<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A-1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): September 10, 1999
eSOFT, INC.
(Exact name of registrant as specified in its charter)
<TABLE>
<CAPTION>
<S> <C> <C>
DELAWARE 00-23527 84-0938960
(State or other jurisdiction of (Commission File Number) (I.R.S. Employer
incorporation or organization) Identification Number)
</TABLE>
295 INTERLOCKEN BOULEVARD, SUITE 500
BROOMFIELD, COLORADO 80021
(303) 444-1600
(Address and Telephone Number of Registrant's Principal Executive Office)
<PAGE> 2
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On September 10, 1999, eSoft, Inc. (the "Company") consummated a merger
with Technologic, Inc., a Georgia corporation ("Technologic"), pursuant to which
Technologic became a wholly-owned subsidiary of the Company (the "Merger"). In
consideration for the Merger, upon its completion, each share of Technologic
common stock was converted into the right to receive .308659 shares of eSoft
common stock, for a total of 1,244,435 shares of eSoft common stock, and each
outstanding and unexercised option to purchase a share of Technologic common
stock was converted into an option or a right to purchase .308659 shares of
eSoft common stock, for a total of 180,565 shares of eSoft common stock. In
addition, 75,000 shares of eSoft common stock were delivered to Technologic's
financial advisor or its affiliates in satisfaction of its fee for services
rendered in connection with the Merger. The Merger has been accounted for as a
pooling of interests.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS.
(a) Financial Statements of Businesses Acquired.
(i) The unaudited financial statements of Technologic, Inc. at June
30, 1999 and for the six months ended June 30, 1999 and 1998 are
set forth at pages F-1 to F-17 attached here-to.
(ii) The audited financial statements of Technologic, Inc. at December
31, 1998 and for the two years in the period ended December 31,
1998 are set forth at pages F-1 to F-17 attached hereto.
(b) Unaudited Pro Forma Condensed Combined Financial Information.
Unaudited pro forma condensed combined financial information giving
effect to the merger with Technologic, Inc. are set forth at pages
F-18 to F-23 attached hereto.
(c) Exhibits.
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
2.1 Agreement and Plan of Merger dated September 10, 1999 between eSoft,
Inc., eSoft Acquisition Corporation and Technologic, Inc. (filed
with current report on Form 8-K on September 27, 1999 and
incorporated herein by reference).
2.2 Form of Stockholders Agreement executed by Technologic, Inc.
stockholders in connection with the merger (filed with current
report on Form 8-K on September 27, 1999 and incorporated herein by
reference).
2.3 Form of Escrow Agreement executed by eSoft, Inc., Brian E. Cohen and
Norwest Bank, N.A. (filed with current report on Form 8-K on
September 27, 1999 and incorporated herein by reference)
<PAGE> 3
EXHIBIT
NUMBER DESCRIPTION OF EXHIBITS
------- -----------------------
2.5 Employment Agreement by and between eSoft, Inc. and Brian E. Cohen
(filed with current report on Form 8-K on September 27, 1999 and
incorporated herein by reference).
2.6 Employment Agreement by and between eSoft, Inc. and Perry B. Finn
(filed with current report on Form 8-K on September 27, 1999 and
incorporated herein by reference).
<PAGE> 4
TECHNOLOGIC, INC.
CONTENTS
================================================================================
<TABLE>
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS F-2
FINANCIAL STATEMENTS
Balance sheets F-3 - F-4
Statements of operations F-5
Statements of stockholders' equity (capital deficit) F-6
Statements of cash flows F-7
Notes to financial statements F-8 - F-17
</TABLE>
<PAGE> 5
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Technologic, Inc.
Norcross, Georgia
We have audited the accompanying balance sheet of Technologic, Inc. as of
December 31, 1998, and the related statements of operations, stockholders'
equity (capital 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 audits 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 Technologic, Inc. 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.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2 to the
financial statements, the Company has suffered recurring losses from operations
and has a working capital deficiency that raise substantial doubt about its
ability to continue as a going concern. Management's plan in regards to these
matters is also described in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ BDO Seidman, LLP
------------------------------
BDO Seidman, LLP
Atlanta, Georgia
August 20, 1999
F-2
<PAGE> 6
TECHNOLOGIC, INC.
BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
------------ ----------
(unaudited)
<S> <C> <C>
ASSETS
CURRENT
Cash and cash equivalents $ 54,440 $ 42,745
Trading securities (Note 3) 183,189 --
Accounts receivable, net of allowance of $46,000 and $46,000 151,075 132,286
Inventories 40,223 26,866
Prepaid marketing expenses 9,729 60,015
Other prepaid expenses 61,883 51,271
---------- ----------
Total current assets 500,539 313,183
---------- ----------
PROPERTY AND EQUIPMENT
Computer equipment 196,541 208,160
Leasehold improvements 175,915 175,915
Furniture and equipment 80,034 71,251
---------- ----------
452,490 455,326
Less accumulated depreciation 155,011 146,615
---------- ----------
Net property and equipment 297,479 308,711
---------- ----------
Restricted cash and cash equivalents 85,000 --
---------- ----------
$ 883,018 $ 621,894
========== ==========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 7
TECHNOLOGIC, INC.
BALANCE SHEETS
================================================================================
<TABLE>
<CAPTION>
December 31, June 30,
1998 1999
----------- -----------
(unaudited)
<S> <C> <C>
LIABILITIES AND STOCKHOLDERS' EQUITY (CAPITAL DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 139,195 $ 294,834
Current portion of long term debt (Note 4) 26,045 19,533
Margin loan on investments 39,544 --
Deferred revenue 235,397 255,961
Accrued expenses:
Payroll and payroll expenses 2,151 41,527
Royalties payable 71,898 199,287
Other 57,836 3,329
----------- -----------
Total current liabilities 572,066 814,471
----------- -----------
LONG-TERM DEBT (Note 4) 6,511 --
----------- -----------
COMMITMENTS AND CONTINGENCIES (Notes 8 and 9)
STOCKHOLDERS' EQUITY (capital deficit) (Note 9)
Common stock, $0.001 par value, 15,000,000 shares
authorized; 8,307,150 shares issued; 4,016,750
shares outstanding 8,307 8,307
Additional paid-in capital 171,051 171,051
Retained earnings (accumulated deficit) 236,266 (260,752)
Treasury stock, at cost (111,183) (111,183)
----------- -----------
Total stockholders' equity (capital deficit) 304,441 (192,577)
----------- -----------
$ 883,018 $ 621,894
=========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 8
TECHNOLOGIC, INC.
STATEMENTS OF OPERATIONS
================================================================================
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
---------------------------- ----------------------------
1998 1997 1999 1998
------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
REVENUES
Hardware and software $ 1,295,078 $ 746,483 $ 732,576 $ 597,826
Maintenance and other services 639,180 478,523 385,042 294,989
------------ ------------ ------------ ------------
1,934,258 1,225,006 1,117,618 892,815
------------ ------------ ------------ ------------
COST OF GOODS SOLD 442,329 320,642 356,957 233,917
------------ ------------ ------------ ------------
Gross profit 1,491,929 904,364 760,661 658,898
------------ ------------ ------------ ------------
EXPENSES
Selling and marketing 569,839 618,906 381,190 243,655
General and administrative 1,051,304 763,237 584,047 404,635
Engineering 266,146 227,171 238,970 152,749
Research and development 351,775 343,488 173,816 111,103
------------ ------------ ------------ ------------
Total costs and expenses 2,239,064 1,952,802 1,378,023 912,142
------------ ------------ ------------ ------------
Operating loss (747,135) (1,048,438) (617,362) (253,244)
Realized gain on trading
securities (Note 3) 234,940 2,020,292 109,445 --
Unrealized gain (loss) on trading
securities (Note 3) 72,361 (460,610) -- 36,181
Other income (expenses) 26,251 (25,577) 10,899 (7,096)
------------ ------------ ------------ ------------
NET (LOSS) INCOME $ (413,583) $ 485,667 $ (497,018) $ (224,159)
============ ============ ============ ============
NET (LOSS) INCOME PER SHARE -
BASIC AND DILUTED (Note 7) $ (0.09) $ 0.11 $ (0.12) $ (0.06)
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING-BASIC (Note 7) 4,355,800 4,342,825 4,016,750 3,971,175
============ ============ ============ ============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING-DILUTED (Note 7) 4,355,800 4,367,825 4,016,750 3,971,175
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 9
TECHNOLOGIC, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
(CAPITAL DEFICIT)
================================================================================
<TABLE>
<CAPTION>
Shares Retained
------------------------- Additional Earnings
Common Treasury Common Treasury Paid-in (Accumulated
Stock Stock Stock Stock Capital Deficit) Total
----------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE,
at January 1, 1997 163,893 (76,296)) $ 164 $ (75,042) $ 174,133 $ 414,182 $ 513,437
50-for-1 stock split
effective January 14, 1998 8,030,757 (3,738,504) 8,030 -- (8,030) -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE,
at January 1, 1997
(as adjusted) 8,194,650 (3,814,800) 8,194 (75,042) 166,103 414,182 513,437
Purchase of treasury
stock -- (74,050) -- (1) -- -- (1)
Net income -- -- -- -- -- 485,667 485,667
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE,
at December 31, 1997 8,194,650 (3,888,850) 8,194 (75,043) 166,103 899,849 999,103
Cash dividend -- -- -- -- -- (250,000) (250,000)
Issuance of common stock 112,500 -- 113 -- 4,948 -- 5,061
Purchase of treasury
stock -- (401,550) -- (36,140) -- -- (36,140)
Net (loss) -- -- -- -- -- (413,583) (413,583)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE,
at December 31, 1998 8,307,150 (4,290,400) 8,307 (111,183) 171,051 236,266 304,441
Net (loss) (unaudited) -- -- -- -- -- (497,018) (497,018)
----------- ----------- ----------- ----------- ----------- ----------- -----------
BALANCE,
at June 30, 1999
(unaudited) 8,307,150 (4,290,400) $ 8,307 $ (111,183) $ 171,051 $ (260,752) $ (192,577)
=========== =========== =========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 10
TECHNOLOGIC, INC.
STATEMENTS OF CASH FLOWS
================================================================================
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
---------------------------- ----------------------------
1998 1997 1999 1998
------------ ------------ ------------ ------------
(unaudited)
<S> <C> <C> <C> <C>
OPERATING ACTIVITIES
Net (loss) income $ (413,583) $ 485,667 $ (497,018) $ (224,159)
Adjustments to reconcile net (loss)
income to cash (used by) provided
by operating activities:
Depreciation 73,177 39,750 25,166 18,836
Proceeds from sale of trading
securities 234,940 2,020,292 292,634 --
Realized (gain) from sale of
trading securities (234,940) (2,020,292) (109,445) --
Unrealized (gain) loss from trading
securities (72,361) 460,610 -- (36,181)
Change in operating assets and
liabilities:
Accounts receivable 58,533 (8,869) 18,789 (119,031)
Inventories (40,223) -- 13,357 --
Prepaid expenses and other 15,618 95,585 (39,674) (171,516)
Accounts payable 985 93,632 155,639 985
Deferred revenue 126,936 4,850 20,564 110,599
Accrued expenses (22,501) (3,251) 112,258 (118,667)
------------ ------------ ------------ ------------
Cash (used by) provided by operating
activities (273,419) 1,167,974 (7,730) (539,134)
------------ ------------ ------------ ------------
INVESTING ACTIVITIES
Property and equipment additions (248,473) (54,031) (36,398) (210,051)
Deposit on leased facilities (85,000) -- 85,000 --
------------ ------------ ------------ ------------
Cash (used by) provided by investing
activities (333,473) (54,031) 48,602 (210,051)
------------ ------------ ------------ ------------
FINANCING ACTIVITIES
Proceeds from (repayment of) long-debt 32,556 -- (13,023) 26,045
Repayment of line of credit (58,600) (19,532) -- (58,600)
Proceeds from (repayment of) margin
loan on investments 39,544 (192,510) (39,544) --
Common stock issued 5,061 -- -- --
Purchase of treasury stock (36,140) (1) -- --
Payment of cash dividend (250,000) -- -- --
------------ ------------ ------------ ------------
Cash used by financing activities (267,579) (212,043) (52,567) (32,555)
------------ ------------ ------------ ------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (874,471) 901,900 (11,695) (781,740)
CASH AND CASH EQUIVALENTS, beginning
of period 928,911 27,011 54,440 928,911
------------ ------------ ------------ ------------
CASH AND CASH EQUIVALENTS, end of period $ 54,440 $ 928,911 $ 42,745 $ 147,171
============ ============ ============ ============
</TABLE>
See accompanying notes to financial statements.
F-7
<PAGE> 11
TECHNOLOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
1. SUMMARY OF NATURE OF OPERATIONS
SIGNIFICANT
ACCOUNTING Technologic, Inc. (the "Company") was founded
POLICIES September 14, 1992, as a Georgia Corporation. The
Company develops and markets secure internet
connectivity solutions principally in the midwestern
and eastern United States.
REVENUE RECOGNITION
Revenue from software sales is recognized upon
shipment in instances where the Company has evidence
of a contract, the fee charged is fixed and
determinable and collection is probable. Hardware and
software bundled sales (internet security appliances)
are recognized upon product shipment. Revenue from
support and maintenance contracts, which are
typically one year in length, is recognized ratably
over the life of the contract. Revenue from other
services is recognized as the services are provided.
CASH AND CASH EQUIVALENTS
For purposes of cash flows, the Company considers all
short-term securities purchased with a maturity of
three months or less to be cash equivalents.
TRADING SECURITIES
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 operations. Gains and losses on
securities sold are determined based on the specific
identification of the securities sold.
INVENTORIES
Inventory consists primarily of supplies and computer
hardware. Inventory is accounted for on the first-in,
first-out basis and reported at the lower of cost or
market.
F-8
<PAGE> 12
TECHNOLOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
MARKETING EXPENSES
The Company expenses marketing costs as they are
performed. Certain marketing expenses have been paid
in advance of services received by the Company which
are classified as prepaid marketing expenses.
PROPERTY AND EQUIPMENT
Property and equipment are stated at cost.
Depreciation is computed over the estimated useful
lives, generally three to seven years, of the
respective assets on the straight-line basis.
Leasehold improvements are amortized over the lesser
of the estimated useful life or of the life of the
lease.
Expenditures for major renewals and betterments that
extend the useful lives of property and equipment are
capitalized. Expenditures for repairs and maintenance
are charged to expense as incurred.
RESEARCH AND DEVELOPMENT COSTS
Software development costs are expensed as incurred
prior to establishing the technological feasibility
of a product. For the period between the
establishment of technological feasibility and the
time a product is available for general release, such
costs are capitalized. The Company has not
capitalized any research and development costs to
date.
STOCK SPLIT
The Company's Board of Directors authorized a
50-for-1 stock split effected in the form of a 49
share dividend payable January 14, 1998 to
shareholders of record on December 31, 1997. All
share and per share amounts in the accompanying
financial statements have been restated to give
effect to the stock split.
INCOME TAXES
The Company is an S Corporation for income tax
purposes and, consequently, the stockholders include
the taxable income or loss of the Company on their
individual income tax returns. Accordingly, there is
no provision for income taxes on the financial
statements.
F-9
<PAGE> 13
TECHNOLOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
NET (LOSS) INCOME PER SHARE
The Company follows the provisions of Statement of
Financial Accounting Standards ("SFAS") No. 128,
"Earnings Per Share." SFAS No. 128 provides for the
calculation of "Basic" and "Diluted" earnings (loss)
per share. Basic earnings (loss) 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 (loss) per share reflects
the potential dilution of securities that could share
in the earnings of an entity. In loss periods,
dilutive contingently issuable shares of common stock
are excluded as the effect would be anti-dilutive.
Refer to Note 7.
STOCK OPTIONS
The Company applies Accounting Principles Board
Opinion ("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," established accounting and disclosure
requirements using a fair value based method of
accounting for stock-based employee compensation
plans. The Company has elected to adopt the
disclosure requirements of SFAS No. 123.
MANAGEMENT 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 and disclosure of contingent assets and
liabilities at the date of the financial statements
and the reported amounts of revenues and expenses
during the reporting period. Actual results could
differ from those estimates.
F-10
<PAGE> 14
TECHNOLOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
INTERIM FINANCIAL STATEMENTS
In the opinion of management, the accompanying
unaudited interim financial statements contain all
adjustments (consisting of normal recurring accruals)
necessary to present fairly the Company's financial
position as of June 30, 1999, and the results of
operations and cash flows for the six months ended
June 30, 1998 and 1999. The results of operations for
the six months ended June 30, 1998 and 1999, are not
necessarily indicative of the results to be expected
for the full year.
IMPACT OF RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
Statement of Position ("SOP") 97-2, "Software Revenue
Recognition," issued by the American Institute of
Certified Public Accountants, became effective in
1998. This Statement provides guidance on applying
generally accepted accounting principles in
recognizing revenue on software transactions and
establishes certain criteria for revenue recognition.
The revenue recognition criteria stated in the
pronouncement had no material impact on the Company's
financial statements.
SOP 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use,"
issued in April 1998, provides guidance on accounting
for the costs of computer software developed or
obtained for internal use and determining whether
computer software is for internal use. This statement
is effective for fiscal years beginning after
December 15, 1998. Adoption of this statement did not
have a significant impact on the Company's 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. The adoption of
SOP 98-5 had no material effect on the Company's
financial statements.
F-11
<PAGE> 15
TECHNOLOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
SFAS No. 133, "Accounting for Derivative Instruments
and Hedging Activities," is effective for all fiscal
quarters of fiscal years beginning after June 15,
2000. SFAS No. 133 requires companies to recognize
all derivatives contracts as either assets or
liabilities in the balance sheet and to measure them
at fair value. If certain conditions are met, a
derivative may be specifically designated as a hedge,
the objective of which is to match the timing of gain
or loss recognition on the hedging derivative with
the recognition of (i) the changes in the fair value
of the hedged asset or liability that are
attributable to the hedged risk or (ii) the earnings
effect of the hedged forecasted transaction. For a
derivative not designated as a hedging instrument,
the gain or loss is recognized in income in the
period of change. Historically, the Company has not
entered into derivatives contracts either to hedge
existing risks or for speculative purposes.
Accordingly, the Company does not expect adoption of
the new standard on January 1, 2001, to affect its
financial statements.
2. GOING CONCERN The Company has experienced losses totalling $413,583
for the year ended December 31, 1998 and has a
working capital deficit of $71,527 at December 31,
1998. These matters raise substantial doubt about the
Company's ability to continue as a going concern.
Management's immediate plans are to merge with eSoft
Incorporated, a publicly traded company, which
management believes will provide the Company with the
necessary funds to operate on a going forward basis.
(Note 8). In the event the merger is not completed,
the current owners plan to contribute additional
paid-in capital. There can be no assurances that the
aforementioned merger will occur, or in the event
that the merger doesn't occur, that the necessary
capital funding will be received. The accompanying
financial statements do not include any adjustments
relating to the recoverability and classifications of
recorded asset amounts or the amounts and
classifications of liabilities that might be
necessary should the Company be unable to continue as
a going concern.
3. TRADING SECURITIES Trading securities consist of common stock of a
single corporation. These securities are carried at
the market value as of December 31, 1998 of $183,189
(cost of $10). Realized gains during the periods
included in the statements of operations pertain to
sales made of the above mentioned common stock.
F-12
<PAGE> 16
TECHNOLOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
4. LONG-TERM DEBT Long-term debt consists of a note payable to a bank
with interest at the bank's prime rate plus 2% (9.75%
at December 31, 1998 and June 30, 1999). The note is
payable in monthly installments of approximately
$2,170 plus interest through March 10, 2000. The note
is collateralized by guarantees from certain
shareholders of the Company.
5. EMPLOYEE BENEFIT Effective January 1, 1995, the Company established a
PLAN 401(k) plan whereby employees, upon attaining 21
years of age, are eligible to contribute up to the
maximum percentage of their salary allowable under
applicable IRS Code Sections. The Company makes
mandatory matching contributions which are at a rate
of 25% of up to 6% of employee contributions. The
Company made mandatory matching contributions for the
years ended December 31, 1998 and 1997 and the six
months ended June 30, 1999 in the amounts of $11,426,
$4,464 and $9,565, respectively.
6. STOCK OPTION In September 2, 1994, the Company adopted the Stock
Option Plan of 1994 PLAN (the "Plan") which provides
for the granting of fixed stock options to purchase
shares of the Company's common stock by key
employees, officers and directors of the Company and
consultants to the Company. The timing, number, and
recipients of the options are generally at the
discretion of the Board of Directors and may be based
on conditions of financial performance of the
Company. No options may be granted to an employee who
possesses more than 10% of the voting power of all
classes of stock of the Company. Subject to certain
changes in capital structure, a maximum of 1,000,000
common stock shares may be issued under the Plan. The
option price is determined by the Board but generally
may not be less than the fair market value of the
stock on the date the option is granted. No one
person may be granted incentive stock options such
that the fair market value of the stock with respect
to which such stock options are exercisable for the
first time during any calendar year is in excess of
$100,000. The options generally vest over a five year
period and expire in ten years (see Note 9).
F-13
<PAGE> 17
TECHNOLOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
The following table summarizes information relative to the Plan:
<TABLE>
<CAPTION>
Weighted
Shares Average
Under Exercise
Option Price
------------ ------------
<S> <C> <C>
Outstanding at January 1, 1997 167,500 $ 0.31
Granted in 1997 225,000 0.36
------------
Outstanding at December 31, 1997 392,500 0.34
Granted in 1998 227,500 0.40
------------
Outstanding at December 31, 1998 620,000 0.36
Granted in six months ended
June 30, 1999 (unaudited) 250,000 0.40
Forfeited in six months ended June
30, 1999 (unaudited) (225,000) 0.37
------------
Outstanding at June 30, 1999
(unaudited) 645,000 0.37
============
</TABLE>
The weighted average fair value of options granted for the years
ended December 31, 1998 and 1997 and the six months ended June 30,
1999 was $0.05, $0.07 and $0.04, respectively.
The following table summarizes the information about the Company's
outstanding stock options at December 31, 1998 and 1997 and June
30, 1999:
<TABLE>
<CAPTION>
Outstanding Exercisable
--------------------------- ------------------------------------------
December 31,
Exercise December 31, June 30, --------------------------- June 30,
Price 1998 1999 1998 1997 1999
- --------------- ------------ ------------ ------------ ------------ ------------
(unaudited) (unaudited)
<S> <C> <C> <C> <C> <C>
$ 0.24 75,000 75,000 30,000 15,000 45,000
0.36 317,500 122,500 82,000 18,500 67,000
0.40 227,500 447,500 -- -- 50,500
------------ ------------ ------------ ------------ ------------
Total 620,000 645,000 112,000 33,500 162,500
============ ============ ============ ============ ============
Weighted
Average $ 0.36 $ 0.37 $ 0.33 $ 0.31 $ 0.34
============ ============ ============ ============ ============
</TABLE>
F-14
<PAGE> 18
TECHNOLOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
Weighted-Average Remaining
Contractual Life of Options
Outstanding Years
--------------------------------
Exercise December 31 June 30,
Price 1998 1999
--------------------------------------------------------------
(unaudited)
<S> <C> <C>
$0.24 8.3 7.8
0.36 9.4 8.4
0.40 9.4 9.3
</TABLE>
The Company applies APB 25 and related Interpretations in accounting
for its plan. Accordingly, no compensation cost has been recognized
for its fixed stock options.
Had compensation cost for the Company's stock-based compensation
plan been determined based on the fair value at the grant dates for
awards under the plan consistent with the fair value method
prescribed by SFAS No. 123, "Accounting for Stock-Based
Compensation," the Company's net (loss) income would have been
increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
Years Ended December 31, Six Months
------------------------ Ended June 30,
1998 1997 1999
--------- --------- ----------
(unaudited)
<S> <C> <C> <C>
Net (loss) income
As reported $(413,583) $485,667 $(497,018)
Pro forma (424,889) 470,964 (505,787)
Basic net (loss) income
per share
As reported $(0.09) $0.11 $(0.12)
Pro forma (0.10) 0.11 (0.13)
Diluted net (loss) income
per share
As reported $(0.09) $0.11 $(0.12)
Pro forma (0.10) 0.11 (0.13)
</TABLE>
F-15
<PAGE> 19
TECHNOLOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
The fair value of options granted is estimated using
the minimum value method with the following
weighted-average assumptions: no dividend yield;
risk-free interest rate of 5.31%, 5.99% and 4.75% for
the years ended December 31, 1998 and 1997 and the
six months needed June 30, 1999, respectively; and an
expected life of 2.6, 3.5 and 2.0 for the years ended
December 31, 1998 and 1997 and the six months ended
June 30, 1999, respectively.
7. NET (LOSS) INCOME Statement of Financial Accounting Standards No. 128,
PER SHARE "Earnings Per Share", requires two presentations of
earnings per share - "Basic" and "Diluted". Basic
(loss) earnings per share is computed by dividing net
income or loss available to common shareholders (the
numerator) by the weighted - average number of common
shares (the denominator) for the period. The
computation of diluted (loss) earnings per share is
similar to basic (loss) earnings per share, except
the denominator is increased to include the number of
additional common shares that would have been
outstanding if the potentially dilutive common shares
had been issued.
The numerator in calculating both basic and diluted
(loss) earnings per share for each period is reported
net (loss) income. The denominator is based on the
following weighted-average number of common shares:
<TABLE>
<CAPTION>
Years Ended December 31, Six Months Ended June 30,
------------------------- -------------------------
1998 1997 1999 1998
---------- ----------- ---------- ----------
<S> <C> <C> <C> <C>
Basic 4,355,800 4,342,825 4,016,750 3,971,175
Diluted 4,355,800 4,367,825 4,016,750 3,971,175
</TABLE>
The difference between basic and diluted
weighted-average common shares for the year ended
December 31, 1997 results from 25,000 "In-the Money"
options being included in diluted weighted-average
common shares.
For the year ended December 31, 1998 and the six
months ended June 30, 1999 and 1998, total stock
options of 620,000, 645,000 and 495,000 were not
included in the computation of diluted loss per share
because their effect was anti-dilutive.
F-16
<PAGE> 20
TECHNOLOGIC, INC.
NOTES TO FINANCIAL STATEMENTS
================================================================================
8. COMMITMENTS AND The Company leases its facilities under a
CONTINGENCIES noncancellable operating lease agreement which
expires in 2003. Rent expense for the years ended
December 31, 1998 and 1997 and the six months ended
June 30, 1999 was $69,129, $85,880 and $37,215,
respectively.
9. SUBSEQUENT EVENT Proposed Business Combination
In May 1999, the Company began discussions with
eSoft, Incorporated ("eSoft") regarding the merger of
the Company and eSoft in a proposed transaction
expected to be accounted for as a pooling of
interests. In the proposed transaction, the Company
would exchange all of its issued and outstanding
common stock shares and options, equal to
approximately 4.6 million shares, for eSoft common
stock shares. This transaction is expected to be
completed in the third quarter of 1999.
Additionally, this event is a "change in control" as
defined in the Company's Stock Option Plan of 1994
(Note 6) which accelerates the vesting provisions of
certain of the exercisable options.
F-17
<PAGE> 21
eSOFT, INC.
AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
(UNAUDITED)
================================================================================
The Unaudited Pro Forma Condensed Combined Financial information reflects
financial information which gives effect to eSoft, Inc.'s ("eSoft" or the
"Company") merger (the "Merger") with Technologic, Inc. ("Technologic"), which
provided for the issuance of 1,244,435 shares of eSoft common stock for all of
the outstanding stock of Technologic, and the conversion of all Technologic
stock options into eSoft stock options to acquire 180,565 shares of eSoft common
stock. The Pro Forma Financial Information included herein reflects the use of
the pooling of interests method of accounting, after giving effect to the pro
forma adjustments discussed in the accompanying notes. Such financial
information has been prepared from, and should be read in conjunction with, the
historical consolidated financial statements and notes thereto of eSoft and
Technologic.
The Pro Forma Condensed Combined Balance Sheet gives effect to the Merger as if
it had occurred on June 30, 1999, combining the balance sheets of eSoft at June
30, 1999, with that of Technologic as of June 30, 1999. The Pro Forma Condensed
Combined Statements of Operations gives effect to the Merger as if it had
occurred at the beginning of the earliest period presented, combining the
results of eSoft for the six months ended June 30, 1999, and each year in the
two year period ended December 31, 1998 with those of Technologic, for the same
periods.
The Pro Forma Condensed Combined Statements of Operations presented do not
include any potential cost savings. The Company believes that it may be able to
reduce salaries and related costs and office and general expenses as it
eliminates duplications of overhead. However, there can be no assurance that the
Company will be successful in effecting any such cost savings.
The Pro Forma Condensed Combined Financial Information is unaudited and is not
necessarily indicative of the consolidated results which actually would have
occurred if the above transactions had been consummated at the beginning of the
periods presented, nor does it purport to present the future financial position
and results of operations for future periods.
F-18
<PAGE> 22
eSOFT, INC.
AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED
FINANCIAL INFORMATION
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
eSoft, Inc. Technologic, Pro Forma
June 30, 1999 and Subsidiary Inc. Adjustments Combined
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
ASSETS
CURRENT:
Cash and cash equivalents $ 1,765,216 $ 42,745 $ -- $ 1,807,961
Accounts receivable, net 2,982,953 132,286 -- 3,115,239
Inventories 743,732 26,866 -- 770,598
Prepaid marketing expenses -- 60,015 -- 60,015
Prepaid expenses and other 99,238 51,271 -- 150,509
------------ ------------ ------------ ------------
Total current assets 5,591,139 313,183 -- 5,904,322
------------ ------------ ------------ ------------
PROPERTY AND EQUIPMENT:
Computer equipment 371,278 208,160 -- 579,438
Furniture and equipment 330,478 247,166 -- 577,644
Manufacturing tool and equipment 26,424 -- -- 26,424
------------ ------------ ------------ ------------
728,180 455,326 -- 1,183,506
Less accumulated depreciation 386,321 146,615 -- 532,936
------------ ------------ ------------ ------------
Net property and equipment 341,859 308,711 -- 650,570
------------ ------------ ------------ ------------
OTHER ASSETS:
Capitalized software development
costs, net of accumulated
amortization of $356,279 786,069 -- -- 786,069
Deferred offering costs 429,471 -- -- 429,471
Other 18,628 -- -- 18,628
------------ ------------ ------------ ------------
Total other assets 1,234,168 -- -- 1,234,168
------------ ------------ ------------ ------------
$ 7,167,166 $ 621,894 $ -- $ 7,789,060
============ ============ ============ ============
</TABLE>
See notes to pro forma condensed combined balance sheet on page F-20.
F-19
<PAGE> 23
eSOFT, INC.
AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED
STATEMENTS OF OPERATIONS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
eSoft, Inc. Technologic, Pro Forma
June 30, 1999 and Subsidiary Inc. Adjustments Combined
-------------- ------------ -------------------- -------------
<S> <C> <C> <C> <C>
LIABILITIES AND
STOCKHOLDERS'
EQUITY (DEFICIT)
CURRENT:
Accounts payable $ 1,596,891 $ 294,834 $ -- $ 1,891,725
Revolving line of credit 80,000 -- -- 80,000
Notes payable 544,957 19,533 -- 564,490
Deferred revenue 31,873 255,961 -- 287,834
Accrued expenses:
Merger fees -- -- 290,625 (e) 290,625
Royalties -- 199,287 -- 199,287
Payroll and payroll expenses 143,804 41,527 -- 185,331
Other 693,107 3,329 -- 696,436
----------- ----------- --------- -------------
Total current liabilities 3,090,632 814,471 290,625 4,195,728
LONG TERM DEBT, NET OF CURRENT
PORTION 1,924,710 -- -- 1,924,710
----------- ----------- --------- -------------
Total liabilities 5,015,342 814,471 290,625 6,120,438
----------- ----------- --------- -------------
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock -- -- -- --
Common stock of Technologic -- 8,307 (8,307) (a) --
Common stock 93,489 -- 12,398 (b) 105,887
Additional paid-in capital 12,793,576 171,051 (376,026) (a),(b),(c),(d) 12,588,601
Treasury Stock -- (111,183) 111,183 (c) --
Notes receivable (151,411) -- -- (151,411)
Accumulated deficit (10,583,830) (260,752) (29,873) (d),(e) (10,874,455)
----------- ----------- --------- -------------
Total stockholders' equity (deficit) 2,151,824 (192,577) (290,625) 1,668,622
----------- ----------- --------- -------------
$ 7,167,166 $ 621,894 $ -- $ 7,789,060
=========== =========== ========= =============
</TABLE>
(a) Par value of the Technologic shares is eliminated and reclassified as newly
issued eSoft Common Stock.
(b) Represents par value of the 1,239,806 shares issued in connection with the
Merger, excluding options that could be exercised by current holders of
Technologic options, based on the number of outstanding Technologic shares
as of the balance sheet date.
(c) The value of treasury stock held by Technologic is reclassified as
additional paid-in capital.
(d) The undistributed losses of an S-Corporation at termination of S-Corporation
status are deemed distributed and contributed to the Corporation as a
reduction to additional paid-in capital.
(e) To record 75,000 shares of stock to be issued to investment bankers in
connection with the merger valued at $3.875 per share.
F-20
<PAGE> 24
eSOFT, INC.
AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED
STATEMENTS OF OPERATIONS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
eSoft, Inc. Technologic, Pro Forma
Six Months Ended June 30, 1999 and Subsidiary Inc. Adjustments Combined
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 2,689,219 $ 1,117,618 $ -- $ 3,806,837
COST OF GOODS SOLD 1,545,735 356,957 -- 1,902,692
------------ ------------ ------------ ------------
Gross profit 1,143,484 760,661 -- 1,904,145
------------ ------------ ------------ ------------
EXPENSES:
Selling and marketing 3,421,638 381,190 -- 3,802,828
General and administrative 2,902,864 584,047 -- 3,486,911
Engineering 476,119 238,970 -- 715,089
Research and development 181,894 173,816 -- 355,710
Amortization of software costs 83,652 -- -- 83,652
------------ ------------ ------------ ------------
Total costs and expenses 7,066,167 1,378,023 -- 8,444,190
------------ ------------ ------------ ------------
Loss from operations (5,922,683) (617,362) -- (6,540,045)
------------ ------------ ------------ ------------
OTHER (INCOME) EXPENSE:
Interest expense, net 25,860 -- -- 25,860
Realized gain on trading securities -- (109,445) -- (109,445)
Other (income) expense, net 95,782 (10,899) -- 84,883
Gain on sale of assets (450) -- -- (450)
------------ ------------ ------------ ------------
Total other (income) expense 121,192 (120,344) -- 848
------------ ------------ ------------ ------------
NET LOSS $ (6,043,875) $ (497,018) $ -- $ (6,540,893)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON
SHARE $ (.68) $ (.65)
============ ============
WEIGHTED-AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
BASIC AND DILUTED 8,829,594 10,069,400(f)
============ ============
</TABLE>
(f) Weighted-average number of common shares outstanding is calculated based on
the weighted-average number of common shares of Technologic for the periods
presented adjusted for the exchange ratio plus the weighted-average number of
common shares of eSoft.
F-21
<PAGE> 25
eSOFT, INC.
AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
eSoft, Inc. Technologic, Pro Forma
Year Ended December 31, 1998 and Subsidiary Inc. Adjustments Combined
-------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
REVENUES $ 7,675,706 $ 1,934,258 $ -- $ 9,609,964
COST OF GOODS SOLD 3,353,846 442,329 -- 3,796,175
------------- ------------- ------------- -------------
Gross profit 4,321,860 1,491,929 -- 5,813,789
------------- ------------- ------------- -------------
EXPENSES:
Selling and marketing 4,006,067 569,839 -- 4,575,906
General and administrative 3,154,864 1,051,304 -- 4,206,168
Engineering 715,951 266,146 -- 982,097
Research and development 382,792 351,775 -- 734,567
Amortization of software costs 189,399 -- -- 189,399
------------- ------------- ------------- -------------
Total costs and expenses 8,449,073 2,239,064 -- 10,688,137
------------- ------------- ------------- -------------
Loss from operations (4,127,213) (747,135) -- (4,874,348)
------------- ------------- ------------- -------------
OTHER (INCOME) EXPENSE:
Interest income, net (139,611) -- -- (139,611)
Realized gain on trading securities -- (234,940) -- (234,940)
Unrealized gain on trading securities -- (72,361) -- (72,361)
Other income, net -- (26,251) -- (26,251)
Loss on sale of assets 1,013 -- -- 1,013
------------- ------------- ------------- -------------
Total other (income) expense (138,598) (333,552) -- (472,150)
------------- ------------- ------------- -------------
Loss before income tax benefit (3,988,615) (413,583) -- (4,402,198)
Income tax benefit (162,000) -- -- (162,000)
------------- ------------- ------------- -------------
NET LOSS $ (3,826,615) $ (413,583) $ -- $ (4,240,198)
============= ============= ============= =============
BASIC AND DILUTED LOSS PER COMMON
SHARE $ (.54) $ (.50)
============= =============
WEIGHTED-AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
BASIC AND DILUTED 7,089,382 8,433,839(f)
============= =============
</TABLE>
See note (f) to pro forma condensed combined statement of operations on page
F-21.
F-22
<PAGE> 26
eSOFT, INC.
AND SUBSIDIARIES
PRO FORMA CONDENSED COMBINED
STATEMENT OF OPERATIONS
(UNAUDITED)
================================================================================
<TABLE>
<CAPTION>
eSoft, Inc. Technologic, Pro Forma
Year Ended December 31, 1997 and Subsidiary Inc. Adjustments Combined
-------------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
REVENUES $ 3,236,563 $ 1,225,006 $ -- $ 4,461,569
COST OF GOODS SOLD 1,492,119 320,642 -- 1,812,761
------------ ------------ ------------ ------------
Gross profit 1,744,444 904,364 -- 2,648,808
------------ ------------ ------------ ------------
EXPENSES:
Selling and marketing 793,397 618,906 -- 1,412,303
General and administrative 826,239 763,237 -- 1,589,476
Engineering 110,724 227,171 -- 337,895
Research and development 231,251 343,488 -- 574,739
Amortization of software costs 116,912 -- -- 116,912
------------ ------------ ------------ ------------
Total costs and expenses 2,078,523 1,952,802 -- 4,031,325
------------ ------------ ------------ ------------
Loss from operations (334,079) (1,048,438) -- (1,382,517)
------------ ------------ ------------ ------------
OTHER (INCOME) EXPENSE:
Interest expense, net 43,209 -- -- 43,209
Realized gain on trading securities -- (2,020,292) -- (2,020,292)
Unrealized loss on trading securities -- 460,610 -- 460,610
Other expense, net -- 25,577 -- 25,577
Loss on sale of assets 13,624 -- -- 13,624
------------ ------------ ------------ ------------
Total other (income) expense 56,833 (1,534,105) -- (1,477,272)
------------ ------------ ------------ ------------
Income (loss) before income tax expense (390,912) 485,667 -- 94,755
Income tax expense 162,000 -- 240,000(g) 402,000
------------ ------------ ------------ ------------
NET INCOME (LOSS) $ (552,912) $ 485,667 $ (240,000) $ (307,245)
============ ============ ============ ============
BASIC AND DILUTED LOSS PER COMMON
SHARE $ (.21) $ (.08)
============ ============
WEIGHTED-AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING
BASIC AND DILUTED 2,688,563 4,029,015(f)
============ ============
</TABLE>
See note (f) to pro forma condensed combined statement of operations on page
F-21.
(g) To record pro forma income tax expense for Technologic as if it were a
C-Corporation.
F-23
<PAGE> 27
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
eSoft, Inc.
Date: November 16, 1999 By: /s/ Jeffrey Finn
------------------------------
Name: Jeffrey Finn
Title: President and Chief
Executive Officer
