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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 20, 1999
REGISTRATION NO. 333-74675
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------
AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
-------------------------
eSOFT, INC.
(Exact Name of Registrant as Specified in its Charter)
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DELAWARE 7372 84-0938960
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
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295 Interlocken Boulevard, Suite 500
Broomfield, Colorado 80021
(303) 444-1600
(Address and Telephone Number of Registrant's Principal Executive Office)
-------------------------
JEFFREY FINN
295 INTERLOCKEN BOULEVARD, SUITE 500
BROOMFIELD, COLORADO
(303) 444-1600
(Name, Address and Telephone Number of Agent for Service)
With Copies To:
LESTER R. WOODWARD, ESQ. PAUL M. BOYD, ESQ.
DAVIS, GRAHAM & STUBBS LLP HAWLEY TROXELL ENNIS & HAWLEY LLP
370 SEVENTEENTH STREET, SUITE 4700 877 MAIN STREET, SUITE 1000
DENVER, COLORADO 80202 BOISE, IDAHO 83701
(303) 892-9400 (208) 344-6000
-------------------------
Approximate Date of Commencement of Proposed Sale to the Public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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 statement for the same offering. [ ]
If this form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number or the earlier effective registration statement
for the same offering. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATE AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT THAT 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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eSOFT, INC.
5335 STERLING DRIVE, SUITE C
BOULDER, COLORADO 80301
(303) 444-1600
NOTICE OF ANNUAL AND SPECIAL MEETING OF STOCKHOLDERS
An annual and special meeting of the stockholders of eSOFT, Inc. will
be held on Thursday, May 20, 1999 at 9:00 a.m. at The Broker Inn, 555 30th
Street, Boulder, Colorado 80303 for the following purposes:
1. To consider and vote upon a proposal to approve an Amended and
Restated Agreement and Plan of Merger, dated as of January 25,
1999, between eSOFT and Apexx Technology, Inc., pursuant to
which, among other things:
o Apexx will become a subsidiary of eSOFT;
o eSOFT will issue 1,591,365 shares of its common stock
in exchange for all of the outstanding common stock
of Apexx; and
o eSOFT will reserve 1,356,003 shares of its common
stock for issuance to holders of options to purchase
Apexx common stock.
2. To elect one person to eSOFT's Board of Directors.
3. To consider and vote upon a proposal to increase the number of
shares of eSOFT common stock that may be issued under eSOFT's
equity incentive plan from 1,700,000 shares to 2,900,000
shares.
A copy of the merger agreement is attached as Appendix A to the Joint
Proxy Statement/ Prospectus accompanying this Notice.
Only stockholders of record at the close of business on April 16, 1999
are entitled to notice of and to vote at the meeting or any postponement or
adjournment thereof. A complete list of those stockholders will be open for
examination by any stockholder for any purpose germane to the meeting at the
principal executive offices of eSOFT for a period of ten days prior to the
meeting.
Your Board of Directors unanimously recommends that you vote to approve
the merger agreement and to consummate the merger that is described in detail in
the accompanying Joint Proxy Statement/ Prospectus. Your Board of Directors also
unanimously recommends that you vote for the election of the nominated director
and for the proposal to increase the number of shares that may be issued under
eSOFT's equity incentive plan.
Your vote is important and we urge you to complete, sign, date and
return your proxy card as promptly as possible, whether or not you expect to
attend the eSOFT meeting. If you are unable to attend in person, your shares
will be voted at the eSOFT meeting if you return your proxy card.
By Order of the Board of Directors,
Philip Becker
Secretary
April 16, 1999
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APEXX TECHNOLOGY, INC.
506 SOUTH 11TH STREET
BOISE, IDAHO 83702
(208) 344-8000
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
A special meeting of the stockholders of Apexx Technology, Inc. will be
held on May 20, 1999 at 4:00 p.m., at The Statehouse Inn, 981 Grove Street,
Boise, Idaho 83702 for the following purpose:
To consider and vote upon a proposal to approve an Amended and Restated
Agreement and Plan of Merger, dated as of January 25, 1999, between Apexx and
eSOFT, Inc., pursuant to which, among other things:
o Apexx will become a subsidiary of eSOFT;
o eSOFT will issue 1,591,365 shares of its common stock in
exchange for all of the outstanding common stock of Apexx; and
o eSOFT will reserve 1,356,003 shares of its common stock for
issuance to holders of options to purchase Apexx common stock.
A copy of the merger agreement is attached as Appendix A to the Joint
Proxy Statement/ Prospectus accompanying this Notice.
Only stockholders of record at the close of business on April 16, 1999
are entitled to notice of and to vote at the meeting or any postponement or
adjournment thereof. A complete list of those stockholders will be open for
examination by any stockholder for any purpose germane to the meeting at the
principal executive offices of Apexx for a period of ten days prior to the
meeting.
Your Board of Directors unanimously recommends that you vote to approve
the merger agreement and to consummate the merger that is described in detail in
the accompanying Joint Proxy Statement/ Prospectus.
Your vote is important and we urge you to complete, sign, date and
return your proxy card as promptly as possible, whether or not you expect to
attend the Apexx meeting. If you are unable to attend in person, your shares
will be voted at the Apexx meeting if you return your proxy card.
By Order of the Board of Directors,
Dr. Kevin Learned
Secretary
April 16, 1999
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Joint Proxy Statement/Prospectus
To the Stockholders of eSOFT, Inc. and Apexx Technology, Inc.:
The Boards of Directors of eSOFT, Inc. and Apexx Technology, Inc. have
unanimously approved a strategic combination that will result in Apexx becoming
a wholly owned subsidiary of eSOFT. The combined company will retain the name
eSOFT, Inc., with executive offices located in Broomfield, Colorado and a
marketing, product development and technical support office located in Boise,
Idaho. Two Apexx directors will join four eSOFT directors to form a six-member
board of directors for the combined company.
Upon completion of the merger, Apexx stockholders will receive 1,591,365 shares
of eSOFT common stock and Apexx optionholders will have the right to exchange
their options for options to purchase 1,356,003 shares of eSOFT common stock.
Immediately after the merger, Apexx stockholders will own approximately 18.1% of
the combined company and eSOFT stockholders will own approximately 81.9% of the
combined company. Assuming that all eSOFT and Apexx options and warrants are
exercised, Apexx security holders will own approximately 25.9% of the combined
company and eSOFT security holders will own approximately 74.1% of the combined
company. eSOFT common stock is listed on the Nasdaq SmallCap market under the
symbol "ESFT."
It is anticipated that the merger will be tax-free to eSOFT and Apexx
stockholders and optionholders for U.S. federal income tax purposes, except for
taxes due on cash received by Apexx stockholders and optionholders for
fractional shares. The merger is intended to be accounted for as a
"pooling-of-interests" transaction.
The merger requires the approval of both the stockholders of eSOFT and Apexx and
the satisfaction of certain other customary conditions. eSOFT and Apexx have
each scheduled special meetings of their respective stockholders to vote on the
merger. The meetings are scheduled as follows:
eSOFT: APEXX:
Thursday, May 20, 1999 Thursday, May 20, 1999
9:00 a.m. 4:00 p.m.
The Broker Inn The Statehouse Inn
555 30th Street 981 Grove Street
Boulder, Colorado 80303 Boise, Idaho 83702
The record date for the meetings is April 16, 1999.
Regardless of the number of shares you own or whether you plan to attend a
meeting, it is important that your shares be represented and voted. You can vote
by using the enclosed proxy card or by attending the meeting. If you do not vote
or you abstain, the effect will be a vote against the merger. YOUR VOTE IS VERY
IMPORTANT.
This Joint Proxy Statement/Prospectus provides you with detailed information
about the proposed merger. We encourage you to read this entire document
carefully.
Philip Becker Thomas Loutzenheiser
Chairman and Chief Technology Officer Chairman and President
eSOFT, Inc. Apexx Technology, Inc.
FOR A DISCUSSION OF CERTAIN RISK FACTORS THAT YOU SHOULD CONSIDER IN EVALUATING
THE MERGER, PLEASE SEE "RISK FACTORS RELATING TO THE MERGER" AND "RISK FACTORS
RELATING TO AN INVESTMENT IN eSOFT COMMON STOCK" BEGINNING ON PAGE 19.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
REGULATOR HAS APPROVED THE eSOFT COMMON STOCK TO BE ISSUED IN THE MERGER OR
DETERMINED WHETHER THIS JOINT PROXY STATEMENT/PROSPECTUS IS TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
This Joint Proxy Statement/Prospectus is dated April 16, 1999 and is first being
mailed to stockholders on April 20, 1999.
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TABLE OF CONTENTS
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QUESTIONS AND ANSWERS ABOUT THE
eSOFT/APEXX MERGER............................................................ 4
WHO CAN HELP ANSWER MY QUESTIONS?
ABOUT THE MERGER.............................................................. 7
SUMMARY.......................................................................... 7
SUMMARY SELECTED HISTORICAL AND
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL INFORMATION................................................ 14
RISK FACTORS RELATING
TO THE MERGER.................................................................... 18
RISK FACTORS RELATING TO AN
INVESTMENT IN eSOFT COMMON STOCK.............................................. 20
DESCRIPTION OF eSOFT............................................................. 25
Corporate History............................................................. 25
Business History.............................................................. 25
Product Line and Services..................................................... 26
Marketing..................................................................... 28
Distribution.................................................................. 28
Operations.................................................................... 29
Intellectual Property......................................................... 29
Product Development Costs..................................................... 29
Competition................................................................... 29
Availability of Raw Materials and
Semi-Finished Goods......................................................... 30
Concentration of Sales........................................................ 31
Concentration of Vendors...................................................... 31
Government Regulations........................................................ 31
Employees..................................................................... 31
eSOFT Property................................................................ 31
eSOFT Legal Proceedings....................................................... 31
eSOFT SELECTED HISTORICAL FINANCIAL
INFORMATION................................................................... 32
eSOFT MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................... 33
Results of Operations......................................................... 33
Liquidity and Capital Resources for the Year
Ended December 31, 1998..................................................... 35
Year 2000 Problem............................................................. 37
New Accounting Pronouncements................................................. 38
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT OF eSOFT........................................................... 40
eSOFT MANAGEMENT................................................................. 41
Biographical Information...................................................... 41
Election of Directors......................................................... 42
eSOFT EXECUTIVE COMPENSATION..................................................... 43
Summary Compensation Table.................................................... 43
Option/SAR Grants in Last Fiscal Year......................................... 43
Aggregated Option/SAR Exercises Fiscal
Year-End Option/SAR Values.................................................. 44
Director Compensation......................................................... 45
Employment Agreements......................................................... 45
Stock Option Plan............................................................. 47
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS OF eSOFT......................................................... 47
Severance Arrangement......................................................... 47
Related Customer.............................................................. 47
DESCRIPTION OF APEXX............................................................. 48
Corporate History............................................................. 48
Apexx Products................................................................ 48
Technical Services............................................................ 49
Markets....................................................................... 49
Sales Channels................................................................ 49
Operations.................................................................... 50
Intellectual Property......................................................... 50
Product Development Costs..................................................... 50
Concentration of Sales........................................................ 50
Concentration of Vendors...................................................... 50
Government Regulations........................................................ 51
Apexx Property................................................................ 51
Employees..................................................................... 51
Competition................................................................... 51
Apexx Legal Proceedings....................................................... 52
APEXX SELECTED HISTORICAL FINANCIAL
INFORMATION................................................................... 53
APEXX'S MANAGEMENT DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS..................................................... 54
Results of Operations......................................................... 54
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Liquidity and Capital Resources for the
Year Ended December 31, 1998............................................... 55
Year 2000 Effect............................................................. 57
New Accounting Pronouncements................................................ 57
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND
MANAGEMENT OF APEXX.......................................................... 59
APEXX EXECUTIVE COMPENSATION.................................................... 60
Summary Compensation Table .................................................. 60
MATERIAL CONTRACTS BETWEEN eSOFT
AND APEXX.................................................................... 60
Loan Agreement............................................................... 60
Joint Marketing Plan......................................................... 61
Purchase Agreement........................................................... 61
Trademark License Agreement ................................................. 61
THE PROPOSED MERGER............................................................. 62
General...................................................................... 62
The Merger................................................................... 62
Voting Agreements............................................................ 62
Background of the Merger..................................................... 62
eSOFT's Reasons for Merger; Recommendation of
the Board of Directors of eSOFT............................................ 64
Apexx's Reasons for Merger; Recommendation
of the Board of Directors of Apexx......................................... 66
Opinion of eSOFT's Financial Advisor......................................... 68
Anticipated Accounting Treatment............................................. 74
Material United States Federal Income Tax
Consequences............................................................... 75
Federal Securities Law Consequences; Stock
Transfer Restrictions...................................................... 77
UNAUDITED PRO FORMA CONDENSED
COMBINED FINANCIAL STATEMENTS................................................ 78
MERGER AGREEMENT................................................................ 84
Overview of the Merger Agreement............................................. 84
Closing; Effective Time Surviving Corporation................................ 84
Consideration to be Received in the Merger................................... 84
Treatment of Apexx Stock Options............................................. 84
Exchange of Shares........................................................... 85
Conditions to the Consummation of the Merger................................. 85
Third Party Consents......................................................... 89
Certain Representations and Warranties....................................... 89
Termination.................................................................. 89
Termination Fees............................................................. 89
Documents to be Executed In Connection With
the Merger Agreement....................................................... 89
MANAGEMENT OF THE COMBINED
COMPANY AFTER THE MERGER..................................................... 91
DISSENTERS' RIGHTS.............................................................. 92
COMPARATIVE RIGHTS OF
STOCKHOLDERS.................................................................... 93
PROPOSAL TO ELECT AN
eSOFT DIRECTOR.................................................................. 101
PROPOSAL TO INCREASE THE NUMBER OF
SHARES OF eSOFT COMMON STOCK
ISSUABLE UNDER eSOFT'S EQUITY
INCENTIVE PLAN............................................................... 101
THE eSOFT SPECIAL MEETING....................................................... 102
Purpose, Time and Place...................................................... 102
Record Date; Quorum; Vote Required........................................... 103
Proxies...................................................................... 104
Revocation................................................................... 104
Proxy Solicitation........................................................... 104
Validity..................................................................... 105
THE APEXX SPECIAL MEETING....................................................... 106
Purpose, Time and Place...................................................... 106
Record Date; Quorum; Vote Required........................................... 106
Proxies...................................................................... 107
Revocation................................................................... 107
Proxy Solicitation........................................................... 108
Validity..................................................................... 108
DESCRIPTION OF eSOFT COMMON STOCK............................................... 109
General...................................................................... 109
Change in Control Provisions of the Articles
of Incorporation and Bylaws................................................ 109
Market Price of eSOFT Common Stock........................................... 109
Dividends.................................................................... 110
CAUTIONARY STATEMENT CONCERNING
FORWARD LOOKING STATEMENTS................................................... 110
LEGAL MATTERS................................................................... 111
EXPERTS......................................................................... 111
WHERE YOU CAN FIND MORE
INFORMATION.................................................................. 111
Appendix A Merger Agreement
Appendix B Stockholders Agreement
Appendix C Opinion of EVEREN Securities
Appendix D Notice of Dissenters' Rights
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QUESTIONS AND ANSWERS
ABOUT THE eSOFT/APEXX MERGER
Q: WHY ARE THE TWO COMPANIES PROPOSING TO MERGE?
A: The companies have complementary product lines in the Internet
connectivity market for small to medium sized businesses. After the
merger, we expect to offer customers a wider range of Internet access
products and to capture a larger market share for these products.
In addition, the merger will permit us to combine our product
development resources, thereby allowing the combined company to
increase the pace of development of new and improved products for this
market.
Moreover, the combined company will have a larger base of existing
customers and resellers, allowing us to target these customers with
incremental product and service offerings and to increase revenues from
these offerings.
Also, if we are successful in integrating the Apexx and eSOFT products
and thus expanding our sales, the larger base of products and sales
revenue should make it easier for us to raise additional capital to
finance the anticipated growth of the combined company.
To review the reasons for the merger in greater detail, please see
pages 64 through 68.
Q: WHAT WILL I RECEIVE IN THE MERGER?
A: Each Apexx stockholder will receive 1.119651 shares of eSOFT common
stock for each share of Apexx common stock they own as of the date of
the merger. No fractional shares will be issued in connection with the
merger. Instead, Apexx stockholders will receive cash for the market
value of any fractional shares.
Of the shares each Apexx stockholder will receive in the merger, 10%
will be placed into escrow for a period of one year. All or a portion
of the shares placed in escrow may be returned to
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eSOFT if the representations and warranties made by Apexx in the merger
are inaccurate and eSOFT suffers more than $200,000 in damages as a
result of the inaccuracy.
In addition, each Apexx stockholder will be required to transfer 1.63%
of the shares of eSOFT common stock the Apexx stockholder will receive
in the merger to Pacific Crest Securities. Pacific Crest Securities
advised Apexx in the merger and is entitled to receive a fee from Apexx
for these services. eSOFT has agreed to pay $200,000 of this fee, and
the Apexx stockholders will pay the remainder of this fee by
transferring to Pacific Crest a portion of the shares of eSOFT common
stock they receive in the merger.
To effect these arrangements, each Apexx stockholder will be required
to sign the Stockholders Agreement attached as Appendix B to this Joint
Proxy Statement/Prospectus. To find out more about the terms of the
Stockholders Agreement, see page 90.
If you own shares of eSOFT common stock as of the date of the merger,
you will continue to hold those shares after the merger.
Q: WHAT WILL APEXX OPTIONHOLDERS RECEIVE IN THE MERGER?
A: Each Apexx option will be converted into an option to purchase eSOFT
common stock at a rate of 1.085879 shares of eSOFT common stock for
each share of Apexx common stock subject to the option. Each of the new
eSOFT options will be exercisable on the same terms as the original
Apexx options.
Q: WHAT WILL THE RELATIVE OWNERSHIP PERCENTAGES OF THE eSOFT AND APEXX
SECURITY HOLDERS BE FOLLOWING THE MERGER?
A: Immediately after the merger, Apexx stockholders will own approximately
18.1% of the combined company and eSOFT stockholders will own
approximately 81.9% of the combined company. Assuming that all eSOFT
and Apexx options and warrants are exercised, Apexx security holders
(including Apexx optionees) will own approximately 25.9% of the
combined company and eSOFT security holders (including present eSOFT
optionees and warrantholders) will own approximately 74.1% of the
combined company.
Q: WHEN WILL APEXX STOCKHOLDERS BE PERMITTED TO SELL THE SHARES I RECEIVE
IN THE MERGER?
A: Except as described below, immediately following the merger, each
Apexx stockholder will be entitled to sell or transfer the eSOFT common
stock received by the stockholder in the merger.
The shares of eSOFT common stock issuable upon the exercise of the new
eSOFT options will be freely tradeable upon the filing of a
registration statement relating to the new eSOFT options.
eSOFT and Apexx stockholders and optionholders who are officers,
directors or 10% stockholders 30 days prior to the date the merger is
completed may not sell or transfer any shares of eSOFT common stock
until eSOFT publishes financial results covering at least 30 days of
operations of the combined companies. By signing the Stockholders
Agreement attached as Appendix B, each Apexx stockholder who is an
officer, director or 10% stockholder 30 days prior to the date the
merger is completed will agree to comply with these trading
restrictions.
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Q: WHY ARE eSOFT STOCKHOLDERS BEING ASKED TO APPROVE THE MERGER?
A: The rules of the Nasdaq SmallCap market require eSOFT to seek
stockholder approval of the merger because eSOFT will be issuing
approximately 1,591,365 shares of eSOFT common stock to Apexx
stockholders upon the merger and up to 1,356,003 shares upon the
exercise of options granted by Apexx. The total of 2,947,368 shares
exceeds 20% of the number of shares of eSOFT common stock currently
outstanding.
Q: WHEN AND WHERE ARE THE MEETINGS?
A: Both the eSOFT and the Apexx meetings are scheduled to take place on
May 20, 1999. The eSOFT meeting will take place at 9:00 a.m. at The
Broker Inn, 555 30th Street, Boulder, Colorado 80303. The Apexx meeting
will take place at 4:00 at The Statehouse Inn, 981 Grove Street, Boise,
Idaho 83702.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We expect to complete the merger shortly after receiving stockholder
approval at the meetings.
Q: WHAT DO I NEED TO DO NOW?
A: After carefully reading and considering the information contained in
this document, please fill out and sign your proxy card. Then mail your
signed proxy card in the enclosed return envelope as soon as possible
so that your shares may be represented at the meeting. Your proxy card
will instruct the persons named on the card to vote your shares at the
meeting as you direct on the card. If you do not vote or you abstain,
the effect will be a vote against the merger. THE BOARDS OF DIRECTORS
OF BOTH eSOFT AND APEXX UNANIMOUSLY RECOMMEND THAT YOU VOTE IN FAVOR OF
THE PROPOSED MERGER.
Q: IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER
VOTE MY SHARES FOR ME?
A: Your broker will vote your shares only if you provide instructions on
how to vote. You should follow the directions provided by your broker
to vote your shares.
Q: MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD OR
CONSENT FORM?
A: You may change your vote at any time before your proxy is voted at the
meeting. You can do this in one of three ways. First, you can send a
written notice stating that you would like to revoke your proxy.
Second, you can complete and submit a new proxy card. If you choose
either of these two methods, you must submit your notice of revocation
or your new proxy card to eSOFT at 295 Interlocken Boulevard, Suite
500, Broomfield, Colorado 80021 (if you are an eSOFT stockholder), or
to Apexx at 506 South 11th Street, Boise, Idaho 83702 (if you are an
Apexx stockholder). Third, you can attend the eSOFT meeting or the
Apexx meeting and vote in person. Simply attending the meeting,
however, will not revoke your proxy; you must vote at the meeting. If
you have instructed a broker to vote your shares, you must follow
directions received from your broker to change your vote.
Q: SHOULD I SEND IN MY STOCK CERTIFICATES NOW?
A: No. After the merger is completed, Apexx stockholders will receive
written instructions for exchanging their stock certificates. eSOFT
stockholders will keep their existing certificates.
Q: WHAT ARE THE TAX CONSEQUENCES OF THE MERGER?
A: It is anticipated that the exchange of shares by Apexx stockholders in
the merger will be tax-free to Apexx stockholders for U.S. federal
income tax purposes, except for taxes due on cash received in lieu of
fractional shares.
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The merger will be tax free to eSOFT stockholders for U.S. federal
income tax purposes. To review the tax consequences to stockholders in
greater detail, see pages 75 through 77.
Q: WHAT WILL APEXX STOCKHOLDERS' TAX BASIS BE IN THE eSOFT COMMON STOCK
THEY RECEIVE IN THE MERGER?
A: The tax basis in the shares of eSOFT common stock each Apexx
stockholder receives in the merger will equal the current tax basis in
such stockholder's Apexx common stock, reduced by the amount of basis
allocable to fractional shares for which such stockholder receives a
cash payment.
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WHO CAN HELP ANSWER MY QUESTIONS ABOUT THE MERGER?
If you have more questions about the merger, you should contact:
eSOFT Stockholders: Apexx Stockholders:
Jeffrey Finn Thomas Loutzenheiser
eSOFT, INC. APEXX TECHNOLOGY, INC.
295 Interlocken Boulevard, Suite 500 506 South 11th Street
Broomfield, Colorado 80021 Boise, Idaho 83702
(303) 444-1600 (208) 336-9400
SUMMARY
This summary, together with the preceding Questions and Answers
section, highlights selected information from this document and may not contain
all of the information that is important to you. To better understand the merger
and related transactions, as well as the other matters to be considered at the
eSOFT meeting, you should read this entire document and the documents we have
referred you to. See "Where You Can Find More Information" on page 109.
THE COMPANIES
eSOFT, INC.
295 Interlocken Boulevard, Suite 500
Broomfield, Colorado 80021
(303) 444-1600
eSOFT develops and markets a product line of Internet protocol adapters that are
marketed under the acronym IPAD. The IPAD is designed to be a total
Internet/Intranet connectivity solution for small and medium sized businesses,
institutions and educational sites that can be easily and economically installed
and managed by existing systems personnel.
APEXX TECHNOLOGY, INC.
506 South 11th Street
Boise, Idaho 83702
(208) 336-9400
Apexx's mission is to provide easy and affordable computer networking solutions
that enhance decision speed and communication capabilities to growing
organizations. Apexx's award-winning TEAM Internet(R) family of products,
targeted to small to medium sized businesses, provides a turnkey
Internet/Intranet solution that gives the customer a powerful, affordable and
easy to manage Internet presence. The key features include Internet
connectivity/ routing, firewall protection, an e-mail server, Web browsing, Web
publishing capabilities and Web filtering applications.
REASONS FOR THE MERGER
eSOFT and Apexx believe that the merger offers an excellent opportunity
to build value for their stockholders for the following reasons, among others:
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o By combining the complementary product lines of eSOFT and
Apexx, the combined company could offer customers a wider
range of products than is now available from either company.
We believe that the merger will allow the combined company to
capture a larger market share for these Internet access
products.
o Like many computer based products, the eSOFT and Apexx
Internet connector products are subject to rapid technological
advancements. By integrating the product development resources
of eSOFT and Apexx, we believe that the merger will allow the
combined company to increase the pace of development of new
and improved products for this market.
o Certain of our competitors have entered into joint
relationships with much larger companies, which will likely
have a substantial impact upon competition in this industry.
We expect the combination of Apexx and eSOFT should create a
company that is better able to withstand the competition of
larger and more well-financed competitors.
o Both eSOFT and Apexx need additional equity capital to fund
their rapid growth in the Internet access appliance market.
Upon integrating the two companies, Apexx and eSOFT will be a
leader in this market. If we are successful in integrating the
Apexx and eSOFT products and thus expanding our sales, the
larger base of products and sales revenue should make it
easier for us to raise additional capital to finance the
anticipated growth of the combined company.
o Because Apexx and eSOFT have overlapping marketing strategies,
marketing strengths and geographic areas of marketing
concentration, we expect the combined company to have a larger
and stronger marketing presence in the industry.
These and other reasons for approving and recommending the merger
identified by the Boards of Directors of eSOFT and Apexx are explained in
greater detail on pages 64 through 68.
ELECTION OF AN eSOFT DIRECTOR
eSOFT stockholders also will be asked to elect Jeffrey Finn, eSOFT's
current President and Chief Executive Officer, as a Class I director of eSOFT.
Detailed information on Mr. Finn is provided on page 41. If Mr. Finn is unable
to stand for re-election, eSOFT's Board of Directors may reduce its size or
designate a substitute. If a substitute is designated, proxies voting on the
original director candidate will be cast for the substituted candidate. eSOFT
has no reason to believe that Mr. Finn will be unable to serve if elected.
INCREASE IN SHARES UNDER EQUITY INCENTIVE PLAN
Finally, eSOFT stockholders will be asked to approve an amendment to
eSOFT's equity incentive plan to increase the number of shares of eSOFT common
stock eligible to be issued under the plan from 1,700,000 shares to 2,900,000
shares. You can find more information regarding this proposal on pages 101
through 102.
9
<PAGE> 13
THE MEETINGS
TIME, PLACE AND RECORD DATE OF THE MEETINGS
The record date for each meeting is the close of business on April 16, 1999. The
eSOFT meeting will be held at 9:00 a.m. at The Broker Inn, 555 30th Street,
Boulder, Colorado 80303 on Thursday, May 20, 1999. The Apexx meeting will be
held at 4:00 p.m. at The Statehouse Inn, 981 Grove Street, Boise, Idaho 83702 on
Thursday, May 20, 1999.
MATTERS TO BE VOTED ON
At the meetings, eSOFT and Apexx stockholders will each be asked to approve the
merger agreement. eSOFT stockholders also will be asked to elect Jeffrey Finn as
a Class I director of eSOFT and to approve a proposal to increase the number of
shares of eSOFT common stock eligible to be issued under eSOFT's equity
incentive plan from 1,700,000 shares to 2,900,000 shares.
VOTES REQUIRED (SEE PAGES 101 AND 104)
The affirmative vote of the holders of a majority of the outstanding shares of
Apexx common stock is required for approval of the merger proposal by Apexx
stockholders. A majority of the shares of eSOFT common stock represented and
voting at the eSOFT meeting is required for eSOFT stockholder approval of the
merger agreement, the proposal to increase the number of shares of eSOFT common
stock eligible for issuance under eSOFT's equity incentive plan and to elect a
Class I eSOFT director.
In addition, one of the conditions to the closing of the merger is that Apexx
stockholders holding at least 95% of the issued and outstanding Apexx common
stock must sign and deliver the Stockholders Agreement to eSOFT.
VOTING AGREEMENTS (SEE PAGE 62)
At the time Apexx executed the merger agree ment, certain Apexx stockholders
collectively owning approximately 50.75% of the issued and outstanding shares of
Apexx Common Stock executed voting agreements in which they agreed to vote in
favor of the merger. Because holders of a majority of the outstanding shares of
Apexx common stock have agreed to vote in favor of the merger, Apexx stockholder
approval of the merger is assured. However, holders of at least 95% of the
issued and outstanding Apexx common stock must sign and deliver the Stockholders
Agreement to eSOFT to satisfy one of the conditions to the closing of the
merger.
VOTING STOCK HELD BY eSOFT AND APEXX
OFFICERS AND DIRECTORS (SEE PAGES 101 and 104)
Approximately 48% of Apexx's common stock as of the record date was owned by
Apexx's directors and executive officers. Approximately 16.9% of eSOFT's common
stock as of the record date was owned by eSOFT's directors and executive
officers.
DISSENTER'S RIGHTS (SEE PAGE 92)
Any Apexx stockholder may assert dissenters' rights by delivering a written
notice to Apexx, before the vote on the merger is taken, stating that the
stockholder intends to demand payment for his or her shares if the merger is
approved. One of the conditions to the closing of the merger is that holders of
no more than 5% of the issued and outstanding shares of Apexx common may
exercise dissenters' rights.
10
<PAGE> 14
OUR RECOMMENDATIONS
TO OUR STOCKHOLDERS
eSOFT (SEE PAGES 64 through 66)
eSOFT's Board of Directors believes that the merger agreement and the merger are
fair to and in the best interests of eSOFT and its stockholders. Accordingly, it
has unanimously approved them and unanimously recommends that eSOFT stockholders
vote FOR the proposal to adopt the merger agreement.
In addition, eSOFT's Board of Directors recommends that eSOFT stockholders vote
FOR the election of Jeffrey Finn as a Class I director of eSOFT, and FOR the
proposal to increase the number of shares of eSOFT common stock eligible for
issuance under eSOFT's equity incentive plan.
APEXX (SEE PAGES 66 through 68)
Apexx's Board of Directors believes that the merger agreement and the merger are
fair to and in the best interests of Apexx and its stockholders. Accordingly, it
has unanimously approved them and unanimously recommends that Apexx stockholders
vote FOR the proposal to adopt the merger agreement.
THE MERGER
The Merger Agreement is attached as Appendix A to this Joint Proxy
Statement/Prospectus, and the Stockholders Agreement is attached as Appendix B
to this Joint Proxy Statement/ Prospectus. We encourage you to read each of
these documents as they are the legal documents that govern the merger.
WHAT APEXX STOCKHOLDERS WILL RECEIVE IN THE MERGER (SEE PAGE 84)
Each Apexx stockholder will receive 1.119651 shares of eSOFT common stock for
each share of Apexx common stock they own as of the date of the merger. No
fractional shares will be issued in connection with the merger. Instead, Apexx
stockholders will receive cash for the market value of any fractional shares.
Of the shares each Apexx stockholder will receive in the merger, 10% will be
placed into escrow for a period of one year. All or a portion of the shares
placed in escrow may be returned to eSOFT if the representations and warranties
made by Apexx in the merger are inaccurate and eSOFT suffers more than $200,000
in damages as a result of the inaccuracy.
In addition, each Apexx stockholder will be required to transfer 1.63% of the
shares of eSOFT common stock the Apexx stockholder receives in the merger to
Pacific Crest Securities. Pacific Crest Securities advised Apexx in the merger
and is entitled to receive a fee from Apexx for these services. eSOFT has agreed
to pay $200,000 of this fee, and the Apexx stockholders will pay the remainder
of this fee by transferring to Pacific Crest a portion of the shares of eSOFT
common stock they receive in the merger.
To effect these arrangements, each Apexx stockholder will be required to sign
the Stockholders Agreement attached as Appendix B to this Joint Proxy
Statement/Prospectus. Apexx stockholders should not send in their stock
certificates until instructed to do so after the merger is completed.
WHAT APEXX OPTIONHOLDERS WILL RECEIVE IN THE MERGER (SEE PAGES 84)
Each Apexx option will be converted into an option to purchase eSOFT common
stock at a rate of 1.085879 shares of eSOFT common stock for each share of Apexx
common stock subject to the option. Each of the new eSOFT options will be
exercisable on the same terms as the original Apexx options.
11
<PAGE> 15
RELATIVE OWNERSHIP PERCENTAGES OF eSOFT AND
APEXX SECURITY HOLDERS
Immediately after the merger, Apexx stockholders will own approximately 18.1% of
the combined company and eSOFT stockholders will own approximately 81.9% of the
combined company. Assuming that all eSOFT and Apexx options and warrants are
exercised, Apexx security holders (including Apexx optionees) will own
approximately 25.9% of the combined company and eSOFT security holders
(including present eSOFT optionees and warrantholders) will own approximately
74.1% of the combined company.
WHEN APEXX STOCKHOLDERS AND OPTIONHOLDERS MAY SELL OR TRANSFER THEIR eSOFT
COMMON STOCK (SEE PAGES 77 AND 90)
Except as described below , immediately following the merger, each Apexx
stockholder will be entitled to sell or transfer the eSOFT common stock received
by the stockholder in the merger.
The shares of eSOFT common stock issuable upon the exercise of the new eSOFT
options will be freely tradeable upon the filing of a registration statement
relating to the new eSOFT options.
In addition, Apexx and eSOFT stockholders and optionholders who are officers,
directors or 10% stockholders 30 days prior to the date the merger is completed
may not sell or transfer any shares of eSOFT common stock until eSOFT publishes
financial results covering at least 30 days of operations of the combined
companies.
By signing the Stockholders Agreement attached as Appendix B, each Apexx
stockholder will agree to comply with these trading restrictions.
WHAT eSOFT STOCKHOLDERS WILL RETAIN IN THE MERGER
Each owner of eSOFT common stock as of the date of the merger will continue to
hold those shares after the merger. The shares currently held by eSOFT
stockholders will represent the same number of shares of the combined company
following the merger. eSOFT stockholders should not send in their stock
certificates in connection with the merger.
DIRECTORS AND SENIOR MANAGEMENT OF eSOFT FOLLOWING THE MERGER (SEE PAGE 91)
When the merger is complete, the Board of Directors of the combined company will
consist of six directors: four directors of eSOFT and two directors to be named
by Apexx. The senior executive officers of eSOFT will continue with the combined
company in their current positions, and Thomas Loutzenheiser, Apexx's current
Chairman of the Board and President, will become eSOFT's vice president of
product development and a Class III eSOFT director following the merger. In
addition, Apexx has the right to name an additional person to be appointed as a
Class II eSOFT director after the merger.
OPINION OF eSOFT'S FINANCIAL ADVISOR (SEE PAGES 68 THROUGH 74)
In deciding to approve the merger, the Board of Directors of eSOFT considered
the opinion of EVEREN Securities, its financial advisor, that, as of the date of
such opinion, the consideration to be paid by eSOFT to the Apexx security
holders was fair to eSOFT from a financial point of view. This opinion is
attached as Appendix C to this Joint Proxy Statement/Prospectus. We encourage
you to read this opinion carefully, as well as the description of the analyses
and assumptions on which the opinion is based.
12
<PAGE> 16
INTERESTS OF CERTAIN PERSONS IN THE MERGER
(SEE PAGE 20)
In considering the recommendations of the Boards of Directors that you vote in
favor of the merger, you should be aware that Mr. Loutzenheiser, an Apexx
officer and director, will have an employment agreement with eSOFT following the
merger. This agreement is consistent with the employment agreements of eSOFT's
current executive officers. The Boards of Directors of eSOFT and Apexx
considered these interests in approving and recommending the merger agreement.
CONDITIONS TO THE MERGER (SEE PAGES 85
THROUGH 88)
The completion of the merger depends upon the satisfaction or waiver of a number
of conditions, including the following:
o approval by both the eSOFT stockholders and the Apexx stockholders;
o execution and delivery of the Stockholders Agreement by Apexx
stockholders holding at least 95% of the issued and outstanding Apexx
common stock;
o holders of no more than 5% of the outstanding Apexx common stock shall
have dissented from the merger;
o the average last sale price per share of eSOFT common stock for the 10
trading days prior to the merger is not higher than $9.00 nor lower
than $3.40;
o successful completion of a live build demonstration of Apexx's
products;
o the continued effectiveness of employment agreements executed by
certain employees of Apexx in connection with the merger;
o the full funding of a joint marketing plan agreed to in connection with
the merger;
o the continued accuracy of each company's representations and warranties
and compliance by each company with its agreements contained in the
merger agreement;
o there being no law or court order that prohibits the merger;
o receipt of a letter from eSOFT's independent public accountants as to
the appropriateness of "pooling of interests" accounting treatment for
the merger; and
o receipt of legal opinions from counsel for each company, including an
opinion from eSOFT's counsel as to the qualification of the merger as a
reorganization for tax purposes.
TERMINATION OF THE MERGER AGREEMENT (SEE PAGE 89)
eSOFT and Apexx can agree to terminate the merger agreement without completing
the merger, and either company can terminate the merger agreement on its own
without completing the merger under various circumstance, including if any of
the following occurs:
o the merger is not consummated by June 1, 1999;
o if all conditions to the closing set forth in the merger agreement have
not been satisfied or waived by June 1, 1999; or
o if either the Apexx or eSOFT Board of Directors withdraws or modifies
its approval or recommendation of the merger agreement or the merger to
their respective stockholders.
13
<PAGE> 17
TERMINATION FEES AND EXPENSES (SEE PAGE 89)
If Apexx terminates the merger agreement because eSOFT's Board of Directors
changes its recommendation of the merger agreement to eSOFT's stockholders, then
Apexx is entitled to receive a fee of $750,000. If eSOFT terminates the merger
agreement because Apexx's Board of Directors recommends another transaction to
Apexx's stockholders, then eSOFT is entitled to receive a fee of $2,000,000.
ANTICIPATED ACCOUNTING TREATMENT (SEE PAGE 74)
The merger is intended to qualify as a "pooling-of-interests" for accounting and
financial reporting purposes, which means that we will treat our companies as if
they had always been combined for accounting and financial purposes, and the
assets and liabilities of eSOFT and Apexx will be carried forward at their
historical amounts.
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES (SEE PAGE 75)
We have structured the merger so that eSOFT and Apexx stockholders should not
recognize any gain or loss for United States federal income tax purposes (except
for taxes due on cash received by Apexx stockholders for fractional shares). We
have conditioned the merger on receipt of a legal opinion that the merger will
qualify as a reorganization for tax purposes.
LISTING OF eSOFT COMMON STOCK
The shares of eSOFT common stock to be issued to the Apexx stockholders in the
merger will be listed on the Nasdaq SmallCap Market.
14
<PAGE> 18
SUMMARY SELECTED HISTORICAL AND UNAUDITED
PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
We are providing the following financial information to aid you in your
analysis of the financial aspects of the merger. This information is only a
summary and you should read it in conjunction with the historical financial
statements of eSOFT and Apexx and the related notes appearing elsewhere in this
Joint Proxy Statement/Prospectus. You should also review the discussions of this
financial information found under the headings "eSOFT Management's Discussion
and Analysis of Financial Condition and Results of Operations" and "Apexx
Management's Discussion and Analysis of Financial Condition and Results of
Operations."
eSOFT SUMMARY HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 3,867,600 $ 1,233,137
Cost of goods sold 1,357,463 429,601
----------- -----------
Gross profit 2,510,137 803,536
Selling, general and
administrative expense 5,772,869 961,834
Other (income) expense (160,070) 34,954
Income tax (benefit) expense (162,000) 162,000
----------- -----------
Net loss $(2,940,662) $ (355,252)
=========== ===========
Net loss per common share
basic and diluted $ (0.54) $ (0.23)
Basic and diluted weighted
average shares outstanding 5,493,276 1,536,884
=========== ===========
CASH FLOW DATA:
Net cash (used in) $(4,282,618) $ (23,805)
operating activities
Net cash (used in) investing
activities (2,761,345) (263,128)
Net cash provided by 369,020
financing activities 7,596,776
BALANCE SHEET DATA:
Current assets $ 6,344,388 $ 660,075
Total assets 7,417,451 1,724,800
Current liabilities 1,636,947 409,082
Long term liabilities -- 535,903
Total liabilities 1,636,947 944,985
Stockholders' equity 5,780,504 779,815
Working capital 4,707,441 250,993
</TABLE>
eSOFT has not paid any dividends since becoming a "C" corporation in September
1997.
15
<PAGE> 19
APEXX SUMMARY HISTORICAL FINANCIAL INFORMATION
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 3,808,106 $ 2,003,426
Cost of goods sold 1,924,172 1,023,344
----------- -----------
Gross profit 1,883,934 980,082
Selling, general and
administrative expense 2,755,970 1,183,704
Other (income) expense 13,917 (5,962)
----------- -----------
Net loss $ (885,953) $ (197,660)
=========== ===========
CASH FLOW DATA:
Net cash (used in) operating
activities $ (915,699) $ (319,154)
Net cash (used in) investing
activities (35,266) (105,586)
Net cash provided by
financing activities 776,864 620,157
BALANCE SHEET DATA:
Current assets $ 1,070,753 $ 862,645
Total assets 1,168,218 974,348
Current liabilities 1,168,679 305,357
Long term liabilities 75,386 25,948
Total liabilities 1,244,065 331,305
Stockholders' equity (deficit) (75,847) 643,043
Working capital (deficit) (97,926) 557,288
</TABLE>
Apexx has not paid any dividends.
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
eSOFT and Apexx are providing the following unaudited pro forma
financial information to give you a picture of what the results of operations
and financial position of the combined company would have looked like, absent
any operational or other changes, had eSOFT's and Apexx's businesses been
combined for the periods and at the dates indicated. This information is
provided for illustrative purposes only and does not show what their results of
operations or financial position would have been if the merger had actually
occurred on the dates assumed. This information also does not indicate what
16
<PAGE> 20
their future operating results or consolidated financial position will be. This
information should be read in conjunction with historical financial statements
and notes thereto of eSOFT and Apexx, appearing elsewhere in this Joint Proxy
Statement/Prospectus. The unaudited pro forma combined operations data does not
include any of the synergies or efficiencies expected to result from the merger.
Please see "Unaudited Pro Forma Condensed Combined Financial Statements" on page
78 for a more detailed explanation of this analysis.
The merger is intended to be accounted for as a pooling-of-interests
for accounting and financial reporting purposes, which means that we will treat
our companies as if they had always been combined for accounting and financial
reporting purposes. For a more detailed description of pooling-of-interests
accounting, see "The Proposed Merger -- Anticipated Accounting Treatment" on
page 74.
The unaudited pro forma combined operations data combines eSOFT's
results for its years ended December 31, 1998 and 1997, with Apexx's results for
its years ended December 31, 1998 and 1997, giving effect to the merger as if it
had occurred as of January 1, 1997.
The unaudited pro forma balance sheet data combines eSOFT's and Apexx's
balance sheets at December 31, 1998, giving effect to the merger as if it had
occurred as of December 31, 1998.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
OPERATIONS DATA:
Revenues ..................................... $ 7,675,706 $ 3,236,563
Net loss ..................................... 3,826,615 (552,912)
Net (loss) per share basic and diluted ....... (0.54) (0.18)
Basic and diluted weighted average
shares outstanding ........................ 7,084,641 3,128,249
</TABLE>
<TABLE>
<CAPTION>
AS OF
DECEMBER 31, 1998
-----------------
<S> <C>
BALANCE SHEET DATA:
Total current assets ......................... $ 7,115,141
Total assets ................................. 8,285,669
Total current liabilities .................... 3,055,626
Total long-term liabilities .................. 75,386
Total liabilities ............................ 3,131,012
Stockholders' equity ......................... 5,154,657
Working capital .............................. 4,059,515
</TABLE>
COMPARATIVE PER COMMON SHARE INFORMATION
eSOFT and Apexx are presenting the following selected comparative per
common share information for eSOFT common stock on a historical and pro forma
combined basis and for Apexx common stock on a historical and pro forma
equivalent basis. This information is provided for illustrative purposes only
and does not show what their results of operations or financial position would
have been if the merger had actually occurred on the dates assumed. This
information should be read in conjunction with historical financial statements
and notes thereto of eSOFT and Apexx, appearing elsewhere in this Joint Proxy
Statement/Prospectus.
17
<PAGE> 21
The unaudited pro forma information in the table assumes that eSOFT
will exchange 1.119651 shares of eSOFT common stock for each share of Apexx
common stock and will issue 1.085879 shares of eSOFT common stock for each share
of Apexx common stock issuable upon the exercise of Apexx options.
<TABLE>
<CAPTION>
eSOFT COMMON STOCK APEXX COMMON STOCK
------------------------------------- --------------------------------------
Pro Forma Pro Forma
Historical Combined Historical Equivalent
--------------- ---------------- ---------------- ---------------
<S> <C> <C> <C> <C>
BOOK VALUE(1)
December 31, 1998 $ 0.84 $ 0.61 $ (0.05) $ 0.68
DIVIDENDS DECLARED
Year Ended December 31, 1998 -- -- -- --
Year Ended December 31, 1997 -- -- -- --
NET LOSS (BASIC AND DILUTED)(2)
Year Ended December 31, 1998 $ (0.54) $ (0.54) $ (0.62) $ (0.60)
Year Ended December 31, 1997 $ (0.23) $ (0.18) $ (0.15) $ (0.20)
</TABLE>
(1) The pro forma combined book value per share of eSOFT common stock
represents the total pro forma combined common stockholder's equity for
eSOFT and Apexx divided by the total pro forma common shares of the
combined entities. The pro forma equivalent book value per share of Apexx
common stock represents the pro forma combined book value per share of
eSOFT common stock multiplied by an assumed exchange ratio of 1.119651.
(2) The pro forma combined loss per share of eSOFT common stock (based on the
weighted average number of common and common equivalent shares) is the
combined historical net loss for eSOFT and Apexx divided by the weighted
average pro forma common and common equivalent shares of the combined
entities. The pro forma equivalent net loss per share of Apexx common stock
represents the pro forma combined net loss per share multiplied by an
assumed exchange ratio of 1.119651.
RECENT DEVELOPMENTS
Recent Financial Results
eSOFT recently reported its preliminary estimated, unaudited financial
results for the three months ended March 31, 1999. eSOFT projects preliminary
estimated revenue for the first quarter to be approximately $550,000
(unaudited). eSOFT also estimates that the first quarter basic and diluted
earnings per share will be a loss of approximately ($.39) (unaudited). On a pro
forma unaudited combined basis and assuming that the merger with Apexx had
occurred on January 1, 1999, eSOFT projects that preliminary estimated revenue
for the first quarter would have been $1,400,000 (unaudited). eSOFT also
estimates that pro forma combined basic and diluted earnings per share would
have been a loss of approximately ($.35) (unaudited). These estimated earnings
per share results include a one-time charge for the anticipated expenses
associated with the merger. These estimated results are preliminary in nature
and may be revised by eSOFT after it conducts a full review of eSOFT's and
Apexx's operations during the first quarter. See "Cautionary Statement
Concerning Forward-Looking Statements."
18
<PAGE> 22
Management Changes
On April 1, 1999, eSOFT announced changes to its management team and
board of directors. eSOFT's board of directors appointed Richard Eyestone as a
Class II eSOFT director. In addition, eSOFT announced that it had accepted the
resignation of Tom Tennessen, eSOFT's chief financial officer, and James P.
Bell, eSOFT's vice president of business development. Search plans for these
positions are underway.
RISK FACTORS RELATING TO THE MERGER
In addition to the other information included in this Joint Proxy
Statement/Prospectus, eSOFT and Apexx stockholders should consider the following
risk factors carefully in determining whether to approve the merger.
FAILURE TO ACHIEVE BENEFITS AND RISKS FROM INTEGRATION OF OPERATIONS
The merger is expected to create a more competitive company. This
requires the integration of two companies' systems and technologies that
previously operated independently. After the merger, eSOFT and Apexx will
integrate the development, production and marketing of their previously separate
product lines, as well as their administrative and financial reporting systems.
The companies will be required to create a common interface for the overall
support of their products in order to generate efficiencies in technical support
of both platforms. Additionally, the companies must develop a common hardware
platform to gain efficiencies in production and thus competitive margins for the
combined entities. No assurance can be given that the companies will be able to
integrate their operations and market a common product line without encountering
difficulties or experiencing the loss of key employees or customers, or that the
synergies anticipated from such integration will be realized. Because the
companies' products overlap in functionality and target market, sales of certain
products may diminish as the combined company restructures its product line;
this may result in an initial reduction of sales growth following the merger
until rebranding of each product line can be accomplished.
BECAUSE THE EXCHANGE RATIOS ARE FIXED, THE MARKET VALUE OF eSOFT COMMON STOCK
ISSUED TO APEXX SECURITY HOLDERS WILL DEPEND ON THE MARKET PRICE OF eSOFT COMMON
STOCK WHEN THE MERGER IS COMPLETED
Apexx stockholders and optionholders are receiving a fixed number of
shares of eSOFT common stock in the merger, rather than a number of shares of
eSOFT common stock with a particular fixed market value. The market values of
eSOFT and Apexx common stock at the time of the merger may vary significantly
from their prices on the date the merger agreement was executed, the date of
this document or the date on which eSOFT and Apexx stockholders vote on the
merger. Because the exchange ratios will not be adjusted to reflect any changes
in the market value of eSOFT or Apexx common stock, the market value of the
eSOFT common stock issued in the merger and the Apexx common stock surrendered
in the merger may be higher or lower than the values of such shares on such
earlier dates. See "The Merger Agreement -- Consideration to be Received in the
Merger" and "Description of eSOFT Common Stock -- Market Price of eSOFT Common
Stock."
EXTREME FLUCTUATIONS IN THE MARKET PRICE OF eSOFT COMMON STOCK MAY RESULT IN
TERMINATION OR RENEGOTIATION
19
<PAGE> 23
One condition to the closing of the merger is that the average market
price of eSOFT common stock during the ten trading days prior to the closing of
the merger cannot be below $3.40 or above $9.00. If this condition is not
satisfied, eSOFT and Apexx each have the right to renegotiate the consideration
to be paid to Apexx security holders in the merger. If the parties cannot reach
an agreement on a renegotiated price, the merger agreement may be terminated and
the merger may be abandoned, before or after a vote of eSOFT or Apexx
stockholders is taken. See "The Merger Agreement -- Conditions to the
Consummation of the Merger" and "Description of eSOFT Common Stock -- Market
Price of eSOFT Common Stock."
MERGER-RELATED CHARGES
eSOFT and Apexx estimate that, as a result of the merger, the combined
company will incur consolidation and integration expenses of approximately
$100,000. In addition, it is expected that eSOFT and Apexx will incur merger
related expenses of approximately $798,000, consisting of investment banking
fees ($300,000 of which will be paid in cash, with the remainder to be paid in
the form of stock and warrants), and $250,000 of legal, accounting and other
fees as well as financial printing and other related costs. If the merger is
consummated, eSOFT expects to expense the anticipated $1,048,000 pre-tax charge
relating to the above-referenced expenses in the second quarter of 1999. The
foregoing amounts are preliminary and the actual amounts may be higher or lower.
Moreover, the combined company may incur additional unanticipated expenses in
connection with the integration of eSOFT's and Apexx's businesses. See
"Unaudited Pro Forma Combined Condensed Financial Statements."
VOTING INTERESTS OF eSOFT AND APEXX STOCKHOLDERS WILL BE SUBSTANTIALLY DILUTED
Based on the exchange ratios and the capitalization of eSOFT and Apexx
as of April 16, 1999, immediately following the merger Apexx stockholders will
own eSOFT common stock representing approximately 18.1% of the voting power of
the combined company and eSOFT stockholders will own securities representing
approximately 81.9% of the voting power of the combined company. Assuming all
eSOFT and Apexx options and warrants are exercised, Apexx security holders
(including Apexx optionees) will own approximately 25.9% of the voting power of
the combined company and eSOFT security holders (including present eSOFT
optionees and warrantholders) will own approximately 74.1% of the voting power
of the combined company. This will constitute a substantial dilution of the
voting interest of both eSOFT and Apexx security holders.
COMBINED COMPANY WILL EXPERIENCE INCREASED CAPITAL REQUIREMENTS
eSOFT and Apexx have accelerated a joint marketing program for the
benefit of both companies. This program anticipates spending in excess of
$800,000 to jointly market and generate new sales leads for the combined
companies. See "Material Contracts Between eSOFT and Apexx -- Joint Marketing
Plan." In addition, both eSOFT and Apexx have suffered losses from operations in
the past, and both expect to continue to incur losses in support of the emerging
growth of the two companies. As a result of these factors, we expect the
combined company to experience increased capital requirements.
In addition, each of eSOFT and Apexx is at an early stage of
development of its business in an emerging market; as a result, the business
prospects, rate of growth and results of operations of both eSOFT and Apexx are
unpredictable. Neither increases or declines in net revenue received by the
companies from quarter to quarter, nor increases in loss suffered by the
combined companies from one fiscal quarter to the next, can be accurately
forecasted in these emerging growth markets. The combined companies are
expending significant resources to quickly build market penetration and market
shares, and the success of these marketing programs cannot be accurately
predicted. Thus additional working
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capital may be required to continue the support of the combined entities to
attain their overall growth objectives.
There can be no assurance that the combined company will be able to
obtain sufficient capital on acceptable terms, from internal or external
sources, to support losses from operations or to pursue its growth plans.
eSOFT AND APEXX ARE CURRENTLY MARKETING A COMBINED PRODUCT LINE, MAKING A
SEPARATION OF THE PRODUCTS MORE DIFFICULT IF THE MERGER IS NOT APPROVED
eSOFT and Apexx are currently conducting a joint marketing program for
the benefit of both companies. This marketing program has combined the eSOFT and
Apexx product lines under the Apexx tradename "TEAM Internet(R)," and eSOFT IPAD
products are currently being sold using the "TEAM Internet(R)" brand name. If
the merger does not occur, the several month lapse in marketing eSOFT products
under the "IPAD" brand will make it somewhat difficult for eSOFT to reenter the
market using the IPAD brand name. In addition, the $800,000 cost of this
marketing program will have been spent by eSOFT to promote the "TEAM
Internet(R)" brand name rather than the "IPAD" brand. See "Material Contracts
Between eSOFT and Apexx -- Joint Marketing Plan."
DEBT OWED BY APEXX TO eSOFT
eSOFT extended a working capital line of credit of $500,000 to Apexx on
December 4, 1999. This line of credit may be increased to $1,000,000 by mutual
agreement of both the eSOFT and the Apexx Board of Directors. This operating
line of credit is secured by a second priority lien on all of the assets of
Apexx and a pledge of all of the Apexx common stock held by Tom Loutzenheiser
and his wife, Gayl Loutzenheiser. See "Material Contracts Between eSOFT and
Apexx -- Loan Agreement." Apexx's assets are also subject to a first priority
lien relating to a $200,000 operating line of credit and equipment loan extended
to Apexx by Idaho Independent Bank. Apexx borrowings under the eSOFT line of
credit are due on August 1, 1999. Apexx will be required to repay this
obligation to eSOFT on August 1, 1999 whether or not the merger is consummated.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Mr. Loutzenheiser, the Chairman of the Board and President of Apexx,
will have an employment agreement with eSOFT and will be an eSOFT director
following the merger. See "The Merger Agreement -- Documents to be Executed in
Connection with the Merger Agreement." This employment agreement is consistent
with the employment agreements of eSOFT's current executive officers.
Accordingly, Mr. Loutzenheiser has an interest in the merger that is in addition
to the interests of Apexx stockholders in general.
RISK FACTORS RELATING TO AN INVESTMENT IN eSOFT COMMON STOCK
In evaluating eSOFT and its business, Apexx stockholders should
carefully consider the following risk factors in addition to the other
information included in this Joint Proxy Statement/Prospectus. In addition,
certain information included in this Prospectus is forward-looking. Such forward
looking information involves significant risks and uncertainties, including
those discussed below, that could cause actual future results to differ
significantly from those expressed in any forward-looking statements made by, or
on behalf of, eSOFT. See "Cautionary Statements Concerning Forward Looking
Statements."
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LIMITED OPERATING AND SALES HISTORY
eSOFT first entered the Internet connectivity marketplace in 1995 with
the IPAD 5000, which is focused at Internet service providers. In 1997, eSOFT
released the IPAD 2500 and the IPAD 1200 as products to serve the small to
medium sized business market. Through the first quarter of 1999, eSOFT has sold
less than 1,800 units of these products, so it has not yet gained significant
market exposure or demonstrable market acceptance. Given the absence of a clear
market acceptance with respect to these two newly introduced products, which in
turn are projected to be responsible for approximately 90% of eSOFT's system
sales in 1999, there can be no assurance that eSOFT will achieve its targeted
market penetration rates, and associated growth in sales revenues.
ANTICIPATED MARKET GROWTH AND RELIANCE UPON THE INTERNET
eSOFT's anticipated future growth in sales revenue is dependent upon
the rate of growth of the market for its systems. Growth of this market in turn
is 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, eSOFT's sales prospects may be adversely
affected. Moreover, there is no assurance that eSOFT will be able to capture an
increasing or consistent share of the market for an all-in-one appliance that
permits companies to connect to the Internet.
RECENT LOSSES
eSOFT has incurred losses during the fiscal years ended December 31,
1997 and 1998 and during the first quarter of 1999. eSOFT's ability to restore
profitability in future reporting periods is uncertain. It is anticipated that,
with the increased expenditures required to build eSOFT's corporate
infrastructure, eSOFT will have higher expenses than gross profits generated by
its operations. As a result, eSOFT expects to continue to incur losses during
this fiscal year.
SUFFICIENCY OF WORKING CAPITAL
During 1999, eSOFT intends to continue rapid expansion of sales and
marketing expenditures to develop a North American wholesale distribution
network, resulting in significantly increased selling, general and
administrative expenses and capital expenditures to meet this rapid expansion.
In addition, because Apexx will be a subsidiary of eSOFT after the merger, eSOFT
will have to provide financial support for similar expansions of Apexx's sales
and marketing efforts. eSOFT has already lent $500,000 to Apexx to fund Apexx's
operations prior to the completion of the merger. These increased expenditures
are anticipated to consume substantially all of eSOFT's working capital. There
can be no assurance that cash flow contributions from operations, coupled with
presently available working capital, will be sufficient to fully fund the
planned expansion of sales and marketing activities, other increased
expenditures and losses incurred from this expansion. It is therefore
anticipated that eSOFT will require additional working capital in the future. In
the event that cash flow from operations, if any, together with the proceeds of
any future financings, are insufficient to meet all of these expenses, eSOFT
will be required to re-evaluate its planned expenditures and allocate its total
resources in such a manner as the board of directors and management deems to be
in eSOFT's best interest.
TECHNOLOGICAL ADVANCES AND OBSOLESCENCE
eSOFT operates within an industry subject to a rapid pace of
technological obsolescence. eSOFT will seek to continuously enhance its products
with technological improvements. There can be no assurance as to the ability of
eSOFT to successfully and timely complete any or all of its development projects
in order to establish and maintain a position at the leading edge of
technological trends within its industry.
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COMPETITION; FEW BARRIERS TO ENTRY
The Internet connectivity business is highly competitive. A number of
eSOFT's competitors are very well established in the marketplace, with larger
sales volumes, broader brand name recognition, and a wider base of technical
resources. Most of the competitors have greater financial resources than eSOFT,
and Intel Corporation has invested in one of eSOFT's competitors. As the market
expands for products that perform in a manner similar to that of eSOFT's product
line, it is expected that a broader range of both small and large industry
participants will enter the market place with competing products. As competition
increases, profit margins on sales may diminish. There can be no assurance that
eSOFT will be able to effectively compete against such competitors given their
strong market presence, or that eSOFT will be able to attain and maintain
anticipated gross margins over time.
PROPRIETARY PROTECTION
eSOFT has no registered trademarks and has not filed any patent or
design utility applications in any jurisdiction. The absence of such proprietary
protection may diminish the ability of eSOFT to distinguish itself from other
industry competitors. In addition, while eSOFT licenses its software to
purchasers and restricts unauthorized use under its licensing provisions, this
does not protect eSOFT from an erosion of potential revenue due to illicit
software use and piracy.
REGULATORY REQUIREMENTS
The industry in which eSOFT operates is subject to a variety of
regulatory rules and requirements in the United States, Europe and countries
where eSOFT hopes to establish markets. In particular, some products require
access to telecommunications carriers and are therefore subject to regulation in
the United States by the Federal Communications Commission and by other
governmental regulatory agencies in foreign countries. While the Internet is
largely unregulated, changes in telecommunication regulations in various
countries might impact the marketing of Internet related products. eSOFT has
performed product testing at accredited test facilities and the product has
passed the FCC tests. eSOFT components that make up the finished product utilize
UL approved components. eSOFT also has acquired the requisite product approval
from the appropriate agency that permits the marketing of Internet products in
the European Union. eSOFT's products may, however, be subject to other
regulatory requirements adopted in various countries. Any such regulatory
requirements could adversely affect the ability of eSOFT to effectively compete
in any market where such regulations are adopted.
TELEPHONE CONNECTION COSTS AS IMPEDIMENTS IN FOREIGN COUNTRIES
A significant cost factor for users of eSOFT's networking products in
certain countries is the cost of maintaining a telephone line committed to
access to the Internet. Deregulation of telephone line access has begun in
Europe in the last several months and telephone line access costs are expected
to decline there, and deregulation in South America is beginning. There can be
no assurance as to when or at what pace any deregulation will have the effect of
significantly reducing the cost of phone service utilization 24 hours per day
and 7 days per week. With costs at their present levels, the demand for Internet
access, and therefore for eSOFT's products, may mature slowly in some countries,
affecting eSOFT's ability to penetrate those markets.
CONCENTRATION OF SALES
During the fiscal year ended December 31, 1998, eSOFT had two customers
that represented 46% and 13% of eSOFT's revenue for the fiscal year ended
December 31, 1998. In addition, one eSOFT
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customer represented 79% of eSOFT's accounts receivable at December 31, 1998.
With such concentration of its sales, eSOFT is exposed to significant declines
in revenue in future periods if any large customer discontinues or substantially
reduces its purchases in future periods. Moreover, eSOFT's credit risk
concentration makes it more vulnerable to a default in payment. In addition, the
larger customers are electronic products distributors and telecommunication
companies in foreign countries that have recently become distributors of the
products and have purchased significant quantities of the products to establish
inventories of the distributors and their affiliated resellers or dealers or end
customers. Unless the products are promptly resold to end users, future sales to
these distributors and telecommunication companies will likely decline.
CONCENTRATION OF PURCHASES
During the fiscal year ended December 31, 1998, eSOFT had two vendors
that accounted for 10% or more of eSOFT's purchases during that period. These
two vendors represented 57% of eSOFT's total purchases for the fiscal year ended
December 31, 1998. With such concentration of purchases, eSOFT is exposed to
these suppliers of product for its finished goods should these entities be
unable to support eSOFT in the future. eSOFT has explored alternative suppliers
for its major supplier of the base unit hardware; however eSOFT may not be able
to quickly execute and have delivery from these alternative suppliers to meet
demand. An inability to source this product from other suppliers would likely
have a material adverse impact on eSOFT's ability to attain or maintain
profitability.
NEW, UNDEVELOPED PUBLIC MARKET
The eSOFT's common stock became listed and began trading on the Nasdaq
SmallCap Market on August 6, 1998. Prior to such listing, there was no public
market for the eSOFT common stock in the United States. Between March 17, 1998
and September 9, 1998, eSOFT's common stock was traded on the Vancouver Stock
Exchange. There can be no assurance that an active public market on the Nasdaq
SmallCap Market will develop or be sustained.
YEAR 2000 ISSUES
The Year 2000 ("Y2K") computer problem refers to the potential for
system and processing failures of date-related data as a result of
computer-controlled systems using two digits rather than four to define the
applicable year. For example, computer programs that have time-sensitive
software may recognize a date represented as "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
All new products and upgrades introduced by eSOFT will be Y2K
compliant. eSOFT has tested the remainder of the IPAD system and connections of
the IPAD product line to other systems utilizing standard Internet protocols.
The testing completed on the IPAD product line to date has lead eSOFT to believe
that the IPAD product will not be affected by a connection to a non-compliant
Y2K system. eSOFT has been testing its existing products for use in the Year
2000 and beyond, and all IPAD products produced after November 1, 1997 are Y2K
compliant until 2036. The results of eSOFT's testing suggest that version 2.03
and each later version of each of its products are Y2K compliant.
However, eSOFT's testing does not cover every possible computing
environment. Accordingly, some customers may have Y2K problems with products
that the company believes are Y2K compliant. For instance, eSOFT's customers may
be operating on older versions of hardware platform utilizing eSOFT's products
software. Early models of the IPAD 2500 and 4500 products shipped before
November 1, 1997 may include a BIOS in the computer hardware that is not Y2K
compliant. The number of IPAD units
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affected is estimated to be a small percentage of the installed base. In
February 1999 an IPAD software upgrade was released to correct the specific
issues caused by use of the non-compliant BIOS. In addition, there is a plan to
replace the non-compliant BIOS with a Y2K compliant BIOS if the customer prefers
a hardware fix.
eSOFT has tested the discontinued TBBS products that it no longer
markets for Y2K compliance, some of which might still be in use. eSOFT's TBBS
product had one deficiency associated with Y2K, which was corrected with a free
update released in October 1998. eSOFT expects that any customers that
materially rely on such discontinued products will test them for Y2K compliance
and notify eSOFT if there are problems. eSOFT's experience in developing Y2K
compliant versions of its existing products suggests that if it is required to
correct Y2K problems in such discontinued products, it could do so without
incurring material expenses. There will be another free update released in the
second quarter of 1999 to correct a similar deficiency in TBBS add-on modules.
eSOFT also may be affected by Y2K issues related to non-compliant
internal systems developed by eSOFT or by third-party vendors. eSOFT has
reviewed its internal systems, including its accounting system, and have found
them to be Y2K compliant. eSOFT is not currently aware of any Y2K problem
relating to any of its internal, material systems and does not believe that it
has any material systems that contain embedded chips that are not Y2K compliant.
eSOFT's internal operations and business are also dependent upon the
computer-controlled systems of third parties such as suppliers, customers and
service providers. Management believes that absent a systemic failure outside
the control of eSOFT, such as a prolonged loss of electrical or telephone
service, Y2K problems at such third parties will not have a material impact on
eSOFT. eSOFT has no contingency plan for systemic failures such as loss of
electrical or telephone services. eSOFT's contingency plan in the event of a
non-systemic failure is to establish relationships with alternative suppliers or
vendors to replace failed suppliers or vendors. Other than the previously
described testing, and remedying problems identified by testing or from external
sources, eSOFT has no other contingency plans or intention to create other
contingency plans.
Any failure by eSOFT to make its products Y2K compliant could result in
a decrease in sales of its products, an increase in allocation of resources to
address Y2K problems of its customers without additional revenue commensurate
with such dedication of resources, or an increase in litigation costs relating
to losses suffered by eSOFT's customers due to such year 2000 problems. Failures
of eSOFT's internal systems could temporarily prevent it from processing orders,
issuing invoices, and developing products, and could require it to devote
significant resources to correcting such problems. But to eSOFT's knowledge, the
internal accounting systems have been attested by the supplier as Y2K compliant.
Due to the general uncertainty inherent in the year 2000 computer problem,
resulting from the uncertainty of the year 2000 readiness of third-party
suppliers and vendors, eSOFT is unable to determine at this time whether the
consequences of Y2K failures will have a material impact on its business,
results of operations, and financial condition.
NO DIVIDENDS
eSOFT has not paid dividends in the past and does not anticipate paying
dividends in the near future. eSOFT expects to retain its earnings to finance
further growth and, when appropriate, retire existing debt.
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DESCRIPTION OF eSOFT
The following description of eSOFT describes eSOFT as it has existed
prior to planning for the merger with Apexx and the integration of the eSOFT and
Apexx product lines as planned for the future. Some combined marketing of the
products of the two companies has begun prior to the date of this Joint Proxy
Statement/Prospectus using the Apexx product identifying trademark "TEAM
Internet(R)." See "Material Contracts Between eSOFT and Apexx -- Joint Marketing
Plan." In this section, however, the eSOFT products are identified by the eSOFT
trademark, "IPAD."
eSOFT is a technology based company that has developed an Internet
connectivity software and hardware product used by businesses to connect to the
Internet. This technology permits businesses to install and operate shared
connectivity to the Internet without highly specialized technical expertise.
eSOFT's primary target market is small to medium sized businesses.
eSOFT believes these businesses 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. Other target markets include
Internet service providers ("ISPs") and telecommunication companies ("Telcos")
that can benefit from an integrated all-in- one connectivity product.
eSOFT believes that, over the long term, high speed access to the
Internet will become increasingly important to small to medium sized businesses.
Many small to medium sized businesses currently rely upon an ISP in order to
gain the Internet advantage. 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 that have been carried out
by an ISP 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 ISP substantial fees in order to offer individual e-mail
addresses plus Internet access to each of many employees, eSOFT's products can
provide such services to a growing company and its employees in a much more cost
effective manner.
CORPORATE HISTORY
eSOFT was incorporated under the laws of the State of Colorado on March
3, 1984. On February 17, 1998, eSOFT merged into a newly formed Delaware
corporation, and was thus reincorporated in the State of Delaware. Through
September 4, 1997, eSOFT had elected to be taxed as an "S-corporation" for U.S.
income tax purposes. Under this election eSOFT was essentially taxed as a
partnership, so instead of corporate income taxes, the stockholders were taxed
individually on their proportional share of eSOFT's taxable income. eSOFT
withdrew the S-corporation election after September 4, 1997 and is now subject
to U.S. corporate income taxes. eSOFT has no subsidiaries.
BUSINESS HISTORY
Until the mid 1990s, eSOFT focused on developing and selling a computer
bulletin board software product known as TBBS. TBBS software allows multiple
users to dial into a computer system and transmit messages, transfer files, and
access data. With the rapid rise of the Internet, the demand for TBBS software
declined. In response, eSOFT designed a new product line that is marketed under
the name IPAD (Internet Protocol Adapter). eSOFT introduced its first IPAD, the
IPAD 5000, in late 1995. This product was focused at the small Internet service
provider. eSOFT refocused its market efforts on small to medium sized businesses
with the design and release of the IPAD 1200 and IPAD 2500 in November of 1997.
eSOFT expects to continue to generate small residual revenues from the sale of
TBBS software, but it does not plan to further develop or upgrade this software,
except for year 2000 compliance issues.
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PRODUCT LINE AND SERVICES
The IPAD product line is primarily designed for the small to medium
sized business. The IPAD is designed to be a total Internet/Intranet
connectivity solution without the complexity and high cost of traditional
solutions. The IPAD's design combines Internet hardware and communications
software that does not require extensive technical knowledge to support. The
IPAD provides an economical and easily installed product to connect internal
computer networks of small to medium sized businesses, institutions, or
educational sites to the Internet. The IPADs are easy to set up and configure
using any standard web browser (such as Microsoft Internet Explorer or Netscape
Navigator). Ongoing administration of the system, such as adding e-mail
accounts, can be done using the same web browser.
eSOFT's products permit the connection to the Internet through all
major data transmission choices, including modem, ISDN, Ethernet, leased-line,
cable, and xDSL. They all also support connecting to computer networks that use
common network interfaces like Ethernet (either 10 or 100 Mbps variety) and
Token Ring. In conjunction with user supplied modems, the products also provide
remote access capability that allows users to dial into the system and securely
access the company network or the Internet from remote locations. The IPAD
product line provides the necessary Internet related features permitting
customers to have e-mail, basic web page hosting, secure file exchange sites
(using FTP), their own domain name, and dial-in remote access for its users. The
software includes a basic Web server, Telnet, an FTP server, an e-mail server, a
remote access server, a DNS, and a packet-filtering firewall.
The IPAD products also contain a robust network security firewall that
keeps hackers from accessing computer data on the company network. The firewall
technology used in the IPAD 1200 is certified by the International Computer
Security Association (ICSA) to withstand vigorous intrusion attacks by hackers.
The IPAD 2500 and 5000 use the same versions of the firewall technology, but are
not yet certified by the ICSA.
The IPAD products utilize personal computer technology such as an Intel
Pentium CPU, with a minimum configuration of 8 megabyte of Ram, a 1.2 gigabyte
hard drive, and a 1.44 megabyte floppy drive. Unlike competing products in the
marketplace, the IPAD does not operate on a UNIX platform, but rather is a
proprietary operating system. This system allows for a high degree of individual
customization on the larger systems to better address the needs of individual
customers.
THE IPAD 5000
The IPAD 5000 is a rugged, rack mountable system designed for use by
ISPs, companies with large Wide Area Networks ("WANs"), and/or large Local Area
Networks ("LANs"). This product requires a higher degree of technical knowledge
to implement than other IPAD models, but in return it is far more flexible and
configurable than the other models. The hardware includes the ability to
customize each unit with up to five different communications interfaces that
allow connecting up to four separate LANs, or up to forty remote offices, or up
to 96 simultaneous, dial-in, remote access users. In addition, the software can
service a nearly unlimited number of e-mail boxes, domain names, and web sites,
with the only limitation being disk space used by each.
THE IPAD 2500
The IPAD 2500 is a small desktop system that is targeted towards the
market for small to medium sized businesses. Unlike the IPAD 5000, the IPAD 2500
is a plug-and-play device with limited
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configuration options. Limiting the options allows the product to be configured
and maintained by a person with very limited technical knowledge about
networking or the Internet. A standard IPAD 2500 has the ability to
simultaneously connect the users of a single LAN and two dial-in remote access
users to the Internet. Optionally, the system can be expanded to allow users on
another LAN to be connected to the Internet, or the total number of dial-in
remote access users that can be connected to the Internet can be expanded to
eight.
THE IPAD 1200
This product is a small desktop system that can connect a business LAN
of up to 150 users to the Internet using a single Internet address. The product
is designed for unsophisticated users who want their network connected to the
Internet in a matter of hours. It only allows a single LAN utilizing any of the
supported network interfaces, and two dial-in remote access users, to be
connected to the Internet using any supported communication interface. The
product is designed for mass production without customization for specific
client needs, allowing unsophisticated users to easily configure and maintain
the system. This product will be replaced with the TEAM Internet(R) 100 in the
first quarter of 1999.
TBBS SOFTWARE
eSOFT expects to continue to generate residual revenues from the sale
of TBBS software. However, since the market for TBBS is progressively declining
in favor of more sophisticated communications products, eSOFT does not expect
any further development or upgrading of the software. The only recent upgrade
for the product was completed in October 1998 to bring the software into Year
2000 compliance.
ACCESSORIES
Customers can order additional communication or network interfaces and
accessories to more effectively configure an IPAD 5000 and, to a lesser extent,
the IPAD 2500, to suit their needs. Aside from an Ethernet card (used to support
cable or xDSL connections), users have the option, with certain models, of
purchasing a modem, ISDN Adapter, interfaces for T1 and fractional T1 leased
lines, and a Token Ring Adapter, as well as extra serial interfaces.
TECHNICAL SUPPORT SERVICES
Users can also purchase from eSOFT an annual contract for technical
support of the IPAD hardware and software. The technical support services
provide telephone support addressing the customers' technical implementation of
the product. The annual contract also includes free access to product upgrades
and updates during the term of the contract. Technical support services assist
customers to install the product and help customers understand networking basics
that can help them use their network to their best advantage. In addition,
support services answer customers' questions to help them with ongoing system
administration.
UPGRADES AND UPDATES
eSOFT plans to produce two IPAD software updates per year, which will
include minor enhancements and bug fixes. Updates are free and are typically
available over the Internet from eSOFT's web site. eSOFT also plans two upgrades
per year, which include major enhancements and bug fixes. Upgrades are
distributed via floppy disc, free of charge to customers who have purchased
annual technical support services contracts and for a fixed fee to customers
without support agreements.
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MARKETING
The IPAD system is considered a horizontal product offering -- it can
be used by businesses in virtually any industry in North America or overseas.
Further, Internet related industry trends strongly indicate that the majority of
the small to medium sized businesses (5 to 150 users) are moving aggressively to
provide their employees access to the power of the Internet. Typically, the
small and medium sized business owners require technology to be relatively
inexpensive and simple to install and maintain. eSOFT believes the IPAD is
positioned to become the leader in systems that provide all-in-one Internet
connectivity, services and support functionality at a very competitive price.
Product competition includes complex and expensive multi-system
offerings, including Microsoft's NT and Small Office Back Office, suppliers of
several Internet connectivity routers/firewalls, and a handful of other
manufacturers who provide varying levels of all-in-one functionality. The IPAD
is quickly differentiated from each of these competitors by one or more of the
following features: ease-of- use, price, functionality and security assurance.
Additionally, as both a competitive and operational advantage, eSOFT intends to
establish local manufacturing and technical support of the IPAD in each of the
major overseas market areas. "See Description of eSOFT -- Competition."
DISTRIBUTION
Since June 1998, eSOFT has focused its distribution effort on building
a two tier model with direct sales to distributors who resell to value-added
resellers ("VARs") and resellers. With this two tier distribution approach eSOFT
signed up Comstor, SED, CHS Latin America, Ingram Micro, Advantage Telecom, and
ASI as distributors. These distributors sell to approximately 35,000 VARs and
resellers. To supplement the distributors, eSOFT employs channel development
representatives ("CDRs"). The purpose of the CDRs and manufacturer's
representatives is to assist our distributors with lead generation and market
pull-through of our products in channel to VARs, resellers, and end users.
During 1998 eSOFT trained and deployed CDRs in Atlanta, Denver, Dallas, Orange
County, and San Antonio, and signed Affinity Marketing Canada, a manufacturer's
representative firm covering Vancouver, Calgary, Edmonton, Toronto, Ottawa,
Montreal and Quebec City. eSOFT anticipates adding additional sales
representatives in the first quarter of 1999 for the eStar program discussed
below and CDRs in Seattle, San Francisco, Chicago, and the Washington DC area.
eSOFT also established two tier distribution in Europe with the signing
of Telindus SA. Although eSOFT was encouraged by initial IPAD evaluations by
this European cable company, management has been disappointed in its overall
efforts to expand its European sales through this original distributor. As a
result, eSOFT is exploring other avenues for distribution and refocusing its
efforts on telecommunication and cable companies in the European market. In
September, eNetco, a United States-based distributor and network product
developer, was granted IPAD distribution rights in Japan. eNetco has introduced
the IPAD into Japanese distribution opportunities and through its efforts signed
NTT Electronics Corporation in February 1999. The agreement grants NTT
Electronics exclusive distribution rights in Japan and non-exclusive
distribution rights in other Asia-Pacific countries. NTT Electronics is a
subsidiary of Nippon Telegraph and Telephone Corp, a New York Stock Exchange
company. In August 1998, eSOFT consummated a contract with Telecom Soluciones,
one of two Argentinian telephone companies. Telecom Soluciones received
exclusive rights to market the IPAD 1200 and 2500 products in Argentina for a
limited period subject to volume requirements. The agreement included an initial
IPAD system delivery in excess of $500,000, which was made in the third quarter
of 1998. eSOFT is also exploring sales to other telecommunications companies in
Latin America, including Peru and Mexico.
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Another distribution channel eSOFT is pursuing is Telcos that provide
data access lines. In the third quarter 1998 eSOFT introduced its eStar alliance
program. The eStar program provides Telcos with an all in one solution where
eSOFT brings together financing, an ISP, and a company to install the product in
small to medium sized businesses throughout the country. The program combines
the strengths of a national leasing company (Transamerica Distribution Finance),
a national systems integrator (IBM Global Services) and Internet access
providers to enable Telcos to deliver a complete Internet package in their
respective markets.
OPERATIONS
Currently, with respect to the IPAD 1200 and 2500, eSOFT purchases a
base unit (hardware, loaded software, LAN feed) from suppliers. The IPAD 1200
and 2500 are received as base units and prior to shipment the required feed
interface (56K modem, ISDN, etc.) is installed at eSOFT's Colorado facility. The
more complex IPAD 5000 is purchased as components and is assembled and
configured at eSOFT's Colorado facility for shipment to the user. eSOFT has
contracted with a manufacturer in Holland to assemble the IPAD 1200 and 2500
using components shipped from eSOFT's stock. The manufacturer in Europe
purchases communication connection devices on eSOFT's behalf that are specific
to the European market for final assembly and shipment to users in Europe.
INTELLECTUAL PROPERTY
eSOFT has no patents, but regards its software as proprietary and
attempts to protect it by relying upon copyrights, trade secret laws, internal
non-disclosure agreements and transferability restrictions incorporated into its
software license agreements. eSOFT 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 eSOFT believes further protects
unauthorized transfers of eSOFT's proprietary information, as well as the
confidentiality of eSOFT's trade secrets. eSOFT also uses a combination of
software programming and hardware devices to protect its products from
unauthorized use or duplication.
PRODUCT DEVELOPMENT COSTS
eSOFT 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 that were capitalized in 1998 totaled $405,000. eSOFT capitalized
$221,000 for such expenditures in 1997. eSOFT incurred $13,000 of expenses
relating to research and development costs in 1998, compared to $57,000 in 1997.
COMPETITION
The Internet connectivity business is highly competitive. A number of
eSOFT's competitors are very well established in the marketplace, with larger
sales volumes, broader brand name recognition and a wider base of technical
resources. As the market expands for products that 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 market with competing
products, as there are comparatively few barriers to entry. As competition
increases, industry margins on system sales may decline. There can be no
assurance that eSOFT will be able to effectively compete against such
competitors given their entrenched market presence, or that eSOFT will be able
to attain and maintain anticipated gross margins over time.
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Competition among the industry participants is based upon a number of
factors including product features, type of user primarily serviced, reputation
of the manufacturer, ease of installation or use, reliability, cost, service
availability and other factors. eSOFT 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. eSOFT's
products are also designed to meet the specific needs of the small to medium
sized business that are eSOFT'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, eSOFT's products emphasize
use of a proprietary based system that is thought by management to be more user
friendly as compared to those operating on Unix platforms.
eSOFT's competitors are comprised of both well-established and
recognized industry participants and smaller corporations in some respects
similar to eSOFT. Both groups produce products that in terms of fundamental
connectivity attributes are similar to those currently offered by eSOFT. Most of
these competitors have greater financial resources than eSOFT; two companies
that are primary competitors have raised between $20 million and $40 million of
equity capital. Additionally, one of the companies has had an investment made by
Intel Corporation. Among the more prominent industry participants at present is
Apexx. Other direct competitors include Whistle Communications, Inc. of Foster
City, California; FreeGate Corporation of Sunnyvale, California and Cobalt
Networks, Inc. of Mountain View, California. Sun Microsystems, Inc. a major
producer of computer workstations, also offers Internet servers that accommodate
high-volume Web site management. While many other companies offer products that
are either advertised or perceived as containing most of the all-in-one feature
set, eSOFT believes many of these products provide less functionality than the
IPAD and other all-in-one systems. These products include for example, simple
routers and firewalls, a router and web server combination and a router and
e-mail server combination.
As is the case with eSOFT, 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. Products that would
likely compete with either the IPAD 1200 or the IPAD 2500 products 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
than eSOFT. eSOFT may be unable to effectively compete against such
well-established firms.
AVAILABILITY OF RAW MATERIALS AND SEMI-FINISHED GOODS
The computers that eSOFT uses to operate its software, computer
hardware, software programs, and accessories are all widely available in the
marketplace. eSOFT has the ability to obtain such goods from a wide range of
suppliers, depending upon pricing, delivery, quality assurance and related
considerations. In combination, eSOFT's IPAD software represents a combination
of "off the shelf" operating systems and related software licensed from third
parties, working together with what eSOFT considers to be its own proprietary
software. eSOFT does not anticipate that obtaining such materials will become an
impediment to growth and expansion.
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CONCENTRATION OF SALES
During the fiscal year ended December 31, 1998, eSOFT had two customers
that accounted for 10% or more of product sales during that period. These two
customers represented 46% and 13% of revenue for the fiscal year ended December
31, 1998. Sales composition in 1998 was 18% shipped to international destined
marketplace and 82% to the domestic market. The eight distributors that make up
the majority of eSOFT's 1998 sales represent 95% of the total accounts
receivable, with one customer representing 75% of eSOFT's accounts receivable at
December 31, 1998. One customer representing 13% of eSOFT's total sales in 1998
was a Japanese customer.
CONCENTRATION OF VENDORS
During the fiscal year ended December 31, 1998, eSOFT had two vendors
that accounted for 10% or more of eSOFT's purchases during that period. These
two vendors represented 57% of eSOFT's purchases for the fiscal year ended
December 31, 1998.
GOVERNMENT REGULATIONS
eSOFT purchases its computer hardware in the United States, and must
obtain FCC approval of such hardware. eSOFT has performed product testing at
accredited test facilities and the product has passed the FCC tests. The
components utilized to assemble the finished product are UL approved. eSOFT
purchases its completed product from manufacturing facilities that are ISO 9000
certified. eSOFT has acquired requisite CE product approval and certification
from appropriate agencies that would permit marketing of its IPAD products in
the European Union. eSOFT has entered into a contract for manufacture of its
products in Holland. The contract manufacturer was chosen for its existing
requisite approvals and ISO 9000 certification.
EMPLOYEES
At December 31, 1998, eSOFT had thirty-one full-time employees. That
number includes seven engineers/technical support employees, three operations
employees, two marketing employees, thirteen sales persons, and six
administrative personnel. Additionally, eSOFT utilized three consultants
temporarily in management positions. No employee is represented by a labor union
and eSOFT believes its employee relations to be good.
eSOFT PROPERTY
eSOFT's corporate headquarters, shipping and assembly facilities are
located at 295 Interlocken Boulevard, Suite 500, Broomfield, Colorado 80021.
eSOFT leases approximately 13,600 square feet of space at this location pursuant
to a lease entered into on February 17, 1999, which expires May 31, 2004, at a
rent of approximately $173,000 per year. eSOFT believes that this facility will
be adequate for its needs for the foreseeable future.
eSOFT LEGAL PROCEEDINGS
There are no material legal proceedings pending to which eSOFT (or any
of its officers or directors in their capacities as such) is a party, or to
which the property of eSOFT is subject. Management of eSOFT is not aware of any
material proceedings being contemplated.
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eSOFT SELECTED HISTORICAL FINANCIAL INFORMATION
We are providing the following selected financial information to aid
you in your analysis of eSOFT. This information is only a summary and you should
read it in conjunction with the historical financial statements of eSOFT and the
related notes appearing elsewhere in this Joint Proxy Statement/Prospectus. You
should also review the discussions of this financial information found under the
heading "eSOFT Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
----------------------------
1998 1997
----------- -----------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 3,867,600 $ 1,233,137
Cost of goods sold 1,357,463 429,601
----------- -----------
Gross profit 2,510,137 803,536
Selling, general and
administrative expense 5,772,869 961,834
Other (income) expense (160,070) 34,955
Income tax (benefit) expense (162,000) 162,000
----------- -----------
Net loss $(2,940,662) $ (355,252)
=========== ===========
Net loss per common share
basic and diluted $ (0.54) $ (0.23)
=========== ===========
Basic and diluted weighted
average shares outstanding 5,493,276 1,536,884
=========== ===========
CASH FLOW DATA:
Net cash (used in) operating
activities $(4,282,618) $ (23,805)
Net cash (used in) investing
activities (2,761,345) (263,128)
Net cash provided by
financing activities 7,596,776 369,020
BALANCE SHEET DATA:
Current assets $ 6,344,388 $ 660,075
Total assets 7,417,451 1,724,800
Current liabilities 1,636,947 409,082
Long-term liabilities -- 535,903
Total liabilities 1,636,947 944,985
Stockholders' equity 5,780,504 779,815
Working capital 4,707,441 250,993
</TABLE>
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eSOFT MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read together with eSOFT's financial
statements and accompanying notes included elsewhere in this Joint Proxy
Statement/Prospectus.
RESULTS OF OPERATIONS
Fiscal Year Ended December 31, 1998 Compared to Fiscal Year Ended December 31,
1997
Beginning at the end of December 1997, eSOFT began expanding sales,
marketing, general and administrative personnel to develop an emerging market
for the all-in-one appliance for Internet access. During eSOFT's fiscal year,
eSOFT expended considerable time and resources to expand its market share of the
new emerging market for the all-in-one Internet appliance. In an effort to
further develop, market, and service these new products to small-to-medium sized
businesses in fiscal 1998, eSOFT expanded in all departments, by adding 16 new
employees, located in four states. This represented an 89% increase in personnel
over 1997. Additionally, eSOFT expended substantial resources resulting from
becoming a public company and registering various private placements.
As a consequence of the matters mentioned above, meaningful comparisons
of the changes in eSOFT's operating results to its fiscal year ended December
31, 1997 are difficult to make. During the year ended December 31, 1998, eSOFT
incurred a net loss in the amount of $2,941,000, compared to a net loss in the
amount of $355,000 for the year ended December 31, 1997. During 1999, eSOFT
intends to continue rapid expansion of sales and marketing expenditures to
develop a North American wholesale distribution network, which will likely
result in significantly increased selling, general and administrative expenses
and capital expenditures to meet this rapid expansion.
Revenues. In 1998 revenues increased $2,635,000, or 214%, from
$1,233,000 in 1997 to $3,868,000 in 1998. eSOFT in 1997 expanded its product
line and in 1998 began focusing on selling directly to VARs and end users
targeting the small-to-medium sized business market until June 1998. In June
1998, eSOFT transitioned to a two-tier distribution strategy to provide
additional access to VARs, resellers, and network consultants. Additionally,
eSOFT was able to leverage the robust IPAD operating system and growth of the
Internet in foreign countries and generate substantial revenues from
international sales. The IPAD product was qualified for connection to the
telecommunication backbone of Argentina, Peru, Chile, Mexico, Spain and Japan.
These qualifications permitted eSOFT to generate 18% of its revenues for the
year from product destined to the international marketplace. The remaining 82%
of eSOFT's revenues occurred from sales of product destined to end users in the
United States. From August to November of 1998, eSOFT added channel development
representatives ("CDRs") in six major cities to work with VARs, resellers, and
distributors to generate product recognition. eSOFT expended substantial
resources in developing the marketplace for the IPAD family of products. eSOFT
added a total of seven employees in the sales area, including a Director of
Sales, in 1998. eSOFT in 1998 generated residual revenues from its TBBS software
of approximately $50,000 for the year compared to $62,000 in 1997.
Gross Margins. eSOFT's gross profit margin in 1998 was approximately
65% compared to 65% in 1997. The 1998 margin remained flat due to the continued
vigilance of eSOFT in outsourcing production of the product to a contract
manufacturer. The outsourcing of the manufacturing permitted eSOFT to maintain
its cost of the product without the addition of more assembly labor, as volumes
continued to grow during the year.
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Selling, General and Administrative, Engineering and R & D Expenses
(SG&A). SG&A increased from $962,000 (78% of sales) in fiscal 1997, to
$5,773,000 (149% of sales) in 1998. This resulted in a 500% increase in SG&A
expenditures over the previous fiscal year. The increased expenditures were
attributed to the overt activities in 1998 of building eSOFT's distribution,
marketing and sales network in an emerging marketplace for the all-in-one
appliance. These expenditures were targeted at building the organization by
hiring professional management, personnel and consultants totaling 34
individuals in 1998 compared to 18 employees and consultants in 1997. General
and Administrative (G&A) expenses increased from $507,000 in 1997 to $2,370,000
in 1998, or a 368% increase. The increases over the 1997 expenditures arose in
support of eSOFT's continued expansion of its marketing efforts and the
increased expenses associated with becoming a public company. In 1998 general
and administrative salaries and employee benefits increased by $534,000,
consulting and legal expenses increased by $584,000, travel expenses increased
by $122,000, bad debts increased by $151,000, stockholders' relations expenses
increased by $75,000, filing fees increased by $51,000, and rent expense
increased by $54,000. Selling and marketing expenditures increased from $226,000
in 1997 to $2,612,000 in 1998; salaries and employee benefits increased by
$1,014,000, travel expenses increased by $292,000 and consulting expense
increased by $564,000. Engineering and technical support expenditures increased
from $56,000 in 1997 to $589,000 in 1998; salaries and employee benefits
increased by $261,000 and consulting expense increased by $161,000. These costs
increased in the support of building an organization that can continue to expand
the growth of its all-in-one appliance both domestically and internationally.
Research and Development Expenditures. eSOFT 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 has previously been established to develop new 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 eSOFT's
existing product lines. Costs for which technological feasibility had been
established, which were capitalized in 1998, totaled $405,000. eSOFT capitalized
$221,000 for such expenditures in 1997. eSOFT incurred $13,000 in expenses
relating to research and development costs in 1998, compared to $57,000 in 1997.
Other Income (Expenses). Interest income totaled $168,000, an increase
of $164,000 over 1997. The increase was associated with the fundraising
activities that occurred in 1998 and the investment income from those funds.
Interest expense totaled $7,000 in 1998 compared to $31,000 in 1997, a decrease
of $24,000. The decrease was due to the pay down and payoff of a term loan in
October 1998 from proceeds of eSOFT's equity funding in 1998.
Net Loss. eSOFT incurred a loss of $2,941,000 in 1998, compared to a
loss of $355,000 in 1997. The loss from operations in 1998, before income taxes,
was $3,103,000, compared to $193,000 in 1997. The increased losses are the
result of eSOFT's aggressive expansion of its product line, marketing efforts,
and the hiring of a professional management team to grow eSOFT in an emerging
market.
Income Taxes and Net Operating Losses. As discussed in Note 5 to the
accompanying financial statements, eSOFT in 1998 recognized a 100% valuation
allowance on its net deferred tax asset since it could not be determined if it
was more likely than not that it would be realized. eSOFT has $2,700,000 in net
operating loss carryforwards with expirations through 2018. The utilization of
certain of the loss carryforwards are limited under Section 382 of the Internal
Revenue Code.
Management believes that higher levels of operating expenditures will
continue through 1999 in order to continue the expansion of eSOFT's product into
an emerging market. eSOFT anticipates to continue to generate operating losses
to attain market penetration. eSOFT anticipates that an aggressive marketing
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strategy and its acquisition activities will help establish eSOFT as a leader in
the market segment.
LIQUIDITY AND CAPITAL RESOURCES FOR THE YEAR ENDED DECEMBER 31, 1998
Capital and Debt Financing
During the first quarter, eSOFT completed a $290,000 private placement
of 290,000 shares of eSOFT's common stock, at a price of $1.00 per share, to
officers, directors and key employees. eSOFT received $186,982 from the offering
net of offering costs.
During the first quarter, eSOFT accepted stock subscriptions of
$150,000 from consultants and an officer of eSOFT at a price of $1.00 per share.
In March and April 1998, $150,000 of the stock subscription was collected. The
Vancouver Stock Exchange required shareholder approval of the private placement
to the officer, which was received in December 1998, at which time the shares
were issued to the officer.
During the first quarter, eSOFT issued 60,000 shares of its common
stock at a price of $0.50 per share for a total of $30,000 upon the exercise of
options. eSOFT received $600 cash and a note receivable for $29,400 to exercise
the shares. The note was subsequently paid in May 1998.
In the first quarter eSOFT converted the non-interest bearing note
payable to related parties in the amount of $355,903 into 355,903 shares of
eSOFT's common stock at a price of $1.00 per share.
In March 1998, eSOFT completed its initial public offering in Canada of
1,550,000 shares of eSOFT's common stock at an offering price of $1.00 per
share. Additionally, the placement agent was issued 110,000 shares of eSOFT's
common stock in the Canadian offering along with warrants to purchase 250,000
shares of eSOFT's common stock at a price of $1.00 for the first 12 months and
at a price of $1.15 for the next 12 months. The net cash proceeds to eSOFT from
the initial public offering was approximately $1,009,000 after payment of
expenses of approximately $541,000.
In April 1998, eSOFT issued 250,000 shares of its common stock at a
price of $1.00 per share for a total of $250,000, upon the exercise of warrants
issued to the placement agent in conjunction with eSOFT's March 1998 initial
public offering.
In June 1998, eSOFT completed the private placement of 1,468,941 shares
of its common stock at a price of $4.25 per share for a total offering of
$6,243,000. The net cash proceeds to eSOFT from the private placement were
approximately $5,480,000 after payment of expenses of the offering of
approximately $256,000, and payment of $507,825 (8.13% of the offering price)
commissions to the placement agent, sub-agents, and finders, who were issued
warrants to purchase 159,318 shares (10.85% of the offered shares) of eSOFT's
common stock at a price of $4.25 in the first year and $4.90 in the second year.
In the third quarter, eSOFT issued 70,000 shares of its common stock at
a price of $1.00 per share for a total of $70,000 upon the exercise of options
and warrants previously granted.
In the fourth quarter, eSOFT issued 35,500 shares of its common stock
at a price of $1.00 per share for a total of $35,500 upon the exercise of
options and warrants previously granted.
The equity financing that occurred in 1998 was utilized to expand
eSOFT's operations and support the losses that incurred from developing the
products in the emerging market place.
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Working capital at December 31, 1998, had increased to approximately
$4,707,000 from less than $251,000 at December 31, 1997. The increase in working
capital is associated directly with the above referenced equity issuances that
occurred in 1998. Non cash equity in the amount of $355,903 was provided from
the conversion of a convertible note payable.
In the fourth quarter of fiscal 1998, eSOFT signed a letter of intent
to acquire all the outstanding equity securities of Apexx Technology, Inc. in
exchange for 2,947,368 shares of eSOFT's common stock. Under the terms of the
letter of intent, eSOFT provided Apexx with an operating line of credit of up to
$500,000 that may be expanded by an additional $500,000 upon the written consent
and agreement of the board of directors of each company. As of December 31,
1998, eSOFT had funded $300,000 of this commitment, and subsequent to December
31, 1998, eSOFT funded the remaining $200,000 of the operating line commitment.
This commitment to support both operations until closing may require additional
fundraising activities in the upcoming months.
Cash Flow
During the year ended December 31, 1998, eSOFT used cash from
operations in the amount of $4,283,000 compared to $24,000 in the prior year.
This is a result of working capital that was utilized to fund the large
increases in accounts receivables, inventories, accounts payables, accrued
expenses, and the increase in other current assets.
Cash used in investing activities, totaled $2,761,000 during the year
ended December 31, 1998 compared to $263,000 in the prior year. The increase is
primarily attributed to the purchase of investments for invested funds,
capitalizable costs incurred in the development of eSOFT's software products,
purchase of property plant and equipment for new personnel, and an advance on
the line of credit provided to Apexx.
Cash provided by financing activities was $7,597,000 for the year ended
December 31, 1998 compared to $369,000 in the previous year. eSOFT received net
proceeds in the amounts of $7,493,000, from the sale of equity securities, the
exercise of stock options and stock subscriptions, during the year.
Principal repayments on debt obligations during the year were $96,000.
eSOFT's negative cash flow from operations has primarily resulted from
an increase in accounts receivable and inventories resulting from increased
business activity and eSOFT attempting to anticipate demand for its product
correctly. Management believes this negative cash flow will continue during
1999, due to eSOFT's intention to continue rapid expansion of sales and
marketing expenditures in order to develop a North American wholesale
distribution network. These actions are anticipated to result in significantly
increased selling, general and administrative expenses and capital expenditures
to meet this rapid expansion.
Capital Resources
eSOFT's working capital has improved significantly over the last 12
months, primarily from external equity financing activities. eSOFT has an excess
of $4,707,000 of current assets over current liabilities as of the 1998 fiscal
year end. Further, eSOFT had cash and securities of $2,647,000 at December 31,
1998. Management anticipates eSOFT will continue to invest significant resources
in its marketing and sales activities in 1999. eSOFT anticipates continuing to
aggressively hire sales and key management to meet its desired growth of eSOFT's
product both domestically and internationally. As staff is expanded, eSOFT will
need to invest in new equipment, and fund the expenses associated with these
additions. Management believes eSOFT will be able to raise additional equity
funding and secure working capital financing of its receivables as eSOFT
continues to aggressively expand in the emerging market.
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eSOFT anticipates it will continue to pursue acquisitions that
complement and leverage the existing technology base as part of its growth
strategy. If acquisitions are consummated, additional capital may be required.
Management believes that eSOFT will continue to incur losses until the
end of 1999, when sales growth is anticipated to reach a level to offset the
aggressive sales growth strategy. Further, management believes that it has
access to capital in the form of additional, short and/or long term credit
facilities, and additional equity financing. Management anticipates it will
continue to have access to additional capital through these sources in amounts
necessary to support its growth plans. In the event that cash flow from
operations, if any, together with the proceeds of any future financings, are
insufficient to meet these expenses, eSOFT 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 eSOFT's best interest. See
"Risk Factors Relating to an Investment in eSOFT Common Stock -- Sufficiency of
Working Capital."
YEAR 2000 PROBLEM
The Year 2000 ("Y2K") computer problem refers to the potential for
system and processing failures of date-related data as a result of
computer-controlled systems using two digits rather than four to define the
applicable year. For example, computer programs that have time-sensitive
software may recognize a date represented as "00" as the year 1900 rather than
the year 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including among other things, a temporary inability
to process transactions, send invoices, or engage in similar normal business
activities.
State of Readiness of Our Product
All new products and upgrades introduced by eSOFT will be Y2K
compliant. eSOFT has tested the remainder of the IPAD system and connections of
the IPAD product line to other systems utilizing standard Internet protocols.
The testing completed on the IPAD product line to date has lead eSOFT to believe
that the IPAD product will not be affected by a connection to a non-compliant
Y2K system. eSOFT has been testing its existing products for use in the Year
2000 and beyond, and all IPAD products produced after November 1, 1997 are Y2K
compliant until 2036. The results of eSOFT's testing suggest that versions 2.03
and higher of the IPAD 1200, IPAD 2500 and the IPAD 5000 are Y2K compliant.
However, eSOFT's testing does not cover every possible computing
environment. Accordingly, some customers may have Y2K problems with products
that eSOFT believes are Y2K compliant. eSOFT's customers may be operating on
older versions of hardware platform utilizing the above products software. Early
models of the IPAD 2500 and 4500 products shipped before November 1, 1997 may
include a BIOS in the computer hardware that is not Y2K compliant. The number of
IPAD units affected is estimated to be a small percentage of the installed base.
In February 1999 an IPAD software upgrade was released to correct the specific
issues caused by use of the non-compliant BIOS. In addition, there is a plan to
replace the non-compliant BIOS with a Y2K compliant BIOS if the customer prefers
a hardware fix. The cost to eSOFT of the IPAD software upgrade and/or a BIOS
upgrade is not expected to be material. Problems encountered by such customers
could be quickly remedied because of the availability of Y2K upgrades and
updates for such products.
eSOFT has tested the discontinued TBBS product that it no longer
markets for Y2K compliance, some of which might still be in use. eSOFT's TBBS
product had one deficiency associated with Y2K that was corrected with a free
update released in October 1998. eSOFT expects that any customers that
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materially rely on such discontinued products will test them for Y2K compliance
and notify eSOFT if there are problems. eSOFT's experience in developing Y2K
compliant versions of its existing products suggests that, if it is required to
correct Y2K problems in such discontinued products, it could do so without
incurring material expenses. There will be another free update released in the
second quarter of 1999 to correct a similar deficiency in TBBS add-on modules.
State of Readiness of our Internal Systems
eSOFT may be affected by Y2K issues related to non-compliant internal
systems developed by eSOFT or by third-party vendors. eSOFT has reviewed its
internal systems, including its accounting system, and has found them to be Y2K
compliant. eSOFT is not currently aware of any Y2K problem relating to any of
its internal, material systems. It does not believe that it has any material
systems that contain embedded chips that are not Y2K compliant.
eSOFT's internal operations and business are also dependent upon the
computer-controlled systems of third parties such as suppliers, customers and
service providers. Management believes that absent a systemic failure outside
the control of eSOFT, such as a prolonged loss of electrical or telephone
service, Y2K problems at such third parties will not have a material impact on
eSOFT. eSOFT has no contingency plan for systemic failures such as loss of
electrical or telephone services. eSOFT's contingency plan in the event of a
non-systemic failure is to establish relationships with alternative suppliers or
vendors to replace failed suppliers or vendors. Other than the previously
described testing, and remedying problems identified by testing or from external
sources, eSOFT has no other contingency plans or intention to create other
contingency plans.
Cost Associated With Y2K Compliance
eSOFT does not separately track expenditures relating to Y2K
compliance. Such expenditures are primarily absorbed within the product
development organization. Based on its overall development expenditures and the
amount of time people in the organization are spending on Y2K compliance, eSOFT
believes that its spending on compliance to date has not been material.
Furthermore, based on its experiences to date, and its assessment that all
material internal systems and all currently marketed products are Y2K compliant,
eSOFT does not anticipate that costs associated with remediating eSOFT's
non-compliant products or internal systems will be material.
Risks
Any failure of eSOFT to make its products Y2K compliant could result in
a decrease in sales of its products, an increase in allocation of resources to
address Y2K problems of its customers without additional revenue commensurate
with such dedication of resources, or an increase in litigation costs relating
to losses suffered by eSOFT's customers due to such year 2000 problems. Failures
of eSOFT's internal systems could temporarily prevent it from processing orders,
issuing invoices, and developing products, and could require it to devote
significant resources to correcting such problems. But to eSOFT's knowledge, the
internal accounting systems have been attested by the supplier as Y2K compliant.
Due to the general uncertainty inherent in the Year 2000 computer problem,
resulting from the uncertainty of the Year 2000 readiness of third-party
suppliers and vendors, eSOFT is unable to determine at this time whether the
consequences of Y2K failures will have a material impact on its business,
results of operations, and financial condition.
39
<PAGE> 43
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Statements
of Financial Accounting Standards that may affect eSOFT's financial statements
as follows:
In June 1998 FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities ," which requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at fair
market value. Gains or losses resulting from changes in the values of those
derivatives are accounted for depending on the use of the derivative and whether
it qualifies for hedge accounting. The key criterion for hedge accounting is
that the hedging relationship must be highly effective in achieving offsetting
changes in fair value or cash flows. SFAS No. 133 is effective for fiscal years
beginning after June 15, 1999. Management believes that the adoption of SFAS No.
133 will have no material effect on its financial statements.
In October 1998 FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise ," which establishes accounting
and reporting standards for certain activities of mortgage banking enterprises
and other enterprises that conduct operations that are substantially similar to
the primary operations of a mortgage banking enterprise. SFAS No. 134 is
effective for the first fiscal quarter beginning after December 15, 1998.
Management believes that the adoption of SFAS No. 134 will have no material
effect on its financial statements.
In February 1999 FASB issued SFAS No. 135, "Rescission of FASB
Statement No. 75 and Technical Corrections." SFAS No. 135 rescinds SFAS No. 75
"Deferral of the Effective Date of Certain Accounting Requirements for Pension
Plans of State and Local Governmental Units." GASB Statement No. 25, "Financial
Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined
Contribution Plan," was issued November 1994, and establishes financial
reporting standards for defined benefit pension plans and for the notes to the
financial statements of defined contribution plans of state and local
governmental entities. Statement 75 is, therefore, no longer needed. This
statement also amends FASB Statement No. 35, "Accounting and Reporting by
Defined Benefit Pension Plans," to exclude from its scope plans that are
sponsored by and provide benefits for the employees of one or more state or
local governmental units. This statement also amends other existing
authoritative literature to make various technical corrections, clarify
meanings, or describe applicability under changed conditions. This statement is
effective for financial statements issued for fiscal years ending after February
15, 1999. Management believes that the adoption of SFAS No. 135 will have no
material effect on its financial statements.
SOP 98-5, "Reporting on the Costs of Start-Up Activities," requires
that the costs of start-up activities, including organization costs, be expensed
as incurred. This statement is effective for financial statements issued for
fiscal years beginning after December 15, 1998. Management believes that the
adoption of SOP 98-5 will have no material effect on its financial statements.
40
<PAGE> 44
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF eSOFT
As of April 16, 1999, there were a total of 7,144,368 shares of eSOFT
common stock issued and outstanding and approximately 150 stockholders of
record. The following table sets forth information regarding beneficial
ownership of eSOFT common stock and options to purchase eSOFT common stock that
are currently exercisable or exercisable within sixty days of the date of this
Joint Proxy Statement/ Prospectus held by (i) all persons known to eSOFT to
beneficially own 5% or more of the eSOFT common stock, (ii) all eSOFT directors,
(iii) each of the persons named under the heading "Executive Compensation of
eSOFT," and (iv) all eSOFT directors and eSOFT executive officers as a group.
Unless otherwise indicated, the stockholders listed below have sole voting and
investment power with respect to the shares reported as beneficially owned.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF
BENEFICIAL PERCENT OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS
- ------------------------------------------------------- ------------ ------------
<S> <C> <C>
Philip L. Becker, Chairman of the Board and Chief
Technical Officer and a Director 1,162,722(1) 15.5%
============ ============
295 Interlocken Boulevard, Suite 500
Broomfield, Colorado 80021
Jeffrey Finn, President and Chief Executive Officer
and a Director 7,500(2) *
============ ============
Jason M. Rollings, Vice President of Operations 15,000(3) *
============ ============
Richard Eyestone, Director 29,167(4) *
Richard B. Rice, Director 17,500(5) *
============ ============
Regis Frank, Former Chief Operating Officer 32,500(6) *
============ ============
All Directors and Executive Officers as a group 1,281,389(7) 16.9%
============ ============
</TABLE>
- ------------------------
* Less than 1%
(1) Includes 135,722 options exercisable presently or within 60 days.
(2) Includes 6,000 options exercisable presently or within 60 days.
(3) Includes 15,000 options exercisable presently or within 60 days.
(4) Includes 4,167 options exercisable presently or within 60 days.
(5) Includes 12,000 options exercisable presently or within 60 days.
(6) Mr. Frank left eSOFT in November 1997
(7) Includes 192,889 options exercisable presently or within 60 days.
41
<PAGE> 45
eSOFT MANAGEMENT
The directors and executive officers of eSOFT are listed below.
Directors are elected as described below under "-- Election of Directors."
Executive officers are elected by the Board of Directors and hold office until
their successors are elected and qualified. There are no committees of the Board
of Directors.
<TABLE>
<CAPTION>
NAME AGE POSITIONS
<S> <C> <C>
Philip L. Becker 51 Chairman, Chief Technical Officer, Secretary and Director
Jeffrey Finn 40 President, Chief Executive Officer and Director
Jason M. Rollings 37 Vice President of Operations
Robert C. Hartman 38 Vice President of Engineering
Stephen Kuzara 34 Vice President of International Sales
Jane Merickel 35 Vice President of Marketing
Richard Eyestone 53 Director
Richard Rice 47 Director
</TABLE>
BIOGRAPHICAL INFORMATION
Philip L. Becker. Mr Becker is eSOFT's Chairman, Chief Technical
Officer and director of eSOFT. Mr. Becker was employed with Martin Marietta
Aerospace as a computer systems designer from 1971 to 1983. In 1983 he founded
Becker Systems as a computer communications consulting firm. Mr. Becker
established eSOFT in 1984 to manufacture and market his bulletin board product,
TBBS. Mr. Becker served as President of eSOFT until September, 1997. Mr. Becker
received a B.S. in Electrical Engineering from Vanderbilt University in 1969.
Mr. Becker has been a director of CANnect Communications, Inc. since February
1997.
Jeffrey Finn. Mr. Finn has been the President, Chief Executive Officer
and a director of eSOFT since November 1998. Mr. Finn was the Senior Vice
President of Sales and Marketing Strategy at Evolving Systems Inc. from July
1996 to October 1998, a company specializing in software solutions for the
telecommunications industry. Mr. Finn was the founder of Prairie Systems, where
he designed and launched a number of innovative telecommunications software
products and services from April 1990 to March 1996.
Jason M. Rollings. Mr. Rollings has been eSOFT's Vice President of
Operations since October 1997. Mr. Rollings was employed with Hi-Tech
Manufacturing, a printed circuit board and computer manufacturer, as Director of
Manufacturing from April 1995 to November 1997, as Director of Manufacturing for
Codar Technology Inc., a military computer manufacturer, from September 1988 to
March 1995, and as Manufacturing Operations Manager for Century Data Inc., a
computer software company, from September 1983 to August 1988. Mr. Rollings has
successfully completed the Xerox Business Management System program at Anaheim,
California, and programs in Executive Management, Facilities Management and
Effective Management Systems.
Robert C. Hartman. Mr. Hartman has been eSOFT's Vice President of
Engineering since 1993. From 1990 to 1993 he was employed by eSOFT as a Senior
Software Engineer. Mr. Hartman served as President of Spark Software, a computer
consulting company, from 1986 to 1990. Mr. Hartman was employed with Automatix,
Inc. as a Senior Software Engineer and Project Leader from 1983 to 1986. Mr.
Hartman received both B.S. (1982) and M.S. (1983) degrees in Computer Science
from Rensselaer Polytechnic Institute.
42
<PAGE> 46
Stephen Kuzara. Mr. Kuzara has been eSOFT's Vice President of
International Sales since March 1999. From December 1997 to February 1998 Mr.
Kuzara was the director of the international division of Micron Electronics,
where he oversaw all sales outside of the U.S. and managed more than 300
international partners and five international subsidiaries. From 1990 to 1997
Mr. Kuzara was employed by Acer Computer International in a variety of
positions, most recently serving as regional general manager of Acer's CIS and
AA Soft divisions. Mr. Kuzara holds a bachelor degree of science in
developmental psychology from Arizona State University and has studied at the
London Business School.
Jane Merickel. Ms. Merickel has been eSOFT's Vice President of
Marketing since December 1998. Ms. Merickel was the Director of Product
Marketing for Evolving Systems, Inc., a company specializing in software
solutions for the telecommunications industry, from January to December 1998.
She was employed in a variety of positions by MCI during the Friends & Family
marketing campaign from July 1991 to December 1997, and was the Executive Senior
Manager of local sales and service at the time of her departure from MCI.
Richard Eyestone. Mr. Eyestone was appointed by eSOFT's Board of
Directors as a Class II director in March 1999. Mr. Eyestone served as Senior
Vice President of Product and Market Management and Vice President of U.S. Sales
for Bay Networks from July 1991 to August 1998. Prior to this, Mr. Eyestone held
various sales and product management roles at several firms, including
Wellfleet, PictureTel and Masscomp. Mr. Eyestone currently sits on the board of
several high-tech start-up and early-stage companies.
Richard Rice. Mr. Rice has been a director of eSOFT since March of
1998. Mr. Rice has been the President, Chief Executive Officer and director of
CANnect Communications, Inc., a telecommunications company that provides voice,
data and Internet services to the Canadian market, since March 1998. Mr. Rice
founded the Costwatch Consulting Group, Inc., a telecommunications consulting
company in 1989.
ELECTION OF DIRECTORS
Article III of eSOFT's Bylaws establishes what is known as a
"classified board of directors," with three classes of directors designated as
Class I, Class II, and Class III. Each class is elected to serve for a three
year term, with each class up for election in different years so that in any one
year, only one-third of all directors are up for election. At each annual
meeting of stockholders, the successors to the class of directors whose terms
expire at that meeting are elected to serve as directors for a three year term.
The current members of eSOFT's board of directors, along with their
Class designation, are as follows: Jeffrey Finn (Class I), Richard Eyestone
(Class II), Philip Becker (Class III), and Richard Rice (Class III). eSOFT
stockholders will be asked to elect Jeffrey Finn as a Class I director at the
eSOFT meeting. Class II directors will serve until the year 2000 annual
stockholder meeting, and Class III directors will serve until the year 2001
annual stockholder meeting.
43
<PAGE> 47
eSOFT EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation paid
during the past three fiscal years to eSOFT's Chief Executive Officer, to the
two executive officers who received total salary and bonus in excess of $100,000
during the fiscal year ended December 31, 1998, and to one former executive
officer who received total salary in excess of $100,000 during the fiscal year
ended December 31, 1998. eSOFT did not make any long-term compensation awards to
any of the named executive officers during the periods indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION AWARDS
----------------------------------------------- ----------
Securities
OTHER ANNUAL Underlying
NAME AND PRINCIPAL POSITION YEAR SALARY Bonus COMPENSATION Options
<S> <C> <C> <C> <C> <C>
Philip Becker 1998 $ 115,833 -- -- --
========
Chairman and Chief Technical Officer 1997 $ 100,000 -- -- 218,000
========
1996 $ 60,000 -- -- --
Jeffrey Finn(1) 1998 $ 25,909 -- -- 418,000
========
President and Chief Executive Officer 1997 -- -- -- --
1996 -- -- -- --
Jason Rollings(2) 1998 $ 90,000 $ 35,973 -- --
=
Vice President of Operations 1997 $ 24,204 -- -- 30,000
========
1996 -- -- -- --
Regis Frank(3) 1998 $ 120,000 -- -- --
Former President and Chief Operating
Officer 1997 -- -- -- 128,000
========
1996 -- -- -- --
</TABLE>
(1) Mr. Finn joined eSOFT in November 1998.
(2) Mr. Rollings joined eSOFT in October 1997.
(3) Mr. Frank served as eSOFT's President and Chief Operating Officer from
November 1997 to October 1998. Mr. Frank received a salary of $10,000 per
month while serving as President and Chief Operating Officer. Pursuant to
the severance arrangement described under the heading "Certain
Relationships and Related Transactions of eSOFT -- Severance Arrangement,"
eSOFT is required to pay Mr. Frank's salary through May 31, 1999.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Prior to the adoption of the equity incentive plan described below
under the heading "-- Stock Option Plan," no stock options were ever granted to
or exercised by executive officers of eSOFT. In the fiscal year ending December
31, 1998, stock options were granted to the executive officers named in the
Summary Compensation Table as follows:
44
<PAGE> 48
<TABLE>
<CAPTION>
% OF TOTAL OPTIONS
GRANTED
NUMBER OF TO DIRECTORS AND
SHARES UNDERLYING EMPLOYEES IN EXERCISE EXPIRATION
NAME OPTIONS GRANTED FISCAL YEAR PRICE DATE
<S> <C> <C> <C> <C>
Jeffrey Finn(1) 418,000 33% $4.00/share 11/5/2002
</TABLE>
- ----------------------
(1) Includes 18,000 options granted in consideration of Mr. Finn's services
as an eSOFT director. 750 options vested for the fiscal year ended
December 31, 1998. Options granted in consideration of services as a
director vest at a rate of 1/24 each month for two years. The remaining
options held by Mr. Finn vest as follows: 77,777 shares vest on June
1999 and 11,111 shares a month vest thereafter until fully vested.
AGGREGATED OPTION/SAR EXERCISES FISCAL YEAR-END OPTION/SAR VALUES
<TABLE>
<CAPTION>
SHARES NUMBER OF SECURITIES UNDERLYING VALUE OF UNEXERCISED
ACQUIRED ON VALUE UNEXERCISED OPTIONS/SARS AT IN-THE MONEY OPTIONS/SARS AT
NAME EXERCISE REALIZED FISCAL YEAR-END FISCAL YEAR-END(1)
<S> <C> <C> <C> <C> <C>
Philip Becker(2)
Unexercisable 0 $ 0 120,111 $ 563,321
Exercisable 0 $ 0 97,889 $ 459,099
Jeffrey Finn(3)
$Unexercisable 0 $ 0 417,250 705,152
Exercisable 0 $ 0 750 $ 1,268
Jason Rollings(4)
Unexercisable 0 $ 0 20,000 $ 93,800
======== ===========
Exercisable 0 $ 0 10,000 $ 46,900
Regis Frank(5)
Unexercisable 0 $ 0 65,500 $ 307,195
======== ===========
Exercisable 0 $ 0 62,500 $ 293,125
======== ===========
</TABLE>
(1) The year-end value represents the difference between the option
exercise prices (ranging from $1.00 to $4.00 per share) and the market
value of eSOFT common stock on December 31, 1998, multiplied by the
number of shares under option. The market value on December 31, 1998
was determined by reference to the closing price on December 31, 1998
of $5.69, as reported by the Nasdaq SmallCap market.
(2) Includes 18,000 options granted in consideration of Mr. Becker's
services as an eSOFT director. Options granted in consideration of
services as a director vest at a rate of 1/24 each month for two
45
<PAGE> 49
years. The remaining options held by Mr. Becker vest as follows: 7/36
of these shares vested in April 1998 and 1/36 of these shares vest each
month thereafter until fully vested.
(3) Includes 18,000 options granted in consideration of Mr. Finn's services
as an eSOFT director. Options granted in consideration of services as a
director vest at a rate of 1/24 each month for two years. The remaining
options held by Mr. Finn vest as follows: options to purchase 77,777
shares are exercisable in June 1999 and options to purchase 11,111
shares vest each month thereafter until fully vested.
(4) The options held by Mr. Rollings vest as follows: 7/36 of these shares
vested in August 1998 and 1/36 of these shares vest each month
thereafter until fully vested.
**1(5) Includes 18,000 options granted in consideration of Mr. Frank's
services as an eSOFT director. Pursuant to the severance arrangement
described below, Mr. Frank had the option to exercise up to 62,500
shares on or before March 31, 1999. All unexercised options terminated
on March 31, 1999.
DIRECTOR COMPENSATION
The eSOFT directors do not currently receive cash compensation for
serving as directors. Other than Mr. Eyestone, who was granted options to
purchase 25,000 shares of eSOFT common stock, each director has been granted
options to purchase 18,000 shares of eSOFT common stock. These options were
granted at an exercise price equal to the fair market value of eSOFT common
stock at the date of grant. Each director's travel expenses are reimbursed by
eSOFT. Options granted in consideration of services as a director vest at a rate
of 1/24 each month for two years.
EMPLOYMENT AGREEMENTS
Philip Becker
On September 2, 1997 eSOFT and Philip Becker, the Chairman, Chief
Technical Officer and a director of eSOFT, entered into an employment agreement
(the "Becker Agreement") that extends for a thirty-six month period commencing
on September 1, 1997. Under the terms of the Becker Agreement, eSOFT is
obligated to pay to Mr. Becker the sum of $10,000 per month. In addition, Mr.
Becker was granted incentive stock options to acquire 200,000 shares of eSOFT
common stock at a price of $1.00 per share for a period of five years. The
options vest over a 36 month period as follows: 7/36 of the options vested in
April 1998 and 1/36 of the options will vest on the first day of each month
thereafter.
Mr. Becker is also eligible to receive a quarterly performance bonus
equal to 10% of eSOFT'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 includes non-competition and confidentiality
provisions that extend for 12 months and five years following the termination of
Mr. Becker's employment with eSOFT, respectively. The Becker Agreement may be
terminated by either eSOFT or Mr. Becker on 30 days notice without cause. If Mr.
Becker's employment is terminated by eSOFT without cause, eSOFT must pay Mr.
Becker one month's salary for each year of employment since 1992.
Jeffrey Finn
On November 6, 1998 eSOFT and Jeffrey Finn, the President and Chief
Executive Officer and a director of eSOFT, entered into an employment agreement
that extends for a thirty-six month period commencing on November 9, 1998. Under
the terms of the agreement, eSOFT will pay to Mr. Finn the
46
<PAGE> 50
sum of $15,000 per month. In addition, Mr. Finn was granted incentive stock
options to acquire 400,000 shares of eSOFT common stock at a price of $4.00 per
share for a period of four years. The options vest over a 36 month period as
follows: 7/36 of the options will vest in June 1999 and 1/36 of the options will
vest on the first day of each month thereafter.
Mr. Finn is also eligible to receive incentive pay equal to 50% of his
annual salary paid quarterly based on objectives agreed by Mr. Finn and the
eSOFT Board of Directors. The incentive pay will be based as follows: one-third
on revenue, one-third on earnings and one-third on mutually agreed quarterly
objectives.
Jason Rollings
On October 7, 1997, eSOFT provided a letter (the "Rollings Letter") to
Jason M. Rollings, eSOFT's Vice President of Operations, outlining the terms of
his employment with eSOFT. Under the terms of the Rollings Letter, eSOFT will
pay to Mr. Rollings the sum of $7,500 per month. In addition, Mr. Rollings was
granted incentive stock options to acquire 30,000 shares of eSOFT common stock
at a price of $1.00 per share for a period of four years from the date of
issuance, January 8, 1998. The options vest over a thirty-six month period as
follows: 7/36 of the options vested in August 1998 and 1/36 of the options will
vest on the first day of each month thereafter. Mr. Rollings is also eligible to
receive a quarterly performance bonus, based equally on Mr. Rollings performance
and eSOFT's performance, not to exceed $7,500 per quarter.
Pursuant to the Rollings Letter, eSOFT also lent Mr. Rollings $20,000.
The loan is to be forgiven over a two-year period; $10,000 of such loan was
forgiven after one year of Mr. Rollings' service and the remainder will be
forgiven when Mr. Rollings has completed his second year of employment with
eSOFT. If Mr. Rollings chooses to leave eSOFT before completing two years of
employment with eSOFT, he is obligated to repay any portion of the loan still
outstanding. If eSOFT terminates Mr. Rollings' employment for any reason, other
than cause, any outstanding loan balance will be immediately forgiven and Mr.
Rollings will be entitled to three months severance.
On March 17, 1998, eSOFT lent Mr. Rollings an additional $15,000. This
loan is to be repaid by Mr. Rollings from any quarterly bonus he receives. If
Mr. Rollings chooses to leave eSOFT before any such loan has been repaid, Mr.
Rollings is obligated to repay any outstanding balance related hereto. If eSOFT
terminates Mr. Rollings for any reason, other than cause, any outstanding loan
balance will be forgiven. At December 31, 1998, the balance outstanding on this
loan was $5,250.
Other Employment Agreements
eSOFT has entered into employment agreements with three other executive
officers with a range of salary levels and benefits. The term of these
employment agreements is thirty-six months, at salary levels ranging from $7,500
to $8,250 per month. The employment agreements provide for either a quarterly
performance-based bonus ranging from $5,000 to $10,000, or a 1% commission on
net sales revenues, paid on a quarterly basis. In addition to monthly
compensation and quarterly bonuses, executives under these agreements have
received incentive stock options to purchase between 40,000 and 60,000 shares of
eSOFT common stock at exercise prices ranging from $1.00 to $6.50 per share.
These executive employment agreements also contain twelve month noncompetition
and confidentiality provisions, and provide for severance payments following a
termination of the executive without cause.
47
<PAGE> 51
STOCK OPTION PLAN
In September 1998 the Board of Directors and on December 4, 1998 the
stockholders of eSOFT approved an amended Equity Compensation 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 eSOFT. Options to purchase up to 1,700,000 shares of eSOFT's
common stock may be granted under the Plan. Terms of exercise and expiration of
options granted under the Plan may be established at 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 years. As of February 15, 1999, options to purchase 1,254,500
shares of eSOFT common stock had been granted under the Plan.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF eSOFT
In addition to the agreements listed under the heading "eSOFT Executive
Compensation -- Employment Agreements," eSOFT has entered into transactions with
its officers and directors, and with principal stockholders listed under the
heading "Security Ownership of Certain Beneficial Owners and Management of
eSOFT" or affiliated entities as described below.
SEVERANCE ARRANGEMENT
On November 10, 1998 eSOFT served Regis Frank, eSOFT's then President
and Chief Operating Officer, with notice of termination of services pursuant to
his employment agreement. Mr. Frank's employment agreement required eSOFT to
provide Mr. Frank with ninety days prior notice of his termination. In addition,
Mr. Frank's employment agreement required eSOFT to pay Mr. Frank three months
salary and to allow Mr. Frank to participate in eSOFT's employee benefits
program for three months as severance following Mr. Frank's termination. Mr.
Frank agreed to resign as an officer and director effective November 10, 1998,
and eSOFT agreed to pay to Mr. Frank $10,000 per month, as provided in his
employment agreement, through February 28, 1999, and to provide Mr. Frank with
severance pay and benefits for three months beginning on March 1, 1999. As part
of his severance arrangement, Mr. Frank also had the right to exercise options
to purchase 62,500 shares of eSOFT common stock until March 31, 1999. All
unexercised options terminated on March 31, 1999.
RELATED CUSTOMER
Richard Rice, an eSOFT director, is also the President, Chief Executive
Officer and a director of CANnect Communications, Inc., which is a distributor
of eSOFT's products in Canada. CANnect purchased $47,000 of eSOFT products in
1998.
48
<PAGE> 52
DESCRIPTION OF APEXX
The following description of Apexx describes Apexx as it has existed
prior to planning for the merger with eSOFT and the integration of the Apexx and
eSOFT product lines as planned for the future. Some combined marketing of the
products of the two companies has begun prior to the date of this Joint Proxy
Statement/Prospectus using the Apexx product identifying trademark "TEAM
Internet(R)."
CORPORATE HISTORY
Apexx was incorporated under the laws of the State of Idaho on August
12, 1992. Apexx's mission is to provide easy and affordable computer networking
solutions that enhance decision speed and communication capabilities to growing
organizations. From 1993 to 1998, Apexx has designed, manufactured, and marketed
over 20 computer networking products in four main product families, and
currently sells eight different networking and telecommunications products.
Currently, Apexx develops, manufactures, and markets the award-winning TEAM
Internet(R) family of Internet Access Servers.
APEXX PRODUCTS
Since 1996, Apexx has focused substantially all of its product and
market development efforts on the TEAM Internet(R product line and related
Internet/Intranet products. The TEAM Internet(R) product line, targeting the
needs of the small to medium sized organization, provides a turnkey
Internet/Intranet solution that gives the customer a powerful, affordable and
easy to manage Internet presence. The key features of the TEAM Internet(R)
products include Internet connectivity/routing, firewall protection, e-mail
server, Web browsing, Web publishing capabilities and Web filtering
applications. There are currently eight models of the TEAM Internet(R) product
line that span the needs of organizations consisting of five to three hundred
computer users. The key selling points of Apexx's product line are:
o The products offer high value compared to complex,
multi-vendor Internet solutions sold by other manufacturers.
o Apexx products allow a multi-user organization to provide
Internet access to up to three hundred users without
additional phone or modem lines.
o No special training or expertise is required to install and
use the TEAM Internet(R) products.
TEAM INTERNET(R) PRODUCTS
Targeted to the needs of small to medium sized organizations, Apexx's
award winning product provides simultaneous shared Internet access and e-mail
for all users on a LAN. TEAM Internet(R) has won many industry awards, including
"Best of LAN Times," Internet Magazine "Net Best" product, PC Computing MVP
Finalist, and Internet World "Best of Show" Finalist. TEAM Internet(R) is an
easy, integrated, and affordable way to connect 5 to 300 computer users to the
Internet for secure Web browsing, e-mail, and other Internet applications. The
TEAM Internet(R) product line is Apexx's major growth focus due to its very
large market and growth potential.
PC TO MAC NETWORKING PRODUCTS
For organizations with both IBM-compatible PCS and Apple Macintosh
computers, Apexx has partnered with Miramar Systems to deliver powerful,
affordable and easy-to-use PC to Mac networking
49
<PAGE> 53
kits. Apexx PCTalkTM MACLAN kits and EtherChainTM MACLAN kits allow PC users to
collaborate with MAC users as peers on a LAN, including file sharing, printer
sharing, and group collaboration applications.
ETHERCHAINTM 10BASE-T ADAPTER
Apexx teamed with Farallon Computing to incorporate Farallon's
innovative EtherWave daisy- chainable 10Base-T technology in a parallel port
Ethernet Adapter. EtherChainTM is one of the most flexible network interface
ethernet adapters on the market for portable computers.
Since early 1996, Apexx has focused substantially all its product and
market development efforts on the TEAM Internet(R) product line. Apexx revenues
from other products are minimal and the TEAM Internet(R) product line
represented 95% of Apexx's total product revenue in 1998.
TECHNICAL SERVICES
Customers can purchase annual technical support services for the entire
TEAM Internet(R) product line. Technical support services provide telephone and
Internet support addressing the customers' initial installation and ongoing
maintenance issues for the products. The services include software upgrades and
maintenance releases that can be performed over the Internet, as well as
technical assistance by telephone, e-mail, and fax.
MARKETS
Apexx's TEAM Internet(R) product line is targeted at the market for
Internet access servers for small to medium sized organizations, a fast-growing
segment of the $1 billion market for small business online access. A leading
market research firm estimates that the market for small business Internet
servers is growing at over 150% per year. Another market research firm estimates
that there are seven million businesses in the United States alone within the 5
to 100 employee range, and that 90% of these businesses will implement some form
of Internet access by the year 2000. In addition, management believes that
international markets offer equal potential as their small to medium sized
organizations rush to connect to the Internet.
SALES CHANNELS
Apexx markets its products through a growing channel of domestic and
international distributors, computer product catalogs and VARs. Apexx products
are distributed by Tech Data Corporation, Northern Computer Technologies, and
Alternative Technology in the United States, and EMJ Corporation in Canada.
These distributors in turn distribute Apexx products to their network of
approximately 8,000 computer resellers in the United States and Canada.
Since 1996, Apexx has sold to over 3,000 VARs and computer dealers in
the United States and Canada. With the TEAM Internet(R) product line, Apexx has
focused on growing its VAR channel and adding programs for ISPs as a sales
channel.
In international markets, Apexx has established distribution partners
in many major markets, including the United Kingdom, Germany, France, Japan,
Switzerland, Sweden, Holland and Australia and several other countries. Apexx
expects significant growth in international sales.
Apexx is also developing strategic sales partnerships for the TEAM
Internet(R) product family. Apexx intends to seek strategic Original Equipment
Manufacturer ("OEM") partners who can re-brand
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<PAGE> 54
the TEAM Internet(TM) product and sell into their sales channels. Apexx has
entered into a marketing agreement and OEM distribution agreement with Extended
Systems, Inc. ("ESI") with respect to the ESI Internet Access Server ("IAS").
See "Apexx Management Discussion and Analysis of Financial Condition and Results
of Operations -- Results of Operations -- Other Expenses" and "-- Liquidity and
Capital Resources."
OPERATIONS
Currently, with respect to the TEAM Internet(R) 100 and 300 series,
Apexx purchases components from suppliers and assembles them for final shipment.
All products shipped for domestic and international sales are shipped from
Apexx's facility in Boise, Idaho. Apexx is currently exploring the option of
outsourcing the product to a contract manufacturer.
INTELLECTUAL PROPERTY
Apexx has no patents, but regards its software as proprietary and
attempts to protect it by relying upon copyrights, trade secret laws, internal
non-disclosure agreements and transferability restrictions incorporated into its
software license agreements. All Apexx copyrighted software is licensed under
the TEAM Internet(R) software end user license agreement and is not sold. Apexx
holds trademarks for TEAMPAGE, TEAM INTERNET, and Apexx. Program source listings
are not released, which Apexx believes further protects unauthorized transfers
of Apexx proprietary information.
PRODUCT DEVELOPMENT COSTS
To improve upon the competitiveness and features of its TEAM
Internet(R) product lines and to create new products, Apexx conducts research
and development through internal research projects. Costs are incurred from time
to time relative to specific projects and all development costs are expensed as
incurred. Product development and research and development costs were $369,884
and $174,579 in 1998 and 1997, respectively.
CONCENTRATION OF SALES
During the fiscal year ended December 31, 1998, Apexx had two customers
that accounted for 10% or more of product sales during the period. These two
customers represented 22% and 20% of Apexx's revenue for the fiscal year ended
December 31, 1998. These two customers represented 14% and 17%, respectively, of
Apexx's total accounts receivable at December 31, 1998. Gross sales composition
in 1998 was 15.2% shipped to international markets and 84.8% to the domestic
market. During the fiscal year ended December 31, 1997, Apexx had one customer
that accounted for 10% or more of product sales during the period. This customer
represented 13% of Apexx's revenue for the fiscal year ended December 31, 1997.
CONCENTRATION OF VENDORS
During the fiscal years ended December 31, 1998 and 1997, Apexx had
vendors that accounted for 10% or more of Apexx's purchases during that period.
During 1998, two vendors represented 32% of Apexx's purchases for the fiscal
year. During 1997, four vendors represented 73% of Apexx's purchases for the
fiscal year.
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<PAGE> 55
GOVERNMENT REGULATIONS
The full TEAM Internet(R) product line has been fully tested and
complies with FCC and CE emission and safety standards. In addition, all TEAM
Internet(R) models are currently Underwriters Laboratories (UL) safety
certified. Apexx is current on its status as a UL certified vendor.
APEXX PROPERTY
Apexx offices are located at 506 S. 11th Street, Boise, Idaho. Apexx
leases approximately 6,000 square feet of space at this location pursuant to a
month-to-month lease at a rent of approximately $5,304 per month. Apexx believes
that this facility is adequate for its purposes for the foreseeable future.
EMPLOYEES
As of December 31, 1998, Apexx employed thirty-seven people. The
majority of Apexx employees are located in the Boise, Idaho office, with remote
sales offices located in Massachusetts, Minnesota, and New York. By department,
there are currently five employees in General & Administrative, five in
Operations, eight in Research & Development, thirteen in Sales & Marketing, and
six in Technical Services. None of Apexx's employees are represented by labor
unions. Apexx believes that its relations with its employees are good.
COMPETITION
Apexx anticipates that competition in the following three categories
will continue:
DIRECT COMPETITION
All in one Internet solution competitors such as Whistle (InterJet) and
iPlanet (IPS 168), which offer products that are similar to TEAM Internet(R) in
concept and features, but are more complex and expensive from the customer's
point of view.
INDIRECT COMPETITION
Individual component solutions in categories such as routers,
firewalls, and web servers that are offered by established and startup companies
(Cisco, Ascend, Compatible Systems, Intel, Cobalt, and Encanto). Since this
approach requires several separate components and can be more expensive to the
customer, it is better suited to larger customers, which Apexx does not target.
SERVER SOFTWARE SOLUTIONS
These offerings from Microsoft and Novell require the customer to
install and run software on their server or a separate computer. This approach
is expensive, requires technical support, and can leave customer's proprietary
information vulnerable to Internet computer users who try to infiltrate computer
systems and access confidential information.
APEXX LEGAL PROCEEDINGS
There are no material legal proceedings pending to which Apexx (or any
of its officers or directors in their capacities as such) is a party, or to
which the property of Apexx is subject. Management of Apexx is not aware of any
material proceedings being contemplated.
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<PAGE> 56
APEXX SELECTED HISTORICAL FINANCIAL INFORMATION
We are providing the following selected financial information to aid
you in your analysis of Apexx. This information is only a summary and you should
read it in conjunction with the historical financial statements of Apexx and the
related notes appearing elsewhere in this Joint Proxy Statement/ Prospectus. You
should also review the discussions of this financial information found under the
heading "Apexx Management's Discussion and Analysis of Financial Condition and
Results of Operations."
<TABLE>
<CAPTION>
FOR THE YEARS ENDED DECEMBER 31,
1998 1997
------------- -------------
<S> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues $ 3,808,106 $ 2,003,426
Cost of goods sold 1,924,172 1,023,344
------------- -------------
Gross profit 1,883,934 980,082
Selling, general and
administrative expense 2,755,970 1,183,704
Other (income) expense 13,917 (5,962)
------------- -------------
Net loss $ (885,953) $ (197,660)
============= =============
CASH FLOW DATA:
Net cash (used in) operating
activities $ (915,699) $ (319,154)
Net cash (used in) investing
activities (35,266) (105,586)
Net cash provided by
financing activities 776,864 620,157
BALANCE SHEET DATA:
Current assets $ 1,070,753 $ 862,645
Total assets 1,168,218 974,348
Current liabilities 1,168,679 305,357
Long-term liabilities 75,386 25,948
Total liabilities 1,244,065 331,305
Stockholders' equity (deficit) (75,847) 643,043
Working capital (deficit) (97,926) 557,288
</TABLE>
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APEXX'S MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read together with Apexx's financial
statements and accompanying notes included elsewhere in this Joint Proxy
Statement/Prospectus.
RESULTS OF OPERATIONS
Fiscal Year Ended December 31, 1998 Compared to Fiscal Year Ended
December 31, 1997
Revenues. During the fiscal year ended December 31 1998, Apexx realized
net revenue of $3,808,106, a 90% increase from the net revenue of $2,003,426 for
the fiscal year ended December 31, 1997. This 90% increase over 1997 revenues
was a result of the growth in the TEAM Internet(R) product line. TEAM
Internet(R) accounted for approximately 97% of total revenue in the fiscal year
ended December 31, 1998, up from approximately 83% in the fiscal year ended
December 31, 1997. The increase in TEAM Internet(R)as a percentage of total
revenue was due to the focus of Apexx's sales and marketing efforts on this
high-growth emerging product category.
Gross Margins. Apexx's gross profit margin for the fiscal year ended
December 31, 1998 was approximately 49% of net revenue, unchanged from
approximately 49% of net revenue for the fiscal year ended December 31, 1997.
This level gross margin resulted primarily from the continuing expansion into
international markets, which generate lower average selling prices than the
domestic markets, and increased OEM business, which had lower product margins.
Offsetting these product margin decreases was an increased efficiency in the
cost of components for the TEAM Internet(R) product line.
Research and Development Expenditures. To stay ahead of the technology
curve, Apexx consistently expands its research and development team. There are
10 Apexx employees that make up the team of hardware, software, and quality
control engineers. This core team will continue to improve the TEAM Internet(R)
family as well as launch new Apexx product lines. Apexx spent $369,884 on
research and development in the fiscal year ended December 31, 1998, a
substantial increase from $174,579 spent in the fiscal year ended December 31,
1997. All research and development costs are expensed as incurred. Apexx has no
capitalized software costs.
Selling, General and Administrative Expenses (SG&A). SG&A increased
from $1,183,704 (59% of net revenue) for the fiscal year ended December 31, 1997
to $2,755,970 (72% of net revenue) for the fiscal year ended December 31, 1998.
The increase was principally due to the creation of a stronger marketing
campaign with supporting literature and advertising, as well as an increase in
new employee hiring to support the continuing growth of Apexx. Sales and
marketing expenses for the fiscal year ended December 31, 1998 were $1,410,543,
an increase of 146% compared to $573,704 from the fiscal year ended December 31,
1997. During 1998, Apexx expanded its United States sales force and added
several resellers for the TEAM Internet(R) product line. Internationally, during
the same period, Apexx added sales representative firms in England and Germany
and established international distributors in the top seven countries: Sweden,
Germany, United Kingdom, Japan, Switzerland, Canada and The Netherlands. In
addition, Apexx put in place operations and support teams to handle anticipated
growth. General and administrative expenses were $725,465 for the fiscal year
ended December 31, 1998, up 131% from the $314,386 spent in the fiscal year
ended December 31, 1997. In addition, under APB 25 "Accounting for Stock Issued
to Employees," stock options issued to employees at below fair market value in
1998 resulted in a charge to compensation expense of $36,813. The remainder of
compensation expense to be recognized in future years for these below fair
market value stock option grants is $167,879.
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<PAGE> 58
An additional significant expense that Apexx incurred in the last half
of 1998 relates to the marketing expenses underlying the note payable to
Extended Systems, Inc. (ESI). The funds received were to assist in the marketing
efforts to benefit the ESI Internet Access Server (IAS), manufactured by Apexx.
Approximately $140,000 was expensed to sales and marketing to benefit the IAS
product line as of December 31, 1998. Apexx receives a $158 credit for each IAS
unit sold by ESI into the channel to reduce the balance of the note until
October 1999, the maturity of the note.
Net Loss. Apexx realized a net loss of ($885,953) for the fiscal year
ended December 31, 1998, of which ($872,036) was attributable to operations. The
balance of the loss was primarily interest expense. For the fiscal year ended
December 31, 1997, Apexx realized a net loss of ($197,660), of which ($203,622)
was attributable to operations.
Income Taxes and Net Operating Losses. As of December 31, 1998, Apexx
had $1,097,803 net operating loss carryforwards with expirations through 2013.
As of December 31, 1998, Apexx also had research and development tax credits of
$37,038 with expiration through 2013. The deferred tax assets related to the net
operating loss carryforwards and the tax credits have been fully offset by a
valuation allowance.
LIQUIDITY AND CAPITAL RESOURCES FOR THE YEAR ENDED DECEMBER 31, 1998
Capital and Debt Financing
In February 1998, Apexx completed a private placement of 239,720 shares
of Apexx common stock at a price of $2.50 per share to existing shareholders and
new accredited investors under a Regulation D offering. Of the 239,720 total
shares issued, 193,620 were issued in the fourth quarter of 1997 and 46,100 in
the first quarter of 1998. Apexx's cash receipts in the first quarter of 1998
were $115,250. In addition, in the first quarter 1998, there were 24,000 shares
of stock issued upon exercise of stock options for cash receipts of $15,000.
In April of 1998, Apexx secured a working capital line of credit with
Idaho Independent Bank for $500,000, collateralized by a first position security
interest in all accounts receivable and inventory of Apexx, as well as personal
guarantees from two Apexx officers. The December 31, 1998 balance under this
line of credit was zero. There are four financial covenants applicable to Apexx
that are required for compliance with the line: current ratio, working capital,
tangible net worth, and debt to tangible net worth. Apexx has received
permission to exclude the eSOFT working capital loan payable in calculation of
the covenants to Idaho Independent Bank, however currently, Apexx was out of
compliance with these ratios at December 31, 1998. Upon signing the loan
agreement with eSOFT, Inc., the working capital loan was restricted to $200,000.
Idaho Independent Bank maintains a first position security interest in Apexx's
assets to secure the debt.
In April of 1998, Apexx secured an equipment loan from Idaho
Independent Bank that is collateralized by a first position security interest in
the fixed assets of Apexx. This term loan replaced a term loan expiring May 1998
from US Bank of Idaho with a balance of $64,426. The Idaho Independent Bank term
loan provides for a maximum loan of $125,000. The balance on December 31, 1998
was $104,309. Idaho Independent Bank maintains a first security interest in
Apexx's fixed assets that secure the debt.
In June 1998, Apexx issued a note payable to Extended Systems, Inc.
(ESI) in conjunction with the marketing agreement and OEM distribution agreement
between ESI and Apexx. The funds were to assist in the marketing efforts to
benefit the ESI Internet Access Server IAS, manufactured by Apexx. Under the
terms of the Marketing Agreement, ESI agreed to loan Apexx up to a maximum of
$500,000.
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<PAGE> 59
The note is reduced by the amount of $158 for each IAS unit sold by ESI into the
channel until October 1999, the note maturity date. The balance of the note on
December 31, 1998 was $356,061. Upon maturity, the note can be repaid in cash,
converted to Apexx common stock at $15 per share, or by another mutually agreed
upon payment method. Apexx controls the choice of payment options. The note is
subordinate to all debt at Idaho Independent Bank.
In December 1998, Apexx entered into a working capital loan payable to
eSOFT, Inc. for up to $500,000. The proceeds of the loan were intended to
accelerate the marketing efforts by Apexx. The note is due in August 1999. The
balance as of December 31, 1998 was $300,000. The principal amount can be
increased up to $1,000,000, upon approval from the Board of Directors of both
Apexx and eSOFT. As part of the loan agreement, Apexx's working capital line of
credit at Idaho Independent Bank cannot be increased above $200,000. However,
Idaho Independent Bank continues to maintain a first position security interest
in the assets that secure the debt. In addition, the eSOFT loan is secured in
the form of a pledge of 344,635 shares of Apexx common stock owned by Tom
Loutzenheiser, the Chairman and President.
Cash Flow
During the year ended December 31, 1998, Apexx used cash from
operations in the amount of $915,699 compared to $319,154 in the prior year.
This is a result of working capital which was utilized to fund the large
increases in accounts receivables, and to support the losses of Apexx.
Cash used in investing activities, totaled $35,266 during the year
ended December 31, 1998 compared to $105,586 in the prior year. The decrease is
due to fewer purchases of property, plant and equipment.
Cash provided by financing activities was $776,864 for the year ended
December 31, 1998 compared to $620,157 in the previous year. Apexx received net
proceeds in the amounts of $130,250, from the sale of equity securities during
the year. Apexx increased it's borrowings, net of repayments, by $646,614 during
the year.
Management believes that higher levels of operating expenditures will
continue through 1999 in order to continue the expansion of Apexx's products
into an emerging market. Apexx anticipates continuing to generate operating
losses to attain market penetration.
The opinion of the independent auditor's contained an uncertainty
paragraph regarding the ability of Apexx to continue as a going concern because
of significant operating losses and deficiencies of working capital. Apexx plans
to draw additional amounts on the loan from eSOFT to meet immediate cash flow
needs in the first quarter of 1999. The proposed merger with eSOFT, Inc. should
also affect Apexx's access to working capital. Should the merger not occur,
Apexx anticipates issuing additional equity to provide Apexx with additional
working capital.
Capital Resources
Apexx's working capital has decreased when compared to the previous
fiscal year. Working capital was a deficit $97,926 in fiscal 1998, compared to
$557,288 in fiscal 1997. The deficit working capital was due to Apexx increasing
its short term borrowing to support its increased accounts receivables and
losses from its selling and marketing expansion. Management anticipates Apexx
will continue to invest significant resources in its marketing and sales
activities in 1999. Apexx anticipates continuing to hire sales and key
management to meet its desired growth of Apexx's products both domestically and
internationally. As staff is expanded, Apexx will need to invest in new
equipment and
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<PAGE> 60
fund the expenses associated with these additions. Management anticipates the
merger with eSOFT will provide it with the ability to leverage its technology to
assist Apexx to grow its sales. Should the merger not be completed Apexx
anticipates that it will be able to raise additional equity to support its
working capital deficit.
Management believes that Apexx will continue to incur losses until the
end of 1999, when sales growth is anticipated to reach a level to offset the
aggressive sales growth strategy. Further, management believes that it has
access to capital in the form of additional, short and/or long term credit
facilities, and additional equity financing. Management anticipates it will
continue to have access to additional capital through these sources in amounts
necessary to support its growth plans. In the event that cash flow from
operations, if any, together with the proceeds of any future financings, are
insufficient to meet these expenses, Apexx 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 Apexx's best interest.
YEAR 2000 EFFECT
Apexx Technology recognizes the seriousness of the year 2000 problem
and is committed to providing products that meet year 2000 compliance. Apexx has
tested the TEAM Internet(R) 100 and TEAM Internet(R) 300 product lines and
believes the following of such products:
Performance and functionality are not affected by dates prior to,
during or after the year 2000. Data storage correctly references dates
before and after year 2000 rollover. Year 2000 is recognized as a leap
year handling both February 29th and 366 days.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has recently issued Statements
of Financial Accounting Standards that may affect Apexx's financial statements
as follows:
In June 1998 FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities requires companies to record derivatives on
the balance sheet as assets or liabilities, measured at fair market value. Gains
or losses resulting from changes in the values of those derivatives are
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The key criterion for hedge accounting is that the hedging
relationship must be highly effective in achieving offsetting changes in fair
value or cash flows. SFAS No. 133 is effective for fiscal years beginning after
June 15, 1999. Management believes that the adoption of SFAS No. 133 will have
no material effect on its financial statements.
In October 1998 FASB issued SFAS No. 134, "Accounting for
Mortgage-Backed Securities Retained After the Securitization of Mortgage Loans
Held for Sale by a Mortgage Banking Enterprise" establishes accounting and
reporting standards for certain activities of mortgage banking enterprises and
other enterprises that conduct operations that are substantially similar to the
primary operations of a mortgage banking enterprise. SFAS No. 134 is effective
for the first fiscal quarter beginning after December 15, 1998. Management
believes that the adoption of SFAS No. 134 will have no material effect on its
financial statements.
In February 1999 FASB issued SFAS No. 135, "Rescission of FASB
Statement No. 75 and Technical Corrections" SFAS No. 135 rescinds SFAS No. 75
"Deferral of the Effective Date of Certain Accounting Requirements for Pension
Plans of State and Local Governmental Units." GASB Statement No. 25, "Financial
Reporting for Defined Benefit Pension Plans and Note Disclosures for Defined
Contribution Plan," was issued November 1994, and establishes financial
reporting standards for defined benefit
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pension plans and for the notes to the financial statements of defined
contribution plans of state and local governmental entities. Statement 75 is,
therefore, no longer needed. This statement also amends FASB Statement No. 35,
"Accounting and Reporting by Defined Benefit Pension Plans," to exclude from its
scope plans that are sponsored by and provide benefits for the employees of one
or more state or local governmental units. This statement also amends other
existing authoritative literature to make various technical corrections, clarify
meanings, or describe applicability under changed conditions. This statement is
effective for financial statements issued for fiscal years ending after February
15, 1999. Management believes that the adoption of SFAS No. 135 will have no
material effect on its financial statements.
SOP 98-5, "Reporting on the Costs of Start-Up Activities," requires
that the costs of start-up activities, including organization costs, be expensed
as incurred. This Statement is effective for financial statements issued for
fiscal years beginning after December 15, 1998. Management believes that the
adoption of SOP 98-5 will have no material effect on its financial statements.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF APEXX
As of April 16, 1999, there were a total of 1,421,305 shares of Apexx
common stock issued and outstanding and 56 stockholders of record. The following
table sets forth information regarding beneficial ownership of Apexx common
stock and options to purchase Apexx common stock that are currently exercisable
or exercisable within sixty days of the date of this Joint Proxy
Statement/Prospectus held by (i) all person known to Apexx to beneficially own
5% or more of the Apexx common stock, (ii) all Apexx directors, (iii) each of
the persons named under the heading "Executive Compensation of Apexx," and (iv)
all Apexx directors and Apexx executive officers as a group. Unless otherwise
indicated, the stockholders listed below have sole voting and investment power
with respect to the shares reported as beneficially owned.
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF BENEFICIAL
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP PERCENT OF CLASS
<S> <C> <C>
Thomas Loutzenheiser 615,135(1) 36.4%
506 South 11th Street
Boise, Idaho 83702
David Dahms 451,707(2) 27.4%
506 South 11th Street
Boise, Idaho 83702
Dr. Kevin Learned 52,000(3) 3.6%
===========
William Guy Rivers 179,057(4) 11.6%
===========
11324-182nd Street NE #G2079
Redmond WA 98052
John Hanousek 110,000(5) 7.2%
506 South 11th Street ===========
Boise, Idaho 83702
Joel and Ann Just 137,650(6) 9.0%
6700 SW 105th ===========
Suite 210
Beaverton OR 97008
Albert Youngwerth 157,461(7) 10.1%
506 South 11th Street ===========
Boise, Idaho 83702
Directors and Executive Officers as a group 1,118,842(8) 57.9%
=========== =======
</TABLE>
(1) Includes 270,500 options exercisable presently or within 60 days.
(2) Includes 225,000 options exercisable presently or within 60 days.
(3) Includes 14,000 options exercisable within 60 days.
(4) Includes 118,400 options exercisable within 60 days.
(5) Includes 110,000 options exercisable presently or within 60 days.
(6) Includes 115,000 options exercisable within 60 days.
(7) Includes 136,461 options exercisable within 60 days.
(8) Includes 509,500 options exercisable within 60 days.
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APEXX EXECUTIVE COMPENSATION
The following table sets forth information regarding compensation paid
during the past three fiscal years to Apexx's Chief Executive Officer. Apexx did
not make any long-term compensation awards to this officer during the periods
indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
SALARY BONUS OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR ($) ($) COMPENSATION ($)
<S> <C> <C> <C> <C>
Thomas Loutzenheiser, 1998 $69,639 -- --
Chairman and President 1997 $61,252 -- --
1996 $58,796 -- --
</TABLE>
MATERIAL CONTRACTS BETWEEN eSOFT AND APEXX
eSOFT and Apexx have entered into the following contracts or
arrangements.
LOAN AGREEMENT
On December 4, 1998, eSOFT agreed to provide a $500,000 line of credit
to Apexx to be used by Apexx for working capital to support its business
operations. This loan by eSOFT to Apexx is secured by a second priority lien on
all of Apexx's assets. As additional security, Thomas Loutzenheiser, Apexx's
Chairman and President, has personally guaranteed the repayment of the loan by
Apexx by pledging 344,635 shares of Apexx common stock. The line of credit
provided by eSOFT terminates on May 1, 1999, and Apexx must repay all
outstanding principal and interest no later than August 1, 1999.
eSOFT may declare that Apexx is in default of the loan agreement and
declare all obligations of Apexx immediately due and payable in the event that:
o Apexx fails to make any payment of principal or interest
within three days of the due date;
o Apexx or Thomas Loutzenheiser defaults in the performance of
any of the terms, conditions, or covenants contained in the
loan agreement or any other document executed in connection
with the loan agreement;
o Apexx declares or is declared bankrupt;
o Apexx discontinues or changes the character of its current
business operation in a manner that has a material adverse
effect on Apexx's financial condition;
o any change occurs in the ownership of Apexx (other than in
connection with the merger);
o any representation or warranty of Apexx or Thomas
Loutzenheiser in any document executed in connection with the
loan is determined to be false or incorrect in any material
respect; or
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o any order, judgment, or decree is entered against Apexx or
Thomas Loutzenheiser that could have a materially adverse
effect on Apexx or that could restrain, limit, or prohibit
Thomas Loutzenheiser from performing his obligations under his
loan guaranty or stock pledge agreements.
JOINT MARKETING PLAN
eSOFT has adopted a strategy to market one product for the joint
benefit of both eSOFT and Apexx. This will result in the products known by eSOFT
as IPAD being re-branded utilizing the Apexx product name of TEAM Internet(R).
eSOFT will focus on selling the TEAM Internet(R) 100 and TEAM Internet(R) 2500
products only. eSOFT has inaugurated a direct mail campaign to focus on
potential users and VARs of the all-in-one appliance Internet connection. This
campaign consisted of a direct mail program of 680,000 pieces to potential end
users of the eSOFT and Apexx products. eSOFT also targeted 238,000 free standing
inserts in business journals in Seattle, Los Angles, Atlanta, Boston, Dallas,
New York, San Francisco focusing on potential end users. Additionally, a 55,000
piece direct mail campaign targeted at VARs and directed at educating these
entities to the all-in-one appliance is formulated around this program. eSOFT
expects to spend approximately $800,000 on this marketing program to jointly
market and generate new sales leads for the combined companies. eSOFT and Apexx
anticipate generating approximately 13,500 qualified leads from this program.
PURCHASE AGREEMENT
On January 27, 1999, eSOFT and Apexx entered into a purchase agreement
that gives eSOFT the right to purchase certain products and replacement parts
manufactured by Apexx. The purchase agreement terminates on July 27, 1999.
TRADEMARK LICENSE AGREEMENT
On April 2, 1999, eSOFT and Apexx entered into a trademark license
agreement that gives eSOFT a royalty-free, irrevocable (during the term of the
Agreement) world-wide, nontransferable license to use the registered trademark
TEAM Internet(R) exclusively in connection with the joint marketing,
distribution and sale with Apexx of Apexx's TEAM Internet(R) product line in
conjunction with eSOFT's IPAD products, accessories and technical support
services. The trademark license agreement automatically terminates if the merger
agreement is terminated.
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THE PROPOSED MERGER
GENERAL
The Boards of Directors of eSOFT and Apexx are furnishing this Joint
Proxy Statement/Prospectus to holders of eSOFT and Apexx common stock in
connection with the solicitation of proxies by the Boards of Directors of eSOFT
and Apexx for use at meetings of their stockholders and at any adjournments or
postponements thereof.
At the respective meetings of the eSOFT and Apexx stockholders, the
holders of eSOFT and Apexx common stock will be asked to vote upon a proposal to
approve the Amended and Restated Agreement and Plan of Merger, dated as of
January 25, 1999, pursuant to which the merger of Apexx into a subsidiary of
eSOFT will be effected. The affirmative vote of a majority of the shares of
Apexx common stock outstanding on April 16, 1999, the record date for the Apexx
meeting, and the affirmative vote of a majority of the shares of eSOFT common
stock represented and voting at the eSOFT meeting, is required to approve the
merger agreement.
THE MERGER
Pursuant to the merger agreement, a newly formed subsidiary of eSOFT
will merge with and into Apexx. The separate corporate existence of the eSOFT
subsidiary will cease and Apexx will be the surviving corporation. In the
merger, each previously outstanding share of Apexx common stock outstanding as
of the effective date of the merger will be exchanged for 1.119651 shares of
eSOFT common stock, and each Apexx option will be converted into an option to
purchase eSOFT common stock at a rate of 1.085879 shares of eSOFT common stock
for each share of Apexx common stock subject to the option. As a result, upon
the consummation of the merger, Apexx will become a wholly owned subsidiary of
eSOFT, and the current security holders of Apexx will become security holders of
eSOFT.
The merger will become effective at the time of filing a certificate of
merger with the Secretary of State of Idaho or at such later time as is
specified in the certificate of merger, which is expected to occur shortly after
the approval by the eSOFT and Apexx stockholders.
VOTING AGREEMENTS
At the time Apexx executed the merger agreement, certain Apexx
stockholders collectively owning approximately 50.75% of the issued and
outstanding shares of Apexx common stock executed voting agreements in which
they agreed to vote in favor of the merger. Because holders of a majority of the
outstanding shares of Apexx common stock have agreed to vote in favor of the
merger, Apexx stockholder approval of the merger is assured. However, holders of
at least 95% of the issued and outstanding Apexx common stock must sign and
deliver the Stockholders Agreement to eSOFT to satisfy one of the conditions to
the closing of the merger.
BACKGROUND OF THE MERGER
eSOFT management and consultants first discussed the possibility of
effecting a business combination with Apexx in late September, 1998. Investments
by certain major computer industry companies in two of eSOFT's principal
competitors for sale of Internet access devices to small and medium sized
businesses, together with rumors of additional investments, prompted a
discussion about possible changes in the competitive environment for eSOFT as a
relatively small, stand-alone company. Consideration was thus given to possible
combinations within the industry that might improve eSOFT's
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competitive position. Apexx was identified as a producer of Internet access
devices that might be a candidate for acquisition.
After checking credit reports on Apexx, Terrance Schreier, President of
Transition Partners, a consultant to eSOFT, telephoned Thomas Loutzenheiser,
President of Apexx, and described eSOFT's possible interest in discussing a
combination. On October 16, Philip Becker, eSOFT's Chairman of the Board, and
Mr. Schreier visited Apexx, had a meeting with Mr. Loutzenheiser and other key
managers of Apexx, and discussed their two companies and strategic issues about
the industry. A mutual confidentiality agreement was signed and additional
information about the companies was shared by the parties. Apexx described its
efforts to raise capital to finance an expansion of its marketing and sales
program, and a possible bridge loan from eSOFT was discussed. eSOFT proposed
that if a combination were effected, eSOFT would issue shares of its common
stock to the Apexx stockholders. The eSOFT shares would be registered under the
Securities Act of 1933 so that the shares could be sold by the Apexx
stockholders in the public markets. In response to an initial inquiry by the
eSOFT representative as to how the Apexx representatives valued Apexx, Mr.
Loutzenheiser stated that Apexx had been valued at $15-20 million.
Following this visit by eSOFT, and after discussions among eSOFT
management and its financial consultants, a term sheet was drafted by eSOFT
providing for the issuance of $12 million of eSOFT stock in exchange for all
Apexx stock. The draft term sheet was furnished to Mr. Loutzenheiser on October
20, 1998. The next day Mr. Loutzenheiser informed Mr. Schreier that Apexx had
engaged Pacific Crest Securities, Inc. in May of 1998 as its investment banker
to assist Apexx in its negotiations. Discussions between eSOFT consultants and
Pacific Crest representatives were held on October 22, 1998, primarily
concerning valuation issues. On October 26, 1998, Mr. Loutzenheiser informed Mr.
Schreier that the Apexx board would be meeting that day. He stated that Apexx
was now proposing that Apexx be valued at $16 million in the transaction and he
requested a revised term sheet reflecting that valuation. eSOFT declined that
request and instead, on October 27, 1998, furnished another draft term sheet to
Mr. Loutzenheiser that called for a valuation of Apexx at $12 million.
Between October 27, 1998, and November 2, 1998, discussions continued
between the eSOFT consultants and Pacific Crest representatives. On November 4,
1998, Pacific Crest sent a letter from the Apexx Board of Directors addressed to
the eSOFT Board of Directors proposing that Apexx be valued at $18.5 million in
a transaction involving the issuance of eSOFT common stock to the Apexx
stockholders, with the value of the eSOFT common stock to be determined based
upon the market price of eSOFT common stock over a ten (10) day period, and
prior to the date that a definitive agreement was signed and the agreement was
announced publicly. The letter also proposed that eSOFT assume some of Apexx's
outstanding stock options and price such options at $2.50 per share. The eSOFT
consultants rejected the proposal in the letter as involving an excessive
valuation for Apexx and inconsistent with the previous discussions. On November
6, 1998, a revised letter from the Apexx Board was received that proposed the
issuance of $15.9 million of eSOFT common stock for all outstanding Apexx common
stock and common stock equivalence and derivatives. The letter also proposed a
meeting of eSOFT and Apexx representatives in Denver.
On November 9, 1998, an outside Apexx director, Mr. Loutzenheiser and
representatives of Pacific Crest met in Denver with Mr. Becker and the eSOFT
consultants. The parties then agreed upon a $14 million dollar valuation for the
Apexx common stock and all options. Discussions were had between representatives
of Pacific Crest and the eSOFT consultants as to valuation of the eSOFT common
stock, and it was agreed that the proposed transaction would be announced upon
signing of the letter of intent. The parties then agreed upon a price of $4.75
per share, the approximate value of the eSOFT common stock, prior to the
announcement of the proposed transaction on November 18, 1998. The eSOFT Board
of Directors and the Apexx Board of Directors had met the previous day to
approve the letter of intent on the terms then agreed upon.
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Following the execution of the letter of intent, the parties continued
to discuss additional conditions and terms of a definitive merger agreement. In
particular, eSOFT and Apexx agreed that one of the conditions to the closing of
the merger would be that the average closing price of eSOFT common stock for the
ten trading days prior to closing must be no less than $3.40 and no greater than
$9.00, subject to a right to renegotiate in good faith if this condition failed
at closing. eSOFT and Apexx also agreed to indemnification limits of Apexx
securityholders for breaches of Apexx representations and warranties. In
addition, certain Apexx stockholders agreed to sign voting agreements in which
they agreed to vote in favor of the merger. On January 25, 1999, the parties
executed definitive agreements governing the merger.
In February 1999, eSOFT and Apexx agreed to revise the merger agreement
in certain respects in light of their ongoing joint marketing efforts. In
particular, eSOFT agreed to fund a joint marketing plan for the benefit of both
companies pending the consummation of the merger. The parties executed amended
and restated definitive documents on February 26, 1999.
eSOFT'S REASONS FOR MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS OF eSOFT
At meetings of the eSOFT Board of Directors held on December 15, 1998
and February 19, 1999, the eSOFT Board of Directors unanimously:
o determined that the merger agreement, the merger and other
transactions contemplated thereby, are advisable and are fair
to and in the best interests of eSOFT and its stockholders;
o approved the merger agreement, the merger and the other
transactions contemplated thereby;
o recommended that the stockholders of eSOFT adopt the merger
agreement; and
o directed that the merger agreement be submitted for
consideration by eSOFT's stockholders at the meeting.
eSOFT'S REASONS FOR THE MERGER
eSOFT's Board of Directors believes that the merger offers an excellent
opportunity to build value for eSOFT's stockholders for the following reasons,
among others:
o eSOFT and Apexx both offer products to small and medium sized
businesses to connect their local area computer networks to
the Internet. Apexx products have been designed and targeted
at businesses that have five to twenty-five personal computers
on a LAN, and offer a set of features specific to this market
segment, while eSOFT has designed and targeted businesses that
have twenty-five to one hundred personal computers on a LAN,
with a set of features specific to that market segment. By
combining the two product lines, customers can be offered a
wider range of products than is now available from either
company. By offering the wider range of products, eSOFT
believes it can increase its share of the market for these
Internet access products.
o Apexx has a team of engineers who are engaged in product
development activities who, combined with the smaller product
development staff at eSOFT should be able to increase the pace
of development of new and improved products for this market.
Like many computer based products, the eSOFT and Apexx
Internet connector products are subject to rapid technological
advancements. eSOFT should be better able to maintain its
leading technology position with the larger engineering staff
that Apexx has developed.
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o Apexx and eSOFT have developed somewhat different marketing
approaches for their products. Apexx has focused on
distribution of its products through systems integrator
relationships mostly in the United States and Europe, and
management of eSOFT believes these distribution channels will
be receptive to adding the eSOFT products. eSOFT management
also believes that it will be possible to sell Apexx products
through the distributors and telephone company partners with
which eSOFT has established relationships in the United
States, South America, Europe and Asia.
o Recently, certain of eSOFT's competitors have entered into
joint relationships with much larger companies, which will
likely have a substantial impact upon competition in this
industry. The combination of Apexx into eSOFT should create a
company which is better able to withstand the competition of
larger and more well-financed competitors.
o If eSOFT is successful in integrating the Apexx and eSOFT
products and thus expanding its sales, the larger base of
products and sales revenue should make it easier for eSOFT to
raise additional capital to finance the anticipated growth of
the combined company. It would then be possible for eSOFT to
expand its marketing and sales efforts at a faster pace and
hopefully further improve its competitive position in the
marketplace.
INFORMATION AND FACTORS CONSIDERED BY THE eSOFT BOARD OF DIRECTORS
The eSOFT Board of Directors made its determination after careful
consideration of, and based on, a number of factors, including, among other
things, the factors described above and the following additional material
factors:
o the judgment, advice and analyses of eSOFT's senior
management, including its favorable recommendation of the
merger;
o the presentations by and discussions with eSOFT's senior
management and representatives of eSOFT's financial advisors
and counsel regarding the terms of the merger agreement;
o the presentation and opinion of EVEREN Securities described
below to the effect that, as of the date of such opinion and
based upon and subject to certain matters stated therein, the
consideration to be paid by eSOFT to Apexx security holders in
the merger was fair from a financial point of view to eSOFT
(see "-- Opinion of eSOFT's Financial Advisor" on page 68);
o the cost savings and operating and marketing efficiencies
available as a result of consummating the merger and the
ability of the combined company more effectively to exploit
the existing assets of the two companies and to pursue future
opportunities;
o eSOFT's and Apexx's strategic fit and compatible product
lines;
o the terms of the merger agreement, including the conditions to
closing of the merger, the ability of Apexx under certain
conditions to consider unsolicited alternative business
combination proposals, the ability to terminate the agreement
on certain conditions, and the termination fees payable on
certain termination events (see "The Merger Agreement" on page
84, including "-- Conditions to the Consummation of the
Merger" on page 85, "-- Termination" on page 89, and "--
Termination Fee" on page 89)
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o the execution and delivery by holders of approximately 50.75%
of the issued and outstanding Apexx common stock of voting
agreements, pursuant to which the holders agreed to vote in
favor of the merger (see "The Merger Agreement -- Documents to
be Executed In Connection With the Merger Agreement" on page
89);
o the parties' ability to consummate the merger;
o that the merger will be accomplished on a tax-free basis to
the stockholders for United States federal income tax
purposes, except for cash received by Apexx stockholders in
lieu of fractional shares;
o that the merger is intended to be accounted for as a
pooling-of-interests transaction that, among other things,
will not require the recognition or amortization of goodwill
or any adjustments to the book values of Apexx's assets;
o information concerning the financial performance and
condition, business operations, debt and capital levels,
products, personnel and prospects of eSOFT and Apexx, and each
company's projected future financial performance as a separate
entity and on a combined basis; and
o the governance structure and management of the combined
company.
In reaching its decision to approve the merger agreement, the merger
and the other transactions contemplated thereby, and to recommend the adoption
of the merger agreement to the eSOFT stockholders, the eSOFT Board of Directors
did not view any single factor as determinative, and did not find it necessary
or practicable to assign any relative or specific weights to the various factors
considered. Furthermore, individual directors may have given differing weights
to different factors.
Each of the factors listed above was believed by the eSOFT Board of
Directors to support the decision to approve the merger agreement. The eSOFT
Board of Directors did not specifically adopt EVEREN Securities' opinion, but
did rely on it in reaching its conclusion that the merger is advisable and fair
to and in the best interests of eSOFT and its stockholders and considered it an
important factor in determining whether to approve the merger agreement.
RECOMMENDATION OF THE eSOFT BOARD OF DIRECTORS
The eSOFT Board of Directors unanimously recommends that the
stockholders of eSOFT vote "FOR" the merger proposal.
APEXX'S REASONS FOR MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS OF APEXX
At a meeting of the Apexx Board of Directors held on January 20, 1999,
the Apexx Board of Directors unanimously:
o determined that the merger agreement, the merger and other
transactions contemplated thereby, are advisable and are fair
to and in the best interests of Apexx and its stockholders;
o approved the merger agreement, the merger and the other
transactions contemplated thereby;
o recommended that the stockholders of Apexx adopt the merger
agreement; and
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o directed that the merger agreement be submitted for
consideration by Apexx's stockholders at the meeting.
APEXX'S REASONS FOR THE MERGER
Apexx Board of Directors believes that the merger offers an excellent
opportunity to build value for Apexx's stockholders for the following reasons,
among others:
o Apexx and eSOFT both offer products to small and medium sized
businesses to connect their local area computer networks to
the Internet. Apexx products, however, generally sell for a
lower price point than the eSOFT products. By combining the
two product lines, customers can be offered the widest range
of product features available in the industry. Through this
joint effort, Apexx believes the combined company can increase
its share of the market and become the leader in the Internet
Access Appliance Market.
o Apexx has a team of engineers who are engaged in product
development and enhancement activities. When joined with the
product development staff at eSOFT, they should be able to
increase the pace of development of new and improved products
for this market. In addition, the teams will be enabled to
widen the focus of additional product lines and increased
investigations into upcoming technologies.
o The marketing strategies of Apexx and eSOFT historically are
quite different. Apexx has focused on creating the demand for
its product through a 2-tier distribution channel, from the
bottom up, while slowly entering into the distributor arena.
Apexx believes in a "high touch sales model" through reseller
training and product seminars to develop the channel
relationships. Apexx is strong in the United States and
Europe. eSOFT has focused on gaining a solid distributor base
to support the demand for the Internet products. eSOFT has the
larger distribution network than Apexx, with which it has
expanded into the United States, South America, Europe, and
Asia. The combined company's marketing and distribution
synergies will develop a larger and stronger presence in the
industry.
o Apexx needs additional equity capital to fund its rapid growth
in the Internet Access Appliance Market. The Board of
Directors had been investigating venture capital or strategic
partnerships to meet that objective. This merger addresses two
needs - creating a combined company of "critical mass" while
increasing public mechanisms for raising additional capital.
Upon integrating the two companies, Apexx and eSOFT will be a
leader in the marketplace. This factor should assist in future
efforts to raise additional capital to finance the anticipated
growth of the combined company.
INFORMATION AND FACTORS CONSIDERED BY THE APEXX BOARD OF DIRECTORS
The Apexx Board of Directors made its determination after careful
consideration of, and based on, a number of factors, including, among other
things, the factors described above and the following additional material
factors:
o The judgement, advice and analyses of Apexx's senior
management, including its favorable recommendation of the
merger;
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o The presentations by and discussions with Apexx's senior
management and representatives of Apexx's investment banker,
accountants and counsel regarding the terms of the merger
agreement;
o The cost savings and operating and marketing efficiencies
available as a result of consummating the merger and the
ability of the combined company more effectively to exploit
the existing assets of the two companies, obtain future
financing, and pursue future business opportunities;
o Apexx and eSOFT's synergies, strategic fit and compatible
product lines;
o The terms of the merger, including the conditions to closing
of the merger, the ability to terminate the agreement on
certain conditions, and the termination fees payable on
certain termination events;
o The parties ability to consummate the merger;
o That the merger will be accomplished on a tax-free basis to
the stockholders for United States federal income tax
purposes, except for cash received by Apexx stockholders in
lieu of fractional shares;
o That the merger is intended to be accounted for as a
pooling-of-interests transaction that, among other things,
will not require the recognition or amortization for goodwill
or any adjustments to the book values of Apexx's assets;
o Information concerning the financial performance and
condition, business operations, debt and capital levels,
products, personnel and prospects of eSOFT and Apexx, and each
company's projected future financial performance as a separate
entity and on a combined basis, and;
o The governance structure and management of the combined
company.
In reaching its decision to approve the merger agreement, the merger
and the other transactions contemplated thereby, and to recommend the adoption
of the merger agreement to the Apexx stockholders, the Apexx Board of Directors
did not view any single factor as determinative, and did not find it necessary
or practicable to assign any relative or specific weights to the various factors
considered. Furthermore, individual directors may have given differing weights
to different factors. Each of the factors listed above was believed to support
the decision to approve the merger agreement.
RECOMMENDATION OF THE APEXX BOARD OF DIRECTORS
THE APEXX BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS OF APEXX VOTE "FOR" THE MERGER PROPOSAL.
OPINION OF eSOFT'S FINANCIAL ADVISOR
EVEREN Securities, Inc. ("EVEREN") was retained by eSOFT to render an
opinion (the "Opinion"), to the Board of Directors of eSOFT (the "eSOFT Board of
Directors"), with respect to the fairness of the merger, from a financial point
of view.
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On December 15, 1998, EVEREN delivered its Opinion to the eSOFT Board
of Directors that, based upon and subject to the matters set forth in the
Opinion and as of such date, the 1,591,365 shares of eSOFT common stock (the
"Merger Consideration") that was to be exchanged for all of the outstanding
voting common stock of Apexx as well as the 1,356,003 shares issuable upon
exercise of all outstanding options to acquire the voting common stock of Apexx
was fair, from a financial point of view, to eSOFT and its shareholders. The
full text of the written opinion of EVEREN, dated as of December 15, 1998, is
set forth as Appendix C to this Joint Proxy Statement/Prospectus and describes
the assumptions made, matters considered and limits on the review undertaken.
eSOFT shareholders are urged to read the Opinion in its entirety.
EVEREN's Opinion addresses only the fairness, from a financial point of
view, of the merger to eSOFT and its shareholders and does not constitute a
recommendation to any shareholder of eSOFT as to any action such shareholder
should take with respect to the merger. In addition, the Merger Consideration
resulted from the negotiations between eSOFT and Apexx and was not initially
determined by EVEREN.
In arriving at the Opinion, EVEREN assumed and relied upon the accuracy
and completeness of the financial and other information obtained from public
sources or provided to it by eSOFT, and EVEREN has not assumed responsibility
for any independent verification of such information or undertaken any
obligation to verify such information. In addition, with respect to the
financial forecasts and projections of eSOFT used in EVEREN's analysis, the
management of eSOFT informed EVEREN that such forecasts and projections
represent the best current judgment of the management of eSOFT, at the date of
the Opinion, as to the future financial performance of eSOFT on a stand-alone
basis, and EVEREN assumed that the projections had been reasonably prepared
based on such current judgment. EVEREN assumed no responsibility for and
expresses no view as to such forecasts and projections or the assumptions on
which they were based. EVEREN did not perform an independent evaluation or
appraisal of the assets of either Apexx or eSOFT.
EVEREN also took into account its assessment of general economic,
market and financial conditions and its experience in similar transactions, as
well as its experience in securities valuation in general. EVEREN's Opinion
necessarily is based upon regulatory, economic, market and other conditions, as
well as information made available to EVEREN as of December 15, 1998. The
regulatory, economic, market and other conditions and the information made
available to EVEREN could only be evaluated by EVEREN as of the date of the
Opinion.
In connection with rendering the Opinion, dated as of December 15,
1998, EVEREN: (i) reviewed the letter of intent by and between eSOFT and Apexx
dated November 20, 1998 (the "LOI"); (ii) reviewed the Agreement and Plan of
merger between eSOFT and Apexx in draft form dated December 15, 1998; (iii)
reviewed eSOFT's annual report on Form 10-KSB for the year ended December 31,
1997 and quarterly reports on Form 10-QSB for the three month periods ended
March 31, 1998, June 30, 1998 and September 30, 1998; (iv) reviewed eSOFT's Form
8-K dated March 30, 1998 regarding eSOFT's March 16, 1998 initial public
offering of common stock and eSOFT's Form 8-K dated June 19, 1998 regarding
eSOFT's June 15, 1998 private placement of common stock; (v) reviewed certain
non-public operating and financial information, including projections relating
to eSOFT's business prepared by the management of eSOFT; (vi) met with certain
members of eSOFT's management to discuss its operations, financial statements
and future prospects; (vii) reviewed unaudited financial statements of Apexx for
the periods January 1, 1997 to December 31, 1997 and January 1, 1998 to
September 30, 1998, as well as an audited balance sheet as of December 31, 1997
prepared by Balukoff, Lindstrom & Co., P.A.; (viii) reviewed certain non-public
operating and financial information, including internal management reports,
projections and a three-year business plan dated October 1, 1998 prepared by the
management of Apexx; (ix) met with certain members of Apexx's management to
discuss its operations, financial statements and future prospects; (x) performed
a relative contribution analysis based on historical and projected
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financial results; (xi) analyzed the pro forma effects of the merger on
projected earnings; (xii) reviewed the terms of selected recent acquisitions
which EVEREN deemed somewhat comparable to that of eSOFT and Apexx; (xiii)
reviewed publicly available financial data and stock market performance data of
companies which EVEREN deemed somewhat comparable to eSOFT and Apexx; (xiv)
reviewed the historical stock prices and reported trading volumes of eSOFT's
common shares; and (xv) conducted such other studies, analyses, inquiries and
investigations as EVEREN deemed appropriate.
The following is a summary of the analyses that EVEREN performed in
arriving at the Opinion: (i) the relative contribution of eSOFT and Apexx to the
financial performance of the combined entity on a pro forma basis; (ii) the pro
forma effects on projected earnings of eSOFT from the merger; (iii) the
Enterprise Value of the Transaction compared to business combinations that
EVEREN believed to be somewhat comparable to that of eSOFT and Apexx; (iv) the
Enterprise Value of the Transaction compared to publicly held companies that
EVEREN considered somewhat comparable to eSOFT and Apexx; (v) the historical
share prices and trading volume of the common stock of eSOFT; and (vi) other
items EVEREN deemed to be relevant.
Enterprise Value Analysis
EVEREN calculated the Enterprise Value of the Transaction, defined as
the transaction value of equity, which was based on the exchange of 2,947,369
shares of eSOFT common stock multiplied by eSOFT's share price on November 20,
1998 and December 11, 1998 (the "Equity Value"), plus net debt. Enterprise Value
of the Transaction was analyzed as a multiple of Apexx's latest twelve months
("LTM") revenues through September 30, 1998. Due to Apexx's current negative
earnings before interest, taxes, depreciation, and amortization ("EBITDA"),
earnings before interest and taxes ("EBIT") and net income, a valuation multiple
of these performance indicators is not meaningful. eSOFT's closing share price
of $5.63 on December 11, 1998 implies an Enterprise Value of the Transaction
multiple of 4.9x Apexx's LTM September 30, 1998 revenues. Assuming a share price
of $4.75 on November 20, 1998, the date on which the LOI was signed, the implied
Enterprise Value of the Transaction multiple would be 4.1x Apexx's LTM revenues.
EVEREN calculated revenue multiples based on Enterprise Value of the Transaction
in order to compare such multiples to the enterprise value multiples calculated
in the comparable company trading analysis and comparable merger transactions
analysis discussed below.
Relative Contribution Analysis
EVEREN prepared an analysis that consisted of determining the relative
contributions of eSOFT and Apexx toward revenue, EBITDA, EBIT, and net income.
Immediately following the merger, Apexx shareholders will own approximately
24.9% of the combined entity on a fully-diluted basis. Apexx would have
contributed approximately 48.4% of the combined entity's gross revenue for the
LTM ended September 30, 1998 on an actual basis, 43.9% for the projected fiscal
year ending December 31, 1998 on a pro forma basis, 42.4% for the projected
fiscal year ending December 31, 1999, 43.0% for the projected fiscal year ending
December 31, 2000, and 38.3% based on annualized third quarter results for
fiscal year 1998.
In analyzing the relative contributions of EBITDA, EBIT, and net
income, EVEREN did not deem either company's contribution to be meaningful.
eSOFT has indicated to EVEREN that it expects to produce positive EBITDA, EBIT
and net income on an annual basis during the projected fiscal year ending
December 31, 1999. Apexx does not expect to produce positive EBITDA, EBIT and
net income on an annual basis until the projected fiscal year ending December
31, 2000. Importantly, eSOFT projects positive EBITDA and net income on a
quarterly basis beginning in the second quarter of fiscal 1999, with positive
EBIT projected to begin in the third quarter of the same year. Alternatively,
Apexx projects positive EBITDA, EBIT and net income on a quarterly basis
beginning the third quarter of fiscal 1999.
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Pro Forma Earnings Analysis
EVEREN prepared an analysis to assess the pro forma earnings effects to
eSOFT resulting from the merger. If the merger between eSOFT and Apexx had
occurred on January 1, 1998, the pro forma loss per share of eSOFT for the
projected fiscal year ending December 31, 1998 would have decreased, or been
accretive by, approximately $0.08. Based on projections provided to EVEREN by
eSOFT and Apexx, the pro forma projected accretion per share for the fiscal
years ending December 31, 1999 and December 31, 2000 would be $0.03 and $0.28,
respectively. Importantly, the accretion percentage per share would steadily
increase form 21.63% for the fiscal year ending December 31, 1998 to 23.04% and
46.43% for the fiscal years ending December 31, 1999 and December 31, 2000,
respectively.
While the merger is accretive to eSOFT shareholders on a pro forma
projected basis in 1998, 1999, and 2000, EVEREN was informed by eSOFT that it
believes that the combined entity on a post-merger basis will be able to realize
significant economies in sales, marketing, management, administration and
advertising on a scale that neither company would be able to achieve on its own.
Comparable Merger Transaction Analysis
EVEREN prepared a comparable transaction analysis that consisted of
reviewing financial aspects of selected acquisitions that EVEREN determined to
be somewhat comparable to that by eSOFT and Apexx ("Selected Comparable
Transactions"). Although there have been a substantial number of acquisitions of
high-growth, emerging technology companies in general, most have involved small,
privately-owned enterprises where financial performance and terms of the
acquisitions were not disclosed.
The current developing state of the market has limited the number of
companies comparable to eSOFT and Apexx, thus preventing any direct comparable
merger transactions analysis. Consequently, EVEREN looked for recent
transactions in SIC codes encompassing eSOFT, Apexx and the Selected Comparable
Companies listed in the following section with transaction values between $10
million and $100 million. Selected Comparable Transactions included
(acquirer/target): Osicom Technologies Inc./ Builders Warehouse Association,
Inc.; Lernout and Hauspie Speech Products N.V./Kurzweil Applied Intelligence,
Inc.; ILOG S.A./CPLEX Optimization, Inc.; Engineering Animation, Inc./Rosetta
Technologies, Inc.; The Learning Company, Inc./Microsystems Software, Inc.;
FIServ, Inc./CUSA Technologies, Inc.; Shiva Corporation/Isolation Systems, Ltd.;
RealNetworks, Inc./Vivo Software, Inc.; Rogue Wave Software, Inc./Stingray
Software Company, Inc.; CyberCash, Inc./IC Verify, Inc.; and Cell Pathways,
Inc./Tseng Labs, Inc. The analysis of Selected Comparable Transactions resulted
in a range of transaction value multiples of LTM revenues of 0.9x to 37.0x, with
a median of 5.6x and a mean of 8.5x. EVEREN noted that based on the Enterprise
Value of the Transaction at November 20, 1998, the date on which the LOI was
signed, the LTM revenue multiple of 4.1x compares favorably to the Selected
Comparable Transactions mean and median multiples of 8.5x and 5.6x,
respectively. Additionally, the Enterprise Value of the Transaction based on the
December 11, 1998 closing stock price of $5.63 implies an Enterprise Value of
the Transaction multiple of 4.9x LTM revenue, which is also below the mean and
median multiples of the Selected Comparable Transactions, as the table below
indicates.
The only Selected Comparable Transaction falling significantly below
the mean and median LTM revenue multiple is FIServ, Inc.'s acquisition of CUSA
Technologies, Inc. at a revenue multiple of 0.9x. An important distinction
between FIServ, Inc.'s transaction and the other Selected Comparable
Transactions is FIServ, Inc.'s significantly larger market capitalization in
excess of $3 billion, thereby creating a significantly larger combined entity
with different market perceptions and characteristics.
71
<PAGE> 75
<TABLE>
<CAPTION>
Enterprise Value of the Transaction/
Target LTM Revenue at:
------------------------------------------
Low Median Mean High November 30, 1998 December 11, 1998
--- ------ ---- ---- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Transaction Value/ 0.9x 5.6x 8.5x 37.0x 4.1x 4.9x
Target LTM Revenue
</TABLE>
Comparable Company Trading Analysis
EVEREN prepared a comparable company trading analysis that consisted of
comparing financial market performances of selected publicly traded companies,
which EVEREN determined to be somewhat comparable to eSOFT and Apexx ("Selected
Comparable Companies"). The public companies deemed somewhat comparable to eSOFT
and Apexx are technology oriented, have mostly generated significant rates of
revenue growth and operate in the computer telephony integration sector. EVEREN
believed this to be the least useful analysis given the limited comparability of
this group to eSOFT and Apexx. The multiples and growth rates for each of the
Selected Comparable Companies were based on the most recent publicly available
information and published estimates of research analysts. The Selected
Comparable Companies included: AVT Corporation; NetSpeak Corporation; Registry
Magic, Inc.; RSI Systems, Inc.; and Westell Technologies, Inc. With respect to
the Selected Comparable Companies, EVEREN considered enterprise value as a
multiple of LTM revenues. EVEREN's analysis of the Selected Comparable Companies
resulted in enterprise value multiples ranging from 1.8x to 14.4x, with a median
of 6.8x and a mean of 7.5x. EVEREN noted that the Enterprise Value of the
Transaction on December 11, 1998 implied an LTM revenue multiple of 4.9x, and
the Enterprise Value of the Transaction on November 20, 1998, implied an LTM
revenue multiple of 4.1x.
Based on the table below, both Enterprise Value of the Transaction
multiples fall below the mean and median of the Selected Comparable Companies.
Due to current negative EBITDA, EBIT and net income, a valuation multiple of
these performance indicators was not meaningful. The market appeared to be
valuing the Selected Comparable Companies based on revenue and revenue growth
rates, as indicated by the wide range of enterprise value multiples of revenue,
regardless of market capitalization. Apexx's expected revenue growth rate of
108.4% is higher than the median but lower than the mean of the Selected
Comparable Companies.
<TABLE>
<CAPTION>
Enterprise Value of the Transaction/
Target LTM Revenue at:
----------------------------------------
Low Median Mean High November 30, 1998 December 11, 1998
--- ------ ---- ---- ----------------- -----------------
<S> <C> <C> <C> <C> <C> <C>
Enterprise Value/ 1.8x 6.8x 7.5x 14.4x 4.1x 4.9x
LTM Revenue
LTM Revenue 15.0% 90.1% 131.3% 336.7% 108.4% (Apexx)
Growth
</TABLE>
Share Price Analysis
EVEREN reviewed the historical share price performance of eSOFT on
various dates prior to, on, and after the announcement date of the merger. The
following table provides an overview of eSOFT's market performance on key dates
from its IPO on March 17, 1998 to December 11, 1998. From March 17, 1998 to
November 17, 1998 (one week before the announcement of the Apexx merger),
eSOFT's stock price increased $0.21 to $4.81 while closing at prices between
$2.63 on October 14, 1998 and $9.00 on May 4, 1998.
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<PAGE> 76
On the morning of November 24, 1998, eSOFT announced it had signed the
LOI to acquire Apexx. At $5.00, trading of eSOFT common shares was halted
temporarily until after the merger announcement. When trading resumed that day,
eSOFT shares next traded at $6.00 and increased to $6.25 immediately thereafter
before closing at $5.69, up $0.63, or 12% higher than the trading level prior to
the LOI announcement. On the day of the LOI announcement, eSOFT's trading volume
was more than four times the average of 110,380 shares over the 30 days
immediately prior to the LOI announcement. Also on November 24, 1998, both the
Russell 2000 Index and the S&P Small Cap Technology Index declined less than 1%
from the previous day's closing. In the week following the Apexx announcement,
eSOFT's stock price increased an additional $1.31, or 23%, on continued heavy
volume, while the Russell 2000 and S&P Small Cap Technology Indices increased
less than 1% each during the same period. Since reaching a post- announcement
high of $7.13 on November 27, 1998, eSOFT's stock price declined to a closing
price of $5.63 on December 11, 1998, 11% higher than its trading level prior to
the announcement of the LOI. During this subsequent period, both the Russell
2000 and S&P Small Cap Technology indices also declined.
<TABLE>
<CAPTION>
eSOFT Historical Trading Performance
- ------------------------------------------------------------------------------------------------------------------
11/24/98
------------------------------------------------
MERGER ANNOUNCEMENT 11/24/98
------------------------------- --------------
3/17/98 11/17/98 PRIOR TO: AFTER: CLOSE: 11/27/98 12/11/98
------- -------- --------- ------ ------ -------- --------
<S> <C> <C> <C> <C> <C> <C>
$4.60 $4.81 $5.00 $6.00 $5.69 $7.13 $5.63
</TABLE>
Other Factors
The foregoing is a summary of the material aspects of the financial
analyses used by EVEREN in connection with rendering the Opinion. The
preparation of a fairness opinion is a complex process and is not necessarily
susceptible to partial analysis or summary description. Selecting portions of
the analyses or of the summary set forth above, without considering the analyses
as a whole, could create an incomplete view of the processes underlying EVEREN's
Opinion. In arriving at the Opinion, EVEREN considered the results of all such
analyses. The analyses were prepared solely for the purposes of EVEREN providing
the Opinion as to the fairness of the merger, from a financial point of view, to
eSOFT and its shareholders, and they do not purport to be appraisals or
necessarily reflect the prices at which businesses or securities actually may be
sold. Any analysis of the fairness of the merger, from a financial point of
view, to eSOFT and its shareholders involves complex considerations and
judgments concerning differences in the potential financial and operating
characteristics of the comparable companies and transactions and other factors
in relation to the trading and acquisition values of the comparable companies.
Analyses based upon forecasts of future results are not necessarily indicative
of actual future results, which may be significantly more or less favorable than
those suggested by such analyses. EVEREN has not appraised or undertaken any
valuation of any assets or property nor has it made any solvency analysis of
either eSOFT or Apexx. EVEREN's Opinion and the related presentation to the
eSOFT Board of Directors on December 15, 1998 was one of many factors taken into
consideration by the eSOFT Board of Directors in making its determination to
approve the merger. The foregoing summary does not purport to be a complete
description of the analyses performed by EVEREN.
EVEREN's Opinion was for the use and benefit of the eSOFT board of
directors in its consideration, from a financial point of view, of the merger.
The Opinion was not intended to be and does not constitute a recommendation to
any shareholder of eSOFT as to any actions such shareholder should take with
respect to the merger. EVEREN was not requested to opine as to, and its opinion
does not in any manner address, eSOFT's underlying business decision to proceed
with or effect the merger, or the relative merits of the merger as compared to
any alternative business strategies which might exist for eSOFT or the effect of
any other transaction in which eSOFT might engage.
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<PAGE> 77
Pursuant to the terms of an engagement letter dated November 24, 1998,
EVEREN is entitled to receive an aggregate cash fee of $200,000 plus
reimbursement for all reasonable out-of-pocket expenses for its role in
rendering the Opinion. Of such fee, $75,000 was paid upon execution of said
engagement letter, $75,000 was due and payable upon rendering the Opinion to the
eSOFT Board of Directors, and $50,000 shall be due and payable at the first time
such Opinion is publicly referred to or is included in any proxy statement or
other public document relating to the proposed transaction. In addition,
pursuant to a November 24, 1998 amendment to an agreement dated July 2, 1998,
EVEREN is entitled to receive a $5,000 quarterly financial advisory fee for a
one-year period commencing July 2, 1998. Such agreement may be extended by
mutual consent. The amendment also entitles EVEREN to warrants to purchase
10,000 shares of eSOFT common stock with the exercise price being the average
daily closing price of eSOFT common stock over the 20 business days immediately
preceding November 24, 1998, which is $4.60 per share. These warrants are in
addition to the warrants previously granted to EVEREN to purchase 100,000 shares
of eSOFT common stock with an exercise price of the average daily closing price
of eSOFT common stock over the 20 business days immediately preceding July 2,
1998, which is $6.98 per share. Initially, the warrants are not exercisable for
one year following issuance, and expire five years from their respective dates
of issuance. In addition, EVEREN and/or its officers, directors, employees or
members of their families and investment portfolios managed by the firm or its
affiliated companies, may have an interest in the securities and/or options of
the securities of eSOFT, and may purchase, sell, trade or act as a market maker
in the securities of eSOFT.
ANTICIPATED ACCOUNTING TREATMENT
The merger is intended to qualify as a "pooling-of-interests" for
accounting and financial reporting purposes in accordance with generally
accepted accounting principles. The companies have conditioned the merger on
receipt of a letter from eSOFT's independent accountants concurring with the
conclusions of eSOFT's management that no conditions exist with respect to eSOFT
and Apexx that would preclude accounting for the merger as a
pooling-of-interests. Under the pooling-of-interests method of accounting, the
recorded assets and liabilities of eSOFT and Apexx will be carried forward to
the combined company's financial statements at their historical amounts, the
consolidated earnings of the combined company will include the earnings of eSOFT
and Apexx for the entire fiscal year in which the merger occurs and for all
prior years presented, and the reported retained earnings of eSOFT and Apexx for
prior periods will be combined and restated as consolidated retained earnings of
the combined company.
Pooling-of-interests accounting treatment requires the sharing of
rights and risks among the affiliates of each of the parties to a business
combination. Accordingly, sales of stock by affiliates of either eSOFT or Apexx
cannot occur in the period commencing 30 days prior to the consummation of the
merger and ending on the date on which the combined company publicly announces
financial results covering at least 30 days of combined operations. To ensure
that such pooling requirements are satisfied, the Stockholders Agreement, which
is required to be signed in connection with the merger, contains trading
restrictions for Apexx's affiliates designed to satisfy the pooling
requirements. In addition, each of eSOFT and Apexx has agreed in the merger
agreement to use its reasonable best efforts to cause their respective
affiliates not to take any action, or fail to take any action, that would
jeopardize the treatment of the merger as a pooling-of-interests.
If eSOFT or Apexx is unable to satisfy the pooling requirements, eSOFT
will be required to account for the merger as a purchase transaction. Such
treatment would require eSOFT to record a significant amount of goodwill on its
balance sheet, the amortization of which may materially depress eSOFT's earnings
over the amortization period used. Such amortization may have a material adverse
effect on the price of eSOFT common stock.
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<PAGE> 78
MATERIAL UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
General
The following discusses the material United States federal income tax
consequences of the merger to United States persons who hold shares of Apexx
common stock as capital assets within the meaning of Section 1221 of the
Internal Revenue Code of 1986, as amended. It does not discuss the tax
consequences that might be relevant to Apexx stockholders entitled to special
treatment under United States federal income tax law (including, without
limitation, dealers in securities, tax-exempt entities, banks, insurance
companies, persons that hold Apexx common stock as part of a straddle, a hedge
against currency risk or a constructive sale or conversion transaction and
foreign persons) or to Apexx stockholders who acquired shares of Apexx common
stock or eSOFT common stock through the exercise or cancellation of employee
stock options or as compensation through other means. This discussion also does
not describe any tax consequences arising out of the tax laws of any state,
local or foreign jurisdiction.
Consummation of the merger is conditioned upon, among other things, the
receipt of the opinion of Davis Graham & Stubbs LLP, to the effect that, on the
basis of the facts, representations and assumptions set forth in such opinions,
the merger will be treated for federal income tax purposes as a reorganization
within the meaning of Section 368(a) of the Internal Revenue Code. Such opinion
will be based on the Internal Revenue Code, regulations promulgated thereunder
and rulings in effect as of the date hereof, current administrative rulings and
practice and judicial precedent, all of which are subject to change, and certain
representations as to factual matters to be made by, among others, eSOFT and
Apexx.
Subject to the foregoing, the following are the material United States
federal income tax consequences of the merger:
o no gain or loss will be recognized by the stockholders of
Apexx with respect to the shares of Apexx common stock
exchanged for eSOFT common stock in the merger (except for
cash received in lieu of fractional shares);
o no gain or loss will be recognized by eSOFT or Apexx as a
result of the merger;
o the aggregate tax basis of the shares of eSOFT common stock
received by an Apexx stockholder will be equal to such
stockholder's aggregate tax basis in the Apexx common stock;
o a holder's holding period with respect to the shares of eSOFT
common stock received pursuant to the merger will include the
holding period of the Apexx common stock exchanged for the
eSOFT shares;
o the receipt of cash in lieu of fractional shares of stock by a
stockholder of Apexx generally will result in taxable gain or
loss to such stockholder for United States federal income tax
purposes based on the difference between the amount of cash
received by such stockholder and such stockholder's adjusted
tax basis allocated to such fractional share. Such gain or
loss generally will constitute capital gain or loss if such
stockholder's Apexx common stock is a capital asset within the
meaning of Section 1221 of the Internal Revenue Code on the
date of the merger and will constitute long-term capital gain
or loss, if the holder's holding period is greater than 12
months as of the date of the merger. For noncorporate holders,
any such long-term capital gain generally will be subject to a
maximum tax rate of 20%. The deductibility of capital losses
is subject to limitations. Under some circumstances, if an
Apexx stockholder maintains a sufficient continuing interest
(direct and constructive) in shares of eSOFT , the full amount
of cash received in lieu of fractional shares may be taxed as
a dividend;
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<PAGE> 79
o a dissenting stockholder of Apexx who demands and receives
payment for his or her Apexx shares generally will recognize
taxable gain equal to the excess of (1) the amount of the cash
payment which the stockholder receives in exchange for such
Apexx shares, reduced by (2) such stockholder's adjusted basis
in the Apexx shares. Such gain or loss would be capital gain
or loss if the Apexx shares were held as capital assets, and
would be long-term capital gain or loss if the shares also
were held for more than one year.
Apexx Option Holders
Persons who own compensation-related options to purchase Apexx shares
will receive, in exchange for their options, options to acquire shares of eSOFT.
Holders of options to acquire Apexx shares should not recognize taxable income
or gain as a result of receiving options to acquire eSOFT shares in connection
with the Merger, although this conclusion is not free from doubt with respect to
any options that are not incentive stock options and that are deeply "in the
money" as of the Effective Time. If an option holder's options to acquire Apexx
shares qualified as incentive stock options for federal income tax purposes, the
options to acquire eSOFT shares in exchange for those options also should
qualify as incentive stock options.
Following the merger, an option holder who exercises an incentive stock
option will not recognize regular taxable income as a result of the exercise,
but will recognize alternative minimum taxable income (potentially giving rise
to an alternative minimum tax liability) equal to the excess of the fair market
value of the optioned stock over the exercise price. The alternative minimum tax
is generally determined by applying rates of up to 28% to the taxpayer's
alternative minimum taxable income, and is payable if and to the extent that the
amount so determined exceeds the taxpayer's regular tax liability. An option
holder who pays the alternative minimum tax generally will be entitled to a tax
credit carryforward, in the amount of the alternative minimum tax paid, which
may be used in future years to offset regular tax in excess of alternative
minimum tax. If the holder of an incentive stock options holds the optioned
stock for a period of more than two years from the date of grant of the
incentive stock option and more than one year from the date of exercise, the
option holder will be entitled to long-term capital gain treatment with respect
to any gain recognized upon the ultimate sale of the optioned stock. If the
option holder disposes of the optioned stock before satisfying these holding
periods, the option holder will recognize income taxable at ordinary income
rates on the sale or exchange of the optioned stock.
An option holder who, after the merger, exercises a
compensation-related option that is not an incentive stock option generally will
be taxable at ordinary income tax rates upon the excess of the fair market value
of the optioned stock at the time of exercise over the exercise price, and will
obtain a basis in the optioned stock equal to such fair market value.
Transfers by Apexx Stockholders of eSOFT Shares to Pacific Crest.
While not free from doubt, Apexx stockholders should not recognize gain
or loss on the transfer of eSOFT shares received in the merger to Pacific Crest
in accordance with the Stockholders Agreement attached as Appendix B to the
Joint Proxy Statement/Prospectus. Such transfer should be treated as a tax-free
contribution to the capital of eSOFT, and the basis of the eSOFT shares
transferred by an Apexx stockholder to Pacific Crest should be added to the
Apexx stockholder's basis in the other eSOFT shares received in the Merger.
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<PAGE> 80
eSOFT Stockholders
No gain or loss will be recognized as a result of the merger by
stockholders of eSOFT with respect to the shares of eSOFT common stock they
hold.
Backup Withholding
Certain noncorporate holders of Apexx common stock may be subject to
backup withholding at a 31% rate on cash payments received in lieu of fractional
shares or cash received by dissenting stockholders of Apexx. Backup withholding
will not apply, however, to a stockholder who (1) furnishes a correct taxpayer
identification number and certifies that he or she is not subject to backup
withholding on the applicable form included in the letter of transmittal to be
delivered to Apexx stockholders following consummation of the merger, (2)
provides a certification of foreign status on Form W-8 (or successor form) or
(3) is otherwise exempt from backup withholding.
Because of the complexity of the tax laws, and because the tax
consequences to any particular Apexx stockholder may be affected by matters not
discussed in this document, each Apexx stockholder is urged to consult a
personal tax advisor concerning the applicability of any federal, state, local
and foreign tax consequences of the merger.
FEDERAL SECURITIES LAW CONSEQUENCES; STOCK TRANSFER RESTRICTIONS
All shares of eSOFT common stock received by Apexx stockholders in the
merger will be freely transferable, except that shares of eSOFT common stock
received by persons who are deemed to be "affiliates" of Apexx under the
Securities Act of 1933, as amended (the "Securities Act"), at the time of the
Apexx meeting may be resold by them only in transactions permitted by Rule 145
or otherwise permitted under the Securities Act. Persons who may be deemed to be
affiliates of Apexx for such purposes generally include individuals or entities
that control, or are controlled by or are under common control with Apexx and
may include certain officers, directors and principal stockholders of Apexx.
Affiliates of eSOFT and Apexx will also be subject to trading restrictions
imposed by the pooling-of-interests accounting rules. See "-- Anticipated
Accounting Treatment" on page 74.
The shares of eSOFT common stock issuable upon the exercise of the new
eSOFT options will be freely tradeable upon the filing of a registration
statement on Form S-8 relating to the new eSOFT options. eSOFT expects to file
such registration statement shortly after the merger is completed.
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<PAGE> 81
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
The unaudited pro forma condensed combined financial information
reflects the proposed acquisition of all of the outstanding stock of Apexx.
The accompanying unaudited pro forma condensed combined balance sheet
presents the financial position of eSOFT as if the proposed merger (treated as a
pooling of interests) had occurred on December 31, 1998. The unaudited pro forma
condensed combined statements of operations for the years ended December 31,
1998 and 1997 give effect to the proposed merger as if it had occurred at the
beginning of the earliest period presented.
In the proposed merger, eSOFT will acquire all the outstanding equity
securities of Apexx in exchange for a maximum of 2,947,368 shares of eSOFT
common stock, of which 1,591,365 shares will be issued to Apexx stockholders of
record, and the remaining 1,356,003 shares will be reserved for issuance to
Apexx optionholders. Of the shares of eSOFT common stock to be exchanged for
Apexx common stock, a total of 159,136 shares will be reserved to secure general
representations made by Apexx, and will be released to the Apexx stockholders
twelve months following the closing date of the merger. Damages relating to a
breach of the Apexx general representations must exceed $200,000 before a claim
can be made against the reserved shares. The Apexx stockholders will deliver
48,000 of the shares of eSOFT common stock they receive to Pacific Crest
Securities, Inc. in partial payment of its investment banking fees, and eSOFT
will pay the remaining $200,000 of such fees. eSOFT will also pay $100,000 and
will issue warrants to purchase 100,000 shares of eSOFT common stock at a price
of $4.75 to its merger consultants in connection with the merger.
The unaudited pro forma condensed combined financial statements have
been prepared from, and should be read in conjunction with, the historical
financial statements and notes thereto of eSOFT and Apexx, appearing elsewhere
in this Joint Proxy Statement/Prospectus. These statements are not necessarily
indicative of future operations or the actual results that would have occurred
had the transactions been consummated at the beginning of the periods indicated.
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<PAGE> 82
eSOFT, INC
PRO FORMA CONDENSED COMBINED BALANCE SHEET
MERGER WITH APEXX TECHNOLOGY, INC.
DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
APEXX eSOFT, INC.
TECHNOLOGY, COMBINED
eSOFT, INC. INC. PRO FORMA CONSOLIDATED
12/31/98 12/31/98 ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 655,650 $ 22,294 $ -- $ 677,944
Investment securities 1,991,541 -- -- 1,991,541
Accounts receivable, less
allowance for possible losses 1,965,085 714,821 -- 2,679,906
Inventories 1,254,696 322,970 -- 1,577,666
Prepaid expenses and other 177,416 10,668 -- 188,084
Note receivable 300,000 -- (300,000)(1) --
------------ ------------ ------------ ------------
Total current assets 6,344,388 1,070,753 (300,000) 7,115,141
PROPERTY AND EQUIPMENT, AT COST
Computer equipment 217,176 133,002 -- 350,178
Manufacturing tool and equipment -- 26,424 -- 26,424
Furniture and equipment 187,464 60,835 -- 248,299
------------ ------------ ------------ ------------
404,640 220,261 -- 624,901
Accumulated depreciation (205,688) (122,796) -- (328,484)
------------ ------------ ------------ ------------
Net property and equipment 198,952 97,465 -- 296,417
============
------------ ------------ ------------ ------------
OTHER ASSETS
Capitalized software costs, net of
accumulated amortization 867,072 -- -- 867,072
Other assets 7,039 -- -- 7,039
------------ ------------ ------------ ------------
TOTAL ASSETS $ 7,417,451 $ 1,168,218 $ (300,000) $ 8,285,669
============ ============ ============ ============
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
79
<PAGE> 83
eSOFT, INC
PRO FORMA CONDENSED COMBINED BALANCE SHEET
MERGER WITH APEXX TECHNOLOGY, INC.
DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
APEXX eSOFT, INC.
TECHNOLOGY, COMBINED
eSOFT, INC. INC. PRO FORMA CONSOLIDATED
12/31/98 12/31/98 ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C> <C> <C>
CURRENT LIABILITIES
Current portion long-term debt $ -- $ 28,923 $ -- $ 28,923
Short term debt -- 656,060 (300,000)(1) 356,060
Accounts payable 968,533 389,548 -- 1,358,081
Deferred revenue 23,910 -- -- 23,910
Customer deposits 248,287 -- -- 248,287
Accrued expenses
Payroll and payroll taxes 256,033 -- -- 256,033
Other 140,184 94,148 550,000(2) 784,332
------------ ------------ ------------ ------------
Total current liabilities 1,636,947 1,168,679 250,000 3,055,626
Note payable, net of current portion -- 75,386 -- 75,386
------------ ------------ ------------ ------------
Total liabilities 1,636,947 1,244,065 250,000 3,131,012
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per
share; authorized 5,000,000 shares;
none outstanding -- -- -- --
Common stock, par value $.01 per share;
authorized 50,000,000 shares;
6,863,502 and 8,454,867 issued and
outstanding historical and pro forma, 68,635 1,106,684 (1,090,770)(3) 84,549
respectively
Additional paid-in capital 9,032,480 36,813 1,588,770(4) 10,658,063
Accumulated deficit (3,320,611) (1,219,344) (1,048,000)(5) (5,587,955)
------------ ------------ ------------ ------------
Total stockholders' equity 5,780,504 (75,847) (550,000) 5,154,657
------------ ------------ ------------ ------------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 7,417,451 $ 1,168,218 $ (300,000) $ 8,285,669
============ ============ ============ ============
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
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<PAGE> 84
eSOFT, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
MERGER WITH APEXX TECHNOLOGY, INC.
YEAR ENDED DECEMBER 31, 1998
(UNAUDITED)
<TABLE>
<CAPTION>
eSOFT, INC.
APEXX COMBINED
eSOFT, INC. TECHNOLOGY, INC PRO FORMA CONSOLIDATED
12/31/98 12/31/98 ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 3,867,600 $ 3,808,106 $ -- $ 7,675,706
COST OF GOODS SOLD 1,357,463 1,924,172 -- 3,281,635
------------ ------------ ------------ ------------
GROSS PROFIT 2,510,137 1,883,934 -- 4,394,071
EXPENSES
Selling and marketing 2,612,065 1,410,543 -- 4,022,608
General and administrative 2,369,564 774,969 -- 3,144,533
Engineering 588,933 127,018 -- 715,951
Amortization of software costs 189,399 -- -- 189,399
Freight expense -- 73,556 -- 73,556
Research and development 12,908 369,884 -- 382,792
------------ ------------ ------------ ------------
5,772,869 2,755,970 -- 8,528,839
OTHER (INCOME) EXPENSE
Interest (income) (167,888) -- -- (167,888)
Interest expense 6,805 21,472 -- 28,277
Other (income) expense 1,013 (7,555) -- (6,542)
------------ ------------ ------------ ------------
(160,070) 13,917 -- (146,153)
LOSS BEFORE INCOME TAX
(BENEFIT) (3,102,662) (885,953) -- (3,988,615)
Income tax (benefit) (162,000) -- -- (162,000)
------------ ------------ ------------ ------------
NET LOSS $ (2,940,662) $ (885,953) $ -- $ (3,826,615)
============ ============ ============ ============
NET LOSS PER COMMON SHARE
Basic and diluted $ (0.54) $ -- $ -- $ (0.54)
============ ============ ============ ============
Basic and diluted weighted
average shares outstanding 5,493,276 -- 1,591,365(4) 7,084,641
============ ============ ============ ============
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
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eSOFT, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
MERGER WITH APEXX TECHNOLOGY, INC.
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
eSOFT, INC.
APEXX COMBINED
eSOFT, INC. TECHNOLOGY, INC PRO FORMA CONSOLIDATED
12/31/97 12/31/97 ADJUSTMENTS PRO FORMA
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 1,233,137 $ 2,003,426 $ -- $ 3,236,563
COST OF GOODS SOLD 429,601 1,023,344 -- 1,452,945
------------ ------------ ------------ ------------
GROSS PROFIT 1,783,618
EXPENSES
Selling and marketing 225,737 573,704 -- 799,441
General and administrative 506,861 340,279 -- 847,140
Engineering 55,653 55,071 -- 110,724
Amortization of software cost 116,912 -- -- 116,912
Freight 40,071 -- 40,071
Research and development 56,671 174,579 -- 231,250
------------ ------------ ------------ ------------
961,834 1,183,704 -- 2,145,538
OTHER (INCOME) EXPENSE
Interest (income) (3,861) -- -- (3,861)
Interest expense 31,012 16,058 -- 47,070
Other (income) expense 7,803 (22,020) -- (14,217)
------------ ------------ ------------ ------------
34,954 (5,962) -- 28,992
LOSS BEFORE INCOME TAX
EXPENSE (193,252) (197,660) -- (390,912)
Income tax expense 162,000 162,000
------------ ------------ ------------ ------------
NET LOSS $ (355,252) $ (197,660) $ -- $ (552,912)
============ ============ ============ ============
NET LOSS PER COMMON SHARE
Basic and diluted $ (0.23) $ -- $ -- $ (0.18)
============ ============ ============ ============
Basic and diluted weighted average
shares outstanding 1,536,884 -- 1,591,365(4) 3,128,249
============ ============ ============ ============
</TABLE>
See accompanying notes to pro forma condensed consolidated financial statements.
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<PAGE> 86
eSOFT, INC
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MERGER WITH APEXX TECHNOLOGY, INC.
NOTES
(UNAUDITED)
(1) To eliminate note receivable owed to eSOFT by Apexx totaling $300,000
at December 31, 1998.
(2) To accrue anticipated costs to be incurred in connection with the
proposed merger as follows:
<TABLE>
<S> <C>
Investment bankers and consultant fees paid in cash $ 300,000
Legal, accounting and other fees 250,000
----------
$ 550,000
==========
(3) Represents the adjustment for the Apexx common stock to reflect the par
value of 1,591,365 shares of eSOFT common stock to be issued in
connection with the proposed merger, not including 1,356,003 shares
which may be issued upon the exercise of options issued to the Apexx
optionees.
(4) Additional Paid in Capital -
No par value common stock of Apexx reclassified as additional paid in
capital to reflect the issuance of eSOFT common stock at
$.01 par value. $1,090,770
Estimated value of 48,000 shares of eSOFT Common Stock transferred
to investment bankers by Apexx stockholders 228,000
Estimated value of warrant to purchase 100,000 shares of
eSOFT common stock granted to merger consultants 270,000
----------
$1,588,770
==========
</TABLE>
(5) Represents the one time charge of $1,048,000 associated with the
proposed merger with Apexx of investment banking and consultant
fees of $300,000, legal, accounting and other fees of $250,000,
value of 48,000 shares of eSOFT common stock transferred to the
investment bankers valued at $228,000, and estimated value of warrants
to purchase 100,000 shares of eSOFT common stock granted to merger
consultants valued at $270,000.
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<PAGE> 87
MERGER AGREEMENT
The following summary of the terms of the Merger Agreement does not
contain all of the information that may be important to you. You should
carefully read the entire Merger Agreement attached as Appendix A to this Joint
Proxy Statement/Prospectus before you decide how to vote.
OVERVIEW OF THE MERGER AGREEMENT
The Merger Agreement contemplates the merger of Apexx with a subsidiary
of eSOFT, with Apexx continuing as the surviving corporation and wholly owned
subsidiary of eSOFT.
CLOSING; EFFECTIVE TIME SURVIVING CORPORATION
Closing
Unless the parties agree otherwise, the closing of the merger is
expected to take place on May 20, 1999, or the second business day after the
date on which all closing conditions have been satisfied or waived or at such
other time as agreed to in writing by eSOFT and Apexx. The closing is expected
to take place shortly after the approval of the stockholders of both companies
at the meetings. The actual time and date of the closing is referred to as the
"Closing Date."
Effective Time
At the closing, eSOFT and Apexx will file articles of merger in
accordance with the relevant provisions of the Idaho Business Corporations Act
and make all other filings or recordings required under Idaho law. The merger
will become effective when the articles of merger are duly filed with the
Secretary of State of Idaho or at such later time as eSOFT and Apexx agree and
as specified in the articles of merger. The time the merger is effective is
referred to as the "Effective Time."
Surviving Corporation
Apexx will become a wholly-owned subsidiary of eSOFT following the
merger. The articles of incorporation and bylaws of eSOFT's newly-formed
subsidiary as in effect immediately prior to the Effective Time will become
Apexx's articles and bylaws.
CONSIDERATION TO BE RECEIVED IN THE MERGER
At the Effective Time, by virtue of the merger and without any action
on the part of any holder of shares of Apexx common stock, (a) each share of
Apexx common stock outstanding immediately prior to the Effective Time will be
converted into the right to receive 1.119651 shares of eSOFT common stock, (b)
each share of Apexx common stock issued and outstanding (including any treasury
stock) will cease to be outstanding and will be canceled, and (c) each share of
eSOFT common stock outstanding immediately prior to the Effective Time will
remain outstanding following the merger and will continue to represent one share
of eSOFT.
TREATMENT OF APEXX STOCK OPTIONS
At the Effective Time, each outstanding and unexercised option to
purchase a share of Apexx common stock issued under Apexx's benefits plans
("Apexx Stock Options") will be assumed by eSOFT and converted into an option or
a right to purchase 1.085879 shares of eSOFT common stock for each share of
Apexx common stock. Such new option or right will otherwise have the same terms
and conditions that were applicable to the Apexx Stock Options immediately prior
to the Effective Time.
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<PAGE> 88
Each share of Apexx common stock will be converted into the right to
receive more shares than will each Apexx stock option because the Apexx
stockholders must pay the fees of Apexx's investment banker, Pacific Crest.
These investment banking fees will be paid to the investment banker by the Apexx
stockholders by transferring to Pacific Crest shares of eSOFT common stock they
receive in the merger.
EXCHANGE OF SHARES
General
Promptly after the Effective Time, eSOFT's transfer agent, The Trust
Company of the Bank of Montreal, will mail to each record holder of certificates
that, immediately prior to the Effective Time of the merger, represented shares
of Apexx common stock, a letter of transmittal and instructions for use in
surrendering such certificates. Upon the surrender of each certificate formerly
representing Apexx common stock, together with a properly completed letter of
transmittal, The Trust Company of the Bank of Montreal will issue in exchange a
common share certificate of eSOFT representing eSOFT common stock and the Apexx
common stock certificate will be canceled. Until surrendered and exchanged, each
Apexx common stock certificate will only represent the right to receive eSOFT
common stock
Fractional Shares
No fractional shares of eSOFT will be issued to holders of Apexx common
stock. In lieu of fractional shares, each holder of shares of Apexx common stock
who would otherwise have been entitled to receive a fraction of a share of eSOFT
common stock instead will receive cash.
eSOFT Stockholders
Stockholder of eSOFT will not be required to exchange their eSOFT stock
certificates. These stock certificates will, after the Effective Time,
automatically represent certificates for shares of the combined company.
CONDITIONS TO THE CONSUMMATION OF THE MERGER
Conditions to Each Company's Obligations to Effect the Merger
The obligations of each company to effect the merger are subject to the
following conditions, unless any condition is waived by both companies:
o The approval of eSOFT and Apexx stockholders of the
transactions contemplated by the merger agreement;
o The absence of any law, order, injunction, or other legal
restraint or prohibition enjoining or preventing the
consummation of the merger or that could reasonably be
expected to have a material adverse effect on Apexx or eSOFT;
o The receipt of all consents, authorizations, orders, and
approvals of, or filings or registrations with, any
governmental entity required to consummate the merger;
o The approval for listing on the Nasdaq SmallCap Market of the
eSOFT common stock to be issued to the Apexx stockholders
pursuant to the merger agreement;
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<PAGE> 89
o eSOFT's independent public accountants, BDO Seidman, LLP,
shall have advised eSOFT that the transactions contemplated by
the merger agreement will be treatable as a
pooling-of-interests;
o The receipt by both Apexx and eSOFT of all documents and
instruments contemplated by the merger agreement in form and
substance reasonably satisfactory to eSOFT, Apexx, and their
respective counsels.
o The law firm of Davis, Graham & Stubbs LLP shall have rendered
an opinion that the merger qualifies as a tax-free
reorganization under Section 368(a) of the Internal Revenue
Code.
Additional Conditions to the Obligations of Apexx
The obligations of Apexx to effect the merger are further subject to
the following conditions, unless waived by Apexx:
o eSOFT shall have performed its agreements contained in the
merger agreement required to be performed on or prior to the
closing.
o The representations and warranties of eSOFT and its wholly
owned subsidiary contained in the merger agreement and any
document delivered in connection with the merger agreement
shall be true and correct as of the closing, and Apexx shall
have received a certificate of the President or a Vice
President of eSOFT, dated the closing date, certifying to such
effect.
o There shall have been delivered to Apexx certificates, dated
within five days of the closing date, of the Secretary of
State of the States of Delaware and Idaho, with respect to the
incorporation, subsistence, and good legal standing of eSOFT
and eSOFT's wholly owned subsidiary, respectively
o There shall have been delivered to Apexx certificates, dated
the closing date, of the Secretary of eSOFT and its wholly
owned subsidiary (i) to the effect that the Certificates of
Incorporation of eSOFT and its subsidiary have not been
amended, (ii) attaching a true and complete copy of the Bylaws
of the eSOFT and its subsidiary as in effect on the closing
date, and (iii) attaching a true and complete copy of the
resolutions of the Board of Directors of eSOFT and its
subsidiary approving the execution and delivery of the merger
agreement and authorizing the consummation of the transactions
contemplated by it.
o There shall have been delivered to Apexx a certificate, dated
the closing date, with respect to the incumbency and
signatures of all officers of eSOFT and eSOFT's wholly owned
subsidiary signing the merger agreement and any other
certificate, agreement, or instrument delivered on behalf of
eSOFT in connection with the merger agreement.
o eSOFT shall have delivered to Apexx an opinion of its counsel
in the form prescribed by the merger agreement.
o The average last sale price per share of eSOFT common stock
for the 10 trading days prior to the Closing Date shall not be
lower than $3.40.
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<PAGE> 90
o eSOFT shall have implemented a mutually agreed upon joint
marketing plan in the first quarter of 1999, in accordance
with a marketing plan attached as an exhibit to the merger
agreement, including, without limitation, fully funding the
marketing spending levels set forth therein.
Additional Conditions to the Obligations of eSOFT and eSOFT's Wholly
Owned Subsidiary
The obligations of eSOFT and eSOFT's wholly owned subsidiary to effect
the merger are further subject to the following conditions, unless waived by
eSOFT:
o Apexx shall have performed its agreements contained in the
merger agreement required to be performed on or prior to the
closing date.
o The representations and warranties of Apexx contained in the
merger agreement and in any document delivered in connection
therewith shall be true and correct as of the Closing Date,
and eSOFT shall have received a certificate of the President
or a Vice President of Apexx, dated the closing date,
certifying to such effect.
o The status of any litigation of Apexx and/or the terms of any
agreements relating to the compromise or dismissal of any
action, suit or proceeding (subject to any restrictions on the
disclosure of such terms) shall be satisfactory to eSOFT.
o Other than with respect to a default identified in the
disclosure schedules to the merger agreement, Apexx shall not
be in material default of a material obligation, where a
default cannot be cured by the closing date, under any of the
material contracts, agreements and other documents identified
in the disclosure schedules to the merger agreement, and eSOFT
shall have received a certificate of the President or a Vice
President of Apexx, dated the closing date, certifying to such
effect.
o Apexx must have obtained and delivered to eSOFT all consents
and approvals of any third parties required in connection with
the execution and delivery of the merger agreement.
o The holders of at least 95% of the issued and outstanding
eSOFT common stock shall have executed and delivered the
Stockholders Agreement to eSOFT.
o The number of Apexx shares that dissent must not consist of
more than five percent (5%) of the issued and outstanding
Apexx common stock.
o There shall have been delivered to eSOFT a certificate, dated
within five days of the closing date, of the Secretary of
State of the State of Idaho, listing all charter documents of
Apexx on file in the office of the Secretary of State and
copies of the Articles of Incorporation of Apexx and all
amendments thereto, certified as true and correct by the
Secretary of State within five days of the closing date.
o There shall have been delivered to eSOFT a certificate, dated
within five days of the closing date, of the Secretary of
State of the State of Idaho or such other jurisdictions, with
respect to the authorization by such jurisdiction of Apexx to
transact business in the jurisdictions identified by Apexx in
the disclosure schedules to the Merger Agreement.
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<PAGE> 91
o There shall have been delivered to eSOFT a certificate, dated
the closing date, of the Secretary of Apexx (i) to the effect
that Apexx's Articles of Incorporation have not been amended,
(ii) attaching a true and complete copy of Apexx's Bylaws as
in effect on the closing date, and (iii) attaching a true and
complete copy of the resolutions of Apexx's Board of Directors
approving the execution and delivery of the merger agreement
and authorizing the consummation of the transactions
contemplated by it.
o There shall have been delivered to eSOFT a certificate, dated
the closing date, with respect to the incumbency and
signatures of all officers of Apexx signing the merger
agreement and any other certificate, agreement or instrument
delivered on behalf of Apexx in connection with the merger
agreement.
o There shall have been no change in the financial condition or
results of operations of Apexx from that reflected in Apexx's
balance sheet delivered pursuant to the merger agreement so as
to result in a Company Material Adverse Change as that term is
defined in the merger agreement.
o eSOFT's independent public accountants, BDO Seidman, LLP,
shall have advised eSOFT that the transactions contemplated by
the merger agreement will be treatable as a
pooling-of-interests;
o Apexx shall have delivered to eSOFT an opinion of its counsel
in the form prescribed by the merger agreement.
o The average last sale price per share of eSOFT common stock
for the 10 trading days prior to the Closing Date shall not be
higher than $9.00.
o Representatives of Apexx, in the presence of eSOFT, shall have
performed a successful live build demonstration of the
software underlying Apexx's TEAM Internet(R)products. Such
live demonstration shall be reasonably designed and performed
so that eSOFT may have the opportunity to confirm to its
satisfaction that the source code version of such software
readily produces the corresponding object code version. Such
demonstration shall be "successful" if (i) it demonstrates to
eSOFT's reasonable satisfaction the accomplishment of any and
all steps as are necessary readily to produce fully functional
object code from the source code, including without
limitation, any steps in which the source code is compiled,
assembled, linked and/or interpreted so as to produce the
object code version of such software, and (ii) such production
of object code is otherwise in accordance with the relevant
representations and warranties made by Apexx in the merger
agreement.
o eSOFT shall have received a letter from Pacific Crest, in form
and substance satisfactory to eSOFT, stating that Pacific
Crest (i) shall look only to Apexx's stockholders for any fees
or expenses in excess of $200,000 otherwise payable by Apexx
to Pacific Crest, (ii) waiving all of Pacific Crest's right to
collect any fees or expenses in excess of $200,000 from Apexx
or eSOFT, and (iii) agreeing that Apexx's $200,000 obligation
to Pacific Crest shall be paid as follows: $50,000 at the time
of Closing, and the balance of $150,000 on the earlier of 45
days after the Closing or upon the completion of a private
placement by eSOFT of securities of eSOFT with a total value
of at least $2,000,000.
In addition to each of the above conditions, the execution and delivery
of each of the agreements discussed under the heading "Documents To Be Executed
In Connection With The Merger Agreement" is a condition to the closing of the
Merger.
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THIRD PARTY CONSENTS
The only material consents, approvals, authorizations of, or filings
with any governmental entity required to consummate the merger are the approval
of the stockholders of eSOFT and Apexx in accordance with the laws of the States
of Delaware and Idaho and the filing of articles of merger with the Secretary of
State of the State of Idaho.
CERTAIN REPRESENTATIONS AND WARRANTIES
The merger agreement contains certain representations and warranties,
subject to certain qualifications, made by eSOFT and Apexx to each other as to,
among other things: their organization, capital structures, corporate
authorization to enter into and consummate the contemplated transactions and
consents and filings needed in connection with them, accuracy of financial
statements and information supplied for use in the registration statement filed
with the Securities and Exchange Commission relating to the merger, required
board and stockholder approvals, the absence of litigation, compliance with
laws, the absence of certain changes or events, environmental matters,
intellectual property, accounting matters, taxes, certain contracts, and
employee benefits and labor matters.
TERMINATION
The merger agreement may be terminated:
o By mutual consent of eSOFT and Apexx;
o By eSOFT or Apexx if the merger has not been consummated by
June 1, 1999;
o By Apexx by resolution of its board of directors if all
additional conditions to the obligations of Apexx referred to
above have not been satisfied by the closing date; or
o By eSOFT by resolution of its board of directors if the board
decides to withdraw or modify its approval or recommendation
of the merger agreement or if all of the additional conditions
to the obligations of eSOFT and eSOFT's wholly owned
subsidiary referred to above have not been satisfied by the
closing date.
TERMINATION FEES
eSOFT and Apexx are each obligated to pay to the other a termination
fee if the merger agreement is terminated under certain circumstances. If eSOFT
withdraws or modifies its recommendation of the merger agreement to eSOFT's
stockholders and this causes Apexx to terminate the merger agreement, eSOFT is
obligated to pay a termination fee of $750,000 to Apexx. If Apexx recommends an
alternative proposal to Apexx's stockholders and this causes eSOFT to terminate
the merger agreement, Apexx is obligated to pay a termination fee of $2,000,000
to eSOFT. The termination fees are payable in cash by wire transfer of
immediately available funds within twenty business days after the merger
agreement is terminated.
DOCUMENTS TO BE EXECUTED IN CONNECTION WITH THE MERGER AGREEMENT
The execution of a Stockholders Agreement, Escrow Agreement, Source
Code Escrow Agreement and several Employment Agreements and Voting Agreements
are conditions to the obligations of eSOFT and Apexx to proceed with the merger.
You should be familiar with the effects these agreements will have, so they are
summarized here. However, you should read these agreements in their
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<PAGE> 93
entirety. All of these agreements have been filed as exhibits to the
registration statement of which this Joint Proxy Statement/Prospectus forms a
part. See "Where You Can Get More Information."
Voting Agreement
Each of Thomas Loutzenheiser, Gayl Loutzenheiser, David Dahms, Albert
Youngwerth, Heather Youngwerth, Lawrence Lynch, George Minow, Chris Minow,
William Rivers, and Ray Jenks, who collectively own approximately 50.75% of the
issued and outstanding shares of Apexx common stock, have executed a voting
agreements in which they agreed to vote FOR the merger. These voting agreements
also grant eSOFT authority, in the form of a proxy, to vote all of their Apexx
shares FOR the merger.
Stockholders Agreement
As a condition of eSOFT's obligations to consummate the merger, the
holders of at least 95% of the Apexx common stock must enter into a Stockholders
Agreement with eSOFT. The Stockholders Agreement is attached as Appendix B to
this Joint Proxy Statement/Prospectus. The Stockholders Agreement provides that
the Apexx stockholders will indemnify eSOFT for a period of 12 months following
the merger, against all claims, losses, or damages that eSOFT may suffer due to
any breach of any covenant or agreement of Apexx contained in the merger
agreement or due to any inaccuracy in any representation or warranty of Apexx
contained in the merger agreement.
The agreement to indemnify eSOFT contained in the Stockholders
Agreement is subject to certain limitations. No stockholder is required to
indemnify eSOFT for any losses until the aggregate amount of all such losses
exceeds $200,000. Thereafter, the stockholders must only indemnify eSOFT for
those losses that exceed $200,000. In addition, each stockholder's liability for
eSOFT's losses is limited to the number of shares placed into escrow on such
stockholder's account.
Since eSOFT and Apexx intend the merger to be accounted for as a
"pooling of interests" for accounting purposes, Apexx's affiliates will also
agree in the Stockholders Agreement to certain restrictions on their ability to
sell the eSOFT common stock they are to receive pursuant to the merger
agreement. See "The Proposed Merger -- Anticipated Accounting Treatment."
Escrow Agreement
Ten percent of the eSOFT common stock to be issued to the Apexx
stockholders pursuant to the merger will be held in escrow for the benefit of
the Apexx stockholders pursuant to an Escrow Agreement. These escrowed shares
will be used to reimburse eSOFT for any damages that the Apexx stockholders must
indemnify eSOFT for pursuant to the indemnification provisions of the
Stockholders Agreement. Under the Escrow Agreement, eSOFT may make a claim for
reimbursement against the escrowed shares. If the claim is determined to be one
for which eSOFT in entitled to indemnification, then the escrow agent will
release to eSOFT that number of shares of eSOFT common stock equal to the amount
of the claim, with the shares valued at a price of $4.75 each.
Source Code Escrow Agreement
On January 25, 1999, Apexx and eSOFT entered into an agreement with
Data Securities International, Inc. ("DSI") pursuant to which eSOFT and Apexx
established an escrow account with DSI. The purpose of the escrow account is to
safeguard the confidential technology of Apexx to ensure that, if the merger is
completed, eSOFT will have full access to all of the products and materials of
Apexx. To that end, DSI will retain copies of the proprietary technology and
materials of Apexx and control access to that technology until the merger is
effected or the merger agreement is terminated.
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Loutzenheiser Employment Agreement
If the merger is completed, Thomas Loutzenheiser, the Chairman and
President of Apexx, will be employed by eSOFT on the terms set forth in an
employment agreement (the "Loutzenheiser Agreement") that extends for a
twenty-four month period commencing on the day following the date the merger is
completed. Under the terms of the Loutzenheiser Agreement, eSOFT will be
obligated to pay to Mr. Loutzenheiser the sum of $9,166 per month. Mr.
Loutzenheiser is also eligible to receive a quarterly performance bonus no
greater than $12,500 per quarter based upon mutually agreed company-wide and
department performance criteria.
In addition, Mr. Loutzenheiser will be granted incentive stock options
to acquire 50,000 shares of eSOFT common stock at an exercise price equal to the
fair market value of the eSOFT common stock on the day after the merger is
completed. The options will expire after four years, and will vest over a 36
month period as follows: 7/36 of the options will vest eight months following
the date of grant and 1/36 of the options will vest on the first day of each
month thereafter.
The Loutzenheiser Agreement will include a non-competition provision
that extends for 12 months following his termination and a confidentiality
provision that extends for three years following his termination. The
Loutzenheiser Agreement may be terminated without cause by either eSOFT or Mr.
Loutzenheiser on 30 days notice. If Mr. Loutzenheiser's employment is terminated
by eSOFT without cause, eSOFT must pay Mr. Loutzenheiser his salary for the
greater of six months or the number of months equal to the number of years Mr.
Loutzenheiser has been employed by eSOFT.
Other Employment Agreements
eSOFT will enter into employment agreements with three other Apexx
employees with a range of salary levels and benefits. The term of each of these
employment agreements is twelve months, at salary levels ranging from $6,667 to
$7,500 per month. The employment agreements provide for a quarterly
performance-based bonus ranging from $10,000 to $20,000, based upon agreed upon
company, sales or revenue goals. In addition to monthly compensation and
quarterly bonuses, each of the agreements provides for the grant of options to
purchase 25,000 shares of eSOFT common stock at an exercise price equal to the
fair market value of the eSOFT common stock on the day following the date the
merger is completed. The options will expire after four years, and will vest
over a 36 month period as follows: 7/36 of the options will vest eight months
following the date of grant and 1/36 of the options will vest on the first day
of each month thereafter. Each of these employment agreements also contains
twelve month noncompetition and confidentiality provisions, and each provides
for severance payments to continue following a termination of the employee
without cause for the greater of three months or the number of months equal to
the number of years eSOFT employed the individual.
MANAGEMENT OF THE COMBINED COMPANY AFTER THE MERGER
When the merger is complete, the board of directors of the combined company will
consist of six directors: four directors of eSOFT and two directors to be named
by Apexx. The senior executive officers of eSOFT set forth under the heading
"Management of eSOFT" will continue with the combined company in their current
positions, and Thomas Loutzenheiser, Apexx's current chief executive officer,
will become eSOFT's vice president of product development and a Class III
director following the merger. In addition, Apexx has the right to name an
additional person to be appointed as a Class II eSOFT director after the merger.
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Thomas Loutzenheiser. Mr. Loutzenheiser has over seventeen years of
product development, product management, sales, and marketing experience within
the computer industry, including eight years at IBM, three years at Extended
Systems, Inc., and one year at data-CACHE Corporation. Mr. Loutzenheiser has a
Bachelor of Science in Mechanical Engineering from the University of Washington,
a Master of Science in Engineering Management from Stanford University, and also
completed the one year IBM Marketing and Sales Education Program.
DISSENTERS' RIGHTS
Under Section 30-1-1302 of the Idaho Business Corporations Act,
stockholders are entitled to payment of the fair value of their shares in the
case of a merger requiring stockholder approval. In order to assert dissenter's
rights, a stockholder who wishes to assert such rights must, before a vote is
taken, deliver a written notice to Apexx stating that the stockholder intends to
demand payment for his/her shares if the proposed action is taken. In addition,
the stockholder must not vote in favor of the proposed action.
If the proposed corporate action is approved by a vote of the
stockholders, the corporation must send a notice to the dissenters who properly
notified the corporation of their intention to dissent before the vote was
taken. This notice, known as the "dissenter's notice" in Idaho, must be sent by
the corporation no later than ten days after the corporate action was taken.
This notice to the dissenting stockholders will state where a dissenting
stockholder must demand payment and how to surrender his/her stock certificates
in exchange for payment of the fair value of the surrendered stock certificates.
When the dissenting stockholder receives the dissenter's notice from
the corporation, he/she must then demand payment for his/her shares, certify
that he/she was a stockholder before the date set for the right to dissent, and
deposit his/her stock certificates as directed in the dissenter's notice. Once
the dissenting stockholder complies with these conditions, the corporation must
then pay the dissenting stockholder an amount that the corporation believes to
be the fair value of the surrendered stock certificates.
A copy of the sections of the Idaho Business Corporation Act that
discuss the rights of stockholders to dissent from a transaction is attached as
Appendix D to this Joint Proxy Statement/Prospectus.
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<PAGE> 96
COMPARATIVE RIGHTS OF STOCKHOLDERS
Apexx is an Idaho corporation and the rights of Apexx stockholders are
currently governed by Idaho law. If the Merger is consummated, Apexx
stockholders will become stockholders of eSOFT, which is a Delaware corporation.
Set forth below is a comparison of the rights of stockholders under Delaware and
Idaho law.
<TABLE>
<CAPTION>
DELAWARE LAW IDAHO LAW
- --------------------------------- ------------------------------------------------ ----------------------------------------------
<S> <C> <C>
REMOVAL OF DIRECTORS Generally, stockholders may remove Generally, stockholders may remove
directors, with or without cause, by a vote directors, with or without cause, by a vote
of the holders of a majority of the shares of the holders of a majority of the shares
entitled to vote in an election of directors. entitled to vote in an election of directors.
- --------------------------------- ------------------------------------------------ ----------------------------------------------
FILLING VACANCIES ON THE A vacancy on the board of directors may Unless the articles of incorporation
BOARD OF DIRECTORS be filled by the majority vote of the provide otherwise, a vacancy on the board
remaining directors. of directors may be filled by:
Newly created directorships resulting from o a vote of the stockholders; or
an increase in the number of directors o the directors remaining in office.
elected by all of the stockholders who
have the right to vote as a single class may If a vacant office was held by a director
also be filled by the remaining directors. elected by a voting group of stockholders,
only the stockholders of that voting group
are entitled to vote to fill the vacancy if
it is filled by a vote of the stockholders.
Vacancies and newly created director
ships which arise in director positions
which the holders of a class or series of
stock are entitled to elect may be filled by
a majority or the sole remaining
director(s) elected by the same series or
class.
- --------------------------------- ------------------------------------------------ ----------------------------------------------
NOTICE OF STOCKHOLDER Notice of stockholder meetings must be Notice of stockholder meetings must be
MEETINGS given no less than 10 and no more than 60 given no less than 10 and no more than 60
days before a meeting. days before a meeting.
- --------------------------------- ------------------------------------------------ ----------------------------------------------
ADJOURNMENT AND NOTICE Stockholders' meetings may be adjourned Stockholders' meetings may be adjourned
OF STOCKHOLDER MEETINGS for up to 30 days without giving notice of for up to 30 days without giving notice of
the adjourned meeting other than by the adjourned meeting other than by
announcement at the adjourned meeting announcement at the adjourned meeting
(unless the Bylaws provide otherwise). (unless the Bylaws provide otherwise).
For an adjournment more than 30 days,
notice must be given as it was for the
original meeting.
- --------------------------------- ------------------------------------------------ ----------------------------------------------
Call for Special Special meetings of stockholders may be Special meetings of stockholders may be
Stockholder Meetings called by the board of directors or by a called by the board of directors, by a
person authorized by the charter or person authorized by the charter or
bylaws. bylaws, or by the holders of at least 20%
of all votes entitled to be cast on any
issue.
- --------------------------------- ------------------------------------------------ ----------------------------------------------
</TABLE>
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<PAGE> 97
<TABLE>
<CAPTION>
DELAWARE LAW IDAHO LAW
- --------------------------------- ------------------------------------------------ ----------------------------------------------
<S> <C> <C>
Stockholder Consent in Stockholder action may be taken without Stockholder action may be taken without
Lieu of Meeting a meeting by a written consent signed by a meeting by a written consent signed by
stockholders having at least the minimum all the stockholders entitled to vote on the
number of votes that would be necessary action.
to authorize the action at a meeting. The
company's charter may prohibit action by
written consent.
- --------------------------------- ------------------------------------------------ ----------------------------------------------
BUSINESS INTRODUCED BY Under the Exchange Act, stockholders Under the Exchange Act, stockholders
STOCKHOLDERS may submit a proposal to be included in a may submit a proposal to be included in a
company's proxy statement if the company's proxy statement if the
stockholder: stockholder:
o Owns at least 1% or $2,000 o Owns at least 1% or $2,000
market value of the securities market value of the securities
entitled to be voted on the entitled to be voted on the
proposal; proposal;
o Has owned the securities for at o Has owned the securities for at
least 1 year prior to the date of least 1 year prior to the date of
the proposal; and the proposal; and
o Continues to own the securities o Continues to own the securities
through the date of the meeting. through the date of the meeting.
The proposal must be received by the The proposal must be received by the
company 120 calendar days before the company 120 calendar days before the
date on which the proxy statement was date on which the proxy statement was
released to stockholders for the previous released to stockholders for the previous
year's meeting. year's meeting.
- --------------------------------- ------------------------------------------------ ----------------------------------------------
STOCKHOLDER PROPOSALS The company may omit a stockholder The company may omit a stockholder
THAT MAY BE EXCLUDED proposal for various reasons, such as if proposal for various reasons, such as if
the proposal: the proposal:
o Is not proper for stockholder o Is not proper for stockholder
action; action;
o Would require the company to o Would require the company to
violate the law or is beyond the violate the law or is beyond the
company's power; company's power;
o Is contrary to SEC proxy rules; o Is contrary to SEC proxy rules;
o Involves a personal claim or o Involves a personal claim or
grievance; grievance;
o Relates to insignificant o Relates to insignificant
operations of the company; operations of the company;
o Relates to the conduct of the o Relates to the conduct of the
company's ordinary business; company's ordinary business;
o Relates to an election to office; o Relates to an election to office;
o Counters a proposal to be o Counters a proposal to be
submitted by the company at the submitted by the company at the
same meeting; same meeting; or
o Deals with the same matter as a o Deals with the same matter as a
prior proposal that receive little prior proposal that receive little
support; or support.
o Relates to specific amounts of
cash or stock dividends.
- --------------------------------- ------------------------------------------------ ----------------------------------------------
</TABLE>
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<PAGE> 98
<TABLE>
<CAPTION>
DELAWARE LAW IDAHO LAW
- --------------------------------- ------------------------------------------------ ----------------------------------------------
<S> <C> <C>
DISSENTER'S RIGHTS Stockholders are entitled to exercise Stockholders are entitled to dissent from
dissenter's rights and receive fair value and obtain fair value for their shares if the
for their shares in the event of a merger if holders comply with the requirements of
the holders comply with the requirements sections 30-1-1302 to 30-1-1323 of the
of section 262 of the DGCL. Idaho Business Corporations Act.
Appraisal rights are not available if: Appraisal rights are not available if:
o Before the merger, the o The shares were registered on a
corporation was listed on a national securities exchange;
national securities exchange or o The shares were listed on the
similar system; national market systems of
o The stock of the corporation was Nasdaq; or
held by more than 2,000 o The shares were held of record by
stockholders; at least two thousand
o The corporation survived the stockholders on the date fixed to
merger and the approval of its determine stockholders entitled to
stockholders was not required for vote on the proposed corporate
the merger because the merger action.
agreement did not amend the
surviving corporation's certificate
of incorporation and did not
provide for the issuance of
common stock of the survivor in
excess of 20% of such survivor's
shares outstanding immediately
prior to the merger; or
o The merger was with or into a
wholly-owned subsidiary and
certain conditions were met.
- --------------------------------- ------------------------------------------------ ----------------------------------------------
DERIVATIVE ACTIONS: WHO Derivative actions may be brought in Derivative actions may be brought in
MAY BRING THEM Delaware by a stockholder on behalf of, Idaho by a stockholder on behalf of, and
and for the benefit of, the corporation. for the benefit of, the corporation. The
The stockholder must have been a stockholder must have been a stockholder
stockholder of the corporation at the time of the corporation at the time of the
of the transaction of which he complains. transaction of which he complains, or
have become a stockholder through
transfer by operation of law from one
who was a stockholder at that time, or
fairly and adequately represent the
interests of the corporation in enforcing
the rights of the corporation.
- --------------------------------- ------------------------------------------------ ----------------------------------------------
</TABLE>
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<PAGE> 99
<TABLE>
<CAPTION>
DELAWARE LAW IDAHO LAW
- --------------------------------- ------------------------------------------------ ----------------------------------------------
<S> <C> <C>
DERIVATIVE ACTIONS: The stockholder must first seek remedial The stockholder must first make a written
REQUIREMENTS action from the board of directors unless demand upon the board of directors and
a demand for redress is excused. wait ninety days from the date of the
demand before filing a derivative action,
The board of directors can appoint an unless the board rejects the demand
independent litigation committee to before the ninety day period expires or
review the stockholder's request for a unless irreparable injury to the
derivative action and the litigation corporation would result by waiting for
committee, acting independently, the expiration of the ninety day period.
reasonably and in good faith, can
terminate the stockholder's action subject
to a court's review of the committee's
independence, good faith and reasonable
investigation.
- --------------------------------- ------------------------------------------------ ----------------------------------------------
DERIVATIVE ACTIONS: When a derivative action proceeds, the When a derivative action proceeds, the
REMEDIES court may apply a variety of legal and court may apply a variety of legal and
equitable remedies on behalf of the equitable remedies on behalf of the
corporation which vary depending on the corporation which vary depending on the
facts and circumstances of the case and facts and circumstances of the case and
the nature of the claim brought. the nature of the claim brought.
- --------------------------------- ------------------------------------------------ ----------------------------------------------
DIVIDENDS AND Subject to any restrictions contained in a Subject to restrictions contained in the
DISTRIBUTIONS corporation's charter, the directors corporation's articles of incorporation,
generally may declare and pay dividends: the directors generally may declare and
pay dividends unless:
o Out of surplus (defined as the
excess, if any, of net assets ovor o The corporation would not be
stated capital) or, when no able to pay its debts as they
surplus exists; become due in the usual course of
o Out of net profits for the fiscal business; or
year in which the dividend is o The corporation's total assets
declared and/or the preceding would be less than the sum of its
fiscal year. total liabilities plus the amount
that would be needed if the
Dividends may not be paid out of net corporation were to be dissolved
profits if the stated capital of the and distributions had to be made
corporation is less than the aggregate to satisfy the preferential rights of
amount of stated capital represented by those stockholders whose rights
the issued and outstanding stock of all are superior to those receiving the
classes having a preference upon the current distribution.
distribution of assets.
- --------------------------------- ------------------------------------------------ ----------------------------------------------
DIRECTOR QUALIFICATIONS Delaware law has no residency Idaho law has no residency requirement
requirement for directors. for directors.
- --------------------------------- ------------------------------------------------ ----------------------------------------------
NUMBER OF DIRECTORS The number of directors of a Delaware The number of directors of an Idaho
corporation shall be fixed by, or in the corporation shall be fixed by, or in the
manner provided in, the bylaws, unless manner provided in, the bylaws, unless
the charter fixes the number of directors. the charter fixes the number of directors.
- --------------------------------- ------------------------------------------------ ----------------------------------------------
</TABLE>
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<PAGE> 100
<TABLE>
<CAPTION>
DELAWARE LAW IDAHO LAW
- --------------------------------- ------------------------------------------------ ----------------------------------------------
<S> <C> <C>
INDEMNIFICATION OF The DGCL authorizes a corporation to The Idaho Business Corporation Act
OFFICERS AND DIRECTORS indemnify the following persons: authorizes a corporation to indemnify
directors and officers in certain
o Directors circumstances.
o Officers
o Employees and The corporation may indemnify against
o Agents all reasonable expenses (including
attorneys' fees) for all judgments, fines
The corporation may indemnify against and amounts paid in settlement.
all reasonable expenses (including
attorneys' fees) for all judgments, fines
and amounts paid in settlement. These
indemnification rights are not exclusive
of other indemnification rights.
- --------------------------------- ------------------------------------------------ ----------------------------------------------
REQUIREMENTS OF Indemnification is only available if: Indemnification is only available if:
INDEMNIFICATION
o The indemnified person acted in o The indemnified person acted in
good faith and in a manner which good faith and in a manner which
he reasonably believed to be in, he reasonably believed to be in,
or not opposed to, the best or not opposed to, the best
interests of the corporation; and interests of the corporation; and
o In the case of a criminal o In the case of a criminal
proceeding, had no reasonable proceeding, had no reasonable
cause to believe his conduct was cause to believe his conduct was
unlawful. unlawful.
No indemnification shall be made if the No indemnification shall be made if it is
individual is held liable to the company, determined that the individual did not
unless the court determines that the meet the above listed standards or is
individual is fairly and reasonably determined to be liable on the basis that
entitled to indemnification for the amount he received a financial benefit to which
of expenses the court deems proper. he was not entitled.
- ---------------------------------- ------------------------------------------------ ----------------------------------------------
DETERMINATION OF A corporation's determination of whether A corporation's determination of whether
INDEMNIFICATION to indemnify someone is to be made: to indemnify someone is to be made:
o By a majority vote of the o By a majority vote of the board of
disinterested directors (even if directors if there are two or more
less than a quorum); disinterested directors;
o By a committee of disinterested o By a committee of disinterested
directors designated by the directors designated by the
majority vote of the disinterested majority vote of the disinterested
directors (even if less than a directors (even if less than a
quorum); quorum);
o By independent legal counsel if o By special legal counsel if there
there are no disinterested are fewer than two disinterested
directors or if the disinterested directors; or
directors so direct; or o By the stockholders, but shares
o By the stockholders. owned by or voted by a director
who is not disinterested may not
be voted.
- ---------------------------------- ------------------------------------------------ ----------------------------------------------
</TABLE>
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<TABLE>
<CAPTION>
DELAWARE LAW IDAHO LAW
- --------------------------------- ------------------------------------------------ ----------------------------------------------
<S> <C> <C>
Where the person defends a matter Where the person defends a matter
successfully, indemnification for successfully, indemnification for
reasonable expenses is mandatory. reasonable expenses is mandatory.
Officers' and directors' expenses may be Officers' and directors' expenses may be
paid in advance of final disposition if the paid in advance of final disposition if the
person agrees to repay the advances if he person agrees to repay the advances if he
is later determined not to be entitled to is later determined not to be entitled to
indemnification. Advance payment for indemnification.
other employees is at the board's
discretion.
- --------------------------------- ------------------------------------------------ ----------------------------------------------
INSURANCE ON BEHALF OF The DGCL permits a corporation to The Idaho Business Corporation Act
INDEMNITEES maintain insurance on behalf of an permits a corporation to maintain
indemnitee against any liability or insurance on behalf of an indemnitee
expenses incurred in the capacity in which against any liability or expenses incurred
he serves the corporation or arising out of in the capacity in which he serves the
his status as such, whether or not the corporation or arising out of his status as
corporation would have the power to such, whether or not the corporation
indemnify him against such expenses and would have the power to indemnify him
liabilities under the applicable provisions against such expenses and liabilities under
of the DGCL. the applicable provisions of the Idaho
Business Corporation Act.
- --------------------------------- ------------------------------------------------ ----------------------------------------------
AMENDMENT TO ARTICLES OF The DGCL requires the approval of the The Idaho Business Corporation Act
INCORPORATION holders of a majority of the outstanding requires the approval of the holders of a
stock entitled to vote for any amendment majority of the outstanding stock entitled
to the certificate of incorporation unless to vote for an amendment to the articles of
the level of approval is increased by the incorporation unless the articles of
certificate of incorporation. If the incorporation provide otherwise, or unless
amendment proposes to change the the board of directors adopts one of the
number or par value of shares or adversely amendments permitted by section 30-1-
affect the rights of a particular class of 1002 of the Idaho Business Corporation
stock, that class is entitled to vote Act.
separately on the amendment, whether or
not it is designated as voting stock.
- --------------------------------- ------------------------------------------------ ----------------------------------------------
AMENDMENT TO THE The DGCL provides stockholders with the The board of directors may amend or
BYLAWS right to amend the bylaws, although a repeal the corporation's bylaws unless the
corporation is permitted in its charter to articles of incorporation reserve the power
give this right to the directors as well. exclusively to the stockholders or the
Director action is subject to being stockholders, in amending or repealing a
amended by stockholders. particular bylaw, provide expressly that
the board of directors may not amend or
repeal that bylaw.
The stockholders may amend or repeal the
bylaws even though the board of directors
may also do so.
- --------------------------------- ------------------------------------------------ ----------------------------------------------
</TABLE>
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<PAGE> 102
PROPOSAL TO ELECT AN eSOFT DIRECTOR
Only eSOFT stockholders of record on April 16, 1999 are eligible to
vote for this proposal. Apexx stockholders will not be asked at the Apexx
meeting to vote for the election of eSOFT directors.
There are currently three members of eSOFT's board of directors. The
members of eSOFT's board of directors are divided into three classes. Class I
consists of one director who is serving a term that expires at the eSOFT
meeting. Class II consists of one director who is serving a term expiring at the
2000 annual meeting of eSOFT stockholders. Class III consists of two directors
who are serving a term expiring at the 2001 annual meeting of eSOFT
stockholders. If the merger with Apexx is approved, Thomas Loutzenheiser,
Apexx's current chief executive officer, will be appointed as a Class III
director with a two-year term expiring at the 2001 annual meeting of eSOFT
stockholders. In addition, Apexx has the right to name an additional person to
be appointed as a Class II eSoft director with a one-year term expiring at the
2000 annual meeting of eSOFT stockholders. In each case, a director services for
the designated term and until his respective successor is elected and qualified.
Vacancies on the eSOFT board of directors may be filled by the affirmative vote
of a majority of the remaining directors then in office. A director elected to
fill a vacancy (including a vacancy created by an increase in the board of
directors) shall serve for the remainder of the full term of the class of
directors in which the vacancy occurred or the new directorship was created.
In November 1998, the eSOFT board of directors appointed Jeffrey Finn
as a Class I director to fill a vacancy in the eSOFT board of directors. The
term of Mr. Finn expires at the eSOFT meeting. The eSOFT board of directors has
nominated Jeffrey Finn for election as a Class I director. In the event Mr. Finn
is unable to or declines to serve as a director at the time of the eSOFT meeting
(which is not anticipated), proxies will be voted for the election of the
person, if any, as may be designated by the present eSOFT board of directors.
Information about Mr. Finn can be found under the heading "eSOFT Management."
A majority of the shares of eSOFT common stock represented and voting
at the eSOFT meeting is required to elect Mr. Finn as a Class I eSOFT director.
THE eSOFT BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS OF eSOFT VOTE "FOR" THE ELECTION OF JEFFREY FINN AS A CLASS I
DIRECTOR OF eSOFT.
PROPOSAL TO INCREASE THE NUMBER OF SHARES OF
eSOFT COMMON STOCK ISSUABLE UNDER eSOFT'S EQUITY INCENTIVE PLAN
Only eSOFT stockholders of record on April 16, 1999 are eligible to
vote for this proposal. Apexx stockholders will not be asked at the Apexx
meeting to vote for the proposal to increase the number of shares of eSOFT
common stock issuable under eSOFT's equity incentive plan.
eSOFT's Board of Directors has approved an amendment of eSOFT's equity
incentive plan, subject to stockholder approval, to increase the number of
shares authorized for issuance under the equity incentive plan by 1,200,000
shares, from a total of 1,700,000 shares of eSOFT common stock to 2,900,000
shares of eSOFT common stock. eSOFT's Board of Directors approved the amendment
to ensure that eSOFT can continue to grant stock awards to employees,
consultants and non-employee directors at levels determined appropriate by the
eSOFT board and its compensation committee.
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<PAGE> 103
At March 1, 1999, options (net of canceled or expired options) covering
an aggregate of 1,222,916 shares of eSOFT common stock had been granted under
the equity incentive plan, and 477,084 shares remained available for future
grant under the plan, plus those shares, if any, that might in the future be
returned to the plan as a result of the cancellation or expiration of options.
If the merger with Apexx is consummated, eSOFT's wholly owned
subsidiary will assume each of the Apexx option plans currently place, and eSOFT
will issue shares of eSOFT common stock in exchange for shares of Apexx common
stock otherwise issuable upon the exercise of Apexx options. As a result of this
assumption, eSOFT will be obligated to issue up to 1,356,003 shares of eSOFT
common stock upon the exercise of Apexx options. The new shares that would be
issuable if the amendment to eSOFT's equity incentive plan is approved would be
in addition to the shares of eSOFT common stock issuable to holders of Apexx
options. Accordingly, if both the merger proposed and the proposal to amend
eSOFT's equity incentive plan are approved, eSOFT would be able to issue up to
4,256,003 shares of eSOFT common stock upon the exercise of eSOFT and Apexx
options.
A majority of the shares of eSOFT common stock represented and voting
at the eSOFT meeting is required for approval of the proposal to increase the
number of shares eligible for issuance under eSOFT's equity incentive plan.
THE eSOFT BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT THE
STOCKHOLDERS OF eSOFT VOTE "FOR" THE PROPOSAL TO INCREASE THE NUMBER OF SHARES
OF eSOFT COMMON STOCK ISSUABLE UNDER eSOFT'S EQUITY INCENTIVE PLAN.
THE eSOFT SPECIAL MEETING
PURPOSE, TIME AND PLACE
This Joint Proxy Statement/Prospectus is being furnished to
stockholders of eSOFT in connection with the solicitation of proxies by eSOFT
from holders of eSOFT common stock for use at the eSOFT meeting to be held on
May 20, 1999 at 9:00 a.m., at 555 30th Street, Boulder, Colorado 80303, and at
any adjournments or postponements thereof. At the eSOFT meeting, holders of
eSOFT common stock will be asked to consider and vote upon:
o The proposal to approve the merger agreement;
o The election of Jeffrey Finn as an eSOFT director; and
o The proposal to increase the number of shares of eSOFT common stock
issuable under eSOFT's equity incentive plan.
The eSOFT board of directors has unanimously determined that the merger
agreement, the merger and the other transactions contemplated thereby are
advisable and fair to and in the best interests of eSOFT and its stockholders,
approved the proposed merger transaction and unanimously recommends that eSOFT
stockholders vote FOR the approval of the merger agreement. In addition, the
eSOFT board of directors unanimously recommends that eSOFT stockholders vote FOR
the election of Jeffrey Finn as an eSOFT director, and FOR the proposal to
increase the number of shares of eSOFT common stock issuable under eSOFT's
equity incentive plan.
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<PAGE> 104
RECORD DATE; QUORUM; VOTE REQUIRED
Record Date
eSOFT has established the close of business on April 16, 1999 as the
record date to determine the holders of eSOFT common stock entitled to notice
of, and to vote at, the eSOFT meeting. Only holders of record of eSOFT common
stock at the close of business on the record date will be entitled to notice of,
and to vote at, the eSOFT meeting. At the close of business on the record date,
7,345,518 shares of eSOFT common stock were outstanding and were held by
approximately 150 holders of record. The eSOFT common stock constitutes the only
outstanding class of voting securities of eSOFT. Each share of eSOFT common
stock is entitled to one vote on the proposal to approve the merger agreement.
Votes may be cast at the eSOFT meeting in person or by proxy.
Quorum
The presence at the eSOFT meeting of the holders of a majority of the
shares of eSOFT common stock, either in person or by proxy, is necessary to
constitute a quorum to transact business at the eSOFT meeting. In the event that
a quorum is not present at the eSOFT meeting, it is expected that such meeting
will be adjourned or postponed in order to solicit additional proxies.
Abstentions and broker non-votes will be counted as shares present for
purposes of determining the presence or absence of a quorum at the eSOFT
meeting. Broker non-votes are shares held by brokers or nominees that are
represented at a meeting but with respect to which the broker or nominee is not
empowered to vote on a particular matter.
Vote Required
A majority of the shares of eSOFT common stock represented and voting
at the eSOFT meeting is required for approval of the merger proposal, the
proposal to increase the number of shares eligible for issuance under eSOFT's
equity incentive plan and to elect a Class I eSOFT director. Abstentions may be
specified with respect to the proposal to approve the merger agreement by
properly marking the "ABSTAIN" box on the proxy for such proposal. Abstentions,
broker non-votes and failures to vote will have the effect of votes cast against
the proposal to approve the merger agreement.
Voting Power of eSOFT Directors and Executive Officers
As of the close of business on the record date and excluding shares
underlying stock options, eSOFT's directors and executive officers and their
affiliates may be deemed to be the beneficial owners of, and had the power to
vote, 1,281,389 outstanding shares of eSOFT common stock, representing
approximately 16.9% of the then outstanding shares of eSOFT common stock. eSOFT
believes that each of its directors and executive officers intends to vote for
approval of each of the proposals to be considered at the eSOFT meeting.
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<PAGE> 105
PROXIES
Shares of eSOFT common stock represented by properly executed proxies
received in time for the eSOFT meeting will be voted at the eSOFT meeting in the
manner specified on such proxies. Proxies that are properly executed but do not
contain voting instructions will be voted FOR the proposal to approve the merger
agreement. No other matter other than the proposal to approve the merger
agreement, the proposal to elect Jeffrey Finn as an eSOFT director, and the
proposal to increase the number of shares of eSOFT common stock issuable under
eSOFT's equity incentive plan may be brought before the eSOFT meeting.
In the event that a quorum is not present at the time the eSOFT
meeting is convened, or if for any other reason eSOFT believes that additional
time should be allowed for the solicitation of proxies, eSOFT may adjourn the
eSOFT meeting with or without a vote of the stockholders. If eSOFT proposes to
adjourn the eSOFT meeting by a vote of the stockholders, the persons named in
the enclosed form of proxy will vote all shares of eSOFT common stock for which
they have voting authority in favor of an adjournment.
eSOFT stockholders whose names appear on the stock records of eSOFT
should return their proxy card to eSOFT's transfer agent, The Bank of Montreal
Trust Company , in the envelope provided with the proxy card. eSOFT stockholders
who hold their eSOFT common stock in the name of a bank, broker or other nominee
should follow the instructions provided by their bank, broker or nominee on
voting their shares.
The grant of a proxy on the enclosed eSOFT proxy card does not
preclude a stockholder from voting in person at the eSOFT meeting.
REVOCATION
eSOFT Stockholders whose names appear on the stock records of eSOFT
may revoke their proxy card at any time prior to its exercise by:
o giving written notice of such revocation to eSOFT's Secretary;
o appearing and voting in person at the meeting; or
o properly completing and executing a later-dated proxy and delivering it
to eSOFT's Secretary at or before the meeting.
The presence of an eSOFT stockholder of record without voting at the
meeting will not automatically revoke a proxy, and any revocation during the
meeting will not affect votes previously taken. eSOFT stockholders who hold
their eSOFT common stock in the name of a bank, broker or other nominee should
follow the instructions provided by their bank, broker or nominee in revoking
their previously voted shares.
PROXY SOLICITATION
eSOFT will bear the cost of solicitation of proxies from its
stockholders. In addition to solicitation by mail, the directors, officers and
employees of eSOFT may solicit proxies from eSOFT stockholders by telephone,
fax, telegram or in person. Arrangements will also be made with brokerage houses
and other custodians, nominees and fiduciaries for the forwarding of
solicitation material to the beneficial owners of stock held of record by such
persons, and eSOFT will reimburse such custodians, nominees and fiduciaries for
their reasonable out-of-pocket expenses in connection therewith.
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<PAGE> 106
In addition, eSOFT has retained Morrow & Co., Inc. to assist eSOFT in
the solicitation of proxies from stockholders in connection with the eSOFT
meeting. Morrow & Co. will receive a fee estimated at $7,500 as compensation for
its services and reimbursement of its out-of-pocket expenses in connection
therewith. eSOFT has agreed to indemnify Morrow & Co. against certain
liabilities arising out of or in connection with its engagement.
VALIDITY
All questions as to the validity, form, eligibility (including time of
receipt), and acceptance of proxy cards will be determined by eSOFT's board of
directors. Any such determination will be final and binding. The eSOFT board of
directors will have the right to waive any irregularities or conditions as to
the manner of voting. eSOFT may accept proxies by any reasonable form of
communication so long as eSOFT can be reasonably assured that the communication
is authorized by the eSOFT stockholder.
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THE APEXX SPECIAL MEETING
PURPOSE, TIME AND PLACE
This Joint Proxy Statement/Prospectus is being furnished to
stockholders of Apexx in connection with the solicitation of proxies by Apexx
from holders of Apexx common stock for use at the Apexx meeting to be held on
May 20, 1999 at 4:00 p.m., at The Statehouse Inn, 981 Grove Street, Boise, Idaho
83702, and at any adjournments or postponements thereof. At the Apexx meeting,
holders of Apexx common stock will be asked to consider and vote upon the
proposal to approve the merger agreement.
The Apexx Board of Directors has unanimously determined that the
merger agreement, the merger and the other transactions contemplated thereby are
advisable and fair to and in the best interests of Apexx and its stockholders,
approved the proposed merger transaction and unanimously recommends that Apexx
stockholders vote FOR the approval of the merger agreement.
RECORD DATE; QUORUM; VOTE REQUIRED
Record Date
Apexx has established the close of business on April 16, 1999 as the
record date to determine the holders of Apexx common stock entitled to notice
of, and to vote at, the Apexx meeting. Only holders of record of Apexx common
stock at the close of business on the record date will be entitled to notice of,
and to vote at, the Apexx meeting. At the close of business on the record date,
1,421,305 shares of Apexx common stock were outstanding and were held by
approximately 56 holders of record. The Apexx common stock constitutes the only
outstanding class of voting securities of Apexx. Each share of Apexx common
stock is entitled to one vote on the proposal to approve the merger agreement.
Votes may be cast at the Apexx meeting in person or by proxy.
Quorum
The presence at the Apexx meeting of the holders of a majority of the
shares of Apexx common stock, either in person or by proxy, is necessary to
constitute a quorum to transact business at the Apexx meeting. In the event that
a quorum is not present at the Apexx meeting, it is expected that such meeting
will be adjourned or postponed in order to solicit additional proxies.
Abstentions and broker non-votes will be counted as shares present for
purposes of determining the presence or absence of a quorum at the Apexx
meeting. Broker non-votes are shares held by brokers or nominees that are
represented at a meeting but with respect to which the broker or nominee is not
empowered to vote on a particular matter.
Vote Required
Approval of the proposal to approve the merger agreement requires the
affirmative vote by the holders of a majority of the outstanding shares of Apexx
common stock as of the record date. Abstentions may be specified with respect to
the proposal to approve the merger agreement by properly marking the "ABSTAIN"
box on the proxy for such proposal. Abstentions, broker non-votes and failures
to vote will have the effect of votes cast against the proposal to approve the
merger agreement.
Voting Power of Apexx Directors and Executive Officers
As of the close of business on the record date and excluding shares
underlying stock options, Apexx's directors and executive officers and their
affiliates may be deemed to be the beneficial owners of, and
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had the power to vote, 1,188,842 outstanding shares of Apexx common stock,
representing approximately 61% of the then outstanding shares of Apexx common
stock. Apexx believes that each of its directors and executive officers intends
to vote for approval of the proposal to approve the merger agreement.
Voting Agreements
Certain Apexx stockholders collectively owning approximately 50.75% of
the issued and outstanding shares of Apexx common stock have executed voting
agreements in which they agreed to vote in favor of the merger. Because holders
of a majority of the outstanding shares of Apexx common stock have agreed to
vote in favor of the merger, Apexx stockholder approval of the merger is
assured. However, holders of at least 95% of the issued and outstanding Apexx
common stock must sign and deliver the Stockholders Agreement to eSOFT to
satisfy one of the conditions to the closing of the merger.
PROXIES
Shares of Apexx common stock represented by properly executed proxies
received in time for the Apexx meeting will be voted at the Apexx meeting in the
manner specified on such proxies. Proxies that are properly executed but do not
contain voting instructions will be voted FOR the proposal to approve the merger
agreement. No matters other than the proposal to approve the merger agreement
may be brought before the Apexx meeting.
In the event that a quorum is not present at the time the Apexx
meeting is convened, or if for any other reason Apexx believes that additional
time should be allowed for the solicitation of proxies, Apexx may adjourn the
Apexx meeting with or without a vote of the stockholders. If Apexx proposes to
adjourn the Apexx special meeting by a vote of the stockholders, the persons
named in the enclosed form of proxy will vote all shares of Apexx common stock
for which they have voting authority in favor of an adjournment.
Apexx stockholders whose names appear on the stock records of Apexx
should return their proxy card to Apexx's corporate Secretary in the envelope
provided with the proxy card. The grant of a proxy on the enclosed Apexx proxy
card does not preclude a stockholder from voting in person at the Apexx meeting.
REVOCATION
Apexx Stockholders whose names appear on the stock records of Apexx
may revoke their proxy card at any time prior to its exercise by:
o giving written notice of such revocation to Apexx's Secretary;
o appearing and voting in person at the meeting; or
o properly completing and executing a later-dated proxy and delivering it
to Apexx's Secretary at or before the meeting.
The presence of an Apexx stockholder of record without voting at the
meeting will not automatically revoke a proxy, and any revocation during the
meeting will not affect votes previously taken.
Apexx stockholders who hold their Apexx common stock in the name of a
bank, broker or other nominee should follow the instructions provided by their
bank, broker or nominee in revoking their previously voted shares.
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PROXY SOLICITATION
Apexx will bear the cost of solicitation of proxies from its
stockholders. In addition to solicitation by mail, the directors, officers and
employees of Apexx may solicit proxies from Apexx stockholders by telephone,
fax, telegram or in person.
VALIDITY
All questions as to the validity, form, eligibility (including time of
receipt), and acceptance of proxy cards will be determined by Apexx's board of
directors. Any such determination will be final and binding. The Apexx board of
directors will have the right to waive any irregularities or conditions as to
the manner of voting. Apexx may accept proxies by any reasonable form of
communication so long as Apexx can be reasonably assured that the communication
is authorized by the Apexx stockholder.
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DESCRIPTION OF eSOFT COMMON STOCK
The following is a summary description of eSOFT's common stock. eSOFT
and Apexx stockholders are urged to review eSOFT's certificate of incorporation,
as amended to date, which has been filed as an exhibit to a registration
statement filed with the Securities and Exchange Commission.
GENERAL
eSOFT is authorized to issue 50,000,000 shares of common stock and
5,000,000 shares of preferred stock. The holders of eSOFT common stock are
entitled to vote at all meetings of stockholders, to receive dividends if, as,
and when declared by the board of directors, and to participate in any
distribution of property or assets on the liquidation, winding up, or other
dissolution of eSOFT. eSOFT common stock has no preemptive or conversion rights.
CHANGE IN CONTROL PROVISIONS OF THE ARTICLES OF INCORPORATION AND BYLAWS
Certain provisions of eSOFT's Amended and Restated Certificate of
Incorporation and Bylaws may make it difficult to change control of eSOFT.
Article 4 of the Amended and Restated Certificate of Incorporation allows the
board of directors of eSOFT to determine or alter the rights, preferences,
privileges, and restrictions to be granted to or imposed upon any wholly
unissued series of preferred stock, to fix the number of shares that constitute
any series of preferred stock, and to determine the designation and series of
preferred stock. Article III of the Bylaws establishes what is known as a
"classified board of directors," with three classes of directors designated as
Class I, Class II, and Class III. Each class is elected to serve for a three
year term, with each class up for election in different years so that in any one
year, only one-third of all directors are up for election. At each annual
meeting of stockholders, the successors to the class of directors whose terms
expire at that meeting are elected to serve as directors for a three year term.
MARKET PRICE OF eSOFT COMMON STOCK
On March 16, 1998 eSOFT completed a public offering of its common stock
in Canada on the Vancouver Stock Exchange. On August 6, 1998 eSOFT's stock began
trading on the Nasdaq SmallCap Market under the symbol "ESFT." eSOFT delisted
from the Vancouver Stock Exchange on September 9, 1998
The range of high and low bid quotations for eSOFT's common stock as
quoted (without retail markup or markdown and without commissions) on the Nasdaq
SmallCap Market and the Vancouver Stock Exchange for the past fiscal year and
the first quarter of the current fiscal year is provided below. The figures
shown below do not necessarily represent actual transactions:
<TABLE>
<CAPTION>
HIGH LOW
BID BID
<S> <C> <C>
1999
First Quarter $6.00 $2.75
1998
Fourth Quarter $7.50 $2.13
Third Quarter $8.00 $2.88
Second Quarter $5.35 $4.25
First Quarter $9.00 $4.95
</TABLE>
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On November 23, 1998, the last trading day before the announcement of the
execution of a letter of intent with respect to the merger, the last sale price
for eSOFT common stock was $5.063 per share, as reported by the Nasdaq SmallCap
Market.
There are approximately 150 record holders of eSOFT common stock. The
transfer agent for the eSOFT common stock is The Trust Company of the Bank of
Montreal with offices at First Bank Tower 6th Floor, 595 Burrard Street,
Vancouver, B.C. V7X1L7.
DIVIDENDS
eSOFT 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 eSOFT's board of directors and will
depend upon, among other things, future earnings, capital requirements, eSOFT's
financial condition and general business conditions.
CAUTIONARY STATEMENT CONCERNING
FORWARD LOOKING STATEMENTS
eSOFT and Apexx have made certain forward-looking statements in this
document and in the documents referred to in this document which are subject to
risks and uncertainties. These statements are based on the beliefs and
assumptions of the management of the companies and on the information currently
available to such management. Forward-looking statements include information
concerning possible or assumed future results of eSOFT, Apexx and the combined
company. These statements may be preceded by, followed by, or otherwise include
the words "believes," "expects," "anticipates," "intends," "plans," "estimates"
or similar expressions.
Forward-looking statements are not guarantees of performance. They
involve risks, uncertainties and assumptions. The future results and stockholder
values of eSOFT, Apexx and the combined company may differ materially from those
expressed in these forward-looking statements. Many of the factors that will
determine these results and values are beyond eSOFT's and Apexx's ability to
control or predict. Stockholders of eSOFT and Apexx are cautioned not to put
undue reliance on any forward-looking statements. Except for their ongoing
obligations to disclose material information as required by the federal
securities law, eSOFT and Apexx do not have any intention or obligation to
update forward-looking statements after they distribute this Joint Proxy
Statement/Prospectus, even if new information, future events or other
circumstances have made them incorrect or misleading. For those statements,
eSOFT and Apexx claim the protection of the safe harbor for forward-looking
statements contained in the Private Securities Litigation Reform Act of 1995.
You should understand that various factors, in addition to those
discussed elsewhere in this document and in the documents referred to in this
document, could affect the future results of the combined company following the
merger and could cause results to differ materially from those expressed in such
forward-looking statements. For a discussion of certain of these important
factors, see "Risk Factors Relating to the Merger" and "Risk Factors Relating to
an Investment in eSOFT Common Stock."
LEGAL MATTERS
The validity of the eSOFT common stock to be issued in connection with
the merger as well as certain tax matters relating to the merger will be passed
upon by Davis, Graham & Stubbs LLP, counsel to eSOFT.
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EXPERTS
The financial statements of eSOFT, Inc. as of and for each of the two
years in the period ended December 31, 1998 included in this Joint Proxy
Statement/Prospectus have been audited by BDO Seidman, LLP, independent
certified public accountants, to the extent and for the periods set forth in
their report appearing elsewhere herein, and are included herein in reliance
upon such report given upon the authority of said firm as experts in auditing
and accounting.
The financial statements of Apexx Technology, Inc. for the years ended
December 31, 1997 and 1998, have been audited by Balukoff, Lindstrom & Co.,
P.A., Certified Public Accountants, as set forth in its report attached hereto.
The financial statements referred to above and attached hereto are included
herein in reliance upon such report given upon the authority of such firm as
experts in auditing and accounting.
WHERE YOU CAN FIND MORE INFORMATION
eSOFT files annual, quarterly and other reports, proxy statements and
other information with the Securities and Exchange Commission. You may read and
copy any reports, statements or other information eSOFT files at the Securities
and Exchange Commission's public reference rooms in Washington, D.C., New York,
New York and Chicago, Illinois. Please call the Securities and Exchange
Commission at 1 (800) SEC-0330 for further information on the public reference
rooms. eSOFT's Securities and Exchange Commission filings are also available to
the public from commercial document retrieval services and at the web site
maintained by the Securities and Exchange Commission at "http://www.sec.gov."
eSOFT has filed a Registration Statement on Form S-4 to register with
the Securities and Exchange Commission the eSOFT common stock to be issued to
Apexx stockholders in the merger. This Joint Proxy Statement/Prospectus is part
of that Registration Statement and constitutes a prospectus of eSOFT in addition
to being a proxy statement of eSOFT and Apexx for the eSOFT meeting and the
Apexx meeting. As allowed by Securities and Exchange Commission rules, this
Joint Proxy Statement/Prospectus does not contain all the information you can
find in the Registration Statement or the exhibits to the Registration
Statement.
If you are a stockholder, you can obtain a complete copy of the
Registration Statement, including exhibits, without charge by submitting a
request in writing or by telephone from the appropriate party at the following
addresses:
eSOFT Stockholders: Apexx Stockholders:
Jeffrey Finn Thomas Loutzenheiser
eSOFT, INC. APEXX TECHNOLOGY, INC.
295 Interlocken Boulevard, Suite 500 506 South 11th Street
Broomfield, Colorado 80021 Boise, Idaho 83702
(303) 444-1600 (208) 336-9400
If you would like to request documents from us, please do so by May 5,
1999 in order to receive them before the meetings.
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YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN THIS JOINT PROXY
STATEMENT/PROSPECTUS TO VOTE ON THE APPROVAL OF THE MERGER. WE HAVE NOT
AUTHORIZED ANYONE TO PROVIDE YOU WITH INFORMATION THAT IS DIFFERENT FROM WHAT IS
CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS. THIS JOINT PROXY
STATEMENT/PROSPECTUS IS DATED APRIL 16, 1999. YOU SHOULD NOT ASSUME THAT THE
INFORMATION CONTAINED IN THIS JOINT PROXY STATEMENT/PROSPECTUS IS ACCURATE AS OF
ANY DATE OTHER THAN SUCH DATE, AND NEITHER THE MAILING OF THIS JOINT PROXY
STATEMENT/PROSPECTUS TO STOCKHOLDERS OF eSOFT AND APEXX NOR THE ISSUANCE OF
eSOFT COMMON STOCK IN THE MERGER SHALL CREATE ANY IMPLICATION TO THE CONTRARY.
110
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APPENDIX A
MERGER AGREEMENT
<PAGE> 115
================================================================================
AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
between
eSOFT, INC.,
eSOFT ACQUISITION CORPORATION
and
APEXX TECHNOLOGY, INC.
Dated as of January 25, 1999
================================================================================
<PAGE> 116
TABLE OF CONTENTS
ARTICLE I: THE MERGER
1.1 The Merger .............................................. 1
1.2 The Closing ............................................. 1
1.3 Effective Time .......................................... 2
1.4 Subsequent Actions. ..................................... 2
ARTICLE II: ARTICLES OF INCORPORATION AND BYLAWS OF THE
SURVIVING CORPORATION
2.1 Articles of Incorporation ............................... 2
2.2 Bylaws .................................................. 2
ARTICLE III: DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION
3.1 Directors of the Surviving Corporation .................. 2
3.2 Officers ................................................ 2
ARTICLE IV: EFFECT OF THE MERGER ON SECURITIES OF MERGER SUB
AND THE COMPANY
4.1 Merger Sub Stock ........................................ 2
4.2 The Company Securities .................................. 3
4.3 Exchange of Certificates Representing the Company
Common Stock ........................................... 4
4.4 Adjustment of Exchange Ratios ........................... 6
ARTICLE V: REPRESENTATIONS AND WARRANTIES OF THE COMPANY
5.1 Existence, Good Standing, Corporate Authority,
Compliance With Law .................................... 6
5.2 Authorization, Validity, and Effect of Agreements ....... 6
5.3 Capitalization .......................................... 7
5.4 Other Interests ......................................... 7
5.5 No Violation ............................................ 7
5.6 Financial Statements .................................... 8
5.7 Absence of Undisclosed Liabilities ...................... 8
5.8 Absence of Certain Changes or Events .................... 8
5.9 List of Properties, Contracts, Etc. ..................... 10
5.10 Title to Assets ......................................... 12
5.11 Adequacy of Assets ...................................... 12
5.12 Condition of Inventory, Property, Plant, and Equipment .. 12
5.13 Accounts Receivable and Accounts Payable. ............... 13
5.14 Litigation .............................................. 13
5.15 Taxes ................................................... 13
5.16 Proprietary Rights ...................................... 14
5.17 Royalties ............................................... 15
5.18 Year 2000 Compliance .................................... 16
5.19 Labor Relations. ........................................ 16
5.20 Certain Employee Matters. ............................... 16
5.21 Transactions With Affiliates ............................ 17
5.22 Permits; Compliance With Laws ........................... 17
5.23 Environmental Matters ................................... 17
5.24 Adverse Agreements ...................................... 18
5.25 Fees .................................................... 18
5.26 Books and Records ....................................... 18
5.27 ERISA ................................................... 18
5.28 Pooling of Interests Treatment .......................... 19
5.29 Insurance ............................................... 19
5.30 Disclosure .............................................. 19
ARTICLE VI: REPRESENTATIONS AND WARRANTIES OF PARENT AND
MERGER SUB
6.1 Existence; Good Standing; Corporate Authority;
Compliance with Law .................................... 19
6.2 Authorization, Validity, and Effect of Agreements ....... 20
6.3 Capitalization .......................................... 20
6.4 No Violation ............................................ 21
6.5 SEC Documents ........................................... 21
6.6 No Consent or Approval Required ......................... 21
6.7 Absence of Change ....................................... 21
6.8 Brokerage ............................................... 22
6.9 Accounts Receivable and Accounts Payable. ............... 22
6.10 Litigation .............................................. 22
6.11 Proprietary Rights ...................................... 22
6.12 Royalties ............................................... 22
6.13 Year 2000 Compliance .................................... 23
6.14 Labor Relations. ........................................ 23
6.15 Certain Employee Matters. ............................... 23
6.17 ERISA ................................................... 23
6.18 Pooling of Interests Treatment .......................... 24
ARTICLE VII: COVENANTS
7.1 Alternative Proposals ................................... 24
7.2 Escrow of Source Code. .................................. 25
7.3 Interim Operations ...................................... 25
7.4 Registration Statement/
Proxy Statement ........................................ 26
7.5 Meeting of Stockholders ................................. 26
7.6 Notices to Holders of
i
<PAGE> 117
Company Options ........................................ 27
7.7 Filings; Other Action ................................... 27
7.9 Release of Guaranty ..................................... 27
7.10 Publicity ............................................... 27
7.11 Listing Application ..................................... 28
7.12 Further Action .......................................... 28
7.13 Expenses ................................................ 28
7.14 Pooling ................................................. 28
7.15 Publication of Financials ............................... 28
7.16 Tax Matters ............................................. 28
7.17 Voting Agreements ....................................... 28
7.18 Employment Agreements ................................... 28
ARTICLE VIII: CONDITIONS
8.1 Conditions to Each Party's Obligation to Effect
the Merger ............................................. 29
8.2 Conditions to Obligation of the Company to Effect
the Merger ............................................. 30
8.3 Conditions to Obligation of Parent and Merger Sub to
Effect the Merger ...................................... 31
ARTICLE IX: ESCROW; LIMITS ON LIABILITY
9.1 Delivery of Parent Common Stock to the Escrow Agent ..... 32
9.2 Dividends Declared After the Effective Time ............. 32
9.3 Survival of Representations ............................. 33
9.4 Indemnity ............................................... 33
9.5 Application by Parent to Escrow Agent for Payment
9.6 Distribution of Deferred Merger Consideration to
the Company's Stockholders ............................. 33
9.7 Unclaimed Funds ......................................... 33
ARTICLE X: TERMINATION
10.1 Termination by Mutual Consent ........................... 33
10.2 Termination by Either Parent or the Company ............. 34
10.3 Termination by the Company .............................. 34
10.4 Termination by Parent ................................... 34
10.5 Effect of Termination and Abandonment ................... 34
10.6 Extension; Waiver ....................................... 35
ARTICLE XI: GENERAL PROVISIONS
11.1 Confidentiality ......................................... 35
11.2 Notices ................................................. 35
11.3 Assignment, Binding Effect .............................. 35
11.4 Entire Agreement ........................................ 36
11.5 Amendment ............................................... 36
11.6 Governing Law ........................................... 36
11.7 Counterparts ............................................ 36
11.8 Headings ................................................ 36
11.9 Interpretation .......................................... 36
11.10 Waivers ................................................. 36
11.11 Incorporation of Exhibits ............................... 36
11.12 Severability ............................................ 36
11.13 Enforcement of Agreement ................................ 36
11.14 Subsidiaries ............................................ 37
11.15 Consent ................................................. 37
EXHIBIT A Source Code Escrow Agreement
EXHIBIT B Voting Agreement
EXHIBIT C
C-1 Loutzenheiser Employment Agreement
C-2 Youngwerth Employment Agreement
C-3 Hanousek Employment Agreement
C-4 Jenks Employment Agreement
EXHIBIT D Escrow Agreement
EXHIBIT E Marketing Plan
EXHIBIT F Opinion of Parent Counsel
EXHIBIT G Opinion of Company Counsel
EXHIBIT H Stockholders Agreement
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<PAGE> 118
INDEX OF DEFINITIONS
activities ............................................................... 17
Agreement ................................................................ 1
Alternative Proposal ..................................................... 24
CERCLA ................................................................... 17
Certificate .............................................................. 3
Closing Date ............................................................. 1
Closing .................................................................. 1
Commission ............................................................... 21
Company Breakup Fee ...................................................... 34
Company Insurance Coverage ............................................... 19
Company Common Stock ..................................................... 3
Company Balance Sheet .................................................... 8
Company Material Adverse Effect .......................................... 8
Company Real Property .................................................... 10
Company .................................................................. 1
Company Superior Proposal ................................................ 25
Deferred Merger Consideration Fund ....................................... 32
Deferred Merger Consideration ............................................ 4
Dissenting Share ......................................................... 3
Documentation ............................................................ 11
Effective Time ........................................................... 2
Environmental Requirement ................................................ 18
ERISA .................................................................... 18
ERISA Affiliate .......................................................... 18
Escrow Agent ............................................................. 4
Escrow Agreement ......................................................... 29
Exchange Agent ........................................................... 4
Exchange Act ............................................................. 21
Exchange Fund ............................................................ 4
hazardous waste .......................................................... 23
hazardous waste .......................................................... 17
Hazardous Material ....................................................... 17
IBCA ..................................................................... 1
Initial Merger Consideration ............................................. 4
knowledge ................................................................ 7
Loan Agreement ........................................................... 8
Material Contracts ....................................................... 12
Merger ................................................................... 1
Merger Sub ............................................................... 1
Multiemployer Plan ....................................................... 18
Multiple Employer Plan ................................................... 18
Multiple Employer Plan ................................................... 23
Option ................................................................... 3
Options .................................................................. 3
Outside Closing Date ..................................................... 34
Pacific Crest ............................................................ 5
parachute payments ....................................................... 14
Parent Common Stock ...................................................... 3
Parent Real Property ..................................................... 23
Parent ................................................................... 1
Parent Breakup Fee ....................................................... 35
Parent Reports ........................................................... 21
Parent Preferred Stock ................................................... 20
Parent Material Adverse Effect ........................................... 21
Parent Stock Option ...................................................... 3
Pension Plan ............................................................. 19
Plan ..................................................................... 18
Product .................................................................. 16
Proprietary Rights ....................................................... 9
Proxy Statement/Prospectus ............................................... 26
RCRA ..................................................................... 17
Registration Statement ................................................... 26
Regulatory Filings ....................................................... 8
Securities Act ........................................................... 21
Share Exchange Ratio ..................................................... 3
Software ................................................................. 11
Stock Option Plans ....................................................... 3
Stockholders Agreement ................................................... 33
Subsidiary ............................................................... 37
Surviving Corporation .................................................... 1
System ................................................................... 16
Taxes .................................................................... 14
tools .................................................................... 11
Unfunded Pension Liability ............................................... 19
Year 2000 Compliant ...................................................... 16
iii
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AMENDED AND RESTATED
AGREEMENT AND PLAN OF MERGER
AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of January
25, 1999 between eSoft, Inc., a Delaware corporation ("Parent"), eSoft
Acquisition Corporation, an Idaho corporation and a wholly owned subsidiary of
Parent ("Merger Sub"), and Apexx Technology, Inc., an Idaho corporation (the
"Company").
RECITALS
A. The Boards of Directors of Parent and the Company each have
determined that a business combination between Parent and the Company is fair to
and in the best interests of their respective companies and stockholders and
accordingly, have agreed to effect the merger provided for herein upon the terms
and subject to the conditions set forth herein.
B. In connection with the merger provided for herein, a total of
2,947,368 shares of Parent's common stock will be issued or reserved for
issuance. Of such shares, 1,591,365 shares will be issued in exchange for all of
the issued and outstanding shares of the Company's common stock, and 1,356,003
shares will be held in reserve for issuance upon the exercise of options to
purchase Parent's common stock.
C. This merger is intended for financial accounting purposes to qualify
as a pooling of interests and for tax purposes to qualify as a non-taxable
reorganization under Section 368(a)(2)(E) of the Internal Revenue Code of 1986,
as amended (the "Code").
D. Parent, Merger Sub, and the Company desire to make certain
representations, warranties, and agreements in connection with the merger.
E. In consideration for the agreement of Parent and Merger Sub to
effect the merger provided for herein, certain officers and key employees of the
Company have agreed to execute employment and non-competition agreements as set
forth herein.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants, and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE I
THE MERGER
1.1 The Merger. Subject to the terms and conditions of this Agreement,
at the Effective Time (as hereinafter defined), Merger Sub shall be merged with
and into the Company in accordance with this Agreement, and the separate
corporate existence of Merger Sub shall thereupon cease (the "Merger"). The
Company shall be the surviving corporation in the Merger (sometimes hereinafter
referred to as the "Surviving Corporation"), and as of the Effective Time, shall
be a wholly owned subsidiary of Parent. The Merger shall have the effects
specified in Section 30-1-1106 of the Idaho Business Corporation Act (the
"IBCA").
1.2 The Closing. Subject to the terms and conditions of this Agreement,
the closing of the Merger (the "Closing") shall take place at the offices of
Davis, Graham & Stubbs LLP at 370 17th Street, Suite 4700, Denver, Colorado
80202 at 10:00 a.m., local time, on (i) the later of the second business day
following the date on which the last to be satisfied or waived of the conditions
set forth in Article VIII (other than those conditions that by their nature are
to be satisfied at the Closing, but subject to the satisfaction or, where
permitted, waiver of those conditions) shall be satisfied or waived in
accordance with this Agreement, or April 30, 1999, or (ii) or at such other
time, date, or place as Parent and the Company may agree. The date on which the
Closing occurs is hereinafter referred to as the "Closing Date."
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1.3 Effective Time. If all the conditions to the Merger set forth in
Article VIII shall have been fulfilled or waived in accordance herewith and this
Agreement shall not have been terminated as provided in Article X, on the
Closing Date, the parties hereto shall execute and file Articles of Merger
meeting the requirements of Section 30-1-1105 of the IBCA. The Merger shall
become effective at the time of filing of the Articles of Merger with the
Secretary of State of the State of Idaho in accordance with the IBCA, or at such
later time which the parties hereto shall have agreed upon and designated in
such filing as the effective time of the Merger (the "Effective Time").
1.4 Subsequent Actions. If, at any time after the Effective Time, the
Surviving Corporation shall consider or be advised that any deeds, bills of
sale, assignments, assurances or any other actions or things are necessary or
desirable to continue in, vest, perfect or confirm of record or otherwise in the
Surviving Corporation's right, title or interest, in, to or under any of the
rights, properties, privileges, franchises or assets of either of its
constituent corporations acquired or to be acquired by the Surviving Corporation
as a result of, or in connection with, the Merger, or otherwise to carry out the
intent of this Agreement, the officers and directors of the Surviving
Corporation shall be authorized to execute and deliver, in the name and on
behalf of either of the constituent corporations of the Merger, all such deeds,
bills of sale, assignments and assurances and to take and do, in the name and on
behalf of each of such corporations or otherwise, all such other actions and
things as may be necessary or desirable to vest, perfect or confirm any and all
right, title and interest in, to and under such rights, properties, privileges,
franchises or assets in the Surviving Corporation or otherwise carry out the
intent of this Agreement.
ARTICLE II
ARTICLES OF INCORPORATION AND BYLAWS OF
THE SURVIVING CORPORATION
2.1 Articles of Incorporation. The Articles of Incorporation of Merger
Sub in effect immediately prior to the Effective Time shall be the Articles of
Incorporation of the Surviving Corporation, until duly amended in accordance
with applicable law.
2.2 Bylaws. At the Effective Time, the Surviving Corporation shall take
such action as is necessary to amend and restate the Bylaws of the Surviving
Corporation to be the same as the Bylaws of Merger Sub hereto, until duly
amended in accordance with applicable law.
ARTICLE III
DIRECTORS AND OFFICERS OF THE SURVIVING CORPORATION
3.1 Directors of the Surviving Corporation. The Surviving Corporation
shall take such action as is necessary to elect as directors of the Surviving
Corporation immediately following the Effective Time: Tom Loutzenheiser, Jeffrey
Finn and Tom Tennessen, until their successors are duly appointed or elected in
accordance with applicable law.
3.2 Officers. The Surviving Corporation shall take such action as is
necessary to elect as the officers of the Surviving Corporation immediately
following the Effective Time: Tom Loutzenheiser, President, and Jeffrey Finn,
Secretary, until their successors are duly appointed or elected in accordance
with applicable law.
ARTICLE IV
EFFECT OF THE MERGER ON SECURITIES OF MERGER SUB
AND THE COMPANY
4.1 Merger Sub Stock. At the Effective Time, each share of common
stock, no par value, of Merger Sub outstanding immediately prior to the
Effective Time shall, by virtue of the Merger and without any action on the part
of
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Parent, be converted into and exchanged for one validly issued, fully paid and
non-assessable share of common stock, no par value, of the Surviving
Corporation.
4.2 The Company Securities.
(a) Subject to the provisions of Article IX hereof, at the
Effective Time, each share of common stock of the Company ("Company Common
Stock") issued and outstanding immediately prior to the Effective Time (other
than any share of Company Common Stock as to which any stockholder has exercised
its dissenters rights under the IBCA (a "Dissenting Share")) shall, by virtue of
the Merger and without any action on the part of the holder thereof, be
converted into the right to receive 1.119651 (the "Share Exchange Ratio")
validly issued, fully paid and non-assessable shares of common stock of Parent,
$.01 par value ("Parent Common Stock").
(b) Each Dissenting Share shall not be converted as set forth in
Section 4.2(a) above, but shall be converted into the right to receive such
consideration from Parent as may be determined to be due with respect to such
Dissenting Share pursuant to the IBCA; provided, however, that each Dissenting
Share in respect of which a claim for appraisal is irrevocably withdrawn after
the Effective Time shall be deemed to be converted, as of the Effective Time,
into the right to receive 1.119651 shares of Parent Common Stock, subject to the
provisions of Article IX hereof.
(c) As a result of the Merger and without any action on the part
of the holder thereof, at the Effective Time all shares of the Company Common
Stock shall cease to be outstanding and shall be canceled and retired, and each
holder of shares of the Company Common Stock shall thereafter cease to have any
rights with respect to such shares of the Company Common Stock, except the right
to receive, without interest, the Parent Common Stock in accordance with
Sections 4.3(b), 4.3(e) and Article IX hereof (and cash in lieu of any
fractional shares pursuant to Section 4.3(c) hereof) upon the surrender of a
certificate (a "Certificate") representing such shares of the Company Common
Stock or, with respect to a Dissenting Share, the right to receive such
consideration per Dissenting Share as such holders of Dissenting Shares may be
determined to be entitled pursuant to the IBCA.
(d) Each share of the Company Common Stock issued and held in the
Company's treasury at the Effective Time shall, by virtue of the Merger, cease
to be outstanding and shall be canceled and retired without payment of any
consideration therefor.
(e) All options to purchase Company Common Stock (individually, a
"Company Option" and collectively, the "Company Options") outstanding at the
Effective Time under any Company stock option plan or agreement (the "Company
Stock Option Plans") shall, at the Effective Time, automatically and without
further action on the part of any holder thereof, be converted into an option to
purchase Parent Common Stock (individually, a "Parent Stock Option" and
collectively, the "Parent Options"). Each option granted by Parent hereunder
shall be exercisable upon the same terms and conditions as under the applicable
Company Stock Option Plan and the applicable option agreement issued thereunder,
except that (i) each such Company Option shall be exercisable for that whole
number of shares of Parent Common Stock (to the nearest whole share) determined
by multiplying the number of shares of the Company Common Stock subject to such
Company Option immediately prior to the Effective Time times 1.085879 (the
"Option Exchange Ratio"), (ii) the total option price of the shares of Parent
Common Stock issuable upon exercise of a Parent Stock Option shall be an amount
equal to the total option price of the shares of Company Common Stock subject to
such Company Option in effect immediately prior to the Effective Time, (iii )
the exercise price per share shall be calculated by dividing the aggregate
option value of the shares of Company Common Stock subject to such Company
Options in effect immediately prior to the Effective Time by the number of
shares of Parent Common Stock underlying such Parent Options, (iv) all Parent
Stock Options shall be immediately exercisable. No payment shall be made for
fractional interests. Except as set forth on Schedule 4.2(e) of the Company
Disclosure Schedule attached to this Agreement (the "Company Disclosure
Schedule"), from and after the date of this Agreement, no additional options
shall be granted by Company under the Company Stock Option Plans or otherwise.
(f) As soon as practicable after the Effective Time, Parent shall
deliver (i) to the holders of Company Options that become fully vested and
exercisable by virtue of the Merger a notice stating that by virtue of the
Merger and pursuant to the terms and conditions of the relevant Company Stock
Option Plan such Company Options have become fully vested and exercisable, and
(ii) to the holders of all Company Options a notice stating that the agreements
evidencing the grants of such Company Options shall continue in effect as Parent
Options on the same terms and conditions (subject to the terms of the relevant
Company Stock Option Plan).
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(g) Parent shall take all corporate action necessary to reserve
for issuance a sufficient number of shares of Parent Common Stock for delivery
upon exercise of Parent Options in accordance with Section 4.2(e). As soon as
practicable following the Closing Date, Parent shall file a registration
statement on Form S-8 with the Securities Exchange Commission with respect to
the shares of Parent Common Stock subject to such Parent Options, and shall use
reasonable efforts to have such registration statement declared effective and to
maintain the effectiveness of such registration statement (and maintain the
current status of the prospectus or prospectuses contained therein) for so long
as such Parent Options remain outstanding.
4.3 Exchange of Certificates Representing the Company Common Stock.
(a) As of the Effective Time, Parent shall deposit, or shall
cause to be deposited, with an exchange agent selected by Parent, which shall be
Parent's Transfer Agent or such other party reasonably satisfactory to the
Company (the "Exchange Agent"), for the benefit of the holders of shares of
Company Common Stock (other than Dissenting Shares), for exchange in accordance
with this Article IV, certificates representing ninety percent (90%) of the
shares of Parent Common Stock (together with any unpaid dividends or
distributions with respect thereto relating to record dates for such dividends
or distributions after the Effective Time, being hereinafter referred to as the
"Exchange Fund") to be issued pursuant to Section 4.2 and paid in exchange for
outstanding shares of Company Common Stock other than Dissenting Shares (the
"Initial Merger Consideration").
(b) As of the Effective Time, Parent shall deposit, or shall
cause to be deposited, with an escrow agent selected by Parent, which escrow
agent shall be reasonably satisfactory to the Company (the "Escrow Agent"), for
the benefit of the holders of shares of Company Common Stock, for distribution
in accordance with Article IX, certificates representing ten percent (10%) of
the shares of Parent Common Stock (together with any dividends or other
distributions with respect thereto relating to record dates for such dividends
or distributions after the Effective Time) to be issued pursuant to Section 4.2
and paid in exchange for outstanding shares of Company Common Stock (the
"Deferred Merger Consideration"). Any dividends or distributions with respect to
the Deferred Merger Consideration relating to record dates for such dividends or
distributions after the Effective Time shall be deposited with the Exchange
Agent and shall constitute part of the Deferred Merger Consideration.
(c) Within 10 days after the Effective Time, Parent shall cause
the Exchange Agent to mail to each holder of record of shares of Company Common
Stock other than Dissenting Shares (i) a letter of transmittal that shall
specify that delivery shall be effected, and risk of loss and title to such
shares of the Company Common Stock shall pass, only upon delivery of the
Certificates representing such shares to the Exchange Agent and which shall be
in such form and have such other provisions as Parent may reasonably specify,
(ii) instructions for use in effecting the surrender of such Certificates in
exchange for certificates representing shares of Parent Common Stock, and (iii)
a direction letter, as contemplated in Section 4.3(d), to be executed by such
holder and returned to the Exchange Agent. Upon surrender of a Certificate for
cancellation to the Exchange Agent together with such letter of transmittal,
duly executed and completed, in accordance with the instructions thereto, the
holder of the shares represented by such Certificate shall be entitled to
receive in exchange therefor (w) a certificate representing that number of whole
shares of Parent Common Stock equal to the product of the Share Exchange Ratio
times the number of shares so surrendered (rounded down to the nearest whole
number), (x) cash in lieu of any fractional share that is equal to the product
of such fractional interest times the last sales price of Parent Common Stock on
the Closing Date as reported by the Nasdaq quotation system, (y) unpaid
dividends and distributions, if any, that such holder has the right to receive
in respect of the Initial Merger Consideration or the Deferred Merger
Consideration, after giving effect to any required withholding tax, and (z) the
right to receive a fractional interest in any Deferred Merger Consideration
payable to stockholders of the Company, all in accordance with Article IX
hereof, the numerator of which fractional interest is the number of shares
represented by the Certificate so surrendered and the denominator which is the
number of shares of Company Common Stock outstanding at the Effective Time. The
shares represented by the Certificate so surrendered shall forthwith be
canceled. No interest will be paid or accrued on the cash for unpaid dividends
and distributions, if any, payable to holders of shares of Company Common Stock.
In the event of a transfer of ownership of Company Common Stock that is not
registered in the transfer records of the Company, a certificate representing
the proper number of shares of Parent Common Stock may be issued to such a
transferee if the Certificate representing such Company Common Stock is
presented to the Exchange Agent, accompanied by all documents required to
evidence and effect such transfer and to evidence that any applicable stock
transfer taxes have been paid.
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(d) Each holder of record of shares of Company Common Stock other
than Dissenting Shares shall execute and deliver or shall authorize Tom
Loutzenheiser to execute and deliver to the Exchange Agent instructions
directing the Exchange Agent to transfer on such holder's behalf an aggregate of
3.016% of the Initial Merger Consideration otherwise payable to such holder to
Pacific Crest Securities ("Pacific Crest").
(e) Notwithstanding any other provisions of this Agreement, no
dividends or other distributions declared after the Effective Time on Parent
Common Stock shall be paid with respect to any shares of Company Common Stock
represented by a Certificate until such Certificate is surrendered for exchange
as provided herein. Subject to the effect of applicable laws, following
surrender of any such Certificate, there shall be paid to the holder of the
certificates representing whole shares of Parent Common Stock issued in exchange
therefor, without interest, (i) at the time of such surrender, the amount of
dividends or other distributions with a record date after the Effective Time
theretofore payable with respect to such whole shares of Parent Common Stock and
not paid, less the amount of any withholding taxes that may be required thereon,
and (ii) at the appropriate payment date, the amount of dividends or other
distributions with a record date after the Effective Time but prior to surrender
and a payment date subsequent to surrender payable with respect to such whole
shares of Parent Common Stock, less the amount of any withholding taxes which
may be required thereon. Notwithstanding the foregoing, any dividends or other
distributions with respect to the Parent Common Stock comprising the Deferred
Merger Consideration that are declared after the Effective Time but prior to the
date any Deferred Merger Consideration is distributed to the Company's
stockholders in accordance with Article IX hereof, shall be paid by Parent to
the Escrow Agent and shall be distributed by the Escrow Agent in accordance with
Article IX.
(f) At or after the Effective Time, there shall be no transfers
on the stock transfer books of the Company of the shares of Company Common Stock
that were outstanding immediately prior to the Effective Time. If, after the
Effective Time, Certificates are presented to the Surviving Corporation, they
shall be canceled and exchanged for certificates of shares of Parent Common
Stock deliverable in respect thereof pursuant to this Agreement, together with a
cash payment (net of any applicable tax withholdings) in lieu of fractional
shares, if any, in accordance with Section 4.3(c), and a cash payment in
accordance with Section 4.3(e) of dividends or distributions, if any, only if
the Certificate or Certificates that immediately prior to the Effective Time
represented such Company Common Stock are surrendered as provided in this
Article IV.
(g) Certificates surrendered for exchange by any person shall not
be exchanged until Parent has received a written agreement from such person as
provided in Section 3.1 of the Stockholders Agreement (as defined in Section 9.4
below).
(h) No fractional shares of Parent Common Stock shall be issued
pursuant hereto. Parent shall pay in lieu of the issuance of any fractional
share of Parent Common Stock an amount that is equal to the product of such
fractional interest times the last sales price of Parent Common Stock on the
Closing Date as reported by the Nasdaq quotation system.
(i) Any portion of the Exchange Fund (including the proceeds of
any investments thereof and any shares of Parent Common Stock) that remains
unclaimed by the former stockholders of the Company one year after the Effective
Time shall be delivered to Parent. Any former stockholders of the Company who
have not theretofore complied with this Article IV shall thereafter look only to
Parent for payment of their shares of Parent Common Stock, and any unpaid
dividends and distributions on the Parent Common Stock deliverable in respect of
each share of the Company Common Stock such stockholder holds as determined
pursuant to this Agreement, in each case, without any interest thereon.
(j) None of Parent, Merger Sub, the Company, the Surviving
Corporation, the Exchange Agent, the Escrow Agent, or any other person shall be
liable to any former holder of shares of Company Common Stock for any amount
properly delivered to a public official pursuant to applicable abandoned
property, escheat or similar laws.
(k) In the event any Certificate shall have been lost, stolen, or
destroyed, upon the making of an affidavit of that fact by the person claiming
such Certificate to be lost, stolen, or destroyed and, if required by the
Exchange Agent, the posting by such person of a bond in such reasonable amount
as the Exchange Agent may require as indemnity against any claim that may be
made against the Company, the Exchange Agent, Parent, or the Surviving
Corporation with respect to such Certificate, the Exchange Agent will issue in
exchange for such lost, stolen, or destroyed
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Certificate the shares of Parent Common Stock (and cash in lieu of fractional
shares, if any) and unpaid dividends and distributions on shares of Parent
Common Stock deliverable in respect thereof pursuant to this Agreement.
4.4 Adjustment of Exchange Ratios. If subsequent to the date of
this Agreement, but prior to the Effective Time, the outstanding shares of
Parent Common Stock or Company Common Stock, respectively, shall have been
changed into a different number of shares or a different class as a result of a
stock split, reverse stock split, stock dividend, subdivision, reclassification,
combination, exchange, recapitalization, or other similar transaction, the Share
Exchange Ratio and the Option Exchange Ratio shall be appropriately adjusted to
provide the holders of Company Common Stock and Company Options the same
economic effect as contemplated by this Agreement prior to such event.
ARTICLE V
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company represents and warrants to Parent as of the date of this
Agreement as follows:
5.1 Existence, Good Standing, Corporate Authority, Compliance With
Law.
(a) The Company is a corporation duly incorporated, validly
existing, and in good standing (including tax good standing) under the laws of
the State of Idaho. The Company is duly licensed or qualified to do business as
a foreign corporation and is in good standing (including tax good standing)
under the laws of the jurisdictions listed in Schedule 5.1 of the Company
Disclosure Schedule, which list contains all jurisdictions in which the
character of the properties owned or leased by it or in which the transaction of
its business makes such qualification necessary, in each case except as would
not, individually or in the aggregate, reasonably be expected to have a Company
Material Adverse Effect (as defined in Section 5.8(a)).
(b) The Company has all requisite corporate power and
authority to own, operate, and lease its properties and carry on its business as
presently conducted and as proposed to be conducted.
(c) The Company is not in violation of any law, ordinance,
governmental rule or regulation to which it or any of its properties or assets
is subject, except as would not, individually or in the aggregate, reasonably be
expected to have a Company Material Adverse Effect, nor is the Company in
violation of any order, judgment, or decree of any court, governmental
authority, or arbitration board or tribunal.
(d) The copies of the Company's Articles of Incorporation and
Bylaws, which have been delivered to Parent, include any and all amendments made
thereto at any time prior to the date of this Agreement and are true, correct,
and complete.
(e) The Company's corporate minute books are accurate as to
their content and include therein the Articles of Incorporation and Bylaws of
the Company with any amendments thereto. The meetings of the directors or
stockholders referred to in the corporate minute books were duly called and
held. The signatures appearing on all documents contained in the corporate
minute books are the true signatures of the persons purporting to have executed
the same and no minutes of meetings or written consents of the directors or
stockholders of the Company are omitted from such minute books that would
contain any resolutions or other actions that would be inconsistent with any of
the representations and warranties contained in Article V hereof or prevent or
limit any of the transactions contemplated by this Agreement. Schedule 5.1 of
the Company Disclosure Schedule sets forth a true and complete list of the names
of all directors of the Company and the names and offices held of all officers
of the Company as of the date hereof.
5.2 Authorization, Validity, and Effect of Agreements. The Company
has the requisite corporate power and authority to execute and deliver this
Agreement and all agreements and documents contemplated hereby. Subject only to
the approval of this Agreement and the transactions contemplated hereby by the
stockholders of the Company as required by the IBCA, the consummation by the
Company of the transactions contemplated hereby has been duly authorized by all
requisite corporate action of the Company. This Agreement has been duly executed
and delivered by the Company and, assuming the due authorization, execution and
delivery by Parent and Merger Sub, constitutes, and all agreements and documents
contemplated hereby (when executed and delivered pursuant hereto for value
received)
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will constitute valid and legally binding obligations of the Company,
enforceable against the Company in accordance with their respective terms,
except to the extent that enforceability may be limited by applicable
bankruptcy, insolvency, moratorium, or other similar laws relating to creditors'
rights and general principles of equity (regardless of whether such
enforceability is considered in a proceeding in equity or at law), including,
without limitation, possible unavailability of specific performance, other
injunctive relief or other equitable remedies and an implied covenant of good
faith and fair dealing.
5.3 Capitalization. As of the date hereof, the authorized capital stock
of the Company consists of 5,000,000 shares of Company Common Stock, no par
value, and no shares of preferred stock. There are (i) 1,421,305 shares of the
Company Common Stock issued and outstanding, and (ii) 1,248,761 shares of
Company Common Stock issuable upon exercise of outstanding Company Options.
Schedule 5.3 of the Company Disclosure Schedule correctly sets forth the name of
each person who holds of record shares of Company Common Stock, the number of
shares of Company Common Stock so held, and the number of whole shares of Parent
Common Stock to be issued in exchange for such shares of Company Common Stock in
connection with the Merger. No additional shares of capital stock of the Company
will be issued, except pursuant to the exercise of options outstanding under and
vesting in accordance with the terms of the Company Stock Option Plans. The
Company has no outstanding bonds, debentures, notes, or other obligations the
holders of which have the right to vote (or which are convertible into or
exercisable for securities having the right to vote) with the stockholders of
the Company on any matter. All issued and outstanding shares of the Company
Common Stock are duly authorized, validly issued, fully paid, nonassessable,
free of preemptive or rescission rights, and were issued in compliance with all
applicable federal and state securities laws. Schedule 5.3 of the Company
Disclosure Schedule correctly sets forth the name of each person who holds or
has rights to receive Company Stock Options, the number of shares of Company
Common Stock issuable in respect of such Company Stock Options, the exercise
prices and terms of such Company Stock Options, and whether or not such Company
Stock Options are intended to qualify as incentive stock options or
non-statutory stock options. Except for the Company Stock Options listed on
Schedule 5.3 of the Company Disclosure Schedule, there are not, at the date of
this Agreement, any authorized, issued, or outstanding options, warrants, calls,
subscriptions, convertible securities, conversion privileges, preemptive rights,
or other rights, agreements, or commitments (whether or not presently
exercisable) that obligate the Company to issue, transfer, or sell any shares of
capital stock or other securities convertible into or evidencing the right to
purchase or otherwise acquire any capital stock of the Company. There are no
outstanding or authorized stock appreciation, phantom stock, profit
participation, or similar plans, contracts, or rights with respect to the
Company that are effective as of the date hereof or that have been executed or
agreed to as of the date hereof with an effective date after the date hereof.
There are no stockholders' agreements, voting trusts, proxies, or other
agreements or understandings with respect to the voting of the capital stock of
the Company to which the Company is a party that are presently effective or have
been executed or agreed to as of the date hereof or, to the best knowledge of
the Company, to which any officer or director of the Company or any stockholder
owned or controlled by such officer or director is or will be a party, except in
accordance with the terms hereof. Except as provided in Article IX of the Bylaws
of the Company, there are no restrictions upon the sale, voting, or transfer of
any shares of Company Common Stock pursuant to the Company's Articles of
Incorporation, Bylaws, or other governing instruments (other than restrictions
typically applicable to unregistered stock under the Securities Act). After the
Effective Time, the Surviving Corporation will have no obligation to issue,
transfer, or sell any shares of capital stock of the Company or the Surviving
Corporation pursuant to any Plan (as defined in Section 5.27). As used in this
Agreement, except as otherwise provided in Section 5.16(d), the "knowledge" of a
person shall mean the actual knowledge of an officer or senior manager of such
person after reasonable investigation.
5.4 Other Interests. The Company does not own, directly or indirectly,
any interest or investment (whether equity or debt) in any corporation,
partnership, joint venture, business, trust, or entity other than investments in
short term investment securities.
5.5 No Violation. Neither the execution and delivery by the Company of
this Agreement and all agreements and documents contemplated hereby or thereby
nor the consummation by the Company of the transactions contemplated hereby or
thereby will: (i) conflict with or result in a breach of any provisions of the
Articles of Incorporation or Bylaws of the Company; (ii) except as set forth in
Schedule 5.5 of the Company Disclosure Schedule, violate, conflict with, result
in a breach of any provision of, constitute a default (or an event which, with
notice or lapse of time or both, would constitute a default) under, result in
the termination or in a right of termination or cancellation of, accelerate the
performance required by, result in the triggering of any payment or other
obligations pursuant to, result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties of the Company under, or result
in being declared void, voidable, or without further binding effect, any of the
terms, conditions, or provisions
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of any note, bond, mortgage, indenture, loan agreement, deed of trust, or any
license, franchise, permit, lease, contract, agreement or other instrument,
commitment, or obligation to which the Company is a party, or by which the
Company or any of its properties is bound or affected; (iii) violate any law,
statute, rule, regulation, judgment, or decree applicable to the Company; or
(iv) other than the filings provided for in Article I, filings required under
the Securities Act, or applicable state securities and "Blue Sky" laws or
filings in connection with the maintenance of qualification to do business in
other jurisdictions (collectively, the "Regulatory Filings"), require any
consent, approval, or authorization of, or declaration, filing, or registration
with, any governmental or regulatory authority.
5.6 Financial Statements. The audited balance sheet and statement
of operations as of and for the twelve months ended December 31, 1997,
accompanied by the audit report of Balukoff Lindstrom & Co., P.A., independent
certified public accountants, which are attached to Schedule 5.6 of the Company
Disclosure Schedule, were prepared in accordance with United States generally
accepted accounting principles ("GAAP") consistently applied throughout the
periods involved except as otherwise set forth therein and present fairly the
financial condition of the Company as of such date and the results of operations
of the Company for the year then ended. The unaudited balance sheet of the
Company as of September 30, 1997 and 1998 and the related statement of
operations for the nine months ended on such date, which are attached to
Schedule 5.6 of the Company Disclosure Schedule, were prepared in accordance
with GAAP consistently applied except as otherwise set forth therein and present
fairly the financial condition of the Company as of such date and the results of
operations of the Company for the nine months then ended, except that such
interim financial statements are subject to normal year-end adjustments that are
not and are not expected to be, individually or in the aggregate, material in
amount and do not include certain notes which may be required by GAAP. The
balance sheet of the Company as of September 30, 1998 is referred to in this
Agreement as the "Company Balance Sheet."
5.7 Absence of Undisclosed Liabilities. Except as and to the
extent reflected or reserved against in the Company Balance Sheet or set forth
in Schedule 5.7 of the Company Disclosure Schedule, at the date of the Company
Balance Sheet, the Company did not have any obligation or liability of any kind
(whether accrued, absolute, contingent, unliquidated, civil, criminal, or
otherwise and whether due or to become due), whether or not any such liability
or obligation would have been required to be disclosed on a balance sheet
prepared in accordance with GAAP, that, individually or in the aggregate, could
have a Company Material Adverse Effect. The Company Balance Sheet has accurate
accruals of all employee benefit costs, including, but not limited to, payroll,
commissions, bonuses, retirement benefits and vacation accruals.
5.8 Absence of Certain Changes or Events.
(a) Since September 30, 1998, no event or events have
occurred, which individually or in the aggregate have had a Company Material
Adverse Effect, as hereafter defined, and there exists no condition or
contingency that could reasonably be expected to result in a Company Material
Adverse Effect. A "Company Material Adverse Effect" means a material adverse
change in the business, properties, financial condition, results of operations,
or prospects of the Company, taken as a whole. Notwithstanding the foregoing,
the parties acknowledge that the Company is at an early stage of development of
its business in an emerging market, that the business, the rate of growth and
results of operations are all unpredictable, that the Company has suffered
losses from operations which are expected to continue through the date of
Closing. It is therefore agreed that neither a less than 70% decline in net
revenue received by the Company from the third fiscal quarter to the fourth
fiscal quarter of 1998 nor any increase in loss suffered by the Company from one
fiscal quarter to the next shall be deemed to result in a Company Material
Adverse Effect.
(b) Since the date of the Company Balance Sheet and except as
set forth in Schedule 5.8(b) of the Company Disclosure Schedule, except in
connection with that certain Loan Agreement dated December 20, 1998 between
Parent and the Company (the "Loan Agreement") and except as specifically
permitted or required by this Agreement or the Loan Agreement, the Company has
not:
(i) declared, set aside, paid, or made any dividend or
other distribution on or in respect of any shares of its capital stock
or directly or indirectly redeemed, retired, purchased, or otherwise
acquired any such shares or any option, warrant, conversion privilege,
preemptive right, or other right or agreement to acquire the same or
any other securities convertible into or evidencing the right to
purchase or otherwise acquire the same;
(ii) made any amendments to its Articles of Incorporation
or Bylaws:
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(iii) made any change in the number of shares of its
capital stock authorized, issued, or outstanding or authorized, issued,
granted, or made any option, warrant, conversion privilege, preemptive
right, or other right or agreement to acquire the same or any other
securities convertible into or evidencing the right to acquire the
same;
(iv) incurred any indebtedness for borrowed money other
than pursuant to the Company's existing lines of credit with Idaho
Independent Bank, which borrowings shall not exceed at any one time
$200,000 in the aggregate;
(v) incurred any obligation or liability (contingent or
otherwise) except (i) normal trade or business obligations incurred in
the ordinary course of business, the performance of which will not,
individually or in the aggregate, have a Company Material Adverse
Effect and (ii) obligations under the contracts, agreements and leases
described in Schedule 5.9 of the Company Disclosure Schedule, the
performance of which will not, individually or in the aggregate, have a
Company Material Adverse Effect;
(vi) discharged or satisfied any lien or encumbrance or
paid any obligations or liability (fixed or contingent) other than
current liabilities paid to unrelated parties, wages paid to officers
and employees and director's fees paid to directors, each in the
ordinary course of business;
(vii) mortgaged, pledged, or subjected to any lien, charge,
or other encumbrance any of its respective properties or assets
(tangible or intangible) except liens for current property taxes not
yet due and payable.
(viii) sold, assigned, leased, transferred or otherwise
disposed of, or agreed to sell, assign, lease, transfer or otherwise
dispose of, any of its tangible assets other than sales of inventory in
the ordinary course of business;
(ix) sold, assigned, licensed, transferred, or otherwise
disposed of, or agreed to sell, assign, license, transfer or otherwise
dispose of, any of its patents, inventions, shop rights, know-how,
trade secrets, confidentiality agreements and confidential information,
registered and unregistered trademarks, service marks, logos, corporate
names, trade names, and other trademark rights, trade dress, or other
designations or combinations of such designations that are distinctive
of goods or services and that are used in a manner that identifies
those goods or services and distinguishes them from the goods or
services of others, works of authorship and any registered or
unregistered copyright therein, Software or Documentation (as defined
in Section 5.9(e)), or other intangible assets, and all registrations
for, and applications for registration of, any of the foregoing
(collectively, "Proprietary Rights") or disclosed any of its
confidential Proprietary Rights to any person (other than Parent);
(x) entered into any transaction, contract, or commitment
other than in the ordinary course of business;
(xi) made any capital expenditures or any commitment
therefor in excess of $30,000 in the aggregate except as consented to
by Parent;
(xii) adopted or made any change in any executive
compensation plan, bonus plan, incentive compensation plan, deferred
compensation agreement, or other employee benefit plan or arrangement;
(xiii) entered into any employment or consulting agreement
or arrangement, or, except for normal bonuses pursuant to and
consistent with existing plans or programs, or wages or salary
increases consistent with past practices, granted or paid any bonus, or
made or granted any general wage or salary increase or any specific
increase in the wages or salary of any employee;
(xiv) suffered any casualty loss or damage, whether or not
such loss or damage shall have been covered by insurance;
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(xv) canceled or compromised any debt or claim except for
adjustments made in the ordinary course of business that, in the
aggregate, are not material, or waived or released any rights that are
material;
(xvi) terminated, amended, or modified any agreement or
instrument described in Schedule 5.9 of the Company Disclosure
Schedule;
(xvii) entered into any transaction with any stockholder,
officer, director, or key employee of the Company or any affiliate of
any such person other than the payment of wages and salaries and other
benefits under employee benefit plans in existence prior to December
31, 1997;
(xviii) made any loans or advances to, guaranties for the
benefit of, or investments in, any person (other than customary travel
advances in accordance with past practices);
(xix) made cash charitable contributions in excess of
$5,000 in the aggregate or any political contributions;
(xx) lost any supplier or suppliers which loss or losses,
individually or in the aggregate, has had, or could reasonably be
expected to have, a Company Material Adverse Effect;
(xxi) merged or consolidated with, or acquired all or
substantially all of the assets, capital stock, or business of any
other person;
(xxii) introduced any material change with respect to the
operation of its business, including its method of accounting;
(xxiii) agreed or committed to do any of the things described
in this Section 5.8.
5.9 LIST OF PROPERTIES, CONTRACTS, ETC. Schedule 5.9 of the
Company Disclosure Schedule sets forth a true and complete list of the
following:
(a) all leases of real property to which the Company is a party,
identifying the parties thereto and including in each case a brief description
of the property covered thereby, the annual rental rate, and the termination
date (all real property covered by such leases being referred to herein as the
"Company Real Property");
(b) all leases of personal property to which the Company is a
party, that (i) provide for future annual payments in excess of $5,000 or (ii)
were entered into other than in the ordinary course of business, identifying the
parties thereto and including in each case, a brief description of the property
covered thereby, the annual rental rate and the termination date and identifying
any such leases with respect to which the obligations thereunder, in accordance
with GAAP, would be required to be capitalized on a balance sheet of the Company
or for which the amount of the asset and liability thereunder, as if so
capitalized, would be required to be disclosed in a note to such balance sheet;
(c) all addresses at which inventory or other property of the
Company is located;
(d) all Proprietary Rights, if any, used in the business or
operations of the Company; identifying the owner thereof and in the case of any
license, the parties thereto, the method of compensating the licensor thereunder
and the termination date;
(e) all Software and Documentation owned by the Company or used
in and material to the business or operations of the Company, identifying the
owner thereof. As used herein: (i) "Software" means all computer programs, in
machine-readable object code and any and all corresponding source code, and
includes, without limitation: any and all printed listings, file formats,
interface or operating system designs, application programs, structure,
architecture, libraries, tools, functions, subroutines, and all components,
portions or modules thereof, and (ii) "Documentation" means all user manuals,
handbooks, on-line materials, development tools, specifications and any other
written or machine readable materials relating in any way to the Software, and
includes, without limitation: any and all
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Software specifications; programmer's or developer's notes, and engineering or
system design notes; instructions for compiling or decompiling; and all
pseudo-code, algorithms, diagrams or flow charts whether or not directly
incorporated in the Software. The Software and Documentation owned by the
Company, listed on Schedule 5.9 of the Company Disclosure Schedule, includes the
copyright registration number of all registered copyrights therein. The list on
Schedule 5.9 of the Company Disclosure Schedule describes the extent to which
the listed Software owned by the Company is proprietary to the Company; if any
such Software requires the use of development tools, routines, libraries or the
like ("tools") that are not proprietary to the Company, such tools are
identified in Schedule 5.9 of the Company Disclosure Schedule; and if any such
Software, or any portion thereof, is required by law or any agreement to be
dedicated to the public, owned or co-owned, or licensed or otherwise authorized
for use by the public or any other person, such requirements are described in
Schedule 5.9 of the Company Disclosure Schedule;
(f) all employment and consulting agreements covering any employee
of, or consultant to, the Company;
(g) the names and current annual or monthly compensation rates of
all employees of the Company;
(h) all deferred compensation agreements, employee stock option
plans, group life, hospitalization or disability insurance, severance policies
and other plans and arrangements providing benefits for employees of the
Company;
(i) all standard and non-standard product warranty terms and
conditions applicable to goods and services sold by the Company;
(j) all insurance coverage that relates to or covers the
properties, assets, business, or operations of the Company, including all
policies or binders of fire, liability, vehicular, title, workers' compensation,
and other insurance, specifying the insurer, the type of coverage, the amount of
coverage, any applicable deductibles, the expiration date and the policy number;
(k) all documents pertaining to the environmental conditions
(actual, potential, or threatened) of any real property owned or leased by the
Company including, without limitation, all environmental reports, assessments,
and audits and all notices, orders, permits, or any other documents from any
governmental authority that refer or relate to any environmental condition of
the Company Real Property or any personal property owned or leased by the
Company or that relate to any actual or potential liabilities or obligations
arising out of such environmental conditions;
(l) the names and ages of all retired employees and all employees
on long-term disability of the Company who are entitled to receive health
benefits;
(m) all bank accounts and safe deposit boxes of the Company,
indicating the names of the persons authorized to draw thereon;
(n) all agreements of the Company with sales representatives,
distributors, authorized service centers or other customers;
(o) all loan agreements, credit agreements, indentures, and other
documents or instruments relating to the borrowing of money by the Company and
all promissory notes and other evidences of indebtedness of the Company,
including without limitation, all such documents and instruments relating to or
evidencing any stockholder loans to the Company;
(p) all guaranties of obligations of the Company under all loan
agreements, leases, and other documents and instruments to which the Company is
a party or by which it is bound, by any officer or director of the Company or
any affiliate of any of the foregoing; and
(q) all other contracts, agreements or commitments of the Company
that (i) provide for future annual payments by the Company in excess of $5,000
or (i) were entered into other than in the ordinary course of business.
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True and correct copies of all documents, including all amendments
thereto, referred to above have been delivered or made available to Parent
(collectively, the "Material Contracts"). Each Material Contract is a valid
obligation of and enforceable against the Company and, to the Company's
knowledge, the other parties thereto, in accordance with its terms for the
period stated therein. There is no existing material breach, default, or event
of default by the Company or, to the knowledge of the Company, by any other
party, under any Material Contract. There is no event that with notice or lapse
of time would constitute a default by the Company under any Material Contract,
nor has any party thereto given notice of or made a claim with respect to any
breach or default. To the Company's knowledge, there are no material
deficiencies in the Company's performance under any Material Contract. The
Company does not have any knowledge of any existing laws, regulations, or
decrees, that materially and adversely affect, or may materially and adversely
affect any of the Material Contracts or that would have a Company Material
Adverse Effect. Except as set forth in Schedule 5.9 of the Company Disclosure
Schedule, no third party consents to the execution, delivery, and consummation
of this Agreement, the documents contemplated hereby or the transactions
contemplated herein are required pursuant to the terms of any Material Contract.
Except as set forth in Schedule 5.9 of the Company Disclosure Schedule, each
employment agreement to which the Company is a party is in full force and
effect, and neither the execution and delivery of this Agreement nor the
consummation of the transactions contemplated hereby shall cause or result in
any default, termination, or acceleration of any provision in any such
employment agreement or give rise to the obligation of the Company to make any
severance or change of control payment.
5.10 TITLE TO ASSETS. Except as set forth in Schedule 5.10 of the
Company Disclosure Schedule, the Company has good title, free and clear of all
liens, charges, and encumbrances (except for (a) liens for non-delinquent taxes
and assessments, (b) liens of landlords and other lessors arising under statute,
and (c) other liens, claims and encumbrances or charges that do not materially
detract from the value of, or impair the use, occupancy or ownership of, the
assets and properties of the Company) to, or a valid leasehold interest in, all
of the personal property (i) reflected on the Company Balance Sheet or acquired
by the Company subsequent to the date thereof (other than assets that have been
sold or otherwise disposed of in the ordinary course of business since the date
of the Company Balance Sheet) or (ii) used in the business or operations of the
Company. Neither the Company nor any predecessor to the Company has owned,
leased, or operated any real property other than the Company Real Property.
5.11 ADEQUACY OF ASSETS. The Company owns or has a valid leasehold
interest in all assets, real and personal properties, contract rights and
licenses necessary for the continued operation of the Company in substantially
the same manner in which it has been and is now operating and for the future
operation of the Company as presently contemplated. Except as set forth on
Schedule 5.11: (a) the Company owns or has the right to use pursuant to license,
sublicense, agreement, or permission all Proprietary Rights necessary for the
operation of the business of the Company as presently conducted, (b) each
Proprietary Right owned or used by Company immediately prior to the Effective
Time hereunder will be owned or available for use by Company on identical terms
and conditions immediately subsequent to the Effective Time hereunder, and (c)
Company has taken all necessary action to maintain and protect each Proprietary
Right that it owns or uses.
5.12 CONDITION OF INVENTORY, PROPERTY, PLANT, AND EQUIPMENT. Schedule
5.12 of the Company Disclosure Schedule sets forth a list of the fixed assets of
the Company, together with the depreciation schedule associated with such fixed
assets. The inventory of the Company consists of items of quality and quantity
usable and saleable in the ordinary course of business of the Company, except
for items reserved against or written off on the Company Balance Sheet. All
property, plant, and equipment used by the Company in the conduct of its
business has been maintained in accordance with standard industry practices and
is in good operating condition and repair, ordinary wear and tear excepted, and
there are no material defects in such property, plant, or equipment.
5.13 ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE. The accounts receivable
reflected on the Company Balance Sheet and all accounts receivable of the
Company that arose thereafter are valid and arose out of bona fide transactions
in the ordinary course of business. Schedule 5.13 of the Company Disclosure
Schedule sets forth a list of any such accounts receivable that the Company
considers to be doubtful accounts.
5.14 LITIGATION. Except as set forth in Schedule 5.14 of the Company
Disclosure Schedule, there are no claims, actions, suits, investigations, or
proceedings (public or private) pending against or affecting the Company or any
of its properties or assets, at law or in equity, before or by any federal,
state, municipal, or other governmental or non-governmental department,
commission, board, bureau, agency, court, or other instrumentality, or
arbitrator or by any
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private person or entity. Except as set forth in Schedule 5.14 of the Company
Disclosure Schedule, to the knowledge of the Company, there are no claims,
actions, suits, investigations, or proceedings (public or private) threatened
against or affecting the Company or any of its properties or assets, at law or
in equity, before or by any federal, state, municipal, or other governmental or
non-governmental department, commission, board, bureau, agency, court, or other
instrumentality, or arbitrator or by any private person or entity, except for
any of the foregoing which would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse Effect. Except as set
forth in Schedule 5.14 of the Company Disclosure Schedule, there are no existing
orders, judgments, settlements, injunctions, or decrees of any court or
governmental agency that apply to the Company or any of its assets, properties,
business, or operations. Except as set forth in Schedule 5.14 of the Company
Disclosure Schedule, since January 1, 1994, no product liability, warranty, or
similar claims have been made against the Company except routine claims in the
ordinary course of business (i.e., claims relating to defective products that
have been satisfied by the Company solely by replacement of products or
adjustment or refunding of purchase price or substantially equivalent credit on
future orders) that, in the aggregate, would not have a Company Material Adverse
Effect. Except as set forth in Schedule 5.14 of the Company Disclosure Schedule,
since January 1, 1994 the Company has not entered into any settlement agreements
relating to the compromise or dismissal of any litigation involving the Company
or any of its properties or assets. Nothing contained in any settlement
agreement to which the Company is a party prevents the Company in any way from
carrying out its business as now conducted or as presently contemplated to be
conducted, in any market, geographical area, or application, or interferes with
the Company's utilization of its Proprietary Rights.
5.15 TAXES. Except as set forth in Schedule 5.15 of the Company
Disclosure Schedule, all returns and reports of all Taxes (as hereinafter
defined) required to be filed by the Company have been timely filed and are
true, correct, and complete in all material respects, and all Taxes payable
pursuant thereto have been timely paid. No deficiency or adjustment in respect
of any Taxes that was assessed against the Company remains unpaid and no such
claim or assessment is pending or, to the knowledge of the Company, threatened.
The Company has made all withholding of Taxes required to be made under all
applicable federal, state, and local tax regulations and such withholdings have
either been paid on a timely basis to the respective governmental agencies or
set side in accounts for such purpose or accrued, reserved against and entered
upon the books of the Company. There are no outstanding agreements or waivers
extending the statutory period of limitations applicable to any tax return or
tax liability of the Company, and to the knowledge of the Company, there is no
proposed liability for any Taxes for which there is not an adequate reserve
reflected on the Company Balance Sheet. The Company has not filed any consent
with the Internal Revenue Service described in Section 341(f) of the Code. The
unpaid Taxes of the Company (i) did not, as of the end of the most recent period
for which financial statements have been prepared, exceed the reserve for Tax
liability (rather than any reserve for deferred Taxes established to reflect
timing differences between book and Tax income), and (ii) do not exceed that
reserve as adjusted for the passage of time through the Effective Time in
accordance with the past custom and practice of the Company in filing its Tax
returns. The Company does not reasonably expect any authority to assess any
additional Taxes for any period for which Tax returns have been filed. There is
no dispute or claim concerning any Tax liability of the Company either (i)
claimed or raised by any authority in writing, or (ii) as to which the Company
has knowledge. The Company has delivered to Parent correct and complete copies
of all federal and state income Tax returns of the Company, examination reports
and statements of deficiencies assessed against or agreed to by the Company for
all years beginning in or after 1992. The Company is not a party to any Tax
allocation or sharing agreement. The Company has not been a member of an
affiliated group filing federal income Tax Returns, and does not have any
liability for the Taxes of any person (other than the Company) under Treas. Reg.
Section 1.1502-6 or any similar provision of state, local or foreign law, as a
transferee or successor, by contract or otherwise. No item of income
attributable to transactions occurring on or before the Effective Time will be
required to be included in taxable income by the Company in a subsequent taxable
year by reason of the Company reporting income on the installment sales method
of accounting, the cash method of accounting, the completed contract method of
accounting or the percentage of complete-capitalized cost method of accounting.
The Company has not made, and is under no obligation to make, payments that are
or, if made, would be, "parachute payments" under Section 280G of the Code, and
no such obligation will arise as a result of this Agreement or other agreements
entered into in connection with this Agreement. "Taxes" shall mean all federal,
state, county, local, foreign and other taxes and governmental assessments,
including but not limited to, income taxes, estimated taxes, withholding taxes,
transfer taxes, excise taxes, sales taxes, real and personal property taxes, ad
valorem taxes, payroll-related taxes, employment taxes, franchise taxes and
import duties, together with any related liabilities penalties, fines or
additions to tax and interest.
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5.16 PROPRIETARY RIGHTS.
(a) Except as set forth on Schedule 5.16(a) of the
Company Disclosure Schedule: (i) to the Company's knowledge, the Company has not
interfered with, infringed upon, misappropriated, or otherwise come into
conflict with any Proprietary Rights of third parties, (ii) the Company (and its
employees with responsibility for Proprietary Rights matters) has not received
any written charge, complaint, claims, demand, or notice alleging any such
interference, infringement, misappropriation, or violation (including any claim
that the Company must license or refrain from using any Proprietary Rights of
any third party), (iii) to the knowledge of the Company (and employees with
responsibility for Proprietary Rights matters), there is no basis for any as-yet
unasserted charge, complaint, claim, demand, or notice alleging any such
interference, infringement, misappropriation, or violation (including any claim
that the Company must license or refrain from using any Proprietary Rights of
any third party), or (iv) to the knowledge of the Company (and employees with
responsibility for Proprietary Rights matters), no third party has interfered
with, infringed upon, misappropriated, or otherwise come into conflict with any
Proprietary Rights of the Company.
(b) Schedule 5.16(b) of the Company Disclosure Schedule
identifies each Proprietary Right that the Company owns. Schedule 5.16(b) of the
Company Disclosure Schedule identifies each registration that has been issued to
Company with respect to any of its Proprietary Rights, identifies each pending
application for registration that the Company has made with respect to any of
its Proprietary Rights, identifies each item of copyrightable Proprietary Rights
(whether or not registration has been sought), and identifies each license,
agreement, or other permission which Company has granted to any third party with
respect to any of its Proprietary Rights and all agreements relating to any of
the Software owned by the Company, including any service, nondisclosure or
escrow agreements (together with any exceptions). The Company has delivered to
Parent correct and complete copies of all such patents, registrations,
applications, licenses, agreements, and permissions (as amended to date).
Schedule 5.16(b) of the Company Disclosure Schedule also identifies each trade
name or unregistered trademark used by Company in connection with its business.
Except as set forth in Schedule 5.16(b) of the Company Disclosure Schedule, with
respect to each Proprietary Right required to be identified in Schedule 5.16(b)
of the Company Disclosure Schedule and with respect to each item of
copyrightable Proprietary Rights (whether or not identified in Schedule 5.16(b)
of the Company Disclosure Schedule):
(i) the Company possesses all right, title, and
interest in and to the Proprietary Right, free and clear of any lien,
license, or other restriction;
(ii) the Proprietary Right is not subject to any
outstanding injunction, judgment, order, decree, ruling, or charge;
(iii) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is pending or, to
the knowledge of Company, threatened, that challenges the legality,
validity, enforceability, manufacture, use or the ability to authorize
the use (including use by way of reproduction of copies, distribution
of copies, preparation of derivative works, public performance or
display, or any other use of any kind or nature), sale or ownership of
the Proprietary Right; and
(iv) the Company has never agreed to indemnify
any person for or against any interference, infringement,
misappropriation, or other conflict with respect to the Proprietary
Right.
(c) Schedule 5.16(c) of the Company Disclosure Schedule
identifies each Proprietary Right that any third party owns and that Company
uses pursuant to license, sublicense, agreement, or permission. The Company has
delivered to Parent correct and complete copies of all such licenses,
sublicenses, agreements, and permissions (as amended to date). Except as set
forth on Schedule 5.16(c) of the Company Disclosure Schedule, with respect to
each Proprietary Right required to be identified in Schedule 5.16(c) of the
Company Disclosure Schedule:
(i) the license, sublicense, agreement, or
permission covering the Proprietary Right is legal, valid, binding,
enforceable against the Company and, to the Company's knowledge,
against the other parties thereto, and in full force and effect;
(ii) the license, sublicense, agreement, or
permission will continue to be legal, valid, binding, enforceable
against the Company and, to the Company's knowledge, against the other
parties thereto, and in full force and effect on identical terms
following the Effective Time;
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(iii) to the Company's knowledge, no party to the
license, sublicense, agreement, or permission is in breach or default,
and no event has occurred which with notice or lapse of time would
constitute a breach or default or permit termination, modification, or
acceleration thereunder;
(iv) no party to the license, sublicense,
agreement, or permission has repudiated in writing any provision
thereof;
(v) with respect to each sublicense, the
representations and warranties set forth in subsections (i) through
(iv) above are true and correct with respect to the underlying license;
(vi) the underlying Proprietary Right is not
subject to any outstanding injunction, judgment, order, decree, ruling,
or charge;
(vii) no action, suit, proceeding, hearing,
investigation, charge, complaint, claim, or demand is pending or, to
the knowledge of Company, threatened, that challenges the legality,
validity, or enforceability of the underlying Proprietary Right;
(viii) the Company has not granted any sublicense
or similar right with respect to the license, sublicense, agreement, or
permission; and
(ix) no such licenses, agreements or permissions
commit the Company to continued maintenance, support, improvement,
upgrade or similar obligation with respect to any of the Proprietary
Rights, which obligation cannot be terminated by the Company upon
notice of ninety (90) days or less.
(d) Schedules 5.16(b) and 5.16(c) of the Company
Disclosure Schedule identify every Proprietary Right used by the Company in the
conduct of its business. Except as set forth in Schedule 5.16(b) of the Company
Disclosure Schedule, all Software owned by the Company performs substantially as
described in all Documentation for such Software insofar as such Documentation
has to do with the performance, specifications or design of such Software; and
in addition, all Software owned by the Company and which has been licensed to
any third party performs in accordance with the warranties, if any, given by the
Company in respect of such Software. Except as set forth in Schedule 5.16(c) of
the Company Disclosure Schedule, all Software owned by any third party and used
by the Company pursuant to license, sublicense, agreement or permission performs
in accordance with the warranties, if any, given by such third party to the
Company, and to the knowledge of the Company (and its employees with
responsibility for use and maintenance or service thereof) such Software
performs substantially as required for the conduct of the Company's business. It
is understood and agreed that "Software owned by the Company" shall include all
Software owned by the Company, whether developed in house by the Company or
purchased by the Company from any third party.
5.17 ROYALTIES. All royalties, license fees, and other fees
relating to the Company's use of Proprietary Rights have been or will be paid in
full as and when due. Except as set forth in Schedule 5.17 of the Company
Disclosure Schedule, to the Company's knowledge, the method used by the Company
to calculate all royalties, license fees, and other fees relating to the
Company's use of Proprietary Rights is correct and accurate and in accordance
with the terms of any agreements the Company has with any third party relating
to the use of such party's Proprietary Rights.
5.18 YEAR 2000 COMPLIANCE. Except as set forth on Schedule 5.18 of
the Company Disclosure Schedule, each system, comprised of software, hardware,
databases, or embedded control systems (microprocessor controlled, robotic or
other device) (collectively, a "System"), that constitutes any part of, or is
used in connection with the use, operation or enjoyment of any material tangible
or intangible asset or real property of the Company and each product licensed,
sold or otherwise distributed by the Company, including software, hardware,
databases, or embedded control systems (collectively, a "Product") (a) is
designed (or has been modified) to be used prior to and after January 1, 2000,
(b) will operate without error arising from the creation, recognition,
acceptance, calculation, display, reporting, storage, retrieval, accessing,
comparison, sorting, manipulation, processing or other use of dates, or
date-based, date-dependent or date-related data, including but not limited to
century recognition, day-of-the-week recognition, leap years, date values and
interfaces of date functionalities, and (c) will not be adversely affected by
the advent of the year 2000 or subsequent years, the advent of the twenty-first
century or the transition from the twentieth century through the year 2000 and
into the twenty-first century (collectively, items (a) through (c) are referred
to herein as "Year 2000 Compliant"). Except
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as set forth on Schedule 5.18 of the Company Disclosure Schedule, all licenses
for the use of any System-related software, hardware, databases or embedded
control system are certified by the manufacturer to be Year 2000 Compliant and
to contain the capabilities required to enable Year 2000 Compliance within the
Company's computer systems (hardware and software), or the licenses permit the
Company or a third party to make all modifications, bypasses, debugging,
work-around, repairs, replacements, conversions or corrections necessary to
permit the System to operate compatibly, in conformance with their respective
specifications, and to be Year 2000 Compliant. No System that is material to the
business, finances, or operations of the Company receives data from or
communications with any component or system external to itself (whether or not
such external component or system is the Company's or any third party's) that is
not itself Year 2000 Compliant excepting the parts of the external component or
system within which noncompliance to Year 2000 Compliance will have no effect on
the data or communications sent to the Company, nor on the Systems of the
Company. Except as set forth on Schedule 5.18 of the Company Disclosure
Schedule, the Company has no reason to believe that it may incur material
expenses arising from or relating to the failure of any of its Systems or
Products as a result of not being Year 2000 Compliant. Notwithstanding anything
in this Section 5.18 to the contrary, any representation with respect to a
System or Product that was developed wholly by a third party and not by the
Company shall be deemed to qualified in its entirety to the Company's knowledge
regarding the facts or events set forth in such representation.
5.19 LABOR RELATIONS. There are no material controversies pending
or, to the knowledge of the Company, threatened, between the Company and any of
its respective employees, former employees, or applicants for employment. The
Company has complied in all respects with all laws relating to the employment of
labor, including any provisions thereof relating to wages, hours, equal
employment opportunity, collective bargaining, federal immigration law, and the
payment of social security and similar taxes, except as would not be reasonably
expected to have a Company Material Adverse Effect. The Company is not liable
for any arrears of wages or any taxes or penalties for failure to comply with
any of the foregoing. None of the employees of the Company are covered by any
collective bargaining agreement and, to the knowledge of the Company, there are
no organizational efforts currently being made or threatened involving any
employees of the Company. All employee severance or change of control policies
covering any employee of the Company are described in Schedule 5.19 of the
Company Disclosure Schedule and no such employee is entitled to any severance or
change of control benefits not described therein.
5.20 CERTAIN EMPLOYEE MATTERS.
(a) Except as set forth on Schedule 5.20(a) of the
Company Disclosure Schedule, all current and former members of management, key
(including sales and recruiting) personnel and consultants (whether employees or
independent contractors) of the Company have executed and delivered to the
Company a confidential information agreement restricting such person's right to
disclose confidential information of the Company. Except as set forth on
Schedule 5.20(a) of the Company Disclosure Schedule, all such members of
management, key personnel and consultants of the Company have been party to a
"work-for-hire" arrangement or proprietary rights agreement with the Company
pursuant to which either (i) in accordance with applicable federal and state
law, the Company has been accorded full, effective, exclusive and original
ownership of all tangible and intangible property thereby arising or (ii) there
has been conveyed to the Company by appropriately executed instruments of
assignment full, effective and exclusive ownership of all tangible and
intangible property thereby arising. No employee, agent, consultant or
contractor of the Company who has contributed to or participated in the
conception and development of proprietary rights of the Company has asserted in
writing or, to the Company's knowledge, threatened any claim against the Company
in connection with such person's involvement in the conception and development
of the proprietary rights of the Company and, to the knowledge of the Company,
no such person has a reasonable basis for any such claim.
(b) Schedule 5.20(b) of the Company Disclosure Schedule
identifies all employees, independent contractors and other personnel of the
Company, their respective rates of pay at the date hereof, and, with respect to
all bill consultants (employees or independent contractors), the billing rate of
each such consultant. Unless otherwise noted on Schedule 5.20(b) of the Company
Disclosure Schedule, each of the Company's personnel identified on Schedule
5.20(b) of the Company Disclosure Schedule is working full time and none of such
personnel has expressly stated to Tom Loutzenheiser, Albert Youngwerth, John
Hanousek or Kelleen Morrison that he or she intends to resign or cease working
with the Company after Closing. Other than increases granted in the ordinary
course of business, the Company has not committed to increase in any manner the
compensation of any of its personnel beyond the amount identified on Schedule
5.20(b) of the Company Disclosure Schedule.
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(c) Except as set forth on Schedule 5.20(c) of the Company
Disclosure Schedule, all current and former (terminated within twelve (12)
months of the date hereof) members of management and key (including sales and
recruiting) personnel of the Company have executed and delivered to the Company
a nonsolicitation agreement restricting such person's right to solicit
employees, customers, clients and prospective customers and clients of the
Company during the term of such person's or entity's employment and for at least
six (6) months thereafter and such agreement contains a provision permitting
assignment of the agreement by Company.
5.21 TRANSACTIONS WITH AFFILIATES. Except as set forth in Schedule 5.21
of the Company Disclosure Schedule, the Company is not a party to any contract,
lease, agreement, or other commitment with any officer, director, or stockholder
of the Company or any affiliate of any such person, and there are no loans
outstanding from the Company to, or to the Company from, any such person or any
affiliate of any such person.
5.22 PERMITS; COMPLIANCE WITH LAWS. Schedule 5.22 of the Company
Disclosure Schedule contains a true, correct, and complete list of all permits,
licenses, consents, and authorizations of any government or governmental
authority held by the Company. Except as set forth in Schedule 5.22 of the
Company Disclosure Schedule, the Company holds all permits, licenses, consents,
and authorizations issued by any government or governmental authority that are
necessary for the conduct of its business , except for any failure to hold that
would not, individually or in the aggregate, reasonably be expected to have a
Company Material Adverse Effect. The Company has not received any written notice
of any violation of any law, ordinance, regulation, or order applicable to the
Company or the business conducted by it. The conduct of the business of the
Company, as presently conducted, complies with all applicable laws, ordinances,
regulations, and orders, including, but not limited to, all laws, ordinances,
regulations or orders relating to the exportation or importation of Products ,
except for any noncompliance that would not, individually or in the aggregate,
reasonably be expected to have a Company Material Adverse Effect.
5.23 ENVIRONMENTAL MATTERS. There has been no "release or threatened
release of a hazardous substance" (as defined in the Comprehensive Environmental
Response, Compensation and Liability Act of 1980, as amended ("CERCLA")) or any
other release, emission, disposal, or discharge into the environment or any use,
storage, transport or handling (collectively, "activities") of Hazardous
Material (as defined below) on, under, about, or from the Company Real Property
other than those activities that have not resulted and could not reasonably be
expected to result in any material liability on the part of the Company. To the
knowledge of the Company, all "hazardous waste" (as defined in the Resource
Conservation and Recovery Act of 1976, as amended ("RCRA") and the regulations
thereunder) generated at the Company's properties have been disposed of at sites
that maintain valid permits under RCRA and any other applicable Environmental
Requirement (as defined below). To the knowledge of the Company and except as
set forth in Section 5.23 of the Company Disclosure Schedule, there are no
underground tanks, PCBs, or asbestos containing materials on the Company Real
Property. Except as set forth in Schedule 5.23 of the Company Disclosure
Schedule, the Company does not have any written notice of any pending formal or
informal assertion by any governmental agency or other person that the Company
or any predecessor business or owner or operator of the Company Real Property
may be a responsible or potentially responsible party in connection with any
violation or obligation arising under any Environmental Requirement at any site
or facility (including the Company Real Property itself.) "Hazardous Material"
shall mean any substance (i) the presence of which requires reporting,
investigation or remediation under any applicable statute, regulation, ordinance
or order; or (ii) which is defined as a "hazardous waste", "hazardous
substance", pollutant or contaminant under any statute, regulation, rule, or
ordinance of any governmental authority having jurisdiction; or (iii) which is
toxic, explosive, corrosive, flammable, infectious, radioactive, carcinogenic,
mutagenic, or otherwise hazardous and is regulated by any governmental authority
having jurisdiction. "Environmental Requirement" shall mean all applicable
statutes, laws, regulations, rules, ordinances, codes, licenses, permits,
orders, standards, guidelines, policies, and similar items of any governmental
authority having jurisdiction and all applicable judicial, administrative, and
regulatory decrees, judgments, and orders and common law relating to the
protection of human health or the environment including, without limitation, all
requirements pertaining to the reporting, licensing, permitting, use, handling,
generation, storage, treatment, transportation, disposal, release, discharge,
investigation, and remediation of Hazardous Material.
5.24 ADVERSE AGREEMENTS. The Company is not a party to or subject to any
contract, agreement, or commitment or subject to any charter or other corporate
restriction or any judgment, order, writ, injunction, decree law, rule, or
regulation that would have, or could reasonably be expected to have, a Company
Material Adverse Effect.
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5.25 FEES. Except as set forth in Schedule 5.25 of the Company
Disclosure Schedule, there are no claims for legal, accounting, financial
advisory, or investment bankers' fees, brokerage commissions, finders' fees, or
similar compensation in connection with the transactions contemplated by this
Agreement based on any arrangement or agreement made by or on behalf of the
Company.
5.26 BOOKS AND RECORDS. Except as set forth in Schedule 5.26 of the
Company Disclosure Schedule, the financial books, records, and work papers of
the Company are complete and correct in all material respects, have been
maintained in accordance with good business practice and accurately reflect the
bases for the consolidated financial condition and results of operations of the
Company set forth in the financial statements referred to in Section 5.6 hereof.
5.27 ERISA. Neither the Company nor any trade or business (whether or
not incorporated) under common control with such Person within the meaning of
Section 414(b) or (c) of the Code (and Sections 414(m) and (o) of the Code for
purposes of provisions relating to Section 412 of the Code) (an "ERISA
Affiliate") of the Company maintains or contributes to or is obligated to
contribute to, and has ever maintained or contributed to or been obligated to
contribute to, (i) any "multiemployer plan", within the meaning of Section 4001
(a)(3) of the Employee Retirement Income Security Act of 1974, as amended, and
the regulations promulgated and rulings issued thereunder ("ERISA"), to which
any person or any ERISA Affiliate of such person makes, is making, or is
obligated to make contributions or, during the preceding three calendar years,
has made, or been obligated to make, contributions (a "Multiemployer Plan"),
(ii) any single employer plan, as defined in Section 4001 (a)(15) of ERISA, that
(a) is maintained for employees of a person or any ERISA Affiliate of such
person and at least one person other than such person and any ERISA Affiliate of
such person or (b) was so maintained and in respect of which such person or an
ERISA Affiliate of such person could have liability under Section 4064 of ERISA
in the event such plan has been or were to be terminated (a "Multiple Employer
Plan") or (iii) except as set forth in Schedule 5.27 of the Company Disclosure
Schedule, any employee benefit plan (as defined in Section 3(3) of ERISA)
sponsored or maintained by the Company or to which the Company makes, is making,
or is obligated to make contributions (a "Plan"), including but not limited to a
Pension Plan (as defined below). With respect to the Plan(s) disclosed in
Schedule 5.27 of the Company Disclosure Schedule:
(i) Each such Plan is in compliance in all material
respects with the applicable provisions of ERISA, the Code, and other
federal or state law. Any such Plan which is intended to qualify under
Section 401(a) of the Code has received a favorable determination letter
from the IRS and to the knowledge of the Company, nothing has occurred
that would cause the loss of such qualification. The Company and each
ERISA Affiliate of the Company has made all required contributions to
any such Plan subject to Section 412 of the Code, and no application for
a funding waiver or an extension of any amortization period pursuant to
Section 412 of the Code has been made with respect to any such Plan.
(ii) There are no pending claims (other than routine claims
for benefits) or, to the knowledge of the Company, threatened claims,
actions, or lawsuits, or action by any governmental authority, with
respect to any such Plan, and there has been no prohibited transaction
or violation of the fiduciary responsibility rules with respect to any
such Plan.
(iii) (1) the execution of, and the performance of the
transactions contemplated in, this Agreement will not (either alone or
upon the occurrence of any additional or subsequent events) constitute
an event under any Plan that will or is reasonably expected to result in
any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits
or obligation to fund benefits with respect to any employee; (2) no such
Plan which constitutes a Pension Plan (as defined below) has any
Unfunded Pension Liability (as defined below); (3) neither the Company
nor any ERISA Affiliate of the Company has incurred, or reasonably
expects to incur, any material liability under Title IV of ERISA with
respect to any such Plan which constitutes a Pension Plan (other than
premiums due and not delinquent under Section 4007 of ERISA); (4)
neither the Company nor any ERISA Affiliate of the Company has incurred,
or reasonably expects to incur, any liability (and no event has occurred
which, with the giving of notice under Section 4219 of ERISA, would
result in such liability) under Section 4201 or 4243 of ERISA with
respect to a Multiemployer Plan; and (5) neither the Company nor any
ERISA Affiliate of the Company has engaged in a transaction that could
be subject to Section 4069 or 4212(c) of ERISA. "Pension Plan" shall
mean a pension plan (as defined in Section 3(2) of ERISA) subject to
Title IV of ERISA that a person sponsors, maintains, or to which it
makes, is making, or is obligated to make contributions, or in the case
of a Multiple Employer Plan has made contributions at any time during
the immediately preceding five (5) plan
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years. "Unfunded Pension Liability" shall mean the excess of a Plan's
benefit liabilities under Section 4001(a)(16) of ERISA, over the current
value of that Plan's assets, determined in accordance with the
assumptions used for funding the Pension Plan pursuant to Section 412 of
the Code for the applicable plan year.
5.28 POOLING OF INTERESTS TREATMENT. To the Company's knowledge, neither
the Company nor any of its affiliates has taken or agreed to take any action or
is aware of any condition which would prevent Parent from accounting for the
transactions provided for herein as a pooling-of-interests under APB Opinion No.
16 (a "Pooling of Interests").
5.29 INSURANCE. The business, properties, and employees of the Company
are insured by the insurers or through the funds and with the types and amounts
of insurance (including, but not limited to, property, product liability,
automobile, workers compensation, business interruption, and excess indemnity
insurance) set forth in Schedule 5.29 of the Company Disclosure Schedule (the
"Company Insurance Coverage"). To the Company's knowledge, the Company Insurance
Coverage is in such amount and on such terms as to adequately cover the risks
attendant to the Company's business. Since January 1, 1997 the Company has not
been denied coverage by any insurance carrier or has failed or currently fails
to maintain any insurance coverage that may be required by the laws of the
states in which the Company sells or manufactures Products or provides services.
The premiums due on the Company Insurance Coverage that covers calendar year
1997 have been paid in full and the premiums due for the period from January 1,
1998 to the Effective Time have been or will be paid in full as and when due.
All such insurance complies in all material respects with the terms of each of
its leases and each of the mortgages, deeds of trust, service agreements with
third parties and/or loan agreements to which the Company is a party.
5.30 DISCLOSURE. To the Company's knowledge, no representation or
warranty by the Company in this Agreement and no statement contained in any
document, certificate, or other writing prepared by the Company or its
representatives and furnished by the Company to Parent pursuant to the
provisions hereof, affirmatively misstates a material fact or omits a material
fact necessary for such document, certificate, or writing to be, in good faith,
accurately and completely responsive in all material respects to the purpose
identified by Parent to the Company for which such information was furnished by
the Company to Parent.
ARTICLE VI
REPRESENTATIONS AND WARRANTIES OF PARENT AND MERGER SUB
The Company represents and warrants to Parent as of the date of this
Agreement as follows:
6.1 EXISTENCE; GOOD STANDING; CORPORATE AUTHORITY; COMPLIANCE WITH LAW.
(a) Each of Parent and Merger Sub is a corporation duly
incorporated, validly existing, and in good standing (including tax good
standing) under the laws of its jurisdiction of incorporation. Parent is duly
licensed or qualified to do business as a foreign corporation and is in good
standing under the laws of the jurisdictions listed in Schedule 6.1 of the
disclosure letter delivered by Parent to the Company at or prior to the
execution hereof (the "Parent Disclosure Schedule"), which list contains all
jurisdictions in which the character of the properties owned or leased by it or
in which the transaction of its business makes such qualification necessary, in
each case except as would not, individually or in the aggregate, reasonably be
expected to have a Parent Material Adverse Effect (as defined in Section 6.7 of
this Agreement).
(b) Parent has all requisite corporate power and authority to own,
operate, and lease its properties and carry on its business as presently
conducted and as proposed to be conducted.
(c) Parent is not in violation of any law, ordinance, governmental
rule or regulation to which it or any of its properties or assets is subject,
except as would not, individually or in the aggregate, reasonably be expected to
have a Parent Material Adverse Effect, nor is Parent in violation of any order,
judgment, or decree of any court, governmental authority, or arbitration board
or tribunal.
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(d) The copies of Parent's Articles of Incorporation and Bylaws,
which have been delivered to Parent, include any and all amendments made thereto
at any time prior to the date of this Agreement and are true, correct, and
complete.
(e) Parent's corporate minute books are accurate as to their
content and include therein the Articles of Incorporation and Bylaws of Parent
with any amendments thereto. The meetings of the directors or stockholders
referred to in the corporate minute books were duly called and held. The
signatures appearing on all documents contained in the corporate minute books
are the true signatures of the persons purporting to have executed the same and
no minutes of meetings or written consents of the directors or stockholders of
Parent are omitted from such minute books that would contain any resolutions or
other actions that would be inconsistent with any of the representations and
warranties contained in Article VI hereof or prevent or limit any of the
transactions contemplated by this Agreement. Schedule 6.1 of the Parent
Disclosure Schedule sets forth a true and complete list of the names of all
directors of Parent and the names and offices held of all officers of the Parent
as the date hereof.
6.2 AUTHORIZATION, VALIDITY, AND EFFECT OF AGREEMENTS.
(a) Each of Parent and Merger Sub has the requisite corporate
power and authority to execute and deliver this Agreement and all agreements and
documents contemplated hereby and thereby. Subject only to the approval of this
Agreement and the transactions contemplated hereby by the stockholders of
Parent, the consummation by Parent and Merger Sub of the transactions
contemplated hereby has been duly authorized by all requisite corporate action
of Parent. This Agreement has been duly executed and delivered by Parent and
Merger Sub and, assuming the due authorization, execution and delivery by the
Company, constitutes, and all agreements and documents contemplated hereby (when
executed and delivered pursuant hereto for value received) will constitute, the
valid and legally binding obligations of Parent and Merger Sub enforceable in
accordance with their respective terms, except to the extent that enforceability
may be limited by applicable bankruptcy, insolvency, moratorium, or other
similar laws relating to creditors' rights and general principles of equity
(regardless of whether such enforceability is considered in a proceeding in
equity or at law), including, without limitation, possible unavailability of
specific performance, other injunctive relief or other equitable remedies and an
implied covenant of good faith and fair dealing.
(b) The affirmative vote of the holders of a majority of the
shares of Parent Common Stock present in person or by proxy at a duly convened
and held meeting of the stockholders of Parent is necessary to approve the
issuance by Parent of the shares of Parent Common Stock pursuant to the terms
hereof. Such vote is the only vote of the holders of any class or series of
Parent's capital stock required in connection with this Agreement and the
transactions contemplated hereby.
6.3 CAPITALIZATION. The authorized capital stock of Parent consists of
50,000,000 shares of Parent Common Stock and 5,000,000 shares of preferred
stock, $.01 par value ("Parent Preferred Stock"). As of December 15, 1998, there
were (a) 6,863,502 shares of Parent Common Stock issued and outstanding, (b) no
shares of Parent Preferred Stock issued and outstanding, (c) 1,283,750 shares of
Parent Common Stock issuable upon exercise of outstanding options to purchase
Parent Common Stock, and (d) 961,418 shares of Parent Common Stock issuable upon
exercise of outstanding warrants. The Parent Common Stock issuable in exchange
for Company Common Stock and upon the exercise of Parent Options, when issued
and delivered in accordance with the terms of this Agreement and the terms of
the agreements governing such options, will constitute duly authorized, validly
issued and outstanding, fully paid and nonassessable shares of Parent Common
Stock.
6.4 NO VIOLATION. Neither the execution and delivery by Parent and
Merger Sub of this Agreement and all agreements and documents contemplated
hereby, nor the consummation by Parent and Merger Sub of the transactions
contemplated hereby or thereby in accordance with the terms hereof, will: (i)
conflict with or result in a breach of any provisions of the Certificate of
Incorporation, as amended, or Bylaws of Parent or the Articles of Incorporation
or Bylaws of Merger Sub; (ii) violate any law, statute, rule, regulation,
judgment, or decree applicable to Parent (iii) except as set forth in Schedule
6.4 of the Parent Disclosure Schedule, violate, conflict with, result in a
breach of any provision of, constitute a default (or an event which, with notice
or lapse of time or both, would constitute a default) under, result in the
termination or in a right of termination or cancellation of, accelerate the
performance required by, result in the triggering of any payment or other
obligations pursuant to, result in the creation of any lien, security interest,
charge or encumbrance upon any of the properties of Parent under, or result in
being declared void, voidable, or without further binding effect, any of the
terms, conditions, or provisions of any note, bond, mortgage, indenture, loan
agreement, deed
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of trust, or any license, franchise, permit, lease, contract, agreement or other
instrument, commitment, or obligation to which Parent is a party, or by which
Parent or any of its properties is bound or affected; (iii) violate any law,
statute, rule, regulation, judgment, or decree applicable to Parent; or (iv)
other than the Regulatory Filings, require any consent, approval, or
authorization of, or declaration, filing, or registration with, any governmental
or regulatory authority.
6.5 SEC DOCUMENTS. Since the date on which a registration statement with
respect to Parent Common Stock became effective with the Securities and Exchange
Commission (the "Commission"), Parent has filed all forms, reports, and other
documents (including all exhibits, schedules and annexes thereto) required to be
filed by Parent with the Commission (collectively, the "Parent Reports"). Except
to the extent that information contained in any Parent Report has been revised
or superseded by a later Parent Report filed and publicly available prior to the
date of this Agreement, as of their respective dates, the Parent Reports (a)
were (and any Parent Reports filed after the date hereof will be) in all
material respects in accordance with the requirements of the Securities Act of
1933, as amended (the "Securities Act") or the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), as the case may be, and the rules and
regulations promulgated thereunder, and (b) as of their respective filing dates
did not (and any Parent Reports filed after the date hereof will not) contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein or necessary to make the statements made therein,
in the light of the circumstances under which they were made, not misleading.
The financial statements of Parent included in such reports (or incorporated
therein by reference) were prepared in accordance with GAAP applied on a
consistent basis during the periods involved (except as may be indicated in the
notes thereto and subject to normal year-end adjustments) and fairly present in
all material respects the financial position of Parent and its consolidated
subsidiaries as of the dates thereof and the periods then ended.
6.6 NO CONSENT OR APPROVAL REQUIRED. Except as contemplated in Section
1.3 and for compliance with any applicable Blue Sky Laws, federal securities
regulations, and Nasdaq requirements, no consent, approval, or authorization of,
or declaration to or filing with, any governmental or regulatory authority is
required for the valid execution and delivery by Parent of this Agreement or any
other agreement or instrument to be executed and delivered by Parent hereunder,
the consummation of the transactions provided for herein or therein or the
issuance and delivery of the Parent Common Stock.
6.7 ABSENCE OF CHANGE. Since September 30, 1998, no event or events have
occurred, which individually or in the aggregate have had a Parent Material
Adverse Effect, as hereafter defined, and there exists no condition or
contingency that could reasonably be expected to result in a Parent Material
Adverse Effect. A "Parent Material Adverse Effect" means a material adverse
change in the business, properties, financial condition, results of operations,
or prospects of the Parent, taken as a whole. Notwithstanding the foregoing, the
parties acknowledge that the Parent is at an early stage of development of its
business in an emerging market, that the business, the rate of growth and
results of operations are all unpredictable, that the Parent has suffered losses
from operations which are expected to continue through the date of Closing. It
is therefore agreed that neither a less than 70% decline in net revenue received
by the Parent from the third fiscal quarter to the fourth fiscal quarter of 1998
nor any increase in loss suffered by the Parent from one fiscal quarter to the
next shall be deemed to result in a Parent Material Adverse Effect.
6.8 BROKERAGE. Except as set forth on Schedule 6.8 of the Parent
Disclosure Schedule, there are no claims for financial advisory or investment
bankers' fees, brokerage commissions, finders' fees, or similar compensation in
connection with the transactions contemplated by this Agreement based on any
arrangement or agreement made by or on behalf of Parent.
6.9 ACCOUNTS RECEIVABLE AND ACCOUNTS PAYABLE. The accounts receivable
reflected on the balance sheet contained in the latest Parent Report filed with
the Commission pursuant to the Exchange Act and all accounts receivable of
Parent that arose thereafter are valid and arose out of bona fide transactions
in the ordinary course of business. Schedule 6.9 of the Parent Disclosure
Schedule sets forth a list of any such accounts receivable that Parent considers
to be doubtful accounts.
6.10 LITIGATION. Except as set forth in Schedule 6.10 of the Parent
Disclosure Schedule, there are no claims, actions, suits, investigations, or
proceedings (public or private) pending against or affecting Parent or any of
its properties or assets, at law or in equity, before or by any federal, state,
municipal, or other governmental or non-governmental department, commission,
board, bureau, agency, court, or other instrumentality, or arbitrator or by any
private person or entity. Except as set forth in Schedule 6.10 of the Parent
Disclosure Schedule, to the knowledge of Parent, there are
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no claims, actions, suits, investigations, or proceedings (public or private)
threatened against or affecting Parent or any of its properties or assets, at
law or in equity, before or by any federal, state, municipal, or other
governmental or non-governmental department, commission, board, bureau, agency,
court, or other instrumentality, or arbitrator or by any private person or
entity, except for any of the foregoing which would not, individually or in the
aggregate, reasonably be expected to have a Parent Material Adverse Effect.
Except as set forth in Schedule 6.10 of the Parent Disclosure Schedule, there
are no existing orders, judgments, settlements, injunctions, or decrees of any
court or governmental agency that apply to Parent or any of its assets,
properties, business, or operations. Except as set forth in Schedule 6.10 of the
Parent Disclosure Schedule, since January 1, 1994, no product liability,
warranty, or similar claims have been made against Parent except routine claims
in the ordinary course of business (i.e., claims relating to defective products
that have been satisfied by Parent solely by replacement of products or
adjustment or refunding of purchase price or substantially equivalent credit on
future orders) that, in the aggregate, would not have a Parent Material Adverse
Effect. Except as set forth in Schedule 6.10 of the Parent Disclosure Schedule,
since January 1, 1994 the Company has not entered into any settlement agreements
relating to the compromise or dismissal of any litigation involving Parent or
any of its properties or assets. Nothing contained in any settlement agreement
to which Parent is a party prevents Parent in any way from carrying out its
business as now conducted or as presently contemplated to be conducted, in any
market, geographical area, or application, or interferes with Parent's
utilization of its Proprietary Rights.
6.11 PROPRIETARY RIGHTS. Except as set forth on Schedule 6.11 of the
Parent Disclosure Schedule: (i) to Parent's knowledge, Parent has not interfered
with, infringed upon, misappropriated, or otherwise come into conflict with any
Proprietary Rights of third parties, (ii) Parent (and its employees with
responsibility for Proprietary Rights matters) has not received any written
charge, complaint, claims, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that Parent
must license or refrain from using any Proprietary Rights of any third party),
(iii) to the knowledge of Parent (and employees with responsibility for
Proprietary Rights matters), there is no basis for any as-yet unasserted charge,
complaint, claim, demand, or notice alleging any such interference,
infringement, misappropriation, or violation (including any claim that Parent
must license or refrain from using any Proprietary Rights of any third party),
or (iv) to the knowledge of Parent (and employees with responsibility for
Proprietary Rights matters), no third party has interfered with, infringed upon,
misappropriated, or otherwise come into conflict with any Proprietary Rights of
Parent.
6.12 ROYALTIES. All royalties, license fees, and other fees relating to
Parent's use of Proprietary Rights have been or will be paid in full as and when
due. Except as set forth in Schedule 6.12 of the Parent Disclosure Schedule, to
Parent's knowledge, the method used by Parent to calculate all royalties,
license fees, and other fees relating to Parent's use of Proprietary Rights is
correct and accurate and in accordance with the terms of any agreements Parent
has with any third party relating to the use of such party's Proprietary Rights.
6.13 YEAR 2000 COMPLIANCE. The disclosure contained in the latest Parent
Report filed with the Commission pursuant to the Exchange Act concerning the
Year 2000 Compliance of the Systems and Products utilized and distributed by
Parent is true and correct, except for such misstatements or omissions that
would not, individually or in the aggregate, reasonably be likely to have a
Parent Material Adverse Effect.
6.14 LABOR RELATIONS. There are no material controversies pending or, to
the knowledge of Parent, threatened, between Parent and any of its respective
employees, former employees, or applicants for employment. Parent has complied
in all respects with all laws relating to the employment of labor, including any
provisions thereof relating to wages, hours, equal employment opportunity,
collective bargaining, federal immigration law, and the payment of social
security and similar taxes, except as would not be reasonably expected to have a
Parent Material Adverse Effect. Parent is not liable for any arrears of wages or
any taxes or penalties for failure to comply with any of the foregoing. None of
the employees of Parent are covered by any collective bargaining agreement and,
to the knowledge of Parent, there are no organizational efforts currently being
made or threatened involving any employees of Parent. All employee severance or
change of control policies covering any employee of the Company are described in
or filed as exhibits to the Parent Reports and no such employee is entitled to
any severance or change of control benefits not described therein.
6.15 CERTAIN EMPLOYEE MATTERS. Except as set forth on Schedule 6.15 of
the Parent Disclosure Schedule, all current and former members of management,
key (including sales and recruiting) personnel and consultants (whether
employees or independent contractors) of Parent have executed and delivered to
Parent a confidential information agreement restricting such person's right to
disclose confidential information of Parent. Except as set forth on Schedule
6.15 of the Parent Disclosure Schedule, all such members of management, key
personnel and consultants of
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Parent have been party to a "work-for-hire" arrangement or proprietary rights
agreement with Parent pursuant to which either (i) in accordance with applicable
federal and state law, Parent has been accorded full, effective, exclusive and
original ownership of all tangible and intangible property thereby arising or
(ii) there has been conveyed to Parent by appropriately executed instruments of
assignment full, effective and exclusive ownership of all tangible and
intangible property thereby arising. No employee, agent, consultant or
contractor of Parent who has contributed to or participated in the conception
and development of proprietary rights of Parent has asserted in writing or, to
Parent's knowledge, threatened any claim against Parent in connection with such
person's involvement in the conception and development of the proprietary rights
of Parent and, to the knowledge of Parent, no such person has a reasonable basis
for any such claim.
6.16 ENVIRONMENTAL MATTERS. There has been no "release or threatened
release of a hazardous substance" (as defined in CERCLA) or any other activities
of Hazardous Material on, under, about, or from any real property owned or
leased by Parent (collectively, the "Parent Real Property") other than those
activities that have not resulted and could not reasonably be expected to result
in any material liability on the part of Parent. To the knowledge of Parent, all
hazardous waste generated at Parent's properties have been disposed of at sites
that maintain valid permits under RCRA and any other applicable Environmental
Requirement. To the knowledge of Parent and except as set forth in Section 6.16
of the Parent Disclosure Schedule, there are no underground tanks, PCBs, or
asbestos containing materials on the Parent Real Property. Except as set forth
in Schedule 6.16 of the Parent Disclosure Schedule, Parent does not have any
written notice of any pending formal or informal assertion by any governmental
agency or other person that Parent or any predecessor business or owner or
operator of Parent Real Property may be a responsible or potentially responsible
party in connection with any violation or obligation arising under any
Environmental Requirement at any site or facility (including the Parent Real
Property itself).
6.17 ERISA. Neither Parent nor any ERISA Affiliate of Parent maintains
or contributes to or is obligated to contribute to, and has ever maintained or
contributed to or been obligated to contribute to, (i) any Multiemployer Plan,
(ii) any a Multiple Employer Plan or (iii) except as set forth in Schedule 6.17
of the Parent Disclosure Schedule, any Plan, including but not limited to a
Pension Plan. With respect to the Plan(s) disclosed in Schedule 6.17 of the
Parent Disclosure Schedule:
(i) Each such Plan is in compliance in all material
respects with the applicable provisions of ERISA, the Code, and other
federal or state law. Any such Plan which is intended to qualify under
Section 401(a) of the Code has received a favorable determination letter
from the IRS and to the knowledge of Parent, nothing has occurred that
would cause the loss of such qualification. Parent and each ERISA
Affiliate of Parent has made all required contributions to any such Plan
subject to Section 412 of the Code, and no application for a funding
waiver or an extension of any amortization period pursuant to Section
412 of the Code has been made with respect to any such Plan.
(ii) There are no pending claims (other than routine claims
for benefits) or, to the knowledge of Parent, threatened claims,
actions, or lawsuits, or action by any governmental authority, with
respect to any such Plan, and there has been no prohibited transaction
or violation of the fiduciary responsibility rules with respect to any
such Plan.
(iii) (1) the execution of, and the performance of the
transactions contemplated in, this Agreement will not (either alone or
upon the occurrence of any additional or subsequent events) constitute
an event under any Plan that will or is reasonably expected to result in
any payment (whether of severance pay or otherwise), acceleration,
forgiveness of indebtedness, vesting, distribution, increase in benefits
or obligation to fund benefits with respect to any employee; (2) no such
Plan which constitutes a Pension Plan (as defined below) has any
Unfunded Pension Liability; (3) neither Parent nor any ERISA Affiliate
of Parent has incurred, or reasonably expects to incur, any material
liability under Title IV of ERISA with respect to any such Plan which
constitutes a Pension Plan (other than premiums due and not delinquent
under Section 4007 of ERISA); (4) neither Parent nor any ERISA Affiliate
of Parent has incurred, or reasonably expects to incur, any liability
(and no event has occurred which, with the giving of notice under
Section 4219 of ERISA, would result in such liability) under Section
4201 or 4243 of ERISA with respect to a Multiemployer Plan; and (5)
neither Parent nor any ERISA Affiliate of Parent has engaged in a
transaction that could be subject to Section 4069 or 4212(c) of ERISA.
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6.18 POOLING OF INTERESTS TREATMENT. To Parent's knowledge, neither
Parent nor any of its affiliates has taken or agreed to take any action or is
aware of any condition which would prevent Parent from accounting for the
transactions provided for herein as a Pooling-of-Interests.
6.19 OPINION OF FINANCIAL ADVISOR. Parent or its Board of Directors has
received the written opinion of Everen Securities dated December 15, 1998, to
the effect that, as of the date thereof, the consideration to be paid in respect
of the Company Common Stock and the Company Options is fair from a financial
point of view to Parent. An executed copy of such opinion has been delivered to
the Company.
ARTICLE VII
COVENANTS
7.1 ALTERNATIVE PROPOSALS. The Company agrees that prior to June 1,
1999, (a) that they shall not, and they shall direct and use their best efforts
to cause the Company's officers, directors, stockholders, employees, agents, and
representatives (including, without limitation, any investment banker, attorney,
or accountant retained by the Company) not to, initiate, solicit, or encourage,
directly or indirectly, any inquiries or the making or implementation of any
proposal or offer (including, without limitation, any proposal or offer to its
stockholders) with respect to a merger, acquisition, consolidation, or similar
transaction involving the Company, or any purchase of all or any significant
portion of the assets or any equity securities of the Company, or any initial
public offering or private placement of the securities of the Company (any such
proposal or offer being hereinafter referred to as an "Alternative Proposal")
or, consistent with their corporate fiduciary obligations, engage in any
negotiations concerning, or provide any confidential information or data to, or
have any discussions with, any person relating to an Alternative Proposal, or
otherwise facilitate any effort or attempt to make or implement an Alternative
Proposal; (b) that they will immediately cease and cause to be terminated any
existing activities, discussions, or negotiations with any parties conducted
heretofore with respect to any of the foregoing, and they will take the
necessary steps to inform the individuals or entities referred to above of the
obligations undertaken in this Section 7.1; and (c) that they will notify Parent
immediately if any such inquiries or proposals are received by, any such
information is requested from, or any such negotiations or discussions are
sought to be initiated or continued with, the Company; provided, however, that,
notwithstanding any other provision hereof, the Company may (i) engage in
discussions or negotiations with a third party who (without any solicitation,
initiation or encouragement, directly or indirectly, by or with the Company or
its representatives after the date hereof) seeks to initiate such discussions or
negotiations and may furnish such third party information concerning the Company
and its business, properties and assets if, and only to the extent that, (A)(x)
the third party has first made a bona fide Alternative Proposal in writing prior
to the date upon which this Agreement and the Merger shall have been approved
and adopted by the required vote of the stockholders of the Company, (y) the
Company's Board of Directors concludes in good faith (after consultation with
its financial advisor) that the acquisition transaction contemplated by such
Alternative Proposal is reasonably capable of being completed, taking into
account all legal, financial, regulatory and other aspects of the Alternative
Proposal and the person making the Alternative Proposal, and could, if
consummated, reasonably be expected to result in a transaction more favorable to
the Company's stockholders from a financial point of view than the Merger
contemplated by this Agreement (any such Alternative Proposal, a "Company
Superior Proposal") and (z) the Company's Board of Directors shall have
concluded in good faith, after considering applicable provisions of state law,
and after consultation with outside counsel, that such action is required for
the Board of Directors to act in a manner consistent with its fiduciary duties
under applicable law and (B) prior to furnishing such information to or entering
into discussions or negotiations with such persons, the Company provides prompt
notice to Parent to the effect that the Company is furnishing information to or
entering into discussions or negotiations with such person. Nothing in this
Section 7.1 shall (x) permit the Company to terminate this Agreement (except as
specifically provided in Article X hereof), (y) permit the Company to enter into
any agreement with respect to an Alternative Proposal prior to the termination
of this Agreement pursuant to Article X (it being agreed that during the term of
this Agreement, the Company shall not enter into any agreement with any person
that provides for, or in any way facilitates, an Alternative Proposal (other
than a confidentiality agreement in customary form)), or (z) affect any other
obligation of the Company under this Agreement. Notwithstanding the foregoing,
in the event that the Board of Directors of the Company shall conclude in good
faith, after considering applicable state law, and after consultation with
outside counsel, that such action is required for it to act in a manner
consistent with its fiduciary duties under applicable law, the Board of
Directors of the Company may withdraw or modify its approval or recommendation
of this Agreement and the Merger.
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7.2 ESCROW OF SOURCE CODE. Immediately upon the execution of this
Agreement, the Company shall execute and deliver to Parent the Source Code
Escrow Agreement attached as Exhibit A to this Agreement and shall deliver the
source codes for the Products into escrow as provided therein.
7.3 INTERIM OPERATIONS.
Prior to the Effective Time, except as authorized by any other provision
of this Agreement, unless Parent has consented in writing thereto, the Company
will not do any of the things enumerated in Section 5.8(b). Further, the
Company:
(a) shall conduct its operations according to its usual, regular,
and ordinary course in substantially the same manner as heretofore conducted;
(b) shall use its best efforts to preserve intact its business
organization and goodwill, keep available the services of its officers,
employees, and partners and maintain satisfactory relationships with those
persons having business relationships with them;
(c) shall promptly deliver to Parent copies of monthly trial
balances taken from the books of account of the Company and prepared in the
ordinary course of business;
(d) will maintain the existence of and protect its Proprietary
Rights;
(e) will comply in all material respects with applicable
contractual obligations;
(f) will operate the Company businesses in compliance with all
applicable municipal, county, state, federal, and foreign laws, regulations,
ordinances, standards, and orders as now in effect (including, without
limitation, the building, zoning, and life safety codes as currently applied
with respect thereto) where the failure to comply therewith would have a Company
Material Adverse Effect.
(g) will pay as and when due the accounts payable that arise in
the ordinary course of its business except to the extent that the amount owing
is being duly contested by the Company and such contest does not have a Company
Material Adverse Effect and adequate reserves therefore are reflected on the
Company Balance Sheet in accordance with the representations and warranties
contained in this Agreement;
(h) will provide to Parent copies of all material documents that
relate to, and, upon request, with verbal or written updates concerning the
status of any litigation filed as of the date hereof or filed from and after the
date hereof by or against the Company after the date of this Agreement but prior
to the Closing Date where the amount claimed or assessed by management of the
Company is likely to be claimed exceeds $3,000;
(i) will permit Parent and its employees, agents, consultants,
accounting, and legal representatives to have reasonable access to all books,
records, contracts, leases, key personnel, property, plant, and equipment of the
Company during normal business hours and furnish to Parent such information
concerning the operations of the Company as Parent or its representatives may
reasonably request.
7.4 REGISTRATION STATEMENT/PROXY STATEMENT.
(a) Parent shall prepare and file with the Commission as soon as
practicable after the date hereof a Registration Statement (the "Registration
Statement") on Form S-4 under the Securities Act, as amended, with respect to
the Parent Common Stock issuable in the Merger, which Registration Statement
shall also serve as a "Proxy Statement" for purposes of obtaining the approval
of Parent's stockholders of this Agreement and a "Proxy Statement/Prospectus"
for purposes of obtaining the approval of the Company's stockholders of this
Agreement. Parent will cause the Proxy Statement/Prospectus and the Registration
Statement to comply as to form in all material respects with the applicable
provisions of the Securities Act, the Exchange Act and the rules and regulations
thereunder. Parent shall use all reasonable efforts to have the Registration
Statement declared effective by the Commission as promptly as practicable.
Parent shall use all reasonable efforts to obtain, prior to the effective date
of the Registration Statement, all necessary state securities law or "Blue Sky"
permits or approvals required to carry out the transactions contemplated by
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this Agreement, and Parent will pay all expenses incident thereto. Parent agrees
that the Registration Statement and each amendment or supplement thereto at the
time of mailing thereof and at the time of the meeting of stockholders of the
Company or of Parent will not include an untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading; provided, however, that the foregoing shall not apply to
the extent that any such untrue statement of a material fact or omission to
state a material fact was made by the Parent in reliance upon and in conformity
with written information concerning the Company furnished to Parent by the
Company specifically for use in the Registration Statement. The Company agrees
that the written information concerning the Company provided by it for inclusion
in the Registration Statement and each amendment or supplement thereto, at the
time of mailing thereof and at the time of the meeting of the stockholders of
the Company or of Parent, will not include an untrue statement of a material
fact or omit to state a material fact required to be stated therein or necessary
to make the statements therein, in light of the circumstances under which they
were made, not misleading. No amendment or supplement to the Registration
Statement will be made by Parent without the approval of the other party. Parent
will advise the Company, promptly after it receives notice, of the issuance of
any stop order, the suspension of the qualification of the Parent Common Stock
issuable in connection with the Merger for offering or sale in any jurisdiction,
any request by any state securities regulating authority for amendment of the
Registration Statement, or requests by any state securities regulatory authority
for additional information.
(b) Parent, Merger Sub, and the Company shall cooperate with one
another in the preparation and filing of the Registration Statement and shall
use their reasonable best efforts to promptly obtain and furnish the information
required to be included in the Registration Statement and to respond promptly to
any comments or requests made by the Commission with respect to the Registration
Statement. Each party hereto shall promptly notify the other parties of the
receipt of comments of, or any requests by, the Commission with respect to the
Registration Statement and shall promptly supply the other parties with copies
of all correspondence between such party (or its representatives) and the
Commission (or its staff) relating thereto. Parent, Merger Sub, and the Company
each agrees to correct any information provided by it for use in the
Registration Statement that shall have become, or is, false or misleading.
7.5 MEETING OF STOCKHOLDERS. Each of Parent and the Company will take
all action necessary in accordance with applicable law and their respective
charter documents to convene a meeting of their respective stockholders on or
before March 31, 1999 to consider and vote upon the approval of this Agreement
and the transactions contemplated hereby. Subject to Section 7.1 of this
Agreement, the Board of Directors of each of Parent and the Company shall
recommend such approval and each of Parent and the Company shall take all lawful
action to solicit such approval, including, without limitation, timely mailing
the Proxy Statement or the Proxy Statement/Prospectus, as applicable, to their
respective stockholders. The Board of Directors of Parent shall nominate Tom
Loutzenheiser and a second person selected by the Company and acceptable to
Parent to serve as a Class II and a Class I director, respectively, of Parent
upon the consummation of the Merger and shall take all action necessary in
accordance with applicable law and its Certificate of Incorporation and Bylaws
to cause its stockholders to consider and vote upon the election of such persons
as directors of Parent.
7.6 NOTICES TO HOLDERS OF COMPANY OPTIONS. The Company will take all
actions necessary in accordance with applicable law and the terms of the Company
Option Plans to provide all required notice of the Merger to the holders of
Company Options.
7.7 FILINGS; OTHER ACTION. Subject to the terms and conditions herein
provided, the Company and Parent shall and shall cause any appropriate other
party to: (a) use all reasonable efforts to cooperate with one another in (i)
determining which filings are required to be made prior to the Effective Time
with, and which consents, approvals, permits, or authorizations are required to
be obtained prior to the Effective Time from governmental or regulatory
authorities of the United States, the several states and foreign jurisdictions
in connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby and (ii) timely making all
such filings and timely seeking all such consents, approvals, permits, or
authorizations; and (b) use all reasonable efforts to take, or cause to be
taken, all other action and do, or cause to be done, all other things necessary,
proper, or appropriate to consummate and make effective the transactions
contemplated by this Agreement.
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7.8 DELIVERY OF FINANCIAL STATEMENTS.
(a) Parent has delivered audited financial statements, prepared in
accordance with GAAP consistently applied, as of and for the two years ended
December 31, 1996 and 1997 and unaudited financial statements, also prepared in
accordance with GAAP consistently applied, as of and for the nine months ended
September 30, 1998. The Company has delivered audited financial statements,
prepared in accordance with GAAP consistently applied, as of and for the year
ended December 31, 1997, and unaudited financial statements, also, prepared in
accordance with GAAP consistently applied, as of and for the year ended December
31, 1996 and the nine months ended September 30, 1997 and 1998. All such audited
financial statements were prepared by independent certified public accounting
firms, licensed and certified to practice before the Commission. Parent shall
reimburse the Company for one-half of all costs incurred by the Company in
connection with its delivery of its audited financial statements up to a maximum
reimbursement of $12,500.
(b) If the Registration Statement is not declared effective on or
before February 14, 1998, Parent and the Company shall each deliver to each
other audited financial statements, prepared in accordance with GAAP
consistently applied, as of and for the year ended December 31, 1998, on or
before February 28, 1998; and in any event, such audited financial statements
shall be delivered at least 10 days prior to the Closing.
(c) Prior to the Effective Time, Parent shall promptly deliver to
the Company copies of monthly trial balances taken from the books of account of
Parent at the end of each month and prepared in the ordinary course of business.
7.9 RELEASE OF GUARANTY. Upon the consummation of the Merger as set
forth in this Agreement, Tom Loutzenheiser and Gayl Loutzenheiser shall be
released from all obligations arising under that certain Guaranty Agreement
dated December 2, 1998 between Mr. Loutzenheiser, Ms. Loutzenheiser and Parent
and that certain Stock Pledge Agreement dated December 2, 1998 between Mr.
Loutzenheiser, Ms. Loutzenheiser and Parent
7.10 PUBLICITY. Each of Parent and the Company shall, subject to
Parent's legal obligations (including requirements of stock exchanges and other
similar regulatory bodies), consult with each other before issuing any press
release or otherwise making public statements with respect to the transactions
contemplated hereby.
7.11 LISTING APPLICATION. Parent shall promptly prepare and submit to
the Nasdaq a listing application covering the shares of Parent Common Stock
issuable in the Merger, and shall use its best efforts to obtain, prior to the
Effective Time, approval for the listing of such Parent Common Stock, subject to
official notice of issuance.
7.12 FURTHER ACTION. Each party hereto shall, subject to the fulfillment
at or before the Effective Time of each of the conditions set forth herein or
the waiver thereof, directly or by or through its officers or directors, perform
such further acts and execute such documents whether before or after the
Effective Time as may be reasonably required to effect the Merger. In addition,
subject to the limitations set forth in this Agreement, and unless specifically
prohibited by applicable law, each party will use its best efforts to cause all
of the conditions to Closing set forth in this Agreement that are within its
control to be satisfied prior to the Closing Date and will not take any action
inconsistent with its obligations under this Agreement or which could hinder or
delay the consummation of the transactions contemplated by this Agreement or
that would cause any representation, warranty, or covenant made by it in this
Agreement or in any certificate, list, exhibit, or other instrument furnished or
to be furnished pursuant hereto, or in connection with the transaction
contemplated hereby, to be untrue in any material respect as of the Effective
Time.
7.13 EXPENSES. Whether or not the Merger is consummated, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such expenses except as
expressly provided herein (including the provisions of Section 7.8(a) relating
to the Company accounting expenses).
7.14 POOLING. From and after the date hereof and until the expiration of
the Restricted Period (as defined below), neither Parent nor the Company shall
or shall permit any of its subsidiaries or controlled affiliates to take, and
Parent and the Company shall use their respective best efforts to cause their
other affiliates not to take, any action, or fail to take any action, that would
jeopardize the treatment of the Merger as a Pooling of Interests. For purposes
hereof, the Restricted Period shall mean the period commencing on the date
hereof and terminating on the date on which thirty days of combined operations
are publicly announced by Parent in accordance with the provisions of Section
7.15 hereof.
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7.15 PUBLICATION OF FINANCIALS. As promptly as reasonably practicable
after the first complete fiscal quarter after the Effective Time that includes
at least 30 days of combined operations of the Company and Parent, Parent will
cause to be publicly reported in a Quarterly Report on Form 10-QSB financial
statements of Parent that include such combined operations.
7.16 TAX MATTERS. Parent and Merger Sub covenant and agree that: (i)
they will treat and cause the Surviving Corporation to treat the Merger as a
reorganization qualifying under Section 368(a)(2)(E) of the Code and will file
and cause the Surviving Corporation to file all returns and reports (including
without limitation those required under Treasury Regulation Section 1.368-3) as
required and in a manner consistent with such treatment and (ii) they will take
no action that will prevent or be inconsistent with treating the Merger as a
reorganization qualifying under Section 368(a)(2)(E) of the Code.
7.17 VOTING AGREEMENTS. Concurrently with the execution of this
Agreement, Apexx stockholders who together own a majority of the outstanding
shares of Company Common Stock, including Tom Loutzenheiser, Gayl Loutzenheiser,
David Dahms, Albert Youngwerth, Heather Youngwerth, Lawrence Lynch, George
Minow, Chris Minow, William Guy Rivers and Ray Jenks shall enter into a voting
agreement substantially in the form of the agreement set forth as Exhibit B to
this Agreement.
7.18 EMPLOYMENT AGREEMENTS. Concurrently with the execution of this
Agreement, each of Tom Loutzenheiser, Albert Youngwerth, John Hanousek and Ray
Jenks shall enter into the employment agreements set forth as Exhibit C-1, C-2,
C-3 and C-4, respectively, to become effective after the Effective Time.
ARTICLE VIII
CONDITIONS
8.1 CONDITIONS TO EACH PARTY'S OBLIGATION TO EFFECT THE MERGER. The
respective obligation of each party to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions:
(a) This Agreement and the transactions contemplated hereby shall
have been approved in the manner required by applicable law by the holders of
the issued and outstanding shares of capital stock of Company and of Parent.
(b) Neither of the parties hereto shall be subject to any order or
injunction of a court of competent jurisdiction that prohibits the consummation
of the transactions contemplated by this Agreement. In the event any such order
or injunction shall have been issued, each party agrees to use its reasonable
efforts to have any such injunction lifted or order reversed.
(c) No action, suit, proceeding, or investigation to suspend the
offering of Parent Common Stock in connection with the Merger shall have been
initiated and be continuing, and all necessary approvals under state securities
laws relating to the issuance or trading of the Parent Common Stock to be issued
to the Company stockholders in connection with the Merger shall have been
received.
(d) The Registration Statement shall have become effective prior
to the mailing by each of the Parent and Company of the Proxy
Statement/Prospectus to their respective stockholders, and no stop order
suspending the effectiveness of the Registration Statement shall then be in
effect.
(e) All consents, authorizations, orders, and approvals of (or
filings or registrations with) any governmental commission, board, or other
regulatory body required in connection with the execution, delivery, and
performance of this Agreement shall have been obtained or made, except for
filings in connection with the Merger and any other documents required to be
filed after the Effective Time.
(f) The Parent Common Stock to be issued to the Company
stockholders in connection with the Merger shall have been approved for listing
on the Nasdaq, subject only to official notice of issuance.
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(g) No action, suit, or proceeding shall be pending or threatened
by or before any court or governmental body in which an unfavorable judgment,
order, or decree would prevent any of the transactions contemplated hereby or
cause any such transaction to be declared unlawful or rescinded or that could
reasonably be expected to cause a Company Material Adverse Effect or a Parent
Material Adverse Effect.
(h) Parent shall have been advised by BDO Seidman, LLP that, based
on the information available to BDO Seidman, LLP and assuming compliance by
Parent and the stockholders of the Company with their covenants and agreements
in this Agreement and the agreements to be entered into in connection with the
consummation of the transactions contemplated by this Agreement, the Merger will
be treatable as a Pooling of Interests; provided, however, that if this closing
condition shall not have been satisfied or waived prior to the Closing Date,
Parent or the Company shall, if requested by the other party, negotiate in good
faith to make such adjustments to the terms and conditions of this Agreement as
would enable Parent and the Company to proceed with the Merger on the purchase
method of accounting, without restrictions required under the Pooling-of-
Interests treatment.
(i) Parent, Merger Sub, the Company, and the Escrow Agent shall
have entered into the escrow agreement set forth as Exhibit D hereto (the
"Escrow Agreement").
(j) Each of Tom Loutzenheiser, Albert Youngwerth, John Hanousek
and Ray Jenks shall not have repudiated in any manner the employment agreements
set forth as Exhibit C-1, C-2, C-3 and C-4, respectively.
(k) Davis, Graham & Stubbs LLP shall have rendered an opinion, in
form and substance reasonably satisfactory to Parent and the Company, that the
Merger qualifies as a tax-free reorganization under Section 368(a) of the Code
(which shall be supported in part by customary certificates of officers of
Parent and the Company).
(l) All documents and instruments to be delivered by the parties
in connection with the transactions contemplated hereby shall be in form and
substance reasonably satisfactory to the parties and their respective counsel,
and the parties shall have received such other documents and instruments as they
may reasonably request in connection therewith.
8.2 CONDITIONS TO OBLIGATION OF THE COMPANY TO EFFECT THE MERGER. The
obligation of the Company to effect the Merger shall be subject to the
fulfillment at or prior to the Closing Date of the following conditions:
(a) Parent shall have performed in all respects its agreements
contained in this Agreement required to be performed on or prior to the Closing
Date, the representations and warranties of Parent and Merger Sub contained in
this Agreement and in any document delivered in connection herewith shall be
true and correct as of the Closing Date, and Company shall have received a
certificate of the President or a Vice President of Parent, dated the Closing
Date, certifying to such effect; provided, however, that notwithstanding
anything herein to the contrary, this Section 8.2(a) shall be deemed to have
been satisfied even if such performance has not occurred or such representations
or warranties are not true and correct, unless the failure to perform or the
failure of any of the representations or warranties to be so true and correct
would have or would be reasonably likely to have a Parent Material Adverse
Effect.
(b) There shall have been delivered to the Company certificates,
dated within five days of the Closing Date, of the Secretary of State of the
State of Delaware and the State of Idaho, with respect to the incorporation,
subsistence, and good legal standing of Parent and Merger Sub, respectively.
(c) All consents and approvals of any third parties required in
connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby shall have been obtained
and delivered to the Company.
(d) The average last sale price per share of Parent Common Stock
for the ten (10) trading days prior to the Closing Date shall not be lower than
$3.40; provided, however, that if this closing condition shall not have been
satisfied or waived prior to the Closing Date, the Company shall, if requested
by Parent, negotiate in good faith with Parent to make such adjustments to the
terms and conditions of this Agreement as would enable the Company to proceed
with the Merger on such adjusted terms.
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(e) There shall have been delivered to the Company certificates,
dated the Closing Date, of the President or Vice President and Secretary,
respectively, of Parent and Merger Sub (i) to the effect that the Certificate of
Incorporation of Parent and Articles of Incorporation of Merger Sub have not
been amended since the date of the Certificates referred to in Section 8.2(b)
above, (ii) attaching a true and complete copy of the Bylaws of Parent and
Merger Sub as in effect on the Closing Date, and (iii) attaching a true and
complete copy of the resolutions of the Board of Directors of Parent and Merger
Sub approving the execution and delivery of this Agreement and authorizing the
consummation of the transactions contemplated hereby.
(f) There shall have been delivered to the Company certificates,
dated the Closing Date, with respect to the incumbency and signatures of all
officers of Parent and Merger Sub signing this Agreement and any other
certificate, agreement, or instrument delivered on behalf of Parent in
connection with this Agreement.
(g) Parent shall have fully implemented a mutually agreed upon
marketing plan in the first quarter of 1999, in accordance with the provisions
of Exhibit E attached hereto, including, without limitation, fully funding the
marketing spending levels set forth therein.
(h) Parent shall have delivered to the Company an opinion of its
counsel in the form attached hereto as Exhibit F.
8.3 CONDITIONS TO OBLIGATION OF PARENT AND MERGER SUB TO EFFECT THE
MERGER. The obligations of Parent and Merger Sub to effect the Merger shall be
subject to the fulfillment at or prior to the Closing Date of the following
conditions:
(a) The Company shall have performed in all respects its
agreements contained in this Agreement required to be performed on or prior to
the Closing Date, the representations and warranties of the Company contained in
this Agreement and in any document delivered in connection herewith shall be
true and correct as of the Closing Date as if made on the Closing Date, and
Parent shall have received a certificate of the President or a Vice President of
the Company, dated the Closing Date, certifying to such effect; provided,
however, that notwithstanding anything herein to the contrary, this Section
8.3(a) shall be deemed to have been satisfied even if such performance has not
occurred or such representations or warranties are not true and correct, unless
the failure to perform or the failure of any of the representations or
warranties to be so true and correct would have or would be reasonably likely to
have a Parent Material Adverse Effect.
(b) The status of any litigation of the Company as described in
Schedule 5.14 of the Company Disclosure Schedule and/or the terms of any
agreements relating to the compromise or dismissal of any action, suit or
proceeding described in Schedule 5.14 of the Company Disclosure Schedule
(subject to any restrictions on the disclosure of such terms) shall be
satisfactory to Parent.
(c) Other than with respect to a default identified in the Company
Disclosure Schedule as of the date of this Agreement, the Company shall not be
in default of any obligation, where said default cannot be cured by the Closing
Date, under any of the Material Contracts, unless any such defaults,
individually or in the aggregate, would not reasonably be expected to have a
Company Material Adverse Effect, and Parent shall have received a certificate of
the President or a Vice President of the Company, dated the Closing Date,
certifying to such effect.
(d) All consents and approvals of any third parties required in
connection with the execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby shall have been obtained
and delivered to Parent.
(e) The average last sale price per share of Parent Common Stock
for the ten (10) trading days prior to the Closing Date shall not be higher than
$9.00; provided, however, that if this closing condition shall not have been
satisfied or waived prior to the Closing Date, Parent shall, if requested by the
Company, negotiate in good faith with the Company to make such adjustments to
the terms and conditions of this Agreement as would enable Parent to proceed
with the Merger on such adjusted terms.
(f) The number of Dissenting Shares shall not consist of more than
five percent (5%) of the issued and outstanding Company Common Stock.
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(g) The holders of at least ninety-five percent (95%) of the
issued and outstanding Company Common Stock shall have executed and delivered to
the Company the Stockholders Agreement (as defined in Section 9.4).
(h) There shall have been delivered to Parent a certificate, dated
within five days of the Closing Date, of the Secretary of State of the State of
Idaho, listing all charter documents of the Company on file in the office of
said Secretary of State and copies of the Articles of Incorporation of the
Company and all amendments thereto, certified as true and correct by said
Secretary of State within five days of the Closing Date.
(i) There shall have been delivered to Parent a certificate, dated
within five days of the Closing Date, of the Secretary of State of the State of
Idaho, with respect to the incorporation, subsistence, and good legal standing
of the Company.
(j) There shall have been delivered to Parent a certificate, dated
within five days of the Closing Date, of the Secretary of State of the State of
Idaho or such other jurisdictions, with respect to the authorization by such
jurisdiction of the Company to transact business in the jurisdictions identified
in Schedule 5.1 of the Company Disclosure Schedule.
(k) There shall have been delivered to Parent a certificate, dated
the Closing Date, of the Secretary of the Company (i) to the effect that the
Company's Articles of Incorporation have not been amended since the date of the
Certificate referred to in Section 8.3(h) above, (ii) attaching a true and
complete copy of the Company's Bylaws as in effect on the Closing Date, and
(iii) attaching a true and complete copy of the resolutions of the Company's
Board of Directors approving the execution and delivery of this Agreement and
authorizing the consummation of the transactions contemplated hereby.
(l) There shall have been delivered to Parent a certificate, dated
the Closing Date, with respect to the incumbency and signatures of all officers
of the Company signing this Agreement and any other certificate, agreement or
instrument delivered on behalf of the Company in connection with this Agreement.
(m) There shall have been no change in the financial condition or
results of operations of the Company from that reflected in the Company Balance
Sheet so as to result in a Company Material Adverse Effect.
(n) The Company shall have delivered to Parent an opinion of its
counsel in the form attached hereto as Exhibit G.
(o) Representatives of the Company shall, in the presence of
Parent, have performed a successful live build demonstration of the Software.
Such live demonstration shall be reasonably designed and performed so that
Parent may have the opportunity to confirm to its satisfaction that the source
code version of each of the Software deliverables hereunder readily produces the
corresponding object code version. Such build demonstration shall be
"successful" if (i) it demonstrates to Parent's reasonable satisfaction the
accomplishment of any and all steps as are necessary readily to produce fully
functional object code from the source code, including without limitation, any
steps in which the source code is compiled, assembled, linked and/or interpreted
so as to produce the object code version of such Software, and (ii) such
production of object code is otherwise in accordance with the relevant
representations and warranties made by the Company in this Agreement.
(p) Parent shall have received a letter, in form and substance
satisfactory to Parent, from Pacific Crest, (i) stating that Pacific Crest shall
look only to the Company's stockholders for any fees or expenses in excess of
$200,000 otherwise payable by the Company to Pacific Crest, (ii) waiving all of
Pacific Crest's right to collect any fees or expenses in excess of $200,000 from
the Company or Parent, and (iii) agreeing that the Company's $200,000 obligation
to Pacific Crest shall be paid as follows: $50,000 at the time of the Closing,
and the balance of $150,000 on the earlier of 45 days after the Closing or upon
the completion of a private placement by Parent of securities of the Parent with
a total value of at least $2,000,000.
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ARTICLE IX
ESCROW; LIMITS ON LIABILITY
9.1 DELIVERY OF PARENT COMMON STOCK TO THE ESCROW AGENT. As of the
Effective Time, Parent shall deposit, or shall cause to be deposited, with the
Escrow Agent, for the benefit of the holders of shares of the Company Common
Stock (other than Dissenting Shares), for distribution in accordance with this
Article IX, the Deferred Merger Consideration (the "Deferred Merger
Consideration Fund"). For tax purposes, the Parent Common Stock held by the
Escrow Agent shall be treated as owned by the beneficial holders of the Parent
Common Stock (rather than by the Parent or any affiliate of the Parent). The
beneficial holders of the Parent Common Stock shall be entitled to direct the
manner in which the Escrow Agent shall vote the shares of Parent Company Common
Stock held in the Deferred Merger Consideration Fund.
9.2 DIVIDENDS DECLARED AFTER THE EFFECTIVE TIME. Any dividends or other
distributions with respect to the Parent Common Stock comprising the Deferred
Merger Consideration that are declared after the Effective Time but prior to the
date any Deferred Merger Consideration is paid by the Escrow Agent to the
Company's stockholders shall be paid to the Escrow Agent, deposited by the
Escrow Agent into the Deferred Merger Consideration Fund, and distributed by the
Escrow Agent in accordance with this Article IX. Any dividends or distributions
with respect to the Deferred Merger Consideration relating to record dates for
such dividends or distributions after the Effective Time shall be deposited with
the Exchange Agent and shall constitute part of the Deferred Merger
Consideration.
9.3 SURVIVAL OF REPRESENTATIONS. Notwithstanding any examination made by
or on behalf of Parent or Merger Sub, the knowledge of Parent or Merger Sub or
any of the respective officers, directors, stockholders, employees, or agents of
Parent or Merger Sub, or the acceptance by any party of any certificate or
opinion, the representations, warranties, covenants, and agreements set forth in
this Agreement, or in any writing delivered by the Company in connection with
this Agreement, shall survive the consummation of the transactions contemplated
hereby and shall expire on the Survival Date.
9.4 INDEMNITY. On or prior to the Closing Date, the holders of at least
ninety-five percent (95%) of the issued and outstanding Company Common Stock
shall have executed and delivered to the Company an agreement with respect to
the indemnification of Parent and Merger Sub with respect to breaches of the
terms and conditions of this Agreement (the "Stockholders Agreement"), which
Stockholders Agreement shall be substantially in the form of Exhibit H attached
hereto. Except for the rights granted to Parent pursuant to Section 9.5 hereof,
the Escrow Agreement and the Stockholders Agreement shall govern Parent's rights
in the event of a breach of any representation, warranty, covenant, or agreement
contained in this Agreement or any document contemplated hereby.
9.5 APPLICATION BY PARENT TO ESCROW AGENT FOR PAYMENT OF CLAIMS. On or
prior to the Closing Date, the Company, Parent, Merger Sub, and a designated
representative of the holders of the Company Common Stock shall execute and
deliver the Escrow Agreement, which Escrow Agreement shall provide for Parent's
right to seek payment for a breach of any representation, warranty, covenant, or
agreement contained in this Agreement or any document contemplated hereby from
the Deferred Merger Consideration Fund. Parent's right to seek payment of any
such claim from the Deferred Merger Consideration Fund shall be governed by the
Escrow Agreement.
9.6 DISTRIBUTION OF DEFERRED MERGER CONSIDERATION TO THE COMPANY'S
STOCKHOLDERS. The Escrow Agent shall, in accordance with and the times provided
in the Escrow Agreement, deliver to the Company's stockholders (other than
holders of Dissenting Shares) each stockholder's pro rata share of any cash and
securities constituting Deferred Merger Consideration remaining after the
payment of any claims by Parent for breaches of any representation, warranty,
covenant, or agreement contained in this Agreement or any document contemplated
hereby.
9.7 UNCLAIMED FUNDS. Any portion of the Deferred Merger Consideration
Fund (including the proceeds of any investments thereof and any shares of Parent
Common Stock) that remains unclaimed by the former stockholders of the Company
two years after the Effective Time shall be delivered to the Surviving
Corporation. Any former stockholders of the Company who have not theretofore
complied with this Article IX and the Escrow Agreement shall thereafter look
only to the Surviving Corporation for payment of their shares of Parent Common
Stock, and any unpaid dividends and distributions on the Parent Common Stock
deliverable in respect of each share of the Company Common Stock such
stockholder holds as determined pursuant to this Agreement, in each case,
without any interest thereon.
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9.8 LIMITS ON LIABILITY. The limitations on the liability of the former
stockholders of the Company shall be set forth in the Stockholders' Agreement.
Notwithstanding anything to the contrary in this Agreement or any agreement or
document contemplated hereby, Parent's aggregate liability for breaches of the
representations, warranties or covenants made in this Agreement, or in any
agreement or document contemplated hereby, shall not exceed $700,000.
ARTICLE X
TERMINATION
10.1 TERMINATION BY MUTUAL CONSENT. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the approval of this Agreement by the stockholders of the Company, by the
mutual consent of Parent and the Company.
10.2 TERMINATION BY EITHER PARENT OR THE COMPANY. This Agreement may be
terminated and the Merger may be abandoned by action of the Board of Directors
of either Parent or the Company if (a) the Merger shall not have been
consummated by June 1, 1999 (the "Outside Closing Date"), or (b) all conditions
to Closing set forth in Section 8.1 shall not have been waived or satisfied by
the Outside Closing Date; provided, that the party seeking to terminate this
Agreement as a result of the failure of the conditions set forth in Sections
8.1(c), (d) or (g) hereof shall have used all reasonable efforts to remove such
injunction, order, or decree; and provided, further, in the case of a
termination under either Section 10.2(a) or Section 10.2(b) hereof, the
terminating party shall not have breached in any material respect its
obligations under this Agreement in any manner that shall have proximately
contributed to the failure to consummate the Merger.
10.3 TERMINATION BY THE COMPANY. This Agreement may be terminated and
the Merger may be abandoned at any time prior to the Effective Time, before or
after the adoption and approval by the stockholders of the Company referred to
in Section 8.1(a) hereof, by action of the Board of Directors of the Company, if
(a) the Board of Directors of Parent shall have withdrawn or modified its
approval or recommendation of this Agreement or the Merger to Parent's
stockholders, (b) all conditions to Closing set forth in Section 8.2 of this
Agreement shall not have been waived or satisfied by the Outside Closing Date,
or (c) the Board of Directors of the Company shall conclude in good faith, after
considering applicable state law, after consulting with outside counsel, that in
light of a Company Superior Proposal such action is required to act in a manner
consistent with its fiduciary duties under applicable law. If the Company
desires to terminate this Agreement pursuant to Section 10.3(c) hereof, the
Company may (only prior to the approval of this Agreement by the Company's
stockholders) terminate this Agreement solely in order to concurrently enter
into a definitive acquisition agreement or similar agreement with respect to any
Company Superior Proposal. The Company may not terminate the Agreement pursuant
to this Section 10.3(c) until after the second business day following delivery
to Parent of written notice advising Parent that the Board of Directors of the
Company is prepared to enter into a definitive acquisition agreement with
respect to a Company Superior Proposal and only if, during such two-business day
period, the Company shall, if requested by Parent, have negotiated in good faith
with Parent to make such adjustments to the terms and conditions of this
Agreement as would enable the Company to proceed with the Merger on such
adjusted terms.
10.4 TERMINATION BY PARENT. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or after
the adoption and approval by the stockholders of Parent hereof, by action of the
Board of Directors of Parent, if (a) the Board of Directors of the Company shall
have withdrawn or modified its approval or recommendation of this Agreement or
the Merger, (b) the Board of Directors of the Company shall have recommended an
Alternative Proposal to the Company's stockholders, or (c) all conditions to
Closing set forth in Section 8.3 hereof shall not have been waived or satisfied
by the Outside Closing Date.
10.5 EFFECT OF TERMINATION AND ABANDONMENT. In the event of termination
of this Agreement and the abandonment of the Merger pursuant to this Article X,
all obligations of the parties hereto shall terminate, except the obligations of
the parties pursuant to this Section 10.5 and Section 7.12 and except for the
provisions of Sections 11.2, 11.3, 11.5, 11.6, 11.7, 11.11, 11.12, and 11.13 and
pursuant to any confidentiality agreement signed by the parties hereto.
Notwithstanding the foregoing, in the event of termination of this Agreement
pursuant to Section 10.3 or 10.4, nothing
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herein shall prejudice the ability of the non-terminating party from seeking
damages from any other party for any termination of this Agreement, including
without limitation, attorneys' fees and the right to pursue any remedy at law
for damages or in equity. Notwithstanding anything to the contrary in this
Agreement, if the Company terminates this Agreement pursuant to Section 10.3(a)
hereof because of Parent's actions in withdrawing or modifying its
recommendation of this Agreement or the Merger to Parent's stockholders, the
Company shall be entitled to liquidated damages equal to $750,000 (the "Company
Breakup Fee"). The Company Breakup Fee shall be payable by Parent in cash by
wire transfer of immediately available funds within twenty (20) business days
following the termination of this Agreement pursuant to Section 10.3(b) hereof.
Notwithstanding anything to the contrary in this Agreement, if Parent terminates
this Agreement pursuant to Section 10.4(b) hereof because of the Company's
actions in recommending an Alternative Proposal to the Company's stockholders,
Parent shall be entitled to a fee equal to $2,000,000 (the "Parent Breakup
Fee"). The Breakup Fee shall be payable by the Company in cash by wire transfer
of immediately available funds within twenty (20) business days following the
termination of this Agreement pursuant to Section 10.4(b) hereof.
10.6 EXTENSION; WAIVER. At any time prior to the Effective Time, any
party hereto, by action taken by its Board of Directors, may, to the extent
legally allowed, (a) extend the time for the performance of any of the
obligations or other acts of the other parties hereto, (b) waive any
inaccuracies in the representations and warranties made to such party contained
herein or in any document delivered pursuant hereto, and (c) waive compliance
with any of the agreements or conditions for the benefit of such party contained
herein. Any agreement on the part of a party hereto to any such extension or
waiver shall be valid only if set forth in an instrument in writing signed on
behalf of such party.
ARTICLE XI
GENERAL PROVISIONS
11.1 CONFIDENTIALITY. The Company agrees that it shall, and it shall
direct and use its best efforts to cause its officers, directors, stockholders,
employees, agents, and representatives to, keep the existence of this Agreement
and the terms of the transactions contemplated hereby strictly confidential and
to not disclose such matters to any third party without Parent's prior written
consent. The Company acknowledges that Parent has certain reporting obligations
as a public company, and agrees that Parent may make public disclosure of the
existence of this Agreement and the terms of the transactions contemplated
hereby at such time as it believes it to be prudent to do so, based upon the
advice of counsel and with notice to and consultation with the Company.
11.2 NOTICES. Any notice required to be given hereunder shall be
sufficient if in writing, and sent by facsimile transmission and by same day or
overnight courier service (with proof of service), hand delivery or certified or
registered mail (return receipt requested and first-class postage prepaid),
addressed as follows:
If to Parent or Merger Sub: If to the Company:
eSoft, Inc. Apexx Technology, Inc.
5335-C Sterling Drive 506 South 11th Street
Boulder, Colorado 80301 Boise, Idaho 83702
Attn: President Attn: President
Telephone: (303) 444-1600 Telephone: (208) 336-9400
Facsimile: (303) 444-1640 Facsimile: (208) 336-9445
With copies to: With copies to:
Davis, Graham & Stubbs LLP Hawley Troxell Ennis & Hawley LLP
370 17th Street, Suite 4700 877 Main Street, Suite 1000
Denver, Colorado 80202 Boise, Idaho 83701
Attn: Lester R. Woodward Attn: Paul M. Boyd
Telephone: (303) 892-7392 Telephone: (208) 344-8000
Facsimile: (303) 893-1379 Facsimile: (208) 344-6505
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or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered, or delivered by courier or on the third
day after the mailing thereof.
11.3 ASSIGNMENT, BINDING EFFECT. Neither this Agreement nor any of the
rights, interests, or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties. Subject to the preceding sentence, this
Agreement shall be binding upon and shall inure to the benefit of the parties
hereto and their respective successors and assigns. Nothing in this Agreement,
expressed or implied, is intended to confer on any person other than the parties
hereto and certain stockholders of the Company (as to Article IX of this
Agreement) and other named beneficiaries of covenants or agreements in the
Agreement, or their respective heirs, successors, executors, administrators, and
assigns any rights, remedies, obligations, or liabilities under or by reason of
this Agreement.
11.4 ENTIRE AGREEMENT. This Agreement, the Exhibits, the Company
Disclosure Schedule, the Parent Disclosure Schedule, the confidentiality
agreements between the parties hereto and any schedules or agreements delivered
in connection with this Agreement constitute the entire agreement among the
parties with respect to the subject matter hereof and supersede all prior
agreements and understandings among the parties with respect thereto. No
information previously provided, addition to or modification of any provision of
this Agreement shall be binding upon any party hereto unless made in writing and
signed by all parties hereto.
11.5 AMENDMENT. This Agreement may be amended by the parties hereto, by
action taken by their respective Boards of Directors, at any time before or
after approval of matters presented in connection with the Merger by the
stockholders of the Company, Parent and Merger Sub, but after any such
stockholder approval, no amendment shall be made which by law requires the
further approval of stockholders without obtaining such further approval. This
Agreement may not be amended except by an instrument in writing signed on behalf
of each of the parties hereto.
11.6 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to its rules of
conflict of laws.
11.7 COUNTERPARTS. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
Executed counterparts transmitted by fax shall be effective as originals.
11.8 HEADINGS. Headings of the Articles and Sections of this Agreement
are for the convenience of the parties only, and shall be given no substantive
or interpretive effect whatsoever.
11.9 INTERPRETATION. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and vice
versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
11.10 WAIVERS. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties, covenants
or agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
11.11 INCORPORATION OF EXHIBITS. The Company Disclosure Schedule, the
Parent Disclosure Schedule and all Exhibits and schedules attached hereto and
referred to herein are hereby incorporated herein and made a part hereof for all
purposes as if fully set forth herein.
11.12 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction unless the same is
material
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to the terms of this Agreement, in the judgment of either party to this
Agreement, in which case the parties shall negotiate in good faith to revise the
same so as to be valid or enforceable. If any provision of this Agreement is so
broad as to be unenforceable, the provision shall be interpreted to be only so
broad as is enforceable.
11.13 ENFORCEMENT OF AGREEMENT. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent breaches of this Agreement and to
enforce specifically the terms and provisions hereof, this being in addition to
any other remedy to which they are entitled at law or in equity.
11.14 SUBSIDIARIES. As used in this Agreement, the word "Subsidiary"
when used with respect to any Party means any corporation, partnership, or other
organization, whether incorporated or unincorporated, of which such party
directly or indirectly owns or controls at least a majority of the securities or
other interests having by their terms ordinary voting power to elect a majority
of the board of directors or others performing similar functions with respect to
such corporation or other organization, or any organization of which such party
is a general partner; provided, however, that in the case of Parent, a
Subsidiary shall not include any corporation to be acquired by it concurrently
with or subsequent to the acquisition of the Company.
11.15 CONSENT. Whenever the consent or approval of a party is required
by the terms of this Agreement, unless otherwise provided, the same shall not be
unreasonably withheld or delayed.
IN WITNESS WHEREOF, the parties have executed this Agreement and caused
the same to be duly delivered on their behalf on the day and year first written
above.
"PARENT"
eSOFT, INC.
By: /s/ Jeffrey Finn
--------------------
Name: Jeffrey Finn
Title: President
"MERGER SUB"
eSOFT ACQUISITION CORPORATION
By: /s/ Jeffrey Finn
--------------------
Name: Jeffrey Finn
Title: President
"THE COMPANY"
APEXX TECHNOLOGY, INC.
By: /s/ Tom Loutzenheiser
----------------------
Name: Tom Loutzenheiser
Title: President
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APPENDIX B
STOCKHOLDERS AGREEMENT
<PAGE> 156
STOCKHOLDERS AGREEMENT
STOCKHOLDERS AGREEMENT (this "Agreement"), dated as of May , 1999
between eSoft, Inc., a Delaware corporation ("Parent") and the stockholders
executing the signature pages hereof (each, a "Stockholder" and together, the
"Stockholders"), each of whom is a Stockholder of Apexx Technology, Inc., an
Idaho corporation (the "Company").
RECITALS
A. The Boards of Directors of Parent and the Company each have
determined that a business combination between Parent and the Company is fair
and in the best interests of their respective companies and Stockholders, and
accordingly have agreed to effect the merger (the "Merger") provided for in that
certain Amended and Restated Agreement and Plan of Merger (the "Merger
Agreement") between Parent, the Company, and eSoft Acquisition Corporation, a
Delaware corporation and wholly owned subsidiary of Parent ("Merger Sub"), dated
as of January 25, 1999 upon the terms and subject to the conditions set forth in
the Merger Agreement.
B. Each Stockholder will receive in the Merger shares of common stock,
$.01 par value, of Parent ("Parent Common Stock"), which Parent Common Stock
will be registered with the Securities and Exchange Commission.
C. In consideration of Parent's agreement to enter into the Merger
Agreement and consummate the transactions contemplated thereby, the Stockholders
have agreed to indemnify Parent and Merger Sub with respect to certain matters
under the Merger Agreement, all as set forth herein.
NOW, THEREFORE, in consideration of the foregoing, and of the
representations, warranties, covenants, and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE 1
INDEMNIFICATION
1.1 SURVIVAL OF REPRESENTATIONS, ETC. Each Stockholder agrees that,
notwithstanding any examination made by or on behalf of Parent or Merger Sub,
the knowledge of Parent or Merger Sub or any of the respective officers,
directors, Stockholders, employees, or agents of Parent or Merger Sub, or the
acceptance by any party of any certificate or opinion, in each case with respect
to the Company, the representations, warranties, covenants, and agreements of
the Company set forth the Merger Agreement, or in any writing delivered by the
Company in connection with the Merger Agreement, shall survive the consummation
of the transactions contemplated thereby and shall expire on the date that is
twelve months from the Closing Date (the "Survival Date").
1.2 INDEMNITY. Subject to the terms and conditions of this Article,
each Stockholder shall indemnify and hold Parent harmless from and against all
demands, claims, causes of action, assessments, including any Federal or state
tax audits, losses, damages, liabilities, costs, and expenses, including,
without limitation, reasonable attorneys' fees and any expenses incident to the
investigation or enforcement of this Article I (collectively, "Losses"), that
Parent may suffer, sustain or become subject to by reason of or arising out of
(i) any breach of any covenant or agreement of the Company contained in the
Merger Agreement or (ii) any inaccuracy in any representation or warranty of the
Company contained in the Merger Agreement, the Company Disclosure Schedule, or
any other agreement or instrument executed by the Company pursuant to the Merger
Agreement. All of the foregoing are hereinafter collectively referred to as
"Claims."
1.3 LIMITATIONS ON INDEMNIFICATION. The indemnification provided for in
Section 1.2 hereof shall be subject to the following limitations and conditions:
<PAGE> 157
(a) No Stockholder shall be liable for indemnification of Parent under
Section 1.2 of this Agreement for any Losses incurred by Parent unless the
aggregate amount of all Losses incurred by Parent and otherwise subject to
indemnification pursuant to said Section 1.2 exceeds $200,000 and thereafter
only for the amount of Losses in excess of $200,000.
(b) No Stockholder shall be liable for any Losses resulting from any
inaccuracy in any representation or warranty of the Company contained in the
Merger Agreement unless written notice of entitlement to make a Claim (whether
or not any monetary Losses have actually been suffered) with respect to such
Losses is given by Parent to Stockholder on or prior to the expiration of the
survival of the particular representation or warranty at issue, as set forth in
Section 1.1 above.
(c) Each Stockholder's aggregate liability for any Losses shall not
exceed such Shareholder's Pro Rata Share of the Deferred Merger Consideration.
Parent agrees that it shall seek to recover any Losses for which Stockholder is
liable pursuant to this Article I only from such Stockholder's Pro Rata Share of
the Deferred Merger Consideration.
(d) In the event that a Stockholder is required to make any payment
under this Agreement, Parent shall be entitled to recover the amount so
determined from the Deferred Merger Consideration in accordance with this
Agreement and the Escrow Agreement. Any Parent Common Stock so recovered by
Parent shall be valued at a price of $4.75 per share. If there should be a
dispute as to the amount or manner of determination of any indemnity obligation
owed under this Agreement, Parent shall be entitled to recover such portion, if
any, of the obligation as shall not be subject to dispute. The difference, if
any, between the amount of the obligation ultimately determined as properly
payable under this Agreement and the portion, if any, theretofore paid shall
bear interest at a rate of eight percent (8%). Upon the payment in full of any
claim, either by setoff or otherwise, Stockholder shall be subrogated to the
rights of Parent against any person, firm, corporation, or other entity with
respect to the subject matter of such claim.
(e) Notwithstanding anything to the contrary in the foregoing, each
Stockholder shall be severally liable for any Losses as a result of any breach
of the representation and warranty set forth in Section 5.25 of the Merger
Agreement, and the limitations set forth in Section 1.5(a) through 1.4(d) above
shall not apply with respect to any Claim regarding such Losses.
1.4 CONDITIONS OF INDEMNIFICATION OF THIRD PARTY CLAIMS. The
obligations and liabilities of the parties hereunder with respect to Claims
resulting from the assertion of liability by third parties ("Third Party
Claims") shall be subject to the following terms and conditions:
(a) Each Stockholder hereby irrevocably makes, constitutes, and
appoints Tom Loutzenheiser as its agent (the "Representative") and authorizes
and empowers him to fulfill the role of Representative hereunder. In the event
of the resignation of the Representative, the resigning Representative shall
appoint a successor either from among the Stockholders or who shall otherwise be
acceptable to Parent and who shall agree in writing to accept such appointment,
and the resigning Representative's resignation shall not be effective until such
a successor shall exist. If the Representative should die or become
incapacitated, his successor shall be appointed within 30 days of his death or
incapacity by a majority of the Stockholders, and such successor either shall be
a Stockholder or shall otherwise be acceptable to Parent. The choice of a
successor Representative appointed in any manner permitted above shall be final
and binding upon all of the Stockholders. The decisions and actions of any
successor Representative shall be, for all purposes, those of the Representative
as if originally named herein.
(b) Each Stockholder hereby irrevocably makes, constitutes, and
appoints the Representative as such person's true and lawful attorney in fact
and agent, for such person and in such person's name, (i) to receive all notices
and communications directed to such Stockholder under this Agreement and to take
any action (or to determine to take no action) with respect thereto as he may
deem appropriate as effectively as such Stockholder could act for himself or
herself, including without limitation, the settlement or compromise of any
dispute or controversy, and (ii) to execute and deliver all instruments and
documents of every kind incident to the foregoing to all intents and purposes
and
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with the same effect as such Stockholder could do personally, and each such
Stockholder hereby ratifies and confirms as his or her own act, all that the
Representative shall do or cause to be done pursuant to the provisions hereof.
All notices and all other communications directed to Stockholders under this
Agreement shall be given to the Representative.
(c) Each Stockholder irrevocably consents to the service of any
process, pleading, notices, or other papers by the mailing of copies thereof by
registered, certified, or first class mail, postage prepaid, to the
Representative at such person's address set forth herein.
(d) The death or incapacity of any Stockholder shall not terminate the
authority and agency of the Representative.
(e) Each Stockholder hereby agrees to indemnify the Representative and
to hold him harmless against any loss, liability, or expense incurred without
negligent conduct or bad faith on the part of the Representative and arising out
of or in connection with his duties as Representative, including the costs and
expenses incurred by such Representative in defending against any claim of
liability in connection herewith.
(f) In the event that any claim or demand for which the Stockholders
would be liable to Parent or Merger Sub hereunder is asserted against or sought
to be collected by a third party, Parent shall promptly notify the
Representative of such claim or demand, specifying the nature of such claim or
demand and the amount or the estimated amount thereof to the extent then
feasible (which estimate shall not be conclusive of the final amount of such
claim or demand) (the "Claim Notice"). The Representative shall promptly provide
notice of each Claim Notice to each Stockholder owning more than 5% of the
Company Common Stock at the Effective Time and shall consult with such holders
concerning whether or not to dispute liability to Parent hereunder with respect
to such claim or demand. The Representative shall have 10 days from its receipt
of the Claim Notice (the "Notice Period") to notify Parent (i) whether or not
the Stockholders dispute their liability to Parent hereunder with respect to
such claim or demand, and (ii) if they do not dispute such liability, whether or
not they desire, at their sole cost and expense, to defend Parent against such
claim or demand; provided, however, Parent is hereby authorized prior to and
during the Notice Period to file any motion, answer, or other pleading that it
shall deem necessary or appropriate to protect its interests; provided further,
however, that Parent shall use its reasonable efforts to provide the
Representative with notice of any such filing and an opportunity to comment
thereon. In the event that the Representative notifies Parent within the Notice
Period that the Stockholders do not dispute such liability and desire to defend
against such claim or demand, then except as hereinafter provided, the
Representative shall have the right to defend by appropriate proceedings, which
proceedings shall be promptly settled or prosecuted to a final conclusion in
such a manner as to avoid any risk of Parent becoming subject to liability for
any other matter. If Parent desires to participate in, but not control, any such
defense or settlement it may do so at its sole cost and expense. If, in the
reasonable opinion of Parent, any such claim or demand involves an issue or
matter that could have an adverse effect on the business, operations, assets,
properties, or prospects of the Company or Parent or an affiliate of Parent,
Parent shall have the right to control the defense or settlement of any such
claim or demand, and its reasonable costs and expenses thereof shall be included
as part of the indemnification obligations of the Stockholders hereunder. If the
Representative disputes the Stockholders' liability with respect to such claim
or demand or elects not to defend against such claim or demand, whether by not
giving timely notice as provided above or otherwise, then the amount of any such
claim or demand, or, if the same be contested by the Representative or by Parent
(but Parent shall not have any obligation to contest any such claim or demand),
then that portion thereof as to which such defense is unsuccessful shall be
conclusively deemed to be a liability of the Stockholders hereunder (subject, if
the Representative has timely disputed liability, to a determination that the
disputed liability is covered by these indemnification provisions).
(g) In the event that Parent should have a claim against the
Stockholders hereunder that does not involve a claim or demand being asserted
against or sought to be collected from it by a third party, Parent shall
promptly send a Claim Notice with respect to such claim to the Representative.
If the Representative does not notify Parent within the Notice Period that he
disputes such claim, then the amount of such claim shall be conclusively deemed
a liability of the Stockholders hereunder.
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<PAGE> 159
(h) Nothing herein shall be deemed to prevent Parent from making a
claim hereunder for potential or contingent claims or demands provided the Claim
Notice sets forth the specific basis for any such potential or contingent claim
or demand and the estimated amount thereof to the extent then feasible and
Parent has reasonable grounds to believe that such a claim or demand will be
made.
1.5 ARBITRATION. Any dispute between the Representative and Parent with
respect to Parent's right to seek indemnification with respect to any Claim
pursuant to the provisions of this Article I shall be resolved by binding
arbitration in accordance with the following provisions of this Section 1.5;
provided, however, that either the Representative or Parent may seek injunctive
relief or other equitable relief to preserve the status quo pending arbitration.
(a) The Representative or Parent may submit any dispute that is subject
to arbitration under this Section 1.5 by giving written notice to the other
parties to such dispute. Within ten business days after receipt of such notice
by such other parties, the Representative shall appoint one arbitrator and
Parent shall appoint one arbitrator and within ten Business Days thereafter the
two arbitrators so appointed shall select a third arbitrator. If the
Representative or Parent shall fail to make such appointment within such ten-day
period, the other party may request the American Arbitration Association to
appoint the second arbitrator. The American Arbitration Association may
thereupon appoint the second arbitrator. If the two appointed arbitrators shall
fail to select a third arbitrator within said ten-day period, the Representative
and Parent shall mutually select the third arbitrator. If such parties are
unable to agree upon such selection, then such party may, upon at least five
Business Days' prior written notice to the other party, request the American
Arbitration Association to appoint the third arbitrator. The American
Arbitration Association may thereupon appoint the third arbitrator. All
arbitrators shall be experienced in corporate and financial matters and shall be
impartial and unrelated, directly or indirectly, so far as employment of
services is concerned to any of the parties or any of their respective
Affiliates. The arbitration shall be conducted in Denver, Colorado in accordance
with the Commercial Arbitration Rules of the American Arbitration Association,
as then in effect, except as otherwise provided in this Section 1.5.
(b) The three arbitrators shall investigate the facts and shall hold
hearings at which the parties may conduct limited discovery, present evidence
and arguments, be represented by counsel, and conduct cross examination. The
three arbitrators shall render a written decision on the matter presented to
them by majority vote as soon as practicable after the appointment of the third
arbitrator and in any event not more than 45 days after such appointment. The
decision of the arbitrators, which may include equitable relief, shall be final
and binding on the parties hereto, and judgment upon the decision may be entered
in any court having jurisdiction thereof. If the three arbitrators shall fail to
render a decision within said 45-day period, either party may institute such
action or proceeding in such court as shall be appropriate in the circumstances
and upon the institution of such action, the arbitration proceeding shall be
terminated and shall be of no further force and effect. The prevailing party
shall be awarded reasonable attorneys' fees, expert and nonexpert witness costs
and expenses, and other costs and expenses incurred in connection with the
arbitration, and the fees and costs of the arbitrators shall be borne by the
nonprevailing party unless, in either case, the arbitrators for good cause
determine otherwise. In resolving any dispute, the arbitrators shall apply the
provisions of this Agreement, without varying therefrom in any respect. The
arbitrators shall not have the power to add to, modify, or change any of the
provisions of this Agreement.
ARTICLE 2
RESTRICTIONS ON TRADING OF PARENT COMMON STOCK;
TRANSFER TO PACIFIC CREST
2.1 POOLING. Each Stockholder listed on Exhibit A hereto (collectively,
the "Control Stockholders") acknowledges that the Merger is intended to be
treated for financial accounting purposes as a "pooling of interests" in
accordance with generally accepted accounting principles. Each Control
Stockholder hereby represents, warrants, and agrees that such Control
Stockholder (i) will not make any sale, transfer, or other disposition of
Company
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<PAGE> 160
Common Stock owned by such Control Stockholder (including any Company Common
Stock acquired upon the exercise of options to purchase Company Common Stock)
during the period from the date hereof and ending at the earlier of the
Effective Time and the termination of the Merger Agreement, and (ii) will not
make any sale, transfer, or other disposition of Parent Common Stock owned by
such Stockholder (including any Parent Common Stock acquired upon the exercise
of options to purchase Parent Common Stock) after the Effective Time until such
time as financial statements that include at least 30 days of combined
operations of the Company and Parent after the Merger shall have been publicly
reported, unless such Control Stockholder shall have delivered to Parent prior
to any such sale, transfer, or other disposition, a written opinion from
independent public accountants for Parent, in form and substance reasonably
satisfactory to Parent, to the effect that such sale, transfer, or other
disposition will not cause the Merger not to be treated as a "pooling of
interests" for financial accounting purposes in accordance with generally
accepted accounting principles and the rules, regulations, and interpretations
of the Commission.
2.2 TRANSFER OF CERTAIN SHARES TO PACIFIC CREST SECURITIES. Each
Stockholder hereby authorizes Tom Loutzenheiser to execute and deliver to the
Exchange Agent instructions directing the Exchange Agent to transfer on such
Stockholder's behalf an aggregate of 3.016% of the Initial Merger Consideration
otherwise payable to such Stockholder to Pacific Crest Securities.
ARTICLE 3
GENERAL PROVISIONS
3.1 "PRO RATA SHARE; OTHER CAPITALIZED TERMS." As used in this
Agreement, the term "Pro Rata Share" of any amount shall mean the fraction that
is determined by dividing the number of shares of Company Common Stock held by a
Stockholder by the total number of shares of Company Common Stock held by all
Stockholders who are parties to this Agreement. Other capitalized terms used,
but not defined herein, shall have the meanings ascribed to them in the Merger
Agreement.
3.2 NOTICES. Any notice required to be given hereunder shall be
sufficient if in writing, and sent by facsimile transmission and by same day or
overnight courier service (with proof of service), hand delivery or certified or
registered mail (return receipt requested and first-class postage prepaid),
addressed as follows:
If to Parent or Merger Sub: If to the Stockholders:
eSoft, Inc. Tom Loutzenheiser
5335-C Sterling Drive Apexx Technology, Inc.
Boulder, CO 80301 506 South 11th Street
Attn: Jeffrey Finn Boise, Idaho 83702
Telephone: (303) 444-1600 Telephone: (208) 336-9400
Facsimile: (303) 444-1640 Facsimile: (208) 336-9445
With copies to: With copies to:
Davis, Graham & Stubbs LLP Hawley Troxell Ennis & Hawley LLP
370 17th Street, Suite 4700 877 Main Street, Suite 1000
Denver, Colorado 80202 Boise, Idaho 83701
Attn: Lester R. Woodward, Esq. Attn: Paul M. Boyd
Telephone: 303-892-7392 Telephone: (208) 344-8000
Facsimile: 303-893-1379 Facsimile: (208) 344-6505
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<PAGE> 161
or to such other address as any party shall specify by written notice so given,
and such notice shall be deemed to have been delivered as of the date so
telecommunicated, personally delivered, or delivered by courier or on the third
day after the mailing thereof.
3.3 ASSIGNMENT, BINDING EFFECT. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any of the
parties hereto (whether by operation of law or otherwise) without the prior
written consent of the other parties.
3.4 ENTIRE AGREEMENT. This Agreement and any schedules or agreements
delivered in connection with this Agreement constitute the entire agreement
among the parties with respect to the subject matter hereof and supersede all
prior agreements and understandings among the parties with respect thereto. No
information previously provided, addition to or modification of any provision of
this Agreement shall be binding upon any party hereto unless made in writing and
signed by all parties hereto.
3.5 AMENDMENT. This Agreement may not be amended except by an
instrument in writing signed on behalf of each of the parties hereto.
3.6 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware without regard to its rules of
conflict of laws.
3.7 COUNTERPARTS. This Agreement may be executed by the parties hereto
in separate counterparts, each of which when so executed and delivered shall be
an original, but all such counterparts shall together constitute one and the
same instrument. Each counterpart may consist of a number of copies hereof each
signed by less than all, but together signed by all of the parties hereto.
Executed counterparts transmitted by fax shall be effective as originals.
3.8 HEADINGS. Headings of the Articles and Sections of this Agreement
are for the convenience of the parties only, and shall be given no substantive
or interpretive effect whatsoever.
3.9 INTERPRETATION. In this Agreement, unless the context otherwise
requires, words describing the singular number shall include the plural and vice
versa, and words denoting any gender shall include all genders and words
denoting natural persons shall include corporations and partnerships and vice
versa.
3.10 WAIVERS. Except as provided in this Agreement, no action taken
pursuant to this Agreement, including, without limitation, any investigation by
or on behalf of any party, shall be deemed to constitute a waiver by the party
taking such action of compliance with any representations, warranties, covenants
or agreements contained in this Agreement. The waiver by any party hereto of a
breach of any provision hereunder shall not operate or be construed as a waiver
of any prior or subsequent breach of the same or any other provision hereunder.
3.11 SEVERABILITY. Any term or provision of this Agreement which is
invalid or unenforceable in any jurisdiction shall, as to that jurisdiction, be
ineffective to the extent of such invalidity or unenforceability without
rendering invalid or unenforceable the remaining terms and provisions of this
Agreement or affecting the validity or enforceability of any of the terms or
provisions of this Agreement in any other jurisdiction unless the same is
material to the terms of this Agreement, in the judgment of either party to this
Agreement, in which case the parties shall negotiate in good faith to revise the
same so as to be valid or enforceable. If any provision of this Agreement is so
broad as to be unenforceable, the provision shall be interpreted to be only so
broad as is enforceable.
3.12 ENFORCEMENT OF AGREEMENT. The parties hereto agree that
irreparable damage would occur in the event that any of the provisions of this
Agreement was not performed in accordance with its specific terms or was
otherwise breached. It is accordingly agreed that the parties shall be entitled
to an injunction or injunctions to prevent
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<PAGE> 162
breaches of this Agreement and to enforce specifically the terms and provisions
hereof, this being in addition to any other remedy to which they are entitled at
law or in equity.
3.13 CONSENT. Whenever the consent or approval of a party is required
by the terms of this Agreement, unless otherwise provided, the same shall not be
unreasonably withheld or delayed
IN WITNESS WHEREOF, the parties have executed this Agreement and caused
the same to be duly delivered on their behalf on the day and year first written
above.
"PARENT"
eSOFT, INC.
By: __________________________
Name: Jeffrey Finn
Title: President
STOCKHOLDER SIGNATURE PAGES FOLLOW
7
<PAGE> 163
<TABLE>
<CAPTION>
NUMBER
STOCKHOLDER OF STOCKHOLDER
NAME ADDRESS SHARES SIGNATURE
<S> <C> <C> <C>
Steve Bolen _____________________
Nancy Learned Briggs _____________________
Camelot Investments, Inc. _____________________
David Dahms _____________________
Frederick J. Ebert _____________________
Aaron James _____________________
Edwards Luggage Profit Sharing Plan _____________________
Richard H. Felix _____________________
John S. Franden _____________________
Janet K. Franden _____________________
Edward Ty Graham _____________________
Terry L. Gustavel _____________________
Patricia A. Gustavel _____________________
Lisa M. Hagan _____________________
Robert Hamlin _____________________
Scott M. Hayes _____________________
Stephen M. Havis _____________________
Eugene D. Heil _____________________
Mary Frances Heil _____________________
Raymond Jenks _____________________
Charles W. Jepson _____________________
Joel Just _____________________
Ann Just _____________________
Robert F. Klumpp _____________________
Lorraine C. Klumpp _____________________
James R. Klumpp _____________________
Janet Klumpp _____________________
Robert W. Klumpp _____________________
</TABLE>
8
<PAGE> 164
<TABLE>
<CAPTION>
NUMBER
STOCKHOLDER OF STOCKHOLDER
NAME ADDRESS SHARES SIGNATURE
<S> <C> <C> <C>
Thomas A. Klumpp _____________________
Robert J. Koontz _____________________
Kurtis J. Koontz _____________________
Kevin E. Learned _____________________
Edwin J. Loutzenheiser, Jr. _____________________
Katherine Loutzenheiser _____________________
Tom Loutzenheiser _____________________
Gayl Loutzenheiser _____________________
Ty Edwin Loutzenheiser _____________________
Holmes Lundt _____________________
Lawrence B. Lynch _____________________
David P. McAnaney _____________________
Mahn Investments LP _____________________
Stephen F. Meyer _____________________
Judith C. Meyer _____________________
George P. Minow _____________________
Chris Minow _____________________
Kelleen M. Morrison _____________________
Thyne Murdoch _____________________
Nancy K. Napier _____________________
Tony W. Olbrich _____________________
Ann C. Nosworthy _____________________
Drew J. Nosworthy _____________________
Oracle Investments, LP _____________________
Ward Parkingson _____________________
William Guy Rivers _____________________
Thomas R. Saldin _____________________
Raymond A. Smelek _____________________
</TABLE>
9
<PAGE> 165
<TABLE>
<CAPTION>
NUMBER
STOCKHOLDER OF STOCKHOLDER
NAME ADDRESS SHARES SIGNATURE
<S> <C> <C> <C>
Candice P. Smelek _____________________
Duane H. Steukle _____________________
Thomas E. Stitzel _____________________
Bonnie E. Stitzel _____________________
George Tholke _____________________
Richard L. Thomas _____________________
Norma J. Thomas _____________________
Mark Upson _____________________
H. James White _____________________
Albert J. Youngwerth _____________________
Heather Youngwerth _____________________
</TABLE>
10
<PAGE> 166
EXHIBIT A
<PAGE> 167
Control Stockholders
David Dahms
Gayl Loutzenheiser
Tom Loutzenheiser
Any other person who has been a member of the Board of Directors of the Company
at any time during the thirty (30) days prior to the Closing.
<PAGE> 168
APPENDIX C
OPINION OF EVEREN SECURITIES
<PAGE> 169
[EVEREN SECURITIES, INC. LETTERHEAD]
December 15, 1998
Board of Directors
eSoft, Incorporated
5335-C Sterling Drive
Boulder, Colorado 80301
Gentlemen:
We understand that eSoft, Incorporated ("eSoft") has agreed to acquire Apexx
Technology, Inc. ("Apexx") pursuant to an Agreement and Plan of Merger between
eSoft and Apexx in draft form dated December 15, 1998 (the "Agreement").
Pursuant to the Agreement, eSoft has agreed to acquire all of the outstanding
voting common stock (the "Stock") as well as all issued and outstanding options
to acquire the voting common stock (the "Stock") as well as all issued and
outstanding options to acquire the voting common stock (the "Options") of Apexx
in a tax free statutory merger (the "Merger"). eSoft intends to acquire all of
the Stock and Options through the exchange of 2,947,369 shares of eSoft common
stock (the "Consideration"). Of such Consideration, 1,568,623 shares shall be
issued to current holders of Apexx Stock, and 1,378,746 shares shall be
reserved for Option holders. Upon consummation of the Merger, Apexx current
shareholders, together with holders of the Options, will own approximately
24.9% of the total common shares on the same basis as current eSoft common
stock shareholders. Each share of eSoft common stock, options and warrants
outstanding prior to the Merger shall remain outstanding without change
subsequent to the Merger. We have been advised by eSoft, which is relying upon
the advice of counsel, that the Merger requires the approval of the
stockholders of both eSoft and Apexx, respectively, in accordance with
applicable law and Nasdaq requirements.
You have requested our opinion as to whether the Merger with Apexx is fair,
from a financial point of view, to eSoft and its shareholders as of the date
hereof.
In forming our opinion, we have, among other things:
(i) reviewed the letter of intent by and between eSoft and Apexx dated
November 20, 1998 (the "LOI");
(ii) reviewed the Agreement and Plan of Merger between eSoft and Apexx in
draft form dated December 15, 1998;
(iii) reviewed eSoft's annual report on Form 10-KSB for the year ended December
31, 1997 and quarterly reports on Form 10-QSB for the three month periods
ended March 31, 1998, June 30, 1998 and September 30, 1998;
(iv) reviewed eSoft's Form 8-K dated March 30, 1998 regarding the Company's
March 16, 1998 initial public offering of common stock and eSoft's Form
8-K dated June 19, 1998 regarding the Company's June 15, 1998 private
placement of common stock;
<PAGE> 170
[EVERGREEN SECURITIES LETTERHEAD]
eSoft, Incorporated
December 15, 1998
Page 2
(v) reviewed certain non-public operating and financial information,
including projections relating to eSoft's business prepared by the
management of eSoft;
(vi) met with certain members of eSoft's management to discuss its
operations, financial statements and future prospects;
(vii) reviewed unaudited financial statements of Apexx of the periods
January 1, 1997 to December 31, 1997 and January 1, 1998 to September
30, 1998, as well as an audited balance sheet as of December 31, 1997
prepared by Balukoff, Lindstrom & Co., P.A.;
(viii) reviewed certain non-public operating and financial information,
including internal management reports, projections and a three year
business plan dated October 1, 1998 prepared by the management of
Apexx;
(ix) met with certain members of Apexx's management to discuss its
operations, financial statements and future prospects;
(x) reviewed publicly available financial data and stock market
performance data of other companies which we deemed somewhat
comparable to eSoft and Apexx;
(xi) reviewed the terms of selected recent acquisitions of companies which
we deemed somewhat comparable to Apexx;
(xii) reviewed the historical stock prices and reported traded volumes of
eSoft's common shares;
(xiii) analyzed the pro forma effects of the Merger on projected earnings;
(xiv) performed a relative contribution analysis based on historical and
projected financial results; and
(xv) conducted such other studies, analyses, inquiries and investigations
as we deemed appropriate.
In arriving at our opinion, we have considered such factors as we have deemed
relevant including, but not limited to: (i) the historical market prices and
trading volume of the common stock of eSoft; (ii) the relative contribution of
eSoft and Apexx to the financial performance of the combined entity on a pro
forma basis; (iii) the market value of publicly held companies we deemed
somewhat comparable to eSoft and Apexx relative to revenues; (iv) the
transaction values of business combinations which we believe somewhat comparable
to eSoft and Apexx relative to revenues; (v) the pro forma effects on projected
earnings of eSoft from the Merger; and (vi) other items we deemed to be
relevant.
During our review, we relied upon and assumed, without independent verification,
the accuracy, completeness and fairness of the financial and other information
provided, and have further relied upon the assurances of management that they
are unaware of any facts that would make the information provided to us to be
incomplete or misleading for the purposes of this opinion. Although our opinion
does not encompass forward looking valuation techniques such as discounted cash
flow analysis, we have assumed that the financial projections which we reviewed
to have been reasonably prepared on bases reflecting the best currently
available estimates and judgements of the future financial performance of each
company. In arriving at our opinion, we have not performed any independent
evaluation or appraisal of the assets of eSoft or Apexx. Our opinion is
necessarily based on the economic, market, and other conditions as in effect on,
and the
<PAGE> 171
[EVEREN SECURITIES LETTERHEAD]
eSoft, Incorporated
December 15, 1998
Page 3
information made available to us as of, the date hereof. We disclaim any
undertaking or obligation to advise any person of any change in any fact or
matter affecting our opinion which may come or be brought to our attention
after the date of this opinion.
eSoft has retained EVEREN Securities, Inc. ("EVEREN") to render the opinion and
EVEREN will receive a fee for our services. EVEREN currently receives a
quarterly investment banking fee from the Company and is entitled to receive
warrants to purchase eSoft common stock. In addition, EVEREN and/or its
officers, directors, employees or members of their families and investment
portfolios managed by the firm or its affiliated companies, may have an interest
in the securities and/or options of the securities of eSoft, and may purchase,
sell, trade or act as a market maker in the securities of eSoft while this
letter is in circulation. No summary of, or excerpt from, this opinion may be
used, and no published reference to this opinion letter may be made except with
our prior express written approval, which shall not be unreasonably withheld.
This opinion does not constitute a recommendation to any shareholder of eSoft
as to any actions which such shareholder should take in conjunction with the
Merger. This opinion relates solely to the question of fairness to eSoft and
its shareholders, from a financial point of view, of the Merger as currently
proposed. Further, we express no opinion herein as to the structure, terms or
effect of any other aspect of the Merger, including, without limitation, any
effects resulting from the application of any bankruptcy, fraudulent conveyance
or other federal or state insolvency law or of any pending or threatened
litigation affecting eSoft or Apexx.
Based on the foregoing, we are of the opinion that the Merger is fair, from a
financial point of view, to eSoft and its shareholders as of the date hereof.
Very truly yours,
EVEREN Securities, Inc.
By: /s/ STUART H. MASON
-------------------------
Stuart H. Mason
Managing Director
<PAGE> 172
APPENDIX D
DISSENTERS' RIGHTS
<PAGE> 173
IDAHO CODE
TITLE 30. CORPORATIONS
CHAPTER 1. GENERAL BUSINESS CORPORATIONS
PART 13. DISSENTERS' RIGHTS
30-1-1301 DEFINITIONS.
In this part:
(1) "Corporation" means the issuer of the shares held by a dissenter before
the corporate action, or the surviving or acquiring corporation by
merger or share exchange of that issuer.
(2) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 30-1-1302, Idaho Code, and who exercises
that right when and in the manner required by sections 30-1-1320
through 30- 1-1328, Idaho Code.
(3) "Fair value," with respect to a dissenter's shares, means the value of
the shares immediately before the effectuation of the corporate action
to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action unless exclusion
would be inequitable.
(4) "Interest" means interest from the effective date of the corporate
action until the date of payment, at the average rate currently paid by
the corporation on its principal bank loans or, if none, at a rate that
is fair and equitable under all the circumstances.
(5) "Record shareholder" means the person in whose name shares are
registered in the records of the corporation or the beneficial owner of
shares to the extent of the rights granted by a nominee certificate on
file with a corporation.
(6) "Beneficial shareholder" means the person who is a beneficial owner of
shares held in a voting trust or by a nominee as the record
shareholder.
(7) "Shareholder" means the record shareholder or the beneficial shareholder.
30-1-1302 RIGHT TO DISSENT.
(1) A shareholder is entitled to dissent from, and obtain payment of the
fair value of his shares in the event of, any of the following
corporate actions:
(a) Consummation of a plan of merger to which the corporation is a
party:
(i) If shareholder approval is required for the merger by
section 30-1- 1103, Idaho Code, or the articles of
incorporation and the shareholder is entitled to vote
on the merger; or
(ii) If the corporation is a subsidiary that is merged
with its parent under section 30-1-1104, Idaho Code;
(b) Consummation of a plan of share exchange to which the
corporation is a party as the corporation whose shares will be
acquired, if the shareholder is entitled to vote on the plan;
(c) Consummation of a sale or exchange of all, or substantially
all, of the property of the corporation other than in the
usual and regular course of business, if the shareholder is
entitled to vote on the sale or exchange, including a sale in
dissolution, but not including a sale pursuant to court order
or a sale for cash pursuant to a plan by which all or
substantially all of the net proceeds of the sale will be
distributed to the shareholders within one (1) year after the
date of sale;
<PAGE> 174
(d) An amendment of the articles of incorporation that materially
and adversely affects rights in respect of a dissenter's
shares because it:
(i) Alters or abolishes a preferential right of the
shares;
(ii) Creates, alters or abolishes a right in respect of
redemption, including a provision respecting a
sinking fund for the redemption or repurchase, of the
shares;
(iii) Alters or abolishes a preemptive right of the holder
of the shares to acquire shares or other securities;
(iv) Excludes or limits the right of the shares to vote on
any matter, or to cumulate votes, other than a
limitation by dilution through issuance of shares or
other securities with similar voting rights; or
(v) Reduces the number of shares owned by the shareholder
to a fraction of a share if the fractional share so
created is to be acquired for cash under section
30-1-604, Idaho Code; or
(e) Any corporate action taken pursuant to a shareholder vote to
the extent the articles of incorporation, bylaws, or a
resolution of the board of directors provides that voting or
nonvoting shareholders are entitled to dissent and obtain
payment for their shares.
(2) A shareholder entitled to dissent and obtain payment for his shares
under this part may not challenge the corporate action creating his
entitlement unless the action is unlawful or fraudulent with respect to
the shareholder or the corporation.
(3) This section does not apply to the holders of shares of any class or
series if the shares of the class or series are redeemable securities
issued by a registered investment company as defined pursuant to the
investment company act of 1940 (15 U.S.C. 80a-15 U.S.C. 80a-64).
(4) Unless the articles of incorporation of the corporation provide
otherwise, this section does not apply to the holders of shares of a
class or series if the shares of the class or series were registered on
a national securities exchange, were listed on the national market
systems of the national association of securities dealers automated
quotation system or were held of record by at least two thousand
(2,000) shareholders on the date fixed to determine the shareholders
entitled to vote on the proposed corporate action.
30-1-1303 DISSENT BY NOMINEES AND BENEFICIAL OWNERS.
(1) A record shareholder may assert dissenters' rights as to fewer than all
the shares registered in his name only if he dissents with respect to
all shares beneficially owned by any one (1) person and notifies the
corporation in writing of the name and address of each person on whose
behalf he asserts dissenters' rights. The rights of a partial dissenter
under this subsection are determined as if the shares as to which he
dissents and his other shares were registered in the names of different
shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to shares
held on his behalf only if:
(a) He submits to the corporation the record shareholder's written
consent to the dissent not later than the time the beneficial
shareholder asserts dissenters' rights; and
(b) He does so with respect to all shares of which he is the
beneficial shareholder or over which he has power to direct
the vote.
<PAGE> 175
30-1-1320 NOTICE OF DISSENTERS' RIGHTS.
(1) If proposed corporate action creating dissenters' rights under section
30-1-1302, Idaho Code, is submitted to a vote at a shareholders'
meeting, the meeting notice must state that shareholders are or may be
entitled to assert dissenters' rights under this part and be
accompanied by a copy of this part.
(2) If corporate action creating dissenters' rights under section 30-1-
1302, Idaho Code, is taken without a vote of shareholders, the
corporation shall notify in writing all shareholders entitled to assert
dissenters' rights that the action was taken and send them the
dissenters' notice described in section 30-1-1322, Idaho Code.
30-1-1321 NOTICE OF INTENT TO DEMAND PAYMENT.
(1) If proposed corporate action creating dissenters' rights under section
30-1-1302, Idaho Code, is submitted to a vote at a shareholders'
meeting, a shareholder who wishes to assert dissenters' rights:
(a) Must deliver to the corporation before the vote is taken
written notice of his intent to demand payment for his shares
if the proposed action is effectuated; and
(b) Must not vote his shares in favor of the proposed action.
(2) A shareholder who does not satisfy the requirements of subsection (1)
of this section is not entitled to payment for his shares under this
part.
30-1-1322 DISSENTERS' NOTICE.
(1) If proposed corporate action creating dissenters' rights under section
30-1-1302, Idaho Code, is authorized at a shareholders' meeting, the
corporation shall deliver a written dissenters' notice to all
shareholders who satisfied the requirements of section 30-1-1321, Idaho
Code.
(2) The dissenters' notice must be sent no later than ten (10) days after
the corporate action was taken, and must:
(a) State where the payment demand must be sent and where and when
certificates for certificated shares must be deposited;
(b) Inform holders of uncertificated shares to what extent
transfer of the shares will be restricted after the payment
demand is received;
(c) Supply a form for demanding payment that includes the date of
the first announcement to news media or to shareholders of the
terms of the proposed corporate action and requires that the
person asserting dissenters' rights certify whether or not he
acquired beneficial ownership of the shares before that date;
(d) Set a date by which the corporation must receive the payment
demand, which date may not be fewer than thirty (30) nor more
than sixty (60) days after the date the notice in subsection
(1) of this section is delivered; and
(e) Be accompanied by a copy of this part.
30-1-1323 DUTY TO DEMAND PAYMENT.
(1) A shareholder sent a dissenters' notice described in section 30-1-
1322, Idaho Code, must demand payment, certify whether he acquired
beneficial ownership of the shares before the date required to be set
<PAGE> 176
forth in the dissenters' notice pursuant to section 30-1-1322(2)(c),
Idaho Code, and, with respect to any certificated shares, deposit his
certificates in accordance with the terms of the notice.
(2) The shareholder who demands payment and, with respect to any
certificated shares, deposits his share certificates under subsection
(1) of this section retains all other rights of a shareholder until
these rights are canceled or modified by the taking of the proposed
corporate action.
(3) A shareholder who does not demand payment or deposit his share
certificates where required, each by the date set in the dissenters'
notice, is not entitled to payment for his shares under this part.
30-1-1324 SHARE RESTRICTIONS.
(1) The corporation may restrict the transfer of uncertificated shares from
the date the demand for their payment is received until the proposed
corporate action is taken or the restrictions released under section
30-1-1326, Idaho Code.
(2) The person for whom dissenters' rights are asserted as to
uncertificated shares retains all other rights of a shareholder until
these rights are canceled or modified by the taking of the proposed
corporate action.
30-1-1325 PAYMENT.
(1) Except as provided in section 30-1-1327, Idaho Code, as soon as the
proposed corporate action is taken, or upon receipt of a payment
demand, the corporation shall pay each dissenter who complied with
section 30-1-1323, Idaho Code, the amount the corporation estimates to
be the fair value of his shares, plus accrued interest.
(2) The payment must be accompanied by:
(a) The corporation's balance sheet as of the end of a fiscal year
ending not more than sixteen (16) months before the date of
payment, an income statement for that year, a statement of
changes in shareholders' equity for that year, and the latest
available interim financial statements, if any;
(b) A statement of the corporation's estimate of the fair value of
the shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under
section 30-1-1328, Idaho Code; and
(e) A copy of this part.
30-1-1326 FAILURE TO TAKE ACTION.
(1) If the corporation does not take the proposed action within sixty (60)
days after the date set for demanding payment and depositing share
certificates, the corporation shall return the deposited certificates
and release the transfer restrictions imposed on uncertificated shares.
(2) If after returning deposited certificates and releasing transfer
restrictions, the corporation takes the proposed action, it must send a
new dissenters' notice under section 30-1-1322, Idaho Code, and repeat
the payment demand procedure.
<PAGE> 177
30-1-1327 AFTER-ACQUIRED SHARES.
(1) A corporation may elect to withhold payment required by section 30-1-
1325, Idaho Code, from a dissenter unless he was the beneficial owner
of the shares before the date set forth in the dissenters' notice as
the date of the first announcement to news media or to shareholders of
the terms of the proposed corporate action.
(2) To the extent the corporation elects to withhold payment under
subsection (1) of this section, after taking the proposed corporate
action, it shall estimate the fair value of the shares, plus accrued
interest, and shall pay this amount to each dissenter who agrees to
accept it in full satisfaction of his demand. The corporation shall
send with its offer a statement of its estimate of the fair value of
the shares, an explanation of how the interest was calculated, and a
statement of the dissenter's right to demand payment under section
30-1-1328, Idaho Code.
30-1-1328 PROCEDURE IF SHAREHOLDER DISSATISFIED WITH PAYMENT OR OFFER.
(1) A dissenter may notify the corporation in writing of his own estimate
of the fair value of his shares and amount of interest due, and demand
payment of his estimate, less any payment under section 30-1-1325,
Idaho Code, or reject the corporation's offer under section 30-1-1327,
Idaho Code, and demand payment of the fair value of his shares and
interest due, if:
(a) The dissenter believes that the amount paid under section
30-1-1325, Idaho Code, or offered under section 30-1-1327,
Idaho Code, is less than the fair value of his shares or that
the interest due is incorrectly calculated;
(b) The corporation fails to make payment under section 30-1-1325,
Idaho Code, within sixty (60) days after the date set for
demanding payment; or
(c) The corporation, having failed to take the proposed action,
does not return the deposited certificates or release the
transfer restrictions imposed on uncertificated shares within
sixty (60) days after the date set for demanding payment.
(2) A dissenter waives his right to demand payment under this section
unless he notifies the corporation of his demand in writing under
subsection (1) of this section within thirty (30) days after the
corporation made or offered payment for his shares.
30-1-1330 COURT ACTION TO DETERMINE SHARE VALUE.
(1) If a demand for payment under section 30-1-1328, Idaho Code, remains
unsettled, the corporation shall commence a proceeding within sixty
(60) days after receiving the payment demand and petition the court to
determine the fair value of the shares and accrued interest. If the
corporation does not commence the proceeding within the sixty-day
period, it shall pay each dissenter whose demand remains unsettled the
amount demanded.
(2) The corporation shall commence the proceeding in the Idaho district
court of the county where a corporation's principal office or, if none
in this state, its registered office is located. If the corporation is
a foreign corporation without a registered office in this state, it
shall commence the proceeding in the county in this state where the
registered office of the domestic corporation merged with or whose
shares were acquired by the foreign corporation was located.
(3) The corporation shall make all dissenters, whether or not residents of
this state, whose demands remain unsettled parties to the proceeding,
as in an action against their shares, and all parties must be served
with a copy of the petition. Nonresidents may be served by registered
or certified mail or by publication as provided by law.
(4) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section is plenary and exclusive. The
court may appoint one (1) or more persons as appraisers to receive
evidence
<PAGE> 178
and recommend decision on the question of fair value. The appraisers
have the powers described in the order appointing them, or in any
amendment to it. The dissenters are entitled to the same discovery
rights as parties in other civil proceedings.
(5) Each dissenter made a party to the proceeding is entitled to judgment:
(a) For the amount, if any, by which the court finds the fair
value of his shares, plus interest, exceeds the amount paid by
the corporation; or
(b) For the fair value, plus accrued interest, of his
after-acquired shares for which the corporation elected to
withhold payment under section 30-1- 1327, Idaho Code.
30-1-1331 COURT COSTS AND COUNSEL FEES.
(1) The court in an appraisal proceeding commenced under section 30-1-
1330, Idaho Code, shall determine all costs of the proceeding,
including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation, except that the court may assess costs against all or some
of the dissenters, in amounts the court finds equitable, to the extent
the court finds the dissenters acted arbitrarily, vexatiously, or not
in good faith in demanding payment under section 30-1- 1328, Idaho
Code.
(2) The court may also assess the fees and expenses of counsel and experts
for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any or all dissenters
if the court finds the corporation did not substantially
comply with the requirements of sections 30-1-1320 through
30-1-1328, Idaho Code; or
(b) Against either the corporation or a dissenter, in favor of any
other party, if the court finds that the party against whom
the fees and expenses are assessed acted arbitrarily,
vexatiously, or not in good faith with respect to the rights
provided by this part.
(3) If the court finds that the services of counsel for any dissenter were
of substantial benefit to other dissenters similarly situated, and that
the fees for those services should not be assessed against the
corporation, the court may award to these counsel reasonable fees to be
paid out of the amounts awarded to dissenters who were benefited.
<PAGE> 179
PART II
INFORMATION NOT REQUIRED
IN PROSPECTUS
ITEM 20 INDEMNIFICATION OF OFFICERS AND DIRECTORS
eSOFT 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 eSOFT provides that,
to the furthest extent permitted by applicable law in effect from time to time,
no director of eSOFT shall have any personal liability for monetary damages to
eSOFT or its stockholders 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 eSOFT or its stockholders, (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, and (iv) any transaction from which the
director derived an improper personal benefit.
Article 9 of the Certificate of Incorporation and the Bylaws of eSOFT
provide similar indemnification provisions as that provided by Section 145 of
the General Corporation Law of the state of Delaware. eSOFT will also indemnify
any person who is serving or has served eSOFT as an officer to the same extent
as a director.
ITEM 21 EXHIBITS AND FINANCIAL STATEMENTS SCHEDULES
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
<S> <C>
2.1 Amended and Restated Agreement and Plan Merger dated January 25, 1999
between eSOFT, Inc., eSOFT Acquisition Corporation and Apexx
Technology, Inc. (filed with Registration Statement on Form S-4 on
March 19, 1999 and incorporated herein by reference).
2.2 Form of Stockholders Agreement to be executed by Apexx Technology,
Inc. stockholders in connection with the merger (filed with
Registration Statement on Form S-4 on March 19, 1999 and incorporated
herein by reference).
2.3 Form of Escrow Agreement to be executed by eSOFT, Inc. Thomas
Loutzenheiser and The Trust Company of The Bank of Montreal (filed
with Registration Statement on Form S-4 on March 19, 1999 and
incorporated herein by reference).
2.4 Source Code Escrow Agreement among eSOFT, Inc., Apex Technology, Inc.
and DSI (filed with Registration Statement on Form S-4 on March 19,
1999 and incorporated herein by reference).
2.5 Employment Agreement by and between eSOFT, Inc. and Thomas
Loutzenheiser (filed with Registration Statement on Form S-4 on March
19, 1999 and incorporated herein by reference).
2.6 Employment Agreement by and between eSOFT, Inc. and Albert Youngwerth
(filed with Registration Statement on Form S-4 on March 19, 1999 and
incorporated herein by reference).
2.7 Employment Agreement by and between eSOFT, Inc. and Ray Jenks (filed
with Registration Statement on Form S-4 on March 19, 1999 and
incorporated herein by reference).
</TABLE>
II-1
<PAGE> 180
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
<S> <C>
2.8 Employment Agreement by and between eSOFT, Inc. and John Hanousek
(filed with Registration Statement on Form S-4 on March 19, 1999 and
incorporated herein by reference).
3.1 Articles of Incorporation (filed with Registration Statement on Form
10-SB on December 22, 1997 and incorporated herein by reference).
3.2 Certificate of Incorporation of New eSOFT, Inc. (filed with Amendment
No. 1 to Registration Statement on Form 10-SB on February 18, 1998
and incorporated herein by reference).
3.3 Certificate of Merger of eSOFT, Inc. into New eSOFT, Inc. (filed with
Amendment No. 1 to Registration Statement on Form 10-SB on February
18, 1998 and incorporated herein by reference).
3.4 Amendment to Certificate of Incorporation of eSOFT, Inc. (filed with
Registration Statement on Form S-4 on March 19, 1999 and incorporated
herein by reference).
3.5 Bylaws of eSOFT (filed with Registration Statement on Form 10-SB on
December 22, 1997 and incorporated herein by reference).
3.6 Bylaws of New eSOFT, Inc. (filed with Registration Statement on Form
10-SB on December 22, 1997 and incorporated herein by reference).
5.1* Opinion of Davis, Graham & Stubbs LLP (including consent)
8.1* Opinion of Davis, Graham & Stubbs LLP regarding certain tax matters
(including consent)
9.1 Voting Agreement by and between eSOFT, Inc and Tom Loutzenheiser,
Gayl Loutzenheiser and David Dahms (filed with Registration Statement
on Form S-4 on March 19, 1999 and incorporated herein by reference).
9.2 Voting Agreement by and between eSOFT, Inc and Albert Youngwerth,
Heather Youngwerth, Lawrence Lynch, George Minow, Chris Minow,
William Rivers, Ray Jenks (filed with Registration Statement on Form
S-4 on March 19, 1999 and incorporated herein by reference).
10.1 Severance Agreement and Mutual Release dated December 19, 1997
between eSOFT and Wayne Farlow (filed with Registration Statement on
Form 10-SB on December 22, 1997 and incorporated herein by
reference).
10.2 Agency Agreement with C.M. Oliver Capital (filed with Amendment No. 1
to Registration Statement on Form SB-2, filed March 24, 1998 and
incorporated herein by reference).
10.3 Agent's Warrant (filed with Amendment No. 1 to Registration Statement
on Form SB-2, filed March 24, 1998 and incorporated herein by
reference).
10.4 Lease Agreement dated September 18, 1997 between eSOFT and Aspen
Industrial Park Partnership (filed with Registration Statement on
Form SB-2 on December 24, 1997 and incorporated herein by reference).
10.5 Voting Agreement dated September 2, 1997 between Philip Becker,
Pantheon Capital Ltd. And Transition Partners, Ltd. (filed with
Registration Statement on Form 10-SB on December 22, 1997 and
incorporated herein by reference).
10.6 Termination Agreement (filed with Amendment No. 1 to Registration
Statement on Form 10-SB on February 18, 1998 and incorporated herein
by reference).
10.7 Registration Rights Agreement dated September 2, 1997 between
Transition Partners, Ltd., Pantheon Capital Ltd. and eSOFT (filed
with Registration Statement on Form 10-SB on December 22, 1997 and
incorporated herein by reference).
10.8 Agreement dated May 6, 1997 between Transition Partners, Ltd. and
eSOFT (filed with Registration Statement on Form 10-SB on December
22, 1997 and incorporated herein by reference).
10.9 Agreement dated October 14, 1996 between Transition Partners, Ltd.
and eSOFT (filed with Registration Statement on Form 10-SB on
December 22, 1997 and incorporated herein by reference).
10.10 Amendment to Agreement dated August 22, 1997 between Transition
Partners, Ltd. and eSOFT (filed with Registration Statement on Form
10-SB on December 22, 1997 and incorporated herein by reference).
</TABLE>
II-2
<PAGE> 181
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
<S> <C>
10.11 Second Amendment to Agreement dated November 11, 1997 between
Transition Partners, Ltd. and eSOFT (filed with Registration
Statement on Form 10-SB on December 22, 1997 and incorporated herein
by reference).
10.12 Stock Option Agreement dated November 11, 1997 between Transition
Partners, Ltd. and eSOFT (filed with Registration Statement on Form
10-SB on December 22, 1997 and incorporated herein by reference).
10.13 Amended Stock Warrant Agreement dated January 29, 1998 (filed with
Amendment No. 1 to Registration Statement on Form 10-SB on February
18, 1998 and incorporated herein by reference).
10.14 Consulting Agreement dated August 1, 1997 between eSOFT and Kent
Nuzum (filed with Registration Statement on Form 10-SB on December
22, 1997 and incorporated herein by reference).
10.15 Consulting Agreement dated August 22, 1997 between Pantheon Capital
Ltd. and eSOFT (filed with Registration Statement on Form 10-SB on
December 22, 1997 and incorporated herein by reference).
10.16 Amendment to Consulting Agreement dated August 22, 1997 between
Pantheon Capital Ltd. and eSOFT (filed with Registration Statement on
Form 10-SB on December 22, 1997 and incorporated herein by
reference).
10.17 Stock Option Agreement dated November 11, 1997 between Pantheon
Capital Ltd. and eSOFT (filed with Registration Statement on Form
10-SB on December 22, 1997 and incorporated herein by reference).
10.18 Amended Stock Warrant Agreement dated January 29, 1998 (filed with
Amendment No. 1 to Registration Statement on Form 10-SB on February
18, 1998 and incorporated herein by reference).
10.19 Stock Option Agreement dated November 11, 1997 between Copeland
Consulting Group, Inc. and eSOFT (filed with Registration Statement
on Form 10-SB on December 22, 1997 and incorporated herein by
reference).
10.20 Amended Stock Warrant Agreement dated January 29, 1998 (filed with
Amendment No. 1 to Registration Statement on Form 10-SB on February
18, 1998 and incorporated herein by reference).
10.21 Employment Agreement dated September 2, 1997 between Philip Becker
and eSOFT (filed with Registration Statement on Form 10-SB on
December 22, 1997 and incorporated herein by reference).
10.22 Form of Employee Confidentiality Agreement (filed with Amendment No.
1 to Registration Statement on Form 10-SB on February 18, 1998 and
incorporated herein by reference).
10.23 Termination Agreement terminating Software Development and Consulting
Agreements (filed with Amendment No. 1 to Registration Statement on
Form 10-SB on February 18, 1998 and incorporated herein by
reference).
10.24 Promissory Note to First National Bank of Arvada, Colorado (filed
with Amendment No. 1 to Registration Statement on Form 10-SB on
February 18, 1998 and incorporated herein by reference).
10.25 Proposal for financing arrangement from Colorado National Bank (filed
with Amendment No. 1 to Registration Statement on Form 10-SB on
February 18, 1998 and incorporated herein by reference).
10.26 Employment Agreement dated March 6, 1998 between Regis Frank and
eSOFT (filed with Amendment No. 1 to Registration Statement on Form
SB-2, filed March 24, 1998 and incorporated herein by reference).
10.27 Employment Agreement dated March 6, 1998 between Robert C. Hartman
and eSOFT (filed with Amendment No. 1 to Registration Statement on
Form SB-2, filed March 24, 1998 and incorporated herein by
reference).
</TABLE>
II-3
<PAGE> 182
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
<S> <C>
10.28 Employment Letter dated October 7, 1997 between Jason M. Rollings and
eSOFT (filed with Amendment No. 2 to Registration Statement on Form
SB-2, filed April 17, 1998 and incorporated herein by reference).
10.29 Employment Letter dated October 7, 1997 between Jason M. Rollings and
eSOFT (filed with Amendment No. 2 to Registration Statement on Form
SB-2, filed April 17, 1998 and incorporated herein by reference).
10.30 Employment Agreement between Thomas R. Tennessen and eSOFT (filed
with Amendment No. 2 to Registration Statement on Form SB-2, filed
April 17, 1998 and incorporated herein by reference).
10.31 Employment Agreement between Thomas R. Tennessen and eSOFT (filed
with Registration Statement on Form SB-2 on August 19, 1998 and
incorporated herein by reference).
10.32 Employment Agreement between James R. Bell and eSOFT (filed with
Registration Statement on Form SB-2 on August 19, 1998 and
incorporated herein by reference).
10.33 Employment Letter between James M. Love and eSOFT (filed with
Registration Statement on Form SB-2 on August 19, 1998 and
incorporated herein by reference).
10.34 Consulting Retainer Agreement (filed with Registration Statement on
Form SB-2 on August 19, 1998 and incorporated herein by reference).
10.35 Form of Distributor Agreement (filed with Registration Statement on
Form SB-2 on August 19, 1998 and incorporated herein by reference).
10.36 Employment Agreement between Jeffrey Finn and eSOFT (filed with
Registration Statement on Form S-4 on March 19, 1999 and incorporated
herein by reference).
10.37 Loan agreement entered into by and between eSOFT, Inc. and Apexx
Technology, Inc. dated December 2, 1998 (filed with Registration
Statement on Form S-4 on March 19, 1999 and incorporated herein by
reference).
10.38 Secured promissory note entered into by Apexx Technology, Inc. and
eSOFT, Inc. dated December 2, 1998 (filed with Registration Statement
on Form S-4 on March 19, 1999 and incorporated herein by reference).
10.39 Security agreement entered into by Apexx Technology, Inc. pledging
assets to secure loan agreement entered into dated December 2, 1998
(filed with Registration Statement on Form S-4 on March 19, 1999 and
incorporated herein by reference).
10.40 Stock Pledge Agreement entered into by Thomas Loutzenheiser and
eSOFT, Inc. dated December 2, 1998 (filed with Registration Statement
on Form S-4 on March 19, 1999 and incorporated herein by reference).
10.41 Guaranty Agreement entered into by Thomas Loutzenheiser and eSOFT,
Inc. dated December 2, 1998 (filed with Registration Statement on
Form S-4 on March 19, 1999 and incorporated herein by reference).
10.42 Employment Agreement between Jane Merickel and eSOFT (filed with
Registration Statement on Form S-4 on March 19, 1999 and incorporated
herein by reference).
10.43* Employment Agreement between Steve Kuzara and eSOFT
10.44* Trademark License Agreement between Apexx Technology, Inc. and eSOFT
23.1* Consent of BDO Seidman, LLP
23.2* Consent of Balukoff, Lindstrom & Co., P.A.
99.1* Letter to eSOFT stockholders
99.2* Proxy Card for eSOFT stockholders
99.3* Proxy Card for Apexx stockholders
</TABLE>
* Filed herewith
II-4
<PAGE> 183
ITEM 22
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 eSOFT'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.
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11 or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
II-5
<PAGE> 184
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
the registrant has duly caused this registration statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the city of Boulder,
Colorado on the 16th day of April, 1999.
eSOFT, INC.
By: /s/ Jeffrey Finn
---------------------------------------------
Name: Jeffrey Finn
Title: President and Chief Executive Officer
Pursuant to 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.
<TABLE>
<CAPTION>
Signatures Title Date
<S> <C> <C>
/s/ Philip Becker Chairman of the Board, Chief Technical Officer April 16, 1999
- --------------------------------
Philip Becker
/s/ Jeffrey Finn Director, President and Chief Executive Officer April 16, 1999
- -------------------------------- (Principal Executive Officer and Acting
Jeffrey Finn Principal Financial Officer)
/s/ Richard Eyestone Director April 16, 1999
- --------------------------------
Richard Eyestone
/s/ Richard Rice Director April 16, 1999
- --------------------------------
Richard Rice
</TABLE>
<PAGE> 185
FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
ESOFT FINANCIAL STATEMENTS
Report of Independent Certified Public Accountants ................................... F-2
Balance Sheet at December 31, 1998 ................................................... F-3
Statements of Operations for the Years ended December 31, 1998 and 1997 .............. F-5
Statements of Stockholders' Equity for the Years ended December 31, 1997 and 1998 .... F-6
Statements of Cash Flows for the Years ended December 31, 1998 and 1997 ............ F-7
Summary of Accounting Policies ....................................................... F-9
Notes to Financial Statements ........................................................ F-15
APEXX FINANCIAL STATEMENTS
Independent Auditors' Report ......................................................... F-31
Balance Sheet at December 31, 1998 ................................................... F-32
Statements of Operations for the Years ended December 31, 1998 and 1997 .............. F-33
Statements of Changes in Shareholders' Deficit for the
Years ended December 31, 1998 and 1997 ........................................... F-34
Statements of Cash Flows for the Years ended December 31, 1998 and 1997 ............. F-35
Notes to Financial Statements ........................................................ F-36
</TABLE>
F-1
<PAGE> 186
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, 1998 and the related statements of operations, stockholders' equity
and cash flows for the years ended December 31, 1998 and 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, 1998 and the results of its operations and its cash flows for the years
ended December 31, 1998 and 1997, in conformity with generally accepted
accounting principles.
Denver, Colorado
January 29, 1999
F-2
<PAGE> 187
ESOFT, INCORPORATED
BALANCE SHEET
================================================================================
<TABLE>
<CAPTION>
December 31, 1998
- ----------------------------------------------------------------------------------
<S> <C>
ASSETS
Current:
Cash and cash equivalents $ 655,650
Investment securities (Note 1) 1,991,541
Accounts receivable, less allowance of $250,000 for possible losses 1,965,085
Note receivable (Note 2) 300,000
Inventories (Note 3) 1,254,696
Prepaid expenses and other 177,416
- ----------------------------------------------------------------------------------
Total current assets 6,344,388
- ----------------------------------------------------------------------------------
PROPERTY AND EQUIPMENT:
Computer equipment 217,176
Furniture and equipment 187,464
- ----------------------------------------------------------------------------------
404,640
Less accumulated depreciation 205,688
- ----------------------------------------------------------------------------------
Net property and equipment 198,952
- ----------------------------------------------------------------------------------
OTHER ASSETS:
Capitalized software development costs,
net of accumulated amortization of $314,453 867,072
Other 7,039
- ----------------------------------------------------------------------------------
Total other assets 874,111
- ----------------------------------------------------------------------------------
$7,417,451
==================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to
financial statements.
F-3
<PAGE> 188
ESOFT, INCORPORATED
BALANCE SHEET (CONTINUED)
================================================================================
<TABLE>
<CAPTION>
December 31, 1998
- ------------------------------------------------------------
<S> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY
Current:
Accounts payable $ 968,533
Deferred revenue 23,910
Customer deposits 248,287
Accrued expenses:
Payroll and payroll taxes 256,033
Other 140,184
- ------------------------------------------------------------
Total current liabilities 1,636,947
- ------------------------------------------------------------
COMMITMENTS AND CONTINGENCIES (NOTES 6 AND 13)
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value, 5,000,000
shares authorized, none outstanding -
Common stock, $.01 par value, 50,000,000
shares authorized, 6,863,502 shares issued
and outstanding 68,635
Additional paid in capital 9,032,480
Accumulated deficit (3,320,611)
- ------------------------------------------------------------
Total stockholders' equity 5,780,504
- ------------------------------------------------------------
$ 7,417,451
============================================================
</TABLE>
See accompanying summary of accounting policies and notes to
financial statements.
F-4
<PAGE> 189
ESOFT, INCORPORATED
STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C>
REVENUES $ 3,867,600 $ 1,233,137
- -------------------------------------------------------------------------------
COSTS AND EXPENSES:
Selling and marketing 2,612,065 225,737
General and administrative 2,369,564 506,861
Cost of revenue 1,357,463 429,601
Engineering 588,933 55,653
Amortization of software costs 189,399 116,912
Research and development (Note 4) 12,908 56,671
- -------------------------------------------------------------------------------
Total costs and expenses 7,130,332 1,391,435
- -------------------------------------------------------------------------------
Loss from operations (3,262,732) (158,298)
- -------------------------------------------------------------------------------
Other (income) expense:
Interest (income) expense, net (161,083) 27,151
Loss on sale of assets 1,013 7,803
- -------------------------------------------------------------------------------
Total other (income) expense (160,070) 34,954
- -------------------------------------------------------------------------------
Loss before income tax (benefit) expense (3,102,662) (193,252)
Income tax (benefit) expense (Note 5) (162,000) 162,000
- -------------------------------------------------------------------------------
NET LOSS $(2,940,662) $ (355,252)
===============================================================================
Basic and diluted loss per common share (Note 8) $ (0.54) $ (0.23)
===============================================================================
Weighted-average number of
common shares outstanding basic and diluted 5,493,276 1,536,884
===============================================================================
</TABLE>
See accompanying summary of accounting policies and notes to
financial statements.
F-5
<PAGE> 190
ESOFT, INCORPORATED
STATEMENTS OF STOCKHOLDERS' EQUITY
================================================================================
<TABLE>
<CAPTION>
Common Stock Additional Total
Years Ended December 31, ----------------------- Paid in Accumulated Stockholders'
1997 and 1998 Shares Amount Capital Deficit Equity
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance, January 1, 1997 1,263,158 $ 12,632 $ 467,973 $ (24,697) $ 455,908
Issuance of common stock pursuant to 820,000 8,200 320,959 - 329,159
private placements, net of offering
costs of $80,841 (Note 7)
Common stock subscribed (Note 7) 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
Issuance of compensatory options (Note 9) - - 69,600 - 69,600
Issuance of warrants for consulting
services (Note 10) - - 214,649 - 214,649
Exercise of warrants and options (Note 7) 415,500 4,155 381,345 - 385,500
Issuance of common stock pursuant to
initial public offering, net of
offering costs of $540,850 (Note 7) 1,550,000 15,500 993,650 - 1,009,150
Issuance of common stock pursuant to
private placements, net of offering
costs of $866,449 (Note 7) 1,908,941 19,089 5,797,460 - 5,816,549
Issuance of common stock to
employees (Note 7) 90,000 900 89,100 - 90,000
Issuance of common stock for offering
fees (Note 7) 110,000 1,100 (1,100) - -
Issuance of common stock pursuant to
conversion of notes payable (Note 7) 355,903 3,559 352,344 - 355,903
Net loss for the year - - - (2,940,662) (2,940,662)
- ---------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 6,863,502 $ 68,635 $ 9,032,480 $(3,320,611) $ 5,780,504
=====================================================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to
financial statements.
F-6
<PAGE> 191
ESOFT, INCORPORATED
STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
Years Ended December 31, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(2,940,662) $ (355,252)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 353,278 141,943
Loss on sale of assets 1,013 7,803
Amortization of discount on investments (71,624) -
Issuance of common stock for compensation 90,000 -
Provision for losses on accounts receivable 202,440 48,000
Provision for inventory obsolescence 59,440 -
Deferred tax expense (benefit) (162,000) 162,000
Consulting expense incurred for note payable - 41,000
Issuance of compensatory options 69,600 -
Changes in operating assets and liabilities:
Accounts receivable (1,967,693) (213,167)
Inventories (1,219,529) (35,948)
Other assets (20,503) (39,777)
Accounts payable 793,779 145,026
Accrued expenses and other 552,555 85,915
Deferred revenue (22,712) (11,348)
- --------------------------------------------------------------------------------
Net cash used in operating activities (4,282,618) (23,805)
- --------------------------------------------------------------------------------
Cash Flows from Investing Activities:
Purchase of investments (1,919,917) -
Proceeds from sale of assets 2,722 -
Purchase of property and equipment (144,593) (21,989)
Advances on non-operating notes
receivable - employee (15,000) (20,000)
Payments received from non-operating
notes receivable - employee 20,443 -
Additions to capitalized software (405,000) (221,139)
Advances on non-operating notes receivable (300,000) -
- --------------------------------------------------------------------------------
Net cash used in investing activities (2,761,345) (263,128)
- --------------------------------------------------------------------------------
</TABLE>
F-7
<PAGE> 192
ESOFT, INCORPORATED
STATEMENTS OF CASH FLOWS (CONTINUED)
================================================================================
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Years Ended December 31, 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Cash Flows from Financing Activities:
Proceeds from sale of stock, warrants and options 8,618,938 560,000
Offering costs paid (1,126,405) (80,841)
Proceeds from stock subscription receivable 200,000 -
Proceeds from borrowings - 100,000
Payments on borrowings (75,757) (24,243)
Proceeds (payments) from related party borrowings (20,000) 20,000
Deferred offering costs - (205,896)
- --------------------------------------------------------------------------------
Net cash provided by financing activities 7,596,776 369,020
- --------------------------------------------------------------------------------
Increase in cash and cash equivalents 552,813 82,087
Cash and cash equivalents, beginning of year 102,837 20,750
- --------------------------------------------------------------------------------
Cash and cash equivalents, end of year $ 655,650 $ 102,837
================================================================================
Supplemental disclosure of cash flow information:
Cash paid for interest $ 6,805 $ 31,012
================================================================================
Supplemental disclosure of non-cash investing
and financing activities:
Common stock issued for conversion of debt $ 355,903 $ -
Common stock issued for offering costs 1,100 -
Warrants issued for consulting services 214,649 -
Convertible notes payable issued for consulting
services and deferred offering costs - 116,000
Common stock issued for subscription receivable - 200,000
================================================================================
</TABLE>
See accompanying summary of accounting policies and notes to
financial statements.
F-8
<PAGE> 193
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 majority of the Company's products are
manufactured by external sources. In 1998, 60% of the
Company's product was purchased from two suppliers. In
1997, there was no such concentration of product
purchased from suppliers.
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
interests 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.
CASH EQUIVALENTS The Company considers cash and all highly liquid
investments purchased with an original maturity of three
months or less to be cash equivalents.
INVESTMENT Investment securities are classified as either
SECURITIES held-to-maturity, available-for-sale or trading.
Investment securities classified as held-to-maturity are
stated at cost, adjusted for amortization of premiums and
accretion of discounts. It is management's intention and
it has the ability to hold investment securities
classified as held-to-maturity and, accordingly,
adjustments are not made for temporary declines in their
market value below amortized cost. Investment securities
classified as available-for-sale are carried at their
estimated market value with unrealized holding gains and
losses, net of tax, reported as a separate component of
stockholders' equity until realized. Investment
securities
F-9
<PAGE> 194
ESOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
================================================================================
classified as trading are carried at estimated market
value. Unrealized holding gains and losses for trading
securities are included in the statements of income.
Gains and losses on securities sold are determined based
on the specific identification of the securities sold. At
December 31, 1998, all investments are classified as
held-to-maturity.
INVENTORIES Inventories, consisting of purchased goods, are valued at
the lower of cost (weighted-average) or market.
PROPERTY AND Property and equipment are stated at cost. Depreciation
EQUIPMENT is computed using the straight-line method over the
estimated useful lives (generally five years) of the
assets.
Depreciation expense for the years ended December 31,
1998 and 1997, was $56,725 and $25,031.
CAPITALIZED Costs incurred internally in creating software products
SOFTWARE COSTS for resale are charged to expense until technological
feasibility has been established upon completion of a
detail program design. Thereafter, all software
development costs are capitalized until the point that
the product is ready for sale and subsequently reported
at the lower of amortized cost or net realizable value.
In accordance with Statement of Financial Accounting
Standard ("SFAS") 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.
LONG-TERM The Company applies SFAS No. 121, "Accounting for the
ASSETS Impairment of Long- Lived Assets." Under SFAS No. 121,
long-lived assets and certain intangibles are evaluated
for impairment when events or changes in circumstances
indicate that the carrying value of the assets may not be
recoverable through the estimated undiscounted future
cash flows resulting from the use of these assets. When
any such impairment exists, the related assets will be
written down to fair value.
REVENUE The Company recognizes certain revenue at the time
RECOGNITION products are shipped to its customers. Provision is made
currently for estimated product returns which may occur.
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
F-10
<PAGE> 195
ESOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
================================================================================
licensing of software products, support and update
services, and training and consulting services are
expensed as incurred.
A portion of sales is made to distributors under terms
allowing certain rights of return and price protection on
unsold product held by the distributors.
Software Revenue Recognition
The Company follows the guidance of Statement of Position
("SOP") 97-2, "Software Revenue Recognition." SOP 97-2
provides guidance on when revenue should be recognized
and in what amounts for licensing, selling, leasing or
otherwise marketing computer software.
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 SFAS No. 109,
"Accounting for Income Taxes," 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.
NET INCOME (LOSS) The Company follows the provisions of SFAS No. 128,
PER SHARE "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 or loss 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.
USE OF The preparation of financial statements in conformity
ESTIMATES with generally accepted accounting principles requires
management to make estimates and assumptions
F-11
<PAGE> 196
ESOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
================================================================================
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.
CONCENTRATIONS Credit risk represents the accounting loss that would be
OF CREDIT RISK recognized at the reporting date if counterparties failed
to completely perform as contracted. Concentrations of
credit risk, whether on or off the balance sheet, that
arise from financial instruments exist for groups of
customers or groups of counterparties when they have
similar economic characteristics that would cause their
ability to meet contractual obligations to be similarly
effected by changes in economic or other conditions.
Concentrations of credit risk with respect to trade
accounts receivable are generally limited due to
customers are dispersed across geographic areas. Ongoing
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 (See Note 12).
FAIR VALUE OF Unless otherwise specified, the Company believes the book
FINANCIAL value of financial instruments approximates their fair
INSTRUMENTS value.
STOCK OPTIONS The Company applies Accounting Principles Board Opinion
AND WARRANTS ("APB") 25, "Accounting for Stock Issued to Employees,"
and related Interpretations in accounting for all stock
option plans. Under APB 25, compensation cost is
recognized for stock options granted at prices below the
market price of the underlying common stock on the date
of grant.
SFAS No. 123, "Accounting for Stock-Based Compensation,"
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.
COMPREHENSIVE The Company has adopted SFAS No. 130, "Reporting
INCOME Comprehensive Income." Comprehensive income is comprised
of net income and all changes to the statements of
stockholders' equity, except those due to investment by
stockholders, changes in paid in capital and
distributions to stockholders. The adoption of SFAS No.
130 does not impact the Company's financial statements
for 1998 and 1997.
F-12
<PAGE> 197
ESOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
================================================================================
PENSIONS AND The Company has adopted SFAS No. 132, "Employers'
OTHER POST Disclosure About Pensions and Other Post Retirement
RETIREMENT BENEFITS Benefits." SFAS No. 132 standardizes the disclosure
requirements for pensions and other post retirement
benefits and requires additional information on changes
in the benefit obligations and fair values of plan assets
that will facilitate financial analysis. The adoption of
SFAS No. 132 does not impact the Company's financial
statement disclosures for 1998 and 1997.
IMPACT OF RECENTLY SFAS No. 133, "Accounting for Derivative Instruments and
ISSUED ACCOUNTING Hedging Activities" requires companies to record
PRONOUNCEMENTS derivatives on the balance sheet as assets or
liabilities, measured at fair market value. Gains or
losses resulting from changes in the values of those
derivatives are accounted for depending on the use of the
derivative and whether it qualifies for hedge accounting.
The key criterion for hedge accounting is that the
hedging relationship must be highly effective in
achieving offsetting changes in fair value or cash flows.
SFAS No. 133 is effective for fiscal years beginning
after June 15, 1999. Management believes that the
adoption of SFAS No. 133 will have no material effect on
its financial statements.
SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained After the Securitization of Mortgage Loans Held
for Sale by a Mortgage Banking Enterprise," establishes
accounting and reporting standards for certain activities
of mortgage banking enterprises and other enterprises
that conduct operations that are substantially similar to
the primary operations of a mortgage banking enterprise.
SFAS No. 134 is effective for the first fiscal quarter
beginning after December 15, 1998. Management believes
that the adoption of SFAS No. 134 will have no material
effect on its financial statements.
SFAS No. 135, "Rescission of FASB Statement No. 75 and
Technical Corrections," rescinds FASB Statement No. 75,
"Deferral of the Effective Date of Certain Accounting
Requirements for Pension Plans of State and Local
Governmental Units." GASB Statement No. 25, "Financial
Reporting for Defined Benefit Pension Plans and Note
Disclosures for Defined Contribution Plans," was issued
November 1994, and established financial reporting
standards for defined benefit pension plans and for the
notes to the financial statements of defined contribution
plans of state and local governmental entities. Statement
75 is, therefore, no longer needed. This Statement also
amends FASB Statement No. 35, "Accounting and Reporting
by Defined Benefit Pension Plans," to exclude from its
scope plans that are sponsored by and provide benefits
for the employees of one or more state or local
governmental units.
F-13
<PAGE> 198
ESOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
================================================================================
This Statement also amends other existing authoritative
literature to make various technical corrections, clarify
meanings, or describe applicability under changed
conditions.
This Statement is effective for financial statements
issued for fiscal years ending after February 15, 1999.
Management believes that the adoption of SFAS No. 135
will have no material effect on its financial statements.
SOP 98-5, "Reporting on the Costs of Start-Up
Activities," requires that the costs of start-up
activities, including organization costs, be expensed as
incurred. This Statement is effective for financial
statements issued for fiscal years beginning after
December 15, 1998. Management believes that the adoption
of SOP 98-5 will have no material effect on its 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> 199
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. INVESTMENT A summary of the amortized cost and estimated market
SECURITIES value of investment securities which mature in six months
is as follows:
<TABLE>
<CAPTION>
Gross Gross Estimated
Unrealized Unrealized Market
December 31, 1998 Amortized Cost Gains Losses Value
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held to maturity:
Short-term zero
coupon notes $1,991,541 $ -- $ -- $1,991,541
=============================================================================
</TABLE>
2. NOTE In December 1998, the Company entered into an adjustable
RECEIVABLE rate line of credit with Apexx Technology, Inc. in the
amount of $500,000. The note bears interest at prime plus
2% (9.75% at December 31, 1998). At December 31, 1998,
the principal balance outstanding on the note was
$300,000. Subsequent to December 31, 1998, the Company
advanced an additional $200,000 to Apexx (see Note 13).
3. INVENTORIES Inventories at December 31, 1998 consisted of the
following:
<TABLE>
<S> <C>
---------------------------------------------------------
Finished goods $1,314,136
Less reserve for obsolescence 59,440
---------------------------------------------------------
$1,254,696
=========================================================
</TABLE>
4. RESEARCH AND During the years ended December 31, 1998 and 1997, the
DEVELOPMENT Company capitalized $405,000 and $221,139 of software
development costs. Amortization expense of capitalized
software development costs included in depreciation and
amortization for the years ended December 31, 1998 and
1997 amounted to $189,399 and $116,912. Research and
development costs were $12,908 and $56,671 for the years
ended December 31, 1998 and 1997.
F-15
<PAGE> 200
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
Research and development expenditures during the
following periods were comprised as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
------------------------------------------------------
<S> <C> <C>
Payroll and related costs $ - $131,627
Officer payroll - 50,000
Internet and telephone expenses - 30,056
Occupancy costs - 34,860
Purchased services 405,000 -
Other 12,908 31,267
------------------------------------------------------
417,908 277,810
Less capitalized software costs 405,000 221,139
------------------------------------------------------
$ 12,908 $ 56,671
======================================================
</TABLE>
5. INCOME TAXES The provision for income taxes consisted of the
following:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
---------------------------------------------------------
<S> <C> <C>
Deferred expense (benefit):
Federal $ (148,000) $148,000
State (14,000) 14,000
---------------------------------------------------------
$ (162,000) $162,000
=========================================================
</TABLE>
A reconciliation of the effective tax rate and the
statutory U.S. federal income tax rates are as follows:
F-16
<PAGE> 201
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
-------------------------------------------------------------------------
<S> <C> <C>
Federal tax benefit at the federal
statutory rate $(1,055,000) $ (66,000)
State income tax benefit, net of federal tax
amount (109,000) (7,000)
Permanent differences (86,000) 1,000
Other 65,000 (9,000)
Deferred tax expense due to S. Corp
termination - 243,000
Increase in valuation allowance 1,023,000 -
-------------------------------------------------------------------------
Income tax (benefit) expense $ (162,000) $ 162,000
=========================================================================
</TABLE>
Temporary differences that give rise to a significant
portion of the deferred tax assets and liabilities are as
follows:
<TABLE>
<CAPTION>
December 31, 1998
------------------------------------------------
<S> <C>
Net operating loss carryforwards $ 1,003,000
Accounts receivable 93,750
Inventory 22,000
Accruals 172,250
Options and warrants 66,000
------------------------------------------------
Total deferred tax asset 1,357,000
------------------------------------------------
Capitalized software costs (325,000)
Other (9,000)
------------------------------------------------
Total deferred tax liability (334,000)
------------------------------------------------
Total 1,023,000
Less valuation allowance 1,023,000
------------------------------------------------
Net deferred tax asset (liability) $ -
================================================
</TABLE>
The valuation allowance of $1,023,000 at December 31,
1998, was established because the Company has not been
able to determine that it is more likely than not that
the deferred tax assets will be realized.
F-17
<PAGE> 202
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
At December 31, 1998, the Company had net operating loss
carryforwards of approximately $2,700,000 with
expirations through 2019. The utilization of certain of
the loss carryforwards are limited under Section 382 of
the Internal Revenue Code.
As stated in the summary of accounting policies, the
Company 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 pro forma income (loss)
per common share if the Company was subject to taxes
(federal statutory rate of 34%) would be as follows:
<TABLE>
<CAPTION>
Year ended December 31, 1997
--------------------------------------------------------
<S> <C>
Loss before income taxes $ (193,252)
Pro forma income tax benefit 66,000
--------------------------------------------------------
Pro forma net loss $ (127,252)
========================================================
Pro forma loss per share $ (0.08)
========================================================
</TABLE>
6. COMMITMENTS Operating Leases
The Company leases certain of its facilities and
equipment under noncancellable operating lease agreements
which expire at various dates through 2004. Rent expense
for the years ended December 31, 1998 and 1997 was
$116,048 and $54,847.
Subsequent to December 31, 1998, the Company executed a
lease to relocate its corporate headquarters and shipping
and assembly facilities into one location. The
anticipated date for the new facility is April 1, 1999.
The new facility lease expires in May 2004 and annual
rental payments are $173,000. The Company is being fully
released from its lease on its current corporate
headquarters.
F-18
<PAGE> 203
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
Future minimum lease payments under noncancellable
operating leases as adjusted for new corporate
headquarters lease are as follows:
<TABLE>
<CAPTION>
Year Ending December 31,
--------------------------------------------------------
<S> <C>
1999 $ 147,000
2000 182,000
2001 185,000
2002 186,000
2003 187,000
Thereafter 78,000
--------------------------------------------------------
$ 965,000
========================================================
</TABLE>
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.
During 1998, the Company entered into an agreement to
terminate the software development agreements. The
termination agreement required the Company to pay $30,000
at the agreement's 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. The required $60,000 payment
was made in 1998.
In 1998, the Company entered into a software development
agreement with a company. The development agreement
required a payment of $150,000 for a wireless product
with VPN capabilities to be integrated with the IPAD.
Additionally, in conjunction with its sales efforts in
Japan, the company was
F-19
<PAGE> 204
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
paid $195,000 to nationalize the interface of the IPAD
for the Japanese marketplace.
Employment Agreements
On September 2, 1997 the Company entered into an
employment agreement with an officer and a director that
extends for a thirty-six month period commencing on
September 1, 1997. Under the terms of the agreement, the
Company is obligated to pay the sum of $10,000 per month.
In addition, the officer and director was granted
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. The options vest over a 36 month period as
follows: 7/36 of the options vested in April 1998 and
1/36 of the options will vest on the first day of each
month thereafter. 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 the gross annual salary, the bonus will be capped
at the amount of the salary for the quarter.
On November 6, 1998 the Company entered into an
employment agreement with an officer and director that
extends for a thirty-six month period commencing on
November 9, 1998. Under the terms of the agreement, the
Company is obligated to pay the sum of $15,000 per month.
In addition, the officer and director was granted
incentive stock options to acquire 400,000 shares of
eSoft common stock at a price of $4.00 per share for a
period of four years. The options vest over a 36 month
period as follows: 7/36 of the options will vest in June
1999 and 1/36 of the options will vest on the first day
of each month thereafter. The officer and director is
also eligible to receive incentive pay equal to 50% of
his annual salary paid quarterly based on objectives
agreed by officer and the Company's Board of Directors.
The incentive pay will be based as follows: one-third on
revenue, one-third on earnings and one-third on mutually
agreed quarterly objectives.
The Company has entered into employment agreements with
four other executive officers with a range of salary
levels and benefits. The term of these employment
agreements is thirty-six months, at salary levels ranging
from $7,500 to $11,000 per month. The agreements
terminate from December 2000 through December 2001. The
employment agreements provide for either a quarterly
performance-based bonus ranging from $5,000 to $12,500,
or a 1%
F-20
<PAGE> 205
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
commission on gross sales, paid on a monthly basis. In
addition to monthly compensation and quarterly bonuses,
executives under these agreements have received incentive
stock options to purchase between 20,000 and 60,000
shares of eSoft common stock at exercise prices ranging
from $1.00 to $6.15 per share.
Future commitments under the above employment agreements
are $695,000, for 1999, 2000 and 2001.
The Company on November 10, 1998 served its former
President and COO with notice of termination of services
pursuant to his employment agreement. The employment
agreement required ninety days prior notice of
termination of services. The agreement requires payment
of three months salary totaling $30,000 and participation
in its employee benefits program as severance beginning
March 1, 1999.
7. STOCKHOLDERS' Stock Split
EQUITY
On August 27, 1997, the Board of Directors authorized a
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.
Private Placements
On September 12, 1997, the Company sold 820,000 shares of
common stock for $410,000 in a private placement.
Warrants to purchase 414,600 shares of common stock were
issued to consultants and investors at an exercise price
of $1.00 per share. The warrants were modified in January
1998 changing the term 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 increases to $1.15 for fifteen days. The net
proceeds to the Company after stock issuance costs was
$329,159.
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.
F-21
<PAGE> 206
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
In January 1998, the Company granted 90,000 shares of
common stock to certain employees for past services
rendered to the Company. The Company recognized $90,000
of compensation expense based on the fair value of its
common stock at that date.
During the first quarter of 1998, the Company completed a
$290,000 private placement of 290,000 shares of the
Company's common stock, at a price of $1.00 per share to
officers, directors, and key employees. The Company
received $186,981 from the offering net of offering
costs.
During the first quarter of 1998, the Company accepted
stock subscriptions of $150,000 from consultants and an
officer of the Company at a price of $1.00 per share. In
March and April 1998, $150,000 of the stock subscription
was collected. The Vancouver Stock Exchange required
shareholder approval of the private placement to the
officer which was received in December 1998 at which time
the shares were issued to the officer.
In June 1998, the Company completed the private placement
of 1,468,941 shares of its common stock at a price of
$4.25 per share for a total offering of $6,243,000. The
net cash proceeds to the Company from the private
placement were $5,479,568 after payment of expenses of
the offering of $255,607, and payment of $507,825
commissions to the agent, sub-agents, and finders, who in
addition were issued warrants to purchase 159,318 shares
of the Company's common stock at a price of $4.25 per
share in the first year and $4.90 per share in the second
year.
Initial Public Offering
In March 1998, the Company completed its initial public
offering in Canada of 1,550,000 shares of the Company's
common stock at an offering price of $1.00 per share.
Additionally, the agent was issued 110,000 shares of the
Company's common stock in the Canadian Offering along
with warrants to purchase 250,000 shares of the Company's
common stock at a price of $1.00 for the first 12 months
and at a price of $1.15 for the next 12 months. The net
cash proceeds to the Company from the IPO was
approximately $1,009,000 after payment of expenses of
approximately $541,000. In April 1998, the agent
exercised its warrants at a price of $1.00 per share and
the Company issued 250,000 shares of its common stock.
F-22
<PAGE> 207
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
Exercise of Stock Options and Warrants
In February 1998, the Company issued 60,000 shares of its
common stock at $.50 per share upon exercise of options
previously granted.
In the third quarter of 1998, the Company issued 70,000
shares of its common stock at a price of $1.00 per share
for a total of $70,000 upon the exercise of options and
warrants previously granted and are in addition to
issuances previously described.
In the fourth quarter of 1998, the Company issued 35,500
shares of its common stock at a price of $1.00 per share
for a total of $35,500 upon the exercise of options and
warrants previously granted.
Conversion of Debt
Prior to January 1, 1996 the Company had entered into an
unsecured note agreement with the initial stockholder in
the amount of $125,000 with interest at 9% per annum,
maturing December 31, 1997. The Company also had borrowed
an additional $111,598 from the stockholder under various
unsecured demand note agreements with interest at 7% per
annum.
On June 21, 1996, the stockholder converted $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.
During 1997, the Company entered into an agreement with a
business consulting firm to provide services through May
31, 1998 in exchange for convertible notes payable
totaling $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.
F-23
<PAGE> 208
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
In the first quarter of 1998, the holders of the above
convertible notes totaling $355,903 converted the notes
into 355,903 shares of common stock at a price of $1.00
per share.
8. LOSS PER The following table sets forth the computation of basic
SHARE and diluted loss per share:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
------------------------------------------------------------------
<S> <C> <C>
Numerator -
Net loss $ (2,940,662) $ (355,252)
Denominator -
Denominator for basic and diluted
earnings per share - weighted
average shares outstanding 5,493,276 1,536,884
------------------------------------------------------------------
Basic and diluted net loss per share $ (0.54) $ (0.23)
==================================================================
</TABLE>
For the years ended December 31, 1998 and 1997, total
stock options and stock warrants of 1,955,418, and
762,100 were not included in the computation of diluted
earnings per share because their effect was
anti-dilutive.
9. STOCK OPTION In September 1998, the Board of Directors, and on
PLAN December 4, 1998, the stockholders, of the Company
approved an amended Equity Compensation 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 1,700,000
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 at 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 years. As of December 31, 1998,
options to purchase 1,516,500 shares of the Company's
common stock had been granted under the Plan.
F-24
<PAGE> 209
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
In September 1997, the Company granted options to
purchase an aggregate of 260,000 shares of its common
stock to employees. Terms of the employee options are
200,000 shares at $1 per share and $60,000 at $.50 per
share which expire September 2002.
In 1998, the Company granted options to purchase
1,156,500 shares of common stock ranging from $1.00 -
$6.85 per share to employees and directors. The shares
vest over various periods from 2 months to 36 months. The
options expire through February 2003. Of the 1,156,500
options, 60,000 were issued at a price below fair market
value at date of grant and, accordingly, the Company
recognized compensation expense of $69,600 based on the
difference between the exercise price and the fair market
value at the grant date.
In 1998, the Company granted 100,000 options to
consultants at $1 per share, of which 65,000 options vest
at date of grant, 35,000 options vest ratably over a 36
month period, with 25,000 of these options being canceled
in 1998. The options expire through March 2002.
10. STOCK OPTIONS The Company applies APB 25 in accounting for stock
AND WARRANTS options and stock purchase warrants granted to employees.
Had compensation expense been determined based upon the
fair value of the awards at the grant date and consistent
with the method under SFAS 123, the Company's net loss
and basic and diluted loss per share would have been
increased to the pro forma amounts indicated in the
following table.
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
-----------------------------------------------------------
<S> <C> <C>
Net loss as reported $ (2,940,662) $ (355,252)
Net loss pro forma (2,962,710) (355,969)
Basic and diluted loss
per share as reported (0.54) (0.23)
Basic and diluted loss
per share pro forma (0.54) (0.23)
===========================================================
Years Ended December 31, 1998 1997
-----------------------------------------------------------
Dividend yield 0% 0%
</TABLE>
F-25
<PAGE> 210
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
<TABLE>
<S> <C> <C>
Expected volatility 6 to 14% 0%
Risk-free interest rates 4.12 to 6.20% 6%
Expected lives in years 1.17 to 5 years 0.25 to 1.94 years
================================================================================
</TABLE>
A summary of the status of the Company's stock option
plans as of December 31, 1998 and 1997 is presented
below:
<TABLE>
<CAPTION>
OPTIONS WARRANTS
------------------------- -----------------------
WEIGHTED AVERAGE WEIGHTED AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Outstanding,
January 1, 1997 -- $ -- -- $ --
Granted 260,000 0.88 502,100 1.00
--------------------------------------------------------------------------------
Outstanding,
December 31, 1997 260,000 0.88 502,100 1.00
Granted 1,256,500 2.79 554,318 3.20
Canceled (82,750) (1.37) -- --
Exercised (120,500) (0.75) (295,000) (1.00)
--------------------------------------------------------------------------------
Outstanding,
December 31, 1998 1,313,250 2.69 761,418 2.61
--------------------------------------------------------------------------------
Exercisable,
December 31, 1997 60,000 0.50 87,500 1.00
--------------------------------------------------------------------------------
Exercisable,
December 31, 1998 295,694 $1.21 761,418 $2.61
--------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
OPTIONS WARRANTS
--------------------------------------------------------------------------------
<S> <C> <C>
Weighted average fair value of options
and warrants granted during 1997 $ 0.88 $ 1.00
Weighted average fair value of options
and warrants granted during 1998 $ 0.57 $ 1.20
--------------------------------------------------------------------------------
</TABLE>
F-26
<PAGE> 211
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
The following table summarizes information about
exercisable stock options and warrants at December 31,
1998 and 1997:
<TABLE>
<CAPTION>
Outstanding Exercisable
----------------------------------- -------------------
Weighted
Average Weighted Weighted
Remaining Average Average
Range of Number Contractual Exercise Number Exercise
Exercise Prices Outstanding Life Price Exercisable Price
--------------------------------------------------------------------------------
December 31, 1998
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Options:
$1.00 606,750 3.26 $1.00 280,861 $1.00
3.06 - 4.00 581,500 3.74 3.74 1,500 4.00
5.34 - 6.85 125,000 3.61 5.96 13,333 6.50
--------------------------------------------------------------------------------
$1.00 - 6.85 1,313,250 3.50 $2.69 295,694 $1.21
================================================================================
Warrants:
$1.00 - 1.10 477,100 0.44 $1.02 477,100 $1.02
--------------------------------------------------------------------------------
4.25 - 4.68 169,318 1.66 4.28 169,318 4.28
--------------------------------------------------------------------------------
5.34 - 6.98 115,000 4.39 6.77 115,000 6.77
--------------------------------------------------------------------------------
$1.00 - 6.98 761,418 1.30 $2.61 761,418 $2.61
================================================================================
December 31, 1997
--------------------------------------------------------------------------------
Options:
$0.50 60,000 0.11 $0.12 60,000 $0.12
1.00 200,000 3.40 0.76 -- --
--------------------------------------------------------------------------------
$0.50 - 1.00 260,000 3.51 $0.88 60,000 $0.12
================================================================================
Warrants:
$1.00 502,100 0.77 $1.00 87,500 $1.00
================================================================================
</TABLE>
F-27
<PAGE> 212
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
The weighted average grant date fair value of stock
options granted is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
------------------------------------------------------
<S> <C> <C>
Market value equal to
exercise price $0.55 $ --
Market value greater than
exercise price 0.44 --
Market value less than
exercise price 1.15 0.88
======================================================
</TABLE>
The weighted average grant date fair value of warrants
granted is summarized as follows:
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
------------------------------------------------------
<S> <C> <C>
Market value equal to
exercise price $ -- $1.00
Market value greater than
exercise price 0.11 --
Market value less than
exercise price 2.24 --
=====================================================
</TABLE>
During 1998, the Company granted warrants to purchase
145,000 shares of common stock ranging from $1.00 to
$6.98 per share to consultants. The warrants vest
immediately and expire at various dates through
November 2003. Certain of the consulting agreements are
for twelve-month periods and, therefore, the Company
recorded an asset of $214,649 that is being amortized
over twelve months. In 1998, the Company recognized
approximately $108,000 of expense in conjunction with
the above warrants.
11. Related Party A director of the Company is also the President, Chief
Transactions Executive Officer and a director of CANnect
Communications, Inc., which is a distributor of the
Company's products in Canada. CANnect purchased $47,000
of the Company's products in 1998.
F-28
<PAGE> 213
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
12.Business In 1998, the Company adopted SFAS No. 131, "Disclosures
Segments About Segments of an Enterprise and Related
Information." Disclosures required by SFAS No. 131 are
as follows:
The Company is engaged in one business segment -
Internet Connectivity Solutions.
The following table presents information by geographic
area:
<TABLE>
<CAPTION>
Year Ended December 31, 1998 Revenues(1) Long-Lived Assets
--------------------------------------------------------------
<S> <C> <C>
United States $3,187,600 $1,066,000
Argentina 508,000 --
Other foreign countries 172,000 --
--------------------------------------------------------
$3,867,600 $1,066,000
========================================================
</TABLE>
For the year ended December 31, 1997, there were no
foreign sales.
(1) Revenues are attributed to countries based on
location of customer.
During 1998, sales to one domestic customer represented
$1,771,000 of the Company's total sales. At December
31, 1998, accounts receivable from this customer was
$1,670,833. During 1998, sales to one customer located
in Argentina represented $508,000 of the Company's
total sales. At December 31, 1998, accounts receivable
from this customer was $256,785. For the year end
December 31, 1997, there were no such concentrations in
sales or accounts receivable.
For the years ended December 31, revenues from
significant customers consisted of the following:
<TABLE>
<CAPTION>
1998 1997
------------------------------------------------
<S> <C> <C>
Customer:
A 46% --
B (export sales to Argentina) 13% --
================================================
</TABLE>
F-29
<PAGE> 214
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
13.SUBSEQUENT In January 1999, the Company signed a Plan of Merger
EVENT and Agreement with Apexx Technology, Inc ("Apexx"). The
proposed merger requires the vote of the shareholders
of both companies to approve the merger. The
transaction proposes the Company issue 2,947,368 shares
of its common stock for all the issued and outstanding
shares and options of Apexx. The Company also extended
a line of credit to Apexx in the amount of $500,000. At
December 31, 1998, $300,000 was outstanding and
subsequent to December 31, 1998, the Company extended
an additional F-30 $200,000.
F-30
<PAGE> 215
INDEPENDENT AUDITORS' REPORT
Board of Directors
Apexx Technology, Inc.
Boise, Idaho
We have audited the accompanying balance sheet of Apexx Technology, Inc. as of
December 31, 1998 and the related statements of operations, changes in
shareholders' deficit, and cash flows for the years ended December 31, 1998 and
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 Apexx Technology, Inc. as of
December 31, 1998 and the results of its operations and its cash flows for the
years ended December 31, 1998 and 1997 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note K to the
financial statements, the Company's significant operating losses raise
substantial doubt about its ability to continue as a going concern. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
February 4, 1999
F-31
<PAGE> 216
APEXX TECHNOLOGY, INC.
BALANCE SHEET
<TABLE>
<CAPTION>
December 31,
1998
------------
<S> <C>
CURRENT ASSETS
Cash $ 22,294
Trade accounts receivable, less allowance for doubtful
accounts of $17,241 714,821
Inventories 322,970
Prepaid expenses 5,411
Other current assets 5,257
-----------
TOTAL CURRENT ASSETS 1,070,753
PROPERTY AND EQUIPMENT, at cost
Furniture and fixtures 60,835
Computer equipment and software 133,002
Manufacturing tool and equipment 26,424
-----------
220,261
Accumulated depreciation (122,796)
-----------
97,465
-----------
$ 1,168,218
===========
LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 389,548
Accrued expenses 94,148
Short-term debt 656,060
Current portion of long-term debt 28,923
-----------
TOTAL CURRENT LIABILITIES 1,168,679
LONG-TERM DEBT
Notes payable, net of current portion 75,386
SHAREHOLDERS' DEFICIT
Common stock, no par value, authorized 5,000,000
shares, issued and outstanding 1,421,305 shares 1,106,684
Additional paid-in capital 36,813
Accumulated deficit (1,219,344)
-----------
(75,847)
-----------
$ 1,168,218
===========
</TABLE>
See accompanying notes
F-32
<PAGE> 217
APEXX TECHNOLOGY, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended
December 31,
-----------------------------
1998 1997
----------- -----------
<S> <C> <C>
REVENUES
Sales, net of returns and allowances $ 3,808,106 $ 2,003,426
COST OF GOODS SOLD 1,924,172 1,023,344
----------- -----------
GROSS PROFIT 1,883,934 980,082
SELLING, GENERAL, AND
ADMINISTRATIVE
EXPENSES 2,755,970 1,183,704
----------- -----------
OPERATING LOSS (872,036) (203,622)
OTHER INCOME (EXPENSE)
Other income 11,093 28,469
Interest income (21,472) (16,058)
Other expense (3,538) (6,449)
----------- -----------
(13,917) 5,962
----------- -----------
NET LOSS $ (885,953) $ (197,660)
=========== ===========
</TABLE>
See accompanying notes
F-33
<PAGE> 218
APEXX TECHNOLOGY, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
Years Ended December 31, 1998 and 1997
<TABLE>
<CAPTION>
ADDITIONAL
COMMON PAID-IN ACCUMULATED
STOCK CAPITAL DEFICIT TOTAL
----------- --------- ----------- -----------
<S> <C> <C> <C> <C>
BALANCE AT JANUARY 1,
1997 $ 322,484 $ -- $ (135,731) $ 186,753
Common stock issued, 169,900 169,900 -- -- 169,900
shares
Common stock issued, 193,620 484,050 -- -- 484,050
shares
Net loss -- -- (197,660) (197,660)
----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31,
1997 976,434 -- (333,391) 643,043
Common stock issued, 46,100 115,250 -- -- 115,250
shares
Common stock issued, 10,000 1,000 -- -- 1,000
shares
Common stock issued, 14,000 14,000 -- -- 14,000
shares
Stock options issued -- 36,813 -- 36,813
Net loss -- -- (885,953) (885,953)
----------- ----------- ----------- -----------
BALANCE AT DECEMBER 31,
1998 $ 1,106,684 $ 36,813 $(1,219,344) $ (75,847)
=========== =========== =========== ===========
</TABLE>
See accompanying notes
F-34
<PAGE> 219
APEXX TECHNOLOGY, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------
1998 1997
--------- ---------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(885,953) $(197,660)
Adjustments to reconcile net loss to net cash used by
operating activities
Depreciation and amortization 49,503 30,617
Bad debt expense 10,541 3,465
Loss on sale of fixed assets -- 5,821
Noncash credits to notes payable (32,699) --
Noncash additions to notes payable 79,888 --
Stock option compensation expense 36,813 --
Changes in operating assets and liabilities
Accounts receivable (468,556) (166,483)
Inventories 71,696 (189,646)
Prepaid expenses 6,673 (3,464)
Other current assets (2,563) --
Accounts payable 152,217 178,181
Accrued expenses 66,741 20,015
--------- ---------
NET CASH USED BY OPERATING (915,699) (319,154)
ACTIVITIES
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (35,266) (105,586)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from stock issuance 130,250 653,950
Borrowings on short-term debt 968,872 370,000
Repayment of short-term debt (390,000) (395,000)
Borrowings on long-term debt 93,323 --
Repayment of long-term obligations (25,581) (8,793)
--------- ---------
NET CASH PROVIDED BY FINANCING 776,864 620,157
ACTIVITIES
--------- ---------
NET INCREASE (DECREASE) IN CASH (174,101) 195,417
CASH AT BEGINNING OF YEAR 196,395 978
--------- ---------
CASH AT END OF YEAR $ 22,294 $ 196,395
========= =========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION
Interest paid $ 13,147 $ 16,058
Taxes paid -- 21
Noncash financing transactions
Short-term debt converted to long-term debt -- 40,200
</TABLE>
See accompanying notes
F-35
<PAGE> 220
APEXX TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE A - SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Apexx Technology, Inc.("Apexx") was incorporated in the State of Idaho on August
12, 1992 to create a leading provider of computer networking solutions for small
and medium businesses. Apexx competes in the market for PC Local Area Network
solutions and for enhanced Internet access for businesses. Apexx sells its
product in the United States, Germany, France, Switzerland, Sweden, United
Kingdom, Ireland, and Japan.
Revenue Recognition
Sales are recognized when products are shipped. Apexx has established programs,
which under specified conditions, enable third party distributors to return
product. Apexx establishes liabilities for estimated returns and allowances at
the time of shipment. Apexx warrants its products against defects in design,
materials and workmanship. A provision for estimated future costs relating to
warranty expense is recorded when products are shipped.
Cash
For purposes of reporting cash flows, Apexx considers all highly liquid debt
instruments purchased with a maturity of three months or less to be cash
equivalents.
Property and Equipment
Property and equipment are stated at cost. Depreciation of property and
equipment is provided using the straight-line method over the estimated useful
lives of the assets, which range from three to five years.
Amortization
Software, licenses and other intangible assets are amortized over periods
ranging from two to five years using the straight-line method.
Inventories
Inventories are stated at the lower of cost or market using the first-in,
first-out (FIFO) method.
Income Taxes
Income taxes are provided for the tax effects of transactions reported in the
financial statements and consist of taxes currently due or recoverable and
deferred taxes related primarily to differences between the bases of assets and
liabilities for financial and income tax reporting.
F-36
<PAGE> 221
APEXX TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements, and
the reported revenues and expenses during the reporting period. Significant
estimates used in preparing this financial statement include those assumed in
determining the return of products and warranty costs associated with the sale
of products and those assumed in determining the lower of cost or market on
inventory. Actual results could differ from those estimates.
Advertising
Apexx records advertising expense in the period the expense is incurred. In 1998
and 1997, Apexx recorded $594,276 and $205,171, respectively in advertising
expense.
Research and Development
Apexx records research and development expense in the period the expense is
incurred. In 1998 and 1997, Apexx spent $369,884 and $174,580, respectively on
research and development activities.
Reclassification
Certain 1997 amounts have been reclassified to conform to the 1998 presentation.
New Accounting Pronouncements
The Financial Accounting Standards Board (FASB) has recently issued Statement of
Financial Accounting Standards that may affect Apexx's financial statements as
follows:
FASB has recently issued Statement of Financial Accounting Standards (SFAS
133), "Accounting for Derivative Instruments and Hedging Activities." SFAS
133 established standards for recognizing all derivative instruments
including those for hedging activities as either assets or liabilities in the
statement of financial position and measuring those instruments at fair
value. SFAS No. 133 is effective for fiscal years beginning after June 15,
1999. Management believes the adoption of this statement will have no
material impact on Apexx's financial statements.
FASB recently issued SFAS No. 134, "Accounting for Mortgage-Backed Securities
Retained after the Securitization of Mortgage Loans Held for Sale by a
Mortgage Banking Enterprise." SFAS No. 134 established accounting and
reporting standards for certain activities of mortgage banking enterprises
and other enterprises that conduct operations that are substantially similar
to the primary operations of a mortgage banking enterprise. SFAS No. 134 is
effective for the first fiscal quarter beginning after December 15, 1998.
Management believes the adoption of this statement will have no material
impact on Apexx's financial statements.
SFAS No. 135, "Rescission of FASB Statement No. 75 and Technical
Corrections," rescinds FASB Statement No. 75, "Deferral of the Effective Date
of Certain Accounting Requirements for Pension Plans of State and Local
Governmental Units." GASB Statement No. 25, "Financial Reporting for
F-37
<PAGE> 222
APEXX TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
Defined Benefit Pension Plans and Note Disclosures for Defined Contribution
Plans," was issued November 1994, and established financial reporting
standards for defined benefit pension plans and for the notes to the
financial statements of defined contribution plans of state and local
governmental entities. Statement 75 is, therefore, no longer needed. This
Statement also amends FASB Statement No. 35, "Accounting and Reporting by
Defined Benefit Pension Plans," to exclude from its scope plans that are
sponsored by and provide benefits for the employees of one or more state or
local governmental units. This Statement also amends other existing
authoritative literature to make various technical corrections, clarify
meanings, or describe applicability under changed conditions. This Statement
is effective for financial statements issued for fiscal years ending after
February 15, 1999. Management believes that the adoption of SFAS No. 135 will
have no material effect on its financial statements.
SOP 98-5, "Reporting on the Costs of Start-Up Activities," requires that the
costs of start-up activities, including organization costs, be expensed as
incurred. This Statement is effective for financial statements issued for
fiscal years beginning after December 15, 1998. Management believes that the
adoption of SOP 98-5 will have no material effect on its financial
statements.
NOTE B - INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or market.
<TABLE>
<CAPTION>
1998
-----------
<S> <C>
Inventories consisted of the following:
Raw materials $ 285,333
Finished goods 37,637
-----------
$ 322,970
===========
</TABLE>
NOTE C - REVOLVING LINE OF CREDIT
Apexx has an unused bank line of credit of $200,000 provided by Idaho
Independent Bank. Apexx also has $500,000 line of credit with a $300,000 balance
at December 31, 1998 provided by eSoft, Inc. The lines bear interest at prime
plus 1.5% and prime plus 2.0%, respectively. The lines expire in May 1999 and
August 1999, respectively, and are secured by accounts receivable, inventory,
equipment, and other assets. Two of Apexx's primary shareholders have personally
guaranteed the bank line of credit. Apexx's president has pledged 344,635 shares
of his company stocks as collateral for the eSoft line of credit.
The line of credit with Idaho Independent Bank has certain debt covenants. These
debt covenants are as follows:
Ratio of current assets to current liabilities of at least 1.5 to 1
Ratio of total liabilities to tangible net worth that does not exceed 2.5 to 1
Minimum working capital of $150,000
Apexx has not obtained a waiver from Idaho Independent Bank for the covenant
violations.
F-38
<PAGE> 223
APEXX TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE D - LONG-TERM DEBT
<TABLE>
<CAPTION>
1998
----
<S> <C>
Long-term debt consists of the following:
Note payable to Idaho Independent
Bank, payable in monthly installments of $3,171, including
interest at prime plus 1.5% (9.25% at December 31, 1998),
maturing March 15, 2002, equipment, inventory and accounts
receivable are provided as collateral $104,309
104,309
Less current portion (28,923)
$ 75,386
</TABLE>
Aggregate maturities in future years are:
<TABLE>
<S> <C>
1999 $ 28,923
2000 32,813
2001 35,616
2002 6,957
--------
Total $104,309
========
</TABLE>
F-39
<PAGE> 224
APEXX TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
NOTE E - INCOME TAXES
Deferred income taxes are provided for temporary differences between financial
and tax basis income. The components of net deferred taxes are as follows at
December 31:
<TABLE>
<CAPTION>
1998
--------
<S> <C>
Deferred tax liability from:
Fixed assets $ (1,588)
Deferred tax asset from:
Accrued expenses 21,950
Allowance for doubtful accounts 6,896
Operating loss carryforward 439,121
Tax credit carryforward 37,038
Valuation allowance (503,417)
--------
Deferred tax asset 1,588
--------
Net deferred tax $ --
========
</TABLE>
For income tax purposes, Apexx has unused net operating loss carryovers and tax
credits. Operating losses and tax credit carryovers used and available are as
follows:
<TABLE>
<CAPTION>
1998 1997
---------- ---------
<S> <C> <C>
Net operating loss $1,097,803 $287,211
Research and development tax credit $ 37,038 $ 15,451
</TABLE>
The federal net operating losses expire during 2011 through 2013. The research
and development tax credits expire during 2009 through 2013.
The valuation allowance increased by $373,337 and $87,471 during 1998 and 1997,
respectively.
NOTE F - RETIREMENT PLANS
Apexx has a Simple SEP pension plan which includes all employees who have
attained the age of 21 and have been employed by Apexx for one year. To be
eligible to participate in the plan, the employee must be reasonably expected to
receive compensation in the plan year of at least $5,000. Apexx matches employee
contributions dollar for dollar up to 3% of the employee's gross wages. For the
years ended December 31, 1998 and 1997, Apexx contributed $16,668 and $9,733,
respectively, on behalf of employees to the retirement plan.
F-40
<PAGE> 225
APEXX TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE G - STOCK OPTIONS
Apexx has four stock option plans which allow key employees and directors of
Apexx to receive incentive stock options. The first plan is a non-qualified
stock option plan for the founders of Apexx. The stock options vest immediately
and expire 10 years from the grant date. The second plan is the 1994 Incentive
Stock Option Plan. These stock options vest at the rate of 20 percent per year
and expire 10 years from the vesting date for regular employees and 5 years from
the vesting date for employees who own more than 10 percent of the total
combined voting power of all classes of shares of Apexx. The third plan is the
1998 Stock Option Plan. These stock options vest at the rate of 25 percent per
year and expire 5 years from the vesting date. Under this plan, the options
become fully vested and exercisable in the event of a merger or asset sale. In
the event of a merger or asset sale, the option holders have 30 days to exercise
their options after receiving notification from the Plan Administrator. The
options terminate if not exercised within the 30 day time period. The fourth
plan is the Restricted Stock Option Plan for the directors of Apexx. The
non-qualified stock options vest immediately and may not be exercised before the
first anniversary date of the option and expire ten years after issuance. Upon
termination, a director has one year following termination to exercise any
unexercised options.
Apexx accounts for these plans under APB Opinion No. 25, "Accounting for Stock
Issued to Employees." In accordance with this opinion, Apexx has recorded
compensation cost of $49,938 for 1998. If compensation cost had been determined
consistent with FASB Statement No. 123, "Accounting for Stock-Based
Compensation," Apexx's 1998 loss would have increased by $46,816. The FASB
Statement No. 123 method of accounting has not been applied to options granted
prior to January 1, 1996. The pro forma compensation cost may not be
representative of that to be expected in future years.
The fair value of each option grant is estimated using the Black-Scholes
option-pricing model with the following weighted-average assumptions used for
grants in 1998:
Expected Volatility 56.75%
Risk-free interest rates 6.0%
Dividend yield 0%
F-41
<PAGE> 226
Apexx Technology, Inc.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Founder's 1994 Restricted 1998
Stock Incentive Stock Stock
Option Plan Option Option
---------- ---------- --------- ---------
<S> <C> <C> <C> <C>
Number of option shares
Beginning of year 832,650 141,461 28,000 --
Granted 10,000 -- 12,000 168,650
Exercised/Canceled (10,000) (17,500) (10,000) (6,500)
Became exercisable -- 24,792 14,000 --
Outstanding at end of year 832,650 123,961 30,000 162,150
Exercisable at end of year 832,650 48,992 30,000 --
Weighted-average exercise prices
Beginning of year .26 1.11 1.00 --
Granted at fair value -- -- 1.00 1.39
Outstanding at end of year .26 1.13 1.00 1.39
Exercisable at end of year .26 1.08 1.00 --
Range of exercise prices at
December 31, 1998 $.10-$.50 $.50-$2.50 $ 1.00 $1.00-$2.50
Remaining weighted-average
contractual life of options
outstanding 4.65 years 8.35 years 9.0 years 5.0 years
</TABLE>
NOTE H - CONCENTRATIONS
Apexx's domestic and international sales, to a significant degree, are made
through distributors. Accordingly, Apexx is dependent upon the continued
viability and financial stability of these distributors. Sales to distributors
that exceed 10 percent of total sales are as follows:
<TABLE>
<CAPTION>
1998 1997
--------- ---------
<S> <C> <C>
Extended Systems, Inc. $ 841,534 $ --
Tech Data $ 758,301 $ 269,838
</TABLE>
F-42
<PAGE> 227
APEXX TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
December 31, 1998 and 1997
During 1998, international sales comprised 15.2% of total sales and the
remaining 84.8% of sales were generated in the domestic market.
Apexx is dependent on obtaining inventory from certain suppliers. Purchases from
suppliers that exceed 10 percent of total purchases are as follows:
<TABLE>
<CAPTION>
1998 1997
-------- --------
<S> <C> <C>
Arrow Electronics $396,470 $282,314
Marshall Industries Technology $232,078 $205,159
First International Computer $ -- $156,669
Merisel $ -- $102,954
</TABLE>
NOTE I - CONTINGENT LIABILITIES
In June 1998, Apexx entered into an agreement with Extended Systems, Inc. (ESI)
as discussed in Note J. ESI contends that it spent $91,000 in marketing expenses
that Apexx is obligated to repay. Apexx disputes that it has any liability for
marketing expenses incurred by ESI. Apexx paid $25,000 to Pacific Crest
Securities, Inc. in July 1998. The agreement provides for Pacific Crest
Securities, Inc. to find a compatible merger partner for Apexx. The proposed
merger with eSoft will result in a fee to Pacific Crest Securities, Inc.
NOTE J - MARKETING AGREEMENT
In June 1998, Apexx entered into an agreement with Extended Systems, Inc. (ESI).
Under the terms of the agreement, ESI agreed to loan Apexx up to $500,000 to
assist in marketing ESI's products. The loan balance is reduced by $158 for each
unit sold through October 1999. The unpaid balance is due in October 1999 and
can be paid in cash, common stock of Apexx, or by another mutually agreed upon
payment method. Apexx controls the choice of payment options. As of December 31,
1998, ESI has advanced Apexx approximately $390,000, including cash advances of
$308,872 and noncash advances of approximately $80,000 and the recorded balance
after accounting for the number of units sold was $356,061. Interest on the note
accrues at a rate of 6% per year.
NOTE K - GOING CONCERN CONTINGENCY
As shown in the accompanying financial statements, Apexx incurred a net loss of
$885,953 for the year ended December 31, 1998. As of December 31, 1998, current
liabilities exceeded current assets by $97,926. The financial statements do not
include any adjustments that might be necessary if Apexx is unable to continue
as a going concern. Apexx plans to merge with eSoft, Inc. or issue additional
stock to fund operations.
F-43
<PAGE> 228
APEXX TECHNOLOGY, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1998 AND 1997
NOTE L - SUBSEQUENT EVENTS
Stock Options Granted
In accordance with previous agreements, Apexx granted 100,000 stock options to
two key employees in January 1999. The options have an exercise price of $5.78,
which is the estimated fair market value of the options on the date of grant.
Line of Credit Borrowings
In January 1999, Apexx borrowed the remaining $200,000 from eSoft, Inc. that
was available under the line of credit agreement. This resulted in a total
liability to eSoft, Inc. of $500,000 in January 1999.
Merger with eSoft, Inc.
On January 25, 1999 Apexx signed an Agreement and Plan of Merger (Agreement)
with eSoft, Inc. (eSoft). The proposed merger will involve a stock for stock and
option exchange. Shareholders of Apexx will receive 1.119651 shares of eSoft
common stock. Of these shares received, 1.63% of will be transferred to Pacific
Crest Securities, Inc. as partial payment of the merger fees owed to them.
Optionholders of Apexx will have each of their current options converted into
1.085879 eSoft options. Each shareholder will have 10% of the eSoft shares
placed into an escrow for a period of one year. All or a portion of these shares
in escrow may be returned to eSoft if the representations and warranties made by
Apexx in the merger are inaccurate and eSoft suffers more than $200,000 in
damages as a result of the inaccuracy.
The proposed merger depends on a number of conditions as outlined in the
Agreement. The proposed merger can be terminated upon certain conditions as
outlined in the Agreement. The primary termination condition requires the merger
to be consummated by June 1, 1999.
If Apexx terminates the merger agreement because eSoft's Board of Directors
changes its recommendation of the merger agreement to eSoft's shareholders, then
Apexx is entitled to receive a fee of $750,000. If eSoft terminates the merger
agreement because Apexx's Board of Directors recommends an alternative proposal
to Apexx's shareholders, then eSoft is entitled to receive a fee of $2,000,000.
Pacific Crest Securities, Inc. Agreement
On January 25, 1999, Apexx received a letter from Pacific Crest Securities, Inc.
(Pacific) stating that Pacific was revising the fee arrangement related to the
proposed merger with eSoft. Under the new terms, eSoft pays Pacific $200,000 and
Apexx shareholders transfer 48,000 shares of eSoft stock to Pacific.
F-44
<PAGE> 229
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
- ------- -----------------------
<S> <C>
2.1 Amended and Restated Agreement and Plan Merger dated January 25, 1999
between eSoft, Inc., eSoft Acquisition Corporation and Apexx
Technology, Inc. (filed with Registration Statement on Form S-4 on
March 19, 1999 and incorporated herein by reference).
2.2 Form of Stockholders Agreement to be executed by Apexx Technology,
Inc. stockholders in connection with the merger (filed with
Registration Statement on Form S-4 on March 19, 1999 and incorporated
herein by reference).
2.3 Form of Escrow Agreement to be executed by eSoft, Inc. Thomas
Loutzenheiser and The Trust Company of The Bank of Montreal (filed
with Registration Statement on Form S-4 on March 19, 1999 and
incorporated herein by reference).
2.4 Source Code Escrow Agreement among eSoft, Inc., Apex Technology, Inc.
and DSI (filed with Registration Statement on Form S-4 on March 19,
1999 and incorporated herein by reference).
2.5 Employment Agreement by and between eSoft, Inc. and Thomas
Loutzenheiser (filed with Registration Statement on Form S-4 on March
19, 1999 and incorporated herein by reference).
2.6 Employment Agreement by and between eSoft, Inc. and Albert Youngwerth
(filed with Registration Statement on Form S-4 on March 19, 1999 and
incorporated herein by reference).
2.7 Employment Agreement by and between eSoft, Inc. and Ray Jenks (filed
with Registration Statement on Form S-4 on March 19, 1999 and
incorporated herein by reference).
2.8 Employment Agreement by and between eSoft, Inc. and John Hanousek
(filed with Registration Statement on Form S-4 on March 19, 1999 and
incorporated herein by reference).
3.1 Articles of Incorporation (filed with Registration Statement on Form
10-SB on December 22, 1997 and incorporated herein by reference).
3.2 Certificate of Incorporation of New eSoft, Inc. (filed with Amendment
No. 1 to Registration Statement on Form 10-SB on February 18, 1998
and incorporated herein by reference).
3.3 Certificate of Merger of eSoft, Inc. into New eSoft, Inc. (filed with
Amendment No. 1 to Registration Statement on Form 10-SB on February
18, 1998 and incorporated herein by reference).
3.4 Amendment to Certificate of Incorporation of eSoft, Inc. (filed with
Registration Statement on Form S-4 on March 19, 1999 and incorporated
herein by reference).
3.5 Bylaws of eSoft (filed with Registration Statement on Form 10-SB on
December 22, 1997 and incorporated herein by reference).
3.6 Bylaws of New eSoft, Inc. (filed with Registration Statement on Form
10-SB on December 22, 1997 and incorporated herein by reference).
</TABLE>
<PAGE> 230
<TABLE>
<S> <C>
5.1* Opinion of Davis, Graham & Stubbs LLP (including consent)
8.1* Opinion of Davis, Graham & Stubbs LLP regarding certain tax matters
(including consent)
9.1 Voting Agreement by and between eSoft, Inc and Tom Loutzenheiser,
Gayl Loutzenheiser and David Dahms (filed with Registration Statement
on Form S-4 on March 19, 1999 and incorporated herein by reference).
9.2 Voting Agreement by and between eSoft, Inc and Albert Youngwerth,
Heather Youngwerth, Lawrence Lynch, George Minow, Chris Minow,
William Rivers, Ray Jenks (filed with Registration Statement on Form
S-4 on March 19, 1999 and incorporated herein by reference).
10.1 Severance Agreement and Mutual Release dated December 19, 1997
between eSoft and Wayne Farlow (filed with Registration Statement on
Form 10-SB on December 22, 1997 and incorporated herein by
reference).
10.2 Agency Agreement with C.M. Oliver Capital (filed with Amendment No. 1
to Registration Statement on Form SB-2, filed March 24, 1998 and
incorporated herein by reference).
10.3 Agent's Warrant (filed with Amendment No. 1 to Registration Statement
on Form SB-2, filed March 24, 1998 and incorporated herein by
reference).
10.4 Lease Agreement dated September 18, 1997 between eSoft and Aspen
Industrial Park Partnership (filed with Registration Statement on
Form SB-2 on December 24, 1997 and incorporated herein by reference).
10.5 Voting Agreement dated September 2, 1997 between Philip Becker,
Pantheon Capital Ltd. And Transition Partners, Ltd. (filed with
Registration Statement on Form 10-SB on December 22, 1997 and
incorporated herein by reference).
10.6 Termination Agreement (filed with Amendment No. 1 to Registration
Statement on Form 10-SB on February 18, 1998 and incorporated herein
by reference).
10.7 Registration Rights Agreement dated September 2, 1997 between
Transition Partners, Ltd., Pantheon Capital Ltd. and eSoft (filed
with Registration Statement on Form 10-SB on December 22, 1997 and
incorporated herein by reference).
10.8 Agreement dated May 6, 1997 between Transition Partners, Ltd. and
eSoft (filed with Registration Statement on Form 10-SB on December
22, 1997 and incorporated herein by reference).
10.9 Agreement dated October 14, 1996 between Transition Partners, Ltd.
and eSoft (filed with Registration Statement on Form 10-SB on
December 22, 1997 and incorporated herein by reference).
10.10 Amendment to Agreement dated August 22, 1997 between Transition
Partners, Ltd. and eSoft (filed with Registration Statement on Form
10-SB on December 22, 1997 and incorporated herein by reference).
</TABLE>
<PAGE> 231
<TABLE>
<S> <C>
10.11 Second Amendment to Agreement dated November 11, 1997 between
Transition Partners, Ltd. and eSoft (filed with Registration
Statement on Form 10-SB on December 22, 1997 and incorporated herein
by reference).
10.12 Stock Option Agreement dated November 11, 1997 between Transition
Partners, Ltd. and eSoft (filed with Registration Statement on Form
10-SB on December 22, 1997 and incorporated herein by reference).
10.13 Amended Stock Warrant Agreement dated January 29, 1998 (filed with
Amendment No. 1 to Registration Statement on Form 10-SB on February
18, 1998 and incorporated herein by reference).
10.14 Consulting Agreement dated August 1, 1997 between eSoft and Kent
Nuzum (filed with Registration Statement on Form 10-SB on December
22, 1997 and incorporated herein by reference).
10.15 Consulting Agreement dated August 22, 1997 between Pantheon Capital
Ltd. and eSoft (filed with Registration Statement on Form 10-SB on
December 22, 1997 and incorporated herein by reference).
10.16 Amendment to Consulting Agreement dated August 22, 1997 between
Pantheon Capital Ltd. and eSoft (filed with Registration Statement on
Form 10-SB on December 22, 1997 and incorporated herein by
reference).
10.17 Stock Option Agreement dated November 11, 1997 between Pantheon
Capital Ltd. and eSoft (filed with Registration Statement on Form
10-SB on December 22, 1997 and incorporated herein by reference).
10.18 Amended Stock Warrant Agreement dated January 29, 1998 (filed with
Amendment No. 1 to Registration Statement on Form 10-SB on February
18, 1998 and incorporated herein by reference).
10.19 Stock Option Agreement dated November 11, 1997 between Copeland
Consulting Group, Inc. and eSoft (filed with Registration Statement
on Form 10-SB on December 22, 1997 and incorporated herein by
reference).
10.20 Amended Stock Warrant Agreement dated January 29, 1998 (filed with
Amendment No. 1 to Registration Statement on Form 10-SB on February
18, 1998 and incorporated herein by reference).
10.21 Employment Agreement dated September 2, 1997 between Philip Becker
and eSoft (filed with Registration Statement on Form 10-SB on
December 22, 1997 and incorporated herein by reference).
10.22 Form of Employee Confidentiality Agreement (filed with Amendment No.
1 to Registration Statement on Form 10-SB on February 18, 1998 and
incorporated herein by reference).
10.23 Termination Agreement terminating Software Development and Consulting
Agreements (filed with Amendment No. 1 to Registration Statement on
Form 10-SB on February 18, 1998 and incorporated herein by
reference).
10.24 Promissory Note to First National Bank of Arvada, Colorado (filed
with Amendment No. 1 to Registration Statement on Form 10-SB on
February 18, 1998 and incorporated herein by reference).
10.25 Proposal for financing arrangement from Colorado National Bank (filed
with Amendment No. 1 to Registration Statement on Form 10-SB on
February 18, 1998 and incorporated herein by reference).
10.26 Employment Agreement dated March 6, 1998 between Regis Frank and
eSoft (filed with Amendment No. 1 to Registration Statement on Form
SB-2, filed March 24, 1998 and incorporated herein by reference).
10.27 Employment Agreement dated March 6, 1998 between Robert C. Hartman
and eSoft (filed with Amendment No. 1 to Registration Statement on
Form SB-2, filed March 24, 1998 and incorporated herein by
reference).
</TABLE>
<PAGE> 232
<TABLE>
<S> <C>
10.28 Employment Letter dated October 7, 1997 between Jason M. Rollings and
eSoft (filed with Amendment No. 2 to Registration Statement on Form
SB-2, filed April 17, 1998 and incorporated herein by reference).
10.29 Employment Letter dated October 7, 1997 between Jason M. Rollings and
eSoft (filed with Amendment No. 2 to Registration Statement on Form
SB-2, filed April 17, 1998 and incorporated herein by reference).
10.30 Employment Agreement between Thomas R. Tennessen and eSoft (filed
with Amendment No. 2 to Registration Statement on Form SB-2, filed
April 17, 1998 and incorporated herein by reference).
10.31 Employment Agreement between Thomas R. Tennessen and eSoft (filed
with Registration Statement on Form SB-2 on August 19, 1998 and
incorporated herein by reference).
10.32 Employment Agreement between James R. Bell and eSoft (filed with
Registration Statement on Form SB-2 on August 19, 1998 and
incorporated herein by reference).
10.33 Employment Letter between James M. Love and eSoft (filed with
Registration Statement on Form SB-2 on August 19, 1998 and
incorporated herein by reference).
10.34 Consulting Retainer Agreement (filed with Registration Statement on
Form SB-2 on August 19, 1998 and incorporated herein by reference).
10.35 Form of Distributor Agreement (filed with Registration Statement on
Form SB-2 on August 19, 1998 and incorporated herein by reference).
10.36 Employment Agreement between Jeffrey Finn and eSoft (filed with
Registration Statement on Form S-4 on March 19, 1999 and incorporated
herein by reference).
10.37 Loan agreement entered into by and between eSoft, Inc. and Apexx
Technology, Inc. dated December 2, 1998 (filed with Registration
Statement on Form S-4 on March 19, 1999 and incorporated herein by
reference).
10.38 Secured promissory note entered into by Apexx Technology, Inc. and
eSoft, Inc. dated December 2, 1998 (filed with Registration Statement
on Form S-4 on March 19, 1999 and incorporated herein by reference).
10.39 Security agreement entered into by Apexx Technology, Inc. pledging
assets to secure loan agreement entered into dated December 2, 1998
(filed with Registration Statement on Form S-4 on March 19, 1999 and
incorporated herein by reference).
10.40 Stock Pledge Agreement entered into by Thomas Loutzenheiser and
eSoft, Inc. dated December 2, 1998 (filed with Registration Statement
on Form S-4 on March 19, 1999 and incorporated herein by reference).
10.41 Guaranty Agreement entered into by Thomas Loutzenheiser and eSoft,
Inc. dated December 2, 1998 (filed with Registration Statement on
Form S-4 on March 19, 1999 and incorporated herein by reference).
10.42 Employment Agreement between Jane Merickel and eSoft (filed with
Registration Statement on Form S-4 on March 19, 1999 and incorporated
herein by reference).
10.43* Employment Agreement between Steve Kuzara and eSoft
10.44* Trademark License Agreement between Apexx Technology, Inc. and eSoft
23.1* Consent of BDO Seidman, LLP
23.2* Consent of Balukoff, Lindstrom & Co., P.A.
99.1* Letter to eSoft stockholders
99.2* Proxy Card for eSoft stockholders
99.3* Proxy Card for Apexx stockholders
</TABLE>
* Filed herewith
<PAGE> 1
[DAVIS, GRAHAM & STUBBS, LLP LETTERHEAD]
Exhibit 5.1
April 16, 1999
eSoft, Inc.
295 Interlocken Boulevard, Suite 500
Broomfield, Colorado 80021
Re: Registration Statement on Form S-4
Reg. No. 333-74675
Ladies and Gentlemen:
We have acted as counsel for eSoft, Inc., a Delaware corporation (the
"Company"), in connection with the preparation of a Registration Statement on
Form S-4 (the "Registration Statement") filed by the Company with the Securities
and Exchange Commission. The Registration Statement relates to the registration
under the Securities Act of 1933, as amended (the "1933 Act"), of 1,591,365
shares of common stock, $.01 par value (the "Securities") that will be issued by
the Company to stockholders of Apexx Technology, Inc., an Idaho corporation,
pursuant to an Amended and Restated Agreement and Plan of Merger dated as of
January 25, 1999 (the "Merger Agreement").
This opinion is delivered pursuant to the requirements of Item
601(b)(5) of Regulation S-K under the 1933 Act.
We have examined and relied on originals or copies, certified or
otherwise identified to our satisfaction, of such documents, corporate records
and other instruments, have made such inquiries as to questions of fact of
officers and representatives of the Company and have made such examinations of
law as we have deemed necessary or appropriate for purposes of giving the
opinion expressed below. In such examination, we have assumed the genuineness of
all signatures, the authenticity of all documents submitted to us as originals
and the conformity with the originals of all documents submitted to us as
copies.
The following opinions are limited solely to applicable federal law of
the United States of America and the General Corporation Law of the State of
Delaware. While we are not licensed to practice in the State of Delaware, we
have reviewed applicable provisions of the General Corporation Law of the State
of Delaware as we have deemed appropriate in connection with the opinions
expressed herein. Except as described, we have neither examined nor do we
express any opinion with respect to Delaware law.
<PAGE> 2
eSoft, Inc.
April 16, 1999
Page 2
Based upon and subject to the foregoing, we are of the opinion that:
1. The issuance and sale by the Company of the Securities, as
provided in the Registration Statement and the Merger Agreement, have been duly
and validly authorized by all necessary corporate action of the Company.
2. The Securities, when issued and sold in conformity with the
resolutions of the board of directors of the Company and as provided in the
Registration Statement and the Merger Agreement, will be validly issued, fully
paid and non-assessable.
We hereby consent to the filing of this opinion with the Commission as
Exhibit 5.1 to the Registration Statement. We also consent to the reference to
this firm under the heading "Legal Matters" in the Joint Proxy
Statement/Prospectus included in the Registration Statement as the counsel who
will pass upon the validity of the Securities. In giving this consent, we do not
thereby admit that we are in the category of persons whose consent is required
under Section 7 of the Securities Act or the rules of the Securities and
Exchange Commission.
Very truly yours,
/s/ Davis, Graham & Stubbs, LLP
DAVIS, GRAHAM & STUBBS, LLP
<PAGE> 1
EXHIBIT 8.1
[Davis, Graham & Stubbs LLP Letterhead]
April 16, 1999
eSoft, Inc.
295 Interlocken Boulevard, Suite 500
Broomfield, Colorado 80021
Apexx Technology, Inc.
506 South 11th Street
Boise, Idaho 83702
Ladies and Gentlemen:
Our opinion has been requested regarding certain federal income tax
consequences of the merger (the "Merger") of eSoft Acquisition Corporation
("Merger Sub"), an Idaho corporation and newly-formed subsidiary of eSoft, Inc.
("eSoft"), a Delaware corporation, with and into Apexx Technology, Inc.
("Apexx"), an Idaho corporation, pursuant to that Amended and Restated Agreement
and Plan of Merger, dated as of January 25, 1999 (the "Agreement"), by and
between eSoft, Apexx and Merger Sub. Unless otherwise indicated, capitalized
terms used in this letter shall have the meaning given them in the Agreement.
For purposes of our opinion, we have examined and relied upon copies of
the following documents, including all schedules and exhibits attached thereto:
(a) the Agreement;
(b) the Registration Statement on Form S-4 containing the
Joint Proxy Statement/Prospectus prepared by eSoft
and Apexx in connection with the Merger and filed
with the Securities and Exchange Commission pursuant
to the Securities Act of 1933, as amended (the
"Registration Statement"); and
(c) certificates to Counsel from eSoft and Apexx provided
in connection with the Merger (the "Certificates").
We have not independently verified the factual matters relating to the
Merger in connection with or apart from our preparation of this opinion and,
accordingly, our opinion does not take into account any matters not set forth in
this letter which might have been disclosed by independent verification.
<PAGE> 2
eSoft, Inc.
Apexx Technology, Inc.
April 16, 1999
Page 2
Provided that the Merger is consummated in accordance with the terms
and conditions set forth in the Agreement, and based on the facts and
representations set forth in the Certificates and this letter, and subject to
the qualifications and other matters set forth in this letter, it is our opinion
that for federal income tax purposes:
(a) The Merger will qualify as a reorganization within the
meaning of Section 368(a) of the Internal Revenue Code of 1986, as
amended (the "Code").
(b) No gain or loss will be recognized by the Apexx
shareholders upon the exchange of their Apexx common stock solely for
eSoft common stock pursuant to the Merger (except with respect to cash
received in lieu of a fractional share of eSoft common stock).
(c) The aggregate tax basis of the eSoft common stock received
by the Apexx shareholders who, pursuant to the Merger, exchange all of
their Apexx common stock solely for eSoft common stock will be the same
as the aggregate tax basis of the Apexx common stock surrendered in
exchange (reduced by any amount allocable to a fractional share
interest in eSoft common stock for which cash is received).
(d) Any cash received by a holder of Apexx common stock in
lieu of a fractional share interest in eSoft common stock shall be
treated as received in exchange for such fractional share. Such gain or
loss generally will be recognized for federal income tax purposes
measured by the difference between the amount of cash received and the
portion of the stockholder's tax basis allocable to such fractional
share.
(e) The holding period of the eSoft common stock received
pursuant to the Merger in exchange for Apexx common stock will include
the holding period of the Apexx common stock surrendered in the
exchange if such Apexx common stock was a capital asset in the hands of
the exchanging stockholder at the Effective Time of the Merger.
Our opinion is limited to the foregoing federal income tax consequences
of the Merger as a reorganization within the meaning of Section 368(a) of the
Code, which is the only matter as to which our opinion has been requested. We do
not address any other federal income tax consequences of the Merger, or any
transactions undertaken incident to the Merger (including the issuance of stock
options by eSoft to certain employees or former employees of Apexx or the
transfer by Apexx shareholders of a portion of their eSoft shares received in
the transaction to an advisor for
<PAGE> 3
eSoft, Inc.
Apexx Technology, Inc.
April 16, 1999
Page 3
Apexx with respect to the transaction). Additionally, we have not considered
matters (including state or local tax consequences) arising under the laws of
any jurisdiction other than matters of federal law arising under the law of the
United States.
Our opinion is based on the understanding that the relevant facts are,
and will be as of the Effective Time of the Merger, as set forth or referred to
in this letter and in the Certificates. If this understanding is incorrect or
incomplete in any respect, our opinion could be affected. Our opinion also is
based upon the existing provisions of United States federal income tax law,
including the Internal Revenue Code of 1986, as amended, the Treasury Department
Regulations promulgated thereunder (final, temporary and proposed), published
revenue rulings and procedures of the Internal Revenue Service, judicial
decisions, reports and statements of congressional committees and members and
such other matters as we have considered relevant, all as in effect on the date
hereof. Any of such authorities could be changed at any time (possibly
retroactively), and any such changes could alter the statements and opinions
expressed herein. In rendering this opinion, we undertake no responsibility to
advise of any new developments in the application or interpretation of the U.S.
federal income tax laws.
This letter is intended for the sole benefit of eSoft, Merger Sub,
Apexx and the Apexx shareholders and may not be relied upon by any other party
without our prior written consent. We hereby consent to the filing of this
opinion with the Securities and Exchange Commission as an exhibit to the
Registration Statement.
Sincerely,
/s/ Davis, Graham & Stubbs LLP
DAVIS, GRAHAM & STUBBS LLP
<PAGE> 1
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into as of
this day of February, 1999, between eSoft, Inc., a Delaware corporation (the
"Company"), and STEVE KUZARA, an individual person (the "Executive").
RECITAL
A. The Company desires to employ the Executive as VICE PRESIDENT OF
INTERNATIONAL SALES, 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 INTERNATIONAL SALES. Subject to Section 4, the
term of Executive's employment under this Agreement (the "Term") shall be for
36 months, beginning MARCH 1, 1999 and ending FEBRUARY 28, 2002.
2. Duties, Responsibilities and Authority. In the capacity as VICE
PRESIDENT OF INTERNATIONAL SALES for the Company, the Executive shall have
primary responsibility for the sales and distribution of the Company's products
and services in Europe, Asia/Pacific and Latin America. These responsibilities
include establishing and maintaining relationships with distributors,
resellers, and strategic business partners in each region. The Executive shall
be responsible for recruiting, hiring, directing, performing administrative
functions, setting and managing compensation and incentive plans for Regional
Directors in each region and other personnel as appropriate. The Executive
shall have primary responsibilities for meeting and exceeding the sales and
revenue objectives established for the International territory and markets. The
Executive shall report to and be subject to the direction and control of the
President of the Company. The Executive shall devote substantially all of
Executive's full
<PAGE> 2
professional and managerial time and effort to the performance of the duties as
VICE PRESIDENT OF INTERNATIONAL SALES and shall not engage in other business
activity or activities which, in the reasonable good-faith judgement of the
President of the Company, conflict with the performance of duties under this
Agreement.
3. Compensation
(a) Salary. For services rendered under this Agreement, the Company
shall pay the Executive a salary at the rate of $8,250.00 per month.
(b) Incentive Pay. The Executive shall be eligible to receive a
quarterly Incentive Pay commission. The Incentive Pay is targeted at 1% of net
revenues received in the International Territory and is defined in the
Executive's Annual Sales Compensation Plan, attached hereto and updated
annually. 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.
(c) Bonuses. The Executive shall be eligible to receive a
performance bonus based upon attainment of minimum quarterly sales quota's. The
Performance Bonus is defined in the Executive's Annual Sales Compensation Plan,
attached hereto and updated annually. 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.
(d) Annual Review. The Executive's salary, bonus, options and terms
of the severance in Section 7 of this Agreement shall be reviewed annually
beginning January 1, 2000 and may be increased as the Board deems appropriate,
but shall not be decreased during the term without mutual agreement.
(e) Stock Options. The Executive has been granted incentive stock
options pursuant to the Company's Stock Option Plan to purchase up to 60,000
shares of the Company's common stock at an exercise price equal to the fair
market value of the Company's common stock on the day of the grant, subject to
board approval. Shares shall vest over a 36 month period with no vesting until
the beginning of the eighth month at which time seven-thirty-sixths (7/36) 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.
(f) 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 three (3) 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
<PAGE> 3
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 Executive's employment for any reason.
(g) 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 Executive's duties under
this Agreement; provided that the Executive presents to the Company an itemized
accounting of such expenses including reasonable supporting data.
(h) Relocation Allowance. The Company shall reimburse the Executive
for certain relocation expenses. These include the following: 1) two
househunting trips for the Executive and Spouse to Denver, Colorado such
househunting trips to include round-trip airfare and two (2) nights lodging at
a hotel (such airfare and hotel arrangements to be approved by the Company in
advance), 2) actual moving expenses up to a maximum of $7,500 using a moving
company approved in advance by the Company. Such relocation by the Executive to
the Company's headquarter's location is expected to occur no later than August
of 1999.
4. Termination.
(a) Termination by the Company without Cause. Notwithstanding
anything to the contrary contained herein but subject to Section 7 hereof, the
Company may, by delivering thirty (30) days' prior written notice to the
Executive, terminate the Executive's employment at any time without Cause (as
hereinafter defined).
(b) Termination by the Executive without Cause. Notwithstanding
anything to the contrary contained herein but subject to Section 7 hereof, the
Executive may, by delivering thirty (30) days' prior written notice to the
Company, terminate the Executive's employment hereunder.
(c) Termination by the Company for Cause. The Company may terminate
the Executive's employment for Cause immediately upon written notice stating
the basis for such termination. "Cause" for termination of the Executive's
employment shall only be deemed to exist if the Executive has (i) breached this
Agreement and if such breach continues or recurs more than thirty (30) days
after notice from the Company specifying the action which constitutes the
breach and demanding its discontinuance, (ii) exhibited willful disobedience of
lawful directions of the President or of the Board, or (iii) committed gross
malfeasance in performance of Executive's 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
Executive's duties hereunder that results from the disability of the Executive
shall not be considered Cause for Executive's termination.
<PAGE> 4
(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, or if the Company is engaged in
unlawful activity or requests the Executive to engage in unlawful activity.
5. Disability. In the event of disability of the Executive during the
term hereof, the Company shall, during the continuance of Executive's
disability but only for a maximum of 90 days following the determination of
disability, pay the Executive the Executive's 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 Executive's duties as described herein for a
consecutive period of thirty (30) days or more.
6. Death. In the event of the death of the Executive, except with
respect to any benefits which have accrued and have not been paid to the
Executive hereunder, the provisions of this Agreement shall terminate
immediately. The Executive's estate shall have the right to receive
compensation due to the Executive as of and to the date of Executive's 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 Executive terminates this
Agreement for Cause, the Executive shall be entitled to receive Executive's
then current salary and benefits, as provided for in Sections 3(a) and 3(e),
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
the initial date of this Agreement 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 Executive's employment hereunder or if Executive's
employment is terminated for Cause, the Executive shall not be entitled to any
severance pay or other compensation beyond the date of termination of
Executive's employment.
<PAGE> 5
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, pursuant to section 4.b or 4.c hereof, 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, pursuant to section
4.b or 4.c hereof, 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 Executive's
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
Executive's 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
Executive of the provisions contained in Sections 8 and 9 are likely to cause
irreparable damage to the Company, and therefore Executive agrees that if there
is a breach or threatened breach by the Executive of the provisions of said
sections, the Company shall be entitled to pursue an injunction restraining the
Executive from such breach, and Executive will make no objection to the form of
relief sought. Nothing herein shall be construed as prohibiting the Company
from pursuing any other available remedies for such breach or threatened
breach.
<PAGE> 6
12. Miscellaneous
(a) Notices. Any notice required or permitted to be given under
this Agreement shall be directed to the appropriate party in writing and mailed
or delivered, if to the Company, to eSoft, Inc., to the attention of the
President, at 5335-C Sterling Drive, Boulder, Colorado 80301, and if to the
Executive, at __________________________________________. 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 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: /s/ Jeffrey Finn
-------------------------------------------
Jeffrey Finn
Chief Executive Officer
THE EXECUTIVE:
By: /s/ Steve Kuzara
-------------------------------------------
Steve Kuzara
<PAGE> 7
eSOFT, INC.
5335 Sterling Drive, Suite C
Boulder, Colorado 80301
- -------------------------------------------------------------------------------
EMPLOYEE CONFIDENTIALITY AGREEMENT
- -------------------------------------------------------------------------------
THIS AGREEMENT is between eSoft, Inc. (the "Company") and ____________
________ an individual residing at ___________________________________________
________ (the "Employee"), based on the following circumstances:
A. WHEREAS the Company owns and is developing several proprietary
software products and services which are and will be maintained as trade
secrets and unpublished copyrighted materials (the "Company's products"), and
B. WHEREAS the Employee is employed as a____________________________
for the Company, and will be given access to and substantial assistance from the
Company's staff in understanding many of the Company's products and plans,
including many of the Company's trade secrets and other confidential
information, and
C. WHEREAS the Company's products are developed at substantial expense
and give the Company an advantage over its competitors, but only so long as
they remain the secret and proprietary information of the Company, and
D. WHEREAS the Employee agreed to enter into this Agreement as a
condition of his/her employment by the Company, understands that he/she will
not be given access to confidential information concerning the Company's
products and plans until he/she enters into this Agreement and acknowledges
that this Agreement is reasonable and necessary for the protection of the
Company's trade secrets and other secret and confidential information, the
protection of which allows the Company to continue in business and to continue
to employ the Employee, THEREFORE
THE COMPANY AND THE EMPLOYEE agree to the following:
1. DEFINITIONS.
a. COMPETITIVE BUSINESS. As used in this Agreement, "competitive
business" means any business or enterprise engaged in the business of providing
any product or service then or historically provided by the Company, including,
but not limited to, computer software or systems for LAN or WAN connectivity to
the Internet within the geographical areas of the United States, including
Alaska and Hawaii, Puerto Rico, and Canada, as well as within the geographical
area of any other country, territory or sovereignty in which the Company has a
presence by virtue of having established a dealership for its products at the
time under consideration.
b. CONFIDENTIAL INFORMATION. As used in this Agreement, the term
"confidential information" means all of the following, whether now or later
existing, concerning the business, products, programs and activities of the
Company: (a) financial and pricing information, including, but not limited to
budgets, budget projections and plant information, (b) customer account lists,
(c) prospective customers identified by the Company, (d) internal customer
data, (e) creations, including, but not limited to, computer code and
programming materials, (f) any corporate strategy or plan, including, but not
limited to, pricing, marketing, manufacturing and data processing plans and
strategies, and (g) any information marked or otherwise identified by the
Company as confidential, including information identified as confidential in
any published Company policy.
<PAGE> 8
c. CREATION. As used in this Agreement, the term "creation" means
any: (a) computer program or code, (b) arithmetic, logarithmic, analog, digital
or other formula, (c) product, marketing or business plan composition, writing
or work, writings, and compositions of words, numbers or analogs, including any
combination of them, (d) any other computer programming material in any form or
medium or expression, and (e) computer hardware structures and configurations,
which concern or relate to any present or prospective, product, program or
activity of the Company.
d. PROSPECTIVE CUSTOMER. As used in this Agreement, the phrase
"prospective customer of the Company" means any person or firm directly
solicited by the Company, other than through general advertising, within the
six (6) month period prior to the date under consideration.
2. PROPRIETARY RIGHTS OF THE COMPANY. The Employee may participate in
the development of the Company's products, marketing materials, and/or business
plans due to the Employee's involvement in the creative process with the
Company's technical, development, marketing and/or management staff, and, to
the extent of the Employee's participation and contribution, all resulting
products and product enhancements, marketing and/or business plan materials
shall be deemed to be made for hire, free from any claim or right of the
Employee. The Employee shall promptly inform the Company of any product or
literature, or any component of either or both of them, in the development or
creation of which he/she participated and shall cooperate with the Company,
even after the termination of his/her employment by the Company, in securing
the product or literature as the Company's sole property; the Employee's
cooperation shall be without further compensation, although the Company shall
reimburse the Employee for any reasonable, documented out-of-pocket expenses
incurred by the Employee in so cooperating.
3. CONFIDENTIALITY. The Employee acknowledges that all confidential
information, as defined in this Agreement, is made available in the strictest
confidence solely for the benefit and purposes of the Company and that
unauthorized disclosure of confidential information would harm the Company's
interests. Accordingly, the Employee agrees that during his/her employment by
the Company he/she will not, directly or indirectly, use for himself or to the
detriment of the Company or disclose to any party, other than as directed or
authorized by any officer of the Company, any confidential information. At the
termination of the Employee's employment by the Company, the Employee shall
promptly deliver all records and copies of confidential information to the
Company.
4. COMPETITIVE ACTIVITY.
a. AS AN EMPLOYEE OF ANOTHER. The Employee agrees that during
his/her employment by the Company he/she shall not engage in a competitive
business as an employee of or otherwise on behalf of any person, firm,
partnership, corporation or other entity.
b. AS AN OWNER OR OTHERWISE. The Employee agrees that during
his/her employment by the Company he/she shall not engage, directly or
indirectly, in a competitive business as an owner, officer, partner, joint
venture, principal or otherwise for himself.
5. PURPOSE. The Employee acknowledges that the protective provisions
of this Agreement are necessary for the Company to maintain its competitive
position and to preserve its trade secrets and proprietary information from
becoming public knowledge when it is the intent of both the Employee and the
Company that the Company's trade secrets, proprietary information and other
confidential information remain the sole and exclusive property of the Company.
6. REMEDIES; ENFORCEMENT. The Company's remedies for any breach of
this Agreement are in addition to any other rights of remedies it may have
against the Employee arising from his/her fiduciary duties as an employee of
the Company. The Employee acknowledges that any violation of the terms of this
Agreement would naturally result in irreparable harm to the Company and agrees
that a violation of the obligations respecting confidentiality, solicitation
and competition will entitle the Company to enjoin the Employee's conduct and
seek an accounting of profits realized by the Employee, in addition to any
other remedies that may be available to the Company. The Company shall be
entitled to recover all of its costs, including its reasonable attorney's fees,
in enforcing its rights and remedies under this Agreement.
<PAGE> 9
7. POLICIES. In addition to other Company policies, the Employee
agrees to act in accordance with all Company policies and procedures concerning
confidential information and employee cooperation in protecting and securing
Company property.
8. EMPLOYMENT. The Employee acknowledges that entering into this
Agreement is a condition of employment with the Company. This Agreement gives
the Employee no greater or lessor rights to continued employment with the
Company than the Employee otherwise has and shall remain in effect after the
Employee's employment with the Company terminates, regardless of the reason, or
lack of reason, for that termination.
9. SEVERABILITY. The provisions of this Agreement are severable and to
the extent any provision is found unenforceable, the remaining provisions of
this Agreement shall be enforced as if the unenforceable provision were
omitted.
10. LAW. This Agreement is to be governed by Colorado law.
DATED this day of , 19 .
---------------- ------------------------ -----
EMPLOYEE: COMPANY:
eSoft, Inc.
a Colorado Corporation
By:
- ---------------------------------- --------------------------------
President
<PAGE> 1
EXHIBIT 10.44
EXECUTION COPY
TRADEMARK LICENSE AGREEMENT
THIS TRADEMARK LICENSE AGREEMENT (this "Agreement") is made and entered
into effective as of April 2, 1999 (the "Effective Date") by and between APEXX
TECHNOLOGY, INC., an Idaho corporation ("Licensor"), and eSOFT, INC., a Delaware
corporation ("Licensee").
R E C I T A L S
A. Licensor is the sole and exclusive owner of the registered
trademark TEAM INTERNET(R) (Registration No. 2,213,806,
Registration date of December 29, 1998 (the "Mark"). A copy of
the registration for the Mark issued by the U.S. Patent and
Trademark Office is attached as Appendix A to this Agreement.
B. Licensor and Licensee have entered into that certain Merger
Agreement, dated as of January 25, 1998 (the "Merger
Agreement"), pursuant to which Licensor will be merged with
and into Licensee, with Licensee being the surviving
corporation in the merger (the "Merger").
C. The parties hereto wish to enter into this Agreement to
provide a means for Licensee to use the Mark in joint
marketing efforts pending consummation of the Merger.
A G R E E M E N T
NOW, THEREFORE, in consideration of the foregoing, and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties agree as follows:
1. GRANT. Licensor hereby grants to Licensee, and Licensee hereby
accepts a royalty-free, irrevocable (during the term of this Agreement)
world-wide, nontransferable license to use the Mark solely and exclusively in
connection with the joint marketing, distribution and sale with Licensor of
Licensor's TEAM Internet(R) product line in conjunction with the Licensee's IPAD
products, accessories and technical support services (the "Products and
Services"), as provided in this Agreement, subject to the following
restrictions:
(a) Licensee shall not use the Mark on or in connection with
any goods, services or businesses other than the Products and Services;
(b) Licensee shall not adopt any marks, names or symbols
confusingly similar with the Mark;
-1-
<PAGE> 2
(c) Licensee shall use the Mark to identify only the Products
and Services in compliance with all applicable statutes, regulations
and administrative rulings and shall not use the Mark in any way that
diminishes the goodwill associated with the Mark;
(d) Licensee shall keep Licensor supplied with samples of its
uses of the Mark, including without limitation, all brochures, Product
specifications and technical support materials, stationery, Web site
references, forms and advertisements in which the Mark appears; and
(f) Licensor will have the right to inspect the business
operations conducted under the Mark by Licensee at reasonable times
upon advance notice in order to assure Licensor that the provisions of
this Agreement are being observed.
2. OWNERSHIP OF THE MARK. Licensor is the sole owner of the Mark. By
this Agreement, Licensee is obtaining a limited right to use the Mark solely in
connection with the joint marketing, distribution and sale of the Products and
Services. Execution of this Agreement shall estop Licensee from asserting any
claim contesting Licensor's ownership of the Mark, Licensor's right to enforce
its ownership rights in the Mark, or any other claim adverse to Licensor's
rights in the Mark. Licensee agrees not to take or cause any actions which would
or actually interfere with Licensor's ownership, use or registration of the
Mark. Notwithstanding any other provision of this Agreement, Licensor
acknowledges and agrees that all uses of the Mark by Licensee in conjunction
with the parties' joint marketing efforts, as contemplated by that certain
Agreement and Plan of Merger between Licensor and Licensee of even date
herewith, including, without limitation, Licensee's direct mail and Web site
activities, are in accordance with, and are authorized by, the terms and
conditions of this Agreement.
3. MARKINGS. Licensee will cause the Mark to be displayed only in such
form or manner as may be specifically approved by Licensor. Licensee also will
cause to appear on all materials on, or in connection with which the Mark is
used, such legends, markings and notices as Licensor may request in order to
give appropriate notice of any trademark, trade name or other rights. No other
markings, legends or notices may be used by Licensee except as approved by
Licensor.
4. TERM. This Agreement, and the license granted hereunder, shall
continue until terminated in accordance with Section 9 below.
5. SUBLICENSE AND ASSIGNMENT. Licensee shall not sublicense the Mark or
assign its rights or delegate its duties hereunder, by operation of law or
otherwise without the prior written consent of Licensor, which such consent
shall not be unreasonably withheld. Any sublicense, assignment or delegation in
violation of this paragraph shall be null and void and shall operate to
terminate this Agreement and the license granted hereunder.
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<PAGE> 3
6. CONSIDERATION. The parties acknowledge that consideration for the
license granted pursuant to this Agreement is the undertakings of Licensee with
respect to Licensor under and pursuant to the Merger Agreement. Accordingly, no
royalty payments shall be due Licensor from Licensee hereunder.
7. LIABILITY AND INDEMNIFICATION. Licensor shall not be liable for any
claims, damages, penalties or losses of any kind arising out of or related in
any way to the Products and Services or to Licensee's illegal or unauthorized
use of the Mark. Licensee shall indemnify and hold Licensor harmless from all
costs, expenses, claims, damages, penalties and losses (including without
limitation reasonable attorneys' fees) arising out of, relating to or resulting
from (i) Licensee's use or promotion of the Mark, (ii) any claims or causes of
action brought by any third party or governmental authority regarding the
Products and Services, and (iii) any breach or alleged breach of this Agreement
by Licensee.
8. INFRINGEMENT. The parties shall promptly notify each other of any
actual, threatened or potential infringement of the Mark and of any registration
or application to register any mark that does or may infringe the Mark. In the
event of an infringement problem, Licensor shall have the initial right to take
appropriate steps to prevent infringement, recover damages, and/or oppose a
conflicting registration. Licensee may take such steps only after Licensor has
expressly declined to do so and only with Licensor's prior written consent. The
party taking such steps shall be solely responsible for all costs and expenses,
including without limitation attorneys' fees, incurred in connection with such
action. Money damages and awards recovered in litigation or settlement may, at
the option of the party prosecuting the infringement, be applied first to the
full cost of litigation. The remainder shall be allocated first to Licensee as
compensation for actual losses directly related to infringement of the Mark, if
any, and then to Licensor. The allocations set forth in this paragraph shall
apply regardless how the damages are characterized in the judgment, award or
settlement establishing the damages.
9. TERMINATION. This Agreement and the license granted hereby shall be
terminated only under the following circumstances:
(a) Mutual Agreement. This Agreement may be terminated by the
mutual written agreement of Licensor and Licensee.
(b) Automatic Termination. This Agreement shall automatically
terminate in the event the Merger Agreement is terminated in accordance with its
terms prior to the consummation of the Merger.
(c) By Licensor. Licensor may not terminate this Agreement
without cause. If Licensee fails to cure a default under or breach of this
Agreement within thirty (30) days of receipt of written notice of default,
Licensor may terminate the Agreement by delivery of a written notice of
termination.
-3-
<PAGE> 4
(d) By Licensee. This Agreement may be terminated by Licensee
upon thirty (30) days' prior written notice to Licensor. Upon such termination,
the license granted to Licensee herein shall terminate and Licensee shall cease
all use of the Mark.
Upon termination of this Agreement pursuant to this Section 9, the
license granted above shall terminate immediately upon receipt of Licensor's
notice of termination, and all Licensee's use of the Mark must stop immediately.
10. NO ASSOCIATION. Nothing in this Agreement is intended nor shall be
construed to create a partnership, joint venture, agency relationship or other
association between Licensor and Licensee.
11. MISCELLANEOUS.
(a) Notices. Any notice or demand required or permitted to be
given under the terms of this Agreement shall be deemed to have been duly given
or made if given by any of the following methods:
(i) Deposited in the United States mail, in a sealed
envelope, postage prepaid, by registered or certified mail, return receipt
requested, respectively addressed as follows:
IF TO LICENSEE:
eSoft, Inc.
5334-C Sterling Drive
Boulder, CO 80301
Attn: President
Tel: (303) 444-1600
Fax: (303) 444-1640
WITH COPIES TO:
Davis, Graham & Stubbs LLP
370-17th Street, Suite 4700
Denver, CO 80202
Attn: Lester R. Woodward, Esq.
Tel: (303) 892-9400
Fax: (303) 892-7400
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<PAGE> 5
IF TO LICENSOR:
Apexx Technology, Inc.
506 South 11th Street
Boise, ID 83702
Attn: President
Tel: (208) 336-9400
Fax: (208) 336-9445
WITH COPIES TO:
Hawley Troxell Ennis & Hawley LLP
877 Main Street, Suite 1000
Boise, ID 83702
Attn: Paul M. Boyd, Esq.
Tel: (208) 344-6000
Fax: (208) 342-3829
(ii) Sent to the above address via an established
national overnight delivery service
(such as Federal Express), charges prepaid, or
(iii) Sent via any electronic communications method
provided the sender obtains written confirmation of receipt of the communication
by the electronic communication equipment at the office of the address listed
above; provided also that, if this method is used, the party shall promptly
follow such notice with a second notice in one of the other available methods
set forth in this Section 11(a).
(iv) Notices shall be effective on the third Business
Day after posting if sent by mail, on the next business day after posting if
sent by express courier, and on the day of dispatch if manually delivered within
regular business hours or if transmitted within regular business hours by
electronic communication methods, or otherwise on the next business day.
(v) Either party may hereinafter designate additional
or replacement addresses to which notice may be sent, upon written notice sent
to the other party at the address above designated, or subsequently designated
in accordance herewith.
(b) No Waiver of Breach. If either of the parties fails to
insist on strict performance of any obligation, duty or condition herein, or
fails to exercise any option conferred herein in any one or more instance, such
failure shall not be construed to be a waiver or relinquishment of any
obligation, agreement, option or right herein, but the same shall be and remain
in full force and effect.
(c) Survival. Notwithstanding any termination or expiration of
this Agreement, the rights and obligations of the parties under Section 2 and
Section 7 shall survive and remain fully enforceable.
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<PAGE> 6
(d) Severability. If any provision of this Agreement is later
held to be illegal in any final order or judgment, the parties intend that the
illegal portion of this Agreement be severed from the remainder of the Agreement
and that the remainder of the Agreement remain in effect to the fullest extent
possible.
(e) Governing Law. This Agreement shall be governed by the
internal laws of the State of Idaho applicable to contracts made in such state
and to be performed entirely within such state, without giving effect to
principles relating to conflicts of law.
(f) Final Agreement. This Agreement constitutes the complete
and final expression of the agreement between the parties hereto with reference
to the subject matter of this Agreement. This Agreement may be amended,
supplemented or revoked at any time in whole or in part only through a written
instrument setting forth such changes signed by the party against whom
enforcement of the changes is being sought.
(g) Counterparts. This Agreement may be executed in a number
of identical counterparts, each of which shall be deemed an original, and all of
which together shall constitute one instrument.
* * *
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<PAGE> 7
IN WITNESS WHEREOF, the parties have executed this License Agreement as
of the date first above written.
LICENSOR: APEXX TECHNOLOGY, INC.
By: /s/ Tom Loutzenheiser
-------------------------------------------
Tom Loutzenheiser, President
LICENSEE: eSOFT, INC.
By: /s/ Jeffrey Finn
-------------------------------------------
Jeffrey Finn, President
<PAGE> 8
Appendix A
U.S. PATENT AND TRADEMARK OFFICE REGISTRATION
See attached.
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
eSoft, Inc.
Boulder, Colorado
We hereby consent to use in the Proxy Statement - Prospectus, constituting a
part of this Registration Statement, of our report dated January 29, 1999,
relating to the financial statement of eSoft, Inc. for the years ended December
31, 1998 and 1997.
We also consent to the reference to us under the caption "Experts" in the
Prospectus.
/s/ BDO Seidman, LLP
Denver, Colorado
April 16, 1999
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
To eSoft, Inc.
As independent auditors and accountants, we hereby consent to the incorporation
of our auditors' report dated February 4, 1999 for the years ended December 31,
1998 and 1997, included in this Form S-4.
/s/ BABERKOFF, LINDSTROM & CO. P.A.
Boise, Idaho
April 16, 1999
<PAGE> 1
EXHIBIT 99.1
[eSOFT LETTERHEAD]
Dear Shareholders:
1998 marked a pivotal year in the history of eSoft. The company took several
sizeable steps in its efforts to rapidly expand the organization to meet the
growing need for Internet connectivity solutions, and experienced the
inevitable pains associated with rapid growth in the high-technology industry.
The company experienced over 160% growth in revenues from 1997 to 1998 and was
successful in both raising capital to fund the growth as well obtaining a
public listing, initially on the Vancouver Stock Exchange and subsequently on
the Nasdaq SmallCap Market.
The year also marked the realization that success would require skill sets,
assets and partnerships in order to move the company forward and compete
successfully. To this end, the company began efforts to recruit professional
management and staff, entered into relationships with partners such as IBM
Global Services, Transamerica and others for the packaging and delivery of
eSoft's products. In late 1998, eSoft entered into a letter of intent to
acquire Apexx Technology, Inc., a competitor with an exciting technology and
reseller base.
eSoft enters 1999 with a renewed vision and energy for achieving market
leadership. The company is in the process of completing the acquisition of
Apexx Technology, scheduled for May 1999. The sales, marketing and product
management functions of eSoft and Apexx have already been merged and the
companies have branded the combined product line as TEAM Internet(R).
eSoft has recently unveiled an updated business strategy for the future.
Recognizing the strength of the Company and its prospects, we built a business
strategy designed to leverage the company's historical Internet and software
engineering focus. This strategy emphasizes three primary areas -- Internet
Access Products, Internet Services and Software Engineering Services.
Internet Access Products emphasizes eSoft's core business of developing,
marketing, selling and supporting the TEAM Internet product line. We will
continue our march toward successfully capturing a 25% market share for these
types of products.
Internet Services focuses on creating value through the aggregation of our
resellers and business customers. The process of building out a reseller
network to serve small to medium-sized business customers is quite expensive
and provides a sizeable barrier to entry for any company that wishes to target
the small business segment. By building this network, eSoft can capitalize on
this valuable asset. For example, when we combine our reseller network with
Internet technologies, we believe we are in a position to quickly create the
premier "go to" Web site or portal for resellers serving the small business
marketplace. This is but one example of how we can quickly and cost-effectively
leverage assets we are already in the process of creating.
Software Engineering focuses on leveraging the skills and talents that make
eSoft unique and differentiate our products in the marketplace. In particular,
we believe that there is a very large opportunity to provide professional Linux
engineering and development capabilities to other organizations by licensing
our software under a private label or OEM arrangement. These projects will be
designed to develop enhancements that we can offer to our product line.
Industry Trends
Despite worldwide growth of the Internet, small to medium-sized businesses have
largely been bystanders in getting connected. Recent studies have shown that
only about 5% of this market segment has dedicated access from their local area
networks (LANs) to the Internet -- meaning over 95% of the market is a prospect
for our products and services (IDC Study, 1998). This market is anticipated to
grow to $550 million by 2000 and to top $1.6 billion by 2002 (Dataquest, 1998).
<PAGE> 1
Growth Strategies
We plan on succeeding in this marketplace through two growth strategies. First,
we will continue to aggressively introduce new features and functions through
our research and development efforts in order to expand our customer base
through internal or organic growth. Second, we will continue to pursue
strategic acquisitions in which the company will gain technologies, products,
distribution networks, or skill sets and expertise the company does not
currently have and/or that would take too long to develop internally.
We will continue to make marketing and sales investments to expand the reseller
network, domestically and internationally, as we believe this network is key to
our long-term success and critical to creating a strong and vibrant presence in
the marketplace.
The coming year holds a number of challenges as we continue to grow and move
the company forward. We will need to continue attracting the types of
management and personnel who have a passion to succeed. We need to continue
being first to market with innovative, superior products and services. We will
need to finalize the Apexx acquisition and integrate the remaining functions
into the eSoft operations. Finally, we need to continue growing our revenue
while managing our expenses. We look forward to successfully addressing these
challenges during what we believe will be an exciting and prosperous 1999.
On behalf of the Board of Directors, I would like to thank you, our employees,
customers, and shareholders for your continued support.
Sincerely,
/s/ Jeffrey J. Finn
Jeffrey J. Finn
President and CEO
eSoft, Inc.
<PAGE> 1
EXHIBIT 99.3
PROXY PROXY
APEXX TECHNOLOGY, INC.
SPECIAL MEETING OF STOCKHOLDERS
MAY 20, 1999
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS OF APEXX
TECHNOLOGY, INC. ("APEXX").
The undersigned hereby appoints Tom Loutzenheiser and David Dahms, or
either of them, as Proxies and authorizes them to represent and vote, as
designated below, all the shares of Common Stock, par value $0.01 per share
("Common Stock"), of Apexx Technology, Inc., which the undersigned is entitled
to vote at the Special Meeting of Stockholders and at any postponements or
adjournments thereof, with respect to the matters set forth below and described
in the Joint Proxy Statement/Prospectus, dated April 16, 1999. If no indication
is made, this Proxy will be voted in favor of each of the proposals set forth
in the Proxy Statement.
1. A proposal to approve an Amended and Restated Agreement and
Plan of Merger dated as of January 25, 1999 by and between
eSoft, Inc., eSoft Acquisition Corporation and Apexx
Technology, Inc.
FOR_____________ AGAINST_____________ ABSTAIN________________
2. To approve such other matters as may properly be presented at
the Special Meeting or any postponement or adjournment
thereof.
FOR_____________ AGAINST_____________ ABSTAIN________________
This Proxy, when properly executed, will be voted in the manner
directed herein by the undersigned shareholder. If no indication is made, this
Proxy will be voted FOR each of the proposals.
Date: _______________ , 1999
------------------------------------------
Signature
------------------------------------------
Signature if held jointly
Please sign exactly as name appears hereon.
When shares are held by joint tenants, both
should sign. When signing as attorney,
executor, administrator, trustee or
guardian, please give full title as such.
If a corporation, please sign in full
corporate name by president or other
authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THIS PROXY
USING THE ENCLOSED POSTAGE PRE-PAID ENVELOPE.
PROXY PROXY
