shall
-3-
<PAGE>
be from a licensed insurer subject to Lender's approval. Owner shall assign to
Lender all rights to receive proceeds of insurance not exceeding the amount owed
under the obligations described above, and direct the insurer to pay all
proceeds directly to Lender. The insurance policies shall require the insurance
Company to provide Lender with at least thirty (30) days' written notice before
such policies are altered or cancelled in any manner. The insurance policies
shall name Lender as a loss payee and provide that no act or omission of Owner
or any other person shall affect the right o Lender to be paid the insurance
proceeds pertaining to the loss or damage of the Collateral. In the event Owner
fails to acquire or maintain insurance, Lender (after providing notice as may be
required by law) may in its discretion procure appropriate insurance coverage
upon the Collateral and charge the insurance cost as an advance of principal
under the promissory note. Owner shall furnish Lender with evidence of insurance
indicating the required coverage. Lender may act as attorney-in-fact for Owner
in making and settling claims under insurance policies, cancelling any policy or
endorsing Owner's name on any draft of negotiable instrument drawn by any
insurer.
15. INDEMNIFICATION. Lender shall not assume or be responsible for the
performance of any of Owner's obligations with respect to the Collateral under
any circumstances. Owner shall immediately provide Lender with written notice of
and indemnify and hold Lender and its shareholders, directors, officer,
employees and agents harmless from all claims, damages, liabilities (including
attorneys' fees and legal expenses), causes of action, actions, suits and other
legal proceedings (cumulatively "Claims") pertaining to its business operations
or the Collateral including, but not limited to, those arising form Lender's
performance of Owner's obligations with respect to the Collateral. Owner upon
the request of Lender, shall hire legal counsel to defend Lender from such
Claims, and pay the attorneys' fees, legal expenses and other costs to the
extent permitted by applicable law, incurred in connection therewith. In the
alternative, Lender shall be entitled to employ its own legal counsel to defend
such Claims at Owner's cost.
16. TAXES AND ASSESSMENTS. Owner shall execute and file all tax returns and pay
al taxes, licenses, fees and assessments relating to its business operations and
the Collateral (including, but not limited to, income taxes, personal property
taxes, withholding taxes, sales taxes, use taxes, excise taxes and workers'
compensation premiums) in a timely manner.
17. INSPECTION OF COLLATERAL AND BOOKS AND RECORDS. owner shall allow lender or
its agents to examine, inspect and make abstracts and copies of the Collateral
and Owner's books and records pertaining to Owner's business operations and
financial condition or the Collateral during normal business hours. Owner shall
provide any assistance required by Lender for these purposes. All of the
signatures and information pertaining to the Collateral or contained int he
books and records shall be genuine, true, accurate and complete in all respects.
Owner shall note the existence of Lender's security interest in its books and
records pertaining to the Collateral.
18. DEFAULT. Owner shall be in default under this Agreement in the event that
Owner, Borrower or any guarantor:
(a) fails to make any payment under this Agreement or any other
indebtedness to Lender when due;
(b) fails to perform any obligation or breaches any warranty or covenant
to Lender contained in this Agreement or any other present or future
written agreement regarding this or any other indebtedness to Lender;
(c) provides or causes any false or misleading signature or representation
to be provided to Lender;
(d) allows the Collateral to be destroyed, lost or stolen, damaged in any
material respect, or subjected to seizure or confiscation; (e) seeks
to revoke, terminate or otherwise limit its liability under any
continuing guaranty; (f) permits the entry or service of any
garnishment, judgment, tax levy, attachment or lien against Owner, any
guarantor, or any of their property;
(g) dies, becomes legally incompetent, is dissolved or terminated, ceases
to operate its business, becomes insolvent, makes an assignment for
the benefit of creditors, or becomes the subject of any bankruptcy,
insolvency or debtor rehabilitation proceeding;
(h) allows the Collateral to be used by anyone to transport or store
goods, the possession, transportation, or sue of which, is illegal; or
(i) causes Lender in good faith to deem itself insecure for any reason.
19. RIGHTS OF LENDER ON DEFAULT. If there is a default under this Agreement,
Lender shall be entitled to exercise one or more of the following remedies
without notice or demand (except as required by law):
(a) to declare the Obligations immediately due and payable in full;
(b) to collect the outstanding Obligations with or without resorting to
judicial process;
(c) To change Owner's mailing address, open Owner's mail, and retain any
instruments or other remittances constituting the Collateral contained
therein;
(d) to take possession of any Collateral in any manner permitted by law;
(e) to apply for and obtain, without notice and upon ex parte application,
the appointment of a receiver for the Collateral without regard to
Owner's financial condition or solvency, the adequacy of the
Collateral to secure the payment or performance of the obligations, or
the existence of any waste to the Collateral;
(f) to require Owner to deliver and make available to Lender any
Collateral at a place reasonably convenient to Owner and Lender; (g)
to sell, lease or otherwise dispose of any Collateral and collect any
deficiency balance with or without resorting to legal process; (h) to
set-off Owner's obligations against any amounts due to Owner
including, but not limited to, monies, instruments, and deposit
accounts maintained with Lender; and
(i) to exercise all other rights available to Lender under any other
written agreement or applicable law.
Lender's rights are cumulative and may be exercised together, separately, and in
any order. If notice to Owner of intended disposition of Collateral is required
by law, Lender will provide reasonable notification of the time and place of any
sale or intended disposition as required under the Uniform Commercial Code. In
the event that Lender institutes an action to recover any Collateral or seeks
recovery of any
-4-
<PAGE>
Collateral by way of a prejudgment remedy in an action against Owner, Owner
waives the posting of any bond which might otherwise be required. Lender's
remedies under this paragraph are in addition to those available at common law,
such as setoff.
20. WAIVER OF JURY TRIAL. LENDER AND OWNER HEREBY KNOWINGLY, VOLUNTARILY AND
INTENTIONALLY WAIVE THE RIGHT EITHER MAY HAVE TO A TRAIL BY JURY IN RESPECT TO
ANY LITIGATION BASED ON, OR ARISING OUT OF, UNDER OR IN CONJUNCTION WITH THE
PROMISSORY NOTE, THIS AGREEMENT AND ANY OTHER AGREEMENT CONTEMPLATED TO BE
EXECUTED IN CONJUNCTION HEREWITH OR THEREWITH, OR ANY COURSE OF CONDUCT, COURSE
OF DEALING, STATEMENTS (WHETHER VERBAL OR WRITTEN) OR ACTIONS OF EITHER PARTY.
THIS PROVISION IS A MATERIAL INDUCEMENT FOR LENDER MAKING THE LOAN EVIDENCED BY
THE PROMISSORY NOTE.
21. APPLICATION OF PAYMENTS. Whether or not a default has occurred under this
Agreement, all payments made by or on behalf of Owner and all credits due to
Owner from the disposition of the Collateral or otherwise may be applied against
the amounts paid by Lender (including attorneys' fees and legal expenses) in
connection with the exercise of its rights or remedies described in this
Agreement and any interest thereon and then to the payment of the remaining
Obligations in whatever order Lender chooses.
22. REIMBURSEMENT OF AMOUNTS EXPENDED BY LENDER. Owner shall reimburse Lender
for all amounts (including attorneys' fees and legal expenses) expended by
Lender in the performance of any action required to be taken by Owner or the
exercise of any right or remedy belonging to Lender under this Agreement,
together with interest thereon at the lower of the highest rate described in any
promissory note or credit agreement executed by Borrower or Owner or the highest
rate allowed by law form the date of payment until the date of reimbursement.
These sums shall be included in the definition of Obligations, shall be secured
by the Collateral identified in this Agreement and shall be payable upon demand.
23. ASSIGNMENT. Owner shall not be entitled to assign any of its rights,
remedies or obligations described in this Agreement without the prior written
consent of Lender. Consent may be withheld by Lender in its sold discretion.
Lender shall be entitled to assign some or all of its rights and remedies
described in this Agreement without notice to or the prior consent of Owner in
any manner.
24. MODIFICATION AND WAIVER. The modification or waiver of any of Owner's
Obligations or Lender's rights under this Agreement must be contained in a
writing signed by Lender. Lender may perform any of Owner's Obligations or delay
or fail to exercise any of its rights without causing a waiver of those
Obligations or rights. A waiver on one occasion shall not constitute a wavier on
any other occasion. Owner's Obligations under this Agreement shall not be
affected if Lender amends, comprises, exchanges, fails to exercise, impairs or
releases any of the obligations belonging to any Owner or third party or any of
its rights against any Owner, third party or collateral.
25. SUCCESSORS AND ASSIGNS. This Agreement shall be binding upon and inure to
the benefit of Owner and Lender and their respective successors, assigns,
trustees, receivers, administrators, personal representatives, legatees, and
devisees.
26. NOTICES. Any notice or other communication to be provided under this
Agreement shall be in writing and sent to the parties at the addresses described
in this Agreement or such other address as the parties may designate in writing
from time to time.
27. SEVERABILITY. If any provision of this Agreement violates the law or is
unenforceable, the rest of the Agreement shall remain valid.
28. APPLICABLE LAW. This Agreement shall be governed by the laws of the state
identified in Lender's address. Owner consents to the jurisdiction and venue of
any court located in the state indicated in Lender's address in the event of any
legal proceeding pertaining to the negotiation, execution, performance or
enforcement of any term or condition contained in this Agreement or any related
document and agrees not to commence or seek to remove such legal proceeding in
or to a different court.
29. COLLECTION COSTS. If Lender hires an attorney to assist in collecting any
amount due or enforcing any right or remedy under this Agreement, Owner agrees
to pay Lender's attorneys' fees and collection costs.
30. MISCELLANEOUS. This Agreement is executed for commercial purposes. Owner
shall supply information regarding Owner's business operations and financial
condition or the Collateral in the form and manner as requested by Lender form
time to time. All information furnished by Owner to Lender shall be true,
accurate and complete in all respects. Owner and Lender agree that time is of
the essence. Owner waives presentment, demand for payment, notice of dishonor
and protest except as required by law. All references to Owner in this Agreement
shall include all parties signing below except Lender. If there is more than one
Owner, their obligations shall be joint and several. This Agreement shall remain
in full force and effect until Lender provides Owner with written notice of
termination. This Agreement and any related documents represent the complete and
integrated understanding between Owner and Lender pertaining to the terms and
conditions of those documents.
31. ADDITIONAL TERMS:
-5-
<PAGE>
Owner acknowledges that Owner has read, understands, and agrees to the terms and
conditions of this Agreement.
Dated: JANUARY 3, 1998
LENDER: FIRST NATIONAL BANK OF ARVADA
GRACE Y. CHAPMAN
ASST. VICE PRESIDENT
OWNER: ESOFT, INC. OWNER:
/s/ Philip L. Becker
- -------------------------------- ---------------------------------------
PHILIP L. BECKER
PRESIDENT
OWNER: OWNER:
- -------------------------------- ---------------------------------------
OWNER: OWNER:
- -------------------------------- ---------------------------------------
OWNER: OWNER:
- -------------------------------- ---------------------------------------
-6-
EXHIBIT 10.22
LETTERHEAD OF COLORADO NATIONAL BANK
January 23, 1998
Mr. Phil Becker, CEO
eSoft Incorporated
5335-C Sterling Drive
Boulder, CO 80301
Dear Mr. Becker:
Based on our discussions concerning the financing needs of eSoft Incorporated
("Borrower"), and based upon our preliminary review of the information provided
to date, Colorado National Bank ("Bank") is pleased to propose the following
financial arrangements. The matters outlined herein constitute a proposal as to
certain of the terms and conditions under which Bank may provide financing. It
is intended to be used as a vehicle for continued discussions and further due
diligence, and does not constitute a commitment of any kind on the part of
Colorado National Bank at this time. Nevertheless, subject to the qualifications
listed and satisfactory completion of our due diligence, we believe we should be
in a position to offer you a financing package structured along the lines of the
attached proposal.
We hope this proposal is acceptable to you, and request that you execute the
proposal where indicated and return it to us prior to February 6, 1998, at which
time this proposal will expire. If you have any questions with respect to this
proposal, please contact me at (303) 444-9109.
Sincerely,
Colorado National Bank
Ed Messman Matt Roan Curtis Johns
Assistant Vice President Assistant Vice President Manager
<PAGE>
PROPOSAL
January 23, 1998
SUMMARY OF TERMS AND CONDITIONS
Borrower: eSoft Incorporated
Amount: A) $300,000 revolving working capital line of credit. The
line of credit will be increased to $750,000 upon
completion of the initial public offering.
B) $75,000 term credit facility.
Purpose: A) To support growth in accounts receivable and inventory.
B) To refinance existing debt with First National Bank of
Arvada.
Rate of Interest: A) One half of one percent (0.50%) in excess of Colorado
National Bank's reference rate as it may vary from time
to time.
B) One and one half of one percent (1.50%) in excess of
Colorado National Bank's reference rate as it may vary
from time to time.
Interest on both facilities will be payable monthly and will
be calculated on a three hundred sixty (360) day basis.
"Reference Rate", at the time of determination, means the rate of interest per
annum which has been publicly announced by Colorado National Bank as its
"Reference Rate", which may be a rate at, above or below the rate or rates at
which the Bank lends to other parties.
Fees: A) A one percent (1.00%) commitment fee payable at
acceptance;
B) A one percent (1.00%) commitment fee payable at
acceptance.
All out-of-pocket expenses, including but not limited to
audit fees, documentation fees, legal fees, and costs
associated with Bank's due diligence process will be borne by
Borrower.
Advance Rate: Advances under the line of credit shall be limited to
the lesser of $750,000 or eighty percent (80%) of "eligible
accounts receivable" and twenty five percent (25%) advance on
"eligible inventory" to a maximum of $150,000.
"Eligible accounts receivable", in addition to any other
provisions as defined in Bank's Loan Agreement, shall exclude
(1) all accounts receivable under which payment is not
received within 90 days from invoice date; (2) all accounts
receivable of a single account debtor wherein fifteen percent
(15%) of the
-2-
<PAGE>
account debtor's balance is over 90 days from invoice date;
(3) that portion of any account receivable of a single
account debtor which constitutes a twenty percent (20%) or
greater concentration in accounts receivable; higher
concentration limits shall be reviewed and approved by Bank
on a case-by-case basis; (4) all foreign accounts receivable
except those foreign receivables insured or covered by
letters of credit; and (5) the amount of any account
receivable that can be offset by a corresponding account
payable.
"Eligible inventory", in addition to any other provisions as
defined in Bank's Loan Agreement, shall include finished
goods and must be located in the U.S. and valued at the lower
of actual cost or market value in accordance with Generally
Accepted Accounting Principals (GAAP).
The advance rates proposed herein are based upon information
available to the Bank as of the date of this proposal, and
may be subject to change due to information obtained during
the due diligence process. The actual initial advance rates
shall be determined after completion of the collateral audit.
Audits: We would anticipate a minimum of one collateral audit per
year. Audit fees are to be paid by Borrower at the time of
each audit.
Maturity: A) March 1, 1999
B) March 1, 2000
Repayment
Schedule: A) Interest only, due monthly. Principal due at maturity.
B) Twenty four (24) equal principal payments plus accrued
interest.
Collateral: Borrower shall execute a Security Agreement and UCC-1
Financing Statement providing Bank with a senior position on
all corporate assets including but not limited to; accounts
receivable, equipment, inventory and general intangibles.
Intangible assets shall be perfected by filing with the
applicable Federal Office (i.e. the United States Copyright
Office).
FINANCIAL REPORTING:
Borrower will be required to periodically submit the following financial
information:
o Monthly financial statements certified by the Borrower's financial
officer within thirty (30) days of each month's end;
o Annual audited financial statements issued by an independent public
accounting firm acceptable to Bank, within ninety (90) days of each
fiscal year end;
o Monthly accounts receivable and accounts payable agings submitted
within fifteen (15) days of the end of each month;
-3-
<PAGE>
o Submit annual income statement and balance sheet projections within
ninety (90) days of the end of each fiscal year;
o All other information that Bank may reasonably request.
CREDIT TERMS AND CONDITIONS:
All extension of credit proposed by the Bank to Borrower, as set forth herein
will be subject to and governed by a "Loan Agreement" acceptable to Bank. Terms
and conditions will be negotiated by Bank and Borrower, and may include, but not
necessarily be limited to:
- Compliance with financial covenants including: Leverage ratio, current
ratio, minimum tangible net worth and debt service coverage;
- Limitations on additional indebtedness and liens;
- Maintenance of all primary depository accounts with Bank.
Our financial covenants are meant to be both flexible and reasonable and will be
modeled according to your projections.
CONDITIONS PRECEDENT TO LENDING:
o Satisfactory completion of the Bank's collateral audit;
o No material adverse change in company's financial condition prior to
funding;
o Formal credit approval by Bank and issuance of a formal commitment;
o Evidence satisfactory to Bank of the perfection of all security
interests granted to the lender;
o Completion of documentation and final terms of the proposed financing
satisfactory to Bank;
CONFIDENTIALITY:
This letter is provided solely for your information and is delivered to you with
the understanding that neither it, nor its substance, shall be disclosed to any
third person, except those who are in confidential relationship to you, or where
the same is required by law.
This letter is meant to be a working document, outlining the general terms and
conditions under which Colorado National Bank would be willing to consider a
financing arrangement for eSoft Incorporated. It is not meant to be a
comprehensive list of terms and conditions that may apply to any future
commitment or any credit agreement or other document that may be entered into by
and between Bank and Borrower. Rather, it is intended only to outline certain
basic points of business understanding around which further discussions may take
place.
Please note that by approval of this proposal, you acknowledge that this letter
of proposal is issued at a time when Colorado National Bank has not undertaken a
full business credit and legal analysis of eSoft Incorporated. As a result of
further analysis and investigation by us, or by reason of information of which
we are not now aware, impediments to closing may be discovered. We may require
that the arrangement be restructured or otherwise modified to make allowances
for such
-4-
<PAGE>
impediments, or the impediments may be so serious as to affect the closing of
these financial arrangements.
A good faith deposit in the amount of $2,500 will be tendered prior to further
processing of the financing. Said fee will be held by Bank as assurance of
Borrower's sincere intention to proceed with the financing. This deposit will be
applied toward the commitment fee. If Borrower fails to accept Bank's proposal
or to close the loan, Bank will be entitled to retain the entire deposit without
regard to the amount expended. If Bank does not deliver a commitment
substantially in accordance with the terms of this proposal, then Bank shall
refund the deposit, less costs incurred.
ACKNOWLEDGED AND ACCEPTED BY:
eSOFT INCORPORATED
/s/ Philip Becker
- -----------------------------
Date: January 25, 1998
-5-
