Gateway, eSoft resolve funding spat

The companies settle a dispute, triggered by eSoft's slumping stock price, about a Gateway investment in the small Linux hardware and software company.

Stephen Shankland principal writer
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Stephen Shankland
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Gateway and eSoft have resolved a disagreement, triggered by eSoft's slumping stock price, about a Gateway investment in the small Linux hardware and software company.

The news yesterday sent eSoft's stock up 13 percent to close at $8.53, but shares sank 5 percent to $8.13 in midday trading today. The stock has been steadily dropping since November, when excitement about the Linux operating system carried its stock to a high of $42.87.

In February, when eSoft's stock was generally trading between $20 and $30, Gateway announced a plan to invest $25 million in eSoft, buying about 1.3 million shares at $19.51 apiece in two installments.

Gateway made the first $12.5 million payment when the deal closed April 26 but didn't make the second payment within 90 days of the closing date, eSoft said in a Securities and Exchange Commission filing.

eSoft described the situation in strong terms: "The company has demanded that Gateway make payment pursuant to the agreement." In addition to ongoing negotiations, "eSoft is also considering what other specific actions it will take with respect to the Gateway payment obligation, which may include the pursuit of legal remedies."

Negotiations have resulted in a revised agreement, the companies said. In it, Gateway will provide the $12.5 million as a four-year loan convertible to eSoft stock. In addition, eSoft will purchase 30,000 shares of Gateway stock for $3 million, and the companies agreed to expand their sales, marketing and distribution agreement.

"This was two business partners that were moving forward together and came to a successful conclusion that was satisfactory to both," said Gateway spokesman John Spelich, declining to comment on the reasons why Gateway didn't make the second $12.5 million payment.

eSoft spokeswoman Nina Piccinini said the renegotiation stemmed from eSoft's lower stock price. "They decided there should be some negotiations involved," she said. With the current stock price, "they would be paying higher than market value."

The new strike price for Gateway will be at the fair market value but not lower than $11 per share or higher than $19.50, she said.

eSoft, which targets small and medium-sized businesses, sells server appliances based on Linux and software that lets numerous people share a connection to the Internet. The company also has licensed its Redphish Internet connectivity software to Hewlett-Packard, Intel, Compaq Computer and Gateway, eSoft said in the filing.

eSoft last week signed 3Com as another partner for its Redphish software program. Redphish provides basic Internet server features, such as housing Web pages or handling email, on a variety of computer hardware types. Terms of the 3Com deal were not disclosed.

Intel invested $3 million in eSoft in 1999.