AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 24, 1998
REGISTRATION NO. 333-43307
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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 1 TO
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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ESOFT, INC.
(Exact name of small business issuer as specified in its charter)
[DELAWARE] 7372 84-0938960
(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization Classification Code Number) Identification Number)
5335 STERLING DRIVE, SUITE C PHILIP L. BECKER
BOULDER, CO 80301 CHIEF EXECUTIVE OFFICER
(303) 444-1600 5335 STERLING DRIVE, SUITE C
(Address and telephone number of BOULDER, CO 80301
principal executive offices) (303) 444-1600
(Name, address and telephone
number of agent for service)
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Copies to:
LESTER R. WOODWARD, ESQ.
DAVIS, GRAHAM & STUBBS LLP
370 SEVENTEENTH STREET, SUITE 4700
DENVER, COLORADO 80202
(303) 892-9400
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APPROXIMATE DATE OF PROPOSED SALE TO PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
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If any of the securities being registered on this Form are to be offered
on a delayed or continuous basis pursuant to Rule 415 under the Securities Act
of 1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
check the following box. |_|
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CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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PROPOSED
PROPOSED MAXIMUM MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) REGISTRATION FEE
<S> <C> <C> <C> <C>
Common Stock, par value $.01 per share....... 3,351,161 shares $1.00 $3,351,161 $988.60
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(1)Estimated solely for the purpose of calculating the registration fee, based
upon the expected price at which the registered securities are to be offered
to the public in a public offering in British Columbia, Canada, which
offering is expected to be completed prior to the effective date of this
registration statement.
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THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
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PROSPECTUS
2,481,161 Shares
[LOGO]
ESOFT, INC.
Common Stock
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The 2,481,161 shares of Common Stock, $.01 par value (the "Common Stock"),
offered hereby (the "Shares") are being offered by stockholders (the "Selling
Stockholders"). See "Selling Stockholders."
Prior to this Offering (the "Offering"), there has been no public market
for the Common Stock in the United States and there can be no assurance that
such a market will develop after the completion of this Offering, or that if
developed, it will be sustained. The Common Stock is presently traded only on
the Vancouver Stock Exchange which is expected to continue to be the primary
market for these stocks. The offering price of the Common Stock to be offered by
this Prospectus will be determined by the market price in effect from time to
time. See "Summary - Initial Public Offering in Canada" and "Market for Common
Equity and Related Stockholder Matters."
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THE SHARES OF COMMON STOCK OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS," LOCATED AT PAGES 4 THROUGH 8.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS
PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
The date of this Prospectus is _______________, 1998.
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SUMMARY
The following summary is qualified in its entirety by and should be read
in conjunction with the more detailed information appearing elsewhere in this
Prospectus, including the information set forth under "Risk Factors,"
"Management's Discussion and Analysis of Results and Operations" and the
financial statements (including the notes thereto).
THE COMPANY
eSoft, Inc. was incorporated under the laws of the State of Colorado on
March 3, 1984. On February 17, 1998, pursuant to approval by the Board of
Directors and shareholders of the Company, the Company merged into a newly
incorporated Delaware corporation, and has thus become reincorporated in the
State of Delaware.
In its early years, the focus of the Company was oriented towards the
development and sale of a computer bulletin board software product known as
TBBS. TBBS Software creates a multi-user host for direct dial-in access for
multiple users for on-going messaging, file transfer and data access. Concurrent
with the rapid rise of Internet related communications media, the demand for
TBBS software declined. In response, the Company designed a new product line of
Internet protocol adapters which are now being marketed under the acronym IPAD
(Internet Protocol Adapter Device). The Company launched its first IPAD product
in 1996.
THE INTERNET PROTOCOL ADAPTOR DEVICE
The IPAD is designed to be a total Internet/Intranet connectivity solution
without the complexity and high cost of traditional solutions. It affords to
small businesses, institutions, and educational sites a full connectivity
solution that is economical, easily installed and managed by existing
information systems personnel. To complete the package for the customer, the
Company can provide leased line connectivity options through major national
access providers. The IPAD product line includes all other accessories needed to
complete the connection, such as turnkey web servers, line interface devices,
modems and rack equipment.
There are currently three IPAD models offered by the Company. The IPAD
5000, the most sophisticated of the three models, integrates Internet hardware
and communications software into a user friendly turnkey system, which does not
require extensive technical knowledge to support. Utilizing an Intel Pentium
CPU, the IPAD 5000 is typically configured with 8MB of RAM, a 1.2GB hard drive
and 1.44 MB floppy drive. The hardware also includes five open slots to allow
for greater customized interface configuration. The IPAD 2500, the mid-range
model, is a desktop unit that contains a router with firewall capabilities, a
terminal server offering up to eight serial ports and the same basic Internet
connectivity provided by all of the Company's IPAD units. The IPAD 1200 is also
a desktop unit primarily designed for mass production without significant
customization for specific client needs. The IPAD 1200 utilizes the same
hardware configuration as the IPAD 5000, has two serial ports and a 10 MB
Ethernet card and can connect a business LAN of up to 150 users to the Internet
using a single address.
SEMINARS AND OTHER SERVICES
The Company also offers comprehensive, two day Internet training seminars.
Attendance fees from these seminars supplement revenues from IPAD product sales.
Customers also can purchase a contract through which the Company offers
technical support services to address customers' specific application needs.
More focused than the general seminars, such technical support services are
designed to address concerns of individual clients for applications ranging from
the launching of their web presence, to the reconfiguration of their LAN to
optimize both efficiency and connectivity.
INITIAL PUBLIC OFFERING IN CANADA
On March 9, 1998, the Company made an initial public offering of 1,550,000
shares of its Common Stock at a price of $1.00 per share in British Columbia,
Canada (the "Canadian Offering"). The offering was made by C.M.
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Oliver Company Limited (the "Agent") pursuant to an Agency Agreement under which
the Agent guaranteed the sale of all of the shares. The shares sold in such
offering will not be registered under the Securities Act of 1933 (the "1933
Act") and will be offered pursuant to an exemption from the registration
requirements of the 1933 Act provided by Regulation S under the 1993 Act. The
Shares in the Canadian Offering will not be offered or sold to U.S. persons. The
Agent received a commission of $.075 per share sold in the Canadian Offering and
also received 110,000 shares of Common Stock as a corporate finance fee and a
warrant to purchase up to 250,000 shares of Common Stock for up to two years at
a price of $1.00 per share for the first year after the offering and for $1.15
per share during the second year after the offering. Pursuant to a Sponsorship
Agreement between the Company and the Agent, dated November 26, 1997, the
Company also paid to the Agent a sponsorship fee of $15,000.
The net proceeds to the Company from the Canadian Offering were
approximately $1,158,250 after payment of $116,750 commissions to the Agent
(7.5% of the offering price) and the payment of other expenses of the offering,
estimated at $350,000, of which $75,000 was evidenced by a promissory note that
was paid, pursuant to the Company's option, by the issuance of shares of common
stock valued at $1.00 per share. The net cash proceeds of the Canadian Offering
are proposed to be used as follows:
Capital Equipment Purchases $ 196,000
Research and Development 214,000
Sales and Distribution Channel Development 340,000
Working Capital(1) $ 408,250
Total $1,158,250
(1)Salaries for planned additional sales and marketing and administrative
personnel, planned at approximately $412,000 over the next 12 months, will be
paid from working capital, partially contributed by proceeds of the offering.
In the event that the proceeds of the offering, together with cash flow from
operations, if any, is insufficient to meet all of the expenses to which the
proceeds have been allocated, the Company will be required to re-evaluate its
planned expenditures and allocate its total resources in such manner as the
Board of Directors and management deems to be in the best interest of the
Company. Moreover, the Board of Directors and Management may, for business
reasons, reallocate funds among these or other uses in order to achieve the
Company's operating objectives.
THIS OFFERING
The Company is registering an aggregate of 2,481,161 shares of its Common
Stock to be offered for sale by stockholders of the Company. Of these shares,
1,979,061 shares are presently owned by the Selling Stockholders. An additional
414,600 shares may be offered by three of the Selling Stockholders which are
consultants to the Company ("Consultants") if they acquire the shares upon
exercise of warrants to purchase shares of Common Stock of the Company at an
exercise price of $1.00 per share, and 87,500 shares being registered may be
offered by a Selling Stockholder if acquired from the Company upon exercise of
warrants issued to the Selling Stockholder in connection with its purchase of
350,000 shares in a private transaction. The Company will not receive any of the
proceeds from the sale of Common Stock by the Selling Stockholders.
Common Stock Outstanding Prior
To This Offering.................. 5,039,061 shares
Common Stock Offered:
By the Selling Stockholders........ 2,481,161 shares
Common Stock To Be Outstanding
After This Offering............... 5,541,161 shares*
Use of Proceeds........................ The Company will receive no proceeds
from the sale of shares by the Selling
Stockholders.
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*Assumes the exercise of warrants to purchase 502,100 shares.
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RISK FACTORS
An investment in the shares of Common Stock offered hereby involves a high
degree of risk relating to the Company, the industries in which the Company
operates and the securities markets, particularly the markets for securities of
small issuers. Prospective purchasers of Common Stock should consider carefully
the information set forth below, as well as the other information in this
Prospectus, in determining whether to purchase the shares of Common Stock
offered hereby. In addition, certain information included in this Prospectus is
forward-looking. Such forward looking information involves significant risks and
uncertainties that could cause actual future results to differ significantly
from those expressed in any forward-looking statements made by, or on behalf of,
the Company. See also "Management's Discussion and Analysis of Financial
Condition" and "Results of Operation - Forward Looking Statements."
The Company operates a growing business in a competitive market. There are
a number of risks inherent to the Company's business. These business risks
should be considered in the context of the Company's business, which is
described under "Business." These business risks include the following:
LIMITED OPERATING AND SALES HISTORY
While the Company's IPAD 5000 first entered the market in 1996, neither
Models 2500 nor 1200 have gained significant market exposure or demonstrable
market acceptance as yet. Given the absence of clear market acceptance with
respect to these two newly introduced products, which in turn are projected to
be responsible for approximately half of the Company's system sales in the next
year, there can be no assurances as to the achievability of expected market
penetration rates, and associated sales revenues.
SUFFICIENCY OF WORKING CAPITAL
The Company intends during the next year to expand its sales and marketing
expenditures, including developing a wholesale distribution network and to
increase selling, general and administrative expenses which expenditures,
together with capital purchases in the year subsequent to the date of this
Prospectus, will substantially exceed the net proceeds of the Canadian Offering.
There can be no assurances that cash flow contributions from operations, coupled
with proceeds of the Canadian Offering and available working capital will be
sufficient to fully fund the planned expansion of sales and marketing activities
and other increased expenditures.
CONTINGENCIES
Although the proceeds of the Canadian Offering, together with anticipated
operating revenues, are expected to be sufficient to meet the Company's needs
for the next year, the Company's budgets make little provision for unexpected
contingencies. In the event that unforeseen costs or delays are incurred, the
ability of the Company to allocate sufficient resources to overcome such events
cannot be assured.
ANTICIPATED MARKET GROWTH
The Company's anticipated growth in sales revenue is predicated upon
assumptions with respect to the rate of growth of the market for its IPAD
systems. Should these assumptions fail to be realized, the Company may be unable
to attain its expected revenue and income.
RELIANCE UPON THE INTERNET
The Company's future sales, will be dependent, in part, upon both the rate
of growth of the Internet, and its reputation as a secure, architecturally
stable, and reliable communications medium. Should these conditions erode, the
Company's sales prospects may be adversely affected.
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TECHNOLOGICAL OBSOLESCENCE
The Company operates within an industry subject to a rapid pace of
technological obsolescence. There can be no assurances as to the ability of the
Company to establish and maintain a position at the leading edge of
technological trends within its industry, and thereby maintain or improve its
competitive position in relation to other market participants.
NEW SOFTWARE DEVELOPMENTS
In future reporting periods, the Company expects to enhance its sales
prospects following the completion of encryption software to facilitate IPAD
supported virtual private networks. See "Business - Planned New Software
Product." There can be no assurances as to the ability of the Company to
successfully complete this development program in the next year as currently
planned or to successfully complete other product development programs it may
undertake.
COMPETITION
A number of the Company's competitors are very well established in the
marketplace, with larger sales volumes, broader brand name recognition, a wider
base of technical resources and greater financial resources than the Company.
There can be no assurance that the Company will be able to effectively compete
against such competitors given their entrenched market presence.
BARRIERS TO ENTRY
As the market expands for products which perform in a manner similar to
that of the IPAD product line, it is expected that a broader range of both small
and large industry participants will enter the marketplace with competing
products. Additionally, there are comparatively few barriers to entry. As such
competition increases, industry margins on system sales may diminish.
Consequently, the ability of the Company to attain and maintain anticipated
gross margins per unit over time, cannot be assured.
PROPRIETARY PROTECTION
The Company has no registered trademarks nor has it filed any patent or
design utility applications in any jurisdiction. The absence of such proprietary
protection may diminish the ability of the Company to distinguish itself from
other industry competitors. In addition, while the Company licenses its software
to purchasers and restricts unauthorized use under its licensing provisions,
this does not protect the Company from an erosion of potential revenue as a
consequence of illicit software use and piracy.
RELIANCE UPON THIRD PARTIES
The Company is reliant upon third parties for the supply of computers,
computer sub-assemblies, and certain software elements. The Company is also
reliant upon third parties to assist it in its marketing and sales activities.
Accordingly, the Company will be subject to risks associated with third party
quality assurance standards, timeliness, reputation, financial stability, labor
relations, regulatory compliance and warranty provisions over which the Company
has little if any control.
NO PRODUCT LIABILITY INSURANCE
The Company does not carry product liability insurance. To the extent that
the Company becomes subject to third party liability claims, its ability to
adequately protect its assets and operations against potential liability
exposure is uncertain.
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RELIANCE ON KEY PERSONNEL; NO KEY MAN INSURANCE
The Company's founder, Chairman, Chief Technology Officer and Chief
Executive Officer, Philip Becker is a key individual upon whom the Company is
likely to be reliant to attain its commercial objectives. The loss of his
services may impair the ability of the Company to attain its corporate
objectives; however, the Company has taken steps to ensure that information
which was previously known only to Mr. Becker now also is known by other members
of the senior management. An employment agreement has been entered into between
the Company and Mr. Becker, but the Company does not presently carry key man
insurance on Mr. Becker's life.
ACQUISITIONS OF NEW PERSONNEL
The Company has hired and expects to hire approximately twenty new
personnel in about one year to facilitate the achievement of its corporate
objectives. As most of these proposed new employees have not yet been
identified, their skills, experience, and their ability to work together as an
integrated team is untested. Should the Company be unable to hire the persons
with the desired skills, or if certain of the new employees fail to perform as
anticipated, the ability of the Company to fully implement its business plan may
be adversely affected.
REGULATORY APPROVALS
The Company has not acquired requisite product approvals and certification
from appropriate agencies which would permit the marketing of IPAD products in
the European Union. Its ability to secure such approvals in a timely period or
at all cannot be assured. See "Business - Government Regulations."
POSSIBLE REGULATORY REQUIREMENTS
While the Internet is largely unregulated, there is a substantial body of
regulation governing the telecommunication market and its industry players.
Changes in the regulatory regime may impact the commercial prospects of Internet
related vendors such as the Company.
RECENT OPERATING LOSSES
In the fiscal year ended December 31, 1997, the Company recorded an
operating loss of $193,252. The net loss was $355,252, due in part to a one-time
charge of $241,042 for deferred taxes resulting from the change in the Company's
tax status from an S-corporation to a C-corporation. However, the Company's
ability to restore profitability in future reporting periods is uncertain.
NO PUBLIC MARKET
There has, to date, been no public market for the Company's Common Stock
in the United States. The shares became listed on the Vancouver Stock Exchange
on March 17, 1998, which is expected to be the primary market for the shares,
but there can be no assurance that an active public market on the Vancouver
Stock Exchange will be sustained.
See "Market for Common Equity and Related Stockholder Matters-Common Stock."
DILUTION
The Company may issue additional Common Stock pursuant to outstanding
stock options, warrants and convertible promissory notes. The Company may also
raise additional capital by undertaking a private placement of Common Stock if
additional capital is needed. These issuances may result in dilution to the
Company's shareholders.
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NO DIVIDENDS
The Company has not paid dividends in the past and does not anticipate
paying dividends in the near future. The Company expects to retain its earnings
to finance further growth and, when appropriate, retire existing debt.
USE OF PROCEEDS
The Company will receive no proceeds from the sale of Common Stock by the
Selling Stockholders pursuant to this Prospectus. For a discussion of the
intended use of the proceeds of the Canadian Offering see the "Summary Initial
Public Offering in Canada."
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the financial
statements and accompanying notes included elsewhere in the Registration
Statement.
INTRODUCTION
The Company is a technology firm which develops and markets communication
products which integrate and simplify PC server connectivity to the Internet
market. In recent years, the Company has developed and brought to production the
IPAD.
The Company was incorporated in 1984 to develop and market its original
product, a computer bulletin board product, TBBS. TBBS integrated formerly
complex technology into products which were relatively simple for the consumer
to use. Through 1995, the Company generated substantially all of its revenues
through sales of TBBS.
In 1995, the Company foresaw the Internet becoming the technology of
choice for the next level of network access connectivity. The Company began
refocusing its efforts on making communications technology simple to use and
began its design of IPAD. The IPAD product line was test marketed in 1995 as a
response to the anticipated demand of the Internet market. The Company's
dependence upon the TBBS product line decreased during and after 1995 as the
Company increased its dependency upon sales of IPAD.
RESULTS OF OPERATIONS
REVENUES
The Company's revenues in the fiscal year ended December 31, 1997 declined
from the fiscal year ended December 31, 1996 primarily as a result of the
decline in revenue from sales of the Company's TBBS product. TBBS product sales
accounted for $239,000 in revenue in 1996 (17% of total revenues), but only
approximately $62,000 (5% of revenue) in 1997. IPAD related product sales in
1997 were $1,171,000, substantially unchanged from $1,167,000 in 1996, but IPAD
sales had declined 33% in the first nine months of 1997 from the comparable 1996
period as marketing and sales activity were curtailed until the fourth quarter
of 1997 as a result of the Company's shortage of working capital. Approximately
44% of the 1997 IPAD sales were recorded in the fourth quarter when sales and
marketing efforts were revived after the infusion of approximately $347,000 in a
private placement in September 1997.
The Company's gross profit margins were approximately 66%, an improvement
over the 57% margins realized in 1996. The 1997 margins improved as a result of
the IPAD product being produced internally instead of being outsourced to
contract manufacturers. The improvement in gross margins was also attributed to
reduced costs of raw material created by quantity purchases and multiple vendor
sourcing.
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Research and Development Expenditures
The Company conducts research and development through internal research
projects. Costs are incurred from time to time, in specific projects that employ
existing technologies for which feasibility previously has been established to
develop applications. Production costs for the development of the software used
for which technological feasibility has been established but before the product
is ready for sale, are capitalized when broad applications are identified within
its existing product lines. Costs for which technological feasibility had been
established, which were capitalized in 1997 totaled $233,000. The Company
capitalized $440,000 for such expenditures in 1996. The Company incurred $57,000
of expenses relating to research and development costs in 1997, compared to no
such expenses in 1996.
Other Expenses
Selling, general and administrative costs ("SG&A") increased from $631,000
(45% of sales) in fiscal 1996, to $922,000 (75% of sales) in 1997, primarily
because of the overt fourth quarter activities including expenditures to build
the organization by hiring professional management and personnel, increases in
new employee hiring, the relocation of the Company from Aurora, Colorado to
Boulder, Colorado, the introduction of the Model 1200 IPAD, the production of
support and sales collateral material, the recruitment of international sales
representatives, and the increase in inventories necessary to support the
increased revenue levels of fiscal year 1998. Sales and marketing expenses for
1997 were reported as $77,544, a decrease of 35% below the $120,259 spent in
1996, as a result of significant decreases in advertising and trade show
expenses, but general and administrative expenses were up 65% in 1997 to
$844,800 from the 1996 level of $510,865. Consultant expense was also higher as
consultants were retained on an interim basis to develop the sales support
literature and brochures to direct the recruitment and hiring of sales personnel
and international representatives.
Net Income (Loss)
The Company realized net income in the fiscal year ended December 31,
1996, but in 1997 the Company recorded a loss of $355,000, of which $193,000 was
attributable to operations. The balance of the loss, $162,000, was substantially
a result of recording deferred taxes because the Company changed its federal
income tax status from an S Corporation to a C Corporation during that period.
Income Taxes and Net Operating Losses
As discussed in Note 4 to the accompanying financial statements, the
Company has recorded an expense to recognize deferred tax liability due to the
change in tax status from an S corporation to a C corporation in September 1997.
The deferred tax liability primarily results from capitalized software
development costs being expensed for income tax purposes in the period such
costs are incurred.
The Company has $155,000 in net operating loss carryforwards with
expirations through 2013. The net operating losses are limited due to issuances
of common stock.
CAPITAL RESOURCES AND LIQUIDITY
Historically, the Company had funded its working capital requirements from
internal operations. During 1996, the Company continued to fund a majority of
its internal working capital needs from $260,000 of cash flow from operating
activities, but it also received advances from Philip Becker, in addition to
approximately $112,000 that he had loaned in 1995 to assist the Company in
funding the IPAD product development, thus increasing the Company's indebtedness
to Mr. Becker to $239,903 at December 31, 1996. This indebtedness was payable by
the Company, at its option, in shares of Common Stock of the Company valued at
the public offering price per share of the Canadian Offering. In February and
March, 1998, the Company elected to pay that obligation, as well as $116,000 of
notes payable to consultants by the issuance of shares.
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As of December 31, 1996, the Company received a binding commitment ,for a
$100,000 loan facility from the First National Bank of Arvada, Colorado to
support IPAD sales growth and the increase in capitalized software until longer
term financing could be arranged. During the first quarter of 1997, the Company
borrowed $100,000 under the interim loan facility from the First National Bank
of Arvada, Colorado, the proceeds of which were used to expand to a limited
degree, the Company's marketing activities and sales programs.
The completion in September of 1997 of the placement of $410,000 of
outside equity permitted the Company to significantly advance its marketing
efforts and to attract additional management personnel. On December 22, 1997,
the Company sold 350,000 shares of Common Stock and warrants to purchase an
additional 87,500 shares to Opus Capital Fund, LLC, for a total purchase price
of $350,438. Net proceeds from these offerings was $679,159. Working capital at
December 31, 1997, had increased to approximately $251,000 from less than
$23,000 at December 31, 1996. Operating activities resulted in a $44,000 cash
reduction in 1997, since the loss recorded for this period was substantially a
result of increased depreciation and amortization and the recording of deferred
taxes, which did not affect current cash flow.
In February and March 1998, the Company sold and issued an additional
440,000 shares, all at a price of $1.00 per share in private transactions to
officers, directors, key employees and consultants of the Company, and sold
60,000 shares to Wayne Farlow, former president of the Company in accordance
with his agreement upon termination of his employment.
On January 3, 1998, the loan from First National Bank of Arvada, Colorado,
described above, was extended to April 3, 1998 for the payment of the
outstanding balance of $73,363, with monthly installment payments of $3,325 in
February and March 1998. The Company has received from the Colorado National
Bank (the "Bank") a preliminary loan proposal that calls for a borrowing
commitment of up to $825,000. This loan would be used to pay the indebtedness to
First National Bank of Arvada with the balance of the commitment to be for a
working capital line of credit. Advances under the line of credit may not exceed
70% of eligible accounts receivable and 25% of eligible inventory to a maximum
of $150,000. This loan will bear interest at 1/2% over the Bank's reference
rate. The borrowings will be secured by a lien on all of the Company's assets.
The proposed loan has not been approved by the Bank and there is no assurance
that it will be obtained. The Company believes that this line of credit, if
obtained, will assist in the Company in financing its anticipated growth of
sales if the growth is achieved.
In the fourth quarter of fiscal 1997, the Company undertook preparations
for its initial public offering, completed in March 1998, through which
approximately $1,158,250 of net cash proceeds has been generated, after payment
of expenses and commissions. This equity infusion, together with working capital
generated from the Company's internal operations, should advance the Company
substantially towards establishing and fortifying channels of distribution for
its IPAD product line, and is expected to be sufficient to meet the capital
requirements of the Company for the next 12 months.
YEAR 2000 EFFECT
The Company's TBBS product line has one deficiency associated with year
2000 for which a correction is scheduled for a revision release in October 1998.
The IPAD product line has no known susceptibility to year 2000 issues. The cost
of the revision to the TBBS product is not expected to be material.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Statements of
Financial Accounting Standards that may affect the Company's financial
statements as follows:
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130, Reporting Comprehensive Income (SFAS
130), which establishes standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all
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changes in equity except those resulting from investments by owners and
distributions to owners. Among other disclosures, SFAS 130 requires that all
items that are required to be recognized under current accounting standards as
components of comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements.
Also, in June 1997, FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information" which supersedes SFAS No. 14,
"Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards for the way that public companies report information about
operating segments in annual financial statements and requires reporting of
selected information about operating segments in interim financial statements
issued to the public. It also establishes standards for disclosures regarding
products and services, geographic areas and major customers. SFAS No. 131
defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
SFAS 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. Because of the recent issuance of the standards,
management has been unable to fully evaluate the impact, if any, the standards
may have on future financial statement disclosures. Results of operations and
financial position, however, will be unaffected by implementation of these
standards.
In October 1997, Statement of Position 97-2, Software Revenue Recognition
(SOP 97-2) was issued. The SOP provides guidance on when revenue should be
recognized and in what amounts licensing, selling, leasing, or otherwise
marketing computer software. SOP 97-2 is effective for transactions entered into
in fiscal years after December 15, 1997. Because of the recent issuance of the
SOP, management has been unable to fully evaluate the impact, if any, the SOP
may have on future financial statement disclosure.
In February 1998, the FASB issued SFAS No. 132, "Employer's Disclosures
about Pensions and Other Postretirement Benefits" which standardizes the
disclosure requirements for pensions and other postretirement benefits and
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. SFAS No. 132 is
effective for years beginning after December 15, 1997 and requires comparative
information for earlier years to be restated, unless such information is not
readily available. Management believes the adoption of this statement will have
no material impact on the Company's financial statements.
* * *
FORWARD-LOOKING STATEMENTS
The Registration Statement contains certain forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Securities Exchange Act of 1934 and the Company intends that such forward-
looking statements be subject to the safe harbors for such statements under such
sections. The forward-looking statements herein are based on current
expectations that involve a number of risks and uncertainties. Such forward-
looking statements are based on numerous assumptions, including, but not limited
to, the following: that significant increases in sales and marketing personnel
and expenditures will result in increased sales; that the recently introduced
IPAD 2500 and IPAD 1200 models will be readily accepted in the market; that the
industry trends perceived by the Company as described under "Business" will
continue to exist; that market segments targeted by the Company will continue to
grow and that the Company can successfully compete with larger, more established
competitors.
The foregoing assumptions are based on judgments with respect to, among
other things, future economic, competitive and market conditions, and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the Company's control. Accordingly,
although the Company believes that the assumptions underlying the
forward-looking statements are reasonable, any such assumption could prove to be
inaccurate and therefore there can be no assurance that the results contemplated
in forward-looking statements will be realized. The forward-looking statements
are subject to risks and uncertainties that could cause actual results to differ
materially from those set forth in or implied by the forward-looking statements.
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BUSINESS
GLOSSARY
The following is a glossary of technical terms that appear in the
discussion of the Company's business in this prospectus:
"CLOSED, PROPRIETARY OPERATING SYSTEM" means an operating system which is
not made available for open use and serves a specific purpose. A closed
proprietary operating system has an advantage in security.
"CPU" means Central Processing Unit, the computational engine of a
computer.
"CSU/DSU" means Customer Service Unit/Digital Service Unit. A device which
converts the signals on a high speed leased line circuit to the digital signals
required to connect to a computer interface.
"DNS (DOMAIN NAME SERVER)" is a server function on the Internet which acts
as a "Directory Assistance" service.
"DOS" means Disk Operating System.
"ETHERNET" is a high speed transmission medium which allows direct
connection of computers in a local area at data transmission speeds of either
10Mhz or 100Mhz.
"FCC" means Federal Communications Commission (US).
"FINGER SERVER" is software which provides responses to queries using the
standard Finger protocol.
"FIREWALL" means a security function to prevent unauthorized access to a
network. Firewalls can be very simple allowing for basic security, or very
complex and involved for more advanced security needs.
"FTP SERVER" means a File Transfer Protocol server which is a server
function that allows you to offer access to files for transfer over the
Internet. They are normally linked to web servers to provide a graphical
interface.
"GB" means Gigabyte. One billion bytes.
"INTEGRAL 56 KB LEASED LINE CSU/DSU" is a complete interface to allow
direct connection to a particular type of leased line known as a 56KB leased
line. Includes both the digital interface and the CSU/DSU required for this type
of connection.
"ISDN" means Integrated Services Digital Network. A special type of
telephone circuit which allows direct digital connections.
"KB" means Kilobyte. One thousand bytes.
"LAN" means Local Area Network. A group of computers in a local area
(usually within a single building) which are connected together to share data.
"MB" means Megabyte. One million bytes.
"MHZ" means Megahertz. One million cycles per second.
"MICROPROCESSOR" is a computer on a single integrated circuit chip.
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"PACKET ROUTING FIREWALL" is a security system based on applying rules to
each packet which enters a router to determine if it should be allowed to
continue onward or be rejected.
"POP3 (POST OFFICE PROTOCOL 3) SERVER" is a server which stores local
mail to be accessed by the end users E-mail package, e.g., Eudora, Microsoft
Exchange, Netscape.
"RAM" means Random Access Memory. A computer's working program and data
memory.
"ROUTER" means a device which acts as a "gateway" between network
segments. A router in its simplest form will examine the address of each
"information packet," determine its destination and send it down the appropriate
wire.
"SMTP (SIMPLE MAIL TRANSPORT PROTOCOL)" is a server that acts as the
sending and receiving server. It looks at the address and sends it on its way
or transfers it to the POP3 (Post Office Protocol 3) server.
"TBBS" means The Bulletin Board Software, a PC server software which
creates a multi-user host for direct dial-in access for multiple users for
ongoing messaging, file transfer and data access.
"TELNET" is the Internet protocol used to simulate a point to modem
(serial line) connection between two computers over the Internet.
"TERMINAL SERVER" means a device which allows for remote dial-up access to
a network.
"UL" means Underwriter's Laboratories, Inc.
"UNIX" is a multiuser computer operating system.
"VPN (VIRTUAL PRIVATE NETWORK)" is the result of using encryption and
special protocols to create a private network using public data transmission
lines to promote lower cost and easy mobile access.
"WWW" means World Wide Web.
CORPORATE HISTORY
eSoft, Inc. was incorporated under the laws of the State of Colorado on
March 3, 1984. On February 17, 1998, pursuant to approval by the Board of
Directors and shareholders of the Company, the Company merged into a newly
incorporated Delaware corporation, and has thus become reincorporated in the
State of Delaware.
The Company is located at 5335 Sterling Drive, Suite C, Boulder, Colorado,
80301.
Through September 4, 1997, the Company had elected to be taxed as an
"S-corporation" for U.S. income tax purposes. Under this election the Company
was essentially taxed as a partnership. Accordingly, in lieu of corporate income
taxes, the shareholders were taxed on their proportional share of the Company's
taxable income individually. The Company withdrew the S-corporation election
after September 4, 1997 and is now subject to U.S. corporate income taxes.
On August 27, 1997 the Company's board of directors authorized a stock
split of 63.1579 to 1. The Company has no subsidiaries.
BUSINESS HISTORY
In its early years, the focus of the Company was oriented towards the
development and sale of a computer bulletin board software product known as
TBBS. TBBS Software creates a multi-user host for direct dial-in access for
multiple users for on-going messaging, file transfer and data access. Concurrent
with the rapid rise of Internet related
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communications media, the demand for TBBS software declined. In response, the
Company designed a new product line of Internet protocol adapters which are now
being marketed under the acronym IPAD (Internet Protocol Adapter Device). The
Company launched its first IPAD product in 1996.
The IPAD is designed to be a total Internet/Intranet connectivity solution
without the complexity and high cost of traditional solutions. It affords the
medium to small businesses, institutions, or educational sites a full
connectivity solution that is economical and easily installed and managed by
existing information systems' personnel. To complete the package for the
customer, the Company can provide leased line connectivity options through major
national access providers. The IPAD product line includes all other accessories
needed to complete the connection, such as turnkey web servers, line interface
devices, modems and rack equipment.
The Company's IPAD is designed to integrate key software and hardware
components to facilitate an Internet presence. This includes the functionality
of a router and a broad range of servers including full DNS, SMTP, POP3, world
wide web, FTP, Telnet and related applications. Also included is a capability to
provide for text-mode user access from data terminals or other hosts such as
BBS's. Given these features, the Company's IPAD product line can be used by
Internet service providers who resell Internet access to the public, as well as
by businesses which can find ready application for the technology, to enhance
internal communications and Internet access for their employees working through
their Internet service provider.
PRODUCT LINE AND SERVICES
THE IPAD 5000
The IPAD 5000 integrates Internet hardware and communications software
into a user friendly turnkey system, which does not require extensive technical
knowledge to support. Utilizing an Intel Pentium CPU, the device is typically
configured with 8 MB of RAM; a 1.2 GB hard drive; and a 1.44 MB floppy drive.
The hardware includes five open slots, and hence is designed to allow for
customized interface configuration. These interfaces may include an Ethernet
card, an ISDN terminal adapter, a V.35 leased line or Token Ring or extra serial
interfaces if desired. The software includes a basic Web Server, Telnet, an FTP
Server, an E-mail Server, a Finger Server, a DNS, and a Packet-Routing Firewall.
Unlike certain competing products in the marketplace, IPAD does not operate on a
UNIX platform but rather is a purpose built component, real time operating
system, which allows for a high degree of individual customization to better
address the needs of individual customers.
THE IPAD 2500
The IPAD 2500 was introduced to the marketplace in the second quarter of
1997. The IPAD 2500 is a desktop unit which contains a router with firewall
capabilities, a terminal server offering up to 8 serial ports, and the same
basic Internet connectivity provided by all of the Company's IPADs. Server
functions include a DNS, a POP3, E-mail, FTP, a SMTP, Telnet, a Finger Server,
and a basic WWW server. While less powerful than the Model 5000, it nonetheless
allows for more than one IP address and routing for up to two networks as well
as multiple web and FTP servers.
THE IPAD 1200
The IPAD 1200 was introduced to the marketplace in October 1997. This
system is also a desktop unit which can connect a business LAN of up to 150
users to the Internet using a single address. The hardware is an Intel Pentium
CPU with 8 MB of RAM, a 1.2 GB hard drive, a 1.44MB floppy drive, 2 serial ports
and a 10 MB Ethernet card. The IPAD 1200 comes standard with either a 56 KB
modem, ISDN terminal adaptor or integral 56 KB leased line CSU/DSU or its
Internet feed. The product is designed for mass production without significant
customization for specific client needs.
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ACCESSORIES
In the case of the Model 5000 (and to a lesser degree with the IPAD 2500),
customers can order additional cards and accessories to more effectively
configure a device to suit their needs. Aside from an Ethernet card, users have
the option, with certain models, of purchasing an ISDN terminal adapter,
interfaces for T1 and fractional T1 leased lines, as well as extra serial
interfaces. As many as 96 serial ports can be accommodated within a Model 5000
with each card being capable of connecting up to 16 modems or terminals.
SEMINARS
The Company also offers Internet training seminars. These comprehensive,
two day programs are offered on a regional basis throughout North America. They
address issues related to end user client set-up and trouble shooting; advanced
Internet operations including routing and domain name server operations;
Internet service provider management techniques, including guidance with respect
to systems performance and networking issues including questions relating to
growth planning, multiple networking interfacing, and connections with other
routers; and specific training with respect to IPAD applications and management
techniques. The Company expects to offer these seminars with greater frequency
in the future to supplement revenues from IPAD product sales.
TECHNICAL SUPPORT SERVICES
Customers can also purchase a contract through which the Company offers
technical support services to address customers' specific application needs.
More focused than the general seminars, such technical support services are
designed to address concerns of individual clients for applications ranging from
the launching of their web presence, to the reconfiguration of their LAN to
optimize both efficiency and connectivity.
TBBS SOFTWARE
Until the mid-1990s, most of the Company's revenues were generated from
the sale of TBBS, its bulletin board system software package. As the life cycle
of this product aged, the Company found it essential to expand and diversify its
range of product offerings which in turn led to the development of the IPAD. The
Company expects to continue to generate residual revenues from the sale of TBBS
software at least through the 1998 fiscal year. However, no further development
or upgrading of the software is expected to be pursued by the Company, as TBBS
is progressively phased out of the market in favor of more sophisticated
communications products.
PLANNED NEW SOFTWARE PRODUCT
The Company proposes to develop an IPAD-supported virtual private
network ("VPN") product. This product will require the development and
integration into the IPAD product of encryption software. The Company expects to
license the encryption software from a firm or firms specializing in this
technology. The Company has identified encryption software which it believes
will meet the needs of this proposed new product and has begun negotiating the
terms of a license. The Company has also begun research to identify the
important characteristics of a future VPN product offering. The Company believes
that the inclusion of the VPN technology in an IPAD product will have
considerable market appeal for prospective customers that require secure network
connections from remote locations. Development of this proposed new product is
in a very early stage and there can be no assurance that the Company will be
able to license the necessary technology at a reasonable cost, or at all, nor
that the Company will be able to satisfactorily integrate the encryption
technology into the IPAD product in a timely manner or at a cost which will
permit the Company to effectively compete with other products offering similar
technology.
OPERATIONS
Currently, with respect to all models, the Company purchases
sub-assemblies from a variety of manufacturers and wholesalers, and undertakes
final assembly and software integration at its production facility in Colorado.
In the future, with respect to Models 1200 and 2500, the Company intends to
purchase the computers in essentially complete
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and finished form. Upon shipment to its production facility, the Company would
install an extra card in the case of the Model 1200 and load its software. With
respect to the somewhat higher performing Model 2500, the modifications and
degree of the Company's customization which is undertaken, is less than that
applicable to the Model 5000, but more vigorous than that carried out in the
context of a typical Model 1200.
In all cases, the loading of the Company's IPAD software is what serves to
distinguish the Company's product line from competing products, and what
provides it with its key performance capabilities. Upon the insertion of the
additional boards and loading of the software, each unit is tested, certain
other quality assurance checks are undertaken, and the devices are packaged.
If and when the sales volume increases to a level beyond the capacity of
the Company's facilities, presently anticipated to be in six to nine months, the
Company expects to outsource the assembly of the product to a contract
manufacturer in the U.S. The Company has engaged a contract manufacturer in
Holland to manufacture products for the European market. This manufacturer was
chosen for its existing requisite approvals and certifications, and it is
investigating European safety standard requirements for the IPAD products. See
"Business - Government Regulations" below.
It is the intention of the Company to sell its products directly to
end-use purchasers, as well as to utilize value added resellers ("VAR"s) and
distributors to assist in product dissemination.
INTELLECTUAL PROPERTY
The Company has no patents, but regards its software as proprietary and
attempts to protect it by relying upon copyrights, trade secret laws, internal
nondisclosure agreements and transferability restrictions incorporated into its
software license agreements. The Company provides its software products under a
perpetual paid-up license agreement. Title does not transfer to the customer.
Program source listings are not released, which the Company believes further
protects against unauthorized transfers of the Company's proprietary
information, as well as the confidentiality of the Company's trade secrets. The
Company also uses a combination of software programming and hardware devices to
protect its products from unauthorized use or duplication.
HISTORY AND COST OF PRODUCT DEVELOPMENT
Up until and including 1994, substantially all of the Company's revenues
were generated from the sale of TBBS software. IPAD product sales commenced in
1995 and the product was released to the general public with the introduction of
the IPAD 5000 in 1996. The precursors to the IPAD 5000 (the IPAD 4000 and IPAD
4500) had identical software as the IPAD 5000 but were installed on 66 MHZ Intel
486 CPUs. In 1996, when the 133 MHZ Intel Pentium CPU became available, all
installed units of Model 4000 and Model 4500 were replaced with Model 5000. The
IPAD 2500 was introduced to the marketplace in mid-1997. The IPAD 1200 was
introduced and was available for purchase in October 1997. Seminars,
accessories, and services are an ongoing activity designed to supplement and
enhance the Company's product offerings, reputation, reliability and industry
stature.
The Company conducts research and development through internal research
projects. Costs are incurred from time to time, in specific projects that employ
existing technologies for which feasibility previously has been established to
develop applications. Production costs for the development of the software used
for which technological feasibility has been established but before the product
is ready for sale, are capitalized when broad applications are identified within
its existing product lines. Costs for which technological feasibility had been
established resulted in $130,000 in costs being capitalized in 1995, $440,000 in
1996, and $233,000 in 1997. The Company incurred research and development
expenses of $254,000 in 1995, $0 in 1996, and $57,000 in 1997.
From time to time, the Company has entered into software development
consulting agreements. Two agreements entered into with John Patrick McMillan, a
consultant, provided for the Company to pay percentages of gross software
licensing fees on certain of its products, including the IPAD software. The
Company and the consultant have entered into a Termination Agreement terminating
those consulting arrangements in consideration of payment of
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$60,000, one-half on execution of the Termination Agreement and one-half after
completion of the Canadian IPO, and a warrant to purchase 20,000 shares of the
Company's Common Stock at $1.00 per share for one year and $1.15 per year for a
second year.
THE MARKET FOR THE PRODUCTS
The primary market being pursued by the Company consists of small to
medium size businesses. The Company believes these businesses increasingly find
it beneficial to host their own Internet infrastructure rather than rely upon an
Internet service provider for all of their Internet access and connectivity
needs. A secondary market consists of Internet service providers which can
benefit from the Company's IPAD integrated software and hardware product line.
The Company believes that for most small to medium size businesses, high
speed large diameter pipeline access to the Internet is sufficiently important
that the businesses would continue to rely upon an Internet service provider in
order to gain that advantage if it were not available in Internet connectivity
products such as the Company's IPAD products. With new advancements in Internet
software, however, individual companies, without a great deal of software
expertise, can now assume many of the responsibilities and functions which
heretofore have been carried out by Internet service providers on their behalf.
This includes control over a router, firewall, remote access server, a web
server, and mail server. Perhaps most importantly, rather than paying an
Internet service provider substantial fees in order to offer individual e-mail
addresses plus Internet access to each of many employees, the IPAD products can
provide such services to a growing company and their employees in a much more
cost effective manner.
Because the Company purchases its computer hardware in the United States,
and because of requirements for FCC approval and UL certification, the Company
has historically limited most of its sales to the United States. Within the
United States, the market and the rate of market growth are both considered to
be sufficiently large as to be able to absorb all of the Company's projected
output through at least the next two years. Although the Company has not
acquired requisite product approvals and certification from appropriate agencies
that would permit marketing of its IPAD products in the European Union, it has
entered into a contract for manufacture of its products in Holland. The contract
manufacturer was chosen for its existing requisite approvals and certification
and it is investigating European safety standards applicable to the IPAD
products. See "Business - Government Regulations."
The Company has sold more than 400 IPAD units since the introduction of
its product line in 1995. In 1997, the Company sold 146 IPAD units. No one
customer has accounted for as much as 10% of the Company's revenue in 1995, 1996
or 1997.
In an article entitled "All-In-One Net Boxes to the Rescue," published in
the September 8, 1997 edition of Inter@ctive Week, an Internet industry trade
publication, market analysts indicate that in 1997, fewer than 6,000 units of
IPAD like products were expected to be sold into the market. If one were to
assume that the average sale ranges from $3,000 - $5,000, this would place the
total market dimensions at $18 - $30 million excluding follow on accessories and
services.
INDUSTRY TRENDS
At one time, the combination of hardware and software that are currently
incorporated within an IPAD device required several pieces of stand alone
equipment, and complex software skills. This in turn created barriers to market
entry among small to medium sized companies, seeking to host many of their own
Internet functions. Unless they maintained the requisite technical skills, it
was more cost effective for these companies to allow an Internet service
provider to host these services on their behalf.
The Company believes that two trends within the marketplace are eroding
this historical condition. First, the burgeoning demand for e-mail and Internet
access has had the effect of increasing the costs borne by companies to provide
widespread access to such services among their employees, (notwithstanding
general reductions in the unit costs of Internet access as a whole). Second, the
Company and its market competitors have been able to take advantage of
increasingly powerful and flexible computer systems. Today, these flexible
computer systems are readily available at
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comparatively modest cost and with the integration of appropriate software, they
can provide an all in one solution to many of the software and hardware
requirements that had previously demanded a variety of pieces of equipment and
considerable software integration skills.
As a consequence, the Company has observed a current industry trend is to
increasingly allow companies to take control of certain key Internet management
tools that have previously been hosted by Internet service providers and to
progressively limit the role of the Internet service providers to that of
offering high capacity access to the Internet itself.
MARKETING PLAN
It is the intention of the Company to rely upon both direct sales and
distributors in order to disseminate its product line through the market. During
1998 and the first quarter of 1999, the Company plans to add regional sales
managers including a European Sales Director, Customer Service Representatives
and a Director of Marketing.
To assist in creating more customer awareness of the Company, the Company
has made provision for an advertising budget of over $100,000 in the forthcoming
year, with a further $80,000 for participation in trade shows. Through a
combination of reliance upon third party distributors as well as upon direct
sales, the Company believes that it can progressively establish a profile as a
major industry participant.
COMPETITION
Competition among the industry participants is based upon a number of
factors including product features, type of user primarily serviced, reputation
of the Company, ease of installation or use, reliability, cost, service
availability and other factors. The Company believes that its principal
competitive advantages are the product features, simplicity and ease of
installation and the availability of technical support for the product and the
customer. The Company's products are also designed to meet the specific needs of
the smaller to mid-sized companies that are the Company's target market. For
example, while many Internet connectivity devices are Unix-based systems
designed to support more complex operations generally required by larger
corporations, the Company's products emphasize use of a DOS based system which
is thought by management to be more user friendly as compared to those operating
on Unix platforms.
The Company's competitors are comprised of both well-established and
recognized industry participants (such as Sun Microsystems, Inc.) and smaller
corporations in some respects similar to the Company. Both groups produce
products which in terms of fundamental connectivity attributes are similar to
those currently offered by the Company. Among the more prominent industry
participants at present are companies such as Whistle Communications, Inc. of
Foster City, California; Apexx Technologies, Corp. of Boise, Idaho; FreeGate
Corporation of Sunnyvale, California; and iPlanet, Inc. of Sunnyvale,
California.
iPlanet, Inc. is a private corporation reportedly established in January
1996. As is the case with the Company, iPlanet provides fully-integrated
turn-key Internet connectivity solutions. iPlanet has developed the IPS series
of products which provide small to medium sized businesses access to the
Internet and Web hosting capabilities. The IP-168 is available in a variety of
models to accommodate speeds ranging from 28.8K dial-up to T1 dedicated lines.
It incorporates router capabilities, and supports a LAN print server. It
includes a Web server, an e-mail server (compatible with popular mail packages
such as Eudora, and Microsoft Mail), and standard mail protocols (POP2/3, IMAP3
and SMTP). The product is compatible with both Microsoft's Windows and Unix
operating systems. The IPS-PRO is a rack mounted version of the IPS 168 which is
designed for larger organizations of about 200 people. The IPS PRO operates with
a Pentium 133 MHZ microprocessor, and offers 32 MB RAM and a dual Ethernet
connection. In addition to the standard e-mail and web servers, the IPS PRO
supports a Domain Name Service Protocol, and can also support remote access
users and file sharing. It also includes a firewall (and related software
elements known as "proxies"). To complement the IPS-168, iPlanet offers a
variety of add-on modules to provide fax, virtual private networking, and e-mail
enhancing capabilities.
Sun Microsystems, Inc. offers Internet servers referred to as "Netra i"
which accommodates high-volume Web site management. Netra i software comes with
Web server (Netscape Enterprise) and Web authoring software. Electronic mail, a
Domain Name Server and FTP functions are also fully integrated, as is firewall
security. Netra
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Internet servers operate in conjunction with Solaris and Unix operating systems.
Until recently, Netra i was classified as a fully integrated series of Internet
servers. However, software and hardware components are now sold separately.
As is the case with the Company, most industry competitors produce an
array of products. Some are relatively inexpensive entry level devices, which in
some respects can be compared to the IPAD 1200. Typically, these are designed
with no significant degree of individual customization. Some products are
similar to the IPAD 5000 in that they provide for a substantial degree of
customization, and can accommodate multiple interfaces, and more than one
hundred individual users on a LAN with little difficulty.
Cross-comparisons indicate that several competing products incorporate
features similar to those offered by IPAD products (in terms of hardware and
software components), although they may provide varying degrees of
functionality, which in turn accounts for pricing variances. For example, the
InterJet product series offered by Whistle Communications, Inc. ranges in price
from $1,995 to $3,495 depending upon product features and capability. Products
which would likely compete with either the IPAD or the IPAD 5000 can either cost
more or less in relation to the IPAD depending upon their technical
specifications.
Some competitors already possess well-established distribution networks or
have formed strategic collaborations with key industry players. Others such as
Sun Microsystems, Inc. have much greater technical and financial resources
compared to the Company. The ability of the Company to effectively compete
against such firms cannot be assured, as they are already well established.
AVAILABILITY OF RAW MATERIALS AND SEMI-FINISHED GOODS
The computers which the Company utilizes to operate its software, whether
purchased in finished form, or as sub-assemblies, computer boards, software
programs and accessories which are assembled at the Company's production
facility from semi-finished goods, all represent widely available materials and
components in the marketplace. The Company has the ability to source such goods
from a wide range of prospective suppliers, depending upon pricing, delivery,
quality assurance and related considerations. In combination, the Company's IPAD
software represent a combination of "off the shelf" operating systems and
related software licensed from third parties, working in concert with what the
Company considers to be its own proprietary software, developed in-house. The
Company does not anticipate that the sourcing of such materials is likely to
become an impediment to its growth and expansion.
GOVERNMENT REGULATIONS
As the Company's products require access to telecommunications carriers,
the products are subject to regulation by the Federal Communications Commission
("FCC"). The Company's IPAD products use components purchased from other
manufacturers which have the required FCC approvals and the Company relies upon
the certification of compliance furnished by those manufacturers. No testing or
certification of the final assembled products offered by the Company is
required. Since the Company's products rely upon electrical power, certain
standards with respect to electrical safety must also be met. The manufacturers
of purchased components obtain the certification of testing laboratories such as
Underwriters Laboratories ("UL") and the Canadian Standards Association and the
Company again relies upon those certifications without the necessity for
certification of the final assembled products. The Company believes there are no
other material U.S. federal or state regulations which must be satisfied to
permit the sale of its products in the U.S.
The Company has not acquired requisite product approvals and certification
from appropriate agencies to permit IPAD products to be marketed in the European
Union. The Company has entered into an agreement with a subcontract manufacturer
located in Holland. This subcontract manufacturer was chosen for its existing
requisite approvals and certifications held, including ISO 9002 certification.
The Company's contract manufacturer is investigating European safety standard
requirements for the IPAD products by its Quality Organization. The Company has
not yet ascertained which approvals and certifications are required to sell its
product in the European Union. There can be no assurance that the necessary
approvals will be obtained without extended delays, or at all.
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EMPLOYEES
At March 1, 1998, 20 people were employed by the Company, all on a
full-time basis, and four persons were performing services for the Company on a
contract basis until full-time management can be hired. The Company believes its
employee relations are excellent.
DESCRIPTION OF PROPERTY
The Company's office, production and warehouse facilities are located at
5335 Sterling Drive, Suite C, Boulder, Colorado 80301. The Company leases
approximately 5,300 square feet of space at this location pursuant to a lease
entered into in November 1997, which expires October 31, 2000, at a rent of
approximately $58,000 per year. The Company believes that this space will be
sufficient for the Company's operations for the foreseeable future.
The Company also remains obligated until November 1998 on a lease covering
1,300 out of 7,500 square feet of lease space that the Company formerly occupied
in Aurora, Colorado. Rental on this 1,300 square feet is approximately $13,000
per year. The Company hopes to sublet this space in the near future, but at
present the Company is using that space for storage.
-19-
<PAGE>
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
DIRECTORS AND EXECUTIVE OFFICERS
The following is a list of the current directors and senior officers of
the Company, their addresses, current positions with the Company and principal
occupations during the past five years:
- -------------------------------------------------------------------------------
NAME AND ADDRESS PRINCIPAL OCCUPATION FOR PREVIOUS FIVE YEARS
- -------------------------------------------------------------------------------
PHILIP L. BECKER(1) Age 51, Chairman, Chief Technology Officer
Chairman, Chief Executive Officer and Chief Executive Officer of the Company
and Chief Technology Officer and since September 1997; President of the
Director Company from July 1985 to September, 1997;
Director of the Company from 1984 to
present.
REGIS A. FRANK(1) Age 52, President and Chief Operating
President, Chief Operating Officer Officer of the Company since January 1998;
and Director Vice-President, Marketing and Sales, of
Sigmacom Corporation, a software developer
and integration services company, from May
1997 to December 1997; President of Team
Advisors, a business and marketing consulting
company, from November 1995 to April 1997;
President and Chief Executive Officer for
SecaGraphics, Inc., a software development
company; from September 1986 to October 1995.
MICHAEL W. JOHNSON Age 36, President and CEO, INFONOW
Director Corporation, Denver, Colorado, since 1995;
1875 Lawrence Street Engagement Manager, McKinsey & Company,
Denver, CO 80302 Inc., consultants, Dallas, Texas and
Amsterdam, Netherlands from 1990 to 1995.
ROBERT B. LOUTHAN Age 56, President of RBL Management Sciences,
Director a management marketing and sales consulting
P. O. Box 4966 company, since 1986.
Vail, CO 81658
RICHARD B. RICE Age 47, Owner, The Costwatch Consulting
Director Group, Inc., a telecommunications consulting
5380 Lookout Ridge Drive company, since 1989.
Boulder, Colorado 80301
KENT NUZUM(1) Age 31, Employed by Daryl Yurek since
Secretary and Acting Chief January 1997; Assistant Vice-President,
Financial Officer Commercial Loans for Bank One, Colorado from
August 1990 to January 1997.
ROBERT B. HARTMAN(1) Age 37, Vice-President, Engineering of the
Vice President-Engineering Company since January 1993; Senior Software
Engineer for the Company from 1990 to 1993;
President of Spark Software, a computer
consulting company from 1986 to 1990; Senior
Software Engineer and Project Leader for
Automatrix, Inc., a software development
company, from 1983 to 1986.
-20-
<PAGE>
JASON M. ROLLINGS(1) Age 36, Vice-President, Operations of the
Vice President - Operations Company since November 1997; Director of
Factory Operations for Micromotion
Inc., an electronics manufacturer, from July
1997 to October 1997; Director of
Manufacturing for Hi-Tech Manufacturing, a
printed circuit board and computer
manufacturer, from April 1995 to July 1997;
Director of Manufacturing for Codar Inc., a
military computer manufacturer, from
September 1988 to March 1995.
- ------------------------------
(1) Address: 5335 Sterling Drive, Suite C, Boulder, Colorado 80301.
Messrs. Becker, Frank, Hartman and Rollings are all full-time employees of
the Company. Mr. Nuzum is a consultant serving as Secretary and acting Chief
Financial Officer on a part-time basis.
ELECTION OF DIRECTORS
Four directors of the Company were elected by the shareholders at a
meeting on February 10, 1998 and will hold office until the next annual meeting
at which time they may be re-elected or replaced. The Certificate of
Incorporation of the Company permits the directors to appoint new directors to
fill any vacancies that may occur on the board. Individuals appointed as
directors to fill vacancies on the board or added as additional directors hold
office like any other director until the next annual shareholder meeting at
which time they may be re-elected or replaced. On March 16, 1998, the directors
elected and appointed Richard B. Rice as a director.
EXECUTIVE COMPENSATION
PHILIP L. BECKER EMPLOYMENT AGREEMENT
On September 2, 1997 the Company and Philip L. Becker, the founder,
Chairman, Chief Technology Officer, Chief Executive Officer and a director of
the Company, entered into an employment agreement (the "Becker Agreement") which
extends for a thirty six month period commencing on September 1, 1997. Under the
terms of the Becker Agreement the Company paid to Mr. Becker the sum of $8,333
per month until March 17, 1998, the completion of the Canadian Offering, and
thereafter the sum of $10,000 per month, plus incentive stock options to acquire
200,000 Common Shares at a price of $1.00 for a period of five years from the
date of issuance, September 2, 1997. The options vest over a 36-month period. No
options were exercisable initially, but 7/36 of the options will vest seven
months after the date of issuance, September 2, 1997, and 1/36 of the options
will vest on the first day of each month thereafter.
The Becker Agreement also provides that Philip Becker shall be eligible to
receive a quarterly performance bonus equal to 10% of the Company's earnings net
of adjustments for interest and taxes. In the event that the bonus exceeds 50%
of Mr. Becker's gross annual salary, the bonus will be capped at the amount of
Mr. Becker's salary for the quarter.
The Becker Agreement incorporates a non-competition agreement which
extends for 12 months after the termination of Philip Becker's employment with
the Company and confidentiality provisions which extend for five years following
the termination of Becker's employment with the Company. The Becker Agreement
may be terminated by either the Company or Mr. Becker on 30 days notice without
cause. If Mr. Becker's employment is terminated by the Company without cause,
the Company must pay Mr. Becker one month's salary for each year of employment
since 1992.
-21-
<PAGE>
EXECUTIVE COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
---------------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
----------------------------------- -------------------------- ------------
SECURITIES
YEAR ENDED RESTRICTED UNDERLYING
NAME AND DECEMBER OTHER ANNUAL STOCK OPTIONS/ LTIP ALL OTHER
PRINCIPAL POSITION 31, SALARY($) BONUS($) COMPENSATION AWARDS(S)($) SARS(#) PAYMENTS($) COMPENSATION($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PHILIP L. BECK 1997 100,000 -- -- -- -- -- --
Chief Executive 1996 60,000 -- -- -- -- -- --
Officer 1995 45,000 -- -- -- -- -- --
J. WAYNE FARLOW 1997 40,000(1) -- -- -- -- -- --
</TABLE>
- ------------------------
(1)Served as CEO from September 2, 1997 to November 7, 1997. Mr. Farlow received
a salary of $10,000 per month while serving as CEO. Pursuant to the Severance
Agreement described below, the Company paid Mr. Farlow's salary through March
7, 1998.
OPTIONS/SAR GRANTS IN LAST FISCAL YEAR
Prior to the adoption of the Stock Option Plan described below, no stock
options were ever granted to or exercised by executive officers of the Company.
In February 1998, the Board of Directors and shareholders of the Company
approved an amended Stock Option Plan, originally adopted in August 1997 (the
"Plan"), which provides for incentive stock options and non-statutory options to
be granted to officers, employees, directors and consultants to the Company.
Options, to purchase up to 900,000 shares of the Company's Common Stock may be
granted under the Plan. Terms of exercise and expiration of Options granted
under the Plan may be established in the discretion of an Administrative
Committee appointed to administer the Plan or by the Board of Directors if no
Committee is appointed, but no option may be exercisable for more than five (5)
years.
In the fiscal year ending December 31, 1997, stock options were granted as
follows:
OPTION/SAR GRANTS IN LAST FISCAL YEAR
% OF TOTAL
NUMBER OF OPTIONS GRANTED
SHARES UNDERLYING TO EMPLOYEES IN EXERCISE EXPIRATION
NAME OPTIONS GRANTED FISCAL YEAR PRICE DATE
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)
- -------------------------------
(1)No options were exercised during the fiscal year ended December 31, 1997.
(2)Pursuant to the Severance Agreement described below, 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.
-22-
<PAGE>
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
Chairman & CEO
J. Wayne Farlow 60,000(1) $30,000 - 0 - $ 0
</TABLE>
- ------------------------------
(1)Pursuant to the severance agreement described below, 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.
SEVERANCE AGREEMENT
Wayne Farlow was Chief Executive Officer of the Company from September 2,
1997 to November 11, 1997. On December 19, 1997 the Company and Wayne Farlow
entered into a Severance Agreement and a Mutual Release (the "Severance
Agreement") pursuant to that Agreement, the Company and Mr. Farlow agreed to Mr.
Farlow's resignation as an officer and director effective November 7, 1997 and
the Company paid Mr. Farlow $10,000 per month through March 7, 1998, plus $1,875
in lieu of accrued vacation. The Company also agreed to allow Wayne Farlow to
continue to participate in the Company's health insurance program, with premiums
paid by the Company, until March 1998. In accordance with an option previously
granted to Mr. Farlow, he has purchased 60,000 shares of Common Stock of the
Company at a price of $0.50 per share, paid for by cash ($600) with the balance
secured by a non-recourse promissory note, payable to the Company and due
September 5, 1999.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The Company has a total of 5,039,061 shares of Common Stock issued and
outstanding after the issuance of 1,550,000 shares in the Canadian Offering and
110,000 shares to the Agent in that Offering. 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 Prospectus 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.
-23-
<PAGE>
AMOUNT AND NATURE OF
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP PERCENT OF CLASS
- ------------------------------------ ------------------ ----------------
Philip L. Becker, Director, Chairman and 1,087,444(1) 21.4%
CEO...............................
5335 Sterling Drive, Suite C
Boulder, CO 80301
Regis A. Frank, President, Chief Operating 47,250(2) 0.9%
Officer and Director .............
5335 Sterling Drive, Suite C
Boulder, CO 80301
Michael W. Johnson, Director ....... 17,250(3) 0.3%
1875 Lawrence Street
Denver, CO 80302
Robert B. Louthan, Director ........ 9,250(4) 0.2%
P. O. Box 4966
Vail, CO 81658
Opus Capital Fund, LLC.............. 437,500(5) 8.5%
1113 Spruce St.
Boulder, CO 80302
Daryl Yurek(6)...................... 425,330(6) 8.3%
1041 Kalmia Avenue
Boulder, CO 80304
W. Terrance Schreier(7)............. 252,265(7) 5.0%
1942 Broadway, Suite 303
Boulder, CO 80302
Gene R. Copeland(8)................. 222,267(8) 4.4%
5373 Lookout Ridge Drive
Boulder, CO 80301
J. Wayne Farlow, Former Director 180,000(11) 3.6%
and CEO(10).......................
Directors and Executive Officers.... 1,248,894(9) 24.7%
as a group
- ------------------------
(1) Includes 44,444 options exercisable presently or within 60 days.
(2) Includes 22,250 options exercisable presently or within 60 days.
(3) Includes 2,250 options exercisable within 60 days.
(4) Reflects options exercisable presently or within 60 days.
(5) Includes 87,500 shares purchasable upon exercise of warrants.
(6) Includes 100,000 shares beneficially owned by Mr. Yurek and held in the name
of the Daryl F. Yurek Self Employed Pension of which Smith Barney Inc. is
custodian. Excludes warrants to purchase 207,300 shares of Common Stock
exercisable beginning September 16, 1998 and expiring March 31, 1999.
-24-
<PAGE>
(7) Includes 41,500 shares held in the name of W. Terrance Schreier Simplified
Employee Pension (SEP), and 202,265 shares held by Transition Partners, Ltd.
Transition Partners, Ltd. is controlled by Mr. Schreier and he is therefore
the beneficial owner of all shares and warrants held in the name of
Transition Partners, Ltd. Excludes warrants held by Transition Partners,
Ltd. to purchase up to 103,650 shares of Common Stock of the Company
exercisable beginning September 16, 1998 and expiring March 31, 1999.
(8) Shares are held by Copeland Consulting Group, Inc. which is controlled by
Mr. Copeland and he is therefore the beneficial owner of all shares and
warrants held in the name of Copeland Consulting Group, Inc. Excludes
warrants held by the Copeland Consulting Group, Inc. to purchase 103,650
shares of Common Stock of the Company exercisable beginning September 16,
1998 and expiring March 31, 1999.
(9) Includes 65,639 options exercisable presently or within 60 days.
(10)Served as CEO from September 2, 1997 to November 7, 1997.
(11)Includes 60,000 shares held by the Company as security for the payment of a
promissory note payable to the Company.
SELLING STOCKHOLDERS
The following table sets forth certain information regarding beneficial
ownership of Common Stock as of March 17, 1998, after giving effect to the
Canadian Offering by the stockholders selling shares in this offering.
<TABLE>
<CAPTION>
SHARES SHARES SHARES
BENEFICIALLY PRE-OFFERING OFFERED BENEFICIALLY POST-OFFERING
OWNED PRE- PERCENTAGE IN THE OWNED POST- %
NAME AND ADDRESS OFFERING OWNERSHIP(1) OFFERING OFFERING OWNERSHIP
- ------------------------ ---------- ------------ -------- ------------ -------------
<S> <C> <C> <C> <C> <C>
Philip L. Becker........ 1,087,444 21.4% 100,000 987,444 17.8%
5335 Sterling Drive, Suite C
Boulder, CO 80301
Opus Capital Fund, LLC.. 437,500(2) 8.5% 437,500(2) -0- 0%
1113 Spruce Street
Boulder, CO 80302
Daryl Yurek............. 425,330(3) 8.3% 532,630(3) 100,000 1.8%
1041 Kalmia Avenue
Boulder, CO 80304
Transition Partners, Ltd. 252,265(4) 5.0% 305,915(4) 50,000 0.9%
1942 Broadway, Suite 303
Boulder, CO 80302
Copeland Consulting Group, 222,267(5) 4.4% 275,917(5) 50,000 0.9%
1942 Broadway, Suite 303
Boulder, CO 80302
Wayne Farlow............ 180,000 3.6% 180,000 -0- 0%
4020 Pinon Drive
Boulder, CO 80303
Marion Jack Rickard..... 100,000 2.0% 100,000 -0- 0%
8500 W. Bowles Ave, #210
Littleton, CO 80123
Robert C. Hartman, Jr... 46,500 1.0% 20,000 26,500 0.5%
3837 S. Olathe Circle
Aurora, CO 80013
-25-
<PAGE>
SHARES SHARES SHARES
BENEFICIALLY PRE-OFFERING OFFERED BENEFICIALLY POST-OFFERING
OWNED PRE- PERCENTAGE IN THE OWNED POST- %
NAME AND ADDRESS OFFERING OWNERSHIP(1) OFFERING OFFERING OWNERSHIP
- ------------------------ ------------ ------------ -------- ------------ -------------
Robert C. Hartman, Sr... 15,000 0.3% 10,000 4,000 0.1%
3837 S. Olathe Circle
Aurora, CO 80013
Joe W. Green............ 70,000 1.4% 30,000 30,000 0.7%
2182 S. Grant St.
Denver, CO 80210
William G. Witmore...... 20,000 0.4% 20,000 -0- 0%
3905 Promontory Court
Boulder, CO 80304
Terrance W. Hefty....... 20,000 0.4% 20,000 -0- 0%
8558 Baseline Road
Lafayette, CO 80026
Kent Nuzum.............. 29,200 0.2% 29,200 -0- 0%
5335 Sterling Drive, Suite C
Boulder, CO 80301
James Oleynick.......... 40,000 0.8% 40,000 -0- 0%
1749 McSpadden Ave
Van Couver, British Columbia
V5N1L3
Adrian Swanton.......... 20,000 0.4% 20,000 -0- 0%
4336 Prospect Road
North Vancouver,
British Columbia
V7N3L7
Equity Ventures Ltd..... 20,000 0.4% 20,000 -0- 0%
44 Church Street
Hamilton HM12, Bermuda
The Goleen Corp. Ltd.... 40,000 0.8% 40,000 -0- 0%
94 Dowdeswell St.
Box N7521
Nassau, Bahamas
William E. Hodal........ 10,000 0.2% 10,000 -0- 0%
2200 - 609 Granville Street
P.O. Box 10337, Pacific Centre
Vancouver, BC V7Y 1H2
Jeana Traviss........... 50,000 1.0% 50,000 -0- 0%
2200 - 609 Granville Street
P.O. Box 10337, Pacific Centre
Vancouver, BC V7Y 1H2
Henry Ewanchuk.......... 80,000 1.6% 80,000 -0- 0%
4116 West 8th Avenue
Vancouver, BC V6R 1Z6
-26-
<PAGE>
SHARES SHARES SHARES
BENEFICIALLY PRE-OFFERING OFFERED BENEFICIALLY POST-OFFERING
OWNED PRE- PERCENTAGE IN THE OWNED POST- %
NAME AND ADDRESS OFFERING OWNERSHIP(1) OFFERING OFFERING OWNERSHIP
- ------------------------ ------------ ------------ -------- ------------ -------------
Mike Meyers............. 20,000 0.4% 20,000 -0- 0%
826 West 48th Avenue
Vancouver, BC V5Z 2R9
Chelsea Capital Corporation 40,000 0.8% 40,000 -0- 0%
1600 - 750 W. Pender Street
Vancouver, BC V6C 2T8
Michael Thomson......... 20,000 0.4% 20,000 -0- 0%
1600 - 750 W. Pender Street
Vancouver, BC V6C 2T8
C.M. Oliver Capital Corporation 20,000 0.4% 20,000 -0- 0%
1600 - 750 W. Pender Street
Vancouver, BC V6C 2T8
Garrow Bay Holdings Ltd. 8,000 0.2% 8,000 -0- 0%
6175 Nelson Avenue
West Vancouver, BC V7W 2A1
Bruce Buckland.......... 8,000 0.2% 8,000 -0- 0%
2200-609 Granville Street
P.O. Box 10337, Pacific Centre
Vancouver, BC V7Y 1H2
Randy Ayers............. 8,000 0.2% 8,000 -0- 0%
2200 - 609 Granville Street
P.O. Box 10337, Pacific Centre
Vancouver, BC V7Y 1H2
Glenn Butterworth....... 8,000 0.2% 8,000 -0- 0%
2200 - 609 Granville Street
P.O. Box 10337, Pacific Centre
Vancouver, BC V7Y 1H2
Richard H. Becker....... 10,000 0.2% 10,000 -0- 0%
1056 Ortego Road
Pebblebeach, CA 93953
Dale Eckert............. 8,000 0.2% 8,000 -0- 0%
2200 - 609 Granville Street
P.O. Box 10337, Pacific Centre
Vancouver, BC V7Y 1H2
Daniel L. Copeland...... 3,333 0.1% 3,333 -0- 0%
5373 Lookout Ridge Dr.
Boulder, CO 80301
Patrick J. Copeland..... 3,333 0.1% 3,333 -0- 0%
5373 Lookout Ridge Dr.
Boulder, CO 80301
-27-
<PAGE>
SHARES SHARES SHARES
BENEFICIALLY PRE-OFFERING OFFERED BENEFICIALLY POST-OFFERING
OWNED PRE- PERCENTAGE IN THE OWNED POST- %
NAME AND ADDRESS OFFERING OWNERSHIP(1) OFFERING OFFERING OWNERSHIP
- ------------------------ ------------ ------------ -------- ------------ -------------
Michelle L. Peebles..... 3,333 0.1% 3,333 -0- 0%
5373 Lookout Ridge Dr.
Boulder, CO 80301
</TABLE>
- ----------------------------
(1) The percentages are calculated after 1,550,000 shares of Common Stock were
sold in the Canadian Offering and 110,000 shares were issued to C.M. Oliver
& Company Limited as a corporate finance fee relating to the Canadian
Offering.
(2) Includes warrants to purchase 87,500 shares of Common Stock.
(3) Includes 100,000 shares held in the name of the Daryl F. Yurek Self Employed
Pension of which Smith Barney Inc. is custodian. Shares Beneficially Owned
Pre-Offering excludes warrants to purchase up to 207,300 shares exercisable
from September 16, 1998 to March 31, 1999, but Shares Offered in the
Offering include such warrant shares.
(4) Shares Beneficially Owned Pre-Offering excludes warrants to purchase up to
103,650 shares of Common Stock of the Company exercisable from September 15,
1998 to March 31, 1999, but such warrant shares are included in Shares
Offered in the Offering. Transition Partners, Ltd. is controlled by Mr.
Schreier and he is the beneficial owner of all shares and warrants held in
the name of Transition Partners, Ltd.
(5) Shares Beneficially Owned Pre-Offering excludes warrants to purchase 103,650
shares of Common Stock of the Company exercisable from September 15, 1998 to
March 31, 1999, but such warrant shares are included in Shares Offered in
the Offering. Copeland Consulting Group, Inc. is controlled by Gene R.
Copeland and he is the beneficial owner of all shares and options held in
the name of Copeland Consulting Group, Inc.
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
COMMON STOCK
Effective March 17, 1998, following completion of the Canadian Offering, the
Common Stock of the Company became listed and began trading on the Vancouver
Stock Exchange. Such exchange is presently the only market, and is expected to
continue to be the primary market for the Common Stock. There are no proposals,
arrangements or understandings with any U.S. brokers, dealers or other persons
to establish a market for the Common Stock in the United States, and no market
is expected to develop in the near future. Moreover, at the date of this
Prospectus, the Common Stock has not been registered or qualified for sale under
state securities or Blue Sky laws of any states. The shares may therefore be
sold by the Selling Stockholders, or resold by a purchaser of the shares from a
Selling Stockholder, in the U.S., only to residents of states in which the sale
of the shares, and in transactions, which are exempt from any registration or
qualification requirement of the laws of that state.
The Company has 5,039,061 shares of Common Stock issued and outstanding, of
which 2,646,110 shares held by U.S. Persons are "restricted securities" under
Rule 144 of the Securities Act of 1933, as amended (the "Act"). The 1,660,000
shares issued in connection with the Canadian Offering are freely tradable in
Canada and such shares are subject to Regulation S under the Act and may not be
sold in the United States or to U.S. Persons (as defined in Regulation S) until
after April 25, 1998, and an additional 410,000 shares issued pursuant to
Regulation S in September 1997 cannot be sold in the U.S. or to U.S. Persons
until September 4, 1998, unless registered or exempt under the Act. 940,000 of
the shares held by Philip Becker have been held for the one-year period under
Rule 144, and will satisfy the two-year holding period under Rule 144 on June
21, 1998. The remaining 1,701,110 shares subject to Rule 144 will satisfy the
Rule 144 one-year and two-year (as the case may be) holding periods at various
times from September 4, 1998 through March 17, 2000. In addition to Rule 144 and
Regulation S restrictions on sales under the U.S. securities laws, in accordance
with Vancouver Stock Exchange requirements, 887,500 shares are subject to a
"hold" and may not be sold by the owners until at least June 16, 1998, and
additionally 151,579 shares are subject to a "hold" until September 16, 1998 and
150,000 shares until March 16, 1999.
-28-
<PAGE>
STOCK OPTIONS AND WARRANTS
As of the date of this Registration Statement, options to purchase 736,000
shares have been granted under the Company's Stock Option Plan (the "Option
Plan"), 33,000 of which are currently exercisable. In addition, the Company has
granted warrants to consultants to purchase an aggregate of 522,100 shares of
Common Stock. All such options are exercisable at a price of $1.00 per share,
and the warrants are exercisable at $1.00 per share until March 16, 1999 and at
$1.15 per share thereafter until March 16, 2000.
The Company has granted to the Agent for the Canadian Offering a
non-transferable warrant (the "Agent's Warrant") to acquire up to 250,000 shares
of Common Stock. The Agent's Warrant is exercisable at $1.00 per share until
March 16, 1999, and thereafter at $1.15 per share until March 16, 2000.
HOLDERS
At March 17, 1998, there were approximately 500 holders of Common Stock of
the Company.
DIVIDENDS
The Company intends, for the foreseeable future to retain all earnings, if
any, for the development of its business opportunities. The payment of future
dividends will be at the discretion of the Company's board of directors and will
depend upon, among other things, future earnings, capital requirements, the
Company's financial condition and general business conditions.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The Company has entered into transactions with its officers and directors,
and with principal shareholders listed above or affiliated entities as described
below.
EMPLOYMENT AGREEMENT - PHILIP BECKER
On September 2, 1997 the Company and Philip Becker ("Becker"), the Chairman,
Chief Technical Officer, Chief Executive Officer and a director of the Company,
entered into an employment agreement (the "Becker Agreement") which extends for
a thirty six month period commencing on September 1, 1997. Under the terms of
the Becker Agreement the Company will pay to Becker the sum of $8,333 per month
until the completion of the Canadian Offering and thereafter the sum of $10,000
per month plus incentive stock options to acquire 200,000 shares of Common Stock
at a price of $1.00 per share for a period of five years from the date of the
issuance, September 2, 1997. The option will vest over a 36 month period. No
options will be exercisable initially, but 7/36 of the options will vest seven
months after the date of the issuance, September 2, 1997, and 1/36 of the
options will vest on the first day of each month thereafter.
The Becker Agreement also provides that Becker shall be eligible to receive
a quarterly performance bonus equal to 10% of the Company's earnings net of
adjustments for interest and taxes. In the event that the bonus exceeds 50% of
Becker's gross annual salary, the bonus will be capped at the amount of Mr.
Becker's salary for the quarter.
The Becker Agreement includes non-competition and confidentiality provisions
which extend for 12 months and five years following the termination of Becker's
employment with the Company, respectively. The Becker Agreement may be
terminated by either the Company or Becker on 30 days notice without cause. If
his employment is terminated by the Company without cause, the Company must pay
Becker one month's salary for each year of employment since 1992.
-29-
<PAGE>
CONSULTING AGREEMENTS
On September 2, 1997, the Company and Kent Nuzum ("Nuzum"), the Secretary,
Interim Chief Financial Officer and a director of the Company, entered into a
consulting and non-competition agreement (the "Nuzum Agreement") which extends
for an eleven month period ending July 31, 1998. Under the terms of the Nuzum
Agreement, Nuzum provides certain consulting services related to the management
of the regulatory issues associated with the listing of the Company's Common
Stock with various stock exchanges in Canada and the United States. As payment
for his consulting services Nuzum receives the sum of $3,500 per month (the
"Consulting Fee") plus Nuzum's reasonable out-of-pocket expenses. In
consideration of the Consulting Fee Nuzum agrees not to disclose any
confidential information relating to the Company for a period of twelve months
following termination of the Nuzum Agreement.
The Company and Transition Partners, Ltd. ("TPL"), a Colorado corporation
with its principal place of business at 1942 Broadway, Suite 303, Boulder,
Colorado, U.S.A. 80302, entered into a letter consulting agreement (the "TPL
Agreement") on October 14, 1996, which was subsequently modified and extended on
May 6, 1997 and August 22, 1997. Under the terms of the TPL Agreement, as
amended, TPL provides certain consulting and advisory services related to
general corporate development, strategic planning and capital formation of the
Company. As payment for its consulting services TPL received a lump-sum payment
of $20,500, in addition to the $36,000 in fees received during the period
October 1996 to March 1997, and two promissory notes in the amounts of $41,000
and $75,000 respectively. Each of the promissory notes was payable, at the
option of the Company, by issuance of Common Stock of the Company valued at the
price of the Common Stock issued in the Canadian Offering, and these promissory
notes have been paid by the issuance of shares of Common Stock at a price of
$1.00 per share. The TPL Agreement will terminate on May 21, 1998.
On August 22, 1997 the Company and Pantheon Capital Ltd. ("Pantheon")
entered into a consulting and non-competition agreement (the "Pantheon
Agreement") which extends until May 21, 1998. Under the terms of the Pantheon
Agreement, as amended November 11, 1997, Pantheon provided certain consulting
services relating to an interim private financing of up to $410,000 and to the
Canadian Offering and agreed not to disclose confidential information of the
Company for five years. All rights of Pantheon under the Pantheon Agreement have
subsequently been transferred to its Stockholders, David Yurek and Kent Nuzum.
In consideration of its consulting services Pantheon was issued warrants to
purchase 414,600 shares of Common Stock of the Company at $1.00 per share
beginning September 16, 1998 and expiring March 31, 1999. The warrant provides
that it may be exercised by giving a non-interest bearing 12-month promissory
note to the Company.
SEVERANCE AGREEMENT
On December 19, 1997 the Company and Wayne Farlow, the President of the
Company from September 2 to November 11, 1997 entered into the Severance
Agreement described under "Executive Compensation - Severance Agreement."
SALE OF SHARES
The sale of Shares by the Selling Stockholders may be effected from time to
time in transactions (which may include block transactions) on any stock
exchange or trading market, if any, on which the Company's Common Stock is
listed or traded, in negotiated transactions, or a combination of such methods
of sale at fixed prices which may be changed, at market prices prevailing at the
time of sale, at prices related to such prevailing market prices, or at
negotiated prices. The Selling Stockholders may effect such transactions by
selling shares to or through broker-dealers, and such broker-dealers may receive
compensation in the form of discounts, concessions or commissions from the
Selling Stockholders and/or the purchasers of such shares for whom such
broker-dealers may act as agent or to whom they sell as principal, or both
(which compensation as to a particular broker-dealer might be in excess of
customary commissions). The Selling Stockholders and any broker-dealers that act
in connection with the sale of the shares of Common Stock hereunder might be
deemed to be "underwriters" within the meaning of Section 2(11) of the Act and
any commissions received by them and any profit on the resale of the Shares as
principals might be deemed to be underwriting discounts and commissions under
the Act.
-30-
<PAGE>
The Company has paid substantially all of the expenses incident to the
offering of the Shares, other than any fees and expenses of counsel to any of
the Selling Stockholders.
LEGAL MATTERS
The due authorization, valid issuance and non-assessability of the shares of
Common Stock offered hereby will be passed upon for the Company by the law firm
of Davis, Graham & Stubbs LLP, Denver, Colorado.
DESCRIPTION OF SECURITIES
The Company is authorized to issue 50,000,000 shares of Common Stock, $.01
par value. The holders of Common Stock are entitled to vote at all meeting of
stockholders, to receive dividends if, as and when declared by the board of
directors, and to participate ratably in any distribution of property or assets
on the liquidation, winding up or other dissolution of the Company. The shares
have no preemptive or conversion rights.
EXPERTS
The financial statements of the Company included in this Prospectus and in
the Registration Statement have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their reports appearing elsewhere herein and in the Registration Statement and
are included in reliance upon such reports given upon the authority of said
firms as experts in auditing and accounting.
AVAILABLE INFORMATION
The Company has filed with the Commission, a Registration Statement on
Form 10-SB pursuant to the Securities Exchange Act of 1934, as amended and a
Registration Statement on Form SB-2 pursuant to the Securities Act of 1933, as
amended (collectively referred to as the "Registration Statements") with respect
to the Shares being offered hereby. This Prospectus does not contain all the
information set forth in the Registration Statements, certain parts of which are
omitted in accordance with the rules and regulations of the Commission, and to
which reference is hereby made. Statements contained in this Prospectus as to
the contents of any contract or any other document are not necessarily complete,
and, in each instance, reference is made to the copy of such contract or
document filed as an exhibit to the Registration Statements, each such statement
being qualified in its entirety by such reference. The Registration Statements
may be inspected and copied at the offices of the Commission at Judiciary Plaza
Building, 450 Fifth Street, N.W., Washington, D.C. 20549; and its regional
offices located at Suite 1400, Northwestern Atrium Center, 500 West Madison
Street, Chicago, Illinois 60661, and Seven World Trade Center, 13th Floor, New
York, New York 10048. Copies of such material, or any portion thereof, may be
obtained from the Public Reference Section of the Commission, Judiciary Place,
450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The
Commission maintains a Web site that contains information regarding registrants'
electronic filings with the Commission. The address of the Commission's Web site
is http://www.sec.gov.
The Company files reports and other financial information with the
Commission pursuant to Section 13 of the Securities Exchange Act of 1934, and
following completion of this Offering, the Company intends to furnish its
stockholders with annual reports containing audited financial statements
examined and reported upon by its independent certified public accountants and
such interim reports, in each case, as it may determine to furnish or as may be
required by law.
-31-
<PAGE>
ESOFT, INCORPORATED
FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1997 AND 1996
<PAGE>
ESOFT, INCORPORATED
CONTENTS
- -------------------------------------------------------------------------------
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 3
BALANCE SHEET AT DECEMBER 31, 1997 4 - 5
STATEMENTS OF OPERATIONS FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996 6
STATEMENTS OF STOCKHOLDERS' EQUITY FOR THE YEARS ENDED
DECEMBER 31, 1997 AND 1996 7
STATEMENTS OF CASH FLOWS FOR THE YEARS
ENDED DECEMBER 31, 1997 AND 1996 8
SUMMARY OF ACCOUNTING POLICIES 9 - 14
NOTES TO FINANCIAL STATEMENTS 15 - 23
F-2
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
eSoft, Incorporated
Boulder, Colorado
We have audited the accompanying balance sheet of eSoft, Incorporated as of
December 31, 1997 and the related statements of operations, stockholders' equity
and cash flows for each of the two years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of eSoft, Incorporated at December
31, 1997 and the results of its operations and its cash flows for each of the
two years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/BDO Siedman, LLP
Denver, Colorado
March 5, 1998
F-3
<PAGE>
ESOFT, INCORPORATED
BALANCE SHEET
- -------------------------------------------------------------------------------
December 31, 1997
- -------------------------------------------------------------------------------
ASSETS
CURRENT:
Cash and cash equivalents $ 102,837
Accounts receivable, less allowance of
$48,000 for possible losses 199,832
Subscriptions receivable 200,000
Inventories 94,607
Prepaid expenses and other 44,799
Deferred income taxes 18,000
- -------------------------------------------------------------------------------
Total current assets 660,075
- -------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Computer equipment 119,544
Furniture and equipment 143,157
- -------------------------------------------------------------------------------
262,701
Less accumulated depreciation 147,881
- -------------------------------------------------------------------------------
Net property and equipment 114,820
OTHER ASSETS:
Capitalized software development costs,
net of accumulated amortization of $152,673 651,470
Deferred offering costs 280,896
Other 17,539
- -------------------------------------------------------------------------------
TOTAL OTHER ASSETS 949,905
- -------------------------------------------------------------------------------
$1,724,800
- -------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to financial
statements.
F-4
<PAGE>
ESOFT, INCORPORATED
BALANCE SHEET
- -------------------------------------------------------------------------------
December 31, 1997
- -------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Note payable - bank $ 75,757
Accounts payable 174,754
Deferred revenue 46,622
Accrued expenses and other 91,949
Notes payable, related party - current 20,000
- -------------------------------------------------------------------------------
Total current liabilities 409,082
DEFERRED TAX LIABILITY - NET 180,000
CONVERTIBLE NOTES PAYABLE -
RELATED PARTIES 355,903
- -------------------------------------------------------------------------------
Total liabilities 944,985
- -------------------------------------------------------------------------------
COMMITMENTS
STOCKHOLDERS' EQUITY:
Common stock, $.01 par value, 50,000,000 shares
authorized, 2,433,158 shares issued
and outstanding 24,332
Additional paid in capital 1,135,432
Accumulated deficit (379,949)
- -------------------------------------------------------------------------------
Total stockholders' equity 779,815
- -------------------------------------------------------------------------------
$1,724,800
- -------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to financial
statements.
F-5
<PAGE>
ESOFT, INCORPORATED
STATEMENTS OF OPERATIONS
- -------------------------------------------------------------------------------
Years Ended December 31, 1997 1996
- ------------------------------------------------------------------------------
REVENUES $ 1,233,137 $1,405,761
- ------------------------------------------------------------------------------
COSTS AND EXPENSES:
Cost of revenue 412,639 598,736
Research and development 56,671 -
Selling, general and
administrative 922,344 631,124
Interest expense 31,012 23,914
Loss on disposal of assets 7,803 27,739
Other (4,080) 4,899
- ------------------------------------------------------------------------------
Total costs and expenses 1,426,389 1,286,412
- ------------------------------------------------------------------------------
Income (loss) before income taxes (193,252) 119,349
- ------------------------------------------------------------------------------
Income tax expense 162,000 -
- ------------------------------------------------------------------------------
NET INCOME (LOSS) $ (355,252) $ 119,349
- ------------------------------------------------------------------------------
Basic and diluted income (loss) per common share $ (.23) $ .11
- ------------------------------------------------------------------------------
Weighted-average number of
common shares outstanding 1,536,884 1,102,253
- ------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to financial
statements.
F-6
<PAGE>
ESOFT, INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Stock Additional Total
----------------------- Paid in Accumulated Stockholders'
Years Ended December 1996 and 1997 Shares Amount Capital Deficit Equity
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, January 1, 1996 921,704 $ 9,217 $340,833 $(144,046) $206,004
Debt exchange for
common stock 341,454 3,415 127,140 - 130,555
Net income for the year - - - 119,349 119,349
- ----------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1996 1,263,158 12,632 467,973 (24,697) 455,908
Issuance of common stock
pursuant to private place-
ments, net of issuance costs
of $80,841 820,000 8,200 320,959 - 329,159
Common stock subscribed 350,000 3,500 346,500 - 350,000
Net loss for the year - - - (355,252) (355,252)
- ----------------------------------------------------------------------------------------------------------------
BALANCE, December 31, 1997 2,433,158 $ 24,332 $1,135,432 $(379,949) $779,815
- ----------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to financial statements.
</TABLE>
F-7
<PAGE>
ESOFT, INCORPORATED
STATEMENTS OF CASH FLOWS
- -------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents
Years Ended December 31, 1997 1996
- -------------------------------------------------------------------------------
OPERATING ACTIVITIES:
Net income (loss) $ (355,252) $ 119,349
Adjustments to reconcile net income
(loss) to net cash (used in) provided by
operating activities:
Depreciation and amortization 141,943 79,637
Loss on disposal of capital assets 7,803 27,739
Provision for losses on accounts receivable 48,000 -
Deferred tax expense 162,000 -
Consulting expense incurred for note payable 41,000 -
Changes in operating assets and liabilities:
Accounts receivable (213,167) 12,173
Inventories (35,948) 37,734
Other assets (59,777) 18,949
Accounts payable 145,026 (58,667)
Accrued expenses and other 85,915 (35,122)
Deferred revenue (11,348) 57,970
- ------------------------------------------------------------------------------
Net cash (used in) provided by operating activities (43,805) 259,762
- ------------------------------------------------------------------------------
INVESTING ACTIVITIES:
Purchase of property and equipment (21,989) (19,041)
Additions to capitalized software (221,139) (440,237)
- ------------------------------------------------------------------------------
Net cash used in investing activities (243,128) (459,278)
- ------------------------------------------------------------------------------
FINANCING ACTIVITIES:
Proceeds from issuance of common stock - net 479,159 -
Proceeds from borrowings 100,000 -
Payments on debt (24,243) -
Proceeds from related party borrowings 20,000 208,550
Deferred offering costs (205,896) -
Payments on related party notes payable - (36,386)
- ------------------------------------------------------------------------------
Net cash provided by financing activities 369,020 172,164
- ------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 82,087 (27,352)
CASH AND CASH EQUIVALENTS,
beginning of year 20,750 48,102
- ------------------------------------------------------------------------------
CASH AND CASH EQUIVALENTS,
end of year $ 102,837 $ 20,750
- ------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to financial
statements.
F-8
<PAGE>
ESOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
BUSINESS eSoft, Incorporated (the "Company" or "eSoft"), a Colorado
corporation, develops and markets internet connectivity
solutions. The Company has developed software, which is
integrated with a hardware component, that allows local area
networks to connect with the internet. The software also contains
full access control for its remote access features. The Company
also resells related connectivity accessories. The Company
previously had developed and sold software for the bulletin board
market.
The Company was previously a Colorado corporation and was merged
into a newly formed Delaware corporation as of February 17, 1998
of the same name with the Colorado corporation ceasing to exist.
The transaction was accounted for on a basis similar to a pooling
of interest with no change in the historical financial statements
of eSoft. The newly formed corporation had no operations prior to
the merger.
Prior to June 30, 1996, eSoft and Philip L. Becker, Ltd. ("PLB")
operated as a combined entity due to common ownership. eSoft, an
S-corporation, acted as the general partner of PLB, a limited
partnership. eSoft, as general partner, owned 10% of the
partnership while the sole stockholder of eSoft owned the other
90% individually. PLB was dissolved on June 30, 1996 and the
assets were contributed to the Company in exchange for common
stock.
The contribution of assets was accounted for in a manner similar
to a pooling-of-interests (the assets, liabilities and
partnership capital were contributed at book values) and,
accordingly, the Company's financial statements have been
presented to include the results of operations as though the
contribution of assets occurred as of January 1, 1996.
CONCENTRATIONS The Company's financial instruments that are exposed to
OF CREDIT RISK concentrations of credit risk consist primarily of cash and cash
equivalents and trade accounts receivable. The Company's cash and
cash equivalents are deposited with financial institutions and
are primarily invested in money market accounts. The investment
policy limits the Company's exposure to concentration of credit
risk. Such deposit accounts at times may exceed federally insured
limits. The Company has not experienced any losses in such
accounts.
F-9
<PAGE>
ESOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
Concentrations of credit risk with respect to trade accounts
receivable are generally limited due to customers dispersed
across geographic areas and generally short payment terms.
On-going credit evaluations of customers' financial condition are
performed and, generally no collateral is required. The Company
maintains an allowance for potential losses based on management's
analysis of possible uncollectible accounts
USE OF The preparation of financial statements in conformity with
ESTIMATES generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosures of contingent assets
and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results
could differ from those estimates and assumptions.
FAIR VALUE OF Unless otherwise specified, the Company believes the book
FINANCIAL value of financial instruments approximates their fair value.
INSTRUMENTS
INVENTORIES Inventories, consisting of purchased goods, are valued at
the lower of cost (first-in, first-out) or market.
PROPERTY AND Property and equipment are stated at cost. Depreciation is
EQUIPMENT computed using straight-line methods over the estimated useful
lives (generally five years) of the assets.
CAPITALIZED Costs incurred internally in creating software products for
SOFTWARE COSTS resale are charged to expense until technological feasibility has
been established upon completion of a detail program design.
Thereafter, all software development costs are capitalized until
the point that the product is ready for sale and subsequently
reported at the lower of amortized cost or net realizable value.
F-10
<PAGE>
ESOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
In accordance with Statement of Financial Accounting Standard No.
86, the Company recognizes the greater amount of annual
amortization of capitalized software costs under 1) the ratio of
current year revenues by product, to the product's total
estimated revenues method or 2) over the products estimated
economic useful life by the straight-line method.
REVENUE Revenue from licensing of software products is recognized upon
RECOGNITION shipment. Revenue from support and update service agreements is
deferred at the time the agreement is executed and recognized
ratably over the contractual period. The Company recognizes
revenues from customer training and consulting services when such
services are provided. All costs associated with licensing of
software products, support and update services, and training and
consulting services are expensed as incurred.
INCOME TAXES The Company with consent of its stockholder, through September 4,
1997, elected under the Internal Revenue Code to be an
S-corporation. Subsequent to September 4, 1997, the Company is
taxed as a U.S. C-corporation. Philip L. Becker, Ltd. elected to
be taxed as a partnership. In lieu of corporation income taxes,
the stockholder and partners were taxed on their proportional
share of the Company's or partnership's taxable income. Therefore
through September 4, 1997, no provision for income taxes has been
made in the accompanying financial statements.
The Company follows the provisions of Statement of Financial
Accounting Standards No. 109 - Accounting for Income Taxes ("SFAS
No. 109"), which requires use of the "liability method."
Accordingly, deferred tax liabilities and assets are determined
based on the temporary differences between the financial
statement and tax bases of assets and liabilities, using the
enacted tax rates in effect for the year in which the differences
are expected to reverse. The provisions of SFAS No. 109 did not
have an impact until after September 4, 1997.
CASH The Company considers cash and all highly liquid investments
EQUIVALENTS purchased with an original maturity of three months or less to be
cash equivalents.
F-11
<PAGE>
ESOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
LONG-TERM The Company applies SFAS No. 121, "Accounting for the Impairment
ASSETS of Long-Lived Assets". Under SFAS No. 121, long-lived assets and
certain intangibles are reported at the lower of the carrying
amount or their estimated recoverable amounts.
NET INCOME Through December 31, 1996, the Company followed the provisions of
(LOSS) PER Accounting Principles Board Opinion (APB) No. 15, "Earnings Per
SHARE Share". Effective for the year ended December 31, 1997, the
Company implemented Statement of Financial Accounting Standards
(SFAS) No. 128, "Earnings Per Share". SFAS No. 128 provides for
the calculation of "Basic" and "Diluted" earnings per share.
Basic earnings per share includes no dilution and is computed by
dividing income available to common stockholders by the weighted
average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of
securities that could share in the earnings of an entity, similar
to fully diluted earnings per share. In loss periods, dilutive
common equivalent shares are excluded as the effect would be
anti-dilutive. Basic and diluted earnings per share are the same
for all periods presented.
Options and warrants to purchase 762,100 shares of common stock
and convertible notes payable-related parties into 355,903 shares
of common stock were not included in the computation of diluted
EPS because their effect was anti-dilutive for the year ended
December 31, 1997.
Subsequent to December 31, 1997, the Company granted 90,000
shares to certain employees, sold 290,000 shares of common stock,
and accepted subscriptions to another 100,000 shares of common
stock. Additionally, the Company converted $177,952 of the
convertible notes payable - related parties into 177,952 shares
of common stock. The Company also granted options to purchase
528,000 shares of common stock to employees, directors, and
consultants.
F-12
<PAGE>
ESOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
STOCK OPTION The Company applies Accounting Principles Board Opinion 25,
PLANS "Accounting for Stock Issued to Employees," (APB Opinion 25) and
related Interpretations in accounting for all stock option plans.
Under APB Opinion 25, no compensation cost has been recognized
for stock options granted as the option price equals or exceeds
the market price of the underlying common stock on the date of
grant.
Statement of Financial Accounting Standards No. 123, "Accounting
for Stock-Based Compensation" (SFAS No. 123), requires the
Company to provide pro forma information regarding net income as
if compensation cost for the Company's stock option plans had
been determined in accordance with the fair value based method
prescribed in SFAS No. 123.
DEFERRED Costs incurred in connection with the Company's anticipated
OFFERING COSTS public offering are deferred and will be charged against
stockholders' equity upon the successful completion of the
offering or charged to expense if the offering is not
consummated.
NEW ACCOUNTING In June 1997, the Financial Accounting Standards Board issued
PRONOUNCEMENTS Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income (SFAS 130), which establishes standards for
reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include
all changes in equity except those resulting from investments by
owners and distributions to owners. Among other disclosures, SFAS
130 requires that all items that are required to be recognized
under current accounting standards as components of comprehensive
income be reported in a financial statement that is displayed
with the same prominence as other financial statements.
Also, in June 1997, FASB issued SFAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information" which
supersedes SFAS No.14, "Financial Reporting for Segments of a
Business Enterprise." SFAS No. 131 establishes standards for the
way that public companies report information about operating
segments in annual financial statements and requires reporting of
selected information about operating segments in interim
financial statements issued to the public. It also establishes
F-13
<PAGE>
ESOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
standards for disclosures regarding products and services,
geographic areas and major customers. SFAS No. 131 defines
operating segments as components of a company about which
separate financial information is available that is evaluated
regularly by the chief operating decision maker in deciding how
to allocate resources and in assessing performance.
SFAS 130 and 131 are effective for financial statements for
periods beginning after December 15, 1997 and requires
comparative information for earlier years to be restated. Because
of the recent issuance of the standards, management has been
unable to fully evaluate the impact, if any, the standards may
have on future financial statement disclosures. Results of
operations and financial position, however, will be unaffected by
implementation of these standards.
In October 1997, Statement of Position 97-2, Software Revenue
Recognition (SOP 97-2), was issued. The SOP provides guidance on
when revenue should be recognized and in what amounts licensing,
selling, leasing, or otherwise marketing computer software. SOP
97-2 is effective for transactions entered into in fiscal years
after December 15, 1997. Because of the recent issuance of the
SOP, management has been unable to fully evaluate the impact, if
any, the SOP may have on future financial statement disclosure.
In February 1998, the FASB issued SFAS No. 132, "Employer's"
Disclosures about Pensions and Other Postretirement Benefits"
which standardizes the disclosure requirements for pensions and
other postretirement benefits and requires additional information
on changes in the benefit obligations and fair values of plan
assets that will facilitate financial analysis. SFAS No. 132 is
effective for years beginning after December 15, 1997 and
requires comparative information for earlier years to be
restated, unless such information is not readily available.
Management believes the adoption of this statement will have no
material impact on the Company's financial statements.
RECLASSIFICATIONS
Certain items included in the prior year's financial statements
have been reclassified to conform to the current presentation.
F-14
<PAGE>
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
1. CONVERTIBLE Prior to January 1, 1996 the Company had entered into an
NOTES unsecured note agreement with the initial stockholder in the
PAYABLE - amount of $125,000 with interest at 9% per annum, maturing
RELATED December 31, 1997. The Company also had borrowed an
PARTIES additional $111,598 from the stockholder under various
unsecured demand note agreements with interest at 7% per
annum.
On June 21, 1996, the stockholder converted $130,555 of the
above notes into 341,454 shares of common stock. The
remaining amounts outstanding and additional advances from
the stockholder during 1996 were combined into a $239,903
unsecured demand note payable. The note bears interest at 7%
per annum and requires monthly interest payments of $1,399.
In October 1997, the note was amended which provides the
Company the option to convert the note into equity at the
price of the Company's contemplated initial public offering.
The note is payable in full on January 2, 1999.
The Company entered into an agreement with a business
consulting firm to provide services through May 31, 1998 in
exchange for convertible notes payable totalling $116,000.
The convertible notes payable bear interest at a rate of 12%
per annum and are payable on January 2, 1999. The notes are
convertible into common stock, at the Company's option, at
the price of the Company's contemplated initial public
offering.
Subsequent to December 31, 1997, holders of the convertible
notes payable accepted as partial payment of the principal
amounts owed 177,952 shares of the Company's common stock
valued at $1.00 per share.
The Company has borrowed a total of $20,000 from the initial
stockholder in April and June 1997. The 7% unsecured notes
payable are due on demand and require monthly interest
payments.
2. RESEARCH AND During the years ended December 31, 1997 and 1996, the
DEVELOPMENT Company capitalized $233,425 and $440,237 of software
development costs. Amortization expense of capitalized
software development costs included in depreciation and
amortization for the years ended December 31, 1997 and 1996
amounted to $116,912 and $35,761. Research and development
costs were $56,671 and $0 for the years ended December 31,
1997 and 1996.
F-15
<PAGE>
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Research and development expenditures during the following
periods were comprised as follows:
Years Ended December 31, 1997 1996
-----------------------------------------------------------
Payroll and related costs $ 131,627 $ 218,545
Officer payroll 50,000 48,300
Internet and telephone
expenses 30,056 35,276
Beta testing - 35,534
Occupancy costs 34,860 24,427
Purchased software - 23,800
Other 43,553 54,355
-----------------------------------------------------------
290,096 440,237
Less capitalized software 233,425 440,237
-----------------------------------------------------------
$ 56,671 $ -
-----------------------------------------------------------
3. COMMITMENTS Leases
The Company leases certain of its facilities and equipment
under noncancellable operating lease agreements which expire
at various dates through 2000. Rent expense for the years
ended December 31, 1997 and 1996 was $50,625 and $31,160.
Future minimum lease payments under noncancellable operating
leases are as follows:
Year ending December 31,
-----------------------------------------------------------
1998 $ 71,000
1999 58,000
2000 49,000
-----------------------------------------------------------
$ 178,000
-----------------------------------------------------------
F-16
<PAGE>
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Software Development and License Agreements
The Company has entered into several software development
and license agreements related to software utilized in
certain of the Company's products. The agreements require
compensation or royalty payments based on percentages
(ranging from 2.5% to 33.3%) of applicable gross sales and
subject to certain maximum amounts per license as defined in
the agreements.
Subsequent to December 31, 1997, the Company entered into an
agreement to terminate the software development agreements.
The termination agreement requires the Company to pay
$30,000 at the agreements inception; $30,000 no later than
15 days after the Company completes its proposed public
offering but not later than December 31, 1998 if the
proposed public offering is not completed by that date; and
the issuance of stock warrants entitling the warrant holder,
for a period of two years from January 29, 1998 to purchase
up to 20,000 shares of the Company's common stock at a price
of $1.00 per share until one year after the closing of the
public offering and $1.15 per share until the warrants
expire.
4. INCOME As stated in the summary of accounting policies, the Company
TAXES had elected to be taxed as an S corporation. In lieu of the
corporation income taxes, the stockholders and partners were
taxed on their proportional share of the Company's taxable
income. The proforma income (loss) per common share if the
Company was subject to taxes (federal statutory rate of 34%)
would be as follows:
Year ended December 31, 1997 1996
-----------------------------------------------------------
Income (loss) before
income taxes $ (193,252) $ 119,349
Proforma income tax
benefit (expense) 66,000 (41,000)
-----------------------------------------------------------
Proforma net income (loss) $ (127,252) $ 78,349
-----------------------------------------------------------
Proforma income (loss) per share (.08) $ .07
-----------------------------------------------------------
F-17
<PAGE>
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
With the change in tax status from an S corporation to a C
corporation on September 4, 1997, the Company recorded an
expense to recognize a deferred tax liability. The deferred
tax liability primarily results from the capitalized
software development costs being expensed for income tax
purposes in the period such costs are incurred.
The provision for income taxes consisted of the following:
Year ended December 31, 1997
-----------------------------------------------------------
CURRENT EXPENSE (BENEFIT):
Federal $ (16,000)
State (2,000)
DEFERRED EXPENSE (BENEFIT):
Federal 164,000
State 16,000
-----------------------------------------------------------
$ 162,000
-----------------------------------------------------------
A reconciliation of the effective tax rates and the
statutory U.S. federal income tax rates follows:
Year ended December 31, 1997
-----------------------------------------------------------
U.S. federal tax benefit at statutory rates $ (68,000)
State income tax benefit, net of federal
tax amount (7,000)
Other (6,000)
Deferred tax expense for software 243,000
-----------------------------------------------------------
Income tax expense 162,000
-----------------------------------------------------------
F-18
<PAGE>
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
Temporary differences that give rise to a significant
portion of the deferred tax assets and liability are as
follows:
December 31, 1997
-----------------------------------------------------------
Net operating loss carryforward $ 58,000
Provision for allowance for uncollectible
accounts 18,000
Software amortization (243,000)
Other 5,000
-----------------------------------------------------------
Net deferred tax liability $ (162,000)
-----------------------------------------------------------
At December 31, 1997, the Company had net operating loss
carryforwards of approximately $155,000 with expirations
through 2013. The net operating losses are limited due to
issuances of common stock.
5. CAPITAL On August 27, 1997, the Board of Directors authorized a
TRANSACTIONS stock split of 63.1579 to 1. All references to common share
and per share amounts in the accompanying financial
statements have been retroactively restated to reflect the
effect of the stock split.
On September 12, 1997, the Company sold 820,000 shares of
common stock for $410,000 in a private placement. In
December 1997, the Company sold 350,000 shares of common
stock for $350,000 in a private placement. The Company
granted the promoter of the private placement warrants to
purchase an additional 87,500 shares of common stock at $1
per share. The warrants expire December 22, 1999. The net
proceeds to the Company after stock issuance costs was
$679,159.
In January 1998, the Company granted 90,000 shares of common
stock to certain employees.
F-19
<PAGE>
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
In February 1998, the Company sold and issued an additional
290,000 shares and accepted subscriptions for an additional
100,000 shares, all at a price of $1.00 per share in private
transactions to officers, directors, key employees and
consultants of the Company.
In September 1997 the Company granted various options and
warrants to purchase an aggregate of 614,600 shares of its
common stock to employees and consultants. Terms of the
employee options are 200,000 shares at $1 per share which
expire September 2002. Warrants to purchase 414,600 shares
of common stock have been issued to consultants at $1 per
share. The warrants were modified in January 1998, changing
the term of the warrants to one year and fifteen days after
the Company's shares are listed for trading. If the shares
are not exercised within a year, the exercise price
increased to $1.15 for fifteen days.
The Company also granted in September 1997, 60,000 options
to an employee at $.50 per share that were exercisable
immediately. The options expire in September 1998. The
60,000 options were exercised in February 1998 under a stock
subscription. The Company received $600 cash and a note
receivable for $29,400 to exercise such shares.
FASB Statement 123, "Accounting for Stock-Based
Compensation" (SFAS No. 123), requires the Company to
provide pro forma information regarding net income and net
income per share as if compensation costs for the Company's
stock option plans and other stock awards had been
determined in accordance with fair value based methods
prescribed in SFAS No. 123. The proforma net loss and net
loss per share for the year ended December 31, 1997 would
have been $(355,969) and ($.23).
F-20
<PAGE>
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
A summary of the Company's outstanding options and warrants
as of December 31, 1997 and changes during the year then
ended is presented below:
Weighted
Average
Range of Exercise
Shares Price
-----------------------------------------------------------
Outstanding, beginning of year - $ -
Granted 762,100 .96
Cancelled - -
Exercised - -
-----------------------------------------------------------
Outstanding, end of year 762,100 $ .96
-----------------------------------------------------------
Weighted
Average
Range of Exercise
Shares Price
-----------------------------------------------------------
Options and warrants exercisable,
end of year 60,000 $ .50
Weighted average fair
value of options granted
during the year $ .96
-----------------------------------------------------------
F-21
<PAGE>
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The following table summarizes information about stock
options and warrants outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options and Warrants Outstanding Options and Warrants Exercisable
--------------------------------------------------------------------------
Weighted
Average Weighted Weighted
Range of Number Remaining Average Number Average
Exercise Outstanding Contractual Exercise Exercisable Exercise
Prices at 12/31/97 Life Price at 12/31/97 Price
--------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ .50 60,000 .75 $ .50 60,000 $ .50
1.00 702,100 2.19 1.00 - -
--------------------------------------------------------------------------
$ .96 762,100 2.08 $ .96 60,000 $ .50
--------------------------------------------------------------------------
</TABLE>
In January 1998, the Company granted options to purchase
418,000 shares of common stock at $1 per share to employees
and directors. The shares vest over various periods from 2
months to 36 months. The options expire through February
2003.
In January and February 1998, the Company granted 90,000
options to consultants at $1 per share, of which 65,000
options vest at date of grant and 25,000 options vest
ratably over a 36 month period. The options expire through
February 2003.
6. NOTE PAYABLE - The Company borrowed $100,000 from a bank on January 3,
BANK 1997. The note bears interest at 12% per annum and is
payable on April 3, 1998. The note is secured by the assets
of the Company.
7. EMPLOYMENT The Company has entered into employment agreements with
AGREEMENTS certain members of management. The agreements expire on
August 31, 2000. Future commitments are 1998-$120,000,
1999-$120,000, and 2000-$80,000.
F-22
<PAGE>
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
- -------------------------------------------------------------------------------
The Company and its former President have entered into a
severance agreement and mutual release pursuant to which the
Company will pay its former president $10,000 per month
through March 7, 1998.
8. RELATED PARTY The Company has entered into various agreements with certain
TRANSACTIONS outside directors to provide services in the year. One
director has an agreement to coordinate the offering process
in Vancouver for $3,500 a month. The agreement became
effective August 1, 1997 and expires July 31, 1998.
The Company has also been paying another director and the
Promoter $6,000 a month each to provide services with
respect to sales, marketing, sales channel development and
related administrative activities in the months of November
and December 1997.
9. PUBLIC OFFERING The Company has entered into a letter of intent with an
underwriter for a proposed public offering of 1,550,000
shares of common stock on the Vancouver Stock Exchange.
10. SUPPLEMENTAL Years ended December 31, 1997 1996
DISCLOSURE TO -----------------------------------------------------------
STATEMENTS OF
CASH FLOW AND Cash paid for interest $ 31,012 $ 23,914
NON CASH Convertible notes payable
INVESTING issued for consulting
AND FINANCING services and deferred
ACTIVITIES offering costs $ 116,000 $ -
Common stock issued for
subscription
receivable $ 200,000 $ -
Common stock issued for
conversion of debt $ - $ 130,555
F-23
<PAGE>
[BACK COVER PAGE OF PROSPECTUS]
[logo]
ESOFT, INC.
PROSPECTUS
NO DEALER, SALESMAN OR OTHER PERSON IS AUTHORIZED TO GIVE ANY INFORMATION
OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING AND NOT
CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION MUST NOT BE
RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR ANY UNDERWRITER. THIS
PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY, ANY SECURITY OTHER THAN THE REGISTERED SECURITIES OFFERED BY THIS
PROSPECTUS OR AN OFFER TO, OR A SOLICITATION OF, ANY PERSON IN ANY JURISDICTION
IN WHICH SUCH AN OFFER OR SOLICITATION IS NOT AUTHORIZED OR WOULD BE UNLAWFUL.
NEITHER THE DELIVERY OF THIS PROSPECTUS, NOR ANY OFFER OR SALE MADE HEREUNDER
SHALL, UNDER THE CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE INFORMATION
HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
TABLE OF CONTENTS
SUMMARY......................................................................2
RISK FACTORS.................................................................4
USE OF PROCEEDS..............................................................7
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.................................................7
BUSINESS....................................................................11
DESCRIPTION OF PROPERTY.....................................................19
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS................20
EXECUTIVE COMPENSATION......................................................21
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT..............23
SELLING STOCKHOLDERS........................................................25
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS....................28
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS..............................29
SALE OF SHARES..............................................................30
LEGAL MATTERS...............................................................31
DESCRIPTION OF SECURITIES...................................................31
EXPERTS.....................................................................31
AVAILABLE INFORMATION.......................................................31
UNTIL ___________, 1998 (90 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS EFFECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT
PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS.
THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN
ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.
, 1998
----------
-32-
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company is incorporated in the state of Delaware. Section 145 of the
General Corporation Law of the State of Delaware contains provisions permitting
corporations organized thereunder to indemnify directors, officers and other
representatives from liabilities in connection with any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative, by reason of the fact that such person was or is a director,
officer, employee or agent of the corporation, against liabilities arising in
any such action, suit or proceeding, expenses incurred in connection therewith,
and against certain other liabilities.
Article 8 of the Certificate of Incorporation of the Company provides
that, to the furthest extent permitted by applicable law in effect from time to
time, no director of the Company shall have any personal liability for monetary
damages to the Company or its shareholders for breach of his fiduciary duty as a
director, except that indemnity is not provided to a director whose conduct
involves (i) a breach of the director's duty of loyalty to the Company or its
shareholders, (ii) acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of the law, (iii) unlawful
distributions as defined in Section 174 of the Delaware General Corporation Law
any transaction from which the director derived an improper personal benefit.
Article 9 of the Certificate of Incorporation and the Bylaws of the
Company provides similar indemnification provisions as that provided by Section
145 of the General Corporation Law of the state of Delaware. The Company will
also indemnify any person who is serving or has served the Company as an officer
to the same extent as a director.
ITEM 25 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the costs and expenses, payable by the
Company in connection with the sale of Common Stock being registered (all
amounts are estimated except the Commission Registration Fee).
Commission Registration Fee........................................ $ 988.60
Blue Sky Qualification Fees and Expenses (including legal fees)
(estimated)..................................................... 1,000.00
Printing Expenses (estimated)...................................... 1,000.00
Legal Fees and Expenses (estimated)................................ 25,000.00
Accountants' Fees and Expenses (estimated)......................... 10,000.00
Miscellaneous Expenses (estimated)................................. 1,000.00
---------
Total............................................................ $38,988.60
=========
II-1
<PAGE>
ITEM 26 RECENT SALES OF UNREGISTERED SECURITIES
PRIVATE PLACEMENT TRANSACTIONS
In September 1997 the Company sold in a private placement transaction
820,000 shares of Common Stock at $.50 per share to 25 investors, nine of which
were U.S. persons. In December, the Company sold to a venture capital fund
350,000 shares of Common Stock at $1.00 per share and warrants to purchase
87,500 shares of Common Stock at $1.00 per share for one year and $1.15 per
share for a second year. The price paid for these warrants was $438.00. In
February and March 1998, the Company sold 440,000 shares at $1.00 per share. The
purchasers are all officers, directors, key employees and consultants of the
company. All of the sales to U.S. persons were made in reliance upon exemptions
from the registration requirements of Section 5 of the 1933 Act provided by Rule
505 of Regulation D under the 1933 Act, and sales outside of the United States
to non-U.S. persons were made in reliance upon Regulation S under the Act.
PROMISSORY NOTES
The Company issued to Transition Partners, Ltd. an $18,750 promissory note
and a $10,250 promissory note, each payable on the earlier of January 2, 1999 or
30 days after the date of the Canadian Offering. The promissory notes were
payable at the option of the Company by issuance of such number of shares of
Common Stock, priced at the offering price to the public in the Canadian
Offering, that in the aggregate equals the amount outstanding under the
promissory note, and the Company has paid the notes by the issuance of 29,000
shares of common stock at $1.00 per share.
The Company issued to Copeland Consulting Group, Inc. an $18,750
promissory note and a $10,250 promissory note, each payable on the earlier of
January 2, 1999 or 30 days after the date of the Canadian Offering. The
promissory notes were payable, at the option of the Company by issuance of such
number of shares of Common Stock, priced at the offering price to the public in
the Canadian Offering, that in the aggregate equals the amount outstanding under
the promissory note, and the Company has paid the notes by the issuance of
29,000 shares of common stock at $1.00 per share.
The Company issued to Pantheon Capital Ltd. a $37,500 promissory note and
a $20,500 promissory note, each payable on the earlier of January 2, 1999 or 30
days after the date of the Canadian Offering. The promissory notes were payable,
at the option of the Company by issuance of such number of shares of Common
Stock, priced at the offering price to the public in the Canadian Offering, that
in the aggregate equals the amount outstanding under the promissory note, and
the Company has paid the notes by the issuance of 58,000 shares of common stock
at $1.00 per share.
The Company believes that the issuance of the promissory notes is exempt
from the registration requirements of Section 5 of the Act by virtue of the
exemption contained in Section 4(2) of the Act.
SEVERANCE AGREEMENT
Pursuant to the Severance Agreement, the Company sold to Wayne Farlow
60,000 shares of Common Stock of the Company at a price of $0.50 per share, the
par value of which was paid in cash ($600) with the balance to be paid by a
non-recourse promissory note payable to the Company and due September 5, 1999.
II-2
<PAGE>
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
3.1 Articles of Incorporation*
3.1a Certificate of Incorporation of New eSoft, Inc.***
3.1b Certificate of Merger of eSoft, Inc. into New eSoft, Inc.***
3.2 Bylaws of eSoft*
3.2a Bylaws of New eSoft, Inc.*
10.1 Severance Agreement and Mutual Release dated December 19, 1997
between the Company and Wayne Farlow*
10.2 Agency Agreement with C.M. Oliver Capital
10.2a Agent's Warrant
10.3 Lease Agreement dated September 18, 1997 between the Company and
Aspen Industrial Park Partnership**
10.6 Voting Agreement dated September 2, 1997 between Philip Becker,
Pantheon Capital Ltd. and Transition Partners, Ltd.*
10.6a Termination Agreement***
10.7 Registration Rights Agreement dated September 2, 1997 between
Transition Partners, Ltd., Pantheon Capital Ltd. and the Company*
10.8 Agreement dated May 6, 1997 between Transition Partners, Ltd. and the
Company*
10.9 Agreement dated October 14, 1996 between Transition Partners, Ltd.
and the Company*
10.10 Amendment to Agreement dated August 22, 1997 between Transition
Partners, Ltd. and the Company*
10.11 Second Amendment to Agreement dated November 11, 1997 between
Transition Partners, Ltd. and the Company*
10.12 Stock Option Agreement dated November 11, 1997 between Transition
Partners, Ltd. and the Company*
10.12a Amended Stock Warrant Agreement dated January 29, 1998***
10.13 Consulting Agreement dated August 1, 1997 between the Company and
Kent Nuzum*
10.14 Consulting Agreement dated August 22, 1997 between Pantheon Capital
Ltd. and the Company*
10.15 Amendment to Consulting Agreement dated August 22, 1997 between
Pantheon Capital Ltd. and the Company*
10.16 Stock Option Agreement dated November 11, 1997 Between Pantheon
Capital Ltd. and the Company*
II-3
<PAGE>
10.16a Amended Stock Warrant Agreement dated January 29, 1998***
10.17 Stock Option Agreement dated November 11, 1997 between Copeland
Consulting Group, Inc. and the Company*
10.17a Amended Stock Warrant Agreement dated January 29, 1998***
10.18 Employment Agreement dated September 2, 1997 between Philip Becker
and the Company*
10.19 Form of Employee Confidentiality Agreement***
10.20 Termination Agreement Terminating Software Development and Consulting
Agreements***
10.21 Promissory Note to First National Bank of Arvada, Colorado***
10.22 Proposal for Financing Arrangement from Colorado National Bank***
10.23 Employment Agreement dated March 6, 1998 between Regis Frank and the
Company
10.24 Employment Agreement dated March 6, 1998 between Robert C. Hartman
and the Company
23.1 Consent of Certified Public Accountants
27 Financial Data Schedule
- -------------------------------
* Filed with Registration Statement on Form 10-SB on December 22, 1997.
** Filed with Registration Statement on Form SB-2 on December 24, 1997.
*** Filed with Amendment No. 1 to Registration Statement on Form 10-SB on
February 18, 1998.
(b) Financial Statement Schedules
None
II-4
<PAGE>
ITEM 28
I. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the Company's Bylaws or the
Certificate of Incorporation, the registrant has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Act and is therefore unenforceable. In
the event that a claim for indemnification against such liabilities (other than
the payment by the registrant of expenses incurred or paid by a director,
officer or controlling person of the registrant in the successful defense of any
action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned hereby undertakes that:
(1) for purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Act shall be deemed to be part of this registration statement as of
the time it was declared effective.
(2) For the purpose of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed to
be a new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the initial
bona fide offering thereof.
(3) It will file, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) include any prospectus required by section 10(a)(3) of the
Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20 percent change in the maximum aggregate offering price set forth in
the "Calculation of Registration Fee" table in the effective registration
statement; and
(iii) include any additional or changed material information on the
plan of distribution.
(4) For purposes of determining liability under the Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(5) The Company will file a post effective amendment to remove from
registration any of the securities that remain unsold at the end of the
offering.
II. UNDERTAKING PURSUANT TO REGULATION 415
The undersigned Registrant hereby undertakes: (1) to file, during any
period in which offers or sales are being made, a post-effective amendment to
this Registration Statement to (a) include any prospectus required by section
10(a)(3) of the Securities Act of 1933 (the "Act"), (b) reflect in the
prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the registration statement, and (c) include any
material information with respect to the plan of distribution not previously
disclosed in the Registration
II-5
<PAGE>
Statement or any material change to such information in the Registration
Statement; (2) that, for the purpose of determining any liability under the Act,
each such post-effective amendment shall be deemed to be a new Registration
Statement relating to the securities offered therein, and the offering of such
securities at that time shall be deemed to be the initial bona fide offering
thereof; and (3) to remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
II-6
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, as
amended, the registrant certifies that it has reasonable grounds to believe that
it meets the requirements for filing on Form SB-2 and has authorized this
registration statement to be signed on its behalf by the undersigned, thereunto
duly authorized, in the City of Boulder, State of Colorado, on December 23,
1997.
eSOFT, INC.
By: /s/Philip L. Becker
----------------------------------
Philip L. Becker, Chairman, Chief
Executive Officer and Chief
Technology Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears herein constitutes and appoints Philip L. Becker and Kent Nuzum, and
each of them, as his true and lawful attorneys-in-fact and agents, with full
power and substitution and resubstitutions, for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments to this
Registration Statement (including post-effective amendments), including a
registration statement filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorneys-in-fact and agents, or any of them, or their or his
substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933 as
amended, this registration statement has been signed by the following persons in
the capacities and on the dates indicated.
SIGNATURES TITLE DATE
/s/Philip L. Becker
- ---------------------- Chairman, Chief Executive Officer,
Philip L. Becker Chief Technology Officer and Director March 24, 1998
/s/Kent Nuzum
- ---------------------- Acting Chief Financial Officer
Kent Nuzum (Principal Financial and Accounting March 24, 1998
Officer)
/s/Regis A. Frank
- ---------------------- President, Chief Operation Officer
Regis A. Frank and Director March 24, 1998
/s/Robert B. Louthan
- ----------------------
Robert B. Louthan Director March 24, 1998
/s/Michael W. Johnson
- ----------------------
Michael W. Johnson Director March 24, 1998
/s/Richard B. Rice
- ----------------------
Richard B. Rice Director March 24, 1998
II-7
AGENCY OFFERING AGREEMENT
THIS AGREEMENT dated for reference the 26th day of November, 1997 is made
BETWEEN:
ESOFT, INC., a Delaware corporation with an office at 5335
Sterling Drive, Boulder, Colorado 80301;
(the "Issuer")
AND:
C.M. OLIVER & COMPANY LIMITED, of 2nd Floor, 750 West Pender
Street, Vancouver, British Columbia V6C 2T8;
(the "Agent")
WHEREAS:
A. The Issuer wishes to raise money for the purposes set forth in its
Prospectus, which is to be filed by the Issuer with the Regulatory Authorities,
by offering for sale certain of its securities;
B. The Issuer wishes to appoint the Agent to distribute those securities and the
Agent is willing to accept the appointment on the terms and conditions of this
Agreement;
THE PARTIES to this Agreement therefore agree:
1. DEFINITIONS
1.1 In this Agreement, including the recitals above:
<PAGE>
2
(a) "Act" means the Securities Act (British Columbia), the
regulations and the rules made thereunder and all policy
statements, blanket orders, notices, rulings and directions
issued by the Commission, all as amended;
(b) "Commission" means the British Columbia Securities Commission;
(c) "Corporate Finance Shares" has the meaning assigned in
subsection 6.2;
(d) "Effective Date" means the date on which a receipt for the
Final Prospectus is Issued by the Commission;
(e) "Exchange" means the Vancouver Stock Exchange;
(f) "Final Prospectus" means the final prospectus filed or
intended to be filed by the Issuer with the Regulatory
Authorities in connection with the Offering and any amendments
to it which may be filed with the Regulatory Authorities.
(g) "Offering" means the offering of the Shares under the
Prospectus;
(h) "Offering Day" means the day on which the Offering is made;
(i) "Preliminary Prospectus" means the preliminary prospectus
filed or intended to be filed by the Issuer with the
Regulatory Authorities in connection with the Offering and any
amendments to it which may be filed with the Regulatory
Authorities.
(j) "Prospectus" means both the Preliminary Prospectus and the
Final Prospectus;
(k) "Regulatory Authorities" means the Commission and the
Exchange;
(l) "Securities" means the Shares, the Agent's Warrants and any
shares in the capital of the Issuer issued on the exercise of
the Agent's Warrants, the Corporate Finance Shares; and
(m) "Shares" means the 1,550,000 common shares in the capital of
the Issuer, as presently constituted, to be distributed under
the Prospectus.
2. APPOINTMENT OF AGENT
2.1 The Issuer appoints the Agent as its exclusive agent and the Agent accepts
the appointment and agrees to act as the exclusive agent of the Issuer to offer
the Shares for sale under the Prospectus.
2.2 The price of the Shares will be US $1.00 per share (the "Offering Price").
<PAGE>
3
2.3 The Issuer will reserve or set aside sufficient shares in its treasury to
issue the Shares, the Corporate Finance Shares and all shares which may be
issued on the exercise of the Agent's Warrants.
3. LISTING APPLICATION AND CONDUCT OF THE OFFERING
3.1 Prior to the Effective Date, the Issuer will apply to the Exchange for a
conditional listing of its common shares.
3.2 Following the Effective Date and after consulting with the Exchange, the
Issuer and the Agent will set the Offering Day.
3.3 The Offering Day will be on or before the earlier of the day which is:
(a) 90days after the Effective Date; and
(b) 12 months after the date of the issue by the Commission of the
receipt for the Preliminary Prospectus.
3.4 The Offering will be made through the facilities of and in accordance with
the rules and policies of the Exchange.
3.5 After the Offering has been completed, the Issuer and the Agent will file
any documents required by the Exchange in order to remove the conditional
listing and to list, post and call the common shares of the Issuer for trading
on the Exchange.
3.6 The Agent will advise the Issuer and its counsel in writing when the
distribution under the Prospectus is complete.
4. OPINIONS AND CERTIFICATES
4.1 Prior to the Agent executing the Agent's Certificate attached to the Final
Prospectus, the Issuer will deliver the following documents to the Agent and its
counsel in a form acceptable to them:
(a) an opinion of the auditor of the Issuer, dated as of the date
of the Final Prospectus and addressed to the Agent and its
counsel, relating to the accuracy of the financial statements
forming part of the Prospectus and the accuracy of the
financial, numerical and certain other information disclosed
in the Prospectus;
(b) an opinion of counsel for the Issuer, dated as of the date of
the Final Prospectus and addressed to the Agent and its
counsel, relating to any legal matter in connection with the
creation, issuance and sale of the Securities for which the
Agent may reasonably request an opinion (the "Legal Opinion");
and
<PAGE>
4
(c) a certificate of the Issuer, dated as of the date of the Final
Prospectus and signed by the president of the Issuer or by
another officer approved by the Agent, certifying certain
facts relating to the Issuer and its affairs (the "Officer's
Certificate").
4.2 The Issuer will also deliver any other certificates, comfort letters or
opinions in connection with any matter related to the Prospectus which are
reasonably requested by the Agent or its counsel.
4.3 On the day prior to the Offering Day the Issuer will provide the Agent and
its counsel with evidence of the necessary approval of the Regulatory
Authorities for the Offering and an updated Legal Opinion and Officer's
Certificate each updated to 4:00 p.m. on the day prior to the Offering Day.
5. AGENT'S COMMISSION
5.1 The Issuer will pay the Agent a commission equal to 7.5% of the gross
proceeds of the Offering.
6. CORPORATE FINANCE SHARES
6.1 The Agent will advise the Issuer with respect to its share structure, timing
and pricing of the Offering and will assist the Issuer with the project
management of the Offering and listing and the co-ordination of required legal,
accounting and regulatory requirements (the "Corporate Finance Services").
6.2 As consideration for the Corporate Finance Services, the Issuer will pay to
the Agent as a fee, 110,000 previously unissued common shares (the "Corporate
Finance Shares") in its capital at a deemed price of US $1.00.
7. GUARANTEED AGENCY AND AGENT'S WARRANTS
7.1 The Agent will purchase any of the Shares which are unsubscribed for on the
Offering Day (the "Guarantee"), including any Shares in respect of which a
subscription has been received but is not binding on the subscriber by reason of
the receipt by the Agent, in accordance with the Act, of written notice
evidencing the intention of the subscriber not to be bound by the subscription.
7.2 In consideration for the Guarantee, the Issuer will issue share purchase
warrants (the "Agent's Warrants") to the Agent or to members of its selling
group as directed by the Agent entitling them to purchase up to 250,000 fully
paid and non-assessable Common Shares previously unissued common shares in the
capital of the Issuer.
<PAGE>
5
7.3 The distribution of the Agent's Warrants will be qualified under the
Prospectus, and except to its employees and to members of its selling group, the
Agent's Warrants will be non-transferrable.
7.4 The right to purchase shares under the Agent's Warrants may be exercised at
any time up to the close of business two years from the day the shares of the
Issuer are listed, posted and called for trading on the Exchange, at the
Offering Price during the first year and at price of US $1.15 during the second
year of the term of the Agent's Warrants.
7.5 The terms governing the Agent's Warrants will include, among other things,
provisions for the appropriate adjustment in the class, number and price of the
shares to be issued under the Agent's Warrants upon the occurrence of certain
events, including any subdivision, consolidation or reclassification of the
shares, the payment of stock dividends or the amalgamation of the Issuer.
7.6 The issue of the Agent's Warrants will not restrict or prevent the Issuer
from obtaining any other financing, nor from issuing additional securities or
rights during the term of the Agent's Warrants.
8. CLOSING
8.1 In this Section:
(a) "Certificates" means the certificates representing the Shares
in the names and denominations reasonably requested by the
Agent and the certificates representing the Agent's Warrants;
(b) "Proceeds" means the gross proceeds of the Offering, less:
(i) the Agent's commission;
(ii) the expenses of the Agent in connection with
the Offering, including the Agent's legal
expenses to a maximum of $30,000, which have
not been repaid by the Issuer; and
(iii) any amount which has been attached by
garnishing order or other form of
attachment.
8.2 The Issuer will, within 10 business days of the Offering Day, deliver the
Certificates, through its registrar and transfer agent, to the Agent against
payment of the Proceeds.
8.3 If the Issuer has satisfied all of its obligations under this Agreement, the
Agent will, within 10 business days of the Offering Day, pay the Proceeds to the
Issuer through its registrar and transfer agent, against delivery of the
Certificates.
<PAGE>
6
9. MATERIAL CHANGES
9.1 If, after the Prospectus is first filed with the Regulatory Authorities but
before the conclusion of the distribution of all the Securities under the
Prospectus, a material change (as defined in the Act) occurs in the affairs of
the Issuer, the Issuer will:
(a) notify the Agent immediately, in writing, with full
particulars of the change;
(b) file with the Regulatory Authorities as soon as practicable,
and in any event no later than 10 days after the change
occurs, an amendment to the Prospectus disclosing the material
change; and
(c) provide as many copies of that amendment to the Agent as the
Agent may reasonably request.
10. TERMINATION
10.1 The Agent may terminate its obligations under this Agreement by notice in
writing to the Issuer at any time before the day the shares of the Issuer are
listed, posted and called for trading on the Exchange if:
(a) there is an event, accident, governmental law or regulation or
other occurrence of any nature which, in the opinion of the
Agent, seriously affects or will seriously affect the
financial markets or the business of the Issuer or any
subsidiary of the Issuer or the ability of the Agent to
perform its obligations under this Agreement;
(b) an enquiry or investigation (whether formal or informal) in
relation to the Issuer, or the Issuer's directors or officers,
is commenced or threatened by an officer or official of any
competent authority;
(c) the financial statements of the Issuer or any of its
predecessors or subsidiaries reveal a material adverse change
in their financial condition from that which is the Agent's
understanding at this time, as set out in the Issuer's audited
financial statements for the year ended December 31, 1996 and
unaudited financial statements for the nine month period ended
September 30, 1997;
(d) a material adverse change occurs or is likely to occur in the
business, affairs, financial condition or capital of the
Issuer;
(e) there is a material change in the share ownership of the
Issuer, or an existing principal or key management employee
leaves the employ of the Issuer, or a shareholder which
beneficially owns more than 5% of the outstanding shares of
the Issuer wishes to transfer or sell substantially all of his
or her common shares;
<PAGE>
7
(f) all approvals of the Regulatory Authorities are not obtained
on a timely basis or any securities commission has issued or
proposes to issue an order to prevent or restrict trading in
the Shares; or
(g) the state of the financial markets becomes such that, in the
sole opinion of the Agent, it would be impracticable or
unprofitable to offer or to continue to offer the Shares for
sale to the public.
10.2 The Agent may terminate its obligations under this Agreement at any time
if:
(a) any order to cease trading (including communicating with
persons in order to obtain expressions of interest) in the
securities of the Issuer is made by a competent regulatory
authority and that order is still in effect;
(b) the Issuer is in breach of any term of this Agreement;
(c) the Agent determines that any of the representations or
warranties made by the Issuer in this Agreement is false or
has become false.
10.3 This Agreement will terminate upon written notice to that effect by the
Agent to the Issuer if a final receipt for the Prospectus is not issued by the
Commission within 120 days of the reference date of this Agreement.
11. WARRANTIES AND REPRESENTATIONS
11.1 The Issuer warrants and represents to the Agent that:
(a) the Issuer and its subsidiaries, if any, are valid and
subsisting corporations duly incorporated and in good standing
under the laws of the jurisdictions in which they are
incorporated, continued or amalgamated;
(b) the Issuer and its subsidiaries, if any, are duly registered
and licensed to carry on business in the jurisdictions in
which they carry on business or own property;
(c) the authorized and issued capital of the Issuer is as
disclosed in the Prospectus and the issued shares are fully
paid and non-assessable;
(d) the Issuer is the beneficial owner of the properties, business
and assets or the interests in the properties, business or
assets referred to in the Prospectus; all agreements by which
the Issuer holds an interest in a property, business or asset
are in good standing according to their terms, and the
properties are in good standing under the applicable laws of
the jurisdictions in which they are situated;
<PAGE>
8
(e) the Prospectus contains full, true and plain disclosure of all
"material facts", within the meaning of the Act, in relation
to the Issuer, its subsidiaries (if any), its business and its
securities, and contains no misrepresentations;
(f) the financial statements of the Issuer which form part of the
Prospectus have been prepared in accordance with United States
generally accepted accounting principles, accurately reflect
the financial position of the Issuer at the date of the
financial statements and there have been no adverse material
changes in the financial position of the Issuer since that
date, except as fully and plainly disclosed in the Prospectus;
(g) the Issuer has complied and will comply fully with the
requirements of all applicable corporate and securities laws,
including, without limitation, the Act and the U.S. Securities
Act of 1933 (the "1993 Act") and the Delaware General
Corporations Law in relation to the issue and trading of its
securities and in all matters relating to the Offering;
(h) the issue and sale of the Securities by the Issuer does not
and will not conflict with, and does not and will not result
in a breach of, any of the terms of its incorporating
documents or any agreement or instrument to which the Issuer
is a party;
(i) except as disclosed in the Prospectus, neither the Issuer nor
any of its subsidiaries, if any, is a party to any actions,
suits or proceedings which could materially affect its
business or financial condition, and no such actions, suits or
proceedings are contemplated or have been threatened;
(j) this Agreement has been authorized by all necessary corporate
action on the part of the Issuer;
(k) the warranties and representations in this Subsection are true
and will remain so as of the conclusion of the distribution
under the Prospectus; and
(l) the Issuer has filed a registration statement with the U.S.
Securities and Exchange Commission ("SEC") seeking the
registration of the Issuer's class of common shares pursuant
to Section 12(g) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), and shall diligently prosecute
such registration so that it may become effective on the
sixtieth day following such filing (or as soon thereafter as
possible) and prior to the Offering Day, and shall thereafter
timely make all such filings as are required by Section 13 of
the Exchange Act.
11.2 The Agent warrants and represents to the Issuer that:
(a) it is a valid and subsisting corporation under the law
of the jurisdiction in which it was incorporated, continued
or amalgamated;
<PAGE>
9
(b) it is a member in good standing of the Exchange; and
(c) it has complied with and will fully comply with the
requirements of all applicable securities laws, including,
without limitation, the Act and the by-laws and rules of the
Exchange, in relation to all matters relating to the Offering.
11.3 The Issuer warrants and represents to the Agent that neither the Issuer nor
any other person described in SEC Rule 262(a) or (b) is or has been the subject
of any matters or proceedings as described therein, and the Agent warrants and
represents to the Issuer that neither it nor any of its directors or officers is
or has been the subject of any matters or proceedings as described in SEC Rule
262(b) or (c).
12. EXPENSES OF AGENT
12.1 Subject to Subsection 12.2, the Issuer will pay all of the expenses of the
Offering and all the expenses reasonably incurred by the Agent in connection
with the Offering including, without limitation, the fees and expenses of the
solicitors for the Agent and the fees and expenses of the Agent in connection
with the preparation of any assessment report obtained for the purpose of
satisfying the requirements of Local Policy 3-17 of the Commission.
12.2 The Issuer will not be bound to pay the fees and expenses of the solicitors
for the Agent which exceed $30,000 in the aggregate, or, unless the Agent has
first obtained the written approval of the Issuer, any single expense of $1,000
or more.
12.3 The Issuer will pay the expenses referred to in Subsection 12.1 even if the
Prospectus and this Agreement are not accepted by the Regulatory Authorities or
the transactions contemplated by this Agreement are not completed or this
Agreement is terminated, unless the failure of acceptance or completion or the
termination is the result of a breach of this Agreement by the Agent.
12.4 The Agent may, from time to time, render accounts for its expenses to the
Issuer for payment on or before the date set out in the accounts.
12.5 The Issuer authorizes the Agent to deduct its reasonable expenses in
connection with the Offering from the proceeds of the Offering and any advance
payments made by the Issuer, including expenses for which an account has not yet
been rendered to the Issuer.
13. FILING OF PROSPECTUS
13.1 The Issuer will cause the Prospectus to be filed with the Regulatory
Authorities, will deliver all necessary copies of the Prospectus to the
Regulatory Authorities and will use its best efforts to have the Prospectus
accepted by the Regulatory Authorities and the Commission issue a receipt for
the Preliminary Prospectus and the Final Prospectus.
<PAGE>
10
13.2 The Issuer will provide the Agent with as many copies of the Prospectus as
the Agent reasonably requests.
13.3 With respect to matters involving the potential application of United
States securities laws, the parties agree as follows:
(a) it is intended that the initial sale of the Securities will be
made solely to persons who are neither U.S. Persons,
Distributors nor their affiliates, as those terms are used in
SEC Regulation S; and
(b) that in order for the sale of the Securities to qualify for
the exemption from 1933 Act registration provided by SEC Rule
903(c)(2):
(i) the Agent agrees that all offers and sales of the
Securities prior to the expiration of the 40 day
restricted period specified in such Rule 903(c)(2)
shall be made only: (x) in accordance with the
provisions of SEC Rules 903 or 904; (y) pursuant to
registration of the Securities under the 1933 Act; or
(z) pursuant to an available exemption from the
registration requirements of the 1933 Act; and
(ii) the Issuer and the Agent agree that all offering
materials and documents (other than press releases)
used in connection with offers and sales of the
Securities prior to the expiration of the 40 day
restricted period specified in Rule 903(c)(2) shall
include statements to the effect that the Securities
have not been registered under the 1933 Act and may not
be offered or sold in the United States or to U.S.
persons (other than distributors) unless the Securities
are registered under the 1933 Act, or an exemption from
the registration requirements of the 1933 Act is
available, and that such statements shall appear:
(A) on the cover or inside cover page of any
prospectus or offering circular used in
connection with the offer or sale of the
Securities;
(B) in the underwriting section of any
prospectus or offering circular used in
connection with the offer or sale of the
Securities; and
(C) in any advertisement made or issued by the
Issuer, Agent, any of their respective
affiliates, or any person acting on behalf
of any of the foregoing.
13.4 Although it is intended that the offering of common shares pursuant to this
Agency Agreement will be made solely to persons who are neither U.S. Persons,
Distributors nor their affiliates, as those terms are used in Regulation S, at
the request of the Agent, the Issuer will use its best efforts to ensure the
effectiveness of the Registration Statement will be declared contemporaneously
with, but not later than, the issuance of a receipt for the (final) Prospectus
by
<PAGE>
11
the Commission and if, at any time following the closing of the distribution
of the Shares via the Prospectus in Canada, the Agent is unable, in the opinion
of its counsel (which counsel shall be reasonably acceptable to the Issuer), to
sell any of the Securities acquired for its own account hereunder in British
Columbia or the United States pursuant to a U.S. securities registration
exemption which will leave such securities free trading in the hands of the
purchaser(s), the Issuer will, at its expense and promptly upon the written
request of the Agent, file a Registration Statement under the 1933 Act with the
SEC covering the Agent's sale of all such securities, and will thereafter
diligently seek the effectiveness of such Registration Statement.
14. GARNISHING ORDERS
14.1 If at any time, up to and including the final date of payment for the
Securities, the Agent receives a garnishing order or other form of attachment
purporting to attach or garnish a part or all of the sale price or exercise
price of any of the Securities, the Agent will be free to pay the amount
purportedly attached or garnished into court.
14.2 Any payment by the Agent into court contemplated in this Agreement will be
deemed to have been received by the Issuer as payment by the Agent against the
sale price or exercise price of the Securities to the extent of the amount paid,
and the Issuer will be bound to issue and deliver the Securities proportionately
to the amount paid by the Agent.
14.3 The Agent will not be bound to ascertain the validity of any garnishing
order or attachment, or whether in fact it attaches any monies held by the
Agent, and the Agent will be free to act with impunity in replying to any
garnishing order or attachment.
14.4 The Issuer will release, indemnify and save harmless the Agent in respect
of all damages, costs, expenses or liability arising from any acts of the Agent
under this Section.
15. INDEMNITY
15.1 The Issuer will indemnify the Agent and each of the Agent's agents,
directors, officers and employees (collectively, the "Indemnified Parties") and
save them harmless against all losses, claims, damages or liabilities:
(a) existing (or alleged to exist) by reason of any untrue
statement contained in the Prospectus or by reason of the
omission to state in the Prospectus any fact necessary to make
any statement in the Prospectus not misleading (except for
information and statements supplied by and referring solely to
the Agent);
(b) arising directly or indirectly out of any order made by any
regulatory authority based upon an allegation that any such
untrue statement or omission exists (except for information
and statements supplied by and referring solely to the Agent)
<PAGE>
12
including, without limitation, an order that trading in or
distribution of the Securities is to cease;
(c) resulting from the failure of the Issuer to file an amendment
to the Prospectus as required by this Agreement;
(d) resulting from any representation or warranty made by the
Issuer in this Agreement not being true or ceasing to be true;
(e) resulting from a breach by the Issuer of any term of this
Agreement;
(f) if the Issuer fails to issue and deliver the certificates
representing the Securities in the form and denominations
satisfactory to the Agent at the time and place required by
the Agent with the result that any completion of a sale of the
Securities does not take place; or
(g) if, following the completion of a sale of any of the
Securities, a determination is made by any competent authority
setting aside the sale unless that determination arises out of
an act or omission by the Agent.
15.2 If any action or claim is brought against an Indemnified Party in respect
of which indemnity may be sought from the Issuer pursuant to this Agreement, the
Indemnified Party will promptly notify the Issuer in writing.
15.3 The Issuer will assume the defence of the action or claim, including the
employment of counsel and the payment of all expenses.
15.4 The Indemnified Party will have the right to employ separate counsel, and
the Issuer will pay the fees and expenses of such counsel.
15.5 The indemnity provided for in this Section will not be limited or otherwise
affected by any other indemnity obtained by any Indemnified Party from any other
person in respect of any matters specified in this Agreement and will continue
in full force and effect until all possible liability of the Indemnified Parties
arising out of the transactions contemplated by this Agreement has been
extinguished by the operation of law.
15.6 If indemnification under this Agreement is found in a final judgment (not
subject to further appeal) by a court of competent jurisdiction not to be
available for reason of public policy, the Issuer and each Indemnified Party
will contribute to the losses, claims, damages, liabilities or expenses (or
actions in respect thereof) for which such indemnification is held unavailable
in such proportion as is appropriate to reflect the relative benefits to and
fault of the Issuer, on the one hand, and each respective Indemnified Party on
the other hand, in connection with the matter giving rise to such losses,
claims, damages, liabilities or expenses ( or actions in respect thereof). No
person found liable for a fraudulent misrepresentation (within the meaning
<PAGE>
13
of applicable securities laws) will be entitled to contribution from any person
who is not found liable for such fraudulent misrepresentation.
15.7 To the extent that any Indemnified Party is not a party to this Agreement,
the Agent will obtain and hold the right and benefit of this section in trust
for and on behalf of such Indemnified Party.
16. SELLING GROUP PARTICIPATION
16.1 The Agent may offer selling group participation in the normal course of the
brokerage business to selling groups of other licensed dealers, brokers and
investment dealers, who may or who may not be offered part of the commissions or
securities to be received by the Agent pursuant to this Agreement.
17. NOTICE
17.1 Any notice under this Agreement will be given in writing and must be
delivered, sent by telegram or telecopier or mailed by prepaid post and
addressed to the party to which notice is to be given at the address indicated
above, or at another address designated by such party in writing.
17.2 If notice is sent by telegram or telecopier or is delivered, it will be
deemed to have been given at the time of transmission or delivery.
17.3 If notice is mailed, it will be deemed to have been received 48 hours
following the date of mailing of the notice.
17.4 If there is an interruption in normal mail service due to strike, labour
unrest or other cause at, or during the 48 hours immediately after, the time a
notice is mailed the notice will be sent by telegram or telecopier or will be
delivered.
18. TIME
Time is of the essence of this Agreement and will be calculated in
accordance with the provisions of the Interpretation Act (British Columbia).
19. SURVIVAL OF REPRESENTATIONS AND WARRANTIES
The representations, warranties, covenants and indemnities of the parties
contained in this Agreement will survive the closing of the purchase and sale of
the Securities.
<PAGE>
14
20. LANGUAGE
This Agreement is to be read with all changes in gender and number as
required by the context.
21. ENUREMENT
This Agreement enures to the benefit of and is binding on the parties to
this Agreement and their successors and permitted assigns.
22. HEADINGS
The headings in this Agreement are for convenience of reference only and do
not affect the interpretation of this Agreement.
23. LAW
This Agreement will be governed by the laws of British Columbia and the
parties attorn to the non-exclusive jurisdiction of the courts of British
Columbia for the resolution of all disputes arising in connection with this
Agreement.
<PAGE>
15
24. COUNTERPARTS
This Agreement may be executed in two or more counterparts, each of which
will be deemed to be an original and all of which will constitute one agreement,
effective as of the reference date given above.
IN WITNESS of this Agreement, the parties have executed and delivered this
Agreement as of the reference date first given above.
THE COMMON SEAL of ESOFT, INC. was )
hereunto affixed in the presence of: )
)
)
- ------------------------------ )
Authorized Signatory ) c/s
)
)
Authorized Signatory )
)
THE COMMON SEAL of C.M. OLIVER & )
COMPANY LIMITED was hereunto affixed in )
the presence of: )
)
)
- ------------------------------ )
Authorized Signatory ) c/s
)
)
- ------------------------------ )
Authorized Signatory )
166,000 Common Shares Void after
Without Par Value March 16, 2000.
Warrant No. W1
SHARE PURCHASE WARRANT
eSoft, Inc.
(the "Company")
This is to certify that, for value received, C.M. Oliver & Company Limited (the
"Warrant Holder") of 1600 - 750 West Pender Street, Vancouver, British Columbia
has the right to purchase from the Company, upon and subject to the terms and
conditions hereinafter referred to, 250,000 common shares without par value (the
"Shares") in the capital of the Company. The Shares may be purchased at a price
of U.S.$1.00 per Share at any time up to 5:00 p.m. local time in Vancouver, B.C.
on March 16, 1999, and thereafter at a price of U.S.$1.15 per Share at any time
up to 5:00 p.m. local time in Vancouver, B.C. on March 16, 2000. The right to
purchase the Shares may be exercised in whole or in part, by the Warrant Holder
only, at the prices set forth above (the "Exercise Price") within the times set
forth above by:
(a) completing and executing the Subscription Form attached hereto
for the number of the Shares which the Warrant Holder wishes to
purchase, in the manner therein indicated;
(b) surrendering this Warrant Certificate, together with the complete
Subscription Form, to The Trust Company of Bank of Montreal, (the
"Transfer Agent") at 6th Floor, 595 Burrard Street, Vancouver,
British Columbia; and
(c) paying the appropriate Exercise Price, in United States funds,
for the number of the Shares of the Company subscribed for,
either by certified cheque or bank draft (drawn on a Canadian
Chartered Bank) or money order payable to the Company in
Vancouver, British Columbia.
Upon surrender and payment, the Company shall forthwith issue to the Warrant
Holder or to such other person or persons as the Warrant Holder may direct, the
number of the Shares subscribed for and will deliver to the Warrant Holder, at
the address set forth on the subscription form, a certificate or certificates
evidencing the number of the Shares subscribed for. If the Warrant Holder
subscribes for a number of Shares which is less than the number of Shares
permitted by this warrant, the Company shall forthwith cause to be delivered to
the Warrant Holder a further Warrant Certificate in respect of the balance of
Shares referred to in this Warrant Certificate not then being subscribed for.
In the event of any subdivision of the common shares of the Company (as such
common shares are constituted on the date hereof) into a greater number of
common shares while this warrant is outstanding, the number of Shares
represented by this warrant shall thereafter be deemed to be
<PAGE>
subdivided in like manner and the Exercise Price adjusted accordingly, and any
subscription by the Warrant Holder for Shares hereunder shall be deemed to be a
subscription for common shares of the Company as subdivided.
In the event of any consolidation of the common shares of the Company (as such
common shares are constituted on the date hereof) into a lesser number of common
shares while this warrant is outstanding, the number of Shares represented by
this warrant shall thereafter be deemed to be consolidated in like manner and
the Exercise Price adjusted accordingly, and any subscription by the Warrant
Holder for Shares hereunder shall be deemed to be a subscription for common
shares of the Company as consolidated.
In the event of any capital reorganization or reclassification of the common
shares of the Company or the merger or amalgamation of the Company with another
corporation at any time while this warrant is outstanding, the Company shall
thereafter deliver at the time of purchase of the Shares hereunder the number of
common shares the Warrant Holder would have been entitled to receive in respect
of the number of the Shares so purchased had the right to purchase been
exercised before such capital reorganization or reclassification of the common
shares of the Company or the merger or amalgamation of the Company with another
corporation.
If at any time while this, or any replacement, warrant is outstanding:
(a) the Company proposes to pay any dividend of any kind upon its common
shares or make
any distribution to the holders of its common shares;
(b) the Company proposes to offer for subscription pro rata to the holders
of its common shares any additional shares of stock of any class or
other rights;
(c) the Company proposes any capital reorganization or classification of its
common shares or the merger or amalgamation of the Company with another
corporation; or
(d) there is a voluntary or involuntary dissolution, liquidation or
winding-up of the Company;
The Company shall give to the Warrant Holder at least seven days prior written
notice (the "Notice") of the date on which the books of the Company are to close
or a record is to be taken for such dividend, distribution or subscription
rights, or for determining rights to vote with respect to such reorganization,
reclassification, consolidation, merger, amalgamation, dissolution, liquidation
or winding-up. The Notice shall specify, in the case of any such dividend,
distribution or subscription rights, the date on which holders of common shares
of the Company will be entitled to exchange their common shares for securities
or other property deliverable upon any reorganization, reclassification,
consolidation, merger, amalgamation, sale, dissolution, liquidation or
winding-up, as the case may be. Each Notice shall be delivered by hand,
addressed to the Warrant Holder at the address of the Warrant Holder set forth
above or at such other address as the Warrant Holder may from time to time
specify to the Company in writing.
-2-
<PAGE>
The holding of this Warrant Certificate or the Warrants represented hereby does
not constitute the Warrant Holder a member of the Company.
Nothing contained herein confers any right upon the Warrant Holder or any other
person to subscribe for or purchase any Shares of the Company at any time
subsequent to 5:00 p.m. local time in Vancouver, B.C. on March 16, 2000 and from
and after such time, this Warrant and all rights hereunder will be void.
Time will be of the essence hereof.
This Warrant Certificate is not valid for any purpose until it has been signed
by the Company.
IN WITNESS WHEREOF, the Company has caused this warrant certificate to be signed
by one of its directors as of the 16th day of March, 1998.
eSoft, Inc.
Per:
- -----------------------------
Regis A. Frank
-3-
<PAGE>
SUBSCRIPTION FORM
To: eSoft, Inc. (the "Company")
And to: the directors thereof.
Pursuant to the Share Purchase Warrant made the 16th day of March, 1998, the
undersigned hereby subscribes for and agrees to take up common shares
------
without par value (the "Shares") in the capital of the Company, at a price of
U.S. $ per Share for the aggregate sum of U.S. $ (the
--------- --------
"Subscription Funds"), and encloses herewith a certified cheque, bank draft or
money order payable to the Company in full payment of the Shares.
The undersigned hereby requests that:
(a) the Shares be allotted to the undersigned;
(b) the name and address of the undersigned as shown below be entered in
the registers of members and allotments of the Company;
(c) the Shares be issued to the undersigned as fully paid and
non-assessable common shares of the Company; and
(d) a share certificate representing the Shares be issued in the name of the
undersigned.
Dated this day of , 19 .
------- -------------- --
DIRECTION AS TO REGISTRATION:
(NAME AND ADDRESS EXACTLY AS YOU WISH THEM TO APPEAR ON YOUR SHARE CERTIFICATE
AND IN THE REGISTER OF MEMBERS.)
Full Name(1):
----------------------------------------------------------------
Full Address:
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
----------------------------------------------------------------
Signature of Subscriber(1):
----------------------------------------------------
If the name above differs from Signature of Subscriber(1) guaranteed
the name of the Subscriber, then by:
please complete the following
guarantee: ---------------------------------------
Authorized Signature Number
NOTE: The signature to this subscription form must correspond with the name as
recorded on the warrant certificate in every particular without alteration or
enlargement or any change whatever. The signature of the person
<PAGE>
executing this power must be guaranteed by a Bank or Trust Company or by a
Member of the Vancouver, Toronto, Montreal or New York Stock Exchange.
[eSOFT LETTERHEAD]
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into as
of this 6th day of March, 1998 between eSoft, Inc., a Delaware corporation (the
"Company"), and REGIS A FRANK, an individual person (the "Executive").
RECITAL
A. The Company desires to employ the Executive as CHIEF
OPERATING OFFICER, and the Executive desires to be employed by the Company in
such position upon the terms and conditions set forth in this Agreement.
B. The Executive acknowledges that during the course of the
Executive's employment the Executive will receive or be exposed to certain
confidential information and trade secrets (collectively referred to as
"Confidential Information") of the Company. The Executive also acknowledges that
this Confidential Information is among the Company's most important assets and
that the value of this Confidential Information would be diminished or
extinguished by disclosure.
AGREEMENT
In consideration of the mutual promises contained herein, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Employment; Position; Term. The Company hereby employs the
Executive and the Executive hereby accepts employment with the Company in the
capacity of Chief Operating Office. Subject to Section 4, the term of
Executive's employment under this Agreement (the "Term") shall be for 36 months,
beginning January 1, 1998 and ending December 31, 2000.
2. Duties, Responsibilities and Authority. In his capacity as
Chief Operating Officer of the Company, the Executive shall have primary
responsibility for the overall operation of the Company. In his capacity as
Chief Operating Officer, the Executive shall report to and be subject to the
direction and control of the Chief Executive Officer of the Company.
1.
<PAGE>
The Executive shall devote substantially all of his professional and managerial
time and effort to the performance of his duties as Chief Operating Officer, and
he shall not engage in any other business activity or activities which, in the
judgment of the Chief Executive Officer of the Company, conflict with the
performance of his duties under this Agreement.
3. Compensation
(a) SALARY. For services rendered under this Agreement, the
Company shall pay the Executive a salary at the rate of $10,000 per month,
payable in equal semi-monthly installments.
(b) BONUSES. The Executive shall be eligible to receive a
performance bonus based upon mutually agreed performance criteria for each
fiscal quarter of the Company completed during the term of this Agreement
beginning with the fiscal quarter commencing January 1, 1998. The maximum
aggregate amount of the bonuses shall be $20,000 per quarter. The payment of the
Executive's performance bonus shall be made as soon as practicable but no later
than sixty (60) days following the end of the fiscal quarter. The Executive
shall not be entitled to a minimum performance bonus.
(c) ANNUAL REVIEW. The Executive's salary and terms of the
severance in Section 7 of this Agreement shall be reviewed annually beginning
January 1, 1999 and may be increased as the Board of Directors deems
appropriate.
(d) STOCK OPTIONS. Concurrently with the effectiveness of this
Agreement and pursuant to action of the Board, the Executive shall be granted
incentive stock options pursuant to the Company's Stock Option Plan to purchase
up to 90,000 shares of the Company's common stock at an exercise price equal to
the offering price of the Company's common stock in the Initial Public Offering
scheduled for March, 1998. These options for 90,000 shares shall vest over a 36
month period with no vesting until the beginning of the seventh month at which
time six-thirty-sixth (6/36) of the options will vest, and then one-thirty-sixth
(1/36) will vest after the beginning of each month thereafter. Vesting shall
occur as long as the Executive remains an employee of the Company. The options,
once vested shall have an expiration date of 5 years from the date of grant of
the option. In addition, the Executive may participate in stock option programs
of the Company upon such terms as the administrators of such programs in their
discretion determine.
(e) BENEFITS AND VACATION. The Executive shall be eligible to
participate in such insurance programs (health, disability or life) or such
other health, dental, retirement or similar employee benefits programs as the
Board may approve, on a basis comparable to that available to other officers and
executive employees of the Company. The Executive shall be entitled to a minimum
of four (4) weeks of paid vacation per year. Vacation time may be accumulated
for up to one year beyond the year for which it is accrued and may be used any
time during such year.
Any vacation time not used during such additional year shall be
2.
<PAGE>
forfeited. The value of any accrued but unused and unforfeited vacation time
shall be paid in cash to the Executive upon termination of his employment for
any reason.
(f) REIMBURSEMENT OF EXPENSES. The Company shall reimburse the
Executive in a timely manner for all reasonable out-of-pocket expenses incurred
by the Executive in connection with the performance of his duties under this
Agreement; provided that the Executive presents to the Company an itemized
accounting of such expenses including reasonable supporting data.
4. Termination.
(a) TERMINATION BY THE COMPANY WITHOUT CAUSE. Notwithstanding
anything to the contrary contained herein but subject to Section 7 hereof, the
Company may, by delivering thirty (30) days' prior written notice to the
Executive, terminate the Executive's employment at any time without Cause (as
hereinafter defined).
(b) TERMINATION BY THE EXECUTIVE WITHOUT CAUSE.
Notwithstanding anything to the contrary contained herein but subject to Section
7 hereof, the Executive may, by delivering thirty (30) days' prior written
notice to the Company, terminate the Executive's employment hereunder.
(c) TERMINATION BY THE COMPANY FOR CAUSE. The Company may
terminate the Executive's employment for Cause immediately upon written notice
stating the basis of such termination. "Cause" for termination of the
Executive's employment shall only be deemed to exist if the Executive has (i)
breached this Agreement and if such breach continues or recurs more than thirty
(30) days after notice from the Company specifying the action which constitutes
the breach and demanding its discontinuance, (ii) exhibited willful disobedience
of directions of the Chief Executive Officer or of the Board, or (iii) committed
gross malfeasance in performance of his duties hereunder or acts resulting in an
indictment charging the Executive with the commission of a felony; provided that
the commission of acts resulting in such an indictment shall constitute Cause
only if a majority of the directors who are not also subject to any such
indictment determine that the Executive's conduct has substantially adversely
affected the Company or its reputation. A material failure to perform his duties
hereunder that results from the disability of the Executive shall not be
considered Cause for his termination.
(d) TERMINATION BY THE EXECUTIVE FOR CAUSE. The Executive may
terminate employment for Cause immediately upon written notice stating the basis
for such termination. "Cause" for termination of employment by the Executive
shall only be deemed to exist if the Company has breached this Agreement and if
such breach continues or recurs more than thirty (30) days after notice from the
Executive specifying the action which constitutes the breach and demanding its
discontinuance.
3.
<PAGE>
5. Disability. In the event of disability of the Executive
during the term hereof, the Company shall, during the continuance of his
disability but only for a maximum of 90 days, pay the Executive his then current
salary, as provided for in Section 3(a), and adjusted pursuant to Section 3(b),
and continue to provide the Executive all other benefits provided hereunder. As
used herein, the term "disability" shall mean the complete and total inability
of the Executive, due to illness, physical or comprehensive mental impairment,
to substantially perform all of his duties as described herein for a consecutive
period of third (30) days or more.
6. Death. In the event of the death of the Executive, except
with respect to any benefits which have accrued and have not been paid to the
Executive hereunder, the provisions of this Agreement shall terminate
immediately. The Executive's estate shall have the right to receive compensation
due to the Executive as of and to the date of his death and shall have the right
to receive an additional amount equal to one-twelfth (1/12th) of the Executive's
annual compensation then in effect.
7. Severance. In the event that the Executive's employment is
terminated by the Company other than for Cause or death of the Executive, or in
the event there is either a material change in the responsibilities of the
Executive or a loss of position within six (6) months after a Change of Control
(as defined in Section 12 of this Agreement), or if the Executive terminates
this Agreement for Cause, the Executive shall be entitled to receive his then
current salary and benefits, as provided for in Section 3(a) and 3(e), and
adjusted pursuant to Section 3(b), payable in semi-monthly installments, for the
greater of three (3) months or that number of months which equals the number of
years that have elapsed from January 1, 1998 until the date of the Executive's
termination by the Company; PROVIDED, HOWEVER, that if any of such payments
would (i) constitute a "parachute payment" within the meaning of Section 280G of
the Internal Revenue Code of 1986 (the "Code") and (ii) but for this provision,
be subject to the excise tax imposed by Section 4999 of the Code (the "Excise
Tax"); the amount payable hereunder shall be reduced to the largest amount which
the Executive determines would not result in any portion of the payments
hereunder being subject to the Excise Tax. If the Executive voluntarily resigns
his employment hereunder or if his employment is terminated for Cause, the
Executive shall not be entitled to any severance pay or other compensation
beyond the date of termination of his employment.
8. Covenant Not to Compete.
(a) During the continuance of the Executive's employment
hereunder and for a period of twelve (12) months after termination of the
Executive's employment hereunder, the Executive shall not engage in any business
which competes with the Company or its affiliates anywhere in the United States
or Canada during the Executive's employment hereunder or at the time of
termination.
(b) The Executive shall not, for a period of twelve (12)
months after termination of the Executive's employment hereunder, employ, engage
or seek to employ or engage for himself or any other person or entities, any
individual who is or was employed or
4.
<PAGE>
engaged by the Company or any of its affiliates until the expiration of six (6)
months following the termination of such person's or entity's employment or
engagement with the Company or any of its affiliates.
9. Trade Secrets and Confidential Information. During his
employment by the Company and for a period of five (5) years thereafter, the
Executive shall not, directly or indirectly, use, disseminate, or disclose for
any purpose other than for the purposes of the Company's business, any
Confidential Information of the Company or its affiliates, unless such
disclosure is compelled in a judicial proceeding. Upon termination of his
employment, all documents, records, notebooks, and similar repositories of
records containing information relating to any Confidential Information then in
the Executive's possession or control, whether prepared by him or by others,
shall be left with the Company or, if requested, returned to the Company.
10. Severability. It is the desire and intent of the undersigned
parties that the provisions of Sections 8 and 9 shall be enforced to the fullest
extent permissible under the laws in each jurisdiction in which enforcement is
sought. Accordingly, if any particular sentence or portion of either Section 8
or 9 shall be adjudicated to be invalid or unenforceable, the remaining portions
of such section nevertheless shall continue to be valid and enforceable as
though the invalid portions were not a part thereof. In the event that any of
the provisions of Section 8 relating to the geographic areas of restriction or
the provisions of Sections 8 or 9 relating to the duration of such Sections
shall be deemed to exceed the maximum area or period of time which a court of
competent jurisdiction would deem enforceable, the geographic areas and times
shall, for the purposes of this Agreement, be deemed to be the maximum areas or
time periods which a court of competent jurisdiction would deem valid and
enforceable in any state in which such court of competent jurisdiction shall be
convened.
11. Injunctive Relief. The Executive agrees that any violation by
him of the provisions contained in Sections 8 and 9 are likely to cause
irreparable damage to the Company, and therefore he agrees that if there is a
breach or threatened breach by the Executive of the provisions of said section,
the Company shall be entitled to an injunction restraining the Executive from
such breach. Nothing herein shall be construed as prohibiting the Company from
pursuing any other available remedies for such breach or threatened breach.
12. Miscellaneous.
(a) NOTICES. Any notice required or permitted to be given
under this Agreement shall be directed to the appropriate party in writing and
mailed or delivered, if to the Company, to eSoft, Inc., to the attention of the
Chief Executive Officer, at 5335-C Sterling Drive, Boulder, Colorado 80301, and
if to the Executive, at 6807 Poppy Court, Arvada, Colorado, 80007.
Notification addresses may be changed with written notice.
(b) BINDING EFFECT. This Agreement is a personal service
agreement and may not be assigned by the Company or the Executive, except that
the Company may assign
5.
<PAGE>
this Agreement to a successor of the Company by a merger, consolidation, sale of
substantially all of the Company's assets or other reorganization (a "Change of
Control"). Subject to the foregoing, this Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective successors,
assigns, and legal representatives.
(c) AMENDMENT. This Agreement may not be amended except by an
instrument in writing executed by each of the undersigned parties.
(d) APPLICABLE LAW. This Agreement is entered into in the
State of Colorado and for all purposes shall be governed by the laws of the
State of Colorado.
(e) ATTORNEY'S FEES. In the event either party takes legal
action to enforce any of the terms of this Agreement, the unsuccessful party to
such action will pay the successful party's reasonable expenses, including
attorney's fees, incurred in such action.
(f) ENTIRE AGREEMENT. This Agreement supersedes and replaces
all prior agreements between the parties related to the employment of the
Executive by the Company.
SIGNATURES
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the first date mentioned above.
THE COMPANY:
By:
----------------------------------------
Philip Becker
Chief Executive Officer
THE EXECUTIVE:
By:
----------------------------------------
Regis A. Frank
6.
[eSOFT LETTERHEAD]
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into as
of this 6th day of March, 1998 between eSoft, Inc., a Delaware corporation (the
"Company"), and ROBERT C. HARTMAN, an individual person (the "Executive").
RECITAL
A. The Company desires to employ the VICE PRESIDENT OF ENGINEERING,
and the Executive desires to be employed by the Company in such position upon
the terms and conditions set forth in this Agreement.
B. The Executive acknowledges that during the course of the
Executive's employment the Executive will receive or be exposed to certain
confidential information and trade secrets (collectively referred to as
"Confidential Information") of the Company. The Executive also acknowledges that
this Confidential Information is among the Company's most important assets and
that the value of this Confidential Information would be diminished or
extinguished by disclosure.
AGREEMENT
In consideration of the mutual promises contained herein, the
receipt and sufficiency of which are hereby acknowledged, the parties hereby
agree as follows:
1. Employment; Position; Term. The Company hereby employs the
Executive and the Executive hereby accepts employment with the Company in the
capacity of Vice President of Engineering. Subject to Section 4, the term of
Executive's employment under this Agreement (the "Term") shall be for 36 months,
beginning January 1, 1998 and ending December 31, 2000.
2. Duties, Responsibilities and Authority. In his capacity as Vice
President of Engineering of the Company, the Executive shall have primary
responsibility for the software design, development and delivery of the
Company's products, as well as pre-sales and post-sales technical support
services and the Company's local area network. In his capacity as Vice President
of Engineering, the Executive shall report to and be subject to the direction
and control
1.
<PAGE>
of the President of the Company. The Executive shall devote substantially all of
his full professional and managerial time and effort to the performance of his
duties as Vice President of Engineering and he shall not engage in any other
business activity or activities which, in the judgment of the President of the
Company, conflict with the performance of his duties under this Agreement.
3. Compensation
(a) SALARY. For services rendered under this Agreement, the
Company shall pay the Executive a salary at the rate of $5,600 per month,
payable in equal semi-monthly installments, until such time as the Company
completes the Initial Public Offering of its Common Stock. After the successful
completion of the Initial Public Offering, the Executive shall be paid a salary
at the rate of $7,500 per month, payable in equal semi-monthly installments, the
first of which such adjusted payment will be pro-rated for the month in which
the Initial Public Offering occurs.
(b) BONUSES. The Executive shall be eligible to receive a
performance bonus based upon mutually agreed performance criteria for each
fiscal quarter of the Company completed during the term of this Agreement
beginning with the fiscal quarter commencing April 1, 1998. The maximum
aggregate amount of the bonuses shall be $5,000 per quarter. The payment of the
Executive's performance bonus shall be made as soon as practicable but no later
than sixty (60) days following the end of the fiscal quarter. The Executive
shall not be entitled to a minimum performance bonus.
(c) ANNUAL REVIEW. The Executive's salary and terms of the
severance in Section 7 of this Agreement shall be reviewed annually beginning
January 1, 1999 and may be increased as the Board of Directors deems
appropriate.
(d) STOCK OPTIONS. Concurrently with the effectiveness of this
Agreement and pursuant to action of the Board, the Executive shall be granted
incentive stock options pursuant to the Company's Stock Option Plan to purchase
up to 40,000 shares of the Company's common stock at an exercise price equal to
the offering price of the Company's common stock in the Initial Public Offering
scheduled for March, 1998. Shares shall vest over a 36 month period with no
vesting until the beginning of the seventh month at which time six-thirty-sixth
(6/36) of the options will vest, and then one-thirty-sixth (1/36) will vest
after the beginning of each month thereafter. Vesting shall occur as long as the
Executive remains an employee of the Company. The options, once vested shall
have an expiration date of 4 years from the date of grant of the option. In
addition, the Executive may participate in stock option programs of the Company
upon such terms as the administrators of such programs in their discretion
determine.
(e) BENEFITS AND VACATION. The Executive shall be eligible to
participate in such insurance programs (health, disability or life) or such
other health, dental, retirement or similar employee benefits programs as the
Board may approve, on a basis
2.
<PAGE>
comparable to that available to other officers and executive employees of the
Company. The Executive shall be entitled to a minimum of four (4) weeks of paid
vacation per year. Vacation time may be accumulated for up to one year beyond
the year for which it is accrued and may be used any time during such year. Any
vacation time not used during such additional year shall be forfeited. The value
of any accrued but unused and unforfeited vacation time shall be paid in cash to
the Executive upon termination of his employment for any reason. Additionally,
within thirty (30) days of the successful completion of the Initial IPO, the
Executive will be paid for all accrued but unused vacation, minus the total
maximum accrual permitted above plus an additional five (5) days at the
Executive's discretion, at the rate of $5,600 per month.
(f) REIMBURSEMENT OF EXPENSES. The Company shall reimburse the
Executive in a timely manner for all reasonable out-of-pocket expenses incurred
by the Executive in connection with the performance of his duties under this
Agreement; provided that the Executive presents to the Company an itemized
accounting of such expenses including reasonable supporting data.
4. Termination.
(a) TERMINATION BY THE COMPANY WITHOUT CAUSE. Notwithstanding
anything to the contrary contained herein but subject to Section 7 hereof, the
Company may, by delivering thirty (30) days' prior written notice to the
Executive, terminate the Executive's employment at any time without Cause (as
hereinafter defined).
(b) TERMINATION BY THE EXECUTIVE WITHOUT CAUSE.
Notwithstanding anything to the contrary contained herein but subject to Section
7 hereof, the Executive may, by delivering thirty (30) days' prior written
notice to the Company, terminate the Executive's employment hereunder.
(c) TERMINATION BY THE COMPANY FOR CAUSE. The Company may
terminate the Executive's employment for Cause immediately upon written notice
stating the basis of such termination. "Cause" for termination of the
Executive's employment shall only be deemed to exist if the Executive has (i)
breached this Agreement and if such breach continues or recurs more than thirty
(30) days after notice from the Company specifying the action which constitutes
the breach and demanding its discontinuance, (ii) exhibited willful disobedience
of directions of the Chief Executive Officer or of the Board, or (iii) committed
gross malfeasance in performance of his duties hereunder or acts resulting in an
indictment charging the Executive with the commission of a felony; provided that
the commission of acts resulting in such an indictment shall constitute Cause
only if a majority of the directors who are not also subject to any such
indictment determine that the Executive's conduct has substantially adversely
affected the Company or its reputation. A material failure to perform his duties
hereunder that results from the disability of the Executive shall not be
considered Cause for his termination.
(d) TERMINATION BY THE EXECUTIVE FOR CAUSE. The Executive may
terminate employment for Cause immediately upon written notice stating the basis
for such
3.
<PAGE>
termination. "Cause" for termination of employment by the Executive shall only
be deemed to exist if the Company has breached this Agreement and if such breach
continues or recurs more than thirty (30) days after notice from the Executive
specifying the action which constitutes the breach and demanding its
discontinuance.
5. Disability. In the event of disability of the Executive during
the term hereof, the Company shall, during the continuance of his disability but
only for a maximum of 90 days, pay the Executive his then current salary, as
provided for in Section 3(a), and adjusted pursuant to Section 3(b), and
continue to provide the Executive all other benefits provided hereunder. As used
herein, the term "disability" shall mean the complete and total inability of the
Executive, due to illness, physical or comprehensive mental impairment, to
substantially perform all of his duties as described herein for a consecutive
period of third (30) days or more.
6. Death. In the event of the death of the Executive, except with
respect to any benefits which have accrued and have not been paid to the
Executive hereunder, the provisions of this Agreement shall terminate
immediately. The Executive's estate shall have the right to receive compensation
due to the Executive as of and to the date of his death and shall have the right
to receive an additional amount equal to one-twelfth (1/12th) of the Executive's
annual compensation then in effect.
7. Severance. In the event that the Executive's employment is
terminated by the Company other than for Cause or death of the Executive, or in
the event there is either a material change in the responsibilities of the
Executive or a loss of position within six (6) months after a Change of Control
(as defined in Section 12 of this Agreement), or if the Executive terminates
this Agreement for Cause, the Executive shall be entitled to receive his then
current salary and benefits, as provided for in Section 3(a) and 3(e), and
adjusted pursuant to Section 3(b), payable in semi-monthly installments, for the
greater of three (3) months or that number of months which equals the number of
years that have elapsed from January 1, 1993 until the date of the Executive's
termination by the Company; PROVIDED, HOWEVER, that if any of such payments
would (i) constitute a "parachute payment" within the meaning of Section 280G of
the Internal Revenue Code of 1986 (the "Code") and (ii) but for this provision,
be subject to the excise tax imposed by Section 4999 of the Code (the "Excise
Tax"); the amount payable hereunder shall be reduced to the largest amount which
the Executive determines would not result in any portion of the payments
hereunder being subject to the Excise Tax. If the Executive voluntarily resigns
his employment hereunder or if his employment is terminated for Cause, the
Executive shall not be entitled to any severance pay or other compensation
beyond the date of termination of his employment.
8. Covenant Not to Compete.
(a) During the continuance of the Executive's employment
hereunder and for a period of twelve (12) months after termination of the
Executive's employment hereunder, the Executive shall not engage in any business
which competes with the Company or
4.
<PAGE>
its affiliates anywhere in the United States or Canada during the Executive's
employment hereunder or at the time of termination.
(b) The Executive shall not, for a period of twelve (12)
months after termination of the Executive's employment hereunder, employ, engage
or seek to employ or engage for himself or any other person or entities, any
individual who is or was employed or engaged by the Company or any of its
affiliates until the expiration of six (6) months following the termination of
such person's or entity's employment or engagement with the Company or any of
its affiliates.
9. Trade Secrets and Confidential Information. During his employment
by the Company and for a period of five (5) years thereafter, the Executive
shall not, directly or indirectly, use, disseminate, or disclose for any purpose
other than for the purposes of the Company's business, any Confidential
Information of the Company or its affiliates, unless such disclosure is
compelled in a judicial proceeding. Upon termination of his employment, all
documents, records, notebooks, and similar repositories of records containing
information relating to any Confidential Information then in the Executive's
possession or control, whether prepared by him or by others, shall be left with
the Company or, if requested, returned to the Company.
10. Severability. It is the desire and intent of the undersigned
parties that the provisions of Sections 8 and 9 shall be enforced to the fullest
extent permissible under the laws in each jurisdiction in which enforcement is
sought. Accordingly, if any particular sentence or portion of either Section 8
or 9 shall be adjudicated to be invalid or unenforceable, the remaining portions
of such section nevertheless shall continue to be valid and enforceable as
though the invalid portions were not a part thereof. In the event that any of
the provisions of Section 8 relating to the geographic areas of restriction or
the provisions of Sections 8 or 9 relating to the duration of such Sections
shall be deemed to exceed the maximum area or period of time which a court of
competent jurisdiction would deem enforceable, the geographic areas and times
shall, for the purposes of this Agreement, be deemed to be the maximum areas or
time periods which a court of competent jurisdiction would deem valid and
enforceable in any state in which such court of competent jurisdiction shall be
convened.
11. Injunctive Relief. The Executive agrees that any violation by
him of the provisions contained in Sections 8 and 9 are likely to cause
irreparable damage to the Company, and therefore he agrees that if there is a
breach or threatened breach by the Executive of the provisions of said section,
the Company shall be entitled to an injunction restraining the Executive from
such breach. Nothing herein shall be construed as prohibiting the Company from
pursuing any other available remedies for such breach or threatened breach.
12. Miscellaneous.
(a) NOTICES. Any notice required or permitted to be given
under this Agreement shall be directed to the appropriate party in writing and
mailed or delivered, if to the
5.
<PAGE>
Company, to eSoft, Inc., to the attention of the President, at 5335-C Sterling
Drive, Boulder, Colorado 80301, and if to the Executive, at 3837 South Olathe
Circle, Aurora, Colorado, 80013. Notification addresses may be changed with
written notice.
(b) BINDING EFFECT. This Agreement is a personal service
agreement and may not be assigned by the Company or the Executive, except that
the Company may assign this Agreement to a successor of the Company by a merger,
consolidation, sale of substantially all of the Company's assets or other
reorganization (a "Change of Control"). Subject to the foregoing, this Agreement
shall be binding upon and inure to the benefit of the parties hereto and their
respective successors, assigns, and legal representatives.
(c) AMENDMENT. This Agreement may not be amended except by an
instrument in writing executed by each of the undersigned parties.
(d) APPLICABLE LAW. This Agreement is entered into in the
State of Colorado and for all purposes shall be governed by the laws of the
State of Colorado.
(e) ATTORNEY'S FEES. In the event either party takes legal
action to enforce any of the terms of this Agreement, the unsuccessful party to
such action will pay the successful party's reasonable expenses, including
attorney's fees, incurred in such action.
(f) ENTIRE AGREEMENT. This Agreement supersedes and replaces
all prior agreements between the parties related to the employment of the
Executive by the Company.
SIGNATURES
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the first date mentioned above.
THE COMPANY:
By:
----------------------------------------
Regis A. Frank
Chief Operating Officer
THE EXECUTIVE:
By:
----------------------------------------
Robert C. Hartman
6.
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
eSoft, Inc.
Boulder, Colorado
We hereby consent to the use in the Prospectus constituting a part of this
Registration Statement of our report dated March 5, 1998, relating to the
financial statements of eSoft, Inc. which is contained in that Prospectus.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/BDO Seidman, LLP
-------------------------------------------
BDO Seidman, LLP
Denver, Colorado
March 24, 1998
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
DECEMBER 31, 1997 FINANCIAL STATEMENTS AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS
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<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> DEC-31-1997
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<PP&E> 262,701
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0
0
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<INCOME-CONTINUING> (355,252)
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