<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 19, 1999
REGISTRATION NO.
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------------
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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<CAPTION>
<S> <C> <C>
DELAWARE 7372 84-0938960
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification Number)
</TABLE>
5335 STERLING DRIVE, SUITE C
BOULDER, COLORADO 80301
(303) 444-1600
(Address and Telephone Number of Registrant's Principal Executive Office)
---------------------------------
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) 344-8000
(Name, Address and Telephone Number of Agent for Service)
---------------------------------
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. [ ]
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
===========================================================================================================================
PROPOSED
AMOUNT OF MAXIMUM PROPOSED AMOUNT OF
SHARES TO BE OFFERING PRICE MAXIMUM AGGREGATE REGISTRATION
TITLE OF SHARES TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE(1) FEE
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares, $.01 par value........... 1,591,365 shares $0.23 $368,891 $103
===========================================================================================================================
</TABLE>
(1) The proposed maximum offering price per share and the proposed maximum
aggregate offering price were calculated pursuant to Rule 457(f)(2) under
the Securities Act of 1933, as amended, and are based on one-third of the
stated value of the common stock of Apexx Technology, Inc. to be exchanged
for the securities being registered hereby.
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.
<PAGE> 2
ESOFT, INC.
5335 STERLING DRIVE, SUITE C
BOULDER, COLORADO 80301
(303) 444-1600
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
A special meeting of the stockholders of eSoft, Inc. will be held on
____________, 1999 at ____________ at ____________________________________ for
the following purposes:
1. To consider and vote upon a proposal to approve an Agreement and
Plan of Merger, dated January 25, 1999, between eSoft and Apexx
Technology, Inc., pursuant to which, among other things:
[ ] Apexx will become a subsidiary of eSoft;
[ ] eSoft will issue 1,591,365 shares of its common stock
in exchange for all of the outstanding common stock of
Apexx; and
[ ] 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 ____________,
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 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 special meeting. If you are unable to attend in person, your
shares will be voted at the eSoft special meeting if you return your proxy
card.
By Order of the Board of Directors,
Thomas Tennessen
Secretary
__________________, 1999
<PAGE> 3
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 ____________, 1999 at ______, at ________________________ for the
following purpose:
To consider and vote upon a proposal to approve an Agreement and Plan
of Merger, dated 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 ____________,
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 special meeting. If you are unable to attend in person, your
shares will be voted at the Apexx special meeting if you return your proxy
card.
By Order of the Board of Directors,
Dr. Kevin Learned
Secretary
____________, 1999
<PAGE> 4
This information is not complete and may be changed. We may not deliver these
securities until the registration statement filed with the Securities and
Exchange Commission is effective. This prospectus is not an offer to sell these
securities and it is not soliciting an offer to buy these securities in any
state where the offer or sale is not permitted.
PRELIMINARY JOINT PROXY STATEMENT/PROSPECTUS
SUBJECT TO COMPLETION, DATED MARCH 19, 1999
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 Boulder, 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 25.1% of the
combined company and eSoft security holders will own approximately 74.9% of the
combined company. eSoft common stock is listed on the Nasdaq SmallCap market
under the symbol "ESFT."
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:
The record date for the special meeting is ____________, 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 18.
- -------------------------------------------------------------------------------
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 ____________, 1999 and is first
being mailed to stockholders on ____________, 1999.
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<S> <C>
QUESTIONS AND ANSWERS ABOUT THE eSOFT/APEXX MERGER.................4
WHO CAN HELP ANSWER MY QUESTIONS?..................................7
SUMMARY............................................................8
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....................................................30
Availability of Raw Materials and Semi-Finished
Goods........................................................31
Concentration of Sales.........................................31
Concentration of Vendors.......................................31
Government Regulations.........................................31
Employees......................................................31
eSoft Property.................................................32
eSoft Legal Proceedings........................................32
eSOFT SELECTED HISTORICAL FINANCIAL INFORMATION...................33
eSOFT MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................34
Results of Operations..........................................34
Liquidity and Capital Resources for the Year
Ended December 31, 1998......................................36
Year 2000 Problem..............................................38
New Accounting Pronouncements..................................40
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF eSOFT........................................42
eSOFT MANAGEMENT..................................................43
Biographical Information.......................................43
Election of Directors..........................................44
eSOFT EXECUTIVE COMPENSATION......................................45
Summary Compensation Table.....................................45
Option/SAR Grants in Last Fiscal Year..........................45
Aggregated Option/SAR Exercises Fiscal Year-End
Option/SAR Values............................................46
Director Compensation..........................................47
Employment Agreements..........................................47
Stock Option Plan..............................................49
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF
eSOFT..........................................................49
Severance Arrangement..........................................49
Related Customer...............................................49
DESCRIPTION OF APEXX..............................................50
Corporate History..............................................50
Apexx Products.................................................50
Technical Services.............................................51
Markets........................................................51
Sales Channels.................................................51
Operations.....................................................52
Intellectual Property..........................................52
Product Development Costs......................................52
Concentration of Sales.........................................52
Concentration of Vendors.......................................53
Government Regulations.........................................53
Apexx Property.................................................53
Employees......................................................53
Competition....................................................53
Apexx Legal Proceedings........................................54
APEXX SELECTED HISTORICAL FINANCIAL INFORMATION...................55
APEXX'S MANAGEMENT DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS..................56
Results of Operations..........................................56
Liquidity and Capital Resources for the Year
Ended December 31, 1998......................................57
Year 2000 Effect...............................................59
New Accounting Pronouncements..................................59
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT OF APEXX........................................61
APEXX EXECUTIVE COMPENSATION......................................63
Summary Compensation Table ....................................63
</TABLE>
2
<PAGE> 6
<TABLE>
<S> <C>
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS OF APEXX..........................................63
Related Customer...............................................63
MATERIAL CONTRACTS BETWEEN eSOFT AND APEXX........................63
Loan Agreement.................................................63
Joint Marketing Plan...........................................64
Purchase Agreement.............................................64
THE PROPOSED MERGER...............................................65
General........................................................65
The Merger.....................................................65
Voting Agreements..............................................65
Background of the Merger.......................................65
eSoft's Reasons for Merger; Recommendation of
the Board of Directors of eSoft..............................67
Apexx's Reasons for Merger; Recommendation of
the Board of Directors of Apexx..............................69
Opinion of eSoft's Financial Advisor...........................71
Anticipated Accounting Treatment...............................77
Material United States Federal Income Tax
Consequences.................................................77
Federal Securities Law Consequences; Stock
Transfer Restrictions........................................79
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL
STATEMENTS.....................................................80
MERGER AGREEMENT..................................................86
Overview of the Merger Agreement...............................86
Closing; Effective Time Surviving Corporation..................86
Consideration to be Received in the Merger.....................86
Treatment of Apexx Stock Options...............................87
Exchange of Shares.............................................87
Conditions to the Consummation of the Merger...................87
Third Party Consents...........................................91
Certain Representations and Warranties.........................91
Termination....................................................91
Documents to be Executed In Connection With the
Merger Agreement.............................................91
MANAGEMENT OF THE COMBINED COMPANY AFTER THE
MERGER.........................................................93
DISSENTERS' RIGHTS................................................94
COMPARATIVE RIGHTS OF STOCKHOLDERS.............................94
PROPOSAL TO ELECT AN eSOFT DIRECTOR..............................102
PROPOSAL TO INCREASE THE NUMBER OF SHARES OF eSOFT
COMMON STOCK ISSUABLE UNDER eSOFT'S EQUITY
INCENTIVE PLAN................................................102
THE eSOFT SPECIAL MEETING........................................103
Purpose, Time and Place.......................................103
Record Date; Quorum; Vote Required............................104
Proxies.......................................................105
Revocation....................................................105
Proxy Solicitation............................................105
Validity......................................................106
THE APEXX SPECIAL MEETING........................................107
Purpose, Time and Place.......................................107
Record Date; Quorum; Vote Required............................107
Proxies.......................................................108
Revocation....................................................108
Proxy Solicitation............................................109
Validity......................................................109
DESCRIPTION OF eSOFT COMMON STOCK................................110
General..........................................................110
Change in Control Provisions of the Articles of
Incorporation and Bylaws....................................110
Market Price of eSoft Common Stock............................110
Dividends.....................................................111
CAUTIONARY STATEMENT CONCERNING FORWARD LOOKING
STATEMENTS....................................................111
LEGAL MATTERS....................................................111
EXPERTS..........................................................112
WHERE YOU CAN FIND MORE INFORMATION..............................112
PART II INFORMATION NOT REQUIRED IN PROSPECTUS....................1
</TABLE>
Appendix A Merger Agreement
Appendix B Stockholders' Agreement
Appendix C Opinion of EVEREN Securities, Inc.
Appendix D Notice of Dissenters' Rights
3
<PAGE> 7
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 67 through 71.
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 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 92.
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?
4
<PAGE> 8
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 25.1% of the
combined company and eSoft security holders (including present eSoft
optionees and warrantholders) will own approximately 74.9% 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 with respect to officers, directors and 10%
stockholders, 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.
Q: WHY ARE ESOFT STOCKHOLDERS BEING ASKED TO APPROVE THE MERGER?
A: The rules of the Nasdaq Small Cap 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 SPECIAL MEETINGS?
A: Both the eSoft and the Apexx special meetings are scheduled to take
place on ____________, 1999. The eSoft special meeting will take place
at __________ at _____________________________. The Apexx special
meeting will take place at __________________ at
_____________________________________.
Q: WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED?
A: We expect to complete the merger promptly after receiving stockholder
approval at the special meetings.
5
<PAGE> 9
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 special meeting. Your
proxy card will instruct the persons named on the card to vote your
shares at the special 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
special 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 5335 Sterling Drive, Suite C,
Boulder, Colorado 80301 (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 special meeting or the
Apexx special 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: 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. 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 77 through 79.
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.
6
<PAGE> 10
WHO CAN HELP ANSWER MY QUESTIONS?
If you have more questions about the merger, you should contact:
eSoft Stockholders: Apexx Stockholders:
Thomas Tennessen Thomas Loutzenheiser
ESOFT, INC. APEXX TECHNOLOGY, INC.
5335 Sterling Drive, Suite C 506 South 11th Street
Boulder, Colorado 80301 Boise, Idaho 83702
(303) 444-1600 (208) 336-9400
7
<PAGE> 11
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, you should read this entire document and the
documents we have referred you to. See "Where You Can Find More Information" on
page 112.
THE COMPANIES
<TABLE>
<S> <C>
ESOFT, INC. APEXX TECHNOLOGY, INC.
5335 Sterling Drive, Suite C 506 South 11th Street
Boulder, Colorado 80301 Boise, Idaho 83702
(303) 444-1600 (208) 336-9400
eSoft develops and markets a product Apexx's mission is to provide easy and
line of Internet protocol adapters that affordable computer networking solutions
are marketed under the acronym IPAD. The that enhance decision speed and
IPAD is designed to be a total communication capabilities to growing
Internet/Intranet connectivity solution organizations. Apexx's award-winning
for small and medium sized businesses, TEAM Internet(R) family of products,
institutions and educational sites that targeted to small to medium sized
can be easily and economically installed businesses, provides a turnkey
and managed by existing systems Internet/Intranet solution that gives
personnel. 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.
</TABLE>
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:
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.
8
<PAGE> 12
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 67 through 71.
ELECTION OF 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 43. 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 102
through 103.
THE SPECIAL MEETINGS
TIME, PLACE AND RECORD DATE OF THE MEETINGS
The record date for each special meeting is the close of business on
____________, 1999. The eSoft special meeting will be held at ________ at
_________________ on ______. The Apexx meeting will be held at
___________________ at ____________ on ____________.
MATTERS TO BE VOTED ON
At the special 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 eligible to be issued under eSoft's equity
incentive plan from 1,700,000 shares to 2,900,000 shares.
VOTES REQUIRED (SEE PAGES 104 AND 107)
The affirmative vote of the holders of a majority of the outstanding shares of
common stock of both eSoft and Apexx is required for approval of the merger
proposal. A majority of the shares of eSoft common stock represented and voting
at the eSoft special meeting is required for approval of 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.
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.
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<PAGE> 13
VOTING AGREEMENTS (SEE PAGES 65 AND 92)
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.
VOTING STOCK HELD BY ESOFT AND APEXX OFFICERS AND DIRECTORS (SEE PAGES 42 AND
61)
Approximately 48% of Apexx's common stock as of the record date was owned by
Apexx's directors and executive officers. Approximately 17% of eSoft's common
stock as of the record date was owned by eSoft's directors and executive
officers.
DISSENTER'S RIGHTS (SEE PAGE 94)
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.
OUR RECOMMENDATIONS
TO OUR STOCKHOLDERS
ESOFT (SEE PAGES 67 THROUGH 69 AND PAGES 102 THROUGH 106)
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 69 THROUGH 71 AND PAGES 107 THROUGH 109)
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 PAGES 86 AND 87)
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
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<PAGE> 14
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 86 AND 87)
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.
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 25.1% of the combined company and eSoft security holders
(including present eSoft optionees and warrantholders) will own approximately
74.9% of the combined company.
WHEN APEXX STOCKHOLDERS AND OPTIONHOLDERS MAY SELL OR TRANSFER THEIR ESOFT
COMMON STOCK (SEE PAGES 77 AND 79)
Except as described below with respect to officers, directors and 10%
stockholders, 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.
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 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.
WHAT ESOFT STOCKHOLDERS WILL RETAIN IN THE MERGER (SEE PAGES 86 AND 87)
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.
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<PAGE> 15
DIRECTORS AND SENIOR MANAGEMENT OF ESOFT FOLLOWING THE MERGER (SEE PAGES 93 AND
94)
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 an eSoft director following the merger.
OPINION OF ESOFT'S FINANCIAL ADVISOR (SEE PAGES 71 THROUGH 77)
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.
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 87 THROUGH 91)
The completion of the merger depends upon the satisfaction 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
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<PAGE> 16
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 91)
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.
TERMINATION FEES AND EXPENSES (SEE PAGE 91)
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 77)
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 77)
We have structured the merger so that eSoft and Apexx stockholders will 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.
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<PAGE> 17
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)
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>
eSoft has not paid any dividends since becoming a "C" corporation in September
1997.
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<PAGE> 18
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
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
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<PAGE> 19
"Unaudited Pro Forma Condensed Combined Financial Statements" on page 80 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 "Anticipated Accounting Treatment" on page 77.
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
----------------------------
BALANCE SHEET DATA:
<S> <C>
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.
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.
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<PAGE> 20
<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.
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<PAGE> 21
RISK FACTORS RELATING TO THE MERGER
In addition to the other information included in this Joint Proxy
Statement/Prospectus, the eSoft and Apexx stockholders should consider the
following risk factors carefully in determining whether to approve the merger.
An investment in eSoft common stock involves certain risks.
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
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."
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<PAGE> 22
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 , 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 25.1% of the voting power of
the combined company and eSoft security holders (including present eSoft
optionees and warrantholders) will own approximately 74.9% 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 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.
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<PAGE> 23
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, investors 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."
LIMITED OPERATING AND SALES HISTORY
eSoft first entered the 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 fourth quarter of 1998, eSoft has sold less than 1,700
units of these products, so they have not yet gained significant market
exposure or demonstrable
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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 the next year,
there can be no assurance that eSoft will achieve its expected 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. 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 the next 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 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.
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
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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 accounted for 10% or more of product sales during that period. These two
customers represented 46% and 13% of eSoft's revenue for the fiscal year ended
December 31, 1998. In addition, one eSoft 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 one or
more of the large
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customers 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 early
1999 an IPAD software upgrade will be 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
first 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
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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.
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 then 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.
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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 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.
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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.
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-
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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.
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.
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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.
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.
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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.
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.
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ESOFT PROPERTY
eSoft's executive offices are located at 5335 Sterling Drive, Suite C,
Boulder, Colorado 80301. eSoft leases approximately 5,300 square feet of space
at this location pursuant to a lease entered into in November 1997, which
expires October 31, 2000, at a rent of approximately $58,000 per year.
eSoft's assembly and warehouse facility is located at 6560 Odell Place,
Suite 6, Boulder, Colorado 80301. eSoft leases 2,878 square feet of space at
this location under a lease entered into in July 1998, which expires in April
1999, at a rent of approximately $2,302 per month. In July 1998, eSoft
relocated the assembly and warehouse functions from its executive offices to
this facility to accommodate additional administrative, sales and marketing
personnel at eSoft's executive offices.
eSoft has executed a lease to relocate its corporate headquarters,
shipping and assembly facilities into one location. The anticipated date of
occupancy for the new facility is April 1, 1999. The new facility will include
13,618 square feet with annual rental payments of $173,000. eSoft has been
fully released from its lease on its current corporate headquarters. eSoft
believes that this new 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
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------
1998 1997
----------- -----------
STATEMENT OF OPERATIONS DATA:
<S> <C> <C>
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 the small-to-medium
size business 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 is 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 size 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 and Canadian 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 margins in 1998 were approximately
65% compared to 65% in 1997. The 1998 margins 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). 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, consulting expense increased by
$564,000. Engineering and technical support expenditures increased from $56,000
in 1997 to $589,000 in 1998. Engineering and technical support; 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 fund raising
activities which 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, before income taxes, in
1998 was $3,103,000, compared to $193,000 from operations in 1997. The
increased losses are the results of eSoft 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 it would be realized. eSoft has $2,700,000 in net
operating loss carryforwards with expirations through 2019. The utilization of
certain of the loss carryforwards are limited under Section 382 of the Internal
Revenue Code.
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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 strategy and its acquisition activities See "Current Developments"
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, 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 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 Agent, subsequent to March 31, 1998,
exercised its right to purchase 250,000 shares of common stock. 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 agent
warrants issued in conjunction with eSoft's March 1998 Initial Public Offering
to its Canadian Agents.
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 Agent, Sub-Agents, and Finders who were issued warrants to
purchase 159,318 (10.85% of the offered shares) 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.
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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.
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 stock of Apexx Technology, Inc. in exchange for
2,947,368 of eSoft's common stock. Under the terms of the letter of intent
eSoft provided an operating line of credit of up to $500,000 with an additional
$500,000 may be advanced upon the written consent and agreement of both boards
of each company. eSoft as of December 31, 1998 funded $300,000 of this
commitment and subsequent to December 31, 1998 funded the remaining $200,000 of
the operating line commitment. This commitment to support both operations until
closing may require eSoft to substantially establishing and fortify
distribution and marketing channels of distribution of both companies' product
lines and may require additional fund raising 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 which 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, costs
incurred in the development of eSoft's software products, purchase of property
plant and equipment for new personnel, and an advance on a note receivable 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.
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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.
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.
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
the following versions of its products, are Y2K compliant:
- IPAD 1200, 2500, 5000v2.03 and up
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.
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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 early 1999 an IPAD software upgrade will be 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 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
first 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 have found them 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 year 2000 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.
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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.
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" 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 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.
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<PAGE> 44
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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<PAGE> 45
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF ESOFT
As of March 10, 1999, there were a total of 7,144,368 shares of eSoft
common stock issued and outstanding and approximately 1,700 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........................... 1,150,111(1) 16.27%
5335 Sterling Drive, Suite C
Boulder, CO 80304
Jeffrey Finn, President and Chief Executive Officer and
a Director.................................................. 9,500(2) 0.14%
Jason M. Rollings, Vice President of Operations ............ 13,333(3) 0.19%
Richard B. Rice, Director................................... 17,500(4) 0.25%
Regis Frank, Former Chief Operating Officer................. 62,500(5) 0.90%
All Directors and Executive Officers as a group............. 1,259,948(6) 17.64%
</TABLE>
- ------------------------
(1) Includes 123,111 options exercisable presently or within 60 days.
(2) Includes 4,500 options exercisable presently or within 60 days.
(3) Includes 13,333 options exercisable presently or within 60 days.
(4) Includes 10,500 options exercisable presently or within 60 days.
(5) Includes 62,500 options exercisable presently or within 60 days. Mr.
Frank left eSoft in November 1997
(6) Includes 209,778 options exercisable presently or within 60 days.
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<PAGE> 46
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 and Director
Jeffrey Finn 40 President, Chief Executive Officer and Director
Jason M. Rollings 37 Vice President of Operations
Thomas Tennessen 39 Chief Financial Officer, Secretary and Treasurer
Robert C. Hartman 38 Vice President of Engineering
James P. Bell 44 Vice President of Business Development
Jane Merickel 35 Vice President of Marketing
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.
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<PAGE> 47
Thomas Tennessen. Mr. Tennessen has been eSoft's Chief Financial
Officer, Secretary, and Treasurer since April 9, 1998. Mr. Tennessen was a
financial consultant from March 1997 to April 1998 and was the Chief Financial
Officer of Topro, Inc., a publicly-held system integrator, from September 1994
to March 1997.
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.
James P. Bell. Mr. Bell has been eSoft's Vice-President of Business
Development since December 1998. Mr. Bell has been employed by eSoft since
April 1998. From January 1990 to April 1998 he was employed as Senior
Vice-President for Operations for Phoenix Network, Inc.
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 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), Philip Becker (Class
III), and Richard Rice (Class III). eSoft stockholders will be asked to elect
Jeffrey Finn as a Class I directors at the eSoft special 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.
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<PAGE> 48
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 $100,000 during the
fiscal year ended December 31, 1998. eSoft did not make any long-term
compensation awards to any of the named executive officers during the periods
indicated.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
OTHER ANNUAL
SALARY BONUS COMPENSATION
NAME AND PRINCIPAL POSITION YEAR ($) ($) ($)
<S> <C> <C> <C> <C>
Philip Becker 1998 $115,833 -- --
Chairman and Chief Technical Officer 1997 $100,000 -- --
1996 $60,000 -- --
Jeffrey Finn(1) 1998 $25,909 -- --
President and Chief Executive Officer 1997 -- -- --
1996 -- -- --
Jason Rollings(2) 1998 $90,000 $35,973 --
Vice President of Operations 1997 $24,204 -- --
1996 -- -- --
Regis Frank(3) 1998 $120,000 -- --
Former President and Chief Operating 1997 -- -- --
Officer 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. Franks'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:
45
<PAGE> 49
<TABLE>
<CAPTION>
% OF TOTAL OPTIONS
NUMBER OF GRANTED
SHARES UNDERLYING TO EMPLOYEES IN EXERCISE EXPIRATION
NAME OPTIONS GRANTED FISCAL YEAR PRICE DATE
<S> <C> <C> <C> <C> <C>
Jeffrey Finn(1) 418,000 33% $4.00/share 11/5/2002
Regis Frank(2) 128,000 10% $1.00/share 1/7/2003
Jason Rollings(3) 30,000 2% $1.00/share 1/7/2002
</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.
(2) 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 has the option to exercise up to 62,500 shares on or
before March 31, 1999. The remaining shares terminate on March 31, 1999.
(3) 10,000 options vested for the fiscal year ended December 31, 1998. The
options held by Mr. Rollings vest as follows: 1,111 shares a month 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>
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 30,000 $140,700
Exercisable 0 $0 10,000 $46,900
Regis Frank(5)
Unexercisable 0 $0 128,000 $600,320
Exercisable 0 $0 57,500 $269,675
</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 Small Cap market.
46
<PAGE> 50
(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 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 on 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.
(5) Includes 18,000 options granted in consideration of Mr. Franks's services
as a director of the Company. Options granted in consideration of services
as a director vest at a rate of 1/24 each month for two years. Options
granted in consideration of services that vested immediately total 20,000
shares. The remaining options 90,000 held by Mr. Frank 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.
DIRECTOR COMPENSATION
The eSoft directors do not currently receive cash compensation for
serving as directors. Each director has been granted an option to purchase
18,000 shares of eSoft common stock at an exercise price of $1.00 per share.
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.
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<PAGE> 51
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 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 $11,000 per month. The employment agreements provide for either a
quarterly performance-based bonus ranging from $5,000 to $12,500, or a 1%
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
48
<PAGE> 52
common stock at exercise prices ranging from $1.00 to $6.15 per share. Certain
of the executive employment agreements also contain twelve month noncompetition
and confidentiality provisions, and certain agreements provide for severance
payments to continue for three months following a termination of the executive
without cause.
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 has the right to
exercise options to purchase 62,500 shares of eSoft common stock until March
31, 1999, the remaining options will terminate 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.
49
<PAGE> 53
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.
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<PAGE> 54
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 kits. Apexx PCTalk(TM) MACLAN
kits and EtherChain(TM) MACLAN kits allow PC users to collaborate with MAC users
as peers on a LAN, including file sharing, printer sharing, and group
collaboration applications.
ETHERCHAIN(TM) 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. EtherChain(TM) 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, email, 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.
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<PAGE> 55
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 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.
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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.
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
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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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APEXX SELECTED 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>
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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
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<PAGE> 60
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.
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.
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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. 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
$557,268 in fiscal 1997. The deficit working capital was due to Apexx
increasing its short term borrowing to support its increased accounts
receivables and losses
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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 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.
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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.
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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT OF APEXX
As of March 1, 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
Raymond Smelek 60,000(3) 4.2%
Dr. Kevin Learned 52,000(4) 3.6%
Charles Jepson 10,000(5) 0.7%
William Guy Rivers 179,057(6) 11.6%
11324-182nd Street NE #G2079
Redmond WA 98052
John Hanousek 110,000(7) 7.2%
506 South 11th Street
Boise, Idaho 83702
Joel and Ann Just 137,650(8) 9.0%
6700 SW 105th
Suite 210
Beaverton OR 97008
Albert Youngwerth 157,461(9) 10.1%
506 South 11th Street
Boise, Idaho 83702
Directors and Executive Officers as a group 1,188,842(10) 61.1%
</TABLE>
- -----------------------
(1) Includes 270,500 options exercisable presently or within 60 days.
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(2) Includes 225,000 options exercisable presently or within 60 days.
(3) Includes 10,000 options exercisable within 60 days.
(4) Includes 14,000 options exercisable within 60 days.
(5) Includes 6,000 options exercisable within 60 days.
(6) Includes 118,400 options exercisable within 60 days.
(7) Includes 110,000 options exercisable presently or within 60 days.
(8) Includes 115,000 options exercisable within 60 days.
(9) Includes 136,461 options exercisable within 60 days.
(10) Includes 525,500 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>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS OF APEXX
Apexx 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 Apexx" or affiliated entities as
described below.
RELATED CUSTOMER
Mr. Raymond Smelek has served on the board of directors of Apexx
Technology, Inc from June 1996 to present. Mr. Smelek has held a variety of
engineering and management positions with Hewlett Packard, retiring in 1994 as
Vice President and Group General Manager for the HP Mass Storage Group. Mr.
Smelek also serves as Chairman of the Board for ESI, a Boise, Idaho based
manufacturer of computer networking products. In 1997, Apexx Technology entered
into an agreement with ESI whereby Apexx sells ESI an OEM, private-labeled
version of the TEAM Internet(R) product, which ESI has rights to sell into
their worldwide distribution channels. See "Apexx Management Discussion and
Analysis of Financial Condition and Results of Operations--Results of
Operations--Other Expenses" and "--Liquidity and Capital Resources."
The Apexx board of directors has excused and will continue to excuse
Mr. Smelek from all discussion or decisions that involve the business
relationship between Apexx and ESI.
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
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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
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 will be inaugurating a direct mail
campaign during February through March 1999 to focus on potential users and
VARs of the all-in-one appliance Internet connection. This will comprise a
direct mail program of 680,000 pieces to potential end users of the eSoft and
Apexx products. eSoft is also targeting 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. This marketing
program anticipates expending approximately $800,000 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.
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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 special meetings of their stockholders and at any
adjournments or postponements thereof.
At the respective special 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 Agreement and Plan of Merger, dated 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 , 1999, the record date for the Apexx special meeting, and
the affirmative vote of a majority of the shares of eSoft common stock
outstanding on , 1999, the record date for the eSoft special 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 as soon as
practicable following 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
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to possible combinations within the industry that might improve eSoft's
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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ESOFT'S REASONS FOR MERGER; RECOMMENDATION OF THE BOARD OF DIRECTORS OF ESOFT
At a special meeting of the eSoft Board of Directors held on December
15, 1998, 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 special 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.
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.
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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 71);
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 86,
including "--Conditions to the Consummation of the Merger" on
page 87, "--Termination" on page 91, and "--Termination Fees and
Expenses" on page 91);
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 91);
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;
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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 special 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
o directed that the merger agreement be submitted for consideration
by Apexx's stockholders at the special 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,
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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;
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;
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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.
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.
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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
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.
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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.
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
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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.
<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
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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 Growth 15.0% 90.1% 131.3% 336.7% 108.4% (Apexx)
</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.
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
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<PAGE> 79
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.
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
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<PAGE> 80
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 as to the
appropriateness of 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, contain 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.
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
77
<PAGE> 81
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 taxed at a maximum 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 and Apexx, the full amount of
cash received in lieu of fractional shares may be taxed as a
dividend;
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. If, however, a dissenting Apexx stockholder
would be considered to own shares of Apexx under the constructive
ownership provisions of Code Section 318, the full cash payment
could under some circumstances be taxed as a dividend.
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<PAGE> 82
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. 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.
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 special 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 77.
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> 83
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> 84
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.
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<PAGE> 85
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>
LIABILITIES AND STOCKHOLDERS' EQUITY
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> 86
ESOFT, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
MERGER WITH APEXX TECHNOLOGY, INC.
YEAR ENDED 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>
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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<PAGE> 87
ESOFT, INC.
PRO FORMA CONDENSED COMBINED STATEMENT OF OPERATIONS
MERGER WITH APEXX TECHNOLOGY, INC.
YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
<TABLE>
<CAPTION>
APEXX ESOFT, INC.
TECHNOLOGY, COMBINED
ESOFT, INC. 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 803,536 980,082 -- 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> 88
ESOFT, INC
PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MERGER WITH APEXX TECHNOLOGY, INC.
NOTES
(UNAUDITED)
<TABLE>
<S> <C>
(1) To eliminate Note Receivable owing eSoft by Apexx totaling $300,000 at
12/31/98.
(2) To accrue anticipated costs to be incurred in connection with the
proposed merger as follows:
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
===========
(5) Represents the one time charge of $1,048,000 associated with the
proposed merger with Apexx of Investment bankers, 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.
</TABLE>
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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 will take
place on April 30, 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 Special
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 Delaware General Corporation Law
and the Idaho Business Corporations Act and make all other filings or
recordings required under Delaware and Idaho law. The merger will become
effective when the articles of merger are duly filed with the Secretary of
State of Delaware and 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.
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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.
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;
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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;
o Receipt by eSoft of written notification from BDO Seidman, LLP,
eSoft's independent public accountants, 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
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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.
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
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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.
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 shall have received an opinion of its independent
accountants, BDO Seidman, LLP, dated the closing date, to the
effect that the merger will be treated 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)
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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.
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 or if all conditions set forth in the merger agreement
are not satisfied or waived by the closing date;
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.
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
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they are summarized here. However, you should read these agreements in their
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
10% 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
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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.
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
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current positions, and Thomas Loutzenheiser, Apexx's current chief executive
officer, will become eSoft's vice president of product development and a Class
II director following the merger.
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.
COMPARATIVE RIGHTS OF STOCKHOLDERS
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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 entitled to vote in an election of
directors. directors.
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FILLING VACANCIES ON THE A vacancy on the board of directors may be Unless the articles of incorporation
BOARD OF DIRECTORS filled by the majority vote of the provide otherwise, a vacancy on the board
remaining directors. of directors may be filled by:
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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
also be filled by the remaining directors. director 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 directorships
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.
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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.
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ADJOURNMENT AND NOTICE OF Stockholders' meetings may be adjourned for Stockholders' meetings may be adjourned for
STOCKHOLDER MEETINGS up to 30 days without giving notice of the up to 30 days without giving notice of the
adjourned meeting other than by adjourned meeting other than by
announcement at the adjourned meeting announcement at the adjourned meeting
(unless the Bylaws provide otherwise). For (unless the Bylaws provide otherwise).
an adjournment more than 30 days, notice
must be given as it was for the original
meeting.
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CALL FOR SPECIAL STOCKHOLDER Special meetings of stockholders may be Special meetings of stockholders may be
MEETINGS called by the board of directors or by a called by the board of directors, by a
person authorized by the charter or bylaws. person authorized by the charter or bylaws,
or by the holders of at least 20% of all
votes entitled to be cast on any issue.
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STOCKHOLDER CONSENT IN LIEU Stockholder action may be taken without a Stockholder action may be taken without a
OF MEETING meeting by a written consent signed by meeting by a written consent signed by all
stockholders having at least the minimum the stockholders entitled to vote on the
number of votes that would be necessary to action.
authorize the action at a meeting. The
company's charter may prohibit action by
written consent.
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BUSINESS INTRODUCED BY Under the Exchange Act, stockholders may Under the Exchange Act, stockholders may
STOCKHOLDERS submit a proposal to be included in a 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 o Has owned the securities for
at least 1 year prior to the at least 1 year prior to the
date of the proposal; and date of the proposal; and
o Continues to own the o Continues to own the
securities through the date of securities through the date of
the meeting. the meeting.
The proposal must be received by The proposal must be received by
the company 120 calendar days the company 120 calendar days
before the date on which the proxy before the date on which the proxy
statement was released to statement was released to
stockholders for the previous stockholders for the previous
year's meeting. year's meeting.
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STOCKHOLDER PROPOSALS THAT The company may omit a stockholder proposal The company may omit a stockholder proposal
MAY BE EXCLUDED for various reasons, such as if the for various reasons, such as if the
proposal: 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 violate the law or is beyond
the company's power; the 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 o Relates to an election to
office; 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 prior proposal that receive
little support; or little support.
o Relates to specific amounts of
cash or stock dividends.
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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
for their shares in the event of a merger the holders comply with the requirements of
if 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 Nasdaq; or
was held by more than 2,000 o The shares were held of record
stockholders; by at least two thousand
o The corporation survived the stockholders on the date fixed
merger and the approval of its to determine stockholders
stockholders was not required entitled to vote on the
for the merger because the proposed corporate action.
merger 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.
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DERIVATIVE ACTIONS: WHO MAY Derivative actions may be brought in Derivative actions may be brought
BRING THEM Delaware by a stockholder on behalf of, and in Idaho by a stockholder on behalf
for the benefit of, the corporation. The of, and for the benefit of, the
stockholder must have been a stockholder of corporation. The stockholder must
the corporation at the time of the have been a stockholder of the
transaction of which he complains. corporation at the time of the
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.
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</TABLE>
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<TABLE>
<CAPTION>
DELAWARE LAW IDAHO LAW
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<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 a demand upon the board of directors and wait
demand for redress is excused. ninety days from the date of the demand
before filing a derivative action, unless
The board of directors can appoint an the board rejects the demand before the
independent litigation committee to review ninety day period expires or unless
the stockholder's request for a derivative irreparable injury to the corporation would
action and the litigation committee, acting result by waiting for the expiration of the
independently, reasonably and in good ninety day period.
faith, can terminate the stockholder's
action subject to a court's review of the
committee's independence, good faith and
reasonable investigation.
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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 the facts and circumstances of the case and the
nature of the claim brought. nature of the claim brought.
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DIVIDENDS AND DISTRIBUTIONS Subject to any restrictions contained in a Subject to restrictions contained in the
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 o The corporation would not be
over stated capital) or, when able to pay its debts as they
no surplus exists; become due in the usual course
o Out of net profits for the of business; or
fiscal year in which the o The corporation's total assets
dividend is declared and/or the would be less than the sum of
preceding fiscal year. its total liabilities plus the
amount that would be needed if
the corporation were to be
dissolved and distributions had
Dividends may not be paid out of net needed to be made to satisfy the
if the corporation were to be profits if preferential rights of those
the stated capital of the dissolved and stockholders whose rights are
distributions had to be corporation is less superior to those receiving the
than the aggregate made to satisfy the current distribution.
preferential amount of stated capital
represented by the rights of those
stockholders whose rights issued and
outstanding stock of all classes are
superior to those receiving the having a
preference upon the distribution current
distribution.
of assets.
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DIRECTOR QUALIFICATIONS Delaware law has no residency requirement Idaho law has no residency requirement for
for directors. directors.
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</TABLE>
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<TABLE>
<CAPTION>
DELAWARE LAW IDAHO LAW
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<S> <C> <C>
NUMBER OF DIRECTORS The number of directors of a The number of directors of an Idaho
Delaware The number of directors of an corporation shall be fixed by, or
Idaho corporation shall be fixed by, or in in the manner provided in, the
the corporation shall be fixed by, or in bylaws, unless the charter fixes
the manner provided in, the bylaws, unless the number of directors.
the manner provided in, the bylaws, unless
the charter fixes the number of directors.
charter fixes the number of directors.
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INDEMNIFICATION OF OFFICERS The DGCL authorizes a corporation to The Idaho Business Corporation Act
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 all
o Agents reasonable expenses (including attorneys'
fees) for all judgments, fines and amounts
The corporation may indemnify against all paid in settlement.
reasonable expenses (including attorneys'
fees) for all judgments, fines and amounts
paid in settlement. These indemnification
rights are not exclusive of other
indemnification rights.
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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 good faith and in a manner
which he reasonably believed to which he reasonably believed to
be in, or not opposed to, the be in, or not opposed to, the
best interests of the best interests of the
corporation; and 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 cause to believe his conduct
was unlawful. was unlawful.
No indemnification shall be No indemnification shall be
made if the individual is held made if it is determined that
liable to the company, unless the individual did not meet
the court determines that the the above listed standards or
individual is fairly and is determined to be liable on
reasonably entitled to the basis that he received a
indemnification for the amount financial benefit to which he
of expenses the court deems was not entitled.
proper.
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</TABLE>
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<TABLE>
<CAPTION>
DELAWARE LAW IDAHO LAW
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<S> <C> <C>
DETERMINATION OF A corporation's determination of whether to A corporation's determination of whether to
INDEMNIFICATION indemnify someone is to be made: indemnify someone is to be made:
o By a majority vote of the o By a majority vote of the board
disinterested directors (even of directors if there are two
if less than a quorum); or more disinterested
o By a committee of disinterested directors;
directors designated by the o By a committee of disinterested
majority vote of the directors designated by the
disinterested directors (even majority vote of the
if less than a quorum); disinterested directors (even
o By independent legal counsel if if less than a quorum);
there are no disinterested o By special legal counsel if
directors or if the there are fewer than two
disinterested directors so disinterested directors; or
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.
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 other indemnification.
employees is at the board's discretion.
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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
expenses incurred in the capacity indemnitee against any liability or
in which he serves the corporation expenses incurred in the capacity
or arising out of his status as in which he serves the corporation
such, whether or not the or arising out of his status as
corporation would have the power to such, whether or not the
indemnify him against such expenses corporation would have the power to
and liabilities under the indemnify him against such expenses
applicable provisions of the DGCL. and liabilities under the
applicable provisions of the Idaho
Business Corporation Act.
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</TABLE>
100
<PAGE> 104
<TABLE>
<CAPTION>
DELAWARE LAW IDAHO LAW
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<S> <C> <C>
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 to majority of the outstanding stock entitled to
the certificate of incorporation unless the vote for an amendment to the articles of
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 number the board of directors adopts one of the
or par value of shares or adversely affect amendments permitted by section 30-1-
the rights of a particular class of stock, that 1002 of the Idaho Business Corporation
class is entitled to vote separately on the Act
amendment, whether or not it is designated
as voting stock.
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AMENDMENT TO THE BYLAWS The DGCL provides stockholders with the The board of directors may amend or repeal
right to amend the bylaws, although a 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 amended stockholders, in amending or repealing a
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.
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</TABLE>
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<PAGE> 105
PROPOSAL TO ELECT AN ESOFT DIRECTOR
Only ESOFT stockholders of record on ________, 1999 are eligible to
vote for this proposal. Apexx stockholders will not be asked 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
special meeting. Class III consists of two directors who are serving a
three-year term expiring at the 2001 annual meeting of eSoft stockholders.
eSoft currently does not have any Class II directors; however, if the merger
with Apexx is approved, Thomas Loutzenheiser, Apexx's current chief executive
officer, will be appointed as a Class II director with a two-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 special 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
special 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 special 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 ____, 1999 are eligible to vote for
this proposal. Apexx stockholders will not be asked to vote for the proposal to
increase the number of shares of eSoft common stock issuable under eSoft's
equity incentive plan.
In March 1999, eSoft's Board of Directors 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.
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.
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<PAGE> 106
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 proposal is
approved would be in addition to the shares of eSoft common stock
issuable to holders of Apexx options.
A majority of the shares of eSoft common stock represented and voting at
the eSoft special 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 special meeting to be held on
__________, 1999 at _______, at __________________, and at any adjournments or
postponements thereof. At the eSoft special 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> 107
RECORD DATE; QUORUM; VOTE REQUIRED
Record Date
eSoft has established the close of business on __________, 1999 as the
record date to determine the holders of eSoft common stock entitled to notice
of, and to vote at, the eSoft special 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 special meeting. At the close of business
on the record date, _________ shares of eSoft common stock were outstanding and
were held by approximately ______ 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 special meeting in person
or by proxy.
Quorum
The presence at the eSoft special 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 special meeting. In
the event that a quorum is not present at the eSoft special 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
special 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 merger proposal requires the affirmative vote by the
holders of a majority of the outstanding shares of eSoft common stock as of the
record date. A majority of the shares of eSoft common stock represented and
voting at the eSoft special meeting is required for approval of 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, 1,259,948 outstanding shares of eSoft common stock, representing
approximately 17% 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 special
meeting.
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<PAGE> 108
PROXIES
Shares of eSoft common stock represented by properly executed proxies
received in time for the eSoft special meeting will be voted at the eSoft
special 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 special meeting.
In the event that a quorum is not present at the time the eSoft special
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 special meeting with or without a vote of the stockholders. If eSoft
proposes to adjourn the eSoft special 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 special 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 special meeting; or
o properly completing and executing a later-dated proxy and delivering
it to eSoft's Secretary at or before the special meeting.
The presence of an eSoft stockholder of record without voting at the
special 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> 109
In addition, eSoft has retained _______________ to assist eSoft in the
solicitation of proxies from stockholders in connection with the eSoft special
meeting. _______________ will receive a fee of $______________ as compensation
for its services and reimbursement of its out-of-pocket expenses in connection
therewith. eSoft has agreed to indemnify ________________ 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 special meeting to be held on
______________, 1999 at ______, at _______, and at any adjournments or
postponements thereof. At the Apexx special 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 _________, 1999 as the
record date to determine the holders of Apexx common stock entitled to notice
of, and to vote at, the Apexx special 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 special meeting. At the close of business
on the record date, _________ shares of Apexx common stock were outstanding and
were held by approximately _____ 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 special meeting in person
or by proxy.
Quorum
The presence at the Apexx special 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 special meeting. In
the event that a quorum is not present at the Apexx special 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
special 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.
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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 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 special meeting will be voted at the Apexx
special 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 special meeting.
In the event that a quorum is not present at the time the Apexx special
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 special 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 Dr. Kevin Learned, 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 special 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 special meeting; or
o properly completing and executing a later-dated proxy and delivering
it to Apexx's Secretary at or before the special meeting.
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The presence of an Apexx stockholder of record without voting at the
special 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.
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 is provided below. The figures shown below do not necessarily represent
actual transactions:
1998 FISCAL YEAR
<TABLE>
<CAPTION>
HIGH LOW
BID BID
<S> <C> <C>
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>
110
<PAGE> 114
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 1,500 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.
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.
111
<PAGE> 115
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 special
meeting and the Apexx special 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:
<TABLE>
<CAPTION>
eSoft Stockholders: Apexx Stockholders:
<S> <C>
Thomas Tennessen Thomas LOUTZENHEISER
ESOFT, INC. APEXX TECHNOLOGY, INC.
5335 Sterling Drive, Suite C 506 South 11th Street
Boulder, Colorado 80301 Boise, Idaho 83702
(303) 444-1600 (208) 336-9400
</TABLE>
If you would like to request documents from us, please do so by
__________, 1999 in order to receive them before the meetings.
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
112
<PAGE> 116
STATEMENT/PROSPECTUS IS DATED __________, 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.
113
<PAGE> 117
APPENDIX A
MERGER AGREEMENT
114
<PAGE> 118
APPENDIX B
STOCKHOLDERS' AGREEMENT
115
<PAGE> 119
APPENDIX C
OPINION OF EVEREN SECURITIES
116
<PAGE> 120
APPENDIX D
DISSENTERS' RIGHTS
117
<PAGE> 121
FINANCIAL STATEMENTS
CONTENTS
<TABLE>
<CAPTION>
PAGE
ESOFT FINANCIAL STATEMENTS
<S> <C>
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, 1997 and 1998 .............................F-33
Statements of Changes in Shareholders' Deficit.......................................................F-34
Statements of Cash Flows for the Years ended December 31, 1997 and 1998..............................F-35
Notes to Financial Statements........................................................................F-36
</TABLE>
F-1
<PAGE> 122
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 presenta tion.
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> 123
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> 124
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> 125
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> 126
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> 127
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> 128
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> 129
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
F-9
<PAGE> 130
ESOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
================================================================================
component of stockholders' equity until realized. Investment
securities 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 is
EQUIPMENT 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 products
RECOGNITION 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
F-10
<PAGE> 131
ESOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
================================================================================
consulting services when such services are provided. All
costs associated with licensing of software products,
support and update services, and training and consulting
services are expensed as incurred.
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.
F-11
<PAGE> 132
ESOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
================================================================================
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 with
ESTIMATES generally accepted accounting principles requires management
to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the
financial statements and revenues and expenses during the
reporting period. Actual results could differ from those
estimates and assumptions.
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
FINANCIAL book value of financial instruments approximates their
INSTRUMENTS fair value.
F-12
<PAGE> 133
ESOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
================================================================================
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.
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
ISSUED ACCOUNTING and 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
F-13
<PAGE> 134
ESOFT, INCORPORATED
SUMMARY OF ACCOUNTING POLICIES
================================================================================
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.
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> 135
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. INVESTMENT A summary of the amortized cost and estimated market value
SECURITIES 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> 136
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:
S F-16
<PAGE> 137
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
----------- -----------
<S> <C> <C>
Federal tax benefit at the federal $(1,055,000) $ (66,000)
statutory rate
State income tax benefit, net of federal tax (109,000) (7,000)
amount
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> 138
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> 139
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> 140
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% commission on gross
sales, paid on a monthly basis. In addition to monthly
F-20
<PAGE> 141
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
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> 142
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> 143
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> 144
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 and
SHARE 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 December
PLAN 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.
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
F-24
<PAGE> 145
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
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 options
AND WARRANTS 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)
=========== ===========
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31, 1998 1997
- ------------------------ ----------- -----------
<S> <C> <C>
Dividend yield 0% 0%
Expected volatility 6 TO 14% 0%
</TABLE>
F-25
<PAGE> 146
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
<TABLE>
<S> <C> <C>
Risk-free interest rates 4.12 TO 6.20% 6%
Expected lives in years 1.17 TO 5 YEARS 0.25 - 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> 147
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> 148
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> 149
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> 150
ESOFT, INCORPORATED
NOTES TO FINANCIAL STATEMENTS
================================================================================
13. SUBSEQUENT In January 1999, the Company signed a Plan of Merger and
EVENT 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 $200,000.
F-30
<PAGE> 151
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> 152
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> 153
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> 154
APEXX TECHNOLOGY, INC.
STATEMENTS OF CHANGES IN SHAREHOLDERS' DEFICIT
<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> 155
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> 156
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> 157
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> 158
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-48
<PAGE> 159
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> 160
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> 161
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> 162
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 4.65 years 8.35 years 9.0 years 5.0 years
contractual life of options
outstanding
</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> 163
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> 164
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> 165
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
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
2.1* Amended and Restated Agreement and Plan Merger dated January 25, 1999
between eSoft, Inc., eSoft Acquisition Corporation and Apexx
Technology, Inc.
2.2* Form of Stockholders' Agreement to be executed by Apexx Technology,
Inc. stockholders in connection with the merger
2.3* Form of Escrow Agreement to be executed by eSoft, Inc. Thomas
Loutzenheiser and The Trust Company of The Bank of Montreal
2.4* Source Code Escrow Agreement among eSoft, Inc., Apex Technology, Inc.
and DSI
2.5* Employment Agreement by and between eSoft, Inc. and Thomas
Loutzenheiser
2.6* Employment Agreement by and between eSoft, Inc. and Albert Youngwerth
2.7* Employment Agreement by and between eSoft, Inc. and Ray Jenks
2.8* Employment Agreement by and between eSoft, Inc. and John Hanousek
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).
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<PAGE> 166
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.
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).
9.1* Voting Agreement by and between eSoft, Inc and Tom Loutzenheiser, Gayl
Loutzenheiser and David Dahms
9.2* Voting Agreement by and between eSoft, Inc and Albert Youngwerth,
Heather Youngwerth, Lawrence Lynch, George Minow, Chris Minow, William
Rivers, Ray Jenks
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).
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).
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<PAGE> 167
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).
II-3
<PAGE> 168
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
10.37* Loan agreement entered into by and between eSoft, Inc. and Apexx
Technology, Inc. dated December 2, 1998
10.38* Secured promissory note entered into by Apexx Technology, Inc. and
eSoft, Inc. dated December 2, 1998
10.39* Security agreement entered into by Apexx Technology, Inc. pledging
assets to secure loan agreement entered into dated December 2, 1998
10.40* Stock Pledge Agreement entered into by Thomas Loutzenheiser and eSoft,
Inc. dated December 2, 1998
10.41* Guaranty Agreement entered into by Thomas Loutzenheiser and eSoft, Inc.
dated December 2, 1998
10.42* Employment Agreement between Jane Merickel and eSoft.
23.1* Consents of Certified Public Accountants
- ----------
* Filed herewith
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
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<PAGE> 169
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.
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<PAGE> 170
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 18th day of March, 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 Beck
- ------------------------------ Chairman of the Board, Chief Technical Officer March 18, 1999
Philip Beck
/s/ Jeffrey Finn
- ----------------------------- Director, President and Chief Executive Officer March 18, 1999
Jeffrey Finn (Principal Executive Officer)
/s/ Richard Rice
- ----------------------------- Director March 18, 1999
Richard Rice
/s/ Thomas Tennessen
- ----------------------------- Chief Financial Officer (Principal Accounting March 18, 1999
Thomas Tennessen Officer)
</TABLE>
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<PAGE> 171
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.
2.2* Form of Stockholders' Agreement to be executed by Apexx Technology,
Inc. stockholders in connection with the merger
2.3* Form of Escrow Agreement to be executed by eSoft, Inc. Thomas
Loutzenheiser and The Trust Company of The Bank of Montreal
2.4* Source Code Escrow Agreement among eSoft, Inc., Apex Technology, Inc.
and DSI
2.5* Employment Agreement by and between eSoft, Inc. and Thomas
Loutzenheiser
2.6* Employment Agreement by and between eSoft, Inc. and Albert Youngwerth
2.7* Employment Agreement by and between eSoft, Inc. and Ray Jenks
2.8* Employment Agreement by and between eSoft, Inc. and John Hanousek
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).
</TABLE>
<PAGE> 172
<TABLE>
<S> <C>
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.
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).
9.1* Voting Agreement by and between eSoft, Inc and Tom Loutzenheiser, Gayl
Loutzenheiser and David Dahms
9.2* Voting Agreement by and between eSoft, Inc and Albert Youngwerth,
Heather Youngwerth, Lawrence Lynch, George Minow, Chris Minow, William
Rivers, Ray Jenks
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).
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).
</TABLE>
<PAGE> 173
<TABLE>
<S> <C>
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> 174
<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
10.37* Loan Agreement entered into by and between eSoft, Inc. and Apexx
Technology, Inc. dated December 2, 1998
10.38* Secured Promissory Note entered into by Apexx Technology, Inc. and
eSoft, Inc. dated December 2, 1998
10.39* Security Agreement entered into by Apexx Technology, Inc. pledging
assets to secure loan agreement entered into dated December 2, 1998
10.40* Stock Pledge Agreement entered into by Thomas Loutzenheiser and eSoft,
Inc. dated December 2, 1998
10.41* Guaranty Agreement entered into by Thomas Loutzenheiser and eSoft, Inc.
dated December 2, 1998
10.42* Employment Agreement between Jane Merickel and eSoft.
23.1* Consents of Certified Public Accountants
</TABLE>
- ----------
* Filed herewith
<PAGE> 1
EXHIBIT 2.1
===============================================================================
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> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE I THE MERGER
<S> <C> <C>
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
</TABLE>
i
<PAGE> 3
<TABLE>
<CAPTION>
<S> <C> <C>
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 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
</TABLE>
ii
<PAGE> 4
<TABLE>
<CAPTION>
ARTICLE IX ESCROW; LIMITS ON LIABILITY
<S> <C> <C>
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 of Claims..................................33
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
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C>
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
</TABLE>
iv
<PAGE> 6
INDEX OF DEFINITIONS
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
v
<PAGE> 7
<TABLE>
<CAPTION>
<S> <C>
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
</TABLE>
vi
<PAGE> 8
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").
<PAGE> 9
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."
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.
<PAGE> 10
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 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
3
<PAGE> 11
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).
(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
4
<PAGE> 12
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
5
<PAGE> 13
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.
(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.
6
<PAGE> 14
(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 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.
7
<PAGE> 15
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
8
<PAGE> 16
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) 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
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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 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
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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:
(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,
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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;
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(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;
(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.
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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 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;
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(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.
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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 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
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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
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(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;
(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.
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(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 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
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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
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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.
(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
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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.
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.
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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
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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 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.
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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.
(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.
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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
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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 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
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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 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.
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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
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Disclosure Schedule, all such members of management, key personnel and
consultants of 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
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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.
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
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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.
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.
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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.
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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 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.
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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.
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,
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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
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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.
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.
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(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.
(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.
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(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.
(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
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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.
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(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.
(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.
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(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.
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.
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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.
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.
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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.
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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 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
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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
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.
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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
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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.
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.
SIGNATURE PAGE FOLLOWS
50
<PAGE> 58
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
51
<PAGE> 59
EXHIBIT A
<PAGE> 60
EXHIBIT B
<PAGE> 61
EXHIBIT C-1
[Employment Agreement omitted; executed copy delivered
to the Executive and to Parent.]
<PAGE> 62
EXHIBIT C-2
[Employment Agreement omitted; executed copy delivered
to the Executive and to Parent.]
<PAGE> 63
EXHIBIT C-3
[Employment Agreement omitted; executed copy delivered
to the Executive and to Parent.]
<PAGE> 64
EXHIBIT C-4
[Employment Agreement omitted; executed copy delivered
to the Executive and to Parent.]
<PAGE> 65
EXHIBIT D
<PAGE> 66
EXHIBIT E
<PAGE> 67
EXHIBIT F
<PAGE> 68
EXHIBIT G
<PAGE> 69
EXHIBIT H
<PAGE> 70
EXHIBIT I
<PAGE> 1
EXHIBIT 2.2
STOCKHOLDERS AGREEMENT
STOCKHOLDERS AGREEMENT (this "Agreement"), dated as of o,
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> 2
(1) 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.
(2) 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.
(3) 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.
(4) 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.
(5) 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:
(1) 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.
(2) 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 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.
2
<PAGE> 3
(3) 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.
(4) The death or incapacity of any Stockholder shall not
terminate the authority and agency of the Representative.
(5) 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.
(6) 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).
(7) 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.
3
<PAGE> 4
(8) 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.
(1) 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.
(2) 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 Common Stock owned by such Control Stockholder (including any Company
Common Stock acquired
4
<PAGE> 5
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
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.
5
<PAGE> 6
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 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.
6
<PAGE> 7
"PARENT"
eSOFT, INC.
By:
----------------------------
Name: Jeffrey Finn
Title: President
STOCKHOLDER SIGNATURE PAGES FOLLOW
7
<PAGE> 8
<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
---------------------------------
</TABLE>
8
<PAGE> 9
<TABLE>
<CAPTION>
Number
STOCKHOLDER of Stockholder
NAME Address Shares Signature
<S> <C> <C> <C>
Robert W. Klumpp
---------------------------------
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
---------------------------------
</TABLE>
9
<PAGE> 10
<TABLE>
<CAPTION>
Number
STOCKHOLDER of Stockholder
NAME Address Shares Signature
<S> <C> <C> <C>
Thomas R. Saldin
---------------------------------
Raymond A. Smelek
---------------------------------
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> 11
EXHIBIT A
<PAGE> 12
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> 1
EXHIBIT 2.3
ESCROW AGREEMENT
THIS ESCROW AGREEMENT is made and entered into as of ____________,
1999, by and among eSoft, Inc., a Delaware corporation ("Parent"), eSoft
Acquisition Corporation, a Delaware corporation and a wholly owned subsidiary of
Parent ("Merger Sub"), Tom Loutzenheiser (the "Representative") a representative
of the stockholders of Apexx Technology, Inc., an Idaho corporation (the
"Company"), and ____________ (the "Escrow Agent").
1. This Escrow Agreement is entered into pursuant to the terms of
that certain Amended and Restated Agreement and Plan of Merger dated as of
January 25, 1999 (the "Merger Agreement") executed by and among Parent, Merger
Sub, and the Company, pursuant to which Merger Sub shall be merged with and into
the Company with the Company surviving. This Escrow Agreement shall be without
force and effect until such time as Escrow Agent receives shares of common
stock, $.01 par value, of Parent (the "Parent Common Stock"), such Parent Common
Stock to be delivered by Parent from time to time pursuant to Section 9.1 of the
Merger Agreement (collectively, the "Stock Deposits"). The certificates
representing the Stock Deposits shall be issued in the name of the Escrow Agent
or its nominee. Upon receipt of the Stock Deposits, together with any dividends
or distributions with respect thereto relating to record dates for such
dividends or distributions after the date hereof (collectively, the
"Distribution Deposits"), the Escrow Agent shall hold the Stock Deposits and the
Distribution Deposits in trust (the Stock Deposits and the Distribution Deposits
are referred to hereinafter as the "Deferred Merger Consideration Fund"), to be
disbursed as set forth under this Escrow Agreement.
2. At any time on or before the expiration of twelve months after
the Closing Date (as defined in the Merger Agreement), Parent may give one or
more written notices to Escrow Agent and the Representative that Parent seeks
payment of a claim (pursuant to Section 9.5 of the Merger Agreement) from the
Deferred Merger Consideration Fund, which written notice shall state the nature
and basis of such Claim and Parent's estimate of the amount thereof. The failure
to so notify the Representative shall in no case prejudice the rights of Parent
under this Agreement unless the Stockholders (as defined in the Stockholders'
Agreement dated ____________, 1999 by and between Parent and the stockholders of
the Company listed therein (the "Stockholders' Agreement")) shall be materially
prejudiced by such failure, and then only to the extent of such prejudice. Upon
receipt of notice of any such Claim from Parent, Escrow Agent shall, on the
tenth day after receipt of such notice, deliver to Parent the amount of the
Claim stated in the notice, in securities valued at a price per share equal to
$4.75; provided, however, that if the Representative shall have delivered to the
Escrow Agent a notice of objection to the payment of a Claim, the Escrow Agent
shall not make any payment with respect to such Claim until the Escrow Agent
receives (i) a notice signed jointly by Parent and the Representative that
contains joint instructions to the Escrow Agent as to the delivery of all or any
portion of the Deferred Merger Consideration Fund with respect to such Claim, or
(ii) a final, non-appealable order of the arbitrators referred to in Sections
1.5 of the Stockholders' Agreement resolving the objection, after which the
Escrow Agent shall promptly deliver all or any portion of the Deferred Merger
Consideration Fund with respect to such Claim in accordance with the decision of
said arbitrators. Pending the receipt of such joint written instructions or
final order, Escrow Agent shall segregate from the Deferred Merger Consideration
Fund such amount in cash or securities, valued at a price per share at a price
per share equal to $4.75 per share, sufficient to discharge the Claim in full.
3. Upon the expiration of twelve months after the Closing Date, the
Escrow Agent shall give the Representative and Parent written notice of its
intent to distribute any Deferred Merger Consideration to the Company's
Stockholders (other than holders of Dissenting Shares (as defined in the Merger
Agreement). Such notice shall state the total amount in the Deferred Merger
Consideration Fund, the amount paid by the Escrow Agent on account of Claims
presented by Parent, the amount segregated from the Deferred Merger
Consideration Fund to pay Claims that are then in dispute or disputable, and the
initial number of shares of Parent Common Stock immediately available for
distribution (the "Initial Distribution Amount") to the Company's Stockholders
(other than holders of Dissenting Shares) on such date. The Escrow Agent shall,
on the tenth day after delivery of such notice, deliver to the Company's
Stockholders (other than holders of Dissenting Shares) at such Stockholders'
last known addresses each Stockholder's pro rata share of the Initial
Distribution Amount (such pro rata share to be determined pursuant to Section 4
hereof); provided, however, that if the Representative or Parent shall have
delivered to the Escrow Agent a notice of objection to the distribution of the
Initial Distribution Amount, the Escrow Agent shall not make any distribution
with respect to such Initial Distribution Amount until the Escrow Agent receives
joint written instructions from the Representative and Parent or a final order
from an arbitration conducted in accordance with Sections 1.5 of the
Stockholders' Agreement. Within ten days of the resolution of all disputes
involving any unpaid Claim for which
1
<PAGE> 2
Parent has delivered notice to the Escrow Agent in accordance with Section 2
hereof, the Escrow Agent shall calculate the remaining number of shares of
Parent Common Stock available for distribution (the "Final Distribution Amount")
to the Company's Stockholders (other than holders of Dissenting Shares) and
shall provide this information to the Representative. The Escrow Agent shall
deliver to the Company's Stockholders (other than holders of Dissenting Shares)
at such Stockholders' last known addresses each Stockholder's pro rata share of
the Final Distribution Amount (such pro rata share to be determined pursuant to
Section 4 hereof).
4. Upon receipt of a notice from the Escrow Agent with respect to
any distribution to Stockholders, the Representative shall determine each
Stockholder's pro rata share of the Initial Distribution Amount and the Final
Distribution Amount by reference to the percentage interest indicated next to
each such Stockholder's name in the table of Stockholder interests attached
hereto as Exhibit A.
5. Upon the receipt by the Escrow Agent of any notice from Parent
that Parent is soliciting the vote or consent of any holder of Parent Common
Stock, the Escrow Agent shall promptly deliver to the Company's Stockholders
(other than holders of Dissenting Shares) at such Stockholders' last known
addresses a notice of such solicitation and shall request that each such
Stockholder deliver to the Escrow Agent instructions with respect to the voting
or consent of the shares of Parent Common Stock beneficially owned by such
Stockholder and held of record by the Escrow Agent. The Escrow Agent shall
timely vote the shares of Parent Common Stock held in the Deferred Merger
Consideration Fund, to the extent practicable, in accordance with instructions
received by the Escrow Agent from such Stockholders.
6. Any portion of the Deferred Merger Consideration Fund that
remains unclaimed by the former stockholders of the Company two years after the
Effective Time shall be delivered to the Company.
7. Upon delivery of the Deferred Merger Consideration Fund to Parent
or the Stockholders, as the case may be, this Escrow Agreement shall be deemed
to be terminated and the Escrow Agent shall be released and discharged from all
further obligations hereunder. Notwithstanding anything herein to the contrary,
all notices or instructions to the Escrow Agent hereunder shall be in writing,
and the Escrow Agent shall have no obligation to act on notice or instructions
that are not in writing.
8. In the event of the resignation of the Representative, the
resigning Representative shall appoint a successor either from among the
Stockholders or another person 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
have been appointed. 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, voting together as a class, and such successor
either shall be a Stockholder or another person otherwise 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.
9. If at any time Escrow Agent shall receive a notice signed jointly
by Parent and the Representative containing instructions to Escrow Agent
regarding the disposition of the Deferred Merger Consideration Fund or any
portion thereof or any matter related thereto, Escrow Agent shall comply with
such instructions. Similarly, if at any time Escrow Agent shall receive a notice
signed jointly by Parent and the Representative that this Escrow Agreement has
been terminated, Escrow Agent shall deliver the Deferred Merger Consideration
Fund in accordance with the joint instructions contained in such notice and upon
such delivery this Escrow Agreement shall be deemed terminated and Escrow Agent
shall be released and discharged from all further obligations hereunder.
10. Escrow Agent shall not be responsible for the performance of any
agreement between the parties hereto except for those agreements and duties that
are explicitly set forth herein. It is understood and agreed that the duties of
Escrow Agent hereunder are purely ministerial in nature and that it shall not be
liable for any error or judgment regarding fact or law, or for any act done or
omitted to be done, except for its own negligence or willful misconduct. Escrow
Agent's determination as to whether an event or condition has occurred, or been
met or satisfied, or as to whether a provision of this Escrow Agreement has been
complied with, or as to whether sufficient evidence of
2
<PAGE> 3
the event or condition or compliance with the provision has been furnished to
it, shall not subject it to any claim, liability, or obligation whatsoever, even
if it shall be found that such determination was improper or incorrect, provided
only that Escrow Agent shall not have been guilty of negligence or willful
misconduct in making such determination. The Escrow Agent shall not be obligated
to take any legal or other action hereunder that might in its judgment involve
expense or liability unless it shall have been furnished with indemnity
acceptable to it. In addition, the Escrow Agent may consult counsel satisfactory
to it, and the advice or opinion of such counsel shall be full and complete
authorization and protection in respect of any action taken, suffered, or
omitted by it hereunder in good faith and in accordance with the advice or
opinion of such counsel.
11. Escrow Agent shall not be responsible for the genuineness,
accuracy, or validity of any document or item deposited with it or any notice or
instruction given to it, and it is fully protected in acting in accordance with
any written instruction or instrument given to it hereunder and reasonably
believed by it to have been signed by the proper parties. Each party hereto
represents and warrants that this Escrow Agreement has been duly and validly
authorized, executed, and delivered by such party and constitutes a valid and
binding obligation of such party, enforceable against such party in accordance
with its terms.
12. If at any time Escrow Agent shall receive conflicting notices,
claims, demands, or instructions with respect to the Deferred Merger
Consideration Fund, or if for any other reason it shall be unable in good faith
to determine the party or parties entitled to receive any part of the Deferred
Merger Consideration Fund, Escrow Agent may refuse to make any payment and
retain the Deferred Merger Consideration Fund in its possession until Escrow
Agent shall have received instructions in writing signed jointly by Parent and
the Representative, or until directed by a final, non-appealable order of the
arbitrators referred to in Sections 1.5 of the Stockholders' Agreement,
whereupon Escrow Agent shall make such disposition in accordance with such joint
instructions or order.
13. (a) Neither the Escrow Agent nor any of its directors, officers,
or employees shall be liable to anyone for any action taken or omitted to be
taken by it or any of its directors, officers, or employees hereunder except in
the case of negligence, bad faith, or willful misconduct. Parent covenants and
agrees to indemnify the Escrow Agent and hold it harmless without limitation
from and against any loss, liability, or expense of any nature incurred by the
Escrow Agent arising out of or in connection with this Escrow Agreement or with
the administration of its duties hereunder, including, but not limited to, legal
fees and expenses and other costs and expenses of defending or preparing to
defend against any claim of liability in the premises, unless such loss,
liability, or expense shall be caused by the Escrow Agent's negligence, bad
faith or willful misconduct. In no event shall the Escrow Agent be liable for
indirect, punitive, special, or consequential damages.
(b) Parent agrees to assume any and all obligations imposed now
or hereafter by any applicable tax law with respect to the payment of funds or
other property under this Escrow Agreement, and to indemnify and hold the Escrow
Agent harmless from and against any taxes, additions for late payment, interest,
penalties, and other expenses, that may be assessed against the Escrow Agent on
any such payment or other activities under this Escrow Agreement. Parent
undertakes to instruct the Escrow Agent in writing with respect to the Escrow
Agent's responsibility for withholding and other taxes, assessments, or other
governmental charges, certifications, and governmental reporting in connection
with its acting as Escrow Agent under this Escrow Agreement. Parent agrees to
indemnify and hold the Escrow Agent harmless from any liability on account of
taxes, assessments, or other governmental charges, including without limitation
the withholding or deduction or the failure to withhold or deduct same, and any
liability for failure to obtain proper certifications or to properly report to
governmental authorities, to which the Escrow Agent may be or become subject in
connection with or which arises out of this Escrow Agreement, including costs,
expenses (including reasonable legal fees and expenses), interest, and
penalties.
14. Escrow Agent may resign at any time upon giving the parties
hereto ten days' prior written notice to that effect. In such event, the
successor escrow agent shall be such person, firm, or corporation as shall be
mutually selected by Parent and the Representative. It is understood and agreed
that such resignation shall not be effective until a successor agrees to act as
escrow agent hereunder; provided, however, if no successor is appointed and
acting hereunder within ten days after such notice is given, Escrow Agent may
pay and deliver the Deferred Merger Consideration Fund into any court of
competent jurisdiction and may apply to any court of competent jurisdiction for
the appointment of a successor escrow agent. The provisions of Section 14 hereof
shall survive the resignation or removal of the Escrow Agent or the termination
of this Escrow Agreement.
3
<PAGE> 4
15. All notices and other communications hereunder shall be in
writing and shall be deemed to have been duly given when personally delivered,
two days after deposit in the mail if mailed by certified mail, return receipt
requested, or when received if delivered via Federal Express or similar
overnight courier service, or by facsimile. Such notices or other communications
shall be sent to the following addresses, unless other addresses are
subsequently specified in writing:
If to Parent:
eSoft, Inc.
5335-C Sterling Drive
Boulder, CO 80301
Attention: Jeffrey Finn
Fax No.: (303) 444-1640
Tel. No.: (303) 444-1600
and: Davis, Graham & Stubbs LLP
370 - 17th Street, Suite 4700
Denver, Colorado 80202
Attention: Lester R. Woodward, Esq.
Fax No.: (303) 892-7392
Tel. No.: (303) 893-1379
If to the Representative:
Tom Loutzenheiser
Apexx Technology, Inc.
506 South 11th Street
Boise, Idaho 83702
Fax No.: (208) 336-9445
Tel. No.: (208) 336-9400
With a copy to:
Hawley Troxell Ennis & Hawley LLP
877 Main Street, Suite 1000
Boise, Idaho 83701
Attn: Paul M. Boyd
Fax No.: (208) 344-6505
Tel. No.: (208) 344-8000
If to Escrow Agent:
16. Parent agrees to pay the Escrow Agent's reasonable compensation
for its normal services hereunder in accordance with Exhibit B attached hereto,
which may be subject to change on an annual basis. The Escrow Agent shall be
entitled to reimbursement on demand for all expenses incurred in connection with
the administration of the escrow created hereby which are in excess of its
compensation for normal services hereunder, including without limitation,
payment of any legal fees and expenses incurred by the Escrow Agent in
connection with the resolution of any claim by any party hereunder.
17. Parent and Representative hereby absolutely and irrevocably
consent and submit to the jurisdiction of the courts of the State of Colorado,
and of any federal court located in said the State of Colorado having
jurisdiction over such matters, in connection with any actions or proceedings
brought against Parent and/or Representative by the Escrow Agent arising out of
or relating to this Escrow Agreement. In any such action or proceeding, Parent
and Representative hereby absolutely and irrevocably waive personal service of
any summons, complaint, declaration, or other process and hereby absolutely and
irrevocably agree that service thereof may be made by certified or registered
first class mail directed to Parent and Representative, as the case may be, at
their respective addresses in accordance with Section 15 hereof.
4
<PAGE> 5
18. The Escrow Agent shall not be responsible for delays or failures
in performance resulting from acts beyond its control. Subject to the
limitations set forth in Section 14 above, such acts shall include but not be
limited to acts of God, strikes, lockouts, riots, acts of war, epidemics,
governmental regulations superimposed after the fact, fire, communication line
failures, computer viruses, power failures, earthquakes or other disasters.
19. This Escrow Agreement and all documents relating thereto,
including, without limitation, (a) consents, waivers, and modifications which
may hereafter be executed, and (b) certificates and other information previously
or hereafter furnished may be reproduced by any photographic, photostatic,
microfilm, optical disk, micro-card, miniature photographic, or other similar
process. The parties hereto agree that any such reproduction shall be admissible
in evidence as the original itself in any judicial or administrative proceeding,
whether or not the original is in existence and whether or not such reproduction
was made by a party in the regular course of business, and that any enlargement,
facsimile, or further reproduction shall likewise to be admissible in evidence.
20. This Escrow Agreement, the Merger Agreement and the
Stockholders' Agreement contain the entire agreement among the parties with
respect to the subject matter hereof. This Escrow Agreement may not be amended,
supplemented, or discharged, and no provision hereof may be modified or waived
except by an instrument in writing signed by all of the parties hereto. No
waiver of any provision hereof by any party shall be deemed a continuing waiver
of any matter by such party.
21. This Escrow Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware.
22. This Escrow Agreement may be executed in counterparts, each of
which shall be deemed an original, but all of which together shall constitute
one and the same instrument. Executed counterparts transmitted by fax shall be
effective as originals.
SIGNATURE PAGE FOLLOWS
5
<PAGE> 6
IN WITNESS WHEREOF, the undersigned have executed this Escrow
Agreement as of the date first set forth above, to be effective as set forth in
Section 1 hereof.
ESCROW AGENT:
By:
-----------------------------
Name:
Title:
PARENT:
eSOFT, INC.
By:
-----------------------------
Name: Jeffrey Finn
Title: President
THE REPRESENTATIVE:
--------------------------------
Name: Tom Loutzenheiser
6
<PAGE> 7
EXHIBIT A
<PAGE> 8
<TABLE>
<CAPTION>
STOCKHOLDER PERCENTAGE
NAME INTEREST
<S> <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 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
Thomas A. Klumpp
</TABLE>
<PAGE> 9
<TABLE>
<CAPTION>
STOCKHOLDER PERCENTAGE
NAME INTEREST
<S> <C>
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
Candice P. Smelek
Duane H. Steukle
Thomas E. Stitzel
</TABLE>
<PAGE> 10
<TABLE>
<CAPTION>
STOCKHOLDER PERCENTAGE
NAME INTEREST
<S> <C>
Bonnie E. Stitzel
George Tholke
Richard L. Thomas
Norma J. Thomas
Mark Upson
H. James White
Albert J. Youngwerth
Heather Youngwerth
</TABLE>
<PAGE> 11
EXHIBIT B
<PAGE> 1
EXHIBIT 2.4
SOURCE CODE ESCROW AGREEMENT
Account Number ______________________
This Agreement is effective January 25, 1999 among Data Securities
International, Inc. ("DSI"), Apexx Technology, Inc. ("Depositor") and eSoft,
Inc. ("Preferred Beneficiary"), who collectively may be referred to in this
Agreement as "the Parties."
A. Depositor and Preferred Beneficiary have entered into an Agreement
and Plan of Merger dated as of December 22, 1998 (the "Merger Agreement")
pursuant to which Depositor will become a wholly owned subsidiary of Preferred
Beneficiary.
B. Depositor and Preferred Beneficiary desire to avoid any tampering
with or corruption of Depositor's proprietary technology pending the merger of
Depositor with and into Preferred Beneficiary's wholly owned subsidiary (the
"Merger").
C. Depositor and Preferred Beneficiary desire to establish an escrow
with DSI to provide for the retention, administration and controlled access of
the proprietary technology materials of Depositor until such time of the Merger
is effected or the Merger Agreement is terminated.
ARTICLE 1
DEPOSITS
1.1 OBLIGATION TO MAKE DEPOSIT. Upon the signing of this Agreement by
the parties, Depositor shall deliver to DSI the proprietary information and
other materials identified on Exhibit A hereto (the "Deposit Materials").
Exhibit A shall be prepared and signed by Depositor and Preferred Beneficiary.
DSI shall have no obligation with respect to the preparation, signing or
delivery of Exhibit A.
1.2 IDENTIFICATION OF TANGIBLE MEDIA. Prior to the delivery of the
Deposit Materials to DSI, Depositor shall conspicuously label for
identification each document, magnetic tape, disk, or other tangible media upon
which the Deposit Materials are written or stored. Additionally, Depositor
shall complete Exhibit B to this Agreement by listing each such tangible media
by the item label description, the type of media and the quantity. Exhibit B
must be signed by Depositor and delivered to DSI with the Deposit Materials.
Unless and until Depositor makes the initial deposit with DSI, DSI shall have
no obligation with respect to this Agreement, except the obligation to notify
the parties regarding the status of the deposit account as required in Section
2.2 below.
1.3 DEPOSIT INSPECTION. When DSI receives the Deposit Materials and
Exhibit B, DSI will conduct a deposit inspection by visually matching the
labeling of the tangible media containing the Deposit Materials to the item
descriptions and quantity listed on Exhibit B. In addition to the deposit
inspection, Preferred Beneficiary may elect to cause a verification of the
Deposit Materials in accordance with Section 1.6 below.
1.4 ACCEPTANCE OF DEPOSIT. Upon completion of the deposit inspection,
if DSI determines that the labeling of the tangible media matches the item
descriptions and quantities on Exhibit B, DSI will date and sign Exhibit B and
mail a copy thereof to Depositor and Preferred Beneficiary. If DSI determines
that the labeling does not match the item descriptions or quantity on the
Exhibit B, DSI will (a) note the discrepancies in writing on Exhibit B; (b)
date and sign Exhibit B with the exceptions noted; and (c) provide a copy of
Exhibit B to Depositor and Preferred Beneficiary. DSI's acceptance of the
deposit occurs upon the signing of Exhibit B by DSI. Delivery of the signed
Exhibit B to Preferred Beneficiary is Preferred Beneficiary's notice that the
Deposit Materials have been received and accepted by DSI.
1.5 DEPOSITOR'S REPRESENTATIONS. Depositor represents as follows:
a. Depositor lawfully possesses all of the Deposit Materials;
b. With respect to all of the Deposit Materials, Depositor has the
right and authority to grant to DSI and Preferred Beneficiary the
rights as provided in this Agreement;
<PAGE> 2
c. Except as identified on Exhibit A, the Deposit Materials are not
subject to any lien or other encumbrance;
d. The Deposit Materials consist of the proprietary information and
other materials identified in Exhibit A; and
e. The Deposit Materials are readable and useable in their current
form or, if the Deposit Materials are encrypted, the decryption
tools and decryption keys have also been deposited.
1.6 VERIFICATION. Preferred Beneficiary shall have the right, at
Preferred Beneficiary's expense, to cause a verification of any Deposit
Materials to be completed. A verification determines, in different levels of
detail, the accuracy, completeness, sufficiency and quality of the Deposit
Materials. If a verification is elected after the Deposit Materials have been
delivered to DSI, then only DSI, or at DSI's election an independent person or
company selected and supervised by DSI, may perform the verification.
1.7 DEPOSIT UPDATES. Depositor shall update the Deposit Materials
within 60 days of each release of a new version of a product. Such updates will
be added to the existing deposit. All deposit updates shall be listed on a new
Exhibit B and the new Exhibit B shall be signed by Depositor. Each Exhibit B
will be held and maintained separately within the escrow account. An
independent record will be created which will document the activity for each
Exhibit B. The processing of all deposit updates shall be in accordance with
Sections 1.2 through 1.6 above. All references in this Agreement to the Deposit
Materials shall include the initial Deposit Materials and any updates.
1.8 REMOVAL OF DEPOSIT MATERIALS. The Deposit Materials may be removed
and/or exchanged only on written instructions signed by Depositor and Preferred
Beneficiary, or as otherwise provided in this Agreement.
ARTICLE 2
CONFIDENTIALITY AND RECORD KEEPING
2.1 CONFIDENTIALITY. DSI shall maintain the Deposit Materials in a
secure, environmentally safe, locked facility which is accessible only to
authorized representatives of DSI. DSI shall have the obligation to reasonably
protect the confidentiality of the Deposit Materials. Except as provided in
this Agreement, DSI shall not disclose, transfer, make available, or use the
Deposit Materials. DSI shall not disclose the content of this Agreement to any
third party. If DSI receives a subpoena or other order of a court or other
judicial tribunal pertaining to the disclosure or release of the Deposit
Materials, DSI will immediately notify the parties to this Agreement. It shall
be the responsibility of Depositor and/or Preferred Beneficiary to challenge
any such order; provided, however, that DSI does not waive its rights to
present its position with respect to any such order. DSI will not be required
to disobey any court or other judicial tribunal order. (See Section 6.5 below
for notices of requested orders.)
2.2 STATUS REPORTS. DSI will issue to Depositor and Preferred
Beneficiary a report profiling the account history at least semi-annually. DSI
may provide copies of the account history pertaining to this Agreement upon the
request of any party to this Agreement.
2.3 AUDIT RIGHTS. During the term of this Agreement, Depositor and
Preferred Beneficiary each shall have the right to inspect the written records
of DSI pertaining to this Agreement. Any inspection shall be held during normal
business hours and following reasonable prior notice.
ARTICLE 3
GRANT OF RIGHTS TO DSI
3.1 TITLE TO MEDIA. Depositor hereby transfers to DSI the title to the
media upon which the proprietary information and materials are written or
stored. However, this transfer does not include the ownership of the
proprietary information and materials contained on the media such as any
copyright, trade secret, patent or other intellectual property rights.
<PAGE> 3
3.2 RIGHT TO MAKE COPIES. DSI shall have the right to make copies of
the Deposit Materials as reasonably necessary to perform this Agreement. DSI
shall copy all copyright, nondisclosure, and other proprietary notices and
titles contained on the Deposit Materials onto any copies made by DSI. With all
Deposit Materials submitted to DSI, Depositor shall provide any and all
instructions as may be necessary to duplicate the Deposit Materials including
but not limited to the hardware and/or software needed.
3.3 RIGHT TO TRANSFER UPON RELEASE. Depositor hereby grants to DSI the
right to transfer the Deposit Materials to Preferred Beneficiary or Depositor
as follows: (a) upon termination of this Agreement in accordance with Section
4.1(a), the Deposit Materials shall be transferred to the Preferred
Beneficiary, and (b) upon termination of this Agreement in accordance with
Section 4.1(b) or 4.1(c), the Deposit Materials shall be transferred to the
Depositor. Except upon such a release or as otherwise provided in this
Agreement, DSI shall not transfer the Deposit Materials.
ARTICLE 4
TERM AND TERMINATION
4.1 TERM OF AGREEMENT. This Agreement is to remain in effect until the
earlier of (a) the Effective Time (as defined in the Merger Agreement); (b) the
date that the Merger Agreement is terminated pursuant to Article X thereof; or
(c) the Agreement is terminated by DSI for nonpayment in accordance with
Section 5.2. If the Deposit Materials are subject to another escrow agreement
with DSI, DSI reserves the right, after the initial one year term, to adjust
the anniversary date of this Agreement to match the then prevailing anniversary
date of such other escrow arrangements.
4.2 TERMINATION FOR NONPAYMENT. In the event of the nonpayment of fees
owed to DSI, DSI shall provide written notice of delinquency to all parties to
this Agreement. Any party to this Agreement shall have the right to make the
payment to DSI to cure the default. If the past due payment is not received in
full by DSI within one month of the date of such notice, then DSI shall have
the right to terminate this Agreement at any time thereafter by sending written
notice of termination to all parties. DSI shall have no obligation to take any
action under this Agreement so long as any payment due to DSI remains unpaid.
4.3 DISPOSITION OF DEPOSIT MATERIALS UPON TERMINATION. Upon
termination of this Agreement, DSI shall destroy, return, or otherwise deliver
the Deposit Materials to Depositor or Preferred Beneficiary in accordance with
Section 3.3 of this Agreement. DSI shall have no obligation to return or
destroy the Deposit Materials if the Deposit Materials are subject to another
escrow agreement with DSI.
4.4 SURVIVAL OF TERMS FOLLOWING TERMINATION. Upon termination of this
Agreement, the following provisions of this Agreement shall survive:
a. Depositor's Representations (Section 1.5);
b. The obligations of confidentiality with respect to the Deposit
Materials;
c. The obligation to pay DSI any fees and expenses due;
d. The provisions of Article 7; and
e. Any provisions in this Agreement which specifically state they
survive the termination or expiration of this Agreement.
ARTICLE 5
DSI'S FEES
5.1 FEE SCHEDULE. DSI is entitled to be paid its standard fees and
expenses applicable to the services provided. DSI shall notify the party
responsible for payment of DSI's fees at least 90 days prior to any increase in
fees. For any service not listed on DSI's standard fee schedule, DSI will
provide a quote prior to rendering the service, if requested.
<PAGE> 4
5.2 PAYMENT TERMS. DSI shall not be required to perform any service
unless the payment for such service and any outstanding balances owed to DSI
are paid in full. Fees are due upon receipt of a signed contract or receipt of
the Deposit Materials whichever is earliest. If invoiced fees are not paid, DSI
may terminate this Agreement in accordance with Section 5.2. Late fees on past
due amounts shall accrue interest at the rate of one and one-half percent per
month (18% per annum) from the date of the invoice.
ARTICLE 6
LIABILITY AND DISPUTES
6.1 RIGHT TO RELY ON INSTRUCTIONS. DSI may act in reliance upon any
instruction, instrument, or signature reasonably believed by DSI to be genuine.
DSI may assume that any employee of a party to this Agreement who gives any
written notice, request, or instruction has the authority to do so. DSI shall
not be responsible for failure to act as a result of causes beyond the
reasonable control of DSI.
6.2 INDEMNIFICATION. DSI shall be responsible to perform its
obligations under this Agreement and to act in a reasonable and prudent manner
with regard to this escrow arrangement. Provided DSI has acted in the manner
stated in the preceding sentence, Depositor and Preferred Beneficiary each
agree to indemnify, defend and hold harmless DSI from any and all claims,
actions, damages, arbitration fees and expenses, costs, attorney's fees and
other liabilities incurred by DSI relating in any way to this escrow
arrangement.
6.3 DISPUTE RESOLUTION. Any dispute relating to or arising from this
Agreement shall be resolved by arbitration under the Commercial Rules of the
American Arbitration Association. Unless otherwise agreed by Depositor and
Preferred Beneficiary, arbitration will take place in Denver, Colorado, U.S.A.
Any court having jurisdiction over the matter may enter judgment on the award
of the arbitrator(s). Service of a petition to confirm the arbitration award
may be made by First Class mail or by commercial express mail, to the attorney
for the party or, if unrepresented, to the party at the last known business
address.
6.4 CONTROLLING LAW. This Agreement is to be governed and construed in
accordance with the laws of the State of Delaware, without regard to its
conflict of law provisions.
6.5 NOTICE OF REQUESTED ORDER. If any party intends to obtain an order
from the arbitrator or any court of competent jurisdiction which may direct DSI
to take, or refrain from taking any action, that party shall:
a. Give DSI at least two business days' prior notice of the hearing;
b. Include in any such order that, as a precondition to DSI's
obligation, DSI be paid in full for any past due fees and be paid
for the reasonable value of the services to be rendered pursuant to
such order; and
c. Ensure that DSI not be required to deliver the original Deposit
Materials (as opposed to a copy) if DSI may need to retain the
original in its possession to fulfill any of its other duties.
ARTICLE 7
GENERAL PROVISIONS
7.1 ENTIRE AGREEMENT. This Agreement, which includes the Exhibits
described herein, embodies the entire understanding among the parties with
respect to its subject matter and supersedes all previous communications,
representations or understandings, either oral or written. DSI's only
obligations to Depositor or Preferred Beneficiary are as set forth in this
Agreement. No amendment or modification of this Agreement shall be valid or
binding unless signed by all the parties hereto, except that Exhibit A need not
be signed by DSI, Exhibit B need not be signed by Preferred Beneficiary and
Exhibit C need not be signed.
<PAGE> 5
7.2 NOTICES. All notices, invoices, payments, deposits and other
documents and communications shall be given to the parties at the addresses
specified in the attached Exhibit C. It shall be the responsibility of the
parties to notify each other as provided in this Section in the event of a
change of address. The parties shall have the right to rely on the last known
address of the other parties. Unless otherwise provided in this Agreement, all
documents and communications may be delivered by First Class mail.
7.3 SEVERABILITY. In the event any provision of this Agreement is
found to be invalid, voidable or unenforceable, the parties agree that unless
it materially affects the entire intent and purpose of this Agreement, such
invalidity, voidability or unenforceability shall affect neither the validity
of this Agreement nor the remaining provisions herein, and the provision in
question shall be deemed to be replaced with a valid and enforceable provision
most closely reflecting the intent and purpose of the original provision.
7.4 SUCCESSORS. This Agreement shall be binding upon and shall inure
to the benefit of the successors and assigns of the parties. However, DSI shall
have no obligation in performing this Agreement to recognize any successor or
assign of Depositor or Preferred Beneficiary unless DSI receives clear,
authoritative and conclusive written evidence of the change of parties.
7.5 REGULATIONS. Depositor and Preferred Beneficiary are responsible
for and warrant compliance with all applicable laws, rules and regulations,
including but not limited to customs laws, import, export, and re-export laws
and government regulations of any country to which the Deposit Materials may be
delivered in accordance with the provisions of this Agreement.
SIGNATURE PAGE FOLLOWS
<PAGE> 6
DEPOSITOR PREFERRED BENEFICIARY
Apexx Technology, Inc. eSoft, Inc.
By: /s/ Tom Loutzenheiser By: /s/ Jeffrey Finn
---------------------------- --------------------------------
Name: Tom Loutzenheiser Name: Jeffrey Finn
Title: President Title: President
Date: January 25, 1999 Date: January 25, 1999
Data Securities International, Inc.
By:
----------------------------
Name:
Title:
Date:
<PAGE> 7
EXHIBIT A
<PAGE> 8
MATERIALS TO BE DEPOSITED
Account Number ___________________________
Depositor represents to Preferred Beneficiary that Deposit Materials delivered
to DSI shall consist of the following:
DEPOSITOR PREFERRED BENEFICIARY
Apexx Technology, Inc. eSoft, Inc.
By: /s/ Tom Loutzenheiser By: /s/ Jeffrey Finn
---------------------------- --------------------------------
Name: Tom Loutzenheiser Name: Jeffrey Finn
Title: President Title: President
Date: January 25, 1999 Date: January 25, 1999
<PAGE> 9
EXHIBIT B
<PAGE> 10
DESCRIPTION OF DEPOSIT MATERIALS
Depositor Company Name: Apexx Technology, Inc.
Account Number
----------------------------------------------------------------
Product Name Version
----------------------------------- -----------------------
(Product Name will appear on Account History report)
<TABLE>
<CAPTION>
DEPOSIT MATERIAL DESCRIPTION:
Quantity Media Type & Size Label Description of Each Separate Item
(Please use other side if additional space is needed)
<S> <C>
_______ Disk 3.5" or ____
_______ DAT tape ____ mm
_______ CD-ROM
_______ Data cartridge tape ____
_______ TK 70 or ____ tape
_______ Magnetic tape ____
_______ Documentation
_______ Other ______________________
</TABLE>
PRODUCT DESCRIPTION:
Operating System
--------------------------------------------------------------
Hardware Platform
-------------------------------------------------------------
DEPOSIT COPYING INFORMATION:
Is the media encrypted? Yes / No If yes, please include any passwords and the
decryption tools.
Encryption tool name Version
----------------------------- ----------------------
Hardware required
--------------------------------------------------------------
Software required
--------------------------------------------------------------
I certify for Depositor that the above described DSI has inspected and accepted
the above Deposit Materials have been transmitted to DSI: materials (any
exceptions are noted above):
Signature Signature
------------------------------ -----------------------------
Print Name Print Name
----------------------------- ----------------------------
Date Date Accepted
----------------------------------- -------------------------
Exhibit B#
----------------------------
Send materials to: DSI, 9555 Chesapeake Dr. #200,
San Diego, CA 92123 (619) 694-1900
<PAGE> 11
EXHIBIT C
<PAGE> 12
DESIGNATED CONTACT
Account Number _______________________
Notices, Deposit Material returns and
communications to Depositor should be
addressed to: Invoices to Depositor should
be addressed to:
Company Name: Apexx Technology, Inc. Apexx Technology, Inc.
Address: 506 South 11th Street 506 South 11th Street
Boise, Idaho 83702 Boise, Idaho 83702
Designated Contact: Tom Loutzenheiser Attn: Tom Loutzenheiser
Telephone: (208) 336-9400 (208) 336-9400
Facsimile: (208) 336-9445
Notices and communications to Invoices to Preferred Beneficiary
Preferred Beneficiary should be should be addressed to:
addressed to:
Company Name: eSoft, Inc. eSoft, Inc.
Address: 5334-C Sterling Drive 5334-C Sterling Drive
Boulder, CO 80301 Boulder, CO 80301
Designated Contact: Jeffrey Finn Attn: Jeffrey Finn
Telephone: (303) 444-1600 (303) 444-1600
Facsimile: (303) 444-1640
Requests from Depositor or Preferred Beneficiary to change the designated
contact should be given in writing by the designated contact or an authorized
employee of Depositor or Preferred Beneficiary.
Contracts, Deposit Materials and Invoice inquiries and fee remittances
notices to DSI should be to DSI should be addressed to:
addressed to:
DSI DSI
Contract Administration Accounts Receivable
Suite 200 Suite 1450
9555 Chesapeake Drive 425 California Street
San Diego, CA 92123 San Francisco, CA 94104
Telephone: (619) 694-1900 (415) 398-7900
Facsimile: (619) 694-1919 (415) 398-7914
Date:
----------------------------------------
<PAGE> 1
EXHIBIT 2.5
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into as
of this ______th day of January 1999, to become effective at the time set
forth in Section 1 hereof, between eSoft, Inc., a Delaware corporation (the
"Company"), and Tom Loutzenheiser, an individual person (the "Executive").
RECITAL
A. The Company desires to employ the Executive as VICE PRESIDENT OF
PRODUCT DEVELOPMENT, 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 PRODUCT DEVELOPMENT. Subject to Section 4, the
term of Executive's employment under this Agreement (the "Term") shall be for
twenty-four (24) months, beginning on the first calendar day following the date
on which the Company acquires Apexx Technology, Inc.
2. Duties, Responsibilities and Authority. In the capacity as VICE
PRESIDENT OF PRODUCT DEVELOPMENT for the Company, the Executive shall have
primary responsibility for product management, product development, and
technical support, as well as providing general management functions for the
Boise, Idaho location for the Company. 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 professional and
managerial time and effort to the performance of the duties as VICE PRESIDENT
OF PRODUCT DEVELOPMENT 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.
1
<PAGE> 2
3. Compensation
(a) Salary. For services rendered under this Agreement, the
Company shall pay the Executive a salary at the rate of $9,166.00 per month.
(b) Bonus. The Executive shall be eligible to receive a
performance bonus based upon mutually agreed company and department performance
criteria for each fiscal quarter of the Company completed during the term of
this Agreement. The target bonus pay at 100% of attainment is $12,500 per
quarter. The payment of the Executive's incentive pay shall be made as soon as
practicable but no later than sixty (60) days following the end of the quarter.
(c) Stock Options. The Executive will be granted incentive stock
options pursuant to the Company's Stock Option Plan to purchase up to 50,000
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. The day of the grant will be the first calendar day following
the date on which the Company acquires Apexx Technology, Inc. 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.
(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) 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 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.
(f) Reimbursement of Expenses. The Company shall reimburse the
Executive in a timely manner for all reasonable out-of-pocket expenses incurred
by the Executive in connection with the performance of Executive's duties under
this Agreement; provided that the Executive presents to the Company an itemized
accounting of such expenses including reasonable supporting data.
2
<PAGE> 3
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.
(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 (i) Company reduces title of
Executive, (ii) Company requires Executive to relocate to Boulder, or (iii) 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
3
<PAGE> 4
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 six (6) 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
Intemal 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 by
the Company for Cause, the Executive shall not be entitled to any severance pay
or other compensation beyond the date of termination of Executive's employment.
8. Covenant Not to Compete.
(a) During the continuance of the Executive's employment
hereunder and for a period of twelve (12) months after termination of the
Executive's employment hereunder, pursuant to section 4.b or 4.c hereof, the
Executive shall not engage in any business which directly 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.
4
<PAGE> 5
9. Trade Secrets and Confidential Information. During Executive's
employment by the Company and for a period of three (3) 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.
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 958 E Braemere Road, Boise, ID. Notification addresses may be
changed with written notice.
(b) Binding Effect. This Agreement is a personal service
agreement and may not be assigned by the Company or the Executive, except that
the Company may assign
5
<PAGE> 6
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:
------------------------------------------
Name: Jeffrey Finn
Title: Chief Executive Officer
THE EXECUTIVE:
By:
------------------------------------------
Tom Loutzenheiser
6
<PAGE> 1
EXHIBIT 2.6
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into as of
this ___________th day of January 1999, to become effective at the time set
forth in Section 1 hereof, between eSoft, Inc., a Delaware corporation (the
"Company"), and ALBERT YOUNGWERTH, an individual person (the "Executive").
RECITAL
A. The Company desires to employ the Executive as DIRECTOR OF
ENGINEERING, and the Executive desires to be employed by the Company in such
position upon the terms and conditions set forth in this Agreement.
B. The Executive acknowledges that during the course of the
Executive's employment the Executive will receive or be exposed to certain
confidential information and trade secrets (collectively referred to as
"Confidential Information") of the Company. The Executive also acknowledges
that this Confidential Information is among the Company's most important assets
and that the value of this Confidential Information would be diminished or
extinguished by disclosure.
AGREEMENT
In consideration of the mutual promises contained herein, the receipt
and sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Employment; Position; Term. The Company hereby employs the
Executive and the Executive hereby accepts employment with the Company in the
capacity of DIRECTOR OF ENGINEERING. Subject to Section 4, the term of
Executive's employment under this Agreement (the "Term") shall be for 12
months, beginning on the first calendar day following the date on which the
Company acquires Apexx Technology, Inc.
2. Duties, Responsibilities and Authority. In the capacity as DIRECTOR
OF ENGINEERING for the Company, the Executive shall have primary responsibility
for lead engineering, system design and other related activities for the
Company's Team Internet products. The Executive shall report to and be subject
to the direction and control of the Vice President of Product Development and
Support of the Company. The Executive shall devote substantially all of
Executive's full professional and managerial time and effort to the performance
of the duties as Director of Engineering 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.
1
<PAGE> 2
3. Compensation
(a) Salary. For services rendered under this Agreement, the Company
shall pay the Executive a salary at the rate of $7,500.00 per month.
(b) Bonus. The Executive shall be eligible to receive a performance
bonus based upon mutually agreed company and department performance criteria
for each fiscal quarter of the Company completed during the term of this
Agreement. The target bonus pay at 100% of attainment is $10,000 per quarter.
The payment of the Executive's incentive pay shall be made as soon as
practicable but no later than sixty (60) days following the end of the quarter.
(c) Stock Options. The Executive will be granted incentive stock
options pursuant to the Company's Stock Option Plan to purchase up to 25,000
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. The day of the grant will be the first calendar day following
the date on which the Company acquires Apexx Technology, Inc. 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.
(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) 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 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.
(f) Reimbursement of Expenses. The Company shall reimburse the
Executive in a timely manner for all reasonable out-of-pocket expenses incurred
by the Executive in connection with the performance of Executive's duties under
this Agreement; provided that the Executive presents to the Company an itemized
accounting of such expenses including reasonable supporting data.
2
<PAGE> 3
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.
(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.
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<PAGE> 4
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 Intemal 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.
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 directly 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 three (3) 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
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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.
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 [insert address for Executive here]. 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.
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(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:
------------------------------------
Name: Jeffrey Finn
Title: Chief Executive Officer
THE EXECUTIVE:
By:
------------------------------------
Albert Youngwerth
6
<PAGE> 1
EXHIBIT 2.7
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into as of
this _______th day of January 1999, to become effective at the time set forth
in Section 1 hereof, between eSoft, Inc., a Delaware corporation (the
"Company"), and Ray Jenks, an individual person (the "Executive").
RECITAL
A. The Company desires to employ the Executive as Director of Sales -
Europe, 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 Director of Sales - Europe. Subject to Section 4, the term of
Executive's employment under this Agreement (the "Term") shall be for 12
months, beginning on the first calendar day following the date on which the
Company acquires Apexx Technology, Inc.
2. Duties, Responsibilities and Authority. In the capacity as Director
of Sales - Europe for the Company, the Executive shall have primary
responsibility for establishing and managing distributor, reseller, end-user
and other channel sales activities in Europe, with specific responsibilities
for sales and revenue attainment for Europe. The Executive shall report to and
be subject to the direction and control of the Vice President of Sales of the
Company. The Executive shall devote substantially all of Executive's full
professional and managerial time and effort to the performance of the duties as
Director of Sales - Europe 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.
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3. Compensation
(a) Salary. For services rendered under this Agreement, the Company
shall pay the Executive a salary at the rate of $6,667.00 per month.
(b) Incentive Pay. The Executive shall be eligible to receive
incentive pay based on actual attainment of sales and revenue objectives. The
target incentive pay at 100% of quota is $20,000 per quarter. Sales and revenue
quota's will be established by the Vice President of Sales of the Company. The
payment of the Executive's incentive pay shall be made as soon as practicable
but no later than sixty (60) days following the end of the quarter.
(c) Stock Options. The Executive will be granted incentive stock
options pursuant to the Company's Stock Option Plan to purchase up to 25,000
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. The day of the grant will be the first calendar day following
the date on which the Company acquires Apexx Technology, Inc. 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.
(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) 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 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.
(f) Reimbursement of Expenses. The Company shall reimburse the
Executive in a timely manner for all reasonable out-of-pocket expenses incurred
by the Executive in connection with the performance of Executive's duties under
this Agreement; provided that the Executive presents to the Company an itemized
accounting of such expenses including reasonable supporting data.
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<PAGE> 3
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.
(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.
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<PAGE> 4
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 Intemal 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.
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 directly 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 three (3) 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
4
<PAGE> 5
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.
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 [INSERT ADDRESS FOR EXECUTIVE HERE]. 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.
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<PAGE> 6
(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:
-------------------------------------
Name: Jeffrey Finn
Title: Chief Executive Officer
THE EXECUTIVE:
By:
-------------------------------------
Ray Jenks
6
<PAGE> 1
EXHIBIT 2.8
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered
into as of this _______th day of January 1999, to become effective at the time
set forth in Section 1 hereof, between eSoft, Inc., a Delaware corporation (the
"Company"), and JOHN HANOUSEK, an individual person (the "Executive").
RECITAL
A. The Company desires to employ the Executive as DIRECTOR OF
PRODUCT MANAGEMENT, 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 DIRECTOR OF PRODUCT MANAGEMENT. Subject to Section 4, the term of
Executive's employment under this Agreement (the "Term") shall be for 12
months, beginning on the first calendar day following the date on which the
Company acquires Apexx Technology, Inc.
2. Duties, Responsibilities and Authority. In the capacity as
DIRECTOR OF PRODUCT MANAGEMENT for the Company, the Executive shall have
primary responsibility for product management activities, product line
strategies, product packaging, product positioning, and product programs. The
Executive shall report to and be subject to the direction and control of the
Vice President of Product Development and Support of the Company. The Executive
shall devote substantially all of Executive's full professional and managerial
time and effort to the performance of the duties as DIRECTOR OF PRODUCT
MANAGEMENT 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.
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<PAGE> 2
3. Compensation
(a) Salary. For services rendered under this Agreement,
the Company shall pay the Executive a salary at the rate of $7,500.00 per
month.
(b) Bonus. The Executive shall be eligible to receive a
performance bonus based upon mutually agreed company and department performance
criteria for each fiscal quarter of the Company completed during the term of
this Agreement. The target bonus pay at 100% of attainment is $10,000 per
quarter. The payment of the Executive's incentive pay shall be made as soon as
practicable but no later than sixty (60) days following the end of the quarter.
The Company will also consider implementing an incentive commission plan of up
to one percent (1%) of the net OEM sales revenue in the event that the
Executive has primary responsibility for OEM sales for the Company. This
incentive commission plan may be in lieu of the Bonus contained in 3(b) herein
and will be agreed mutually between the Executive and the Company.
(c) Stock Options. The Executive will be granted incentive
stock options pursuant to the Company's Stock Option Plan to purchase up to
25,000 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. The day of the grant will be the first calendar day
following the date on which the Company acquires Apexx Technology, Inc. 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.
(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) 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 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.
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<PAGE> 3
(f) Reimbursement of Expenses. The Company shall reimburse
the Executive in a timely manner for all reasonable out-of-pocket expenses
incurred by the Executive in connection with the performance of Executive's
duties under this Agreement; provided that the Executive presents to the
Company an itemized accounting of such expenses including reasonable supporting
data.
4. Termination.
(a) Termination by the Company without Cause.
Notwithstanding anything to the contrary contained herein but subject to
Section 7 hereof, the Company may, by delivering thirty (30) days' prior
written notice to the Executive, terminate the Executive's employment at any
time without Cause (as hereinafter defined).
(b) Termination by the Executive without Cause.
Notwithstanding anything to the contrary contained herein but subject to
Section 7 hereof, the Executive may, by delivering thirty (30) days' prior
written notice to the Company, terminate the Executive's employment hereunder.
(c) Termination by the Company for Cause. The Company may
terminate the Executive's employment for Cause immediately upon written notice
stating the basis for such termination. "Cause" for termination of the
Executive's employment shall only be deemed to exist if the Executive has (i)
breached this Agreement and if such breach continues or recurs more than thirty
(30) days after notice from the Company specifying the action which constitutes
the breach and demanding its discontinuance, (ii) exhibited willful
disobedience of 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.
(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
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<PAGE> 4
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 Intemal 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.
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 directly 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. Hewlett-Packard
Printer Business Units are not considered direct competition.
(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.
4
<PAGE> 5
9. Trade Secrets and Confidential Information. During
Executive's employment by the Company and for a period of three (3) 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.
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 3135 South Canonero Way Boise Idaho 83709. 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
5
<PAGE> 6
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:
------------------------------------------
Name: Jeffrey Finn
Title: Chief Executive Officer
THE EXECUTIVE:
By:------------------------------------------
John Hanousek
6
<PAGE> 1
EXHIBIT 9.1
VOTING AGREEMENT
THIS VOTING AGREEMENT (this "Agreement") dated as of January
25, 1999 is by and between the undersigned stockholders of the Company (as
hereinafter defined) (individually a "Stockholder" and collectively
"Stockholders") and eSoft, Inc., a Delaware corporation ("Parent").
RECITALS
WHEREAS, concurrently herewith, Parent, a wholly owned
subsidiary of Parent ("Merger Sub"), and Apexx Technology, Inc., an Idaho
corporation (the "Company"), are entering into an Agreement and Plan of Merger
of even date herewith (the "Merger Agreement"), pursuant to which, and subject
to the terms and conditions contained therein, Merger Sub will be merged with
and into the Company (the "Merger"); and
WHEREAS, as a condition to its willingness to enter into the
Merger Agreement, Parent has required that each of the undersigned Stockholders
enter into and each of the Stockholders has agreed to enter into this Agreement
or an agreement in the same form as this Agreement (together, the "Voting
Agreements"); and
WHEREAS, the Board of Directors of the Company has, prior to
the execution of the Merger Agreement and the Voting Agreements, approved the
Merger Agreement and the Merger; and
WHEREAS, Parent and Merger Sub will enter into the Merger
Agreement in part in reliance on Stockholder's representations, warranties and
agreements set forth in this Agreement;
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained in this Agreement and other good and valuable consideration
the receipt and sufficiency of which are hereby approved, and intending to be
legally bound hereby, it is agreed as follows:
1. Proxy with Respect to the Shares. During the Term,
Stockholder hereby irrevocably appoints Merger Sub as Stockholder's attorney and
proxy, with full power of substitution, to vote or to express written consent in
lieu of a vote or meeting with respect to all of the shares of Company Common
Stock (as hereinafter defined) that Stockholder is entitled to vote at any
meeting of stockholders (whether annual or special and whether or not an
adjourned meeting) of the Company, or pursuant to written action taken in lieu
of any such meeting or otherwise, in such manner as to cause the Merger and the
Merger Agreement to be approved and the right to vote against any other
transaction or proposal that would constitute a Change of Control (as
hereinafter defined). During the Term, this proxy is irrevocable, is coupled
with an interest sufficient in law to support an irrevocable proxy and is
granted in consideration of and as an inducement to cause Parent and Merger Sub
to enter into the transactions contemplated by this Agreement and the Merger
Agreement. During the Term, this proxy shall revoke any other proxy granted by
Stockholder at any time with respect to the Shares (as hereinafter defined) and
during the Term, no subsequent proxies will be given with respect thereto by
Stockholder. "Change of Control" shall mean any action or agreement that would
impede, interfere with, delay, postpone or attempt to discourage the Merger,
including but not limited to, (a) any extraordinary corporate transaction (other
than the Merger), such as a merger, other business combination, reorganization
or liquidation involving Company, (b) a sale or transfer of a material amount of
assets of the Company or any of its subsidiaries, (c) any change in the
management or board of directors of the Company, except as otherwise agreed to
in writing by Parent, or (d) any material change in the present capitalization
of the Company.
2. Agreement to Support Merger. In the event that the Proxy
granted in Section 1 hereof is ineffective, Stockholder agrees, subject to the
terms of Section 3 of this Agreement, to vote any and all shares of the
Company's common stock, no par value ("Company Common Stock"), which Common
Stock is listed on Exhibit A attached hereto, as well as any shares of Company
Common Stock acquired by Stockholder prior to the Merger (collectively, the
1
<PAGE> 2
"Shares") held by Stockholder in favor of the Merger pursuant to the terms of
the Merger and the Merger Agreement, but in the event that a vote for the Merger
does not take place during the Term, then Stockholder agrees not to vote in
favor of any other Change of Control during the remaining portion of the Term.
3. Condition to Stockholder's Obligations. The right of Merger
Sub or Parent as a permitted assignee to exercise the proxy granted in Section
1, and the obligation of each Stockholder under Section 2, are subject to the
condition that (i) Parent shall have performed all material agreements contained
in the Merger Agreement that are required to be performed prior to, and cannot
reasonably be performed after, the time that the proxy is to be exercised by
Merger Sub or action by Stockholders is required and (ii) that no material
representations and warranty of Parent and Merger Sub in the Merger Agreement
shall fail to be true at the time of such exercise of the proxy or other action,
and such failure cannot reasonably be cured after such time, and in either case,
such failure to perform or the failure of a representation and warranty to be
true and correct would have or would be reasonably likely to have a Parent
Material Adverse Effect. Merger Sub may exercise its proxy without regard to the
preceding sentence unless it has received a written notice from a Stockholder,
at least 24 hours before the proxy is to be exercised, that asserts a failure to
perform a breach of representation and warranty that would prohibit Merger Sub
from exercising the proxy. The obligations of the parties to perform under this
Agreement upon its execution and thereafter shall be subject to the additional
condition that there shall be no preliminary or permanent injunction or other
order issued by any court of competent jurisdiction in effect that prohibits (i)
this Agreement, or (ii) the Merger. Each Stockholder and Parent agree not to
seek any such injunction or order. Parent agrees that it will oppose and will
seek the immediate lifting of any such injunction or order and each Stockholder
agrees to cooperate with Parent in such efforts.
4. Representations and Warranties of Stockholder. Each
Stockholder severally represents and warrants to Parent as follows:
4.1 Ownership of Shares. On the date hereof, the
Shares are all of the shares of Company Common Stock currently
owned by such Stockholder, beneficially and of record. Except
as set forth on Exhibit A to this Agreement, Stockholder does
not have any rights to acquire any additional shares of
Company Common Stock. Stockholder currently has, and at the
closing of the Merger will have good, valid and marketable
title to, and the sole and unfettered right to vote, the
Shares, free and clear of all liens, encumbrances,
restrictions, options, warrants, rights to purchase and claims
of every kind (other than the encumbrances created by this
Agreement and the Loan Agreement (as defined in the Merger
Agreement) and other than restrictions on transfer under
applicable Federal and State securities laws).
4.2 Power; Binding Agreement. Stockholder has the
full legal right, power and authority to enter into and
perform all of Stockholder's obligations under this Agreement.
5. Term. The duration and term (the "Term") of this Agreement
will be the earlier of (a) August 5, 1999, (b) when Parent, Merger Sub and
Stockholder mutually consent in writing to terminate this Agreement, or (c) upon
the termination of the Merger Agreement by the Company. After the Term, this
Agreement will terminate and be null and void, other than the provisions
relating to expenses.
6. Expenses. Each party hereto will pay all of its expenses in
connection with the transactions contemplated by this Agreement, including,
without limitation, the fees and expenses of its counsel and other advisers.
7. Certain Covenants of Parent. Parent agrees to use its
reasonable best efforts to make and consummate the Merger pursuant to the terms,
and subject to the conditions, contained in the Merger Agreement.
8. Notices. All notices or other communications required or
permitted hereunder shall be in writing (except as otherwise provided herein)
and shall be deemed duly given when received by delivery in person, by telecopy,
telex or telegram or by certified mail, postage prepaid, or by an overnight
courier service, addressed as follows:
2
<PAGE> 3
If to Parent or Merger Sub:
eSoft, Inc.
5334-C Sterling Drive
Boulder, Colorado 80301
Attn: President
Telephone: (303) 444-1600
Facsimile: (303) 444-1640
with copies to:
Davis, Graham & Stubbs LLP
370 17th Street, Suite 4700
Denver, CO 80202
Attn: Lester R. Woodward, Esq.
Telephone: (303) 892-9400
Facsimile: (303) 892-7400
If to Stockholder, at the address set forth in the signature
page hereto
9. Entire Agreement: Amendment. This Agreement, together with
the documents expressly referred to herein, constitute the entire agreement
among the parties hereto with respect to the subject matter contained herein and
supersede all prior agreements and understandings among the parties with respect
to such subject matter. This Agreement may not be modified, amended, altered or
supplemented except by an agreement in writing executed by the party against
whom such modification, amendment, alteration or supplement is sought to be
enforced.
10. Assigns. This Agreement shall be binding upon and inure to
the benefit of the parties hereto and their respective successors and assigns,
but neither this Agreement nor any of the rights, interests or obligations
hereunder shall be assigned by any of the parties hereto without the prior
written consent of the other parties, except that Merger Sub may assign any or
all of its rights and obligations hereunder to Parent or any direct or indirect
wholly-owned subsidiary of Parent without the consent of Stockholder, but no
such transfer shall relieve Merger Sub of its obligations under this Agreement
if such transferee does not perform the obligations of Merger Sub hereunder.
11. Governing Law. This Agreement, and all matters relating
hereto, shall be governed by, and constituted in accordance with the laws of the
State of Delaware without giving effect to the principles of conflicts of laws
thereof.
12. Covenants. Stockholder hereby agrees and covenants that it
shall not (i) transfer (which terms shall include, without limitation, for the
purposes of this Agreement, any sale, gift, pledge, alienation, assignment or
other disposition, directly or indirectly, by operation of law, in connection
with any merger or otherwise (collectively, a "Transfer")), or consent to any
Transfer of, any or all of the Shares or any interest therein, except pursuant
to the Merger or the Loan Agreement, (ii) enter into any contract, option or
other agreement or understanding with respect to any Transfer of any or all of
the Shares or any interest therein, (iii) grant any proxy, power of attorney or
other authorization in or with respect to the Shares, except for this Agreement,
or (iv) deposit the Shares into a voting trust or enter into a voting agreement
or arrangement with respect to the Shares.
13. Certain Events. Stockholder agrees that this Agreement and
the obligations hereunder shall attach to Stockholder's Shares and shall be
binding upon any person or entity to which legal or beneficial ownership of
Stockholder's Share shall pass, whether by operation of law or otherwise,
including without limitation, such Stockholder's heirs, guardians,
administrators or successors. In the event of any stock split, stock dividend,
merger, reorganization,
3
<PAGE> 4
recapitalization or other change in the capital structure of the Company
affecting the Shares, or the acquisition of additional shares of Company Common
Stock or other voting securities of the Company by Stockholder, the number of
Shares listed in Exhibit A shall be adjusted appropriately and this Agreement
and the obligations hereunder shall attach to any additional shares of Company
Common Stock or other voting securities of the Company issued to or acquired by
Stockholder.
14. Stockholder Capacity. No person executing this Agreement
who is or becomes during the term hereof a director of the Company makes any
agreement or understanding herein in his or her capacity as a director. Each
Stockholder is executing this Agreement solely in his or her capacity as the
record and beneficial owner of Stockholder's Shares. The parties hereto
acknowledge and agree that none of the provisions herein set forth shall be
deemed to restrict or limit any fiduciary duty the undersigned or any partner of
the undersigned or any of their respective affiliates may have as a member of
the Board of Directors or executive officer of the Company, or as counsel to the
Company; provided, that no such duty shall excuse the undersigned from his or
her obligation as a Stockholder of the Company to vote the Shares, to the extent
that they may be so voted, as herein provided and to otherwise comply with the
terms and conditions of this Agreement.
15. Enforcement. Stockholder agrees that irreparable damage
would occur and that Parent and Merger Sub would not have any adequate remedy at
law in the event that any of the provisions of this Agreement were not performed
in accordance with their specific terms or were otherwise breached. It is
accordingly agreed that Parent and Merger Sub shall be entitled to an injunction
or injunctions to prevent breaches or threatened breaches by Stockholder or
Company of this Agreement and to enforce specifically the terms and provisions
of this Agreement in any court of the United States located in the State of
Colorado or in Colorado state court, this being in addition to any other remedy
to which Parent and/or Merger Sub may be entitled at law or in equity. In
addition, each of the parties hereto irrevocably and unconditionally (i)
consents to be subject to the personal jurisdiction of any federal court located
in the State of Colorado or any Colorado state court in the event any dispute
arises out of this Agreement or any of the transactions contemplated hereby,
(ii) agrees that such party will not attempt to deny or defeat the personal
jurisdiction of such courts by motion or other request for leave from any such
court, (iii) agrees that such party shall not bring any action relating to this
Agreement or any of the transactions contemplated hereby in any court other than
a federal court sitting in the State of Colorado or a Colorado state court and
(iv) that service of process may also be made on such party by prepaid certified
mail with a proof of mailing receipt validated by the United States Postal
Service constituting evidence of valid service, and that service made pursuant
to this clause (iv) shall have the same legal force and effect as if served upon
such party personally within the State of Colorado.
IN WITNESS WHEREOF, Parent has caused this Agreement to be
executed by its duly authorized officer and Stockholder has executed this
Agreement as of the date and year first above written.
PARENT
eSOFT, INC.
By: /s/ Jeffrey Finn
-----------------------------
Name: Jeffrey Finn
Title: President
4
<PAGE> 5
Stockholder
/s/ Tom Loutzenheiser
-------------------------------------
Name: Tom Loutzenheiser
Address:
-----------------------------
-------------------------------------
Stockholder
/s/ Gayl Loutzenheiser
-------------------------------------
Name: Gayl Loutzenheiser
Address:
-----------------------------
-------------------------------------
Stockholder
/s/ David Dahms
-------------------------------------
Name: David Dahms
Address:
-----------------------------
-------------------------------------
5
<PAGE> 6
EXHIBIT A
<PAGE> 7
SHARES SUBJECT TO VOTING AGREEMENT
COMPANY COMMON STOCK OWNED
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Stockholder Name Number of Shares Owned
- --------------------------------------------------------------------------------
<S> <C>
Tom Loutzenheiser and Gayl 344,635
Loutzenheiser as Joint Tenants
- --------------------------------------------------------------------------------
David Dahms 226,707
- --------------------------------------------------------------------------------
</TABLE>
RIGHTS TO ACQUIRE COMPANY COMMON STOCK
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Stockholder Name Nature of Right Number of Shares
- --------------------------------------------------------------------------------
<S> <C> <C>
Tom Loutzenheiser Stock Options 294,500
- --------------------------------------------------------------------------------
Gayl Loutzenheiser Stock Options 2,000
- --------------------------------------------------------------------------------
David Dahms Stock Options 275,000
- --------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 9.2
VOTING AGREEMENT
THIS VOTING AGREEMENT (this "Agreement") dated as of January
25, 1999 is by and between the undersigned stockholders of the Company (as
hereinafter defined) (individually a "Stockholder" and collectively
"Stockholders") and eSoft, Inc., a Delaware corporation ("Parent").
RECITALS
WHEREAS, concurrently herewith, Parent, a wholly owned
subsidiary of Parent ("Merger Sub"), and Apexx Technology, Inc., an Idaho
corporation (the "Company"), are entering into an Agreement and Plan of Merger
of even date herewith (the "Merger Agreement"), pursuant to which, and subject
to the terms and conditions contained therein, Merger Sub will be merged with
and into the Company (the "Merger"); and
WHEREAS, as a condition to its willingness to enter into the
Merger Agreement, Parent has required that each of the undersigned Stockholders
enter into and each of the Stockholders has agreed to enter into this Agreement
or an agreement in the same form as this Agreement (together, the "Voting
Agreements"); and
WHEREAS, the Board of Directors of the Company has, prior to
the execution of the Merger Agreement and the Voting Agreements, approved the
Merger Agreement and the Merger; and
WHEREAS, Parent and Merger Sub will enter into the Merger
Agreement in part in reliance on Stockholder's representations, warranties and
agreements set forth in this Agreement;
AGREEMENT
NOW, THEREFORE, in consideration of the mutual covenants and
agreements contained in this Agreement and other good and valuable
consideration the receipt and sufficiency of which are hereby approved, and
intending to be legally bound hereby, it is agreed as follows:
1. Proxy with Respect to the Shares. During the Term,
Stockholder hereby irrevocably appoints Merger Sub as Stockholder's attorney
and proxy, with full power of substitution, to vote or to express written
consent in lieu of a vote or meeting with respect to all of the shares of
Company Common Stock (as hereinafter defined) that Stockholder is entitled to
vote at any meeting of stockholders (whether annual or special and whether or
not an adjourned meeting) of the Company, or pursuant to written action taken
in lieu of any such meeting or otherwise, in such manner as to cause the Merger
and the Merger Agreement to be approved and the right to vote against any other
transaction or proposal that would constitute a Change of Control (as
hereinafter defined). During the Term, this proxy is irrevocable, is coupled
with an interest sufficient in law to support an irrevocable proxy and is
granted in consideration of and as an inducement to cause Parent and Merger Sub
to enter into the transactions contemplated by this Agreement and the Merger
Agreement. During the Term, this proxy shall revoke any other proxy granted by
Stockholder at any time with respect to the Shares (as hereinafter defined) and
during the Term, no subsequent proxies will be given with respect thereto by
Stockholder. "Change of Control" shall mean any action or agreement that would
impede, interfere with, delay, postpone or attempt to discourage the Merger,
including but not limited to, (a) any extraordinary corporate transaction
(other than the Merger), such as a merger, other business combination,
reorganization or liquidation involving Company, (b) a sale or transfer of a
material amount of assets of the Company or any of its subsidiaries, (c) any
change in the management or board of directors of the Company, except as
otherwise agreed to in writing by Parent, or (d) any material change in the
present capitalization of the Company.
2. Agreement to Support Merger. In the event that the Proxy
granted in Section 1 hereof is ineffective, Stockholder agrees, subject to the
terms of Section 3 of this Agreement, to vote any and all shares of the
Company's common stock, no par value ("Company Common Stock"), which Common
Stock is listed on Exhibit A attached hereto, as well as any shares of Company
Common Stock acquired by Stockholder prior to the Merger (collectively, the
1
<PAGE> 2
"Shares") held by Stockholder in favor of the Merger pursuant to the terms of
the Merger and the Merger Agreement, but in the event that a vote for the
Merger does not take place during the Term, then Stockholder agrees not to vote
in favor of any other Change of Control during the remaining portion of the
Term.
3. Condition to Stockholder's Obligations. The right of
Merger Sub or Parent as a permitted assignee to exercise the proxy granted in
Section 1, and the obligation of each Stockholder under Section 2, are subject
to the condition that (i) Parent shall have performed all material agreements
contained in the Merger Agreement that are required to be performed prior to,
and cannot reasonably be performed after, the time that the proxy is to be
exercised by Merger Sub or action by Stockholders is required and (ii) that no
material representations and warranty of Parent and Merger Sub in the Merger
Agreement shall fail to be true at the time of such exercise of the proxy or
other action, and such failure cannot reasonably be cured after such time, and
in either case, such failure to perform or the failure of a representation and
warranty to be true and correct would have or would be reasonably likely to
have a Parent Material Adverse Effect. Merger Sub may exercise its proxy
without regard to the preceding sentence unless it has received a written
notice from a Stockholder, at least 24 hours before the proxy is to be
exercised, that asserts a failure to perform a breach of representation and
warranty that would prohibit Merger Sub from exercising the proxy. The
obligations of the parties to perform under this Agreement upon its execution
and thereafter shall be subject to the additional condition that there shall be
no preliminary or permanent injunction or other order issued by any court of
competent jurisdiction in effect that prohibits (i) this Agreement, or (ii) the
Merger. Each Stockholder and Parent agree not to seek any such injunction or
order. Parent agrees that it will oppose and will seek the immediate lifting of
any such injunction or order and each Stockholder agrees to cooperate with
Parent in such efforts.
4. Representations and Warranties of Stockholder. Each
Stockholder severally represents and warrants to Parent as follows:
4.1 Ownership of Shares. On the date hereof, the Shares
are all of the shares of Company Common Stock currently owned
by such Stockholder, beneficially and of record. Except as
set forth on Exhibit A to this Agreement, Stockholder does
not have any rights to acquire any additional shares of
Company Common Stock. Stockholder currently has, and at the
closing of the Merger will have good, valid and marketable
title to, and the sole and unfettered right to vote, the
Shares, free and clear of all liens, encumbrances,
restrictions, options, warrants, rights to purchase and
claims of every kind (other than the encumbrances created by
this Agreement and the Loan Agreement (as defined in the
Merger Agreement) and other than restrictions on transfer
under applicable Federal and State securities laws).
4.2 Power; Binding Agreement. Stockholder has the full
legal right, power and authority to enter into and perform
all of Stockholder's obligations under this Agreement.
5. Term. The duration and term (the "Term") of this Agreement
will be the earlier of (a) May 1, 1999, (b) when Parent, Merger Sub and
Stockholder mutually consent in writing to terminate this Agreement, or (c)
upon the termination of the Merger Agreement by the Company. After the Term,
this Agreement will terminate and be null and void, other than the provisions
relating to expenses.
6. Expenses. Each party hereto will pay all of its expenses
in connection with the transactions contemplated by this Agreement, including,
without limitation, the fees and expenses of its counsel and other advisers.
7. Certain Covenants of Parent. Parent agrees to use its
reasonable best efforts to make and consummate the Merger pursuant to the
terms, and subject to the conditions, contained in the Merger Agreement.
8. Notices. All notices or other communications required or
permitted hereunder shall be in writing (except as otherwise provided herein)
and shall be deemed duly given when received by delivery in person, by
telecopy, telex or telegram or by certified mail, postage prepaid, or by an
overnight courier service, addressed as follows:
2
<PAGE> 3
If to Parent or Merger Sub:
eSoft, Inc.
5334-C Sterling Drive
Boulder, Colorado 80301
Attn: President
Telephone: (303) 444-1600
Facsimile: (303) 444-1640
with copies to:
Davis, Graham & Stubbs LLP
370 17th Street, Suite 4700
Denver, CO 80202
Attn: Lester R. Woodward, Esq.
Telephone: (303) 892-9400
Facsimile: (303) 892-7400
If to Stockholder, at the address set forth in the signature
page hereto
9. Entire Agreement: Amendment. This Agreement, together with
the documents expressly referred to herein, constitute the entire agreement
among the parties hereto with respect to the subject matter contained herein
and supersede all prior agreements and understandings among the parties with
respect to such subject matter. This Agreement may not be modified, amended,
altered or supplemented except by an agreement in writing executed by the party
against whom such modification, amendment, alteration or supplement is sought
to be enforced.
10. Assigns. This Agreement shall be binding upon and inure
to the benefit of the parties hereto and their respective successors and
assigns, but neither this Agreement nor any of the rights, interests or
obligations hereunder shall be assigned by any of the parties hereto without
the prior written consent of the other parties, except that Merger Sub may
assign any or all of its rights and obligations hereunder to Parent or any
direct or indirect wholly-owned subsidiary of Parent without the consent of
Stockholder, but no such transfer shall relieve Merger Sub of its obligations
under this Agreement if such transferee does not perform the obligations of
Merger Sub hereunder.
11. Governing Law. This Agreement, and all matters relating
hereto, shall be governed by, and constituted in accordance with the laws of
the State of Delaware without giving effect to the principles of conflicts of
laws thereof.
12. Covenants. Stockholder hereby agrees and covenants that
it shall not (i) transfer (which terms shall include, without limitation, for
the purposes of this Agreement, any sale, gift, pledge, alienation, assignment
or other disposition, directly or indirectly, by operation of law, in
connection with any merger or otherwise (collectively, a "Transfer")), or
consent to any Transfer of, any or all of the Shares or any interest therein,
except pursuant to the Merger or the Loan Agreement, (ii) enter into any
contract, option or other agreement or understanding with respect to any
Transfer of any or all of the Shares or any interest therein, (iii) grant any
proxy, power of attorney or other authorization in or with respect to the
Shares, except for this Agreement, or (iv) deposit the Shares into a voting
trust or enter into a voting agreement or arrangement with respect to the
Shares.
13. Certain Events. Stockholder agrees that this Agreement
and the obligations hereunder shall attach to Stockholder's Shares and shall be
binding upon any person or entity to which legal or beneficial ownership of
Stockholder's Share shall pass, whether by operation of law or otherwise,
including without limitation, such Stockholder's heirs, guardians,
administrators or successors. In the event of any stock split, stock dividend,
merger, reorganization,
3
<PAGE> 4
recapitalization or other change in the capital structure of the Company
affecting the Shares, or the acquisition of additional shares of Company Common
Stock or other voting securities of the Company by Stockholder, the number of
Shares listed in Exhibit A shall be adjusted appropriately and this Agreement
and the obligations hereunder shall attach to any additional shares of Company
Common Stock or other voting securities of the Company issued to or acquired by
Stockholder.
14. Stockholder Capacity. No person executing this Agreement
who is or becomes during the term hereof a director of the Company makes any
agreement or understanding herein in his or her capacity as a director. Each
Stockholder is executing this Agreement solely in his or her capacity as the
record and beneficial owner of Stockholder's Shares. The parties hereto
acknowledge and agree that none of the provisions herein set forth shall be
deemed to restrict or limit any fiduciary duty the undersigned or any partner
of the undersigned or any of their respective affiliates may have as a member
of the Board of Directors or executive officer of the Company, or as counsel to
the Company; provided, that no such duty shall excuse the undersigned from his
or her obligation as a Stockholder of the Company to vote the Shares, to the
extent that they may be so voted, as herein provided and to otherwise comply
with the terms and conditions of this Agreement.
15. Enforcement. Stockholder agrees that irreparable damage
would occur and that Parent and Merger Sub would not have any adequate remedy
at law in the event that any of the provisions of this Agreement were not
performed in accordance with their specific terms or were otherwise breached.
It is accordingly agreed that Parent and Merger Sub shall be entitled to an
injunction or injunctions to prevent breaches or threatened breaches by
Stockholder or Company of this Agreement and to enforce specifically the terms
and provisions of this Agreement in any court of the United States located in
the State of Colorado or in Colorado state court, this being in addition to any
other remedy to which Parent and/or Merger Sub may be entitled at law or in
equity. In addition, each of the parties hereto irrevocably and unconditionally
(i) consents to be subject to the personal jurisdiction of any federal court
located in the State of Colorado or any Colorado state court in the event any
dispute arises out of this Agreement or any of the transactions contemplated
hereby, (ii) agrees that such party will not attempt to deny or defeat the
personal jurisdiction of such courts by motion or other request for leave from
any such court, (iii) agrees that such party shall not bring any action
relating to this Agreement or any of the transactions contemplated hereby in
any court other than a federal court sitting in the State of Colorado or a
Colorado state court and (iv) that service of process may also be made on such
party by prepaid certified mail with a proof of mailing receipt validated by
the United States Postal Service constituting evidence of valid service, and
that service made pursuant to this clause (iv) shall have the same legal force
and effect as if served upon such party personally within the State of
Colorado.
IN WITNESS WHEREOF, Parent has caused this Agreement to be
executed by its duly authorized officer and Stockholder has executed this
Agreement as of the date and year first above written.
PARENT
eSOFT, INC.
By: /s/ Jeffrey Finn
------------------------------------------
Name: Jeffrey Finn
Title: President
4
<PAGE> 5
Stockholder
/s/ Albert Youngwerth
---------------------------------------------
Name: Albert Youngwerth
Address:
-------------------------------------
---------------------------------------------
Stockholder
/s/ Heather Youngwerth
---------------------------------------------
Name: Heather Youngwerth
Address:
-------------------------------------
---------------------------------------------
Stockholder
/s/ Lawrence Lynch
---------------------------------------------
Name: Lawrence Lynch
Address:
-------------------------------------
---------------------------------------------
Stockholder
/s/ George Minow
---------------------------------------------
Name: George Minow
Address:
-------------------------------------
---------------------------------------------
Stockholder
/s/ Chris Minow
---------------------------------------------
Name: Chris Minow
Address:
-------------------------------------
---------------------------------------------
Stockholder
/s/ William Rivers
---------------------------------------------
Name: William Rivers
Address:
-------------------------------------
---------------------------------------------
Stockholder
/s/ Ray Jenks
---------------------------------------------
Name: Ray Jenks
Address:
-------------------------------------
---------------------------------------------
5
<PAGE> 6
EXHIBIT A
<PAGE> 7
SHARES SUBJECT TO VOTING AGREEMENT
COMPANY COMMON STOCK OWNED
<TABLE>
<CAPTION>
Stockholder Name Number of Shares Owned
- -------------------------------------------------------------------------------
<S> <C>
Albert Youngwerth and Heather 21,000
Youngwerth as Joint Tenants
- -------------------------------------------------------------------------------
Lawrence Lynch 15,000
- -------------------------------------------------------------------------------
George Minow and Chris Minow 30,081
- -------------------------------------------------------------------------------
William Guy Rivers 60,657
- -------------------------------------------------------------------------------
Ray Jenks 23,000
- -------------------------------------------------------------------------------
</TABLE>
RIGHTS TO ACQUIRE COMPANY COMMON STOCK
<TABLE>
<CAPTION>
Stockholder Name Nature of Right Number of Shares
- -------------------------------------------------------------------------------
<S> <C> <C>
Albert Youngwerth Stock Options 136,461
- -------------------------------------------------------------------------------
William Guy Rivers Stock Options 118,400
- -------------------------------------------------------------------------------
Ray Jenks Stock Options 48,000
- -------------------------------------------------------------------------------
</TABLE>
8
<PAGE> 1
EXHIBIT 10.36
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered into as of
the 6th day of November, 1998 between eSoft, Inc., a Delaware corporation
("eSoft" or the "Company"), with offices at 5335 Sterling Drive, Suite C,
Boulder, Colorado 80301 and JEFFREY J. FINN of 5744 East Oxford Avenue,
Englewood, Colorado 80111 (the "Executive").
RECITAL
A. The Company desires to employ the Executive as PRESIDENT AND CHIEF
EXECUTIVE OFFICER, and the Executive desires to be employed by the Company in
such position upon the terms and conditions set forth in this Agreement.
B. The Executive acknowledges that during the course of the
Executive's employment the Executive will receive or be exposed to certain
confidential information and trade secrets (collectively referred to as
"Confidential Information") of the Company. The Executive also acknowledges
that this Confidential Information is among the Company's most important assets
and that the value of this Confidential Information would be diminished or
extinguished by disclosure.
AGREEMENT
In consideration of the mutual promises contained herein, the receipt
and sufficiency of which are hereby acknowledged, the parties hereby agree as
follows:
1. Employment; Position; Term. The Company hereby employs the
Executive and the Executive hereby accepts employment with the Company in the
capacity of President and Chief Executive Officer. Subject to the Termination
Clause, the term of Executive's employment under this Agreement (the "Initial
Term") shall be for 36 months, beginning November 9, 1998 and ending November
8, 2001. Unless otherwise agreed in writing by the Company and the Executive no
later than August 9 in the year 2001, there shall be an automatic 24-month
renewal of the Agreement beginning on November 9, 2001.
2. Duties, Responsibilities and Authority. In his capacity as
President and Chief Executive Officer of the Company, the Executive shall have
primary responsibility for the overall operation of the Company, subject to the
direction and control of the Board of Directors of the Company. The Executive
shall devote substantially all of his professional and managerial time and
effort to the performance of his duties as President and Chief Executive
Officer, and he shall not engage in any other business activity or activities
which, in the judgment of the Board of Directors of the Company, conflict with
the performance of his duties under this Agreement.
<PAGE> 2
3. Position and Duties. The Executive shall serve as the President and
CEO of eSoft, and shall have such responsibilities and authority as is
generally consistent with such title and position. Specific duties, among
others, some of which may be delegated by the Executive will include:
(1) General management of eSoft and all of its subsidiaries
and companies in which eSoft has the controlling interest (hereafter referred
to as the "Company").
(2) Development of the Company's primary business strategy.
(3) Member of the Board of Directors for the Company, with
responsibilities for recruitment and retention of board members.
(4) Approval of capital and operating budgets.
(5) Development and maintenance of industry, vendor,
customer, and partner relationships that enhance the Company's corporate and
market position.
(6) Providing input to the Board of Directors for the
selection and analysis of acquisitions, mergers and joint ventures.
(7) All officers, including the CFO or controller, will
report to the Executive.
Any material change of title, reporting relationships, elimination of
duties, or change in subordinate reporting relationships, will, at the
Executive's sole discretion, activate the Severance Payout Clause, of the
Agreement.
4. Reporting. The Executive will report to the Board of Directors.
5. Compensation and Related Matters.
(1) Salary. For services rendered under this Agreement, the
Company shall pay the Executive a salary at the rate of $15,000 per month. The
base monthly salary will be payable in accordance with the Company's normal pay
periods. The base monthly salary will be subject to a minimum increase of 5%
per year, or the base salary will be increased to the regional average for a
similar position in a similar size company based on industry salary surveys,
whichever approach results in a greater increase.
(2) Incentive Pay. The Executive shall be eligible for
incentive pay targeted at 50% of annual base salary. The Incentive Pay shall be
paid quarterly based on a combination of company, revenue and earnings
objectives as agreed by the Executive and the Board of Directors. The Incentive
Pay shall commence in the fourth calendar quarter of 1998 and shall be paid on
a prorated basis for the quarter. The Incentive Pay shall be paid during the
first normal pay period following the end of each quarter. The Board of
Directors and the Executive shall mutually agree and establish quarterly
objectives that shall be based 1/3 on Company objectives, 1/3 on revenue
-2-
<PAGE> 3
objectives and 1/3 on earning objectives. Other than the fourth calendar
quarter of 1998, the Incentive Pay objectives for a quarter shall be agreed
upon no later than the fifteenth (15th) day of each quarter.
(3) Stock Options. The Executive will be granted stock
options to purchase 400,000 shares of eSoft common stock, granted pursuant to
the Company's Incentive Compensation Plan. The options will be incentive stock
options for purposes of the Internal Revenue Code of 1986 to the extent
eligible and have an exercise price per share equal to the fair market value on
the date the options are granted. Except as otherwise provided herein, no
options will vest until seven months after the date of grant. Seven months
after the date of grant, seven thirty sixths of the options shall be
exercisable and the remaining options shall vest at the rate of 1/36th of the
total options on the first day of each successive calendar month until the
options are fully vested. The grant of the options will be reflected in Stock
Option Agreements in the form of Exhibits 1 and 2, attached hereto. From time
to time, the Board of Directors will consider granting additional options based
on individual and Company performance.
(4) Director Stock Options. The Executive will also be
granted stock options to purchase 18,000 shares of eSoft common stock (the
"Director Option") also pursuant to the Company's Incentive Compensation Plan.
The options will have an exercise price per share equal to the fair market
value on the date the options are granted. They will vest over a twelve (24)
month period in 24 equal installments and remain exercisable for four (4) years
from the date granted. The grant of the Director Options will be reflected in a
Stock Option Agreement in the form of Exhibit 3, attached hereto. The Executive
will receive a similar Director Option for each additional two-year period in
which he serves on the eSoft Board of Directors at exercise prices based on the
then-current fair market price of the eSoft common stock.
(5) Vacation. The Executive will be entitled to the following
annual paid vacation schedule, and whatever additional personal days and sick
leave are normally allocated to eSoft executive personnel.
Years 1-2 Three (3) Weeks Annually
Years 3-4 Four (4) Week Annually
Years 5 and beyond Five (5) Weeks Annually
(6) The Executive will be entitled to a full benefits
package, including fully paid health, disability, life insurance, 401(k) plans
and other benefits normally offered to eSoft executive personnel. The Executive
is authorized to incur reasonable expenses of promoting the business of the
Company, including expenses in entertainment, travel and other similar items.
The Company shall reimburse the Executive for all such expenses upon timely
presentation by the Executive of expense reports for such expenditures.
Additionally, the Executive will receive reimbursement for use of a PCS
cellular phone and a business line with Internet service in his home, such
expenses to be submitted in a timely fashion using the Company's normal expense
reporting procedures. eSoft agrees to pay the premiums for the Executive's
existing Long-Term Disability and Term Life Insurance policies, assuming the
premiums and coverages are competitive and satisfactory to both parties, so
long as this Agreement is in effect.
-3-
<PAGE> 4
(7) Director and Officer Insurance. The Company will pay for
D&O insurance covering the Executive for a minimum of $2,000,000 and will
indemnify the Executive for business related activity to the full extent the
law provides.
6. Termination.
(1) Termination by the Company without Cause. 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).
(2) Termination by the Executive without Good Reason. The
Executive may, by delivering thirty (30) days' prior written notice to the
Company, terminate the Executive's employment at any time without Good Reason
(as hereinafter defined).
(3) Termination by the Company for Cause. The Company may
terminate the Executive's employment for Cause immediately upon written notice
stating the basis of such termination. "Cause" for termination of the
Executive's employment shall only be deemed to exist if the Executive has (i)
breached this Agreement and if such breach continues or recurs more than thirty
(30) days after notice from the Company specifying the action which constitutes
the breach and demanding its discontinuance, or (ii) committed gross
malfeasance in performance of his duties hereunder or acts resulting in an
indictment charging the Executive with the commission of a felony; provided
that the commission of acts resulting in such an indictment shall constitute
Cause only if a majority of the directors who are not also subject to any such
indictment determine that the Executive's conduct has substantially adversely
affected the Company or its reputation. A material failure to perform his
duties hereunder that results from the disability of the Executive shall not be
considered Cause for his termination.
(4) Termination by the Executive for Good Reason. The
Executive may terminate his employment for Good Reason immediately upon written
notice stating the basis for such termination. "Good Reason" for termination of
employment by the Executive shall only be deemed to exist if (i) Executive
terminates his employment following the assignment to Executive by the Company
of any duties that are significantly incompatible with, and substantially
detract from, Executive's position, duties, titles, offices, responsibilities,
or status with the Company or a subsidiary, excluding, without limitation, any
isolated and insubstantial action which is remedied by the Company promptly
after receipt of notice thereof given by Executive; or (ii) any material breach
of this Agreement by the Company.
7. Severance. In the event that during the Term of this Agreement, the
Executive's employment is terminated by the Company other than for Cause or
death of the Executive or if the Executive terminates his employment for Good
Reason, the Executive shall be entitled (i) to receive his then current salary,
targeted incentive pay and benefits, as provided for in Sections 5(a), 5(b) and
5(f), payable in semi-monthly installments, for twelve (12) months from the
date of the Executive's termination; (ii) if such termination occurs more than
three (3) months but not more than twelve (12) months after the date hereof,
twenty five percent (25%) of the options that are not then vested
-4-
<PAGE> 5
pursuant to the terms of grant as specified in Section 5(c) shall be
accelerated so that they are immediately exercisable and all options that are
then exercisable (other than the Director Options) shall be extended in
duration to be exercisable for twenty-four (24) months after the date of
termination; and (iii) if such termination occurs more than twelve (12) months
after the date hereof fifty percent (50%) of the options that are not then
vested shall be accelerated so that they are immediately exercisable, and all
options that are then exercisable (other than Director Options) shall be
extended as provided in clause (ii) of this Section 7. If the Executive's
employment is terminated by the Company, without Cause, within three months
prior to a Change of Control as defined in the Company's Equity Compensation
Plan the provisions of Section 11 of Exhibits 1 and 2 shall apply as if the
Executive's employment had not terminated prior to the Change of Control. If
the Executive voluntarily resigns his employment hereunder or if his employment
is terminated for Cause, the Executive shall not be entitled to any severance
pay or other compensation beyond the date of termination of his employment.
8. Excise Tax and Gross-Up Provisions.
(1) Subject to paragraph (d) below, in the event that any
payment or the value of any benefit received or to be received by Executive,
pursuant to the terms of this Agreement or any other plan, arrangement or
agreement from the Company, its successors or any person affiliated with any of
them (a "Payment"), would be subject to the excise tax (the "Excise Tax")
imposed by Section 4999 of the Internal Revenue Code of 1986, as amended (the
"Code") (or any successor provision or any similar provision of state and/or
local law), the Company shall pay to Executive, at the time specified in
Section 7, whether or not Executive remains employed by the Company at such
time and whether or not Executive remained employed by the Company for the
duration of this Agreement, an additional amount (the "Gross-Up Payment") such
that the net amount retained by Executive, prior to applicable FICA withholding
and prior to any applicable federal, state, and local income tax withholding on
such Payment, but after deduction of: (i) the Excise Tax on such Payment; (ii)
all federal, state, and local tax and Excise Tax upon the payment provided for
by this paragraph; and (iii) any interest, penalties, and additions to tax
payable by Executive with respect to (i) and (ii), shall be equal to such
Payment. For purposes of determining the amount of the GrossUp Payment,
Executive shall be deemed to pay federal, state, and local income taxes at the
highest marginal rates applicable to individual in the calendar year in which
the Gross-Up Payment is to be made and the reduction in federal income taxes
resulting from the payment of additional state and local income taxes shall be
taken into account. Executive shall not be entitled to receive a Gross-Up
Payment under this subsection with respect to any Payment with respect to which
he receives a Gross-Up Payment under the terms of any other Company plan or
agreement applicable to Executive.
(2) The Gross-Up Payments provided for in subsection (a)
above shall be made upon the earlier of (i) a certification to the Company by a
tax advisor to Executive that Executive is liable for Excise Tax with respect
to any Payment, or (ii) the assessment upon Executive or payment by Executive
of any Excise Tax with respect to any Payment.
(3) In the event that it is established pursuant to a final
determination of a court or an Internal Revenue Service proceeding that the
Excise Tax is less than the amount previously
-5-
<PAGE> 6
determined under Section 8(a), Executive shall repay to the Company, at the
time that such reduction in Excise Tax is so finally determined, the difference
between the Gross-Up Payment as originally determined and the Gross-Up Payment
that would have been determined by taking into account the reduced Excise Tax,
subject to adjustments such that Executive is in the same after-tax position as
Executive would have been in under Section 8(a) had the Excise Tax been
properly determined at the time at which the Gross-Up Payment was made, plus
interest on the amount of such repayment at the rate provided in Section
1274(b)(2)(B) of the Code. In the event that the Excise Tax is determined, in
the manner aforesaid, to exceed the amount previously determined under Section
8(a), the Company shall make an additional Gross-Up payment in respect of such
excess at the time that the amount of such excess if finally determined.
(4) If the Payments which are contingent upon an event
described in Section 280G(b)(2)(A)(i) of the Code and which would be payable to
Executive in the absence of this paragraph (d) ("the Change in Control
Payments") would result in the imposition of an Excise Tax, then the Change of
Control Payments which shall be payable to Executive shall be limited to the
maximum amount which can be paid to Executive without resulting in any Excise
Tax, but only if such limitation does not result in an aggregate reduction of
the Change in Control Payments otherwise payable to Executive in excess of
$20,000. For purposes of the preceding sentence, the value of Change in Control
Payments shall be determined in accordance with Code Section 280G and
administrative guidance thereunder. In the event of a reduction in Change in
Control Payments under this paragraph (d), Executive shall, in consultation
with the Company, determine the manner in which the Change in Control Payments
shall be reduced in order to achieve the purposes of this paragraph (d).
9. Covenant Not to Compete.
(1) During the continuance of the Executive's employment
hereunder and for a period of twelve (12) months after termination of the
Executive's employment hereunder, the Executive shall not engage in any
business which competes with the Company or its affiliates anywhere in the
United States or Canada during the Executive's employment hereunder or at the
time of termination.
(2) The Executive shall not, for a period of twelve (12)
months after termination of the Executive's employment hereunder, employ,
engage or seek to employ or engage for himself or any other person or entities,
any individual who is or was employed or engaged by the Company or any of its
affiliates until the expiration of six (6) months following the termination of
such person's or entity's employment or engagement with the Company or any of
its affiliates.
10. Trade Secrets and Confidential Information. During his employment
by the Company and for a period of five (5) years thereafter, the Executive
shall not, directly or indirectly, use, disseminate, or disclose for any
purpose other than for the purposes of the Company's business, any Confidential
Information of the Company or its affiliates, provided however, that this
provision shall not apply to any information which: (a) becomes generally
available to the public other than as a result of a disclosure by Executive;
(b) was rightfully available to Executive on a nonconfidential basis from a
source other than the Company (provided such source was not bound by
-6-
<PAGE> 7
a confidentiality agreement with the Company or otherwise prohibited from
transmitting the information to Executive by a contractual, legal or fiduciary
obligation); (c) is readily ascertainable by proper means; or (d) is required
to be disclosed by operation of law. Upon termination of his employment, all
documents, records, notebooks, and similar repositories of records containing
information relating to any Confidential Information then in the Executive's
possession or control, whether prepared by him or by others, shall be left with
the Company or, if requested, returned to the Company.
11. Severability. It is the desire and intent of the undersigned
parties that the provisions of Sections 9 and 10 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 9 or 10 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 9 relating to the geographic areas
of restriction or the provisions of Section 9 or 10 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.
12. Injunctive Relief. The Executive agrees that any violation by him
of the provisions contained in Sections 9 and 10 are likely to cause
irreparable damage to the Company, and therefore he agrees that if there is a
breach or threatened breach by the Executive of the provisions of said section,
the Company shall be entitled to an injunction restraining the Executive from
such breach. Nothing herein shall be construed as prohibiting the Company from
pursuing any other available remedies for such breach or threatened breach.
13. Miscellaneous.
(1) 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
Board of Directors, at 5335-C Sterling Drive, Boulder, Colorado 80301, and if
to the Executive, at 5744 East Oxford Avenue, Englewood, Colorado 80111.
Notification addresses may be changed by written notice.
(2) Binding Effect. This Agreement is a personal service
agreement and may not be assigned by the Company or the Executive, except that
the Company may assign this Agreement to a successor of the Company by a
merger, consolidation, sale of substantially all of the Company's assets, sale
of a majority of the Company's outstanding voting stock, or other
reorganization. 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.
(3) Amendment. This Agreement may not be amended except by an
instrument in writing executed by each of the undersigned parties.
-7-
<PAGE> 8
(4) 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.
(5) 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.
(6) Entire Agreement. This Agreement supersedes and replaces
all prior agreements between the parties related to the employment of the
Executive by the Company.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
first date mentioned above.
eSOFT, INC.:
Date: November 17, 1998 By: /s/ Philip L. Becker
------------------------ -----------------------------------
Philip L. Becker, Chairman and
Chief Executive Officer
THE EXECUTIVE:
Date: November 12, 1998 By: /s/ Jeffrey J. Finn
------------------------ -----------------------------------
Jeffrey J. Finn
-8-
<PAGE> 1
EXHIBIT 10.37
LOAN AGREEMENT
This Loan Agreement (this "Agreement") is made and entered into as of
December 2, 1998, by and between eSoft, Inc., a Delaware corporation
("Lender"), and Apexx Technology, Inc., an Idaho corporation ("Borrower"), and
is being executed in conjunction with a $500,000.00 revolving line of credit
loan from Lender to Borrower.
RECITALS
WHEREAS, Borrower has requested Lender to provide a line of credit to
be utilized by Borrower for working capital in the conduct of Borrower's
business, and Lender has agreed to provide short-term financing to the Borrower
pursuant to the terms hereof.
WHEREAS, the line of credit provided hereby shall terminate on May 1,
1999 and all sums due and owing thereunder shall be payable by Borrower on or
before August 1, 1999.
WHEREAS, Lender and Borrower desire hereby to set forth the terms and
conditions upon which the short term financing will be completed.
NOW, THEREFORE, in consideration of the promises and other good and
valuable consideration, the receipt and sufficiency of which is hereby
acknowledged, the parties hereto agree as follows:
1. WORKING CAPITAL LINE OF CREDIT. Subject to the terms and conditions
of this Agreement, Lender agrees to make loans to Borrower on a revolving basis
(the "Working Capital Line of Credit") in one or more Advances (as defined
below) from time to time to provide working capital for Borrower; provided,
however, that Lender shall not be obligated to make Advances under the Working
Capital Line of Credit if the amount of such Advance, together with the then
outstanding principal balance of that certain Secured Promissory Note of even
date herewith made by Borrower and payable to Lender in the principal amount of
$500,000.00 (the "Note"), would exceed $500,000.00. Borrower shall give Lender
ten (10) business days prior written notice of each requested draw under the
Working Capital Line of Credit. All Advances under the Working Capital Line of
Credit shall bear interest at the rate specified from time to time in the Note.
At the request of Borrower, Lender shall consider increasing the amount of the
Working Capital Line of Credit to $1,000,000; provided, however, that no such
increase shall occur without the express written consent and agreement of the
Boards of Directors of both Borrower and Lender.
2. GUARANTY. The obligations of the Borrower under the Note will be
guaranteed by Mr. Tom Loutzenheiser (collectively, the "Shareholder") pursuant
to a Guaranty in form and substance satisfactory to Lender (the "Guaranty").
The Guaranty shall be secured by a pledge of all shares (the "Pledged Shares")
of Borrower's Common Stock, no par value, held by the Shareholder. The Guaranty
shall be a non-recourse obligation of the Shareholder, and Lender's sole
recourse against the Shareholder upon an Event of Default (as defined herein)
shall be to exercise its right to proceed against the Pledged Shares. Lender's
security interest in the Pledged Shares will be evidenced by stock pledge
agreements and other documentation necessary, in Lender's sole discretion, to
perfect and evidence Lender's security interest in the Pledged Shares
(collectively, the "Pledge Documents").
<PAGE> 2
3. SECURITY. The obligations of the Borrower under the Note will be
further secured by a second priority security interest in all of Borrower's
right, title and interest in and to any of its tangible or intangible property
and assets, whether real, personal or mixed, whether now owned or existing or
hereafter acquired or arising, wherever located, including, without limitation,
all accounts, chattel paper, documents, contracts, licenses, equipment,
fixtures, general intangibles, goods, instruments, intellectual property
rights, inventory and money, together with all after-acquired property,
replacements and substitutions thereof and all proceeds from any sale thereof
(collectively, the "Collateral"). Such security interests will be evidenced by
any filings, recordations, approvals, certificates, assignments, and other
documentation necessary, in Lender's sole discretion, to perfect and evidence
Lender's security interest in the Collateral (collectively, the "Security
Documents").
4. CONDITIONS TO ADVANCES. Lender shall have no obligation to make any
Advances under the Working Capital Line of Credit unless each of the following
conditions shall have been met to Lender's satisfaction.
(a) Lender shall have received duly executed originals of this
Agreement, the Note, the Guaranty, the Pledge Documents and the
Security Documents (collectively, the "Loan Documents"), and Lender
shall have a valid and perfected (1) first priority security interest
in the Pledged Shares in accordance with the terms of the Pledge
Documents, and (2) second priority security interest in the Collateral
in accordance with the terms of the Security Documents;
(b) Lender shall have received certified copies of resolutions of
the Board of Directors of Borrower authorizing or ratifying the
execution, delivery, and performance of this Agreement, the Note, and
the Security Documents;
(c) Borrower shall have received the consent of Idaho Independent
Bank (the "Bank") to the execution and delivery of the Loan Documents;
(d) Lender shall have received such other documents as Lender has
reasonably requested;
(e) No Event of Default, or default or event that, with notice or
the passage of time or both, would become an Event of Default, shall
have occurred and be continuing;
(f) The representations and warranties of Borrower and the
Shareholder contained in the Loan Documents, shall be true and correct
as of the date the requested Advance is to be made, with the same
effect as though made on such date;
(g) Except for litigation and proceedings disclosed in writing to
Lender on or prior to the date of this Agreement, no litigation,
arbitration proceeding, or governmental proceeding shall be pending or
known to be threatened against Borrower or the Shareholder
-2-
<PAGE> 3
that, in the opinion of Lender, could materially and adversely affect
the financial condition or business of Borrower or materially impair
the ability of Borrower or the Shareholder to perform their respective
obligations under the Loan Documents; and
(h) No material adverse change shall have occurred in the financial
condition of Borrower.
5. ADVANCES UNDER LINE OF CREDIT NOTE.
(a) Each time that Lender funds a draw by Borrower under the
Working Capital Line of Credit, such funding shall be deemed to be an
advance of loan proceeds under the Note (individually, an "Advance"
and collectively, "Advances"). The date and amount of all Advances and
of each repayment or prepayment of principal on the Note received by
Lender shall be recorded by Lender on a schedule attached to the Note
absent manifest error. The aggregate unpaid principal amount so
recorded shall be rebuttably presumptive evidence of the principal
amount owing and unpaid on the Note. The failure to record any such
amount or any error in so recording any such amount shall not,
however, limit or otherwise affect the obligations of Borrower
hereunder or under the Note to repay the unpaid principal amount of
the Note, together with all interest accruing thereon.
(b) If at any time the principal balance of the Note exceeds
$500,000.00, Borrower shall promptly make a principal payment to
Lender in the amount of such excess, unless Lender otherwise agrees in
writing (at its sole and absolute discretion), in which case such
additional amounts shall be treated as additional extensions of credit
under the Note and shall be subject to the terms and provisions of the
Loan Documents.
(c) All payment of principal, or interest on, the Note and all
payments of any fees due to Lender shall be made in immediately
available funds by Borrower to Lender. All such payments shall be made
to Lender not later than 2:00 p.m. Mountain Time on the date due.
Funds received after that hour shall be deemed to have been received
by Lender on its next succeeding business day.
6. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to
Lender that the following are true and correct and agrees with Lender as
follows:
(a) Borrower is a corporation duly organized, validly existing, and
in good standing under the laws of the State of Idaho, and is
qualified to do business and in good standing as a foreign corporation
in each jurisdiction where the nature of the business transacted by it
or the nature of the property owned or leased by it makes such
qualification appropriate. Borrower has full corporate power to own
its property and to carry on its business as described in that certain
Business Plan of Borrower dated October 1, 1998 (the "Business Plan"),
a copy of which has been provided to Lender.
-3-
<PAGE> 4
(b) Except as set forth on Schedule 6(b) to this Agreement,
Borrower has full power, authority and legal right to execute,
deliver, observe and perform the terms of this Agreement, the Note and
the Security Documents, and to incur the obligations provided for
herein and therein. Neither Borrower's execution and delivery of this
Agreement, the Note and the Security Documents nor the performance or
observance by Borrower of the provisions thereof, violates any
provisions of Borrower's charter documents, or constitute a default
thereunder. The execution and delivery of the Guaranty and the Pledge
Documents, and the performance or observance by the Shareholder of the
provisions thereof, do not violate any provisions of Borrower's
charter documents, or constitute a default thereunder. Except as set
forth on Schedule 6(b) to this Agreement, no authorization, consent or
approval by any entity, person or class of persons is required as a
condition to the execution, delivery or performance of the Loan
Documents. Except as set forth on Schedule 6(b) to this Agreement, no
notice to or filing with any entity or person is required in
connection with the execution, delivery or performance of the Loan
Documents.
(c) This Agreement, the Note and the Security Documents have been
duly executed and delivered by Borrower, and each constitutes valid
and legally binding obligations of Borrower, enforceable in accordance
with their respective terms.
(d) Except as set forth on Schedule 6(d) to this Agreement, there
is no litigation, arbitration proceeding or governmental proceeding
pending or, to the knowledge of Borrower, threatened, against Borrower
or the Shareholder that could materially and adversely affect the
financial condition or business of Borrower or materially impair the
ability of Borrower or the Shareholder to perform their respective
obligations under the Loan Documents.
(e) The execution, delivery and performance of the Loan Documents
will not result in the creation of any other encumbrance or charge
upon any asset of Borrower pursuant to the terms of any other
agreement. Except as set forth on Schedule 6(e) to this Agreement, no
provision of any existing agreement, mortgage, indenture, or contract
binding on Borrower or affecting its property is in effect that would
in any way prevent the execution, delivery, or carrying out of the
terms of the Loan Documents.
(f) Borrower has filed all United States or state income tax
returns and all other material tax returns that are required to be
filed by it or has received valid extensions of the due date thereof,
in which case Borrower shall file such returns on or before the date
to which such filing has been extended, and has paid all taxes due
pursuant to such returns or pursuant to any assessment received by
Borrower.
(g) All of the financial statements and information of Borrower
delivered to Lender as of the date of this Agreement are complete and
correct in all material respects and have been prepared from the books
and records of Borrower, which are true and correct in all material
respects. All financial statements and information of Borrower that
are delivered
-4-
<PAGE> 5
to Lender after the date of this Agreement will be complete and
correct in all material respects and will be prepared in accordance
with generally accepted accounting principles consistently applied and
will fairly present the financial condition of Borrower as of the
dates of such statements and information and the results of its
operations for the periods then ended. No event or condition has
occurred that reasonably could be expected to have a material adverse
effect on the ability of Borrower to perform its obligations under
this Agreement, the Note or the Security Documents.
(h) Borrower has complied in all material respects with all
applicable local, state and federal laws, and Borrower is not aware of
any investigation of Borrower, its business or any of its assets
underway by any local, state or federal agency with respect to
enforcement of such laws and regulations. Borrower has no knowledge of
any past or existing violations of any such laws, ordinances or
regulations issued by any governmental authority concerning or
pertaining to Borrower or its business or assets.
(i) The representations and warranties of Borrower contained in the
Loan Documents shall survive delivery of this Agreement and the other
Loan Documents and the Advances.
7. GENERAL COVENANTS. Until the final payment in full of the Note and
performance of all other obligations of Borrower hereunder and under each of
the other Loan Documents, Borrower covenants and agrees with Lender as follows:
(a) Within thirty (30) days after the end of each calendar month,
Borrower will furnish Lender with unaudited financial statements of
Borrower certified by its president and prepared in accordance with
generally accepted accounting principles;
(b) Except as otherwise specifically permitted in the Security
Documents, Borrower shall not, nor permit any of its subsidiaries or
affiliates to (1) sell, assign, convey, lease or otherwise dispose of
all or any part of its assets or securities, or grant the option or
any other right to purchase, lease or otherwise acquire any part of
its assets or securities, except in the ordinary course of Borrower's
business, (2) dissolve, liquidate or otherwise cease to do business,
or (3) merge or consolidate with any person;
(c) Neither Borrower nor any subsidiary thereof shall create,
assume or suffer to exist any mortgage, lien, encumbrance or other
security interest on the Collateral, other than those existing on the
date hereof, created under the Security Documents or consented to by
Lender;
(d) Borrower will maintain adequate books and records and permit
representatives of Lender to inspect such books and records at
reasonable times;
-5-
<PAGE> 6
(e) Borrower shall maintain and preserve the Collateral in the
ordinary course of business;
(f) Borrower shall comply in all material respects with all
agreements to which it is a party or pertaining to the Collateral;
(g) Other than Advances incurred under the Working Capital Line of
Credit, and indebtedness under Borrower's lines of credit with the
Bank not to exceed $200,000 in the aggregate at any one time, Borrower
shall not incur any additional indebtedness for borrowed money;
(h) Borrower shall preserve and maintain its corporate existence,
and shall be and remain qualified to do business as a foreign
corporation and be in good standing in each jurisdiction in which such
qualification is appropriate or desirable in view of its business or
operations or the ownership of the Collateral;
(i) Borrower shall comply at all times and in all material respects
with all valid and applicable statutes, rules and regulations of the
United States of America, of the states thereof and their counties,
municipalities and other subdivisions and of any other jurisdictions
applicable to it, and the provisions of permits, licenses and any
other authorizations issued to it, except where noncompliance would
not have a material adverse effect on the ability of Borrower to
perform its obligations under the Loan Documents;
(j) Borrower and Shareholder, at Borrower's cost, shall take all
actions necessary or reasonably requested by Lender to maintain the
Pledge Documents or the Security Documents in full force and effect
and enforceable in accordance with their respective terms, including
(1) making filings and recordations, (2) making payments of fees and
other charges, (3) issuing supplemental documentation, including
continuation statements, and (4) taking all actions necessary or
reasonably requested by the Lender to ensure that (A) the Pledged
Shares are and remain subject to a valid and enforceable first-ranking
lien and security interest in favor of Lender, and (B) the Collateral
is and remains subject to a valid and enforceable second-ranking lien
and security interest in favor of the Lender.
(k) Borrower will pay and discharge or cause to be paid and
discharged promptly all taxes, assessments, and government charges or
levies imposed upon it or upon its income or profits, its payroll, or
upon any of its assets, before the same shall become in default, as
well as all lawful claims for labor, materials and supplies or
otherwise which, if unpaid, might result in the filing of a lien or
charge upon any of its assets; provided, however, that Borrower shall
not be required to pay a discharge or to cause to be paid and
discharged any such tax, assessment, charge, levy, or claim so long as
the validity thereof shall be contested in good faith by appropriate
proceedings and Borrower shall have set aside adequate reserves with
respect to any such tax, assessment, charge, levy, or claim so
contested;
-6-
<PAGE> 7
(l) Borrower will not allow any default to occur under any of its
indebtedness existing from time to time; and
(m) Borrower shall at all times maintain insurance providing such
coverage and in such amounts as may be acceptable to Lender and naming
Lender as an additional insured party. Each such policy of insurance
shall provide that coverage may not be canceled without thirty (30)
days prior written notice to Lender.
8. EVENTS OF DEFAULT. The occurrence of any of the following events
shall constitute an event of default (an "Event of Default") under the terms of
this Agreement, and thereupon Lender, at its option, may declare all
obligations of Borrower immediately due and payable and thereafter Lender shall
have no duty to make any Advance of the Working Capital Line of Credit.
Borrower expressly waives the rights of protest, presentment, demand, notice of
intent to accelerate, and notice of acceleration, and Lender will not lose any
of its rights hereunder, through delay on its part in presenting complaints,
partial exercise of its rights, or through failure to exercise such rights.
(a) Borrower shall fail to make any payment of principal or
interest within three (3) days of the due date on any indebtedness to
Lender;
(b) Borrower or the Shareholder shall default in the performance of
any of the terms, conditions, or covenants in the Loan Documents, and
such default continues for more than ten (10) business days after
Lender gives Borrower or the Shareholder written notice of such
default;
(c) An involuntary case or other proceeding shall be commenced
against Borrower or the Shareholder that seeks liquidation,
reorganization, or other relief with respect to it or its debts or
other liabilities under any bankruptcy, insolvency, or other similar
law now or hereafter in effect or seeking the appointment of a
trustee, receiver, liquidator, custodian, or other similar official of
it or any substantial part of its property, and such involuntary case
or other proceeding shall remain undismissed and unstayed for a period
of ninety (90) days, or an order for relief against Borrower or the
Shareholder shall be entered in any case under the United States
Federal Bankruptcy Code;
(d) Borrower or the Shareholder shall commence a voluntary case or
other proceedings seeking liquidation, reorganization, or other relief
with respect to itself or its debts or other liabilities under any
bankruptcy, insolvency, or other similar law now or hereafter in
effect or seeking the appointment of a trustee, receiver, liquidator,
custodian, or other similar official of it or any substantial part of
its property, or shall consent to any such relief or to the
appointment of or taking possession by any such official in an
involuntary case or other proceeding commenced against it, or shall
make a general assignment for the benefit of creditors, or shall fail
generally to, or shall admit in writing its inability to, pay its
debts as they become due, or shall take any action to authorize or
effect any of the foregoing;
-7-
<PAGE> 8
(e) Borrower shall discontinue its business or permit any change to
be made in the character of its business as carried on at the date
hereof that would have a material adverse effect on the financial
condition of Borrower;
(f) Any change shall occur in the ownership of Borrower;
(g) Any representation or warranty of Borrower or the Shareholder
in any Loan Document shall be determined to be false or incorrect in
any material respect at the time it was made;
(h) An order, judgment, or decree shall be entered against Borrower
that could have any material adverse effect upon Borrower or its
financial condition or business operations and shall continue unstayed
and in effect for a period of ten (10) business days; or
(i) Any order, judgment, or decree shall be entered against the
Shareholder that could restrain, limit or prohibit the Shareholder
from performing its obligations under the Guaranty or the Pledge
Documents and shall continue unstayed and in effect for a period of
ten (10) business days.
9. REMEDIES. Upon the occurrence of an Event of Default, Lender shall
have the right to:
(a) Immediately declare all unpaid principal and accrued and unpaid
interest on the Note and all other amounts payable hereunder due and
payable, without demand for payment, presentment for payment, protest,
notice of protest, notice of intent to accelerate, notice of
acceleration, or any other notices of any kind, each of which is
hereby expressly waived by Borrower;
(b) Terminate its obligation to make any Advance that has not been
made as of the date of such Event of Default;
(c) Pursue any other remedies available to Lender under the Loan
Documents, and under applicable laws and legal and equitable remedies.
10. TERMINATION OF WORKING CAPITAL LINE OF CREDIT. The Working Capital
Line of Credit shall terminate on May 1, 1999, and no further Advances
thereunder shall be made on or after such date.
11. SUBORDINATION. Lender covenants and agrees that the payment of the
principal of and interest on the Note is hereby expressly subordinated in right
of payment to the prior payment in full of all indebtedness under Borrower's
lines of credit with the Bank not to exceed $200,000 in the aggregate principal
amount, together with accrued and unpaid interest.
-8-
<PAGE> 9
12. MISCELLANEOUS.
(a) Payment of Expenses. Borrower agrees to and shall pay all
costs and expenses of and associated with the transactions
contemplated hereby and shall reimburse Lender for all such costs and
expenses, including without limitation, the reasonable fees, costs and
expenses of Lender's legal counsel.
(b) Subordination Documents. Lender agrees to cooperate with
Borrower to obtain the consent of the Bank to the transactions
contemplated by this Loan Agreement, and Lender agrees to execute and
deliver such documents and agreements as the Bank may reasonably
request to reflect the subordination of the liens created by the
Security Documents to the liens held by the Bank.
(c) Waivers. Borrower expressly waives any presentment, demand,
protest, or other notice of any kind. No notice to or demand on
Borrower or the Shareholder in any case shall, of itself, entitle
Borrower or the Shareholder to any other or further notice or demand
in similar or other circumstances. No delay or omission by Lender in
exercising any power or right hereunder shall impair any such right or
power to be construed as a waiver thereof or any acquiescence therein,
or shall any single or partial exercise or any such power preclude
other or further exercise thereof, or the exercise of any other right
or power hereunder.
(d) Notices. All notices and other communications provided for
hereunder shall be in writing and shall be delivered personally, by
reputable overnight courier or by confirmed telecopy; if to the
Borrower or the Shareholder, to 506 South 11th Street, Boise, Idaho
83702, Attention:Tom Loutzenheiser, Telecopy number (208) 336-9445; if
to the Lender, to 5335-C Sterling Drive, Boulder, Colorado 80301,
Attention: President, Telecopy number (303) 444-1620; or, as to either
party, at such other address as shall be designated by such party in a
written notice to the other party.
(e) Amendment. This Agreement may be amended, modified, or
supplemented only by the written agreement of the parties hereto.
(f) Binding Effect; Assignment. This Agreement shall be binding
upon and shall inure to the benefit of the parties hereto and their
respective successors and permitted assigns; provided, however, that
neither this Agreement nor any rights hereunder may be assigned by
Borrower without the prior written consent of Lender.
(g) Headings. The headings in this Agreement are inserted for
convenience and identification only and are not intended to describe,
interpret, define, or limit the scope, extent, or intent of this
Agreement or any provision hereof.
(h) Entire Agreement. The Loan Documents embody the entire
agreement and understanding of the parties hereto, and supersede all
prior agreements or understandings
-9-
<PAGE> 10
(whether written or oral), with respect to the subject matter hereof.
There are no restrictions, promises, representations, warranties,
covenants, or undertakings, other than those expressly set forth or
referred to in the Loan Documents.
(i) Governing Law. The validity of this Agreement and any of its
terms and provisions, as well as the rights and duties of the parties
hereunder, shall be governed by the laws of the State of Colorado
without regard to its conflicts of laws doctrines.
(j) Severability and Invalid Provisions. If any provision of this
Agreement is held to be illegal, invalid, or unenforceable under
present or future laws effective during the term hereof, such
provision shall be fully severable and this Agreement shall be
construed and enforced as if such illegal, invalid, or unenforceable
provision had never comprised a part hereof. The remaining provisions
hereof shall remain in full force and effect and shall not be affected
by the illegal, invalid, or unenforceable provision or by its
severance herefrom. Furthermore, in lieu of such illegal, invalid, or
unenforceable provisions there shall be added automatically as a part
of this Agreement a provision as similar in terms to such illegal,
invalid, or unenforceable provision as may be possible and be legal,
valid, and enforceable and that shall not be more restrictive than the
one severed herefrom.
(k) Gender and Number. Wherever the context requires, the gender
of all words used in this Agreement shall include the masculine,
feminine, and neuter, and the number of all words shall include the
singular and the plural.
(l) Counterparts. This Agreement may be executed in multiple
counterparts, each of which shall be deemed an original, but all of
which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the
day and year first above written.
BORROWER:
APEXX TECHNOLOGY, INC.
ADDRESS:
506 South 11th Street By: /s/ Tom Loutzenheiser
Boise, Idaho 83702 ------------------------------------------
Name: Tom Loutzenheiser
Title: President and Chief Executive Officer
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<PAGE> 11
LENDER:
eSOFT, INC.
ADDRESS:
5335-C Sterling Drive By: /s/ Jeffrey Finn
Boulder, Colorado 80301 ------------------------------------------
Name: Jeffrey Finn
Title: President and Chief Executive Officer
-11-
<PAGE> 1
EXHIBIT 10.38
SECURED PROMISSORY NOTE
$500,000 BOULDER, COLORADO
DECEMBER 2, 1998
For value received, Apexx Technology, Inc., an Idaho corporation
("Borrower"), hereby unconditionally promises to pay to the order of eSoft,
Inc., a Delaware corporation ("Lender"), or any subsequent Holder or Holders of
this Note (the "Holder"), on the earlier to occur of (i) August 1, 1999, or
(ii) when declared due and payable by the Holder upon the occurrence of an
event of default specified in the Loan Agreement (as defined below), at its
offices at 5335-C Sterling Drive, Boulder, Colorado 80301, or at such other
place as designated in writing by the Holder hereof, in lawful money of the
United States of America and in immediately available funds, the aggregate
principal sum of Five Hundred Thousand and No/100 Dollars ($500,000) or so much
thereof as may be advanced by Holder to Borrower hereunder.
This Note evidences borrowings by the undersigned under that certain
Loan Agreement of even date herewith (the "Loan Agreement"), between Borrower
and Lender; and this Note and the Holder are entitled to all the benefits
provided for under the Loan Agreement, to which reference is hereby made for a
statement thereof. Terms used but not defined in this Note are defined in the
Loan Agreement.
Interest will accrue on the outstanding amount of this Note at a rate
equal to the Prime Rate (as defined herein) in effect from time to time, plus
2%, compounded monthly and adjusted on a quarterly basis. If any amounts due on
this Note are not paid in full when such amounts become due and payable,
interest will accrue on the outstanding amount of this Note at a rate equal to
the Prime Rate in effect from time to time, plus 4%, compounded monthly and
adjusted on a quarterly basis, until such amounts are paid. Interest shall be
computed on the basis of a year of 360 days for the actual number of days
elapsed.
Accrued interest is payable monthly, and is due by the last day of
each month. Interest for each monthly period will be computed by applying the
applicable interest rate to each day's ending principal balance on this Note.
The daily balance of this Note shall be computed by taking the principal
balance at the beginning of each day, adding any Advances made that day, and
subtracting any principal payments made as of that day. Interest begins to
accrue on the date an Advance is made.
Interest under this Note shall not exceed the maximum rate permitted
by law. If any amount is paid under this Note as interest in excess of such
maximum lawful rate, then the amount so paid will not constitute interest but
rather will constitute a prepayment on account of the principal amount of this
Note.
The amounts due under this Note are secured by (a) a pledge of 344,635
shares of Borrower's Common Stock, no par value, pursuant to a pledge agreement
in the form attached hereto as Annex A, and (b) all of Borrower's assets
pursuant to a security agreement in the form attached hereto as Annex B.
<PAGE> 2
Notwithstanding anything contained herein to the contrary, without the
prior written consent of the boards of directors of Borrower and Lender, no
advancements shall be made hereunder such that the total of all advancements of
principal recorded, less all payments of principal recorded, exceeds $500,000.
It is expressly agreed that this Note evidences a revolving line of
credit, the maximum principal amount of which line of credit shall not exceed
Five Hundred Thousand and No/100 Dollars ($500,000). Accordingly, at all times
the total of all advancements of principal recorded on a schedule attached
hereto, less all payments of principal recorded on such schedule, shall not
exceed Five Hundred Thousand and No/Dollars ($500,000). It is contemplated that
the principal of this Note may be advanced to Borrower in a series of
advancements to be made from time to time in the sole and absolute discretion
of Lender. The amounts of the advances and payments recorded by Lender on a
schedule attached hereto shall be binding upon Borrower as to the amount owed
by Borrower. This Note may be paid in full from time to time, but shall
nevertheless remain in full force and effect to evidence any advances made
under such revolving line of credit after any such payment in full. This Note
may be prepaid, in whole or in part, at any time and from time to time without
premium or penalty of any kind.
The payment of the principal of and interest on this Note is hereby
expressly subordinated in right of payment to the prior payment in full of all
indebtedness under Borrower's lines of credit with Idaho Independent Bank not
to exceed $200,000 in the aggregate principal amount, together with accrued and
unpaid interest.
Borrower may make principal payments of this Note at any time and in
any amount. Payments made prior to the date of maturity of this Note shall be
applied first to any expenses of Lender incurred in connection with the Loan
Agreement (including any expenses incurred in the enforcement of this Note),
then to accrued and unpaid interest and then to the outstanding principal
balance of the Note.
Borrower expressly agrees that this Note, or any payment hereunder,
may be extended from time to time and that the Holder may accept security for
this Note or release security of this Note without in any way affecting the
liability of Borrower hereunder.
All payments under this Note shall be made without defense, set-off,
or counterclaim, free and clear of and without deduction for any taxes of any
nature now or hereafter imposed.
The term "Prime Rate" shall mean the prime rate as announced from time
to time by the Wall Street Journal from time to time as the "prime rate." Such
rate is determined by the Wall Street Journal as a general reference rate of
interest, taking into account such factors as the Wall Street Journal may deem
appropriate, it being understood that it is not necessarily the lowest or best
rate actually charged by any bank to any customer.
2
<PAGE> 3
THE UNDERSIGNED HEREBY WAIVES DEMAND AND PRESENTMENT FOR PAYMENT,
PROTEST, AND NOTICE OF PROTEST AND OF NONPAYMENT.
The failure or delay by the Holder of this Note in exercising any of
its rights hereunder in any instance shall not constitute a waiver thereof in
that or any other instance. The Holder of this Note may not waive any of its
rights except by an instrument in writing signed by the Holder. The Holder of
this Note may assign the rights hereunder without the consent of Borrower. The
provisions of this Note shall be binding upon and shall inure to the benefit of
the successors and assigns of the undersigned, which shall include, without
limitation, a receiver, trustee or debtor-in-possession of or for the
undersigned.
If this Note is not paid at maturity, however such maturity may be
brought about, and this Note is placed in the hands of an attorney for
collection or if collection by suit or through the probate court, bankruptcy
court, or by any other legal or judicial proceeding is sought, Borrower agrees
to pay all expenses incurred, including attorneys' fees, all of which shall
become a part of the principal hereof.
This Note and the obligations of the undersigned shall be governed by
and construed in accordance with the laws of the State of Colorado. For
purposes of any proceeding involving this Note or any of the obligations of the
undersigned, the undersigned hereby submits to the non-exclusive jurisdiction
of the courts of the State of Colorado and of the United States having
jurisdiction in the County of Boulder and State of Colorado, and agrees not to
raise and waives any objection to or defense based upon personal jurisdiction
or the venue of any such court or based upon forum non conveniens. The
undersigned agrees not to bring any action or other proceedings with respect to
this Note or with respect to any of its obligations hereunder in any other
court unless such courts of the State of Colorado and of the United States
determine that they do not have jurisdiction in the matter.
This Note may not be amended without the prior written approval of the
Holder.
Apexx Technology, Inc.
By: /s/ Tom Loutzenheiser
----------------------------------------
Name: Tom Loutzenheiser
Title: President and Chief
Executive Officer
3
<PAGE> 4
SCHEDULE OF
ADVANCES AND PAYMENTS OF PRINCIPAL AND INTEREST
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
AMOUNT OF UNPAID PRINCIPAL NOTATION MADE BY
DATE AMOUNT OF ADVANCE PRINCIPAL PAID OR PREPAID INTEREST PAID BALANCE OF LOAN (INITIALS)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
4
<PAGE> 1
EXHIBIT 10.39
SECURITY AGREEMENT
This Security Agreement ("Security Agreement") is entered into this
2nd day of December, 1998 between Apexx Technology, Inc. ("Pledgor") , whose
principal place of business is located at 506 S. 11th Street, Boise, Idaho
83702, and eSoft, Inc. (the "Secured Party"), whose principal place of business
is located at 5335-C Sterling Drive, Boulder, Colorado 80301.
1. Pledgor hereby grants to the Secured Party a security interest in
all of Borrower's right, title and interest in and to any of its tangible or
intangible property and assets, whether real, personal or mixed, whether now
owned or existing or hereafter acquired or arising, wherever located,
including, without limitation, all accounts, chattel paper, documents,
contracts, licenses, equipment, fixtures, general intangibles, goods,
instruments, intellectual property rights, inventory and money, together with
all after-acquired property, replacements and substitutions thereof and all
proceeds from any sale thereof (collectively, the "Collateral"). The
intellectual property that is included within the Collateral shall include,
without limitation, the following (collectively, the "Intellectual Property"):
a. All inventions, discoveries, patents, patent disclosures,
copyrights, mask works, know-how, developments, research data,
designs, technology, trade secrets (technical and
non-technical), test procedures, processes, data and
documentation (including any electronic media in which such
materials may be embodied), confidential information,
intellectual and similar intangible property rights whether or
not patentable (or otherwise subject to legally enforceable
restrictions or protections against unauthorized third party
usage), and any and all applications for, and extensions,
divisions and reissuances of, any of the foregoing, and rights
therein; the foregoing expressly including all rights of any
kind and nature, including the copyright, in and to any Software
or Documentation. As used herein: (a) "Software" means all
computer programs, in machinereadable 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 (b) "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 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 shall include, without
limitation, the Software and Documentation set forth in Schedule
1 to this Security Agreement.
b. All trademarks, service marks, trade names or other names,
symbols, devices, trade dress, or other designations or
combinations of such designations that are distinctive of
Pledgor's goods or services and that are used in a manner
<PAGE> 2
that identifies those goods or services and distinguishes them
from the goods or services of others as may be owned or used by
Pledgor, including without limitation those trademarks and
service marks owned by Pledgor as set forth in registrations or
pending applications in the United States Patent and Trademark
Office, any state of the United States, or any foreign country
(collectively, the "Marks"); the goodwill of the business in
which each of the Marks is used, or that part of the goodwill of
the business connected with the use of and symbolized by each of
such Marks (the "Goodwill"); and, in the case of the Marks for
which an application for registration may have been filed in the
United States as an "Intent to Use" application, if any, under
Section 1(b) of the Lanham Act and in respect of which a
verified statement of use has not yet been filed, that portion
of Pledgor's ongoing and existing business to which each such
Mark pertains (the "Business"). The Marks shall include, without
limitation, the Marks set forth in Schedule 2 to this Security
Agreement.
c. All shop rights, licenses, and beneficial interests as Pledgor
may have in and to any third party proprietary intangible
property, including any goodwill pertaining thereto (the
"Beneficial Interests").
d. All rights to renew, use or register any of the Intellectual
Property in any country; and to collect royalties or other
proceeds in respect of any of the Intellectual Property; and all
of Pledgor's claims for damages by reason of past infringement
of any of the Intellectual Property, with the right to sue for
and collect the same for its own use and benefit and to enforce
and collect any damages or enforce any remedies in respect of
any of the Intellectual Property whether now existing or
hereafter accruing (collectively, the "Related Rights").
2. This Security Agreement is executed by Pledgor to secure
performance of Pledgor's obligations under that certain Secured Promissory Note
dated December 2, 1998 in the principal amount of $500,000 (the "Note")
executed by Pledgor and payable to the order of Secured Party. The obligation
of Pledgor to make all payments under such Note, together with all costs of
collection (if any) are collectively referred to in this Security Agreement as
the "Obligations." The Obligations shall include all extensions, renewals,
rearrangements, or modifications of the Note.
3. Pledgor will pay to Secured Party, on demand, all expenses,
including reasonable attorney's fees and other legal expenses, incurred or paid
by Secured Party in exercising or protecting its interest, rights, and remedies
under this Security Agreement.
4. Pledgor hereby covenants and agrees with Secured Party as follows:
a. As soon as practicable after request therefore, without further
consideration, Pledgor shall execute and deliver, in proper form
for relevant recording or filing, such additional collateral
assignments, consents, memoranda for recording, and other
instruments or documents, and sign such proper oaths or
-2-
<PAGE> 3
affirmations, as Secured Party may reasonably deem necessary or
desirable to vest or confirm in Secured Party its security
interest in any of the Intellectual Property and to facilitate
the effective recordation or establishment of Secured Party's
security interest thereto or validity thereof; and, without
limiting the foregoing obligation, Pledgor agrees that Pledgor
will sign all lawful papers, will make all rightful oaths in
execution thereof, and will generally do everything possible to
aid Secured Party, its successors, assigns and nominees to obtain
and enforce proper protection for its security interest in the
Intellectual Property in all countries, this obligation to be
binding upon Pledgor and upon Pledgor's successors, assigns and
nominees; Pledgor hereby granting to Secured Party an irrevocable
power of attorney on Pledgor's behalf to execute, acknowledge and
deliver any and all such collateral assignments, consents,
memoranda, instruments or documents.
b. Pledgor hereby acknowledges and agrees that all references
herein to "Pledgor" shall include any other person (natural
person or any corporate or other juridical entity) which is an
affiliate of Pledgor or which controls, is controlled by or
under common control with Pledgor.
c. Pledgor hereby represents and warrants that Pledgor has no
knowledge of any claim or any basis for a claim that the
manufacture, use, or sale of products or processes covered by
any of the Intellectual Property, or any other action which
might be taken with respect to any of the Intellectual Property
violates any rights of any third person; and that Pledgor has no
knowledge of any manufacture, use or sale, or of any other
action by any third person which would conflict with or
constitute an infringement of any of the Intellectual Property.
d. At Secured Party's request, Pledgor agrees to enter into an
escrow agreement (the "Escrow Agreement") with Secured Party and
an escrow agent mutually agreed upon between Pledgor and Secured
Party and that provides for the escrow of a current and complete
master, reproducible copy of all the source code of the
Software. Such source code in escrow shall be promptly updated,
from time to time, to reflect all additions, revisions,
modifications and enhancements thereto. Pledgor and Secured
Party shall each pay 50% of all costs and expenses incurred for
establishing and maintaining the escrow. As used herein "source
code" shall mean the human-readable form of the Software
together with all related Documentation, including all comments
and any procedural code such as job control language and
materials useful for design, modification or maintenance (e.g.,
logic designs, flow charts, and principles of operation). The
Escrow Agreement shall provide that upon Pledgor's breach of any
of its Obligations, Secured Party shall have the right to
receive the source code from escrow, and to use the source code
for all purposes whatsoever.
-3-
<PAGE> 4
5. Secured Party will have the power to endorse any instrument
described as a portion of the Collateral and Pledgor hereby grants to Secured
Party a limited power of attorney, deemed coupled with an interest, for the
purposes of endorsing in the name of Pledgor any such instrument or document
constituting Collateral or which may be received in payment for or as proceeds
of the Collateral.
6. Pledgor will not sell or offer to sell or otherwise transfer or
encumber the Collateral without the prior written consent of the Secured Party.
7. Pledgor will keep the Collateral in good order and repair and will
not waste or destroy the Collateral.
8. At the request of the Secured Party, Pledgor will join with the
Secured Party in executing one or more financing statements pursuant to the
Uniform Commercial Code, as enacted in the States of Idaho, Minnesota and
Massachusetts, in form satisfactory to the Secured Party. Pledgor authorizes
Secured Party, without the necessary joinder by Pledgor, to file in all
jurisdictions in which Collateral is or may be located one or more financing
statements covering all or any portion of the Collateral.
9. Pledgor represents, warrants, and agrees that: (a) Pledgor has full
power and authority to execute and deliver this Security Agreement and to
perform its obligations hereunder; (b) Pledgor has observed all corporate
formalities necessary for the execution, delivery, and performance of this
Security Agreement; (c) a duly authorized and empowered officer of Pledgor has
executed this Security Agreement on behalf of Pledgor; (d) the Collateral is
not subject to the interest of any third party except as set forth on Exhibit A
hereto, and Pledgor will defend the Collateral and its proceeds against the
claims and demands of all third parties; and (e) Pledgor agrees to execute and
deliver to Secured Party such powers of attorney, pledge agreements,
endorsements of securities or other instruments or other documents, and to
endorse and deliver to Secured Party such Collateral as may be reasonably
required by Secured Party in order to effectively grant to Secured Party the
security interest in and to the Collateral and to enforce Secured Party's
rights in the same.
10. SECURED PARTY SHALL BE UNDER NO DUTY WHATSOEVER TO MAKE OR GIVE
ANY PRESENTMENT, DEMAND FOR PERFORMANCE, NOTICE OF NONPERFORMANCE, PROTEST,
NOTICE OF PROTEST, NOTICE OF DISHONOR, OR OTHER NOTICE OR DEMAND IN CONNECTION
WITH ANY COLLATERAL, OR TO PRESERVE ANY RIGHTS AGAINST PRIOR PARTIES. Secured
Party shall not be liable for failure to collect or realize upon any or all of
the Collateral, or for any delay in so doing, nor shall Secured Party be under
any duty to take any action whatsoever with regard thereto. Secured Party shall
use reasonable care in the custody and preservation of any Collateral in its
possession but need not take any steps to keep the Collateral identifiable.
Secured Party shall have no duty to comply with any recording, filing, or other
legal requirements necessary to establish or maintain the validity, priority or
enforceability of, or Secured Party's rights in or to, any of the Collateral.
11. Pledgor: (a) waives any right to require Secured Party to proceed
against any person, exhaust any Collateral, or pursue any other remedy in
Secured Party's power; (b) waives any and all notice of acceptance of this
Security Agreement or of creation, modification, renewal, or extension
-4-
<PAGE> 5
of any of the indebtedness that is secured by the Collateral hereunder; and (c)
waives any defense arising by reason of any disability or other defense of
Pledgor or any other person, or by reason of the cessation from any cause
whatsoever of the liability of Pledgor or any other person.
12. Pledgor authorizes Secured Party, without notice or demand and
without any reservation of rights against Pledgor and without affecting its
liability hereunder or on the Obligations, from time to time to: (a)
compromise, settle, or release the obligation of Pledgor with respect to any or
all of the Obligations or Collateral; and (b) take and hold security, other
than the Collateral, for the payment of any or all of the Obligations, and
exchange, enforce, waive, and release any or all of the Collateral or other
security.
13. Secured Party may, in its discretion, sell, assign and deliver all
or any part of the Collateral at public or private sale, without notice or
advertisement, and bid and become purchaser at any public sale. Secured Party
may apply the proceeds of any disposition of Collateral available for
satisfaction of the Obligations and expenses of sale in any order of preference
which Secured Party in its sole discretion chooses. Pledgor shall remain liable
for any deficiency. Upon any sale of any Collateral, Secured Party shall have
the right to deliver to the purchaser thereof all or any portion of the
Collateral, free and clear of any claim or right of Pledgor, or any person
claiming by, through or under Pledgor. The Collateral may be sold separately or
combined with the collateral of other debtors as Secured Party deems necessary
or desirable. Secured Party shall not be obligated to make any sale pursuant to
any notice of sale provided and Secured Party may, without notice or
publication, adjourn any public or private sale or cause such sale to be
adjourned from time to time by written or oral announcement given at the time
and place fixed for such sale and may reconvene such sale, pursuant to such
notice of adjournment, at any time or place designated by Secured Party in such
announcement. Secured Party shall not be required to conduct any sale of any
Collateral pursuant to this Security Agreement and is authorized to proceed
with collection of the Obligations from Debtor by all legal means including,
but not limited to, institution of a lawsuit in a court of competent
jurisdiction for collection of the Obligations. Any sale of any Collateral that
meets the requirements of the Washington Uniform Commercial Code will be deemed
to satisfy the requirements of this Security Agreement.
14. The rights, powers, and remedies of Secured Party hereunder shall
be in addition to all rights, powers, and remedies given by statute or rule of
law. Regardless of whether or not the Uniform Commercial Code is in effect in
the jurisdiction where such rights, powers, and remedies are asserted, Secured
Party shall have the rights, powers and remedies of a secured party under the
Uniform Commercial Code of Colorado, as amended. No forbearance, failure, or
delay by Secured Party in exercising any right, power, or remedy shall be
deemed a waiver thereof or preclude any other or further exercise thereof. No
single or partial exercise of any right, power, or remedy shall preclude any
other or further exercise thereof, or the exercise of any other right, power,
or remedy.
15. Secured Party acknowledges that the Collateral is subject to a
prior lien held by Idaho Independent Bank (the "Bank"), and that all of Secured
Party's rights under this Security Agreement are subordinate to the Bank's
prior liens on the Collateral. Secured Party agrees to execute and deliver such
documents and agreements as the Bank may reasonably request to reflect the
subordination of the liens created by this Agreement to the liens held by the
Bank.
-5-
<PAGE> 6
16. This Security Agreement shall be binding on and enforceable
against Pledgor and its successors, assigns, and legal representatives and
shall inure to the benefit of Secured Party and its successors, assigns, and
legal representatives.
17. This Security Agreement and the obligations of the Pledgor and the
Secured Party hereunder shall be governed by and construed in accordance with
the laws of the State of Colorado. For purposes of any proceeding involving
this Security Agreement or any of the obligations of the Pledgor and the
Secured Party, the Pledgor and the Secured Party hereby submit to the
non-exclusive jurisdiction of the courts of the State of Colorado and of the
United States having jurisdiction in the County of Boulder and State of
Colorado, and agree not to raise and waives any objection to or defense based
upon personal jurisdiction or the venue of any such court or based upon forum
non conveniens. The Pledgor and the Secured Party agree not to bring any action
or other proceedings with respect to this Security Agreement or with respect to
any of its respective obligations hereunder in any other court unless such
courts of the State of Colorado and of the United States determine that they do
not have jurisdiction in the matter.
18. This Security Agreement may not be amended (nor may any of its
terms be waived) except in writing duly signed by Secured Party and by Pledgor.
If any provision of this Security Agreement is rendered or declared illegal or
unenforceable by reason of any existing or subsequently enacted legislation or
by a decree of last resort, Pledgor and Secured Party shall promptly meet and
negotiate substitute provisions for those rendered illegal or unenforceable,
but all of the remaining provisions shall remain in full force and effect.
IN WITNESS WHEREOF, the parties have executed this Security Agreement
as of the 2nd day of December, 1998.
PLEDGOR
APEXX TECHNOLOGY, INC.
By: /s/ Tom Loutzenheiser
------------------------------------------
Name: Tom Loutzenheiser
Title: President and Chief Executive Officer
SECURED PARTY
eSOFT, INC.
By: /s/ Jeffrey Finn
------------------------------------------
Name: Jeffrey Finn
Title: President and Chief Executive Officer
-6-
<PAGE> 1
EXHIBIT 10.40
STOCK PLEDGE AGREEMENT
This Stock Pledge Agreement ("Pledge Agreement") is made as of
December 2, 1998, between eSoft, Inc., a Delaware corporation ("eSoft"), and
Tom Loutzenheiser (the "Pledgor"), a director, officer and shareholder of Apexx
Technology, Inc., an Idaho corporation (the "Company").
RECITALS
WHEREAS, eSoft and the Company are parties to a Letter of Intent,
dated November 20, 1998 (the "Letter of Intent"), pursuant to which the Company
and eSoft are discussing a transaction in which the Company will become a
wholly owned subsidiary of eSoft.
WHEREAS, eSoft and the Company are parties to a Loan Agreement, dated
December 2, 1998 (the "Loan Agreement"), pursuant to which the Company will
provide a working capital line of credit (the "Line of Credit") to be utilized
by the Company for working capital in the conduct of the Company's business.
WHEREAS, concurrently with the execution of the Loan Agreement, the
Company will issue a secured promissory note (the "Note") to eSoft to evidence
the debt created by the Line of Credit.
WHEREAS, the Pledgor has guaranteed the debt created by the Line of
Credit and certain of the Company's obligations under the Letter of Intent on a
non-recourse basis pursuant to a Guaranty Agreement, dated December 2, 1998
(the "Guaranty").
WHEREAS, the Pledgor has agreed to secure the Guaranty by a pledge to
eSoft of all of the shares of the Company's Common Stock, no par value ("Common
Stock"), beneficially owned by the Pledgor.
WHEREAS, eSoft and the Pledgor intend that this Pledge Agreement
provide the terms and conditions upon which the Guaranty is secured by a pledge
to eSoft of the shares of Common Stock beneficially owned by the Pledgor.
NOW, THEREFORE, in consideration of the promises contained herein and
other good and valuable consideration, the receipt and sufficiency of which are
hereby acknowledged, and in order to induce eSoft to make advances to the
Company pursuant to the Loan Agreement, the Pledgor and eSoft hereby agree as
follows:
AGREEMENT
1. PLEDGE. Pledgor hereby pledges to eSoft, and grants to eSoft, a
security interest in all of the Common Stock identified on Schedule A hereto
(the "Pledged Interest"), which Common Stock constitutes all of the Common
Stock beneficially owned by Pledgor, as security for the prompt and complete
payment when due of the unpaid principal and interest on the Note.
<PAGE> 2
2. DELIVERY OF PLEDGED INTEREST. Upon the execution of this Pledge
Agreement, Pledgor shall deliver to Davis, Graham & Stubbs LLP ("DGS") the
certificate(s) representing the Pledged Interest, together with duly executed
forms of assignment sufficient to transfer title thereto to eSoft. DGS shall
hold the Pledged Interest until such time as eSoft declares an Event of Default
under the Loan Agreement and demands the delivery of the Pledged Interest, at
which time DGS shall deliver the Pledge Interest to eSoft.
3. VOTING RIGHTS; CASH DIVIDENDS. During the term of this Pledge
Agreement and until such time as there exists a default in the payment of
principal or interest on the Note or any other default under the Note, Pledgor
shall be entitled to all voting rights with respect to the Pledged Interest and
shall be entitled to receive all cash dividends paid in respect of the Pledged
Interest. Upon the occurrence of and during the continuance of any such
default, eSoft shall retain all such cash dividends payable on the Pledged
Interest as additional security hereunder.
4. STOCK DISTRIBUTIONS, ETC. If, while this Pledge Agreement is in
effect, Pledgor becomes entitled to receive or receives any securities or other
property in addition to, in substitution of, or in exchange for the Pledged
Interest (whether as a distribution in connection with any recapitalization,
reorganization, reclassification, stock dividend or otherwise), Pledgor shall
accept such securities or other property on behalf of and for the benefit of
eSoft as additional security for the obligations of the Company under the Note
and shall promptly deliver such additional security to eSoft together with duly
executed forms of assignment, and such additional security shall be deemed to
be part of the Pledged Interest hereunder.
5. DEFAULT. If the Company defaults in the payment of the principal or
interest under the Note as they become due (whether upon demand, acceleration
or otherwise) or defaults in its obligations set forth under the heading
"Cessation of Third Party Acquisition Activities" set forth in the Letter of
Intent, eSoft may exercise any and all rights, powers, and remedies of any
owner of the Pledged Interest (including the right to vote the shares and
receive distributions with respect to such shares) and shall have and may
exercise, without demand, any and all rights and remedies granted to a secured
party upon default under the Uniform Commercial Code of Colorado or otherwise
available to eSoft under applicable law.
6. COSTS AND ATTORNEYS' FEES. All costs and expenses, including
reasonable attorneys' fees, incurred in exercising any right, power, or remedy
conferred by this Pledge Agreement or in the enforcement thereof, shall become
part of the indebtedness secured hereunder and shall be paid by Pledgor from
the proceeds of the sale of the Pledged Interest hereunder.
7. PAYMENT OF INDEBTEDNESS AND RELEASE OF PLEDGED INTEREST. Upon
payment in full of the indebtedness evidenced by the Note and termination of
the Line of Credit, eSoft shall surrender the Pledged Interest together with
all forms of assignment.
8. FURTHER ASSURANCES. Each Pledgor agrees that at any time and from
time to time upon the written request of eSoft, Pledgor will execute and
deliver such further documents and do such further acts and things as eSoft may
reasonably request in order to effect the purposes of this Pledge Agreement.
2
<PAGE> 3
9. SEVERABILITY. Any provision of this Pledge Agreement that is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate nor render
unenforceable such provision in any other jurisdiction.
10. NO WAIVER; CUMULATIVE REMEDIES. eSoft shall not by any act, delay,
omission or otherwise be deemed to have waived any of its rights or remedies
hereunder, and no waiver shall be valid unless in writing, signed by eSoft, and
then only to the extent therein set forth. A waiver by eSoft of any right or
remedy hereunder on any one occasion shall not be construed as a bar to any
right or remedy which eSoft would otherwise have on any future occasion. No
failure to exercise nor any delay in exercising on the part of eSoft, any
right, power or privilege hereunder shall preclude any other or further
exercise thereof or the exercise of any other right, power or privilege. The
rights and remedies herein provided are cumulative and may be exercised singly
or concurrently, and are not exclusive of any rights or remedies provided by
law.
11. WAIVERS, AMENDMENTS; APPLICABLE LAW. None of the terms or
provisions of this Pledge Agreement may be waived, altered, modified or amended
except by an instrument in writing, duly executed by the parties hereto. This
Agreement and all obligations of each Pledgor hereunder shall, together with
the rights and remedies of eSoft hereunder, inure to the benefit of eSoft and
its successors and assigns. This Pledge Agreement shall be governed by, and be
construed and interpreted in accordance with, the internal laws, not the laws
of conflicts, of the State of Colorado.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
PLEDGOR
/s/ Tom Loutzenheiser
---------------------------------------------
Name: Tom Loutzenheiser
ESOFT
ESOFT, INC.
By: /s/ Jeffrey Finn
------------------------------------------
Name: Jeffrey Finn
Title: President and Chief Executive Officer
3
<PAGE> 4
SCHEDULE A
PLEDGED INTEREST
<PAGE> 5
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------
CERTIFICATE REGISTERED HOLDER SECURITY NUMBER OF SHARES
NUMBER
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TOM LOUTZENHEISER COMMON STOCK, NO
PAR VALUE
- -----------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------
TOTAL: 344,635
- -----------------------------------------------------------------------------------------------------
</TABLE>
<PAGE> 1
EXHIBIT 10.41
GUARANTY AGREEMENT
This Guaranty Agreement ("Guaranty Agreement") is made as of December
2, 1998, between eSoft, Inc., a Delaware corporation ("eSoft"), and Tom
Loutzenheiser (the "Guarantor"), a director, officer and shareholder of Apexx
Technology, Inc., an Idaho corporation (the "Company").
1. Guarantor, for value received, the receipt and sufficiency of which
is hereby acknowledged, and to induce eSoft, at its option, at any time or from
time to time to lend monies, with or without security, to or for the account of
the Company, pursuant to a Loan Agreement dated December 2, 1998 between eSoft
and the Company (the "Loan Agreement"), hereby unconditionally guarantees (a)
the prompt payment on demand by eSoft or at maturity of all indebtedness,
obligations and liabilities of any kind of the Company to eSoft, now
outstanding or owing or which may hereafter be existing or incurred, including,
without limitation, that certain Secured Promissory Note of even date herewith
in the face amount of $500,000 (the "Note"), executed by the Company and
payable to the order of eSoft or any subsequent holder or holders of the Note,
and (b) the Company's performance of its obligations under the heading
"Cessation of Third Party Acquisition Activities" set forth in that certain
Letter of Intent dated November 20, 1998 between the Company and eSoft
(hereinafter collectively called the "Indebtedness").
2. Guarantor hereby acknowledges that, at the request of the Company,
eSoft shall consider increasing the amount of the line of credit contemplated
by the Loan Agreement (the "Line of Credit") to $1,000,000; provided, however,
that no such increase shall occur without the express written consent and
agreement of the Boards of Directors of both the Company and eSoft. Guarantor
hereby agrees that this Guaranty Agreement shall survive any such increase and
that Guarantor shall continue to unconditionally guarantee, as set forth in
Section 1 above and subject to the limitations set forth in Section 3 below,
any increased amount of the Indebtedness resulting from any increase in the
Line of Credit.
3. The liability of the Guarantor for any payments hereunder shall be
limited to the aggregate fair market value of the Pledged Interest, as defined
in that certain Stock Pledge Agreement of even date herewith between eSoft and
the Guarantor (the "Pledge Agreement"). Notwithstanding anything in this
Guaranty to the contrary, eSoft's sole recourse against the Guarantor upon an
Event of Default (as defined in the Loan Agreement) shall be to exercise its
right to proceed against the Pledged Interest in accordance with the Pledge
Agreement.
4. This guaranty is an absolute, completed and continuing one, and no
notice of the Indebtedness or of any extension of credit already or hereafter
contracted by or extended to the Company need be given to Guarantor.
5. Guarantor agrees that all indebtedness, obligations and liabilities
of any kind of the Company to Guarantor now outstanding or owing or which may
hereafter be existing or incurred and all security interests now existing or
which may hereafter be existing shall be subordinated to the Indebtedness and
to all security interests now existing or which may hereafter be existing of
eSoft in the Collateral (as defined in that certain Security Agreement dated
the date hereof between eSoft and the Company).
<PAGE> 2
6. eSoft shall not be obligated by reason of its acceptance of this
Guaranty Agreement to engage in any transactions with or for the Company or the
Guarantor. Whether or not any existing relationship between Guarantor and the
Company has been changed or ended and whether or not this Guaranty Agreement
has been revoked, eSoft may enter into transactions resulting in the creation
or continuance of the Indebtedness and may otherwise agree, consent to or
suffer the creation or continuance of any of the Indebtedness, without any
consent or approval by Guarantor and without any prior or subsequent notice to
Guarantor. The liability of Guarantor shall not be affected or impaired by any
of the following acts or things (which eSoft is expressly authorized to do,
omit or suffer from time to time, both before and after revocation of this
Guaranty Agreement, without consent or approval by or notice to Guarantor): (a)
any acceptance of collateral security, guarantors, accommodation parties or
sureties for any or all of the Indebtedness; (b) one or more extensions or
renewals of the Indebtedness (whether or not for longer than the original
period) or any modification of the interest rates, maturities, if any, or other
contractual terms applicable to any of the Indebtedness or any amendment or
modification of any of the terms or provisions of any loan agreement or other
agreement under which the Indebtedness or any part thereof arose; (c) any
waiver or indulgence granted to the Company, any delay or lack of diligence in
the enforcement of the Indebtedness or any failure to institute proceedings,
file a claim, give any required notices or otherwise protect any of the
Indebtedness; (d) any full or partial release of, compromise or settlement
with, or agreement not to sue, the Company or any guarantor or other person
liable in respect of any of the Indebtedness; (e) any release, surrender,
cancellation or other discharge of any evidence of the Indebtedness or the
acceptance of any instrument in renewal or substitution therefor; (f) any
failure to obtain collateral security (including rights of set off) for the
Indebtedness, or to see to the proper or sufficient creation and perfection
thereof, or to establish the priority thereof, or to preserve, protect, insure,
care for, exercise or enforce any collateral security; or any modification,
alteration, substitution, exchange, surrender, cancellation, termination,
release or other change, impairment, limitation, loss or discharge of any
collateral security; (g) any collection, sale, lease or disposition of, or any
other foreclosure or enforcement of or realization on, any collateral security;
(h) any assignment, pledge or other transfer of any of the Indebtedness or any
evidence thereof; and (i) any manner, order or method of application of any
payments or credits upon the Indebtedness. Guarantor waives any and all
defenses and discharges available to a surety, guarantor or accommodation
co-obligor.
7. Guarantor waives any and all defenses, claims, setoffs and
discharges of the Company, or any other obligor, pertaining to the
Indebtedness, except the defense of discharge by payment in full. Without
limiting the generality of the foregoing, Guarantor will not assert, plead or
enforce against eSoft any defense of waiver, release, discharge or disallowance
in bankruptcy, statute of limitation, res judicata, statute of frauds,
anti-deficiency statute, fraud, incapacity, minority, usury, illegality or
unenforceability which may be available to the Company or any other person
liable in respect of any of the Indebtedness, or any set off available against
eSoft to the Company or any other such person, whether or not on account of a
related transaction. Guarantor expressly agrees that Guarantor shall be and
remain liable for any deficiency remaining after foreclosure of any mortgage or
security interest securing the Indebtedness, whether or not the liability of
the Company or any other obligor for such deficiency is discharged pursuant to
statute or judicial decision. The liability of Guarantor shall not be
2
<PAGE> 3
affected or impaired by any voluntary or involuntary liquidation, dissolution,
sale or other disposition of all or substantially all the assets, marshaling of
assets and liabilities, receivership, insolvency, bankruptcy, assignment for the
benefit of creditors, reorganization, arrangement, composition or readjustment
of, or other similar event or proceeding affecting the Company or any of its
assets. Guarantor will not assert, plead or enforce against eSoft any claim,
defense or set off available to Guarantor against the Company.
8. If any payment applied by eSoft to the Indebtedness is thereafter
set aside, recovered, rescinded or required to be returned for any reason
(including, without limitation, the bankruptcy, insolvency or reorganization of
the Company or any other obligor), the Indebtedness to which such payment was
applied shall for the purpose of this Guaranty Agreement be deemed to have
continued in existence, notwithstanding such application, and this Guaranty
Agreement shall be enforceable as to such Indebtedness as fully as if such
application had never been made.
9. Guarantor authorizes eSoft, without notice or demand and without
affecting Guarantor's liability hereunder, to take and hold security for the
payment of this Guaranty Agreement and/or any of the Indebtedness, and
exchange, enforce, waive and release any such security; and to apply such
security and direct the order or manner of sale thereof as eSoft in its
discretion may determine; and to obtain a guaranty of any of the Indebtedness
from any one or more persons, corporations or entities whomsoever and at any
time or times to enforce, waive, rearrange, modify, limit or release such other
persons, corporations or entities from their obligations Guarantor waives any
right to require eSoft to (a) proceed against the Company, (b) proceed against
or exhaust any security held from the Company, (c) have the Company joined with
Guarantor in any suit arising out of this Guaranty Agreement and/or any of the
Indebtedness, or (d) pursue any other remedy in eSoft's power whatsoever.
Guarantor waives any defense arising by reason of any disability, lack of
corporate authority or power, or other defense of the Company or any other
guarantor of any of the Indebtedness, and shall remain liable hereon regardless
of whether the Company or any other guarantor be found not liable thereon for
any reason. Until all the Indebtedness shall have been paid in full, Guarantor
shall have no right of subrogation, and waives any right to enforce any remedy
which eSoft now has or may hereafter have against the Company, and waives any
benefit of and any right to participate in any security now or hereafter held
by eSoft.
10. Guarantor agrees that if the maturity of any Indebtedness is
accelerated by bankruptcy or otherwise, such maturity shall also be deemed
accelerated for the purpose of this Guaranty Agreement without demand or notice
to Guarantor. Subject to Section 2 of this Guaranty Agreement, Guarantor will,
immediately upon notice from eSoft of the Company's failure to pay any
Indebtedness upon demand by eSoft or at maturity, pay to eSoft at eSoft's
headquarters in Boulder County, Colorado, the amount due and unpaid by the
Company and guaranteed hereby. The failure of eSoft to give this notice shall
not in any way release Guarantor hereunder.
11. In order to induce eSoft to accept this Guaranty Agreement,
Guarantor represents and warrants to eSoft (which representations and
warranties will survive the creation of the Indebtedness and any extension of
credit thereunder) that:
3
<PAGE> 4
a. Guarantor has full power, authority and legal right to execute,
deliver, observe and perform the terms of this Guaranty Agreement
and the Pledge Agreement (collectively, the "Pledge Documents").
No authorization, consent or approval by any entity, person or
class of persons is required as a condition to the execution,
delivery or performance of the Pledge Documents. No notice to or
filing with any entity or person is required in connection with
the execution, delivery or performance of the Pledge Documents.
b. Each of the Pledge Documents has been duly executed and delivered
by the Guarantor, and each constitutes valid and legally binding
obligations of the Guarantor, enforceable in accordance with their
respective terms.
c. Except as set forth on Schedule 11(c) to this Agreement, there is
no litigation, arbitration proceeding or governmental proceeding
pending or, to the knowledge of the Guarantor, threatened, against
the Guarantor that could materially impair the ability of the
Guarantor to perform his obligations under the Pledge Documents.
d. The execution, delivery and performance of the Pledge Documents
will not result in the creation of any other encumbrance or charge
upon any asset of the Guarantor pursuant to the terms of any other
agreement. No provision of any existing agreement, mortgage,
indenture, or contract binding on the Guarantor or affecting any
of his assets is in effect that would in any way prevent the
execution, delivery, or carrying out of the terms of the Pledge
Documents.
e. Guarantor's guaranty pursuant to this Guaranty Agreement
reasonably may be expected to benefit, directly or indirectly,
Guarantor.
f. The representations and warranties of the Guarantor contained in
the Pledge Documents shall survive delivery of this Guaranty
Agreement, the Pledge Agreement, the Loan Agreement and the
Advances (as defined in the Loan Agreement).
12. This Guaranty Agreement is and shall be in every particular
available to the successors and assigns of eSoft and is and shall always be
fully binding upon the heirs, legal representatives, successors and assigns of
Guarantor, notwithstanding that some or all of the monies, the repayment of
which this Guaranty Agreement applies, may be actually advanced after any
bankruptcy, receivership, reorganization or other event affecting Guarantor.
13. Any notice or demand to Guarantor under or in connection with this
Guaranty Agreement may be given and shall conclusively be deemed and considered
to have been given and received upon the deposit thereof, in writing, duly
stamped and addressed to Guarantor at the address of Guarantor appearing on the
records of eSoft, in the U.S. mail, but actual notice, however given or
received, shall always be effective.
4
<PAGE> 5
14. This Guaranty Agreement and the obligations of the Guarantor
hereunder shall be governed by and construed in accordance with the laws of the
State of Colorado. For purposes of any proceeding involving this Guaranty
Agreement or any of the obligations of the Guarantor, the Guarantor hereby
submits to the non-exclusive jurisdiction of the courts of the State of
Colorado and of the United States having jurisdiction in the County of Boulder
and State of Colorado, and agrees not to raise and waives any objection to or
defense based upon personal jurisdiction or the venue of any such court or
based upon forum non conveniens. The Guarantor agrees not to bring any action
or other proceedings with respect to this Guaranty Agreement or with respect to
any of his obligations hereunder in any other court unless such courts of the
State of Colorado and of the United States determine that they do not have
jurisdiction in the matter.
15. This Guaranty Agreement represents the final agreement between the
parties and may not be contradicted by evidence of prior, contemporaneous, or
subsequent oral agreements of the parties.
16. There are no unwritten oral agreements between parties.
5
<PAGE> 6
IN WITNESS WHEREOF, the parties hereto have executed this Agreement on
the date first written above.
GUARANTOR
/s/ Tom Loutzenheiser
---------------------------------------------
Name: Tom Loutzenheiser
ESOFT
eSOFT, INC.
By: /s/ Jeffrey Finn
------------------------------------------
Name: Jeffrey Finn
Title: President and Chief Executive Officer
6
<PAGE> 1
EXHIBIT 10.42
EMPLOYMENT AGREEMENT
This Employment Agreement ("Agreement") is made and entered
into as of this 15th day of December, 1998, between eSoft, Inc., a Delaware
corporation (the "Company"), and JANE MERICKEL, an individual person (the
"Executive").
RECITAL
A. The Company desires to employ the Executive as VICE
PRESIDENT OF MARKETING, 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 MARKETING. Subject to Section 4, the term of
Executive's employment under this Agreement (the "Term") shall be for 36
months, beginning DECEMBER 15, 1998 and ending DECEMBER 14, 2001.
2. Duties, Responsibilities and Authority. In the capacity as
VICE PRESIDENT OF MARKETING for the Company, the Executive shall have primary
responsibility for advertising, promotion, pricing, marketing communications,
public relations, web presence, and market research. Also, Executive
establishes marketing plans and strategies necessary to reach corporate sales,
profitability and product support goals. 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 professional and
managerial time and effort to the performance of the duties as VICE PRESIDENT
OF MARKETING 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.
<PAGE> 2
3. Compensation
(a) Salary. For services rendered under this
Agreement, the Company shall pay the Executive a salary at the rate of
$7,500.00 per month.
(b) Bonuses. The Executive shall be eligible to
receive a performance bonus based upon mutually
agreed performance criteria for each fiscal quarter of the Company completed
during the term of this Agreement beginning with the fiscal quarter commencing
January 1, 1999. The maximum aggregate amount of the bonuses shall be $7,500
for the first quarter of 1999, $8,500 for the second quarter of 1999, and
$10,000 per quarter thereafter. The payment of the Executive's performance
bonus shall be made as soon as practicable but no later than sixty (60) days
following the end of the fiscal quarter. The Executive shall not be entitled to
a minimum performance bonus.
(c) Annual Review. The Executive's salary, 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.
(d) 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.
(e) Benefits and Vacation. The Executive shall be
eligible to participate in such insurance programs (health, disability or life)
or such other health, dental, retirement or similar employee benefits programs
as the Board may approve, on a basis comparable to that available to other
officers and executive employees of the Company. The Executive shall be
entitled to a minimum of 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 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.
(f) Reimbursement of Expenses. The Company shall
reimburse the Executive in a timely manner for all reasonable out-of-pocket
expenses incurred by the Executive in connection with the performance of
Executive's duties under this Agreement; provided that the Executive presents
to the Company an itemized accounting of such expenses including reasonable
supporting data.
<PAGE> 3
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.
(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.
<PAGE> 4
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 Intemal 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.
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
<PAGE> 5
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.
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 4206 #D South Granby Street Aurora, CO 80014.
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.
<PAGE> 6
(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/ Jane Merickel
-----------------------------------------
Jane Merickel
<PAGE> 1
EXHIBIT 23.1
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/ BALUKOFF, LINDSTROM & CO., P.A.
Boise, Idaho
March 17, 1999
<PAGE> 2
CONSENT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
eSoft, Inc.
Boulder, Colorado
We hereby consent to the use in the Proxy Statement - Prospectus, constituting
a part of this Registration Statement, of our report dated January 29, 1999,
relating to the financial statements 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
March 18, 1999
