<PAGE> 1
SCHEDULE 14A
(RULE 14a-101)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14a INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934 (AMENDMENT NO. )
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] Confidential, for Use of the
Commission Only (as permitted by
Rule 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Rule 14a-11(c) or Rule 14a-12
</TABLE>
Esoft, Inc.
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(Name of Registrant as Specified in Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement, if Other Than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
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(2) Aggregate number of securities to which transaction applies:
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(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
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(4) Proposed maximum aggregate value of transaction:
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(5) Total fee paid:
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[ ] Fee paid previously with preliminary materials.
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[ ] Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee was
paid previously. Identify the previous filing by registration statement
number, or the form or Schedule and the date of its filing.
(1) Amount Previously Paid:
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(2) Form, Schedule or Registration Statement No.:
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(3) Filing Party:
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(4) Date Filed:
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<PAGE> 2
eSoft, Inc.
5335 Sterling Drive, Suite C
Boulder CO 80303
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
To Be Held on December 4, 1998
TO THE STOCKHOLDERS:
NOTICE IS HEREBY GIVEN that a Special Meeting of Stockholders of eSoft,
Inc. ("eSoft" or the "Company"), a Delaware corporation, will be held on Friday,
December 4, 1998, at 10:00 AM, Mountain Standard Time, at the Marriott Courtyard
Hotel located at 4710 Pearl East Circle, Boulder, Colorado, for the following
purposes:
1. To adopt an amendment to Article 4 of the Company's Certificate of
Incorporation to authorize 5,000,000 shares of preferred stock, with certain
terms and conditions of such preferred stock to be determined in the future by
the board of directors.
2. To adopt an amendment to Article 7 of the Company's Certificate of
Incorporation and Article II of the Company's Bylaws to prevent stockholders
from taking action by written consent in lieu of a vote at a stockholders'
meeting.
3. To adopt an amendment to Article 11 of the Company's Certificate of
Incorporation and Article X of the Company's Bylaws to provide that the Bylaws
may only be amended by the stockholders upon the vote of at least two-thirds of
the Company's outstanding voting stock.
4. To adopt an amendment to Article II of the Company's Bylaws to
eliminate the right of stockholders to call a special meeting of stockholders.
5. To adopt an amendment to Article III of the Company's Bylaws to
institute a classified board of directors with staggered terms.
6. To approve certain amendments to the Company's 1998 Stock Option Plan.
7. To approve the private placement and issuance of the shares subscribed
by Philip Becker dated March 14, 1998 as required by the Vancouver Stock
Exchange.
8. To transact such other items of business as may properly come before
the meeting, or any adjournment thereof.
The foregoing items of business are more fully described in the Proxy
Statement accompanying this Notice.
Only stockholders of record at the close of business on November 4,
1998, are entitled to notice of and to vote at the Special Meeting and any
adjournment thereof. The Company's stock transfer books will not be closed. A
complete list of the stockholders entitled to vote at the Special Meeting will
be open to the examination of any stockholder, for any purpose germane to the
Special Meeting, during ordinary business hours for a period of ten days prior
to the date of the Special Meeting at the offices of the Company at 5335
Sterling Drive, Suite C, Boulder, Colorado 80301 and at the time and place of
the Special Meeting.
All stockholders are cordially invited to attend the meeting in
person. However, to ensure your representation at the meeting, you are urged to
mark, sign, date and return the enclosed proxy card as promptly as possible in
the enclosed postage-prepaid envelope. Any stockholder attending the Special
Meeting may vote in person even if he or she has returned a proxy.
Sincerely,
Thomas R. Tennessen
Secretary
October 28, 1998
<PAGE> 3
eSOFT, INC.
5335 STERLING DRIVE, SUITE C
BOULDER, COLORADO 80301
(303) 444-1600
-----------------------------------------------------
PROXY STATEMENT
-----------------------------------------------------
This Proxy Statement and the enclosed Proxy are solicited on behalf of
eSoft, Inc. ("eSoft" or the "Company") for use at the Special Meeting of
Stockholders (the "Special Meeting") to be held on Friday, December 4, 1998, at
10:00 AM, Mountain Standard Time, at Marriott Courtyard located at 4710 Pear
East Cir. Boulder, Co, or at any adjournment thereof, for the purposes set forth
herein and in the accompanying Notice of Special Meeting of Stockholders. The
Special Meeting will be held at the Marriott Courtyard Hotel at 4710 Pearl East
Circle, Boulder, Colorado.
The total cost of soliciting proxies will be borne by the Company. The
Company has engaged the firm of Trust Company of Bank of Montreal as proxy
solicitors. The fee to such firm for solicitation services is estimated to be
$3,500.00, plus reimbursement of out-of-pocket expenses. In addition, proxies
may be solicited by officers and regular employees of the Company, without extra
remuneration, by personal interviews, telephone and by electronic means. It is
anticipated that banks, brokerage houses and other custodians, nominees and
fiduciaries will forward soliciting material to beneficial owners of shares
entitled to vote on the matters presented at the Special Meeting, and such
persons will be reimbursed for the out-of-pocket expenses incurred by them in
this connection.
These proxy solicitation materials were first mailed on or about
November 4, 1998, to all stockholders entitled to vote at the Special Meeting.
RECORD DATE AND VOTING SECURITIES
Only holders of the Company's Common Stock, $.01 par value (the
"Common Stock"), as of the close of business on November 4, 1998 (the "Record
Date"), are entitled to notice of and to vote at the Special Meeting. On the
Record Date, there were outstanding 6,746,002 shares of Common Stock, which
constituted all of the outstanding voting securities of the Company. Each share
of Common Stock is entitled to one vote on all matters presented at the Special
Meeting. There is no cumulative voting. The presence of a majority of the votes
represented by the Common Stock is required to constitute a quorum. The
affirmative vote of a majority of the total number of shares of Common Stock
outstanding on the Record Date is necessary for the approval of the proposals
to amend the Company's Certificate of Incorporation and Bylaws, other than the
proposal to increase the stockholder voting requirement for future amendments
to the Company's Certificate of Incorporation and Bylaws, which requires the
affirmative vote of the holders of two-thirds of the shares of Common Stock
outstanding on the Record Date. The affirmative vote of a majority of the
number of shares of Common Stock present in person or represented by proxy at
the Special Meeting and entitled to vote is necessary for the approval of the
proposal to amend the Company's equity incentive plan and to approve the
private placement of shares to Philip Becker. Abstentions and broker non-votes
are counted for purposes of determining the presence or absence of a quorum for
the transaction of business. Abstentions are counted in tabulations of the vote
cast on proposals presented to the shareholders and thus have the same effect
as a negative vote, whereas broker non-votes are not tabulated for any purpose
in determining whether a proposal has been approved.
A list of the shareholders entitled to vote on the matters presented
at the Special Meeting may be examined at the Company's principal executive
offices, which are located at 5335 Sterling Drive, Suite C, Boulder, Colorado
80301, during the ten-day period preceding the Special Meeting.
<PAGE> 4
VOTING PROCEDURES
If the enclosed Proxy is properly executed and returned, the shares of
Common Stock represented thereby will be voted in the manner specified. If no
specification is made on the Proxy, then the shares shall be voted in
accordance with the recommendations of the Board of Directors. A proxy may be
revoked by a stockholder at any time prior to the exercise thereof by written
notice to the Secretary of the Company, by submission of any other Proxy
bearing later date or by attending the Special Meeting and voting in person.
The enclosed Proxy will also be voted in connection with the
transaction of such other business as may properly come before the Special
Meeting or any adjournment thereof. Management knows of no other matters other
than the matters set forth above to be considered at the Special Meeting. If,
however, any other matters properly come before the Special Meeting or any
adjournment thereof, the persons named in the accompanying Proxy will vote such
Proxy in accordance with his best judgment on such matter. The persons named in
the accompanying Proxy will also, if in their judgment it is deemed to be
advisable, vote to adjourn the Special Meeting from time to time.
Only those Proxies that are properly executed and received by 9:00 AM
Mountain Standard Time on December 4, 1998 will be voted at the Special
Meeting.
AMENDMENTS TO THE COMPANY'S CERTIFICATE OF INCORPORATION AND BYLAWS
(PROPOSAL NOS. 1 THROUGH 5)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF
PROPOSALS 1 THROUGH 5.
GENERALLY
Proposals Nos. 1 through 5 involve what are commonly known as
anti-takeover measures. Delaware law permits a corporation significant
flexibility in governing its internal affairs and its relationships with
shareholders and other parties. Specifically, Delaware law permits a
corporation to adopt a number of measures designed to reduce a corporation's
vulnerability to hostile takeover attempts. The over-all effect of the
following proposal is to render more difficult the accomplishment of undesired
mergers, tender offers or proxy contests, the assumption of control by an
undesired principal stockholder or stockholder group, and the removal of
current management and Board of Directors.
ADVANTAGES OF ANTI-TAKEOVER PROVISIONS
Anti-takeover provisions allow the Board of Directors flexibility to
more carefully evaluate, plan and engage in transactions that will effect the
Company, its management and its stockholders. This will aid the Board of
Directors to obtain maximum value for the Company and its stockholders, with
due consideration to matters such as the recognition or postponement of gain or
loss for tax purposes, the management and business of the acquiring corporation
and maximum strategic deployment of corporate assets. Takeover attempts that
not have been so considered may seriously disrupt the business and management
of the Company and result in terms which may be less favorable to stockholders
than otherwise may have been obtained.
DISADVANTAGE OF ANTI-TAKEOVER PROVISIONS
Although anti-takeover measures allow flexibility to carefully
consider various types of significant corporate events, they also restrict
flexibility in some manners. For instance, such measures may discourage a
future attempt to acquire the control of the Company which a substantial or
majority of the stockholders feel to be in their best interests. Certain
measures may also make it more difficult for a majority of the stockholders to
alter the composition of the Board of Directors or incumbent management.
Anti-takeover measures may also make a proxy contest less effective as a means
of replacing various or all members of the Board of Directors. In a worst case
scenario, the strengthened tenure of the Board of Directors may enable the
Board of Directors to thwart or ignore the majority will of the stockholders.
2
<PAGE> 5
PROPOSED AMENDMENTS
On September 18, 1998, the Board of Directors adopted resolutions
proposing that the Certificate of Incorporation and Bylaws be amended as set
forth in Proposal Nos. 1 through 5. Such amendments are not in response to any
known or suspected takeover attempt. The Certificate of Incorporation and
Bylaws do not currently contain any such measures, largely as a result of
restrictions placed on the Company by the rules of the Vancouver Stock
Exchange, on which the Company's Common Stock was listed until September 9,
1998. However, the Board of Directors desires to provide itself the flexibility
to carefully consider any such attempts. The Board of Directors further note
the disadvantages of anti-takeover measures, but also note that, under Delaware
law, a board of directors always has a fiduciary duty to act in the best
interests of the stockholders. The Board of Directors feels that this duty
offsets to a large extent the disadvantages of anti-takeover measures.
Copies of the Certificate of Incorporation and Bylaws, as each is
proposed to be amended, are attached hereto as Exhibit A and Exhibit B,
respectively.
AMENDMENT TO ARTICLE 4 OF THE COMPANY'S CERTIFICATE OF INCORPORATION
(PROPOSAL NO. 1)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF
THE AMENDMENT TO ARTICLE 4 OF THE COMPANY'S CERTIFICATE OF INCORPORATION.
PROPOSED AMENDMENT
Under Article 4 of the Company's Certificate of Incorporation, the
Company's capital stock currently consists of 50,000,000 shares of Common
Stock, with a par value of $.01 per share. On September 18, 1998, the Board of
Directors adopted a resolution proposing that Article 4 of the Certificate of
Incorporation be amended to authorize the Company to issue an additional
5,000,000 shares of preferred stock, with a par value of $.01 per share (the
"Preferred Stock"). The proposed amendment will give to the Board of Directors
the authority to determine or alter the rights, preferences, privileges and
restrictions to be granted to or imposed upon any wholly unissued series of
Preferred Stock, to fix the number of shares constituting any such series and
to determine the designation of the series of Preferred Stock (collectively,
the "Preferred Stock Amendment").
PURPOSES AND EFFECTS OF THE PREFERRED STOCK AMENDMENT
The Preferred Stock Amendment [is not intended as an anti-takeover
device and] would have been implemented earlier if not for restrictions placed
on the Company by the rules of the Vancouver Stock Exchange. The Preferred
Stock Amendment will greatly facilitate the Company's efforts to raise
additional capital in the future and the ability to issue Preferred Stock
rather than Common Stock will provide the Company with more financing
flexibility. The Board of Directors may authorize the issuance of Preferred
Stock in connection with various corporate transactions, including corporate
partnering agreements. The Board of Directors may also authorize the issuance
of Preferred Stock for the purpose of adopting a shareholder rights plan.
STOCKHOLDER APPROVAL OF PREFERRED STOCK AMENDMENT AND IMPLEMENTATION
The affirmative vote of the holders of a majority of the outstanding
shares of Common Stock is required for approval of the proposed Preferred Stock
Amendment. If the Preferred Stock Amendment is adopted by the required vote of
the Company's stockholders, it will become effective when the Certificate of
Amendment to the Certificate of Incorporation is filed with the Secretary of
State of the State of Delaware. The Company currently anticipates that this
filing will be made on December 7, 1998.
3
<PAGE> 6
AMENDMENT TO ARTICLE 7 OF THE COMPANY'S CERTIFICATE OF INCORPORATION
AND ARTICLE II OF THE COMPANY'S BYLAWS
(PROPOSAL NO. 2)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF
THE AMENDMENT TO ARTICLE 7 OF THE COMPANY'S CERTIFICATE OF INCORPORATION
AND ARTICLE II OF THE COMPANY'S BYLAWS.
PROPOSED AMENDMENT
Article II of the Company's Bylaws currently allows the stockholders
to effect any action required or permitted to be taken by the stockholders of
the Company without a meeting, without prior notice and without a vote if a
consent in writing, setting forth the action so taken, is signed by all the
stockholders entitled to vote. The Company's Certificate of Incorporation does
not have any provision regarding actions by written consent of stockholders. On
September 18, 1998, the Board of Directors adopted a resolution proposing that
Article 7 of the Certificate of Incorporation and Article II of the Bylaws be
amended to prevent stockholders from taking action by written consent in lieu
of a vote at a stockholders' meeting (the "Written Consent Amendment").
PURPOSES AND EFFECTS OF THE WRITTEN CONSENT AMENDMENT
Elimination of such stockholder written consents may lengthen the
amount of time required to take stockholder actions, as actions by written
consent pursuant to the current Bylaws are not subject to a minimum notice
requirement as are stockholders' meetings. However, the elimination of
stockholder written consents will a prevent controlling stockholder or group of
stockholders from amending the Bylaws or removing members of the Board of
Directors without calling a special meeting of the stockholders and waiting the
notice periods determined by the Board of Directors pursuant to the Bylaws. By
requiring the actions to be taken at meetings, this will ensure that
stockholders will have sufficient time to weigh the arguments presented by both
sides in connection with any contested stockholder vote.
STOCKHOLDER APPROVAL OF WRITTEN CONSENT AMENDMENT AND IMPLEMENTATION
The affirmative vote of the holders of a majority of the outstanding
shares of Common Stock is required for approval of the proposed Written Consent
Amendment. If the Written Consent Amendment is adopted by the required vote of
the Company's stockholders, it will become effective when the Certificate of
Amendment to the Certificate of Incorporation is filed with the Secretary of
State of the State of Delaware. The Company currently anticipates that this
filing will be made on December 7, 1998.
AMENDMENT TO ARTICLE 11 OF THE COMPANY'S CERTIFICATE OF INCORPORATION
AND ARTICLE X OF THE COMPANY'S BYLAWS
(PROPOSAL NO. 3)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF
THE AMENDMENT TO ARTICLE 11 OF THE COMPANY'S CERTIFICATE OF INCORPORATION
AND ARTICLE X OF THE COMPANY'S BYLAWS.
PROPOSED AMENDMENT
Article 11 of the Certificate of Incorporation and Article X of the
Bylaws currently allow shareholders to amend the Bylaws upon a majority vote of
the stockholders. On September 18, 1998, the Board of Directors adopted a
resolution proposing that Article 11 of the Certificate of Incorporation and
Article X of the Bylaws be amended to require a two-thirds vote of stockholders
to amend the Bylaws (the "Two-Thirds Amendment").
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<PAGE> 7
PURPOSES AND EFFECTS OF THE TWO-THIRDS AMENDMENT
By requiring a two-thirds vote of the stockholders to amend the
Bylaws, the Board of Directors feels that the it will be more difficult for a
principal shareholder or shareholder group to amend the Bylaws to facilitate an
takeover attempt.
STOCKHOLDER APPROVAL OF TWO-THIRDS AMENDMENT AND IMPLEMENTATION
The affirmative vote of the holders of two-thirds of the outstanding
shares of Common Stock is required for approval of the proposed Two-Thirds
Amendment. If the Two-Thirds Amendment is adopted by the required vote of the
Company's stockholders, it will become effective when the Certificate of
Amendment to the Certificate of Incorporation is filed with the Secretary of
State of the State of Delaware. The Company currently anticipates that this
filing will be made on December 7, 1998.
AMENDMENT TO ARTICLE II OF THE COMPANY'S BYLAWS
TO ELIMINATE THE RIGHT OF STOCKHOLDERS TO CALL A SPECIAL MEETING
(PROPOSAL NO. 4)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF
THE AMENDMENT TO ARTICLE II OF THE COMPANY'S BYLAWS TO ELIMINATE
THE RIGHT OF STOCKHOLDERS TO CALL A SPECIAL MEETING.
PROPOSED AMENDMENT
Article II of the Bylaws currently allows a special meeting of the
Company's stockholders to be called by the president or secretary of the
Company at the written request of majority of the voting stockholders. On
September 18, 1998, the Board of Directors adopted a resolution proposing that
Article II of the Bylaws be amended to eliminate the right of stockholders to
call a special meeting of stockholders (the "Special Meeting Amendment").
PURPOSES AND EFFECTS OF THE SPECIAL MEETING AMENDMENT
A common tactic of bidders attempting a takeover is to initiate a
proxy contest by calling a special meeting. By eliminating such a right,
expensive proxy contests may be avoided outside the context of the Company's
annual meeting. Moreover, the Board of Directors may still call special
meetings of the stockholders when issues arise for which stockholders guidance
is required.
STOCKHOLDER APPROVAL OF SPECIAL MEETING AMENDMENT AND IMPLEMENTATION
The affirmative vote of the holders of a majority of the outstanding
shares of Common Stock is required for approval of the proposed Special Meeting
Amendment. If the Special Meeting Amendment is adopted by the required vote of
the Company's stockholders, it will become effective when the Certificate of
Amendment to the Certificate of Incorporation is filed with the Secretary of
State of the State of Delaware. The Company currently anticipates that this
filing will be made on December 7, 1998.
5
<PAGE> 8
AMENDMENT TO ARTICLE III OF THE COMPANY'S BYLAWS
TO INSTITUTE A CLASSIFIED BOARD OF DIRECTORS
(PROPOSAL NO. 5)
THE BOARD OF DIRECTORS RECOMMENDS A VOTE FOR THE APPROVAL OF
THE AMENDMENT TO ARTICLE III OF THE COMPANY'S BYLAWS.
PROPOSED AMENDMENTS
Article III of the Bylaws currently does not provide for a classified
board of directors. On September 18, 1998, the Board of Directors adopted a
resolution proposing that Article III of the Bylaws be amended to institute a
classified Board of Directors, with members of each class to be elected each
year for a maximum term of three years (the "Classified Board Amendment").
PURPOSES AND EFFECTS OF THE CLASSIFIED BOARD AMENDMENT
A classified Board of Directors deters what is commonly called a
"creeping acquisition" in which a person or group seeks to acquire: (i) a
controlling position without paying a control premium to the selling
stockholders; (ii) a position sufficient to exert control over the Company
through a proxy contest or otherwise; or (iii) a block of stock with the
intention to promote a sale or liquidation or a repurchase by the Company of the
block at a premium, or an exchange of the block for assets of the Company. A
classified Board of Directors makes it significantly more difficult for such a
person to control or influence the Company by replacing member of the Board of
Directors.
If the Classified Board Amendment is approved, the Board of Directors
would be divided into three classes of directors as nearly equal in number as
possible, designated Class I, Class II and Class III. Approximately one-third of
the directors would be elected at the annual meeting of shareholders each year
to serve for a term of three years. The Classified Board Proposal provides that
if the number of directors is changed, any increase or decrease will be
apportioned among the classes so as to maintain the number of directors in each
class as nearly equal as possible. Directors will hold office until the annual
meeting of shareholders in the year in which such director's term expires and
until such director's successor is elected, subject to prior death, resignation,
retirement, disqualification or removal from office of such director. Any
director of any class elected by the directors to fill a vacancy as a result of
an increase in the number of directors will, however, only hold office until the
next annual meeting of shareholders of the Corporation at which directors are
elected. In no case will a decrease in the number of directors shorten the term
of office of any incumbent director.
The current members of the Company's Board of Directors are Philip
Becker, Regis Frank, Michael Johnson and Richard Rice. If the Classified Board
Proposal is approved, the Board of Directors will designate Mr. Frank as a Class
I director to serve until the 1999 Annual Meeting of Shareholders, Mr. Johnson
as a Class II director to serve until the 2000 Annual Meeting of Shareholders
and Messrs. Becker and Rice as Class III directors to serve until the 2001
Annual Meeting of Shareholders. The Classified Board Proposal would thus result
in the Board's extending Mr. Johnson's term of by one year and the term of
office of Messrs. Becker and Rice by two years. In addition, only one director
would be elected by the shareholders at the 1999 Annual Meeting of Shareholders.
At each annual meeting thereafter, successors to the class of directors whose
term expires at that annual meeting would be elected for a three-year term.
STOCKHOLDER APPROVAL OF CLASSIFIED BOARD AMENDMENT AND IMPLEMENTATION
The affirmative vote of the holders of a majority of the outstanding
shares of Common Stock is required for approval of the proposed Classified Board
Amendment. If the Classified Board Amendment is adopted by the required vote of
the Company's stockholders, it will become effective when the Certificate of
Amendment to the Certificate of Incorporation is filed with the Secretary of
State of the State of Delaware. The Company currently anticipates that this
filing will be made on December 7, 1998.
6
<PAGE> 9
AMENDMENT TO CERTAIN PROVISIONS OF THE
COMPANY'S STOCK OPTION PLAN
(PROPOSAL NO. 6)
THE BOARD OF DIRECTORS RECOMMEND A VOTE FOR THE APPROVAL
OF THE AMENDMENT TO THE STOCK OPTION PLAN
In February 1998, the Board of Directors, with stockholder approval,
amended the Company's Stock Option Plan (the "Stock Plan") to comply with
restrictions imposed by rules of the Vancouver Stock Exchange. At December 31,
1997, there were 900,000 shares of Common Stock authorized for issuance under
the Stock Plan.
At October 31, 1998, options (net of canceled or expired options)
covering an aggregate of 993,500 shares of Common Stock had been granted under
the Stock Plan, and 0 shares remained available for future grant under the
Stock Plan, plus those shares, if any, that might in the future be returned to
the plan as a result of the cancellation or expiration of options.
On September 18, 1998, the Board of Directors approved the amendment,
restatement and renaming of the Stock Plan to the Equity Incentive Plan (the
"Amended Stock Plan"), subject to stockholder approval, to enhance the
flexibility of the Board and the Compensation Committee in granting stock
awards to the Company's employees, consultants and non-employee directors now
that the Company is no longer listed on the Vancouver Stock Exchange. The
amendment and restatement increases the number of shares authorized for
issuance under the Stock Plan by 800,000 shares, from a total of 900,000 shares
of Common Stock to 1,700,000 shares of Common Stock. The amendment and
restatement also reflects certain other changes to the Stock Plan, which are
reflected in the summary of the Amended Stock Plan that appears below. The
Board approved the amendment and restatement of the Amended Stock Plan to
ensure that the Company can continue to grant stock awards to employees,
consultants and non-employee directors at levels determined appropriate by the
Board and the Compensation Committee. A summary of the Amended Stock Plan is
set forth below:
GENERAL
The Amended Stock Plan provides for the grant of incentive stock
options, nonstatutory stock options, restricted stock (collectively, "stock
awards") and supplemental bonuses to compensate stock award recipients for the
income tax liabilities associated with nonstatutory stock option and restricted
stock grants. Incentive stock options granted under the Amended Stock Plan are
intended to qualify as "incentive stock options" within the meaning of Section
422 of the Internal Revenue Code of 1986, as amended (the "Code"). Nonstatutory
stock options granted under the Amended Stock Plan are not intended to qualify
as incentive stock options under the Code. See "Federal Income Tax Information"
for a discussion of the tax treatment of the stock awards.
PURPOSE
The Amended Stock Plan was adopted to attract and retain directors,
officers, other employees and consultants of the Company and its subsidiaries
and to provide such persons with incentives to continue in the long-term
service of the Company and to create in such persons with incentives to
continue in the long-term service of the Company and to create in such persons
a more direct interest in the future success of the operations of the Company
by relating incentive compensation to increases in stockholder value. All of
the Company's approximately 31 employees are eligible to participate in the
Amended Stock Plan requiring a 7 month cliff vesting of the option.
7
<PAGE> 10
ADMINISTRATION
The Board of Directors has delegated the administration of the Amended
Stock Plan to the Company's Compensation Committee, which is a committee
consisting of two non-employee directors of the Company. The Plan Committee has
the power to construe and interpret the Amended Stock Plan and, subject to the
provisions of the Amended Stock Plan, to determine the persons to whom and the
dates on which stock awards will be granted, whether a stock award will be an
incentive stock option, nonstatutory stock option, grant of restricted stock or
a combination of the foregoing, the number of shares to be subject to each
stock award, and the provisions of each stock award granted (which need not be
identical), including the time or times during the term of each stock award
within which all or a portion of such stock award may be exercised, the
exercise price and the type of consideration. As used herein with respect to
the Amended Stock Plan, the "Board" refers to the Compensation Committee as
well as to the Board of Directors itself.
Regulations under Section 162(m) of the Code require that the
directors who serve as members of the Compensation Committee must be "outside
directors." The Amended Stock Plan provides that directors serving on the
Compensation Committee will also be "outside directors" within the meaning of
Section 162(m). This limitation excludes from the Compensation Committee (i)
current employees of the Company, (ii) former employees of the Company
receiving compensation for past services (other than benefits under a
tax-qualified retirement plan) during the year, (iii) current and former
officers of the Company, and (iv) directors currently receiving direct or
indirect remuneration from the Company in any capacity (other than as a
director). Remuneration is received (a) if it is paid directly to the director
personally or to an entity in which the director has a beneficial ownership
interest greater than fifty percent, or (b) if more than a de minimis amount
was paid in the Company's preceding taxable year to an entity in which the
director has a beneficial ownership interest of at least five percent or by
which the director is employed or self-employed other than as a director.
ELIGIBILITY
Equity incentive stock options may be granted under the Amended Stock
Plan only to employees (including officers) of the Company and its affiliates.
Employees (including officers), directors and consultants are eligible to
receive stock awards other than incentive stock options under the Amended Stock
Plan. The Company estimates that approximately 37 employees and consultants
(including officers) and 2 directors are currently eligible to participate in
the Amended Stock Plan.
No incentive stock option may be granted under the Amended Stock Plan
to any person who, at the time of the grant, owns (or is deemed to own) stock
possessing more than 10% of the total combined voting power of the Company or
any affiliate of the Company, unless the option exercise price is at least 110%
of the fair market value of the stock subject to the option on the date of
grant, and the term of the option does not exceed five years from the date of
grant. The aggregate fair market value, determined at the time of grant, of the
shares of Common Stock with respect to which incentive stock options are
exercisable for the first time by an optionee during any calendar year after
1997 (under all such plans of the Company and its affiliates) may not exceed
$100,000.
STOCK SUBJECT TO THE AMENDED STOCK PLAN
If stock awards granted under the Amended Stock Plan expire or
otherwise terminate without being exercised, the Common Stock not purchased
pursuant to such stock awards again becomes available for issuance under the
Amended Stock Plan.
TERMS OF STOCK AWARDS
The following is a description of the permissible terms of stock
awards under the Amended Stock Plan. Individual stock award grants may be more
restrictive as to any or all of the permissible terms described below.
Exercise Price; Payment. The exercise price of incentive stock options
under the Amended Stock Plan may not be less than the fair market value of the
Common Stock subject to the option on the date of the option grant, and in some
cases (see "Eligibility" above) may not be less than 110% of such fair market
value. If options are granted with exercise prices below market value,
deductions for compensation attributable to the exercise of such options could
be limited by Section 162(m). See "Federal Income Tax Information." At October
27, 1998, the closing price of the Company's Common Stock as reported on the
Nasdaq Small Cap Market was $4.25 per share.
8
<PAGE> 11
The Board has the authority to reprice any options outstanding and to
offer employees the opportunity to replace outstanding higher priced options,
whether incentive or nonstatutory, with new lower priced options. To the extent
required by Section 162(m), an option repriced under the Amended Stock Plan is
deemed to be canceled and a new option granted.
The exercise price of options granted under the Amended Stock Plan
must be paid either: (a) in cash in the form of currency or check or other cash
equivalent acceptable to the Company; (b) at the discretion of the Board, (i)
by delivery of shares of Common Stock that are already owned by the optionee
and have a fair market value at the time of exercise that is equal to the
exercise price, (ii) by delivery of shares of Common Stock with respect to
which a stock option is exercised, (c) a recourse promissory note in favor of
the Company, (d) any other legal consideration that the Board may deem
appropriate, and (e) any combination of the foregoing.
Vesting. Options granted under the Amended Stock Plan may become
exercisable ("vest") in cumulative increments as determined by the Board. The
Board typically determines that shares covered by options granted under the
Amended Stock Plan will vest over three years at the rate of 1/36 per month
beginning seven months after the date of grant, except with respect to option
grants to non-employee directors, which the Board typically determines will
vest 1/24 per month beginning on the date of the grant. Shares covered by
options granted in the future under the Amended Stock Plan may be subject to
different vesting terms. The Board has the power to accelerate the time during
which an option may be exercised. Shares of restricted stock awarded under the
Amended Stock Plan may, but need not, be subject to a repurchase option in
favor of the Company in accordance with a vesting schedule to be determined by
the Board. To the extent provided by the terms of a stock option, a participant
may satisfy any federal, state or local tax withholding obligation relating to
the exercise of such option by a cash payment upon exercise, by authorizing the
Company to withhold a portion of the stock otherwise issuable to the
participant, by delivering already-owned stock of the Company or by a
combination of these means.
Term. The maximum term of options under the Amended Stock Plan is five
years. Options under the Amended Stock Plan terminate thirty days after
termination of the optionee's employment or relationship as a consultant or
director of the Company or any affiliate of the Company, unless such
termination is due to such person's death or disability in which case the
option may be exercised at any time within the earlier of (i) twelve months of
such death or disability and (ii) the expiration of the term of the option.
Individual options by their terms may provide for exercise within a shorter or
longer period of time following termination of service, employment or the
consulting relationship. With respect to stock awards, in the event that the
participant's employment or relationship as a consultant or director of the
Company or any affiliate of the Company terminates, the Company may repurchase
or otherwise reacquire any or all shares of stock held by that person which
have not vested as of the date of such termination.
ADJUSTMENT PROVISIONS
If there is any change in the stock subject to the Amended Stock Plan
or subject to any stock award granted under the Amended Stock Plan (through
merger, consolidation, reorganization, recapitalization, stock dividend,
dividend in property other than cash, stock split, liquidating dividend,
combination of shares, exchange of shares, change in corporate structure or
other transaction not involving the receipt of consideration by the Company),
the Amended Stock Plan and stock awards outstanding thereunder will be
appropriately adjusted by the Board of Directors as to the types and the
maximum number of shares subject to such plan.
DURATION, AMENDMENT AND TERMINATION
Unless sooner terminated, the Amended Stock Plan will terminate on
August 26, 2007.
The Board may also amend the Amended Stock Plan at any time or from
time to time. However, no amendment will be effective unless approved by the
stockholders of the Company to the extent such approval is necessary in order
for the Amended Stock Plan to satisfy Section 422 of the Code or any Nasdaq or
securities exchange listing requirements. The Board may submit any other
amendment to the Amended Stock Plan for stockholder approval, including, but
not limited to, amendments intended to satisfy the requirements of Section
162(m) of the Code and the regulations promulgated thereunder regarding the
exclusion of performance-based compensation from the limitation on the
corporate deductibility of compensation paid to certain executive officers.
9
<PAGE> 12
RESTRICTIONS ON TRANSFER
Under the Amended Stock Plan, incentive stock options and rights under
a restricted stock agreement (as long as the stock awarded remains subject to
its terms) may not be transferred by the participant otherwise than by will or
by the laws of descent and distribution. Incentive stock options during the
lifetime of the optionee may be exercised only by the optionee. A nonstatutory
stock option may be transferred to the extent provided in the option agreement.
CHANGE OF CONTROL PROVISIONS
If there is a change of control of the Company, all stock awards
outstanding under the Amended Stock Plan as of the day before the consummation
of the Change of Control will automatically accelerate so that each stock
option is fully exercisable with respect to the total number of shares subject
to such stock option and the restrictions on each restricted stock award will
lapse and the shares of restricted stock will no longer be subject to
forfeiture.
FEDERAL INCOME TAX INFORMATION
Incentive Stock Options. Incentive stock options under the Amended
Stock Plan are intended to be eligible for the favorable federal income tax
treatment accorded "incentive stock options" under the Code.
There generally are no federal income tax consequences to the optionee
or the Company by reason of the grant or exercise of an incentive stock option.
However, the exercise of an incentive stock option may create or increase the
optionee's alternative minimum tax liability, if any.
If an optionee holds stock acquired through exercise of an incentive
stock option for at least two years from the date on which the option is
granted and at least one year from the date on which the shares are transferred
to the optionee upon exercise of the option, any gain or loss on a disposition
of such stock will be long-term capital gain or loss. Generally, if the
optionee disposes of the stock for a gain before the expiration of either of
these holding periods (a "disqualifying disposition"), at the time of
disposition, the optionee will realize taxable ordinary income equal to the
lesser of (a) the excess of the stock's fair market value on the date of
exercise over the exercise price, or (b) the optionee's actual gain, if any, on
the purchase and sale. The optionee's additional gain, or any loss, upon the
disqualifying disposition will be a capital gain or loss, which will be
long-term or short-term generally depending on whether the stock was held for
more than one year at the time of the disqualifying disposition. Long-term
capital gains currently are generally subject to lower tax rates than ordinary
income. The maximum long-term capital gains rate for federal income tax
purposes is currently 20% while the maximum ordinary income rate is currently
39.6%. Slightly different rules may apply to optionees who acquire stock
subject to certain repurchase options or who are subject to Section 16(b) of
the Securities Exchange Act of 1934, as amended (the "Exchange Act").
To the extent the optionee recognizes ordinary income by reason of a
disqualifying disposition, the Company will generally be entitled (subject to
the requirement of reasonableness, the provisions of Section 162(m) of the Code
and the satisfaction of a tax reporting obligation) to a corresponding business
expense deduction in the tax year in which the disqualifying disposition
occurs.
Nonstatutory Stock Options. Nonstatutory stock options granted under
the Amended Stock Plan generally have the following federal income tax
consequences:
There are no tax consequences to the optionee or the Company by reason
of the grant of a nonstatutory stock option. Upon exercise of a nonstatutory
stock option, the optionee normally will recognize taxable ordinary income
equal to the excess of the stock's fair market value on the date of exercise
over the option exercise price. Generally, with respect to employees, the
Company is required to withhold from regular wages or supplemental wage
payments an amount based on the ordinary income recognized. Subject to the
requirement of reasonableness, the provisions of Section 162(m) of the Code and
the satisfaction of a tax reporting obligation, the Company will generally be
entitled to a business expense deduction equal to the taxable ordinary income
realized by the optionee. Upon disposition of the stock, the optionee will
recognize a capital gain or loss equal to the difference between the selling
price and the sum
10
<PAGE> 13
of the amount paid for such stock plus any amount recognized as ordinary income
upon exercise of the option. Such gain or loss will be long or short-term
depending on whether the stock was held for more than one year at the time of
disposition. Slightly different rules may apply to optionees who acquire stock
subject to certain repurchase options or who are subject to Section 16(b) of
the Exchange Act.
Restricted Stock. In general, a participant will not recognize taxable
income upon the receipt of restricted stock, because such stock will be subject
to restrictions which constitute a "substantial risk of forfeiture" within the
meaning of Section 83 of the Code (including, for this purpose, any restriction
under Section 16(b) of the Exchange Act). Rather, the participant will
recognize ordinary income at such time as the restrictions no longer apply, in
an amount equal to the fair market value of the stock at that time over the
amount, if any, paid for the stock. However, a participant may elect to be
taxed currently upon receipt of the stock (without regard to such restrictions)
by making an election under Section 83(b) of the Code within 30 days of
receipt. In this event, the participant will recognize ordinary income at the
time of the receipt of the stock in an amount equal to the excess, if any, of
the fair market value of the stock at that time over the amount, if any, paid
for the stock. However, if the shares are later forfeited, the participant will
not be entitled to any loss (except for any amount actually paid for the
stock). Any future appreciation in the stock realized upon the sale or exchange
of the stock will be treated as a capital gain, which will be long-term or
short-term generally depending on whether the stock was held for more than one
year at the time of the sale or exchange. The amount of compensation income to
the participant generally is deductible by the Company. Any dividends paid to
the participant on restricted stock before the stock is taken into income are
ordinary compensation income to the participant and generally are deductible by
the Company.
Potential Limitation on Company Deductions. As part of the Omnibus
Budget Reconciliation Act of 1993, the U.S. Congress amended the Code to add
Section 162(m), which denies a deduction to any publicly held corporation for
compensation paid to certain employees in a taxable year to the extent that
compensation exceeds $1,000,000 for a covered employee. It is possible that
compensation attributable to options, when combined with all other types of
compensation received by a covered employee from the Company, may cause this
limitation to be exceeded in any particular year.
Certain kinds of compensation, including qualified "performance-based
compensation," are disregarded for purposes of the deduction limitation. In
accordance with regulations issued under Section 162(m), compensation
attributable to options will qualify as performance-based compensation,
provided that (i) the option is granted by a compensation committee comprised
solely of "outside directors," (ii) the plan contains a per-employee limitation
on the number of shares for which options may be granted during a specified
period, and the amount of compensation the employee could receive is based
solely on an increase in the value of the stock after the date of the grant;
and (iii) under the terms of the plan or the employee's award agreement, the
amount of compensation the employee could receive is based solely on an
increase in the value of the stock after the date of the grant or award.
NEW PLAN BENEFITS
The following table presents certain information with respect to
options that have been granted under the Amended Stock Plan in 1997 through
October 31, 1998, subject to stockholder approval of the Amended Stock Plan, to
certain executive officers listed individually, to all executive officers as a
group, to all directors who are not executive officers, and to all employees
who are not executive officers.
11
<PAGE> 14
NEW PLAN BENEFITS
<TABLE>
<CAPTION>
1998 AMENDED STOCK PLAN
-----------------------
NUMBER OF SHARES SUBJECT
NAME AND POSITION DOLLAR VALUE(1) TO OPTIONS GRANTED
- --------------------------------------------------- ----------------- ------------------
<S> <C> <C>
Philip L. Becker, Chairman, CEO and CTO $ 218,000 218,000
Regis Frank, President and COO 128,000 128,000
Robert C. Hartman, VP of Engineering 40,000 40,000
Jason Rollings, VP of Operations 30,000 30,000
Thomas Tennessen, CFO, Secretary and Treasurer 45,000 45,000
James Love, VP of Sales 560,000 80,000
Rex Bell, VP of Marketing 320,400 60,000
Executive Group ................................... 1,341,400 601,000
Non-Executive Director Group ...................... 61,000 61,000
Non-Executive Officer Employee Group .............. 873,063 256,500
Consultants Group ................................. 75,000 75,000
---------- --------
Total ...................................... $2,350,463 993,500
========== ========
- ------------------
</TABLE>
(1) Dollar value is calculated by using the exercise price of the shares at the
date of grant. The current options grant price range from $1.00 TO $7.15 per
share. All option grants are granted at the closing price on the date of grant.
STOCKHOLDER APPROVAL OF AMENDED STOCK PLAN
The affirmative vote of the holders of a majority of the shares
present in person or represented by proxy at the meeting and entitled to vote
will be required to approve the amendment and restatement of the original Stock
Plan. Broker non-votes and abstentions are counted towards a quorum, but are
not counted for any purpose in determining whether this matter has been
approved. A copy of the Amended Stock Plan is attached hereto as Exhibit C.
APPROVAL OF PRIVATE PLACEMENT
OF SHARES TO PHILIP BECKER
(PROPOSAL NO. 7)
THE BOARD OF DIRECTORS RECOMMEND A VOTE FOR THE APPROVAL
OF THE PRIVATE PLACEMENT OF SHARES TO MR. BECKER
In March 1998 prior to the Canadian Initial Public Offering the
Company privately placed a total of 250,000 shares of the Company's Common
Stock at a purchase price of $1.00 per share. Philip Becker, the Chairman,
Chief Executive Officer and Chief Technical Officer of the Company, subscribed
and paid for 100,000 of these shares. To avoid transfer restrictions on these
shares that would have been required by the Vancouver Stock Exchange, on which
the Company's Common Stock was listed until September 9, 1998, Mr. Becker
subscription was conditional on shareholder approval of such purchase. If
shareholders do not approve Mr. Becker's purchase of these shares, the Company
will refund immediately the $100,000 paid by Mr. Becker.
If Mr. Becker's purchase of these shares is approved by the Company's
shareholders, his beneficial ownership of the Company's Common Stock would
increase from 15.01% to 16.23% of the total number of shares of Common Stock
outstanding as of October 31, 1998.
STOCKHOLDER APPROVAL OF PRIVATE PLACEMENT OF SHARES
The affirmative vote of the holders of a majority of the shares
present in person or represented by proxy at the meeting and entitled to vote
will be required to approve the private placement of shares to Mr. Becker.
Broker non-votes and abstentions are counted towards a quorum, but are not
counted for any purpose in determining whether this matter has been approved.
12
<PAGE> 15
EXECUTIVE COMPENSATION
The following tables contain disclosure regarding compensation awarded
to, earned by, or paid to the named executive officers.
EXECUTIVE COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
-------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------------------- ---------------------- ----------
SECURITIES
YEAR UNDERLYING
ENDED RESTRICTED OPTIONS/
NAME AND DECEMBER OTHER ANNUAL STOCK LTIP ALL OTHER
PRINCIPAL POSITION 31, SALARY($) BONUS(S) COMPENSATION($) AWARD(S)($) SARS(#) PAYMENTS($) COMPENSATION($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PHILIP L. BECKER, 1997 100,000 -- -- -- -- -- --
Chief Executive
Officer 1996 60,000 -- -- -- -- -- --
1995 45,000 -- -- -- -- -- --
J. WAYNE FARLOW(1) 1997 120,000(2) -- -- -- -- -- --
- -----------------------
</TABLE>
(1) Served as Chief Executive Officer from September 2, 1997 to November 7,
1997. Mr. Farlow received a salary of $10,000 per month while serving as
Chief Executive Officer. Pursuant to a Severance Agreement, the Company
paid Mr. Farlow's salary through March 7, 1998.
(2) Reflects Mr. Farlow's salary on an annual basis. As he served as Chief
Executive Officer from September 2, 1997 to November 7, 1997, the Company
actually paid him $40,000 in salary for 1997.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Prior to the adoption of the Stock Plan, no stock options were ever
granted to or exercised by executive officers of the Company. At the Special
Meeting, shareholders will be asked to amend the Stock Plan and adopt the
Amended Stock Plan described in Proposal No. 6 above.
In February 1998, the Board of Directors and shareholders of the
Company approved the Stock 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 Stock Plan. Terms of exercise
and expiration of Options granted under the Stock 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 were
granted as follows:
13
<PAGE> 16
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% OF TOTAL
OPTIONS GRANTED
NUMBER OF
TO EMPLOYEES IN EXERCISE EXPIRATION
SHARES UNDERLYING
NAME OPTIONS GRANTED FISCAL YEAR PRICE DATE
<S> <C> <C> <C> <C>
Philip L. Becker 200,000(1) 36% $1.00/share 9/2/2002
J. Wayne Farlow 60,000(2) 10% $ .50/share 9/2/1998(2)
J. Wayne Farlow 200,000(3) 36% $1.00/share 3/17/2003(3)
J. Wayne Farlow 100,000(3) 18% $2.00/share 3/17/2003(3)
- -------------------------------
</TABLE>
(1) No options were exercised during the fiscal year ended December 31, 1997.
(2) Pursuant to a Severance Agreement, Mr. Farlow exercised this option on
December 19,1997 and purchased the shares on February 20, 1998.
(3) Upon Mr. Farlow's resignation on November 7, 1997 as described below,
these options expired.
AGGREGATED OPTIONS/SAR EXERCISES FY-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
(a) (b) (c) (d) (e)
NUMBER OF SECURITIES VALUE OF UNEXERCISED IN-
SHARES UNDERLYING UNEXERCISED THE MONEY OPTIONS/SARS
ACQUIRED VALUE OPTIONS/SARS AT FY-END(#) AT FY-END(#) EXERCISABLE/
NAME ON EXERCISE REALIZED EXERCISABLE/UNEXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C>
Philip L. Becker - 0 - - 0 - 200,000 (U) $ 0
J. Wayne Farlow 60,000(1) $30,000 - 0 - $ 0
- ------------------------------
</TABLE>
(1) Pursuant to a Severance Agreement, Mr. Farlow exercised this option on
December 19,1997 and purchased the shares on February 20, 1998.
During the fiscal year ended December 31, 1997, the Company did not
make any long-term incentive plan awards not disclosed above.
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. Mr. Becker and Mr. Frank also
receive compensation as officers.
14
<PAGE> 17
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
On the Record Date, the Company had a total of 6,746,002 shares of
Common Stock issued and outstanding. The following table sets forth information
regarding beneficial ownership of Common Stock of the Company and options to
purchase Common Stock that are currently exercisable or exercisable within
sixty days of the date of this Proxy 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.
<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 Chief 1,037,889(1) 15.17%
Executive Officer
5335 Sterling Drive, Suite C
Boulder, CO 80301
Regis A. Frank, President, Chief Operating 73,250(2) 1.08%
Officer and Director
Michael W. Johnson, Director 30,050(3) .44%
Richard B. Rice, Director 27,500 .41%
Daryl Yurek 553,332(4) 7.95%
J. Wayne Farlow, Former Director and Chief 164,000 2.43%
Executive Officer(5)
Directors and Executive Officers as a group 1,295,033(6) 19.20%
- -------------------------------
</TABLE>
(1) Includes 97,889 options exercisable presently or within 60 days.
(2) Includes 48,250 options exercisable presently or within 60 days.
(3) Includes 8,250 options exercisable within 60 days.
(4) Includes 80,000 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. Includes warrants to purchase 215,200 shares of Common
Stock exercisable presently or within 60 days.
(5) Served as CEO from September 2, 1997 to November 7, 1997.
(6) Includes 201,333 options exercisable presently or within 60 days.
OTHER MATTERS
The Company knows of no other matters to be submitted at the Special
Meeting. If any other matters properly come before the Special Meeting, it is
the intention of the persons named in the enclosed form of Proxy to vote the
shares they represent as the Board may recommend.
15
<PAGE> 18
By signing and returning the enclosed Proxy, stockholders will be
assured of representation at the Special Meeting in connection with approval of
the matters discussed herein. Each stockholder should review, complete, execute,
date and return the enclosed Proxy to the Company in the envelope provided as
promptly as possible. The Board of Directors appreciates the cooperation of the
stockholders.
Dated: October 28, 1998
16
<PAGE> 19
EXHIBIT A
PROPOSED AMENDMENTS
TO THE ARTICLES OF INCORPORATION
OF
eSOFT, INC.
ARTICLE 4
Section 4.1 Authorized Shares. The total number of shares that
the Corporation shall have authority to issue is 55,000,000, of which 50,000,000
shall be designated common stock, with a par value of $.01 per share, and
5,000,000 shall be designated preferred stock, with a par value of $.01 per
share.
ARTICLE 6
The board of directors of the Corporation is expressly
authorized to make, alter, or repeal the bylaws of the Corporation.
ARTICLE 11
The bylaws of the Corporation 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 vote of at least two-thirds of the
outstanding shares of the Company, 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, this Certificate of Incorporation and the bylaws of the
Corporation, 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.
<PAGE> 20
EXHIBIT B
PROPOSED AMENDMENTS
TO THE BYLAWS
OF
eSOFT, INC.
ARTICLE II
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.
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 no action shall be taken by the
stockholders by written consent.
ARTICLE III
Section 3. Classes of Directors.
Subject to the rights of the holders of any series of
Preferred Stock to elect additional directors under specified circumstances, the
directors shall be divided into three classes designated as Class I, Class II
and Class III, respectively. Directors shall be assigned to each in accordance
with a resolution or resolutions adopted by the board of directors. At the first
annual meeting of stockholders following the adoption and filing of the bylaws,
the term of office of the Class I directors shall expire and Class I directors
shall be elected for a full term of three years. At the second annual meeting of
stockholders following the adoption and filing of the bylaws, the term of office
of the Class II directors shall expire and Class II directors shall be elected
for a full term of three years. At the third annual meeting of stockholders
following the adoption and filing of this Certificate of Incorporation the term
of office of the Class III directors shall expire and Class III directors shall
be elected for a
<PAGE> 21
full term of three years. At each succeeding annual meeting of stockholders,
directors shall be elected for a full term of three years to succeed the
directors of the class whose terms expire at such annual meeting.
Notwithstanding the foregoing provisions of this Article, each
director shall serve until his successor is duly elected and qualified or until
his death, resignation or removal.
Section 4. Vacancies.
Unless otherwise provided in the Certificate of Incorporation,
any vacancies on the board of directors resulting from death, resignation,
disqualification, removal or other causes any newly created directorships
resulting from any increase in the number of directors, shall unless the board
of directors determines by resolution that any such vacancies or newly created
directorships shall be filled by stockholders, be filled only by the affirmative
vote of a majority of the directors then in office, even though less than a
quorum of the board of directors. Any director elected in accordance with the
preceding sentence shall hold office for a remainder of the full term of the
director for which the vacancy occurred and until such director's successor
shall have been elected and qualified. A vacancy in the board of directors shall
be deemed to exist under this Bylaw in the case of the death, removal or
resignation of any director.
Section 6. Removal.
Subject to the rights of the holders of any series of
Preferred Stock no director shall be removed without cause. Subject to any
limitations imposed by law, the board of directors or any individual director
may be removed from office at any time with cause by the affirmative vote of the
holders of a majority of the voting power of all the then-outstanding shares of
voting stock of the corporation, entitled to vote at an election of directors.
Section 8. 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
2
<PAGE> 22
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 vote of at least two-thirds of the outstanding shares of the Company, 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.
3
<PAGE> 23
EXHIBIT C
eSOFT, INC.
EQUITY COMPENSATION PLAN
(AS AMENDED THROUGH SEPTEMBER 18, 1998)
ARTICLE I
PURPOSE
The purpose of the eSoft, Inc. Equity Compensation Plan (the
"Plan") is to attract and retain directors, officers, other employees and
consultants of eSoft, Inc. and its Subsidiaries and to provide such persons with
incentives to continue in the long-term service of the Company and to create in
such persons a more direct interest in the future success of the operations of
the Company by relating incentive compensation to increases in stockholder
value.
ARTICLE II
STRUCTURE OF THE PLAN
The Plan is divided into three separate programs:
A. The Discretionary Stock Option Grant Program under
which eligible persons may, at the discretion of the Committee or the Board, be
granted Stock Options;
B. The Restricted Stock Program under which eligible
persons may, at the discretion of the Committee or the Board, be granted rights
to receive shares of Common Stock, subject to certain restrictions; and
C. The Supplemental Bonus Program under which eligible
persons may, at the discretion of the Committee or the Board, be granted a right
to receive payment, in cash, shares of Common Stock, or a combination thereof,
of a specified amount.
ARTICLE III
DEFINITIONS
As used in this Plan:
"10% Stockholder" shall mean the owner of stock (as determined
under Section 424(d) of the Code) possessing more than ten percent (10%) of the
total combined voting power of all classes of stock of the Company or any
Subsidiary.
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"Award" shall mean a grant made under this Plan in the form of
Stock Options, Restricted Stock or Supplemental Bonuses.
"Board" shall mean the Company's Board of Directors.
"Change in Control" shall mean a change in ownership or
control of the Company effected through any of the following transactions:
(i) the acquisition, directly or indirectly by any
person or group (within the meaning of Sections 13(d) and
14(d)(2) of the Exchange Act) other than a trustee or other
fiduciary holding securities under an employee benefit plan of
the Company, of beneficial ownership (within the meaning of
Rule 13d-3 of the Exchange Act) of securities possessing more
than thirty percent (30%) of the total combined voting power
of the Company's outstanding securities;
(ii) a change in the composition of the Board over a
period of eighteen (18) consecutive months or less such that
fifty percent (50%) or more of the Board members have neither
(A) been directors continuously since the beginning of such
period nor (B) been unanimously elected or nominated by the
Board for election as directors during such period;
(iii) a stockholder-approved merger or consolidation
to which the Company is a party and in which (A) the Company
is not the surviving entity or (B) securities possessing more
than thirty percent (30%) of the total combined voting power
of the Company's outstanding securities are transferred to a
person or persons different from the persons holding those
securities immediately prior to such transaction; or
(iv) the sale, transfer or other disposition of all
or substantially all of the Company's assets in complete
liquidation or dissolution of the Company.
"Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
"Committee" shall mean the Plan Committee and shall also
include the Employee Committee, if established, when reference is made to
functions that may be performed by the Employee Committee.
"Common Stock" shall mean the Company's common stock, $.01 par
value.
"Company" shall mean eSoft, Inc., a Delaware corporation.
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"Date of Grant" shall mean the date specified by the Committee
on which a grant of an Award shall become effective, which shall not be earlier
than the date on which the Committee takes action with respect thereto.
"Employee" shall mean an individual who is in the employ of
the Company or any Subsidiary.
"Employee Committee" shall mean a committee composed of at
least one member of the Board of Directors who may, but need not, be a
Non-Employee Director, which, if established, shall be empowered hereunder to
grant Awards to Eligible Employees who are not directors or "officers" of the
Company as that term is defined in Rule 16a-1(f) of the Exchange Act nor
"covered employees" under Section 162(m) of the Code, and to establish the terms
of such Awards at the time of grant, but shall have no other authority with
respect to the Plan or outstanding Awards except as expressly granted by the
Plan.
"Exchange Act" shall mean the Securities Exchange Act of 1934,
as amended.
"Fair Market Value" of a share of Common Stock on any relevant
date shall be determined in accordance with the following provisions:
(i) If the Common Stock is at the time listed on any
stock exchange or traded on the Nasdaq National Market, the
Nasdaq Small Cap Market, or any other securities trading
market that reports daily the closing selling price per share
of Common Stock, the Fair Market Value shall be deemed equal
to the closing selling price per share of Common Stock on the
date in question on the stock exchange or other securities
trading market determined by the Committee to be the primary
market for the Common Stock, as such price is officially
quoted on such exchange or trading market.
(ii) If there is no closing selling price for the
Common Stock on the date in question, or if the Common Stock
is neither listed on a stock exchange or traded on a
securities trading market that reports daily the closing
selling price per share of the Common Stock, then the Fair
Market Value shall be deemed to be the average of the
representative closing bid and asked prices on the date in
question as reported by the Nasdaq Stock Market or other
reporting entity selected by the Committee.
(iii) In the event the Common Stock is not traded
publicly, the Fair Market Value of a share of Common Stock
shall be determined, in good faith, by the Committee after
such consultation with outside legal, accounting and other
experts as the Committee may deem advisable, and the Committee
shall maintain a written record of its method of determining
such value.
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"Non-Employee Director" shall mean a director of the Company
who meets the definition of (i) a "non-employee director" set forth in Rule
16b-3 under the Exchange Act, as amended, or any successor rule and (ii) an
"outside director" set forth in Treasury Regulation 1.162-27, as amended, or any
successor rule.
"Non-Statutory Option" shall mean a Stock Option that (i) does
not qualify as an "incentive stock option" under Section 422 of the Code or any
successor provision or (ii) is not intended to be an incentive stock option.
"Optionee" shall mean the person so designated in an agreement
evidencing an outstanding Stock Option.
"Option Price" shall mean the purchase price payable by a
Participant upon the exercise of a Stock Option.
"Participant" shall mean a person who is selected by the
Committee to receive benefits under this Plan and (i) is at that time a
director, officer or other Employee of the Company or any Subsidiary, (ii) is at
that time a consultant or other independent advisor who provides services to the
Company or a Subsidiary, or (iii) has agreed to commence serving in any capacity
set forth in (i) or (ii) of this definition.
"Plan" shall mean the Company's Equity Incentive Plan as set
forth herein.
"Plan Committee" shall mean a committee consisting entirely of
two or more Non-Employee Directors, who are empowered hereunder to take all
action required in the administration of the Plan and the grant and
administration of Awards hereunder.
"Plan Effective Date" shall mean August 27, 1997, the date on
which this Plan was approved by the Company's Board of Directors.
"Redemption Value" shall mean the amount, if any, by which the
Fair Market Value of one share of Common Stock on the date on which the Stock
Option is exercised exceeds the Option Price for such share.
"Restricted Stock" shall mean shares of Common Stock granted
under Article VII that are subject to restrictions imposed pursuant to said
Article.
"SEC" shall mean the U.S. Securities and Exchange Commission
and any successor thereto.
"Statutory Stock Option" shall mean a Stock Option that (i)
qualifies as an "incentive stock option" under Section 422 of the Code or any
successor provision and (ii) is
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intended to be treated for purposes of federal income tax treatment as an option
that is so qualified.
"Stock Option" shall mean a right granted under the Plan to a
Participant to purchase Common Stock at a stated price for a specified period of
time.
"Subsidiary" shall mean a corporation, partnership, joint
venture, unincorporated association or other entity in which the Company has a
direct or indirect ownership or other equity interest; provided, however, for
purposes of determining whether any person may be a Participant for purposes of
any grant of Statutory Stock Options, "Subsidiary" means any subsidiary
corporation of the Company as defined in Section 424(f) of the Code.
"Supplemental Bonus" shall mean the right to receive payment
in cash of an amount determined pursuant to Article IX of this Plan.
"Term" shall mean the length of time during which a Stock
Option may be exercised.
ARTICLE IV
ADMINISTRATION OF THE PLAN
A. Delegation to the Committee. This Plan shall be
administered by the Plan Committee. Members of the Plan Committee and the
Employee Committee shall serve for such period of time as the Board may
determine and may be removed by the Board at any time. The action of a majority
of the members of the Plan Committee and the Employee Committee present at any
meeting, or acts unanimously approved in writing, shall be the acts of the Plan
Committee and the Employee Committee, respectively.
B. Powers of the Committee. The Plan Committee shall
have full power and authority, subject to the provisions of this Plan, to
establish such rules and regulations as it may deem appropriate for proper
administration of this Plan and to make such determinations under, and issue
interpretations of, the provisions of this Plan and any outstanding Awards as it
may deem necessary or advisable. In addition, the Plan Committee shall have full
power and authority to administer and interpret the Plan and make modifications
as it may deem appropriate to conform the Plan and all actions pursuant to the
Plan to any regulation or to any change in any law or regulation applicable to
this Plan.
C. Actions of the Committee. All actions taken and all
interpretations and determinations made by the Committee in good faith
(including determinations of Fair Market Value) shall be final and binding upon
all Participants, the Company and all other interested persons. No director or
member of the Committee shall be personally liable for any action,
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determination or interpretation made in good faith with respect to the Plan, and
all directors and members of the Committee shall, in addition to their rights as
directors, be fully protected by the Company with respect to any such action,
determination or interpretation.
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D. Awards to Officers and Directors.
1. Awards to officers shall be granted by the
Plan Committee. If the Plan Committee is not composed as prescribed in the
definition of Plan Committee in Article III, the Board may take such action with
respect to any Award to an officer as it deems necessary or advisable to comply
with Rule 16b-3 of the Exchange Act and any related rules, including but not
limited to seeking stockholder ratification of such Award or restricting the
sale of any shares of Common Stock underlying the Award for a period of six
months.
2. Discretionary Awards to Non-Employee
Directors, if any, shall be granted by the Board.
ARTICLE V
ELIGIBILITY AND SELECTION
A. Eligibility. The persons eligible to participate in
the Discretionary Stock Option Grant Program, the Restricted Stock Program and
the Supplemental Bonus Program are as follows:
1. Employees of the Company or a Subsidiary;
2. Members of the Board; and
3. Consultants and other independent advisors who
provide services to the Company or a Subsidiary.
C. Selection of Participants. The Committee shall from
time to time determine the Participants to whom Awards shall be granted pursuant
to the Discretionary Stock Option Grant Program, the Restricted Stock Program
and the Supplemental Bonus Program.
ARTICLE VI
SHARES AVAILABLE UNDER THE PLAN
A. Maximum Number. The number of shares of Common Stock
issued or transferred and covered by outstanding awards granted under this Plan
shall not in the aggregate exceed 1,700,000 shares of Common Stock, which may be
Common Stock of original issuance or Common Stock held in treasury, or a
combination thereof Shares of Common Stock that may be issued upon the exercise
of Stock Options shall be applied to reduce the maximum number of shares
remaining available for use under the Plan. The Company shall at all times
during the term of the Plan and while any Stock Options are
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outstanding retain as authorized and unissued Common Stock, or as treasury
Common Stock, at least the number of shares of Common Stock required under the
provisions of this Plan, or otherwise assure itself of its ability to perform
its obligations hereunder.
B. Unused and Forfeited Stock. The following shares of
Common Stock shall automatically become available for use under the Plan: (i)
any shares of Common Stock that are subject to an Award under this Plan that are
not used because the terms and conditions of the Award are not met, including
any shares of Common Stock that are subject to a Stock Option that expires or is
terminated for any reason, (ii) any shares of Common Stock with respect to which
a Non-Statutory Option is exercised that are used for full or partial payment of
the Option Price, and (iii) any shares of Common Stock withheld by the Company
in satisfaction of the withholding taxes incurred in connection with the
exercise of a Non-Statutory Option.
C. Capital Changes. If any change is made to the Common
Stock by reason of any stock split, stock dividend, recapitalization,
combination of shares, exchange of shares or other change affecting the
outstanding Common Stock as a class without the Company's receipt of
consideration, appropriate adjustments shall be made to (i) the maximum number
and/or class of securities issuable under the Plan, (ii) the number and/or class
of securities for which any one person may be granted Awards under this Plan per
calendar year, (iii) the number and/or class of securities for which grants are
subsequently to be made pursuant to Article VI of this Plan, and (iv) the number
and/or class of securities and the Option Price per share in effect under each
outstanding option under this Plan. Such adjustments to the outstanding options
are to be effected in a manner that shall preclude the enlargement or dilution
of rights and benefits under such options. The adjustments determined by the
Committee shall be final, binding and conclusive.
ARTICLE VII
DISCRETIONARY STOCK OPTION GRANT PROGRAM
A. Discretionary Grant of Stock Options to Participants.
The Committee may from time to time authorize grants to Participants of options
to purchase shares of Common Stock upon such terms and conditions as the
Committee may determine in accordance with the following provisions (in
connection with any grants under this paragraph II.A to Non-Employee Directors,
"Committee" shall mean the entire Board of Directors):
1. Each grant shall specify the number of shares of
Common Stock to which it pertains;
2. Each grant shall specify the Option Price per share;
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3. Each grant shall specify the form of consideration to
be paid in satisfaction of the Option Price and the
manner of payment of such consideration, which may
include (i) cash in the form of currency or check or
other cash equivalent acceptable to the Company, (ii)
shares of Common Stock that are already owned by the
Optionee and have a Fair Market Value at the time of
exercise that is equal to the Option Price, (iii)
shares of Common Stock with respect to which a Stock
Option is exercised, (iv) a recourse promissory note
in favor of the Company, (v) any other legal
consideration that the Committee may deem appropriate
and (vi) any combination of the foregoing;
4. Any grant may provide for deferred payment of the
Option Price from the proceeds of sale through a
broker of some or all of the shares of Common Stock
to which the exercise relates;
5. Any grant may provide that shares of Common Stock
issuable upon the exercise of a Stock Option shall be
subject to restrictions whereby the Company has the
right or obligation to repurchase all or a portion of
such shares if the Participant's service to the
Company is terminated before a specified time, or if
certain other events occur or conditions are not met;
6. Successive grants may be made to the same Participant
regardless of whether any Stock Options previously
granted to the Participant remain unexercised;
7. Each grant shall specify the period or periods of
continuous service by the Optionee to the Company or
any Subsidiary that are necessary before the Stock
Option or installments thereof shall become
exercisable;
8. All Stock Options that meet the requirements of the
Code for "incentive stock options" shall be Statutory
Stock Options unless (i) the option agreement clearly
designates the Stock Options granted thereunder, or a
specified portion thereof, as a Non-Statutory Option,
or (ii) a grant of Statutory Stock Options to the
Participant would be prohibited under the Code or
other applicable law;
9. Each grant shall specify the Term of the Stock
Option, which Term shall not be greater than 5 years
from the Date of Grant; and
10. Each grant shall be evidenced by an agreement, which
shall be executed on behalf of the Company by any
officer thereof and delivered to and
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accepted by the Optionee and shall contain such terms
and provisions as the Committee may determine
consistent with this Plan.
B. Special Terms Applicable to Statutory Stock Options.
The following additional terms shall be applicable to all Statutory Stock
Options granted pursuant to this Plan. Stock Options that are specifically
designated as Non-Statutory Options shall not be subject to the terms of this
paragraph VII.B.
1. Statutory Stock Options shall be granted only to
Employees of the Company or a Subsidiary;
2. The Option Price per share shall not be less than the
Fair Market Value per share of Common Stock on the
Date of Grant;
3. The aggregate Fair Market Value of the shares of
Common Stock (determined as of the respective Date(s)
of Grant) with respect to which Statutory Stock
Options granted to any Employee under the Plan (or
any other plan of the Company or a Subsidiary) are
exercisable for the first time during any one
calendar year shall not exceed the sum of One Hundred
Thousand Dollars ($100,000). To the extent the
Employee holds two (2) or more such Stock Options
that become exercisable for the first time in the
same calendar year, the foregoing limitation on the
treatment of such Stock Options as Statutory Stock
Options shall be applied on the basis of the order in
which such Stock Options are granted; and
4. If any Employee to whom a Statutory Stock Option is
granted is a 10% Stockholder, then the Option Price
per share shall not be less than one hundred ten
percent (110%) of the Fair Market Value per share of
Common Stock on the Date of Grant, and the option
Term shall not exceed five (5) years measured from
the Date of Grant.
ARTICLE VIII
RESTRICTED STOCK PROGRAM
A. Awards Granted. Coincident with or following
designation for participation in the Plan, a Participant may be granted one or
more Restricted Stock Awards consisting of shares of Common Stock. The number of
shares granted as a Restricted Stock Award shall be determined by the Committee.
B. Restrictions. A Participant's right to retain a
Restricted Stock Award granted to such Participant under Article VII.A shall be
subject to such restrictions, including
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but not limited to his or her continuous employment by the Company for a
restriction period specified by the Committee or the attainment of specified
performance goals and objectives, as may be established by the Committee with
respect to such award. The Committee may in its sole discretion require
different periods of employment or different performance goals and objectives
with respect to different Participants, to different Restricted Stock Awards or
to separate, designated portions of the shares constituting a Restricted Stock
Award.
C. Privileges of a Stockholder, Transferability. A
Participant shall have all voting, dividend, liquidation and other rights with
respect to shares of Common Stock in accordance with its terms received by him
or her as a Restricted Stock Award under this Article VIII upon his or her
becoming the holder of record of such shares; provided, however, that the
Participant's right to sell, encumber or otherwise transfer such shares shall be
subject to the limitations of Article XI hereof.
D. Enforcement of Restrictions. The Committee may in its
sole discretion require of the placing a legend on the stock certificates
referring to the restrictions to enforce the restrictions referred to in
paragraphs VIII.A and VIII.B.
ARTICLE IX
SUPPLEMENTAL BONUS PROGRAM
A. Non-Statutory Stock Options. The Committee, at the
time of grant or at any time prior to exercise of any Non-Statutory Option, may
provide for a Supplemental Bonus from the Company or a Subsidiary in connection
with a specified number of shares of Common Stock then purchasable, or which may
become purchasable, under such Non-Statutory Option. Such Supplemental Bonus
shall be payable in cash upon the exercise of the Non-Statutory Option with
regard to which such Supplemental Bonus was granted. A Supplemental Bonus shall
not exceed the amount necessary to reimburse the Participant for the income tax
liability incurred by him or her upon the exercise of the Non-Statutory Option,
calculated using the maximum combined federal and applicable state income tax
rates then in effect and taking into account the tax liability arising from the
Participant's receipt of the Supplemental Bonus.
B. Restricted Stock Awards. The Committee, either at
such time as the restrictions with respect to a Restricted Stock Award lapse or
a Section 83(b) election is made under the Code by the Participant with respect
to shares issued in connection with a Restricted Stock Award, may provide for a
Supplemental Bonus from the Company or a Subsidiary. Such Supplemental Bonus
shall be payable in cash and shall not exceed the amount necessary to reimburse
the Participant for the income tax liability incurred by him or her with respect
to shares issued in connection with a Restricted Stock Award, calculated using
the maximum combined federal and applicable state income tax rates then in
effect and taking into account the tax liability arising from the Participant's
receipt of the Supplemental Bonus.
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ARTICLE X
TERMINATION OF SERVICE
A. Statutory Stock Options. The following provisions
shall govern the exercise of any Statutory Stock Options held by any Employee
whose employment is terminated:
1. If the Optionee's employment with the Company is
terminated for any reason other than such Optionee's
death or disability, all Statutory Stock Options held
by the Optionee shall be exercisable, to the extent
that such Stock Options were exercisable on the date
the Optionee's employment terminated, for a period of
one (1) months following such termination of
employment.
2. If the Optionee's employment with the Company is
terminated because of such Optionee's death or
disability within the meaning of Section 22(e)(3) of
the Code, all Statutory Stock Options held by the
Optionee shall become immediately exercisable and
shall be exercisable for a period of twelve (12)
months following such termination of employment.
3. In no event may any Statutory Stock Option remain
exercisable after the expiration of the Term of the
Stock Option. Upon the expiration of any one (1) or
twelve (12) month exercise period, as applicable, or,
if earlier, upon the expiration of the Term of the
Stock Option, the Stock Option shall terminate and
shall cease to be outstanding for any shares for
which the Stock Option has not been exercised.
B. Non-Statutory Options. The following provisions shall
govern the exercise of any Non-Statutory Options:
1. If the Optionee's employment, service on the Board or
consultancy is terminated for any reason other than
such Optionee's death or disability, all
Non-Statutory Options held by the Optionee shall be
exercisable, to the extent such Stock Options were
exercisable on the date of such termination, for a
period of one (1) months following such termination.
2. If the Optionee's employment, service on the Board or
consultancy is terminated because of such Optionee's
death or disability, all Non-Statutory Options held
by the Optionee shall become immediately exercisable
and shall be exercisable for a period of twelve (12)
months following such termination.
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3. In no event may any Non-Statutory Option remain
exercisable after the expiration of the Term of the
Stock Option. Upon the expiration of any one (1) or
twelve (12) month exercise period, as applicable, or,
if earlier, upon the expiration of the Term of the
Stock Option, the Stock Option shall terminate and
shall cease to be outstanding for any shares for
which the Stock Option has not been exercised.
C. Restricted Stock Awards. In the event of the death or
disability (within the meaning of Section 22(e) of the Internal Revenue Code) or
retirement of a Participant, all employment period and other restrictions
applicable to Restricted Stock Awards then held by him or her shall lapse, and
such awards shall become fully nonforfeitable. Subject to Articles X and XIV, in
the event of a Participant's termination of employment for any other reason, any
Restricted Stock Awards as to which the employment period or other restrictions
have not been satisfied shall be forfeited.
ARTICLE XI
TRANSFERABILITY OF STOCK OPTIONS
During the lifetime of the Optionee, Statutory Stock Options
shall be exercisable only by the Optionee and shall not be assignable or
transferable. In the event of the Optionee's death prior to the end of the Term,
any Stock Option may be exercised by the personal representative of the
Optionee's estate, or by the person(s) to whom the option is transferred
pursuant to the Optionee's will or in accordance with the laws of descent and
distribution. Upon the prior written consent of the Board and subject to any
conditions associated with such consent, a Non-Statutory Option may be assigned
in whole or in part during the Optionee's lifetime to one or more members of the
Optionee's immediate family (as that term is defined in Rule 16a-1(e) of the
Exchange Act) or to a trust established exclusively for one or more such family
members. In addition, the Board, in its sole discretion, may allow a
Non-Statutory Option to be assigned in other circumstances deemed appropriate.
The terms applicable to the assigned portion shall be the same as those in
effect for the Stock Option immediately prior to such assignment and shall be
set forth in such documents issued to the assignee as the Committee may deem
appropriate. Notwithstanding any assignment or transfer of a Stock Option, in no
event may any Stock Option remain exercisable after the expiration of the Term
of the Stock Option.
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ARTICLE XII
STOCKHOLDER RIGHTS
The holder of a Stock Option shall have no stockholder rights
with respect to the shares subject to the Stock Option until such person shall
have exercised the Stock Option, paid the Option Price and become a holder of
record of the purchased shares of Common Stock.
ARTICLE XIII
ACCELERATION OF VESTING
The Committee may, at any time in its sole discretion,
accelerate the vesting of any Award made pursuant to this Plan by giving written
notice to the Participant. Upon receipt of such notice, the Participant and the
Company shall amend the agreement relating to the Award to reflect the new
vesting schedule. The acceleration of the exercise period of an Award shall not
affect the expiration date of such Award.
ARTICLE XIV
CHANGE IN CONTROL
In the event of a Change in Control of the Company, all Awards
outstanding under the Plan as of the day before the consummation of such Change
in Control shall automatically accelerate for all purposes under this Plan so
that each Stock Option shall become fully exercisable with respect to the total
number of shares subject to such Stock Option and may be exercised for any or
all of those shares as fully-vested shares of Common Stock as of such date,
without regard to the conditions expressed in the agreements relating to such
Stock Option, and the restrictions on each Restricted Stock Award shall lapse
and such shares of Restricted Stock shall no longer be subject to forfeiture.
ARTICLE XV
CANCELLATION AND REGRANT OF OPTIONS
The Committee shall have the authority, at any and from time
to time, with the consent of the affected Optionees, to effect the cancellation
of any or all outstanding Stock Options and/or any Restricted Stock Awards and
grant in substitution new Stock Options and/or Restricted Stock Awards covering
the same or different number of shares of Common Stock. In the case of such a
regrant, the Option Price shall be set, in accordance with Article VII, on the
new Date of Grant.
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ARTICLE XVI
FINANCING
The Committee may, in its sole discretion, authorize the
Company to make a loan to a Participant in connection with the exercise of a
Stock Option, and may authorize the Company to arrange or guaranty loans to a
Participant by a third party in connection with the exercise of a Stock Option.
ARTICLE XVII
TAX WITHHOLDING
A. Tax Withholding. The Company's obligation to deliver
shares of Common Stock upon the exercise of Stock Options under the Plan shall
be subject to the satisfaction of all applicable federal, state and local income
and employment tax withholding requirements.
B. Surrender of Shares. The Committee may, in its
discretion, provide any or all holders of Non-Statutory Options under the
Discretionary Stock Option Grant Program with the right to use shares of Common
Stock in satisfaction of all or part of the taxes incurred by such holders in
connection with the exercise of such Stock Options. Such right may be provided
to any such holder in either or both of the following formats:
1. The election to have the Company withhold, from the
shares of Common Stock otherwise issuable upon the
exercise of such Non-Statutory Option, a portion of
those shares with an aggregate Fair Market Value less
than or equal to the amount of taxes due as
designated by such holder; or
2. The election to deliver to the Company, at the time
the Non-Statutory Option is exercised, one or more
shares of Common Stock previously acquired by such
holder with an aggregate Fair Market Value less than
or equal to the amount of taxes due as designated by
such holder.
ARTICLE XVIII
EFFECTIVE DATE AND TERM OF THE PLAN
A predecessor to this Plan was adopted by the Board and the
Company's stockholders and became effective on the Plan Effective Date. On
December 4, 1998, the Company's stockholders approved an amendment to the Plan
expanding the types of awards available under the plan and increasing the
maximum aggregate number of shares of Common Stock that may be made subject to
Stock Options from 900,000 shares to 1,700,000 shares.
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This Plan shall terminate upon the earliest of (i) ten (10) years after the Plan
Effective Date or (ii) the termination of all outstanding Awards in connection
with a Change in Control. Upon such plan termination, all outstanding Awards
shall thereafter continue to have force and effect in accordance with the
provisions of the documents evidencing such Awards.
ARTICLE XIX
AMENDMENT OF THE PLAN
A. The Plan Committee shall have complete and exclusive
power and authority to amend or modify the Plan in any or all respects, unless
stockholder approval of such amendments or modifications is required under
applicable law. No such amendment or modification shall adversely affect the
rights and obligations with respect to Awards outstanding under the Plan at the
time of such amendment or modification, unless the Participant consents to such
amendment or modification.
B. Stock Options in excess of the number of shares of
Common Stock then available for issuance may be granted under this Plan,
provided any excess shares actually issued under this Plan shall be held in
escrow until such further action, necessary to approve a sufficient increase in
the number of shares available for issuance under the Plan, is taken. If such
further action is not obtained within 12 months after the date the first such
excess issuances are made, then (i) any unexercised options granted on the basis
of such excess shares shall terminate and cease to be outstanding, and (ii) the
Company shall promptly refund to the Optionees the exercise price paid for any
excess shares issued under the Plan and held in escrow, together with interest
for the period the shares were held in escrow, and such shares shall thereupon
be automatically cancelled and cease to be outstanding. If stockholder approval
of a sufficient increase in the number of shares subject to the Plan does not
occur within 12 months of the grant of any Stock Option intended to be an
Statutory Stock Option which is granted pursuant to this Article XIX.B, such
Stock Option shall be deemed to be a Non-Statutory Option.
ARTICLE XX
REGULATORY APPROVALS
The implementation of the Plan, the granting of any Award
under the Plan and the issuance of any shares of Common Stock under any Award
shall be subject to the Company's procurement of all approvals and permits
required by regulatory authorities having jurisdiction over the Plan, the Awards
granted pursuant to the Plan and the shares of Common Stock issued pursuant to
any Award under the Plan. No Stock Option shall be exercisable, no shares of
Common Stock or other assets shall be issued or delivered under the Plan, and no
transfer of any Non-Statutory Option shall be approved by the Committee, unless
and until there shall have been compliance with (i) all applicable requirements
of Federal and state securities laws, including the filing and effectiveness of
a registration statement on Form S-8
-16-
<PAGE> 39
under the Securities Act of 1933, as amended, covering the shares of Common
Stock issuable under the Plan, and (ii) all applicable listing requirements of
the Nasdaq SmallCap Market or the Nasdaq National Market, as applicable.
ARTICLE XXI
NO EMPLOYMENT/SERVICE RIGHTS
Nothing in this Plan shall confer upon any Participant any
right to continue in service for any period or specific duration or interfere
with or otherwise restrict in any way the rights of the Company (or any
Subsidiary employing or retaining such person) or of the Participant, which
rights are hereby expressly reserved by each, to terminate such person's service
at any time for any reason, with or without Cause.
-17-
<PAGE> 40
PROXY PROXY
eSOFT, INC.
Special Meeting of Stockholders
December 4, 1998
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF eSOFT,
INC. ("eSOFT").
The undersigned hereby appoints Philip Becker and Thomas Tennessen, or
either of them, as Proxies and authorizes them to represent and vote, as
designated below, all the shares of Common Stock, par value $0.01 per share
("Common Stock"), of eSoft, Inc., which the undersigned is entitled to vote at
the Special Meeting of Stockholders and at any postponements or adjournments
thereof, with respect to the matters set forth below and described in the Proxy
Statement, dated October 28, 1998. If no indication is made, this Proxy will be
voted in favor of each of the proposals set forth in the Proxy Statement.
1. A proposal to adopt an amendment to Article 4 of the Company's
Certificate of Incorporation to authorize 5,000,000 shares of preferred stock,
with certain terms and conditions of such preferred stock to be determined in
the future by the board of directors.
FOR AGAINST ABSTAIN
---------------- ------------------- ----------------
2. A proposal to adopt an amendment to Article 7 of the Company's
Certificate of Incorporation and Article II of the Company's Bylaws to prevent
stockholders from taking action by written consent in lieu of a vote at a
stockholders' meeting.
FOR AGAINST ABSTAIN
---------------- ------------------- ----------------
3. A proposal to adopt an amendment to Article 11 of the Company's
Certificate of Incorporation and Article X of the Company's Bylaws to provide
that the Bylaws may only be amended by the stockholders upon the vote of at
least two-thirds of the Company's outstanding voting stock.
FOR AGAINST ABSTAIN
---------------- ------------------- ----------------
4. A proposal to adopt an amendment to Article II of the Company's
Bylaws to eliminate the right of stockholders to call a special meeting of
stockholders.
FOR AGAINST ABSTAIN
---------------- ------------------- ----------------
5. A proposal to adopt an amendment to Article III of the Company's
Bylaws to institute a classified board of directors with staggered terms.
FOR AGAINST ABSTAIN
---------------- ------------------- ----------------
6. A proposal to approve certain amendments to the Company's 1998 Stock
Option Plan.
FOR AGAINST ABSTAIN
---------------- ------------------- ----------------
<PAGE> 41
7. A proposal to approve the private placement and issuance of the
shares subscribed by Philip Becker dated March 14, 1998 as required by the
Vancouver Stock Exchange.
FOR AGAINST ABSTAIN
---------------- ------------------- ----------------
8. To approve such other matters as may properly be presented at the
Special Meeting or any postponement or adjournment thereof.
FOR AGAINST ABSTAIN
---------------- ------------------- ----------------
This Proxy, when properly executed, will be voted in the manner
directed herein by the undersigned shareholder. If no indication is made, this
Proxy will be voted FOR the each of the proposals.
Date: _______________ , 1998
-------------------------------------------
Signature
-------------------------------------------
Signature if held jointly
Please sign exactly as name appears hereon.
When shares are held by joint tenants, both
should sign. When signing as attorney,
executor, administrator, trustee or
guardian, please give full title as such.
If a corporation, please sign in full
corporate name by president or other
authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY
USING THE ENCLOSED POSTAGE PRE-PAID ENVELOPE.
PROXY PROXY
