eSoft, Inc.
295 Interlocken Boulevard, #500
Broomfield, Colorado 80021
(303) 444-1600
OFFER TO EXCHANGE
OUTSTANDING OPTIONS
TO PURCHASE COMMON STOCK
December 6, 2001
ESOFT, INC.
OFFER TO EXCHANGE OUTSTANDING OPTIONS
THE OFFER EXPIRES AT 12:00 MIDNIGHT, U.S. MOUNTAIN STANDARD TIME,
ON JANUARY 8, 2002, UNLESS WE EXTEND THE OFFER
We are offering our employees, including our executive officers and members of our Board of Directors, the opportunity to exchange all outstanding options to purchase shares of our common stock that have an exercise price that is equal to or greater than $2.50 per share (Eligible Option Grants) for replacement options to purchase shares of our common stock (Replacement Options) (Offer). If you wish to accept this Offer, you must complete an Election Form agreeing to exchange your Eligible Option Grants for Replacement Options. In addition, if you wish to accept this Offer, you must exchangeall of your options that were granted in the six-month period prior to the date on which this Offer is first provided to you (the Commencement Date)—even if the exercise price of those options is less than $2.50 per share. This Offer is currently expected to expire at 12:00 midnight, U.S. Mountain Standard Time, on January 8, 2002, unless we extend the Offer to a later date (the Expiration Date). In other words:
Any options granted in the six-month period prior to the Commencement Date that are cancelled due to your participation in the Offer will be replaced by the same number of Replacement Options, subject to the conditions set forth below in this Offer.
The Replacement Options will be granted on July 9, 2002, or a later date if the Expiration Date is extended, provided that if our common stock is publicly traded on the Nasdaq or any Subsequent Market (as defined in the Glossary) and there are no reported sales of our common stock on such date, then the Replacement Option Grant Date will be the next day on which there is a reported sale (Replacement Option Grant Date). Each Replacement Option will have an exercise price equal to the Fair Market Value of our common stock on the Replacement Option Grant Date. The Fair Market Value will be (i) the closing price of our common stock as reported on Nasdaq or any other securities market that reports daily the closing selling price per share of our common stock or (ii) if our common stock is not publicly traded, the value of our common stock as determined in good faith by our Board of Directors on the Replacement Option Grant Date. The number of shares subject to each Replacement Option will equal the number of shares subject to each Eligible Option Grant you exchange, subject to adjustment.
We are making this Offer upon the terms, and subject to the conditions, described in this Offer to Exchange (and the attachments hereto) and in the related cover letter and attached Summary Term Sheet and Questions and Answers (which together, as they may be amended from time to time, constitute the Offer). Without limiting the preceding sentence, this Offer is subject to the conditions that we describe in Section 6 of the Offer to Exchange.
ALTHOUGH OUR BOARD OF DIRECTORS HAS APPROVED THIS OFFER, NEITHER WE NOR OUR BOARD OF DIRECTORS MAKES ANY RECOMMENDATION AS TO WHETHER YOU SHOULD TENDER YOUR ELIGIBLE OPTION GRANTS FOR EXCHANGE.
i
YOU MUST MAKE YOUR OWN DECISION WHETHER TO TENDER YOUR ELIGIBLE OPTION GRANTS.
Shares of our common stock are quoted on Nasdaq under the symbol "ESFT." On December 3, 2001 the closing price of our common stock as reported on Nasdaq was $0.96 per share. We recommend that you obtain current market quotations for our common stock before deciding whether to elect to exchange your Eligible Option Grants.
If you have any questions regarding the Offer, please consult the Summary Term Sheet and Questions and Answers. If the Summary Term Sheet or the Questions and Answers do not answer your questions, or if you need assistance completing the related documentation, please contact Cheryl Muench at cmuench@esoft.com or at (303) 444-1600 x3333.
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION (SEC), NOR HAS THE SEC PASSED UPON THE FAIRNESS OR MERITS OF SUCH TRANSACTION OR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
IMPORTANT
Your election to exchange one or more of your Eligible Option Grants is voluntary. If you decide to participate in this Offer,you must complete the Election Form contained in the packet sent to you and deliver it in accordance with its instructions before 12:00 midnight, U.S. Mountain Standard Time, on January 8, 2002, or if we extend the Offer such later Expiration Date. If you do not deliver the Election Form by the stated time on the Expiration Date, you will be deemed to have rejected the Offer. Delivery will be deemed made only when the Election Form is actually received by us. No late deliveries will be accepted. Please also note that, even if you timely deliver your Election Form, in order to preserve the status of options that are not exchanged pursuant to the Offer as incentive stock options, we retain the right to choose whether to accept your Eligible Option Grants for exchange. Accordingly, your Eligible Option Grants (and the related stock option agreements) will be automatically cancelled if, and only if, we accept your Eligible Option Grants for exchange. Nevertheless, we intend to accept promptly after the Expiration Date all Eligible Option Grants that are properly submitted to be exchanged and have not been validly withdrawn.
We cannot guarantee that the Replacement Options will have a lower exercise price than the Eligible Option Grants. However, our Board of Directors believes that the Offer may create a better chance for some participants to obtain value from their options and our stock option program in the short term. The Board of Directors recognizes that the decision to accept or reject the Offer is an individual one that should be based on a variety of factors. You should consult your personal advisors if you have questions about your financial and/or tax situation. The information about this Offer is limited to this document, the attached Summary Term Sheet and Questions and Answers and the Tender Offer Statement on Schedule T/O.
WE HAVE NOT AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON OUR BEHALF AS TO WHETHER OR NOT YOU SHOULD TENDER YOUR ELIGIBLE OPTION GRANTS PURSUANT TO THE OFFER. OTHER THAN AS SET FORTH IN THIS OFFER TO EXCHANGE, WE HAVE NOT AUTHORIZED ANYONE TO GIVE YOU ANY INFORMATION OR TO MAKE ANY REPRESENTATION IN CONNECTION WITH THIS OFFER OTHER THAN THE INFORMATION AND REPRESENTATIONS CONTAINED IN THIS DOCUMENT, THE ATTACHED SUMMARY TERM SHEET AND QUESTIONS AND ANSWERS AND THE TENDER OFFER STATEMENT ON SCHEDULE T/O. IF ANYONE MAKES ANY RECOMMENDATION OR REPRESENTATION TO YOU OR GIVES YOU ANY INFORMATION, YOU MUST NOT RELY UPON THAT RECOMMENDATION, REPRESENTATION OR INFORMATION AS HAVING BEEN AUTHORIZED BY US.
ii
Commencement Date means December 6, 2001, or such later date that we first provide our employees and members of our Board of Directors the opportunity to participate in this Offer and the means to exchange Eligible Option Grants.
Company Option Plan means our Equity Compensation Plan.
Eligible Option Grants means all outstanding options to purchase shares of our common stock that have an exercise price that is equal to or greater than $2.50 per eSoft share. If you do exchange outstanding options that have an exercise price that is equal to or greater than $2.50 per share, then the options granted in the six-month period prior to the Commencement Date must also be exchanged, even if those shares were granted at an exercise price below $2.50 per share. These options are also included in the definition of Eligible Option Grants.
Employedand employment includes services to us either as an employee or as a member of our Board of Directors.
Expiration Date means the time that this Offer will expire, which is currently set to be at 12:00 midnight, U.S. Mountain Standard Time, on January 8, 2002, unless we extend the Offer to a later date.
Fair Market Value means (i) the closing price of our common stock as reported on Nasdaq or any Subsequent Market or (ii) if our common stock is not publicly traded, the value of our common stock as determined in good faith by our Board of Directors on the Replacement Option Grant Date.
Nasdaq means The Nasdaq Stock Market, Inc.'s SmallCap Market.
Non-exempt Employee means an employee that is entitled to receive overtime pay.
Offer means the offer to exchange Eligible Option Grants for Replacement Options.
Replacement Grant Plan means our Equity Compensation Plan. All Replacement Options will be issued under the Replacement Grant Plan.
Replacement Options means options to purchase shares of our common stock that will be issued in exchange for the Eligible Option Grants.
Replacement Option Grant Date means the date that is six months and one day after the Expiration Date. For example, assuming that January 8, 2002 is the Expiration Date, the Replacement Option Grant Date will be July 9, 2002. If our common stock is publicly traded on the Nasdaq or a Subsequent Market and no sales of our common stock are reported on the date that is six months and one day after the Expiration Date, then the Replacement Option Grant Date shall be the next day on which there is a reported sale.
SEC means the United States Securities and Exchange Commission.
Schedule T/O means the Tender Offer Statement filed by us with the SEC in connection with this Offer to Exchange, including any amendments thereto.
Subject to adjustment means that the number of shares to be granted under your Replacement Options will be changed to give effect to any stock splits, stock dividends, recapitalizations or similar transaction that may occur between the Expiration Date and the Replacement Option Grant Date.
Subsequent Market means the New York Stock Exchange, American Stock Exchange, Nasdaq National Market or any other securities market that reports daily the closing selling price per share of our common stock.
iii
The following is a summary of the material terms of this Offer. We urge you to read carefully the remainder of this Offer to Exchange, the Questions and Answers and the Schedule T/O, because the information in this summary is not complete and additional important information is contained in the remainder of this Offer to Exchange and the Schedule T/O. We have included cross-references to the relevant sections of this Offer to Exchange where you can find a more complete description of the topics discussed in this summary.
Number of Shares. The number of shares subject to the Replacement Options will equal the number of shares subject to the Eligible Option Grants exchanged, subject to adjustment. (See Section 8)
Term. Each Replacement Option will have the same term as, and expire no later than, the cancelled Eligible Option Grant that it replaced. For example, if you elect to cancel an Eligible Option Grant which, by its terms, would have expired no later than January 1, 2009, then your Replacement Option will also expire no later than January 1, 2009. (See Section 8)
Vesting and Exercisability. The vesting schedule of the Eligible Option Grants will carry over to the relevant Replacement Options; that is, you will receive vesting credit under each Replacement Option equal to the vesting under the corresponding Eligible Option Grant that is exchanged. If you are a Non-exempt Employee, then you will not be able to exercise your Replacement Options for at least six months after the Replacement Option Grant Date. (See Sections 5 and 8)
Exercise Price. The Replacement Options will have an exercise price equal to the Fair Market Value of our common stock on the Replacement Option Grant Date. (See Sections 5 and 8)
Incentive Stock Options. For employees residing in the United States, the Replacement Options will be treated as incentive stock options to the maximum extent permitted by U.S. tax law;provided, however, that Replacement Options granted to non-employee members of our Board of Directors may not be treated as incentive stock options. (See Section 12)
iv
Eligible Option Grants held by our executive officers and members of our Board of Directors may be exchanged in this Offer. (See Sections 8 and 9)
v
1. NUMBER OF OPTIONS; EXPIRATION DATE.
We are offering to exchange Replacement Options for Eligible Option Grants held by our employees, including our executive officers and members of our Board of Directors. Eligible Option Grants are all outstanding options that were granted under our Equity Compensation Plan (Company Option Plan) and that have an exercise price that is equal to or greater than $2.50 per share of common stock. As of December 3, 2001, an aggregate of 3,254,126 shares of our common stock were covered by options outstanding under our Equity Compensation Plan, of which 1,908,724 shares were covered by Eligible Option Grants.
Your participation in this Offer is voluntary. Youmay elect to exchangeone or more of your Eligible Option Grants; but you may not exchange less than all shares subject to a particular Eligible Option Grant. However,if you elect to exchange any Eligible Option Grant, youmust exchange all options granted to you in the six-month period prior to the Commencement Date, even if the exercise price of such options is less than $2.50 per share. For example, based on a Commencement Date of December 6, 2001, to participate in this Offer, you must exchangeall of your options that were granted on or after June 6, 2001, even if the exercise price of some of those options is less than $2.50 per share. These options are also included in the definition of Eligible Option Grants. Our Offer is subject to the terms and conditions described in this Offer and the attached Summary Term Sheet and Questions and Answers. We will only accept Eligible Option Grants that are properly exchanged and not validly withdrawn in accordance with Section 5 of this Offer before the Offer expires on the Expiration Date.
The Replacement Options will be granted on July 9, 2002 (or a later date if the Offer is extended) and will have an exercise price equal to the Fair Market Value of our common stock on the Replacement Option Grant Date. If, however, on the Replacement Option Grant Date you are on a leave of absence that is not protected by statute, then the Replacement Options will be granted on the date, if any, that you return to regular employment with us. The Fair Market Value will be the closing price of our common stock as reported on Nasdaq or any Subsequent Market, or, if our common stock is not publicly traded, the value of our common stock as determined in good faith by our Board of Directors on the Replacement Option Grant Date. The number of shares subject to your Replacement Options will equal the number of shares subject to each Eligible Option Grant that you exchange and any options granted in the six-month period prior to the Commencement Date that are cancelled because of your election to exchange Eligible Option Grants. The number of shares subject to the Replacement Options will be adjusted for any stock splits, stock dividends, recapitalizations or similar transactions that may occur between the Expiration Date and the Replacement Option Grant Date.
IF, FOR ANY REASON (INCLUDING DEATH), YOU ARE NOT EMPLOYED BY US FROM THE EXPIRATION DATE THROUGH THE REPLACEMENT OPTION GRANT DATE, YOU WILL NOT RECEIVE ANY REPLACEMENT OPTIONS OR ANY OTHER CONSIDERATION IN EXCHANGE FOR YOUR ELIGIBLE OPTION GRANTS THAT HAVE BEEN EXCHANGED. IF YOUR EMPLOYMENT WITH US TERMINATES AFTER YOU TENDERED YOUR OPTIONS BUT PRIOR TO THE EXPIRATION DATE, YOU ARE NOT ELIGIBLE TO PARTICIPATE IN THE OFFER. IF THE OPTIONS THAT YOU TENDERED FOR EXCHANGE HAVE AN EXERCISE PRICE THAT IS LESS THAN $2.50 PER SHARE, THEY ARE NOT ELIGIBLE TO BE EXCHANGED IN THE OFFER UNLESS THEY ARE OPTIONS THAT MUST BE EXCHANGED PURSUANT TO THE SECOND PARAGRAPH OF THIS SECTION 1. PARTICIPATION IN THIS OFFER DOES NOT CONFER UPON YOU THE RIGHT TO REMAIN EMPLOYED BY US.
IF YOU ARE AN EMPLOYEE RESIDING IN THE UNITED STATES, THEN YOUR EMPLOYMENT WITH US IS "AT WILL" AND MAY BE TERMINATED BY US OR BY YOU AT
1
ANY TIME, INCLUDING PRIOR TO THE REPLACEMENT OPTION GRANT DATE, FOR ANY REASON, WITH OR WITHOUT CAUSE.
All Replacement Options will be issued under our Equity Compensation Plan (the Replacement Grant Plan), pursuant to replacement option agreements between you and us. For employees residing in the United States, all Replacement Options will be treated as incentive stock options under U.S. tax law to the maximum extent permitted by U.S. tax law;provided, however, that Replacement Options granted to non-employee members of our Board of Directors may not be treated as incentive stock options.
The Expiration Date of this Offer means 12:00 midnight, U.S. Mountain Standard Time, on January 8, 2002, unless we, in our discretion, extend the Offer. If we extend the Offer, the term Expiration Date will refer to the latest time and date at which the Offer expires. See Section 13 for a description of our rights to extend, delay, terminate and amend the Offer.
We will publish a notice if we decide to amend this Offer and take any of the following actions:
If the Offer is scheduled to expire within ten business days from the date we notify you of such an increase or decrease, we intend to extend the Offer for a period of ten business days after the date the notice is published.
A business day means any day other than a Saturday, Sunday or U.S. federal holiday and consists of the time period from 12:01 a.m. through 12:00 midnight.
2. PURPOSE OF THE OFFER.
Many of our outstanding options, whether or not they are currently exercisable, have exercise prices that are significantly higher than the current market price of our common stock. For this reason, we believe these options are not attractive as an incentive to retain and motivate employees, and are unlikely to be exercised in the foreseeable future. By making this Offer, we intend to provide our employees with the benefit of holding options that over time may have a greater potential to increase in value, and thereby create better incentives for our employees to remain with us and contribute to the attainment of our business and financial objectives and the creation of value for all of our stockholders.
The Board of Directors has approved this Offer.We cannot guarantee that the Replacement Options will have a lower exercise price than the Eligible Option Grants, and we make no representations as to our future stock price. However, the Board of Directors believes that the Offer may create a better chance for participating employees to obtain value from their options and our stock option program. The Board of Directors recognizes that the decision to accept or reject the Offer is an individual one that should be based on a variety of factors, and you should consult with your personal advisors if you have questions about your financial and/or tax situation.
We regularly evaluate various strategic and business development opportunities, including licensing agreements, marketing arrangements, joint ventures, acquisitions and dispositions. We intend to continue to selectively pursue alliances and acquisitions that would allow us to gain access to new customers and technologies, penetrate new geographic markets and enter new product markets. Subject
2
to the foregoing, and except as otherwise disclosed in this Offer (including in Section 15) or in our filings with the SEC, we presently have no plans or proposals that relate to or would result in:
Neither we nor our Board of Directors makes any recommendation as to whether you should exchange your Eligible Option Grants, nor have we authorized any person to make any such recommendation. You are urged to evaluate carefully all of the information in this Offer and to consult your own legal, investment and/or tax advisors. You must make your own decision whether to exchange your Eligible Option Grants.
3. PROCEDURES.
Making Your Election. To make your election to accept or reject this Offer, you must make your election and deliver the Election Form in accordance with its instructions before 12:00 midnight, U.S. Mountain Standard Time, on the Expiration Date. The Election Form is provided in the packet regarding the Offer. If you have misplaced your Election Form, please contact Cheryl Muench at cmuench@esoft.com or at (303) 466-1600 x3333. You do not need to return your stock option agreements for your Eligible Option Grants to effectively elect to accept the Offer as they will be automatically cancelled if we accept your Eligible Option Grants for exchange. You will be required to return your stock option agreements only upon our request.
The delivery of Election Forms, Notices of Withdrawal and any other required documents are at the sole risk of the option holder.Delivery will be deemed made only when actually received by us. No late deliveries will be accepted.
3
Determination of Validity; Rejection of Eligible Option Grants; Waiver of Defects; No Obligation to Give Notice of Defects. We will determine, in our discretion, all questions as to the number of shares subject to Eligible Option Grants and the validity, form, eligibility (including time of receipt) and acceptance of Election Forms. Neither we nor any other person is obligated to give notice of any defects or irregularities in any Election Form or otherwise in the exchange of any Eligible Option Grants, and no one will be liable for failing to give such notice. Our determination of these matters will be final and binding on all parties. We may reject any or all Election Forms or Eligible Option Grants that are exchanged to the extent that we determine they were not properly executed or delivered or to the extent that we determine it is unlawful to accept the Eligible Option Grants that are exchanged. Additionally, in order to preserve the status of options that are not exchanged pursuant to the Offer as incentive stock options, we retain the right to choose whether or not to accept your Eligible Option Grants for exchange. Accordingly, your Eligible Option Grants (and the related stock option agreements) will be automatically cancelled if, and only if, we accept your Eligible Option Grants for exchange, provided that such Eligible Option Grants are properly and timely exchanged and are not validly withdrawn. Nevertheless, we intend to accept promptly after the Expiration Date all Eligible Option Grants that are properly submitted to be exchanged and have not been validly withdrawn. We may waive any of the conditions of the Offer provided we waive such condition for all option holders. Likewise, we may waive any defect or irregularity in any Election Form with respect to any particular Eligible Option Grants or any particular option holder. No Eligible Option Grants will be accepted for exchange until all defects or irregularities have been cured to our satisfaction by the option holder exchanging the Eligible Option Grants, or waived by us, prior to the Expiration Date.
Our Acceptance Constitutes an Agreement. If you elect to exchange your Eligible Option Grants and you exchange your Eligible Option Grants according to the procedures described above, you will have accepted the Offer. Our acceptance of Eligible Option Grants that are properly exchanged will form a binding agreement between us and you on the terms and subject to the conditions of this Offer.
Subject to our rights to extend, terminate and amend the Offer, we currently expect that we will accept on the Expiration Date of the Offer all Eligible Option Grants for which an Election Form has properly been delivered and which has not thereafter been validly withdrawn.
4. CHANGE IN ELECTION.
You may only change your election by following the procedures described in this Section 4. You may change your election at any time before 12:00 midnight, U.S. Mountain Standard Time, on the Expiration Date.
To change your election, you must either deliver a Notice of Withdrawal or re-deliver an Election Form, each in accordance with its instructions, before 12:00 midnight, U.S. Mountain Standard Time, on the Expiration Date. Each of these documents is provided in the packet regarding the Offer. If you have misplaced any of the items provided in the packet, please contact Cheryl Muench at cmuench@esoft.com or at (303) 555-1600 x3333. The last Notice of Withdrawal or Election Form delivered by you prior to 12:00 midnight, U.S. Mountain Standard Time, on the Expiration Date will be treated by us as your final election with respect to the Offer.
The delivery of Election Forms, Notices of Withdrawal and any other required documents are at the sole risk of the option holder.Delivery will be deemed made only when actually received by us. No late deliveries will be accepted.
5. ACCEPTANCE OF ELIGIBLE OPTION GRANTS FOR EXCHANGE AND CANCELLATION AND ISSUANCE OF REPLACEMENT OPTIONS.
We have the right to accept or reject any Eligible Option Grant for exchange in our sole discretion. However, on the terms and subject to the conditions of this Offer, we currently expect that
4
on the Expiration Date we will accept Eligible Option Grants for exchange and cancel all Eligible Option Grants properly exchanged and not validly withdrawn before the Expiration Date in accordance with this Offer. The Replacement Options will be granted on July 9, 2002, or at a later date if the Offer is extended, with vesting of the Replacement Options carrying over from each respective Eligible Option Grant that is exchanged. If, however, on the Replacement Option Grant Date you are on a leave of absence that is not protected by statute, then the Replacement Options will be granted on the date, if any, that you return to regular employment with us.
The number of shares subject to your Replacement Option will equal the number of shares subject to each Eligible Option Grant that you exchange plus any options granted in the six-month period prior to the Commencement Date that are cancelled because of your election to exchange Eligible Option Grants. The number of shares subject to the Replacement Options will be adjusted for any stock splits, stock dividends, recapitalizations or similar transactions that may occur between the Expiration Date and the Replacement Option Grant Date. A listing of all of your Eligible Option Grants and the options granted in the six-month period prior to the Commencement Date will be distributed to you via interoffice mail or facsimile. If you have misplaced or have any questions regarding this document, please contact Cheryl Muench at cmuench@esoft.com or at (303) 555-1600 x3333. If you are not employed by us on the Expiration Date, then you are not eligible to participate in this Offer. If you are an employee of ours as of the Expiration Date but are not employed continuously by us through the Replacement Option Grant Date, you will not be eligible to receive Replacement Options.
We will notify you as promptly as practicable if we reject your election to exchange your Eligible Option Grants. If you are not notified of a rejection, you may assume that on the Expiration Date your properly executed and delivered Election Form has been accepted. Our acceptance of Eligible Option Grants that are properly exchanged will form a binding agreement between us and you on the terms and subject to the conditions of this Offer. In your Election Form you may elect to provide us with your email address, in which case you will be sent an email confirming your election. The confirmation will confirm your election and will state the number of Replacement Options that we will grant to you on the Replacement Option Grant Date. If you do not provide us with your email address, you will not receive confirmation of your election.
6. CONDITIONS OF THE OFFER.
We will have the right not to accept any Eligible Option Grants that you elect to exchange, and we may terminate or amend the Offer, or postpone our acceptance and cancellation of any Eligible Option Grants that you elect to exchange, in each case at any time on or before the Expiration Date, if we determine that any of the following events has occurred and, in our reasonable judgment, such event makes it inadvisable for us to proceed with the Offer or to accept and cancel Eligible Option Grants that you elect to exchange:
5
The conditions to the Offer are for our benefit. As stated in Section 2, the benefits that we believe we will receive from the Offer include providing our employees with the benefit of holding options that over time may have a greater potential to increase in value, and thereby create better incentives for our employees to remain with us and contribute to the attainment of our business and financial objectives and the creation of value for all of our stockholders. We may assert the conditions to the Offer in our discretion before the Expiration Date and we may waive them at any time and from time to time before the Expiration Date, whether or not we waive any other condition to the Offer.
Our failure to exercise any of these rights is not a waiver of any of these rights. The waiver of any of these rights with respect to particular facts and circumstances is not a waiver with respect to any
6
other facts and circumstances. Any determination we make concerning the events described in this Section 6 will be final and binding upon everyone.
Additionally, the U.S. Internal Revenue Service may characterize our Offer to you as a modification of those Eligible Option Grants that are incentive stock options, even if you decline the Offer. In order to reduce this risk, we retain the right to choose whether or not to accept your Eligible Option Grants for exchange for any reason (including reasons other than those described above) in our sole discretion. Accordingly, your Eligible Option Grants (and the related stock option agreements) will be automatically cancelled if, and only if, we accept your Eligible Option Grants for exchange, provided that such Eligible Option Grants are properly and timely exchanged and are not validly withdrawn. Nevertheless, we intend to accept promptly after the Expiration Date all Eligible Option Grants that are properly submitted to be exchanged and have not been validly withdrawn.
Also, if your employment with us terminates, whether voluntarily, involuntarily (including, but not limited to, redundancy) or for any other reason (including death), before your Replacement Options are granted, you will not receive any Replacement Options or have a right to any Eligible Option Grants that were previously cancelled. THEREFORE, IF YOU ARE NOT EMPLOYED BY US FROM THE EXPIRATION DATE THROUGH THE REPLACEMENT OPTION GRANT DATE, YOU WILL NOT RECEIVE ANY REPLACEMENT OPTIONS OR ANY OTHER CONSIDERATION IN EXCHANGE FOR YOUR ELIGIBLE OPTION GRANTS THAT HAVE BEEN ACCEPTED FOR EXCHANGE AND CANCELLED.
IF YOU ARE AN EMPLOYEE RESIDING IN THE UNITED STATES, THEN YOUR EMPLOYMENT WITH US IS "AT WILL" AND MAY BE TERMINATED BY US OR BY YOU AT ANY TIME, INCLUDING PRIOR TO THE REPLACEMENT OPTION GRANT DATE, FOR ANY REASON, WITH OR WITHOUT CAUSE.
7. PRICE RANGE OF COMMON STOCK.
The Eligible Option Grants to be exchanged pursuant to this Offer are not publicly traded. However, upon exercise of a Replacement Option that we grant, the option holder will become an owner of our common stock. On August 6, 1998, our common stock began trading on the Nasdaq SmallCap Market under the symbol "ESFT." On May 3, 2000, we transferred to the Nasdaq National Market. On September 25, 2001, we returned to the Nasdaq SmallCap Market. The following table shows, for the periods indicated, the high and low closing sales prices per share of our common stock as reported on the Nasdaq SmallCap Market or Nasdaq National Market as applicable.
| Quarter ended | High | Low | |||||
|---|---|---|---|---|---|---|---|
| Fiscal Year 2000 | |||||||
| March 31, 2000 | $ | 32.50 | $ | 15.00 | |||
| June 30, 2000 | $ | 18.87 | $ | 6.63 | |||
| September 30, 2000 | $ | 9.43 | $ | 4.00 | |||
| December 31, 2000 | $ | 5.87 | $ | .78 | |||
Fiscal Year 2001 | |||||||
| March 31, 2001 | $ | 3.53 | $ | .91 | |||
| June 30, 2001 | $ | 1.63 | $ | .94 | |||
| September 30, 2001 | $ | 1.40 | $ | .85 | |||
| December 31, 2001 (through December 3, 2001) | $ | 1.04 | $ | .69 | |||
As of December 3, 2001, the last reported sale price of our common stock, as reported by the Nasdaq SmallCap Market, was $0.96 per share.
7
We cannot guarantee that the Replacement Options will have a lower exercise price than the Eligible Option Grants. We recommend that you obtain current market quotations for our common stock before deciding whether to elect to exchange your Eligible Option Grants.
8. SOURCE AND AMOUNT OF CONSIDERATION; TERMS OF REPLACEMENT OPTIONS.
Consideration. The number of shares subject to your Replacement Options will equal the number of shares subject to each Eligible Option Grant that you exchange. The number of shares subject to the Replacement Options will be adjusted for any stock splits, stock dividends, recapitalizations or similar transactions that may occur between the Expiration Date and the Replacement Option Grant Date. Each Replacement Option generally will have the same terms as the cancelled Eligible Option Grant that it replaced. See below for a summary of the terms of the Replacement Options, including special rules concerning the exercise of Replacement Options granted to Non-exempt Employees.
If we receive and accept the exchange of all Eligible Option Grants, we will grant Replacement Options to purchase a total of approximately 1,908,724 shares of our common stock. As of December 3, 2001, there were approximately 15,748,397 shares of our common stock outstanding. The common stock issuable upon exercise of the Replacement Options would equal approximately 12.12% of the total shares of our common stock outstanding as of December 3, 2001.
Merger or Acquisition. If we merge with or are acquired by another entity between the Expiration Date and the Replacement Option Grant Date, then the resulting entity will be bound to grant the Replacement Options under the same terms and subject to the same conditions as described in this Offer; however, the type of security and the number of shares subject to each Replacement Option would be determined by the acquisition agreement between us and the acquiror based on the same principles applied to the handling of the options to acquire our common stock that are outstanding at the time of the acquisition. As a result of the ratio in which our common stock may convert into an acquiror's common stock in an acquisition transaction, you may receive options for more or fewer shares of the acquiror's stock than the number of shares subject to the Eligible Option Grants that you exchange.
Terms of Replacement Options. All Replacement Options will be issued under our Equity Compensation Plan.
For employees residing in the United States, the Replacement Options will be treated as incentive stock options to the maximum extent permitted by U.S. law;provided, however, that Replacement Options granted to non-employee members of our Board of Directors may not be treated as incentive stock options. (See Section 12) If you are an employee residing outside the United States, your stock option agreement may contain different and/or additional terms to comply with local laws.
The issuance of Replacement Options under this Offer will not create any contractual or other right of the recipients to receive any future grants of options or benefits in lieu of options. Declining to participate in this Offer will not impact your ability to receive options or other stock awards in the future.
The following description of the Replacement Grant Plan and the replacement option agreements is a summary intended to highlight major attributes of these documents and is not complete. A Replacement Option will be subject to the terms and conditions of the Equity Compensation Plan, and the replacement option agreement. Additional information about the Replacement Grant Plan may be found in the S-8 Registration Statement and related Prospectus prepared in connection with the Replacement Grant Plan. Please contact Cheryl Muench at cmuench@esoft.com or at (303) 444-1600 x3333 to request a copy of the Replacement Grant Plan, related prospectus and current form of stock option agreement. Copies will be provided promptly and at our expense. The form of stock option
8
agreement may be changed with the approval of our Board of Directors or our Compensation Committee prior to the Replacement Option Grant Date.
General. The Equity Compensation Plan, as amended, was adopted on August 27, 1997. As of December 3, 2001, there was an aggregate of 5,000,000 shares of common stock reserved for issuance under the Replacement Grant Plan. The Equity Compensation Plan permits us to grant options intended to qualify as incentive stock options under the Internal Revenue Code.
Administration. Our Board of Directors has delegated administration of the Replacement Grant Plan to the Compensation Committee of the Board of Directors. Nonetheless, our Board of Directors has the authority to construe, interpret and amend the Replacement Grant Plan.
Term. The term of each option granted under the Replacement Grant Plan is fixed by our Compensation Committee at the time of grant. Each Replacement Option will have the same term as, and expire no later than, the cancelled Eligible Option Grant that it replaced.
Exercise Price. The Replacement Options will have an exercise price equal to the Fair Market Value of our common stock on the Replacement Option Grant Date, which is expected to be July 9, 2002, or a later date if we extend the Offer. The Fair Market Value will be the closing price of our common stock as reported on Nasdaq or any Subsequent Market, or, if our common stock is not publicly traded, the value of our common stock as determined in good faith by our Board of Directors on the Replacement Option Grant Date.We cannot guarantee that the Replacement Options will have a lower exercise price than the Eligible Option Grants. We recommend that you obtain current market quotations for our common stock before deciding whether to elect to exchange your options.
Vesting and Exercise. The Compensation Committee of the Board of Directors (or any appropriately delegated committee of the Board of Directors) has the authority to determine the time or times at which options granted under the Replacement Grant Plan may be exercised. If you receive a Replacement Option and are continuously employed by us, your Replacement Option will vest according to the same vesting schedule and vesting commencement date as the Eligible Option Grant for which it was exchanged. See "Time of Exercise" below for special rules applicable to the exercise of Replacement Options granted to Non-Exempt Employees.
Time of Exercise. Generally, you may exercise the vested portion of a Replacement Option at any time. If your employment or service with us terminates for any reason (except due to death or permanent disability or if you are a member of our Board of Directors), you can only exercise the vested portion of your Replacement Option within three months following your termination date, even if you would have had a longer period of time under your Eligible Option Grant. If your employment or service with us terminates as a result of your death, your estate or beneficiaries may exercise some or all of your Replacement Options within twelve months following your termination date. However, under no circumstances may you exercise the Replacement Options after the expiration of the term of such option. If you are a Non-exempt Employee, you will not be able to exercise your Replacement Options (even if vested) for at least six months after the Replacement Option Grant Date. If you are a Non-exempt Employee and your service terminates (other than by reason of your death or disability, as defined in the applicable Replacement Grant Plan) during the six-month period following the Replacement Option Grant Date then you may exercise your vested Replacement Options at any time during the thirty-day period beginning on the day that is six months and one day after the Replacement Option Grant Date. Note that an exercise under these circumstances of Replacement Options intended to qualify as incentive stock options may disqualify such Replacment Options for incentive stock option treatment. See Section 12—"Material U.S. Federal Income Tax Consequences—U.S. Federal Income Tax Consequences of Incentive Stock Options".
9
Tax Consequences. If you are an employee residing in the United States, you should refer to Section 12 for a discussion of the material U.S. federal income tax consequences of the Replacement Options and the Eligible Option Grants, as well as the consequences of accepting or rejecting this Offer. If you are an employee residing outside the United States, please see Schedule B for more details on the tax and social insurance consequences of this transaction under the laws of the country in which you live and work.
Termination of Employment Prior to Replacement Option Grant Date. IF, FOR ANY REASON (INCLUDING DEATH), YOU ARE NOT EMPLOYED BY US FROM THE EXPIRATION DATE THROUGH THE REPLACEMENT OPTION GRANT DATE, YOU WILL NOT RECEIVE ANY REPLACEMENT OPTIONS OR ANY OTHER CONSIDERATION IN EXCHANGE FOR YOUR ELIGIBLE OPTION GRANTS THAT HAVE BEEN EXCHANGED. IF YOUR EMPLOYMENT WITH US TERMINATES AFTER YOU TENDERED YOUR OPTIONS BUT PRIOR TO THE EXPIRATION DATE, YOU WILL NOT BE ELIGIBLE TO PARTICIPATE IN THE OFFER. PARTICIPATION IN THIS OFFER DOES NOT CONFER UPON YOU THE RIGHT TO REMAIN EMPLOYED BY US. This means that if you die or quit, with or without good reason, or we terminate your employment, with or without cause, prior to the Replacement Option Grant Date and after the Expiration Date, you will not receive anything for the Eligible Option Grants that you exchanged and we cancelled.
Registration of Option Shares. All shares of common stock issuable upon exercise of options under the Replacement Grant Plan, including shares that will be issuable upon exercise of all Replacement Options, have been registered under the Securities Act of 1933 on a Registration Statement on Form S-8 filed with the SEC. Unless you are considered an affiliate of ours, you will be able to sell shares you obtain upon the exercise of vested Replacement Options free of any transfer restrictions under applicable securities laws.
Our statements in this Offer concerning the Replacement Grant Plan and the Replacement Options are merely summaries and do not purport to be complete. These statements are subject to, and are qualified in their entirety by reference to, all provisions of the Replacement Grant Plan and the corresponding form of option agreement under the Replacement Grant Plan, which is filed as an exhibit to the Tender Offer Statement on Schedule T/O, of which this Offer to Exchange is a part. See Section 16—Additional Information—for a discussion on how to obtain a copy of the Replacement Grant Plan and the corresponding form of option agreement.
9. INTERESTS OF DIRECTORS AND OFFICERS; TRANSACTIONS AND ARRANGEMENTS INVOLVING THE ELIGIBLE OPTION GRANTS.
A list of our directors and executive officers is attached to this Offer to Exchange as Schedule A. As of December 3, 2001, our executive officers and non-employee directors (8 persons) as a group held options outstanding under the Company Option Plan to purchase a total of 1,867,430 shares of our common stock. This covered approximately 57.39% of the shares subject to all options outstanding under the Company Option Plan. In addition, as of December 3, 2001, our executive officers and non-employee directors as a group held Eligible Option Grants to purchase a total of 1,168,500 shares of our common stock. This covered approximately 61.22% of the shares subject to all Eligible Option Grants. All of the Eligible Option Grants held by executive officers and members of our Board of Directors are eligible to be exchanged in this Offer.
During the past 60 days, we have granted options to purchase 319,527 shares of our common stock with an exercise between $0.87 and $0.97 per share. Of the options granted during this period, 276,430 were granted to the executive officers and directors listed in Schedule A. During the past 60 days, no individuals have exercised options to acquire shares of our common stock.
Neither we, nor, to the best of our knowledge, any member of our Board of Directors or any of our executive officers or those of our subsidiaries, nor any affiliates of ours, engaged in transactions
10
involving Eligible Option Grants during the past 60 days. In addition, except as otherwise described above, neither we, nor, to our knowledge, any of our executive officers or members of our Board of Directors are a party to any agreement, arrangement or understanding with respect to any of our securities (including but not limited to, any agreement, arrangement or understanding concerning the transfer or the voting of any of our securities, joint ventures, loan or option arrangements, puts or calls, guarantees of loans, guarantees against loss or the giving or withholding of proxies, consents or authorizations).
10. STATUS OF ELIGIBLE OPTION GRANTS ACQUIRED BY US IN THE OFFER.
Many of our option holders hold options with exercise prices significantly higher than the current market price of our common stock. We believe it is in our best interest to offer these option holders an opportunity to more effectively participate in the potential growth in our stock price. We could accomplish this goal by repricing some existing options, which would enable option holders to immediately receive replacement options with a lower exercise price. However, the repriced options would be subject to variable accounting, which could require us to record additional compensation expense each quarter until the repriced options were exercised, cancelled or expired.
We believe that we can accomplish our goals of providing option holders with the benefit of choosing whether they want to receive options that over time may have greater potential to increase in value than the Eligible Option Grants held by the option holders, without incurring additional current or future compensation expense. Applicable financial accounting rules provide that if each of the following conditions is met, we will not recognize any compensation expense as a result of the Offer:
Eligible Option Grants (including option grants issued in the six-month period prior to the Commencement Date that will be exchanged because of your election to cancel Eligible Option Grants) that have been granted under the Company Option Plan and that we acquire in connection with the Offer will be cancelled and the shares of common stock that may be purchased under those Eligible Option Grants will be returned to the pool of shares available for grants of new awards or options under such plans without further stockholder action, except as required by applicable law or Nasdaq rules or any other securities quotation system or any stock exchange on which our common stock is then quoted or listed.
11
11. LEGAL MATTERS; REGULATORY APPROVALS.
We are not aware of any license or regulatory permit that appears to be material to our business that might be adversely affected by the Offer, or of any approval or other action by any government or regulatory authority or agency that is required for the acquisition or ownership of the Eligible Option Grants as described in the Offer. If any other approval or action should be required, we presently intend to seek such approval or take such action. This could require us to delay the acceptance of any Eligible Option Grants that you elect to exchange. We cannot assure you that we would be able to obtain any required approval or take any other required action. Our failure to obtain any required approval or take any required action might result in harm to our business. Our obligation under the Offer to accept exchanged Eligible Option Grants and to issue Replacement Options is subject to conditions, including the conditions described in Section 6.
12. MATERIAL U.S. FEDERAL INCOME TAX CONSEQUENCES.
The following is a general summary of the material U.S. federal income tax consequences of the exchange of Eligible Option Grants under the Offer. This discussion is based on the U.S. Internal Revenue Code, its legislative history, U.S. Treasury Regulations and administrative and judicial interpretations as of the date of the Offer, all of which may change, possibly on a retroactive basis. This summary does not discuss all of the tax consequences that may be relevant to you in light of your particular circumstances, nor is it intended to apply in all respects to all categories of option holders. In addition, this discussion does not address any aspect of foreign, state or local income taxation or any other form of taxation that may be applicable to an option holder. If you are an employee residing outside the United States, the discussion in this Section 12 generally will not apply to you. Please see Schedule B for more details regarding the tax treatment of the exchange in your country.
We believe that the exchange will be treated as a non-taxable exchange. If you exchange outstanding incentive or nonqualified stock options for Replacement Options, you will not be required to recognize income for U.S. federal income tax purposes at the time of the exchange.
At the Replacement Option Grant Date, you will not be required to recognize additional income for U.S. federal income tax purposes. The grant of Replacement Options is not recognized as taxable income in the United States.
U.S. Federal Income Tax Consequences of Incentive Stock Options. You will not be subject to any current U.S. federal income tax if you elect to exchange your incentive stock options in exchange for Replacement Options.
If you exchange your incentive stock options and we accept your incentive stock options, any Replacement Options you are granted will qualify as incentive stock options to the maximum extent permitted by U.S. federal tax law;provided, however, that Replacement Options granted to non-employee members of our Board of Directors may not be treated as incentive stock options. In addition, certain Replacement Options granted to Non-exempt Employees and intended to be incentive stock options may not qualify as incentive stock options under certain circumstances. As explained in Section 8, if you are a Non-exempt Employee and your employment is terminated before your Replacement Options become exercisable, your Replacement Options that are vested as of the date your employment terminates will be exercisable for 30 days, beginning on the date that is 6 months after the Replacement Option Grant Date. If you exercise Replacement Options under these circumstances and the date of your exercise is more than 3 months after the date your employment terminates, such Replacement Options will not qualify as incentive stock options. Instead, they will be treated as nonqualified stock options. See "U.S. Federal Income Tax Consequences of Nonqualified Stock Options" below.
In order to qualify for long-term capital gain treatment of gain on the sale of shares subject to an incentive stock option, such shares must be held by the optionee for the longer of one year from the
12
date of the option exercise and two years from the date of the option grant. For purposes of these required incentive stock option holding periods, Replacement Options qualifying as incentive stock options will be treated as newly granted on the Replacement Option Grant Date. Thus, if you elect to exchange existing incentive stock options, no credit can be given for the period of time you held such options.
We do not believe that our Offer to you will change any of the terms of your Eligible Option Grants if you do not accept the Offer. However, if you choose not to accept this Offer, it is possible that the U.S. Internal Revenue Service would decide that the right to exchange your incentive stock options under this Offer is a modification of your incentive stock options. A successful assertion by the U.S. Internal Revenue Service that your incentive stock options are modified could extend the holding period of the incentive stock options required to qualify for favorable tax treatment and cause a portion of your incentive stock options to be treated as nonqualified stock options.
Under current U.S. federal income tax law, you should not have realized taxable income when incentive stock options were granted to you under the Company Option Plan. In addition, you generally will not realize taxable income when you exercise an incentive stock option. However, your alternative minimum taxable income will be increased by the amount that the aggregate fair market value of the shares you may purchase under the incentive stock option (which is generally determined as of the date you exercise the option) exceeds the aggregate exercise price of the incentive stock option. Except in certain circumstances that are described in the Company Option Plan and in your option agreement, such as your death or disability, if an option is exercised more than three months after your employment is terminated, the option will not be treated as an incentive stock option and is subject to taxation under the rules applicable to nonqualified stock options that are discussed below.
If you sell common stock that you acquired by exercising an incentive stock option, the tax consequences of the sale depend on whether the disposition is qualifying or disqualifying. The disposition of the common stock is qualifying if it is made after the later of: (a) more than two years from the date the incentive stock option was granted or (b) more than one year after the date the incentive stock option was exercised.
If the disposition of the common stock you received when you exercised incentive stock options is qualifying, any excess of the sale price over the exercise price of the option will be treated as long-term capital gain taxable to you at the time of the sale. If the disposition is not qualifying, which we refer to as a disqualifying disposition, the excess of the fair market value of the common stock on the date the option was exercised over the exercise price will be taxable ordinary income to you at the time of the sale. However, if the difference between the sale price and the option exercise price is less than the amount in the preceding sentence, this lesser amount is ordinary income to you. Any amount in excess of the ordinary income amount will be long term capital gain or short-term capital gain, depending on whether or not the common stock was sold more than one year after the option was exercised.
If you sell common stock you received when you exercised an incentive stock option in a qualifying disposition, we will not be entitled to a tax deduction. However, if you sell, in a disqualifying disposition, common stock you received when you exercised an incentive stock option, we will be entitled to a deduction equal to the amount of compensation income taxable to you.
U.S. Federal Income Tax Consequences of Nonqualified Stock Options. Under current U.S. law, you will not recognize income for federal income tax purposes upon the grant of a nonqualified stock option. However, when you exercise the option, the difference between the exercise price of the option and the fair market value of the shares subject to the option on the date of exercise will be treated as taxable compensation income to you and, if you are an employee, then you will be subject to withholding of U.S. income and employment taxes at that time. We will be entitled to a deduction equal to the amount of compensation income taxable to you if we comply with applicable withholding requirements.
13
The subsequent sale of the shares acquired pursuant to the exercise of a nonqualified stock option generally will give rise to capital gain or loss equal to the difference between the sale price and the sum of the exercise price paid for the shares plus the ordinary income recognized with respect to the shares, and these capital gains or losses will be treated as long term capital gains or losses if you held the shares for more than one year following exercise of the option.
We recommend that you consult your own tax advisor with respect to the federal, state, local and foreign tax consequences of participating in the Offer.
13. EXTENSION OF THE OFFER; TERMINATION; AMENDMENT.
We may at any time, and from time to time, extend the period of time during which the Offer is open and delay accepting any Eligible Option Grants tendered for exchange by announcing the extension and/or giving oral or written notice of the extension to the option holders.
Prior to the Expiration Date, we may postpone accepting and canceling any Eligible Option Grants or terminate or amend the Offer if any of the conditions specified in Section 6 occur. In order to postpone accepting or canceling, we must announce the postponement and give oral or written notice of the postponement to the option holders. Our right to delay accepting and canceling Eligible Option Grants may be limited by Rule 13e-4(f)(5) under the Securities Exchange Act, which requires that we pay the consideration offered or return the surrendered options promptly after we terminate or withdraw the Offer.
As long as we comply with any applicable laws, we may amend the Offer in any way, including decreasing or increasing the consideration offered in the Offer to option holders or by decreasing or increasing the number of Eligible Option Grants to be exchanged or surrendered in the Offer.
We may amend the Offer at any time by announcing an amendment. If we extend the length of time during which the Offer is open, notice of the amendment must be issued no later than 6:00 a.m., U.S. Mountain Standard Time, on the next business day after the last previously scheduled or announced Expiration Date. Any announcement relating to the Offer will be sent promptly to option holders in a manner reasonably designed to inform option holders of the change.
If we materially change the terms of the Offer or the information about the Offer, or if we waive a material condition of the Offer, we may extend the Offer to the extent required by Rules 13e-4(d)(2) and 13e-4(e)(3) under the Securities Exchange Act. Under these rules, the minimum period an Offer must remain open following material changes in the terms of the Offer or information about the Offer, other than a change in price or a change in percentage of securities sought, will depend on the facts and circumstances. We will publish a notice if we decide to take any of the following actions:
If the Offer is scheduled to expire within ten business days from the date we notify you of such an increase or decrease, we intend to extend the Offer for a period of ten business days after the date the notice is published.
14. FEES AND EXPENSES.
We will not pay any fees or commissions to any broker, dealer or other person asking holders of Eligible Option Grants to exchange such Eligible Option Grants pursuant to this Offer.
14
15. INFORMATION ABOUT US.
OVERVIEW
Our principal offices are located at 295 Interlocken Boulevard, Suite 500, Broomfield, Colorado 80021, and our telephone number is (303) 444-1600. We were incorporated in Colorado in 1984 and were reincorporated in Delaware in February 1998.
We design, develop and market secure Internet appliances that address the Internet security needs of small, medium and distributed enterprises (SMEs) and the hosting needs of Internet Service Providers (ISPs). The demand for our products is driven by the deployment of broadband Internet connections and the growing demand for secure Website and email hosting services. Our InstaGate EX2 Internet security appliance provides SMEs with Internet security, firewall, virtual private network (VPN) and related offerings. In addition, our InstaRak secure server appliance securely hosts web, email, and domain name service (DNS) for multiple Internet domains.
15
SELECTED FINANCIAL DATA
Set forth below is a selected summary of our financial information. The financial data as of December 31, 2000 and for the years ended December 31, 2000 and 1999 are derived from our audited consolidated financial statements included in our Annual Report on Form 10-KSB for the year ended December 31, 2000. The financial data as of September 30, 2001 and for the nine months ended September 30, 2001 and 2000 are derived from our unaudited consolidated financial statements included in our Quarterly Report on Form 10-QSB for the quarter ended September 30, 2001. This financial data should be read together with the Management's Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and related notes included in our Annual Report on Form 10-KSB for the year ended December 31, 2000 and our Quarterly Report on Form 10-QSB for the quarter ended September 30, 2001.
SELECTED CONSOLIDATED FINANCIAL STATEMENT
| | Year Ended December 31, | Nine months ended September 30, | |||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | 1999 | 2000 | 2000 | 2001 | |||||||||||
| | (audited) | (unaudited) | |||||||||||||
| Revenues: | |||||||||||||||
| Product sales | $ | 6,165,525 | $ | 6,146,974 | $ | 4,773,311 | $ | 5,275,222 | |||||||
| Product development and license fees | 1,880,296 | 1,362,501 | 1,326,150 | 277,000 | |||||||||||
| Subscriptions, maintenance and other | 1,033,826 | 1,261,414 | 866,264 | 1,618,270 | |||||||||||
| Total revenues | 9,079,647 | 8,770,889 | 6,965,725 | 7,170,492 | |||||||||||
Costs and expenses: | |||||||||||||||
| Cost of product and service revenue | 3,573,695 | 4,392,335 | 3,306,156 | 4,520,437 | |||||||||||
| Selling, general and administrative | 13,792,914 | 14,515,564 | 11,760,778 | 6,717,739 | |||||||||||
| Research and development | 2,155,935 | 3,626,360 | 2,646,897 | 2,386,307 | |||||||||||
| Total costs and expenses | 19,522,544 | 22,534,259 | 17,713,831 | 13,624,483 | |||||||||||
Loss from operations | (10,442,897 | ) | (13,763,370 | ) | (10,748,106 | ) | (6,453,991 | ) | |||||||
Other (income) expense: | |||||||||||||||
| Interest income | (64,467 | ) | (1,012,117 | ) | (683,310 | ) | (637,413 | ) | |||||||
| Interest expense | 527,967 | 888,603 | 457,905 | 1,290,704 | |||||||||||
| Unrealized loss on available-for-sale securities | — | — | — | 1,617,000 | |||||||||||
| Realized gain on trading securities | (109,445 | ) | — | — | — | ||||||||||
| Other (income) expense | (11,348 | ) | — | — | 5,011 | ||||||||||
| Net loss before cumulative effect of change in accounting principle | (10,785,604 | ) | (13,639,856 | ) | (10,522,701 | ) | (8,729,293 | ) | |||||||
| Cumulative effect of change in accounting principle: Deemed financing cost for beneficial conversion feature of debentures | — | (2,369,912 | ) | — | — | ||||||||||
| Net loss | $ | (10,785,604 | ) | $ | (16,009,768 | ) | $ | (10,522,701 | ) | $ | (8,729,293 | ) | |||
| Historical net loss per share before cumulative effect of change in accounting principle, basic and diluted | $ | (1.00 | ) | $ | (0.90 | ) | $ | (0.70 | ) | $ | (0.56 | ) | |||
Historical net loss per share, basic and diluted | $ | (1.00 | ) | $ | (1.06 | ) | $ | (0.70 | ) | $ | (0.56 | ) | |||
16
| | | | As of | | |||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| | | December 31, 2000 (audited) | | September 30, 2001 (unaudited) | |||||||||||
| Consolidated Balance Sheet Data: | |||||||||||||||
| Cash and cash equivalents | $ | 20,128,119 | $ | 7,992,137 | |||||||||||
| Working capital | 19,949,367 | 11,567,941 | |||||||||||||
| Total assets | 24,502,323 | 18,428,253 | |||||||||||||
| Total long-term obligations | 12,893,948 | 11,598,078 | |||||||||||||
| Total stockholder's equity (deficit) | 8,827,930 | 1,391,426 | |||||||||||||
| Book value per share | $ | 0.58 | $ | 0.09 | |||||||||||
* Book value per share is computed by dividing stockholders' equity by the number of shares of common stock outstanding at September 30, 2001.
The financial information included in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2000 and our Quarterly Report on Form 10-QSB for the quarter ended September 30, 2001 is incorporated by reference and may be inspected at, and copies may be obtained from, the same places and in the same manner as set forth under Section 16—"Additional Information."
16. ADDITIONAL INFORMATION.
With respect to the Offer, we have filed a Tender Offer Statement on Schedule T/O with the SEC, of which this Offer to Exchange is a part. This Offer to Exchange does not contain all of the information contained in the Schedule T/O and the exhibits to the Schedule T/O. We recommend that you review the Schedule T/O, including its exhibits, before making a decision on whether to tender your options.
We recommend that you review the following materials that we have filed with the SEC before making a decision on whether to exchange your options:
17
The SEC file number for these filings is 000-23527. These filings, our other annual, quarterly and current reports, our proxy statements and our other SEC filings may be examined, and copies may be obtained, at the following SEC public reference rooms:
| 450 Fifth Street, N.W. Room 1024 Washington, D.C. 20549 | 500 West Madison Street Suite 1400 Chicago, Illinois 60661 |
You may obtain information on the operation of the public reference rooms by calling the SEC at 1-800-SEC-0330.
Our SEC filings are also available to the public on the SEC's Internet site at http://www.sec.gov.
Our common stock is quoted on the Nasdaq SmallCap Market under the symbol "ESFT," and our SEC filings can be read at the following Nasdaq address:
Nasdaq Operations
1735 K Street, N.W.
Washington, D.C. 20006
We will also provide without charge to each holder of Eligible Option Grants, upon their written or oral request, a copy of this Offer to Exchange or any or all of the documents to which we have referred you, other than exhibits to these documents (unless the exhibits are specifically incorporated by reference into the documents). Requests should be directed to:
eSoft, Inc.
Amy Beth Hansman
295 Interlocken Boulevard, #500
Broomfield, CO 80021
or by telephoning us at (303) 444-1600 x3224 between the hours of 9:00 a.m. and 5:00 p.m., Broomfield, Colorado, local time.
As you read the documents listed in this Section 16, you may find some inconsistencies in information from one document to another. Should you find inconsistencies between the documents, or between a document and this Offer, you should rely on the statements made in the most recent document.
The information about us contained in this Offer to Exchange should be read together with the information contained in the documents to which we have referred you.
17. MISCELLANEOUS.
This Offer and our SEC reports referred to above include forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. However, the safe harbors of Section 27A of the Securities Act and 21E of the Securities Exchange Act do not apply to statements made in connection with this Offer. These forward-looking statements involve risks and uncertainties, including those described in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2000. We encourage you to review the risk factors contained in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2000 before you decide whether to participate in the Offer.
If at any time we become aware of any jurisdiction where the making of this Offer violates the law, we will make a good faith effort to comply with the law. If, we cannot comply with the law, the Offer will not be made to, nor will exchanges be accepted from or on behalf of, the option holders residing in that jurisdiction.
18
Our Board of Directors recognizes that the decision to accept or reject this Offer is an individual one that should be based on a variety of factors and you should consult your personal advisors if you have questions about your financial or tax situation. The information about this Offer from us is limited to this document, the attached Summary Term Sheet and Questions and Answers and the Tender Offer Statement on Schedule T/O.
WE HAVE NOT AUTHORIZED ANY PERSON TO MAKE ANY RECOMMENDATION ON OUR BEHALF AS TO WHETHER OR NOT YOU SHOULD TENDER YOUR OPTIONS PURSUANT TO THE OFFER. WE HAVE NOT AUTHORIZED ANYONE TO GIVE YOU ANY INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THE OFFER OTHER THAN THE INFORMATION AND REPRESENTATIONS CONTAINED IN THIS DOCUMENT, THE ATTACHED SUMMARY TERM SHEET AND QUESTIONS AND ANSWERS AND THE TENDER OFFER STATEMENT ON SCHEDULE T/O. IF ANYONE MAKES ANY RECOMMENDATION OR REPRESENTATION TO YOU OR GIVES YOU ANY INFORMATION, YOU MUST NOT RELY UPON THAT RECOMMENDATION, REPRESENTATION OR INFORMATION AS HAVING BEEN AUTHORIZED BY US.
19
INFORMATION ABOUT OUR DIRECTORS AND
EXECUTIVE OFFICERS
Our directors and executive officers and their positions and offices as of December 3, 2001, are set forth in the following table:
| Name | Age | Position and Offices Held | ||
|---|---|---|---|---|
James DeSorrento | 58 | Director | ||
Richard D. Eyestone | 55 | Director | ||
Frederick Frank | 69 | Director | ||
Jeffrey J. Finn | 43 | President, Chief Executive Officer and Director | ||
Amy Beth Hansman | 32 | Vice President of Finance and Secretary | ||
Robert C. Hartman | 41 | Vice President of Engineering | ||
Richard B. Rice | 50 | Director | ||
Jason M. Rollings | 40 | Vice President of Operations |
The address of each executive officer and director is: c/o eSoft, Inc. 295 Interlocken Boulevard, #500, Broomfield, Colorado 80021.
Biographies for each of our executive officers and directors are set forth in our Annual Report on Form 10-KSB for the fiscal year ended December 31, 2000 and incorporated by reference herein.
ADDENDA FOR EMPLOYEES RESIDING OUTSIDE THE U.S.
We believe that you will not be subject to additional tax solely by virtue of your participation in the Offer and your tender of Eligible Option Grants for Replacement Options. However, the tax legislation in most of the countries outside of the United States does not specifically address the tax consequences of the tender of Eligible Option Grants for Replacement Options. Consequently, although it appears that you will not be subject to any additional tax liability if you participate in the Offer, we cannot be certain of this result. It is possible that you may be subject to tax on the value of the Replacement Options upon grant or on some other basis or that you may lose the ability to claim preferential tax treatment in connection with your Replacement Options. We therefore strongly recommend that you consult with your tax advisor as to the tax consequences of participating in the Offer.
If you are eligible for this Offer because you are an employee of eSoft living or working in the United States, Korea or Singapore but are also subject to the tax laws in another country, you should be aware that there may be other tax and social insurance consequences which may apply to you. You should be certain to consult your own tax advisors to discuss these consequences.
ADDENDUM FOR EMPLOYEES IN KOREA
The following is a general summary of the material tax consequences of the exchange of Eligible Option Grants and the grant of Replacement Options under the Offer for tax residents in Korea. This discussion is based on Korean tax law as of the date of the Offer, which is subject to change, possibly on a retroactive basis. The information may be out of date at the time you exercise the Replacement Options or sell the shares you acquire upon exercise. This summary is general in nature and does not discuss all of the tax consequences that may be relevant to you in light of your particular circumstances, nor is it intended to be applicable in all respects to all categories of option holders. We advise all option holders considering replacing their Eligible Option Grants to meet with their own tax advisors. If you are a citizen or resident of another country, the information contained in this summary may not be applicable to you. You are advised to seek appropriate professional advice as to how the tax or other laws in your country apply to your specific situation.
Option Exchange
We do not believe that there will be a tax liability in connection with the tender of your Eligible Option Grants in exchange for Replacement Options; however, this is not completely certain.
Grant
You will not be subject to tax when the Replacement Options are granted to you.
Exercise
When you exercise the Replacement Options, you will be subject to income tax on the difference (or spread) between the fair market value of the shares on the date of exercise and the exercise price. The spread will be treated as salary or wages and taxed at your marginal rate. No securities transaction tax will apply when you exercise the Replacement Options.
Sale of Shares
When you sell the shares that you acquire upon exercise of the Replacement Options, you will be subject to capital gains tax on any gain that you realize on such sale, which gain will be equal to the difference between the sale price and the fair market value of the shares at the time of exercise. No securities transaction tax will apply when you sell the shares acquired upon exercise of the Replacement Options.
Dividends
If you exercise the Replacement Options to purchase shares, you may be entitled to receive dividends. Any dividends paid on our stock will be subject to income tax in Korea and withholding tax in the United States. You will be entitled to a tax credit against your Korean income tax for the United States federal tax withheld. You must report the amount of the dividends on your income tax return.
Withholding and Reporting
When you exercise the Replacement Options, your employer is not required to withhold or report income tax. It is your responsibility to report this income on your annual tax return and to pay all taxes owed. Your employer may be required to withhold and make contributions to Korea's social insurance fund in connection with the income that you recognize upon exercise of the Replacement Options.
Exchange Control Restrictions
If you remit funds to purchase shares upon the exercise of the Replacement Options, you will be required to have the remittance of funds "confirmed" by a foreign exchange bank in Korea. To receive
the confirmation, you will be required to submit certain documentation to the bank. You should check with the bank regarding the specific documentation they require and the time required to obtain a confirmation prior to exercise.
Please consult a tax advisor to determine the tax considerations and tax consequences relevant to your participation in the Offer.
ADDENDUM FOR EMPLOYEES IN SINGAPORE
The following is a general summary of the material tax consequences of the exchange of Eligible Option Grants and the grant of Replacement Options under the Offer for tax residents in Singapore. This discussion is based on Singapore tax law as of the date of the Offer, which is subject to change, possibly on a retroactive basis. The information may be out of date at the time you exercise the Replacement Options or sell the shares you acquire upon exercise. This summary is general in nature and does not discuss all of the tax consequences that may be relevant to you in light of your particular circumstances, nor is it intended to be applicable in all respects to all categories of option holders. We advise all option holders considering replacing their Eligible Option Grants to meet with their own tax advisors. If you are a citizen or resident of another country, the information contained in this summary may not be applicable to you. You are advised to seek appropriate professional advice as to how the tax or other laws in your country apply to your specific situation.
Option Exchange
We do not believe there will be a tax liability in connection with the tender of your Eligible Option Grants in exchange for Replacement Options; however, this is not completely certain.
Grant
You will not be subject to tax when the Replacement Options are granted to you.
Exercise
When you exercise the Replacement Options, you will be subject to income tax on the difference (or spread) between the fair market value of the shares on the date of exercise and the exercise price.
Sale of Shares
If you acquire shares upon exercise of the Replacement Options, you will not be subject to tax when you sell the shares, unless you are in the business of buying and selling securities.
Dividends
If you acquire shares upon exercise of the Replacement Options, you may be entitled to receive dividends. Any dividends paid on our stock that are received in Singapore may be subject to income tax in Singapore and withholding tax in the United States. You may be entitled to a tax credit equal to the United States federal tax withheld, although the deduction may not exceed the tax that would have been paid in Singapore on the same income.
Withholding and Reporting
Your employer will not be required to withhold income tax or social insurance contributions at the time of the exercise of the Replacement Options. Your employer will report the exercise of the Replacement Options on your annual return outlining all salary and benefits paid to you during the year. Your employer will give this return to you and you will be responsible for reporting and paying any income taxes resulting from the exercise of the Replacement Options.
It is also your responsibility to report and pay taxes resulting from the sale of your shares or the receipt of any dividends.
Please consult a tax advisor to determine the tax considerations and tax consequences relevant to your participation in the Offer.
These Questions and Answers relate to our offer to exchange all outstanding options to purchase shares of our common stock that have an exercise price that is equal to or greater than $2.50 per share. They are to be read in conjunction with the Offer to Exchange of which they are a part.
| Q1 | What is the Stock Option Exchange Program? | ||
A1 | Our Stock Option Exchange Program (also referred to in these materials as the Offer) is a voluntary program permitting eligible employees and members of our Board of Directors to cancel stock options that have an exercise price that is equal to or greater than $2.50 per share and exchange them for replacement options covering the same number of shares, subject to adjustment. The Replacement Options will be granted on July 9, 2002, or, if we extend the Expiration Date of the Offer, at a later date. If our common stock is publicly traded on the Nasdaq or any Subsequent Market and there are no reported sales of our common stock on such date, then the Replacement Option Grant Date will be the next day on which there is a reported sale. Each Replacement Option will have an exercise price equal to the Fair Market Value of our common stock on the Replacement Option Grant Date. The Fair Market Value will be the closing price of our common stock as reported on the Nasdaq or any Subsequent Market, or, if our common stock is not publicly traded, the value of our common stock as determined in good faith by our Board of Directors on the Replacement Option Grant Date. | ||
Your participation is voluntary. You may either keep all of your current Eligible Option Grants at their current exercise price or exchange some or all of your Eligible Option Grants for Replacement Options covering the same number of shares as the Eligible Option Grants you exchanged, subject to adjustment. However, if you have been granted options since June 6, 2001 and you elect to exchange any of your Eligible Option Grants, you must exchange ALL of your options granted since June 6, 2001 for Replacement Options as well—even if the exercise price of some of those options is less than $2.50 per share. | |||
Q2 | Why is the Stock Option Exchange Program being offered? | ||
A2 | In light of the decline in the price of our common stock, we recognize that the exercise prices of the majority of our outstanding options, whether or not they are currently exercisable, are higher than the price of our common stock as reported on Nasdaq. We have determined that these options are not attractive or effective as an incentive to retain and motivate employees, and are unlikely to be exercised in the foreseeable future. By making this Offer we intend to provide our employees with the benefit of holding options that over time may have a greater potential to increase in value, and thereby create better incentives for our employees to remain with us and contribute to the attainment of our business and financial objectives and the creation of value for all of our stockholders. | ||
Q3 | Why don't you just reprice my options, as I have seen done at other companies? | ||
A3 | In 1998, the Financial Accounting Standards Board adopted unfavorable accounting treatment for companies that reprice options. If we were to simply reprice options, we would be required to take a charge against future operating results based on any appreciation in value of the repriced options in each accounting period. The amount of that charge would be uncertain until the end of each accounting period. That uncertainty would affect our operating results and would likely create additional volatility in our stock price. | ||
Q&A–1
Q4 | Why can't I just receive additional options? | ||
A4 | We strive to balance the need for a competitive compensation package for our employees with the interests of our stockholders. Because of the large number of options that we currently have outstanding, a large grant of new options would be dilutive to our stockholders and could have a dilutive effect on our earnings per share if we become profitable. | ||
Q5 | What optionsmay I exchange as part of the Offer? | ||
A5 | As described more fully below, we are offering to exchange any stock option: | ||
• | that is currently outstanding under our Equity Compensation Plan; | ||
• | that has an exercise price equal to or greater than $2.50 per share; and | ||
• | that is still outstanding on January 8, 2002 or such later Expiration Date if we extend the Offer. | ||
If you elect to exchange any Eligible Option Grant, then youmust also exchange all of your options that were granted in the six-month period prior to the Commencement Date—even if the exercise price of some of those options isless than $2.50 per share. For example, based on a Commencement Date of December 6, 2001, to participate in this Offer, you must exchange ALL of your options that were granted on or after June 6, 2001. The options granted in the six-month period prior to the Commencement Date that are cancelled due to your participation in the Offer will be replaced by the same number of Replacement Options. | |||
If you attempt to exchange an option having an exercise price ofless than $2.50 per share (other than options that you must exchange pursuant to the preceding paragraph), that option will not be an Eligible Option Grant and any election you may have made to exchange that option will not be accepted by us. | |||
Q6 | What optionsmust I exchange as part of the Offer? | ||
A6 | You do not have to exchange any options. However, as explained in Q&A 5, if you decide to participate in the Offer and exchange any Eligible Option Grants, you must exchange ALL options granted to you within the six-month period preceding the Commencement Date, even if the exercise price of those options is less than $2.50 per share. | ||
Q7 | If I elect to exchange my Eligible Option Grants, do I have to exchange all of my Eligible Option Grants or can I just exchange some of them? | ||
A7 | Subject to the requirement that you exchange all options granted since June 6, 2001 if you elect to participate in the Offer (See Q&A 5 and Q&A 6), if you have more than one Eligible Option Grant, then you may exchange any or all of them. You cannot exchange a portion of any particular Eligible Option Grant and keep the balance. You must exchange all unexercised shares that are subject to each particular Eligible Option Grant that you exchange in the Offer. | ||
Q8 | Can I exchange a portion of an unexercised Eligible Option Grant? | ||
A8 | No. If you elect to exchange an Eligible Option Grant, you must exchange all shares covered by that Eligible Option Grant that have not been exercised. | ||
Q&A–2
Q9 | Can I exchange the remaining portion of an Eligible Option Grant that I have partially exercised? | ||
A9 | Yes. If you have exercised an Eligible Option Grant in part, and the remaining unexercised portion of that option is still outstanding, you may exchange the remaining portion pursuant to the Offer. Options for which you have properly submitted an exercise notice prior to the Expiration Date will be considered exercised to that extent, whether or not you have received confirmation of exercise for the shares purchased. | ||
Q10 | May I exchange options that I have already exercised? | ||
A10 | The Offer only pertains to options and does not apply in any way to outstanding shares that you have purchased, whether upon the exercise of options or otherwise. If you have exercised an Eligible Option Grant in its entirety, that option is no longer outstanding and is therefore not subject to the Offer. | ||
Q11 | Are purchase rights granted under our 2000 Employee Stock Purchase Plan eligible for exchange under the Stock Option Exchange Program? | ||
A11 | No. Neither purchase rights granted under our Employee Stock Purchase Plan nor shares of our common stock acquired under our Employee Stock Purchase Plan or other employee plans are eligible to participate in the Offer. | ||
Q12 | Are there conditions to the Offer? | ||
A12 | Yes. In addition to the requirement that you exchange all options granted since June 6, 2001 if you elect to participate in the Offer (see Q&A 5 and Q&A 6), the Offer is subject to a number of other conditions, which are described in Section 6 of the Offer to Exchange. Please read that section carefully. The Offer isnot conditioned on a minimum number of option holders accepting the Offer or a minimum number of options being exchanged. | ||
Q13 | Are there any eligibility requirements that I must satisfy to receive my Replacement Options? | ||
A13 | You must be employed by us or be a member of our Board of Directors on January 8, 2002 or, if the Offer is extended, such later Expiration Date. You also must remain continuously employed (or a member of our Board) through the Replacement Option Grant Date. If you go on a leave of absence protected by statute, you will be considered "continuously employed" during that leave. If you go on a leave that is not protected by statute, then you will be considered "continuously employed" only so long as we approve your leave. | ||
If you are not an employee or a member of our Board of Directors on the Expiration Date, you will not be eligible to exchange any Eligible Option Grants, and any election you may have made will not be accepted by us.Also, if you do not remain an employee or a member of our Board of Directors through the Replacement Option Grant Date and your Eligible Option Grants were cancelled under this Offer, you will not be granted Replacement Options and your cancelled options will not be reinstated. | |||
IF YOU ARE AN EMPLOYEE RESIDING IN THE UNITED STATES, THEN YOUR EMPLOYMENT WITH US IS "AT WILL" AND MAY BE TERMINATED BY US OR BY YOU AT ANY TIME, INCLUDING PRIOR TO THE REPLACEMENT OPTION GRANT DATE, FOR ANY REASON, WITH OR WITHOUT CAUSE. | |||
Q&A–3
Q14 | Are employees who are on a leave of absence on the Replacement Option Grant Date eligible to participate? | ||
A14 | If you exchange Eligible Option Grants in the Offer and, on the Replacement Option Grant Date, you are on a leave of absence that is protected by statute, then you will be entitled to Replacement Options on the Replacement Option Grant Date. If, however, on the Replacement Option Grant Date you are on an approved leave of absence that is not protected by statute, then the Replacement Options will be granted only if you return to regular employment with us. For those employees, the "Replacement Option Grant Date" will be the date of return. | ||
Q15 | Can employees residing outside the United States participate? | ||
A15 | All current employees, including employees residing outside the United States, holding Eligible Option Grants may participate in the Offer provided they meet the eligibility criteria set forth in Q&A 13. | ||
Special considerations or conditions may apply to employees residing outside the United States. In some countries, the application of local rules may have important consequences to those employees. Included in the Offer to Exchange are short summaries of some of the consequences with respect to the countries other than the United States where our employees reside (see Schedule B to the Offer to Exchange). If you are an employee residing outside the United States, you should review these summaries. We also recommend that you consult your individual tax, legal and investment advisors. | |||
Q16 | What if my employment is terminated between the Expiration Date and the Replacement Option Grant Date? | ||
A16 | If you elect to exchange Eligible Option Grants, your election will be irrevocable as of 12:00 midnight, U.S. Mountain Standard Time, on January 8, 2002, or if the Offer is extended, such later Expiration Date. If your employment with us terminates, whether voluntarily, involuntarily (including, without limitation, redundancy), or for any other reason (including death), before your Replacement Options are granted, you will not receive any Replacement Options. You will not have a right to any Eligible Option Grants that have been cancelled under any circumstances. IF YOU ARE NOT CONTINUOUSLY EMPLOYED BY US FROM THE EXPIRATION DATE THROUGH THE REPLACEMENT OPTION GRANT DATE, YOU WILL NOT RECEIVE ANY REPLACEMENT OPTIONS OR ANY OTHER CONSIDERATION IN EXCHANGE FOR YOUR ELIGIBLE OPTION GRANTS THAT HAVE BEEN ACCEPTED FOR EXCHANGE AND CANCELLED. | ||
IF YOU ARE AN EMPLOYEE RESIDING IN THE UNITED STATES, THEN YOUR EMPLOYMENT WITH US IS "AT WILL" AND MAY BE TERMINATED BY US OR BY YOU AT ANY TIME, INCLUDING PRIOR TO THE REPLACEMENT OPTION GRANT DATE, FOR ANY REASON, WITH OR WITHOUT CAUSE. | |||
Q&A–4
Q17 | Are the terms and conditions of the Offer the same for everyone? | ||
A17 | No. The terms and conditions differ as follows: | ||
• | Replacement Options granted to our employees residing in the United States will be treated as incentive stock options to the maximum extent permitted by U.S. tax laws. | ||
• | Non-exempt Employees (i.e., those entitled to receive overtime pay) must wait for six months after the Replacement Option Grant Date in order to exercise (including exercises made by way of a same-day sale) their Replacement Options. If, however, you are a Non-exempt Employee and your service terminates (other than by reason of your death or disability as defined in the applicable Replacement Grant Plan) during the six-month period following the Replacement Option Grant Date, then you may exercise your vested Replacement Options at any time during the thirty-day period beginning on the day that is six months and one day after the Replacement Option Grant Date. An exercise of Replacement Options under these circumstances may disqualify such Replacement Options for incentive stock option treatment. | ||
• | Replacement Options granted to members of our Board of Directors will not be treated as incentive stock options unless they are employed by us. | ||
• | Replacement Options granted to employees in jurisdictions outside the United States may be subject to different terms and conditions than those granted to our employees residing in the United States. If you are an employee residing outside the United States, please see Schedule B for more details. | ||
Q18 | If I am a Non-exempt Employee, why must I wait at least six months following the Replacement Option Grant Date to exercise (including an exercise made by way of a same-day sale) my vested Replacement Options? | ||
A18 | In order for us to exclude gains from the exercise of stock options from your regular rate of pay for purposes of calculating overtime pay, recent changes in the law require that new stock option grants, including Replacement Option grants, be unexercisable for six months following the date of grant. | ||
Q19 | How should I decide whether to participate? | ||
A19 | We understand that this will be a challenging decision for everyone. The Offer does carry considerable risk, and there is considerable uncertainty regarding our future stock performance. As a result, the decision to participate must be your personal decision, and it will depend largely on the exercise prices of your Eligible Option Grants and your assumptions about our business, our financial performance, our stock price, investors' demand for equity securities of similar companies, the performance of the Nasdaq, the future overall economic and political environment, and numerous other factors as well as your desire and ability to remain an employee of eSoft until the Replacement Option Grant Date. For these reasons, we cannot advise you on the decision to participate in the Offer, and we have not authorized anyone to make any recommendation on our behalf as to your choices. | ||
Q&A–5
Q20 | How does the Offer work? | ||
A20 | On or before January 8, 2002, or if the Offer is extended, such later Expiration Date, you may decide to exchange any of your Eligible Option Grants for Replacement Options. The Replacement Options will be granted on the Replacement Option Grant Date, which we currently anticipate will be July 9, 2002. The number of shares subject to your Replacement Options will equal the number of shares subject to the Eligible Option Grants that you exchanged. The number of shares to be granted under your Replacement Options will be adjusted for any stock splits, stock dividends, recapitalizations or similar transactions that may occur between the Expiration Date and the Replacement Option Grant Date. | ||
If you elect to exchange any of your Eligible Option Grants, you must exchangeall options granted to you during the six-month period prior to the Commencement Date, even if the exercise price of such options isless than $2.50 per share. For example, assuming a Commencement Date of December 6, 2001, to participate in the Offer, you must exchange ALL of your options that were granted on or after June 6, 2001. The options granted in the six-month period prior to the Commencement Date that are cancelled due to your participation in the Offer will be replaced by the same number of Replacement Options. | |||
Q21 | What if my Eligible Option Grants are not currently vested? Can I exchange them? | ||
A21 | Yes. Your Eligible Option Grants do not need to be vested for you to participate in the Offer. | ||
Q22 | My options are separated between incentive stock options and nonqualified stock options because my original grant exceeded the $100,000 limit on incentive stock options imposed by U.S. tax laws. Can I cancel one part but not the other? (This question is relevant only for employees who are residing in the United States.) | ||
A22 | No. An option that has been separated into a partial incentive stock option and a partial nonqualified stock option is still considered to be a single option and cannot be separated for purposes of the Offer. You should note that all Replacement Options for employees residing in the United States will be incentive stock options to the maximum extent permitted by U.S. tax law. | ||
Q23 | When will I receive my Replacement Options? | ||
A23 | You will be granted your Replacement Options on the Replacement Option Grant Date, which is expected to be July 9, 2002. If we extend the Offer, the Replacement Option Grant Date will be later. See Q&A 1. We expect to distribute stock option agreements relating to the Replacement Options within approximately six weeks following the Replacement Option Grant Date. | ||
Q24 | Why won't I receive my Replacement Options immediately after the Expiration Date of the Offer? | ||
A24 | To avoid adverse accounting consequences that can result from stock option exchanges, we cannot grant Replacement Options or any other options to participants in the Offer for at least six months and one day after the Expiration Date. Assuming you remain continuously employed by us, you will not receive your Replacement Options until the Replacement Option Grant Date. If you participate in the Offer, any other options that otherwise might have been granted to you prior to the Replacement Option Grant Date will be deferred until the Replacement Option Grant Date at the earliest. | ||
Q25 | How will my Replacement Options vest? | ||
A25 | Each Replacement Option generally will be subject to the same vesting schedule and have the same vesting commencement date as the Eligible Option Grant it replaces. | ||
Q&A–6
Q26 | Will I be entitled to vesting "credit" during the period beginning on the Expiration Date and ending on the Replacement Option Grant Date? | ||
A26 | Yes. If you receive a Replacement Option, you will receive vesting credit under the Replacement Option equal to the vesting under the corresponding Eligible Option Grant that is exchanged, including during the period beginning on the Expiration Date and ending on the Replacement Option Grant Date. | ||
Q27 | What is the exercise price for the Replacement Options? | ||
A27 | The exercise price of your Replacement Options will be the Fair Market Value of our common stock on the Replacement Option Grant Date, which is expected to be July 9, 2002, unless we extend the Offer. The Fair Market Value will be the closing price of our common stock as reported on Nasdaq or any Subsequent Market, or, if our common stock is not publicly traded, the value of our common stock as determined in good faith by our Board of Directors on the Replacement Option Grant Date.We cannot guarantee that the Replacement Options will have a lower exercise price than the Eligible Option Grants you exchanged, and we make no representations as to our future stock price. We recommend that you obtain current market quotations for our common stock before deciding whether to elect to participate in the Offer and exchange your Eligible Option Grants. | ||
Q28 | How long is the option term of the Replacement Options? | ||
A28 | The Replacement Options granted to you will retain the original option term of the Eligible Option Grants being exchanged. | ||
Q29 | If I exchange my Eligible Option Grants, how many shares will I receive under my Replacement Options? | ||
A29 | This is a share-for-share Stock Option Exchange Program, so for each share subject to the Eligible Option Grants that you exchange (and for all options granted in the six-month period before the Commencement Date that are exchanged as a result of your participation in this Offer), you will receive an option for one share under the Replacement Options. However, the number of shares subject to your Replacement Options will be adjusted for any stock splits, stock dividends, recapitalizations or similar transaction that may occur between the Expiration Date and the Replacement Option Grant Date. | ||
Q30 | Will I have to wait longer to sell common stock under my Replacement Options than I would under the Eligible Option Grants that I exchange? | ||
A30 | Possibly. If you are a Non-exempt Employee (i.e., you are entitled to receive overtime pay), then you may not exercise (including exercises made by way of a same-day sale) your Replacement Options for at least six months after the Replacement Option Grant Date. Also, if you are a Non-exempt Employee and your service terminates (other than by reason of your death or disability, as defined in the applicable Replacement Grant Plan) during the six-month period following the Replacement Option Grant Date, then you may exercise your vested Replacement Options at any time during the thirty-day period beginning on the day that is six months and one day after the Replacement Option Grant Date. You should direct questions about whether you are a Non-exempt Employee to Cheryl Meunch at (303) 444-1600 x3333. | ||
Q31 | Am I eligible to receive future grants if I participate in this exchange? | ||
A31 | Because of the accounting consequences, if you elect to exchange Eligible Option Grants, you will not receive any additional stock option grants until after the Replacement Option Grant Date. | ||
Q&A–7
Q32 | Can you provide me with examples of how an exchange will operate? | ||
A32 | Yes. Please note, however, that these examples may not apply if you are an employee residing outside the United States. | ||
Example #1: For purposes of illustration only, assume that (1) the grant date of your Eligible Option Grant was June 5, 2000; (2) your Eligible Option Grant was for 3,600 shares; (3) the exercise price of your Eligible Option Grant was $8.63 per share; (4) the vesting schedule of your Eligible Option Grant was seven thirty-sixths (7/36) after the first seven months and on a month to month basis thereafter for the next twenty-nine months (i.e., 700 shares vest on January 5, 2001, and 100 shares vest per month thereafter for the next twenty-nine months); (5) the Fair Market Value of our common stock on the Replacement Option Grant Date (assume July 9, 2002) is $2.20 per share; and (6) you timely file an election. | |||
Using the assumptions listed above, upon our acceptance of your election, we would cancel your Eligible Option Grant on January 8, 2002. On the Replacement Option Grant Date, we would grant you a new option for 3,600 shares with an exercise price of $2.20 per share. The vesting schedule for this Replacement Option would be the same as for the Eligible Option Grant, and therefore you would have cumulatively vested in 2,400 shares (2/3 of the Replacement Option) as of July 9, 2002. | |||
Example #2. For purposes of illustration only, assume that (1) the grant date of your Eligible Option Grant was July 12, 2000; (2) your Eligible Option Grant was for 3,600 shares; (3) the exercise price of your Eligible Option Grant was $6.00 per share; (4) the vesting schedule of your Eligible Option Grant was seven thirty-sixths (7/36) after the first seven months and on a month to month basis thereafter for the next twenty-nine months (i.e., 700 shares vest on March 12, 2001, and 100 shares vest per month thereafter for the next twenty-nine months); (5) the Fair Market Value of our common stock on the Replacement Option Grant Date (assume July 9, 2002) is $2.20 per share; and (6) you timely file an election. | |||
Using the assumptions listed above, upon our acceptance of your valid election, we would cancel your Eligible Option Grant on January 8, 2002. On the Replacement Option Grant Date, we would grant you a new option for 3,600 shares with an exercise price of $2.20 per share. The vesting schedule for this Replacement Option would be the same as for the prior option, and therefore 2,300 shares would be immediately vested, and you would become cumulatively vested in 2,400 shares (2/3) of the Replacement Option as of July 12, 2002. | |||
Q33 | How long will the Offer remain open? | ||
A33 | The Offer is scheduled to remain open until 12:00 midnight, U.S. Mountain Standard Time, January 8, 2002 or, if the Offer is extended, such later Expiration Date. We currently have no plans to extend the Offer beyond January 8, 2002. If we do extend the Offer, we will announce the extension no later than 6:00 a.m., U.S. Mountain Standard Time, on the next business day following the previously announced Expiration Date. | ||
Q34 | If the Offer is extended, how does the extension impact the date on which my Replacement Options will be granted? | ||
A34 | If we extend the Offer, the Replacement Option Grant Date will be extended to a day that is at least six months and one day after the extended Expiration Date. | ||
Questions & Answers 35-38 relate only to persons subject to U.S. federal income taxes and do not cover any state, local or non-U.S. tax consequences.If you are an employee residing outside the United States, please review the summaries in Schedule B to the Offer and/or consult your personal tax advisor to determine the tax and social insurance consequences of this exchange transaction. | |||
Q&A–8
Q35 | Will my Replacement Options be incentive stock options or nonqualified stock options? | ||
A35 | The Replacement Options will be incentive stock options to the maximum extent permitted by U.S. tax law;provided, however, that Replacement Options granted to non-employee members of our Board of Directors may not be treated as incentive stock options. | ||
Q36 | In the U.S., what is the difference in tax treatment between nonqualified stock options and incentive stock options? | ||
A36 | When you exercise a nonqualified stock option, you will pay U.S. federal, state and local income taxes and FICA taxes on the difference between the exercise price of the nonqualified stock option and the fair market value of the common stock on the day of exercise. For employees, this amount will be reported as income on your W-2 for the year in which the exercise occurs. Also for employees, withholding amounts must be collected when the exercise takes place. When you sell shares that you have acquired by exercising a nonqualified stock option, any excess of the sale price over the exercise price of the option will be treated as long term capital gain or short term capital gain taxable to you at the time of sale, depending on whether you held the shares for more than one year. | ||
You generally will not realize taxable income when you exercise an incentive stock option. However, your alternative minimum taxable income will be increased by the amount that the aggregate fair market value of your shares, which is generally determined as of the date you exercise the option, exceeds the aggregate exercise price of the option. When you sell your shares that you have acquired by exercising an incentive stock option, the tax consequences of the sale depend on whether the disposition is "qualifying" or "disqualifying." The disposition of your shares is a qualifying disposition if it is made after the later of: (a) more than two years from the date the incentive stock option was granted or (b) more than one year after the date the incentive stock option was exercised. | |||
If the disposition of your shares you received when you exercised incentive stock options is a qualifying disposition, any excess of the sale price over the exercise price of the option will be treated as long term capital gain taxable to you at the time of the sale. If the disposition is a disqualifying disposition, the excess of the fair market value of your shares on the date the option was exercised over the exercise price will be taxable ordinary income to you at the time of the sale. However, if the difference between the sale price and the option exercise price is less than the amount in the preceding sentence, this lesser amount is ordinary income to you. Any amount you realize in excess of the ordinary income amount will be long-term capital gain or short-term capital gain, depending on whether or not you sold your shares more than one year after the option was exercised. | |||
Q37 | Will I have to pay U.S. taxes if I exchange my Eligible Option Grants in the Offer? | ||
A37 | We do not believe that any U.S. federal income tax consequences will be imposed as a result of your participation in the Offer. However, for personalized tax advice you should contact your own tax advisor. | ||
Q&A–9
Q38 | What are the U.S. tax implications for not participating in this Offer? | ||
A38 | We do not believe that our Offer to you will change any of the terms of your Eligible Option Grants if you do not accept the Offer. However, the U.S. Internal Revenue Service may characterize our Offer to you as a modification of those Eligible Option Grants that are incentive stock options, even if you decline the Offer. A successful assertion by the U.S. Internal Revenue Service that your Eligible Option Grants have been modified could extend the Eligible Option Grants' holding period to qualify for favorable tax treatment and cause a portion of your Eligible Option Grants to be treated as nonqualified stock options. In order to minimize the risk that our Offer to you could be characterized as a modification of those Eligible Option Grants that are incentive stock options, we have structured the Offer so that we retain the right to choose whether or not to accept your Eligible Option Grants for Exchange. Accordingly, your Eligible Option Grants (and the related stock option agreements) will be automatically cancelled if, and only if, we accept your Eligible Option Grants for exchange. If you choose not to exchange your Eligible Option Grants and you have been granted incentive stock options, we recommend that you consult with your own tax advisor to determine the U.S. tax consequences of the exercise of those Eligible Option Grants and the sale of the common stock that you will receive upon exercise. Nevertheless, we intend to accept promptly after the Expiration Date all Eligible Option Grants that are properly submitted to be exchanged and have not been validly withdrawn. | ||
Q39 | What do I need to do to exchange my Eligible Option Grants? | ||
A39 | To exchange your Eligible Option Grants, you must complete and deliver the Election Form contained in the Option Exchange Program Packet in accordance with its instructions before 12:00 midnight, U.S. Mountain Standard Time, on the Expiration Date, which is expected to be January 8, 2002.Delivery will be deemed made only when the Election Form is actually received by us. No late deliveries will be accepted. We may reject any Eligible Option Grant if we determine the Election Form is not properly completed or to the extent that we determine it would be unlawful to accept the Eligible Option Grant. Also, please note that, even if you timely deliver your Election Form, in order to preserve the status of options that are not exchanged pursuant to the Offer as incentive stock options, we retain the right to choose whether or not to accept your Eligible Option Grants for exchange. Accordingly, your Eligible Option Grants (and the related stock option agreements) will be automatically cancelled if, and only if, we accept your Eligible Option Grants for exchange. Nevertheless, we intend to accept promptly after the Expiration Date all Eligible Option Grants that are properly submitted to be exchanged and have not been validly withdrawn. | ||
Q40 | What is the deadline to elect to participate in the Offer? | ||
A40 | You must deliver your Election Form in accordance with its instructions by 12:00 midnight, U.S. Mountain Standard Time, on the Expiration Date, which is expected to be January 8, 2002. Although we do not currently intend to do so, we may, in our discretion, extend the Offer at any time. If we extend the Offer, we will announce the extension no later than 6:00 a.m., U.S. Mountain Standard Time, on the next business day following the scheduled or announced Expiration Date. | ||
Q41 | Can I change my election? How often? | ||
A41 | Yes. You can change your election at any time by either delivering a Notice of Withdrawal or revising and re-delivering your Election Form, each in accordance with its instructions, prior to the Expiration Date. There is no limit to the number of times you can change your election prior to the Expiration Date. However, the last Notice of Withdrawal or Election Form you deliver prior to the Expiration Date will determine your election with respect to the Offer. | ||
Q&A–10
Q42 | What will happen if I do not turn in my Election Form by the Expiration Date? | ||
A42 | If you do not turn in your Election Form by the Expiration Date, you cannot participate in the Offer.Delivery will be deemed made only when your Election Form is actually received by us. No late deliveries will be accepted. | ||
Q43 | Will I receive a confirmation of my election or change of election? | ||
A43 | Yes. In your Election Form you may elect to provide us with your email address, in which case you will be sent an email confirming your election. The confirmation will confirm your election and will state the number of Replacement Options that we will grant to you on the Replacement Option Grant Date. If you would like to receive a confirmation, it is important that you provide us with your email address. If you do not provide us with your email address, you will not receive confirmation of your election. | ||
Q44 | What happens to my Replacement Options if eSoft, Inc. merges or is acquired prior to the Replacement Option Grant Date? | ||
A44 | If we merge with or are acquired by another entity between the Expiration Date and Replacement Option Grant Date, then the resulting entity will be obligated to grant the Replacement Options under the same terms as provided in this Offer; however, the type of security and the number of shares subject to each Replacement Option would be determined by the acquisition agreement between us and the acquiror based on the same principles applied to the handling of the options to acquire our common stock that are outstanding at the time of the acquisition. As a result of the ratio in which our common stock may convert into an acquiror's common stock in an acquisition transaction, you may receive options for more or fewer shares of the acquiror's common stock than the number of shares subject to the Eligible Option Grants that you exchange. | ||
Q45 | What if I do not accept this Offer? | ||
A45 | This Offer is completely voluntary. You do not have to participate, and there are no penalties for electing not to participate in this Offer. However, if you are an employee residing in the United States, you choose not to participate in this Offer and your Eligible Option Grants are incentive stock options, the Offer may modify the status of your incentive stock options. Please consult with your personal tax advisor. | ||
Q46 | Where do I go if I have additional questions about this Offer? | ||
A46 | Please direct your questions to Cheryl Muench at cmuench@esoft.com or at (303) 444-1600 x3333. | ||
Q&A–11
