<PAGE>
As filed with the Securities and Exchange Commission on November 29, 1999
Registration No. 333-
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ESYNCH CORPORATION
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(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
Delaware 5961 87-0461856
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer Identification
incorporation or organization) Classification Code Number) Number)
</TABLE>
15502 Mosher Avenue, Tustin, California 92780 (714) 258-1900
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(Address and telephone number of registrant's principal executive offices)
15502 Mosher Avenue, Tustin, California 92780
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(Address of principal place of business)
Thomas Hemingway
15502 Mosher Avenue, Tustin, California 92780
(714) 258-1900
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(Name, address and telephone number of agent for service)
Please send a copy of all communications to:
Nicholas J. Yocca, Esq.
Stradling Yocca Carlson & Rauth, P.C.
660 Newport Center Drive, #1600
Newport Beach, California 92660
Telephone (949) 725-4120 Fax (949) 823-5120
Approximate date of commencement of proposed sale to the public: From time to
time after the registration statement becomes effective.
If this form is filed to register additional securities for an offering under
Rule 462(b) under the Securities Act of 1933, please check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed under Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. / /
<PAGE>
If this form is a post-effective amendment filed under Rule 462(d) under the
Securities Act, check the following box and list the Securities Act Registration
Statement number of the earlier effective Registration Statement for the same
offering. / /
If delivery of the prospectus is expected to be made under Rule
434, please check the following box. / /
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis under Rule 415 of the Securities Act, check the
following box. /XX/
CALCULATION OF REGISTRATION FEE
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<CAPTION>
Title of Each Proposed Maximum Proposed Maximum
Class of Securities Amount Being Offering Price Per Aggregate Amount of
To Be Registered Registered Unit/Share(1) Offering Price Registration Fee
<S> <C> <C> <C> <C>
Common Stock,
par value $.001,
underlying Series J
Convertible Preferred
Stock (2)(3) 1,571,424(4) $3.50 $5,499,998 $1,529.00
Common Stock,
par value $.001,
underlying Warrants (2)(3) 393,750(4) $3.50 $1,378,125 $ 383.12
Total registration fee $1,912.12
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) based on the average of the high ($3.6875) and the
low ($3.3125) sale prices reported on the Nasdaq over-the-counter bulletin
board on November 23, 1999.
(2) Under Rule 416 there are also being registered such additional shares as
may be issued as a result of the anti-dilution provisions of the Series J
Convertible Preferred Stock and the accompanying Warrants.
(3) Securities being registered for resale only.
(4) Equal to 200% of the number of shares of Common Stock initially issuable
upon conversion or exercise of the Series J Convertible Preferred Stock and
accompanying Warrants.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall become effective on that date in accordance with Section 8(a) of the
Securities Act or until the registration statement shall become effective on
such date as the Commission, acting under said Section 8(a), may determine.
<PAGE>
The information in this prospectus is not complete and may be changed. The
selling security holders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and is not an offer to buy
these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION DATED NOVEMBER 29, 1999
PROSPECTUS
up to 1,965,174 shares of Common Stock, par value $.001 each
------------------
eSynch Corporation
15502 Mosher Avenue, Tustin, California 92780
(714) 258-1900
------------------
Selling security holders are offering shares of common stock underlying
warrants and convertible preferred stock. The Common Stock may be offered from
time to time by the selling security holders. They are offering all of the
Common Stock for their own benefit.
Our Common Stock is listed on the OTC Bulletin Board maintained by the
NASD under the symbol "ESYN." On November 26, 1999, the last reported sale price
of the Company's Common Stock was $4.00.
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THESE ARE SPECULATIVE SECURITIES AND THIS INVESTMENT INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 2.
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Information regarding the selling security holders is set forth in
"Selling Security Holders" and "Plan of Distribution." All or a portion of the
shares of Common Stock offered hereby may be offered for sale, from time to
time, on the over-the-counter bulletin board, or otherwise, at prices and terms
then obtainable, or in negotiated transactions.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
adequacy of the prospectus. Any representation to the contrary is a criminal
offense.
The date of this prospectus is November 29, 1999
<PAGE>
TABLE OF CONTENTS
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Page
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<S> <C>
PROSPECTUS SUMMARY 1
RISK FACTORS 2
FORWARD-LOOKING AND CAUTIONARY STATEMENTS 9
USE OF PROCEEDS 9
SELLING SECURITY HOLDERS 10
PLAN OF DISTRIBUTION 12
LEGAL PROCEEDINGS 14
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 17
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 22
DESCRIPTION OF SECURITIES 24
INTEREST OF NAMED EXPERTS AND COUNSEL 29
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES 29
DESCRIPTION OF BUSINESS 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS 36
DESCRIPTION OF PROPERTY 39
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 40
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 41
EXECUTIVE COMPENSATION 42
FINANCIAL STATEMENTS 46
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 77
</TABLE>
Electronic Digital Distribution, eSynch, Kiss Software, Kissco, AtoZWare,
Oxford Media, and all product or service names of eSynch used in this
Prospectus, are unregistered trademarks, service marks and tradenames of
eSynch. The logos associated with such names are unregistered trademarks and
service marks of eSynch. Other brand names or trademarks appearing in this
prospectus are the property of their respective owners.
<PAGE>
ESYNCH CORPORATION PROSPECTUS SUMMARY
INTRODUCTION
Please read this prospectus carefully. We have not authorized anyone to provide
you with any information except the information contained in this prospectus.
You must not rely on any unauthorized information.
The information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or of any
sale of common stock.
This prospectus does not offer to sell or buy any shares in any jurisdiction
where it is unlawful.
In this prospectus, "eSynch," "we," "us" and "our" refer to eSynch Corporation
and subsidiaries.
THE OFFERING
Common stock offered up to 1,965,174 shares (1)
Use of Proceeds: The proceeds from the sale
of each selling security
holder's Common Stock will
belong to the selling
security holder. The
Company will not receive
any of the proceeds.
Trading Symbol ESYN
Trading Market Nasdaq over-the-counter
Bulletin Board
(1) We have initially registered 1,965,174 shares of Common Stock for sale by
the selling security holders. This amount is equal to 200% of the number of
shares of Common Stock initially issuable to the selling security holders upon
their conversion of shares of preferred stock and their exercise of warrants. We
are initially required to register this amount of shares by agreement with the
selling security holders.
-1-
<PAGE>
RISK FACTORS
Before you invest in our common stock, you should be aware that there are
various risks, including those described below. Additional risks, and
uncertainties not presently known to us or that we currently deem immaterial,
may also impair our business operations. If any of the following risks actually
occur, our business could be harmed. In such case, the shares of our common
stock that you purchase could decline in value and you may lose all or part of
your investment. You should consider carefully these risk factors before you
decide to purchase our shares.
We have a limited operating history and revenues have been minimal to date
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To date we have generated only minimal revenues. As a result, we have not yet
generated cash from operations and have had to rely on proceeds from sales of
our shares to fund our operations. Also we have only a limited operating history
on which our business can be evaluated and our business must be considered in
light of the risks, uncertainties, expenses and difficulties frequently
encountered by companies in their early stages of development that are entering
into new and rapidly evolving markets. These risks include the following:
* The limited resources that we have to compete with more established
competitors who have greater brand name recognition and greater resources.
* The need to raise additional capital to sustain operations and the absence
of any assurance that such financing will be obtainable, when needed, on
acceptable terms, if at all.
* The need to establish alliances or partnerships with established companies.
* The need to develop brand name recognition and to continually strengthen
customer loyalty and satisfaction.
* Uncertainty as to our business model.
* Anticipated continued losses from operations.
* The difficulties of managing growth.
* The difficulty of anticipating and adapting to technological, market and
other changes.
* The difficulties of attracting, integrating and motivating qualified
personnel.
We must, among other things, successfully implement and execute our business and
strategy, continue to develop and upgrade our technology, enhance our services
and products to meet the needs of a changing market, and provide superior
customer service.
-2-
<PAGE>
Our future operating results are unpredictable
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Our operating results are unpredictable and we expect them to fluctuate in the
future due to a number of factors, many of which are outside our control. These
factors include:
* the ability of competitors to provide services and products that are
competitive with our own.
* competition from larger companies with greater brand name recognition or
greater financial, marketing or management resources that those available
to us.
* adverse changes in consumer trends or general economic conditions.
* our ability to keep pace with technological developments.
As a strategic response to changes in the competitive environment, we may from
time to time make certain decisions that temporarily harm our business. As a
result, our operating results at times may be below expectations. If this
happens, it is likely that the value of our common stock would decline.
We need additional capital
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Our business model indicates that it is likely that we will incur operating
losses over the next several months. As a result of those losses and the funds
needed for managing acquisitions, working capital and infrastructure
development, we anticipate that we will have to raise substantial additional
capital to sustain us during this period. We may not be able to obtain the
financing that our business requires. Even if we can obtain financing when it is
needed, it may not be on favorable terms. In addition, a financing could have
the effect of reducing the percentage of our shares owned by our existing
stockholders, including investors purchasing shares in this offering. A
financing could have the additional effect of diluting or reducing the value of
the outstanding shares. We may sell shares or grant options or warrants to buy
shares at prices lower than the prevailing value of your shares.
Management owns a controlling interest in eSynch Corporation
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Our officers and directors currently own or control a substantial majority of
our outstanding common stock. If they act in concert, they will continue to be
able to exercise voting control over eSynch for the foreseeable future and will
be able to elect the entire Board of Directors and generally determine our
management policy. Also this management control could prevent, or make more
difficult, a sale of eSynch.
The loss of key personnel could adversely affect operations
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Thomas Hemingway and others play a key role in our operations and in the further
development of our business. The loss of the services of any of them could
adversely impact our business and chances for success.
-3-
<PAGE>
A failure to attract key personnel could adversely affect our plans
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Our performance also will greatly depend on our ability to hire, train, retain
and motivate additional officers and other key employees. However, competition
for highly skilled managerial, technical, marketing and customer service
personnel is intense. We may not be able to successfully attract, integrate or
retain sufficiently qualified personnel and, in that event, our business could
suffer.
We face competition in the markets we serve
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There is intense competition among companies selling services and products on
the Internet. Increased competition is likely to bring both strong price and
quality competition. As a result, in order to remain competitive, we might have
to make additional expenditures on research and development, marketing, and
customer service or to reduce our pricing, or both, which would adversely affect
our ability to achieve and maintain profitability.
There are several other companies involved in media and digital distribution
channels that have far greater financial and management resources and greater
name brand recognition than we have. If any of those companies were to compete
with us, we could find it difficult to attract new and retain existing users of
our services as a result of such competition.
There is a sporadic trading market for our common stock
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The public market for our common stock is sporadic. After this offering, you may
not be able to resell your shares at or above the public offering price due to a
number of factors, including:
* actual or anticipated fluctuations in our operating results or annualized
contract values.
* changes in expectations as to our future financial performance.
* changes in securities analysts' financial estimates.
* the operating and stock price performance of our competitors and other
comparable companies.
-4-
<PAGE>
Volatility and stock market risk
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In addition, the stock market in general, and the stocks of web-based businesses
in particular, have experienced extreme volatility that often has been unrelated
to the operating performance of particular companies. These broad market and
industry fluctuations may adversely affect the trading price of our common
stock, regardless of our actual operating performance.
A large amount of shares will become available for future sale
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We expect the trading price of our Common Stock to fluctuate depending on the
supply of our shares in the public market. We estimate that the amount of our
shares traded publicly has not been more than 1,000,000. That represents less
than 10% of the number of shares that are outstanding on a fully diluted basis.
Many of the shares that are outstanding are or will within the next 6 months
become available for sale in the public market. Rule 144, this offering, and our
registration of shares under the 1999 Stock Incentive Plan or other options will
result in a large number of shares being available for public sale as compared
with the number of shares historically traded. A large supply of shares, unless
met by an equal or greater demand, could result in lower trading prices.
Sales by the selling security holders could depress our stock price
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The availability of shares and the trading prices may fluctuate based upon
factors other than intrinsic value of our stock. The selling security holders
(whose shares will become convertible on January 28, 2000 or when the SEC allows
this offering to be effective, whichever is sooner) may act independently of
each other and cause confusion in the market. The selling security holders have
not informed us of an intention to sell shares through underwriters and may sell
through ordinary broker transactions. Purchasers of Common Stock in this
offering may be affected by subsequent sales by the selling security holders.
Because the conversion rate of the Series J Preferred Shares will increase when
the share price of the Common Stock is lower, the holders of Series J Preferred
Stock may elect to exercise at times when it is disadvantageous to holders of
Common Stock.
Future issuances of stock could adversely affect holders of common stock
- ------------------------------------------------------------------------
The Board of Directors is authorized to issue additional shares of preferred
stock without approval from holders of common stock. Preferred stock can have
rights and preferences, as may be determined by the Board of Directors, that are
senior to the common stock. The Board of Directors is authorized to issue
additional shares of common stock without approval from holders of common stock.
Additional common stock may be issued or reserved for issuance on terms and at
prices as may be determined by the Board of Directors. Among other things, such
authority may make it more difficult for a person to acquire eSynch. In turn,
this may make it less likely that holders of common stock will receive a premium
price for their shares.
-5-
<PAGE>
We run a risk of system capacity constraints and system failure
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We are largely dependent upon our communications and computer hardware and
software. A high volume of traffic and transactions on our servers could exceed
their capacity. If our digital content were to load slowly, this may potentially
drive away customers. Based on our experience and the experience of other
e-commerce companies, we anticipate that we will experience periodic system
interruptions in the future. Any system interruptions that result in the
unavailability of our service or in reduced customer activity could lead our
users to seek out our competitors. In such an event, we might find it difficult
and might have to incur additional marketing costs to get our users to return to
our servers. Also our systems are vulnerable to damage from earthquake, fire,
flood, power loss, telecommunication failure, break-in and similar catastrophic
events. A substantial interruption in the operability of these systems would
harm our business. We also do not have any business interruption insurance that
would compensate us for any resulting losses we might incur.
Our Internet business is vulnerable to third party misconduct
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Despite our implementation of network and firewall security, our servers are
vulnerable to computer viruses, physical or electronic break-ins, deliberate
attempts by third parties to exceed the capacity of our systems and similar
disruptive problems. Computer viruses, break-ins or other problems caused by
third parties could lead to interruptions, delays, and losses of data. The
occurrence of any of these risks could harm our business.
We rely on trade secret protection to protect some of our rights
- ----------------------------------------------------------------
To date we have relied to a significant degree on trade secret laws and
technical measures to establish and protect our proprietary rights. Secrecy,
copyrights and other methods to protect our intellectual property rights may
prove to be ineffective or inadequate to prevent imitation of our services or
products or to prevent others from claiming violations of their proprietary
rights by us. In addition, others may assert rights in our proprietary rights.
Our customer lists are also of great value to our business, and if a competitor
acquired these lists, it could harm our business.
-6-
<PAGE>
We will depend on acceptance of our brand names
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We believe that the development of brand name recognition is critical to the
success of most businesses, including our own, particularly with the recent and
growing increase in the number of companies that are conducting business on the
Internet. Development and awareness of the eSynch brand name will depend largely
on our success in increasing our customer base and strategic relationships. If
consumers do not perceive us as offering a desirable way to access digital
content and software or other e-commerce companies do not perceive us as an
effective marketing and sales channel for their products or services, we would
be unsuccessful in promoting our brand name.
We need to protect our business names
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We have only recently commenced a program designed to obtain trademark
registrations for our software and our business names and service mark
registrations for our service names. We may be unable to obtain such
protections. Registrations or other protections of names may prove to be
inadequate to prevent imitation of our names or to prevent others from claiming
violations of their trademarks and service marks by us. In addition, others may
assert rights in our trademarks and service marks.
We could face liability for materials disseminated through the Internet
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The law relating to the liability of Internet service companies for information
carried on or disseminated through their services is currently unsettled. It is
possible that claims could be made against Internet service companies under both
U.S. and foreign law for defamation, libel, invasion of privacy, negligence,
copyright or trademark infringement, or other theories based on the nature and
content of the materials disseminated through their services. Furthermore, the
growth and development of the market for Internet commerce may prompt calls for
more stringent consumer protection laws that may impose additional burdens on
companies conducting business over the Internet. The adoption of any additional
laws or regulations may decrease the growth of the Internet, which, in turn,
could decrease the demand for our Internet auctions and other services. This
could increase our cost of doing business or otherwise harm our business.
Our evolving business plan may change
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We intend to continue to develop our business plan and to explore opportunities
to expand the breadth and depth of our products and services. Changes in how
business is generally conducted could prevent us from achieving our business
objectives. Financially more powerful providers that offer competitive services
or products could also prevent us from achieving our business objectives.
-7-
<PAGE>
Year 2000 readiness statement
- -----------------------------
The computer systems of many businesses face the risk of malfunction in the year
2000. This malfunction is the result of computer programs that were designed to
use two digits rather than four digits to define an applicable year. This could
cause a system failure or miscalculations in the processing of data which, in
turn, could lead to disruptions in business operations and inability to process
transactions or engage in other business transactions.
We have conducted some limited testing of our systems and services and on that
basis we believe, though we cannot be certain, that they will function properly
in the year 2000. However, we also utilize third-party equipment and software
that may not be year 2000 compliant. We rely on the Internet for customers to
access our web sites and there is no guarantee that the operation of the
Internet itself will be unaffected by the year 2000. If our equipment or
software, or any third-party equipment or software on which we rely for our
operations, fails to properly process date-sensitive data, or if similar
problems impact the Internet or the economy generally, we could suffer
interruptions in our services and might have to incur unanticipated expenses to
remedy any such problems. We do not presently have a contingency plan in place
if one of our third-party providers, such as Internet backbone providers, should
experience system failure due to failure to comply with year 2000 issues, and we
do not intend to establish such a contingency plan.
Additional Risks
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In addition to matters affecting the Company's industry generally, factors which
could cause actual results to differ from expectations include, but are not
limited to (i) sales of the Company's software which may not rise to the level
of profitability; (ii) due to the rapidly changing and intensely competitive
nature of the industry, competitors may introduce new products with significant
competitive advantages over the Company's products; (iii) the Company may not
have sufficient resources, including any future financing it is able to obtain,
to sustain marketing and other operations; (iv) the Company may be unable to
attract and retain sufficient management and technical expertise, or may lose
key employees; (v) the Company's contractual or legal efforts to protect its
confidential information or intellectual property may be inadequate or
ineffective to provide protection, and the Company may be unable financially to
pursue legal remedies that may be available; (vi) the Company's selection, due
diligence, execution, and integration of acquisitions may not prove effective or
reasonable; (vii) the Company may suffer in material respects from the direct or
indirect effects of the "Year 2000" problem on public utilities,
telecommunications networks, customers, vendors, service providers, and the
economy or financial markets generally; (viii) the Company may suffer from other
technical or communications problems, such as power outages, system failures,
system crashes, or hacking; and (ix) the Company may be subjected to unknown
risks and uncertainties, or be unable to assess risks and uncertainties as may
exist.
-8-
<PAGE>
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 (the "Securities Act") and Section 21E
of the Securities Exchange Act of 1934 (the "Exchange Act") and such
forward-looking statements are subject to the safe harbors created thereby. For
this purpose, any statements contained in this prospectus except for historical
information may be deemed to be forward-looking statements. Also, words such as
"may," "will," "expect," "believe," "anticipate," "intend," "could," "estimate"
or "continue" or the negative or other variations thereof or comparable
terminology are intended to help you identify forward-looking statements. In
addition, any statements that refer to expectations, projections or other
characterizations of future events or circumstances are forward-looking
statements. Forward-looking statements include, but are not limited to,
statements regarding:
* Our expectations about the marketplace and consumer acceptance.
* Our marketing and sales plans.
* Our expectations regarding the growth of our business and that our
business model will succeed.
* Our ability to introduce new services and products and improve technology.
* The success of our technology.
These statements are not guarantees of future performance. Future performance is
subject to risks, uncertainties and assumptions that are difficult to predict
and may be beyond our control. Therefore, our actual results could differ
materially from anticipated results. These risks and uncertainties include those
noted in "Risk Factors" above.
We do not undertake any obligation to update or revise any forward-looking
statements contained in this prospectus for any reason, even if new information
becomes available or other events occur in the future.
USE OF PROCEEDS
The proceeds from the sale of each selling security holder's Common Stock will
belong to the selling security holder. The Company will not receive any proceeds
from such sales of the Common Stock.
-9-
<PAGE>
SELLING SECURITY HOLDERS
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
BEFORE THE OFFERING AFTER THE OFFERING
SERIES J PREFERRED COMMON(1) PREFERRED COMMON(1)
-------------------- --------------- --------- ---------
NAME OF SELLING SECURITY HOLDER NUMBER PERCENT NUMBER PERCENT NUMBER NUMBER
------------------------------- ------ ------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Amro International, S.A.(2)(3) 50 18.2% 180,357 1.9% (12) (12)
Austinvest Anstalt Balzers(3)(4) 50 18.2% 180,357 1.9% (12) (12)
Esquire Trade & Finance Inc.(3)(5) 50 18.2% 180,357 1.9% (12) (12)
Manchester Asset Management, Ltd.(6)(7) 40 14.5% 144,285 1.5% (12) (12)
Gilston Corporation, Ltd.(6)(8) 35 12.7% 126,250 1.3% (12) (12)
Triton Private Equity Fund L.P.(9) 25 9.1% 90,178 1.0% (12) (12)
Talbiya Investments Ltd.(10)(11) 12.5 4.5% 45,089 0.5% (12) (12)
Intercoastal Financial Services Corp.(6) 12.5 4.5% 35,714 0.4% (12) (12)
Total (selling security holders
combined)(11) 275.0 100.0% 982,587 (11) (12) (12)
</TABLE>
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(1) Beneficial ownership of Common Stock for purposes of this table is
calculated based on the maximum number of shares of Common Stock issuable upon
conversion of Series J Preferred Stock (assuming a conversion price of $3.50),
and exercise of all of the warrants. However, the terms of the Series J
Preferred Stock will not permit the conversion of Series J Preferred Stock by a
selling security holder if it and its affiliates would thereby own more than
4.99% of the outstanding Common Stock. The Series J conversion price is
initially equal to $3.50, subject to adjustment (see "Description of
Securities-Preferred Stock-Series J Preferred Stock"). The Series J Preferred
Stock becomes convertible on January 28, 2000 or any earlier date on which the
SEC determines this offering becomes effective.
(2) Address: 40 Ultra Finance, Grossmuenster Platz, #6, Zurich, Switzerland
CH822.
(3) Includes 37,500 shares issuable upon exercise of warrants and 142,857 shares
issuable upon conversion of preferred stock.
(4) Address: Landstrasse 938, 9494 Furstentum, Vaduz/Liechtenstein, Austria.
(5) Address: P.O. Box 146, Road Town, Tortola, British Virgin Islands.
(6) Address: 760 US Highway One-Suite 206, North Palm Beach, FL, 33408.
(7) Includes 30,000 shares issuable upon exercise of warrants and 114,285 shares
issuable upon conversion of preferred stock.
(8) Includes 26,250 shares issuable upon exercise of warrants and 100,000 shares
issuable upon conversion of preferred stock.
(footnotes continue on next page)
-10-
<PAGE>
(Footnotes continued)
(9) Address: 225 North Market Street, Suite 220, Wichita, Kansas 67202. Includes
18,750 shares issuable upon exercise of warrants and 71,428 shares issuable upon
conversion of preferred stock.
(10) Address: Ragnall House, 18 Peel Road, Douglas, Isle of Man, 1M14L2 United
Kingdom.
(11) A total of 196,875 shares are issuable upon exercise of warrants and
785,712 shares are issuable upon conversion of preferred stock. This would
aggregately represent 9.5% beneficial ownership. Under the terms of the Series J
Preferred Stock, the selling security holders cannot convert shares of Series J
Preferred Stock to the extent that a holder and its affiliates would then own
more than 4.99% of the outstanding Common Stock. The selling security holders
disclaim beneficial ownership of any shares issuable upon conversion to the
extent that any holder and its affiliates would then own more than 4.99% of the
outstanding Common Stock.
(12) We are required to register all of the shares of Common Stock issuable to
the selling security holders. Selling security holders may offer any or all of
the shares of Common Stock from time to time. The selling security holders are
not required to sell any or all of the shares of Common Stock. They may retain
the Common Stock indefinitely.
-11-
<PAGE>
PLAN OF DISTRIBUTION
The Company is presently aware of no arrangements or understandings, formal or
informal, pertaining to the distribution of the shares of Common Stock described
herein. The Company may file a supplemented Prospectus, pursuant to Rule 424(b)
under the Securities Act, if it is required to do so and if it is notified by a
selling security holder that any material arrangement has been entered into with
a broker-dealer for the sale of shares of Common Stock bought through a block
trade, special offering, exchange distribution or secondary distribution.
All or a portion of the shares of Common Stock offered hereby may be offered for
sale, from time to time, on the over-the-counter bulletin board, or otherwise,
at fixed prices which may be changed, at market prices at the time of sale, at
prices related to market prices, at prices and terms then obtainable, or in
negotiated transactions. In addition, the shares of Common Stock offered hereby
may be sold by one or more of the following: (a) a block trade in which the
broker or dealer so engaged will attempt to sell the shares of Common Stock as
agent, but may position and resell a portion of the block as principal to
facilitate the transaction; (b) purchases by a broker or dealer as principal and
resale by such broker or dealer for its account pursuant to this Prospectus; and
(c) ordinary brokerage transactions and transactions in which the broker
solicits purchasers. In effecting sales, brokers or dealers engaged by the
selling security holders may arrange for other brokers or dealers to
participate.
The selling security holders may effect these transactions by selling the common
stock to or through broker-dealers, who may receive compensation in the form of
discounts, concessions or commissions from the selling security holders or the
purchasers of the common stock for whom the broker-dealer may act as an agent or
to whom they may sell the common stock as a principal, or both. The compensation
to a particular broker-dealer may be in excess of customary commissions.
Each selling security holder may indemnify any broker-dealer that participates
in transactions involving sales of the shares against certain liabilities,
including liabilities arising under the Securities Act.
The selling security holders and broker-dealers who act in connection with the
sale of the common stock may be considered "underwriters" within the meaning of
the Securities Act, and any commissions received by such broker-dealers and
profits on any resale of the common stock as a principal may be considered
underwriting discounts and commissions under the Securities Act.
-12-
<PAGE>
We have agreed to bear expenses in connection with the registration and sale of
the common stock offered by the selling security holders (other than selling
commissions). The selling security holders will pay all brokers' commissions,
concessions or discounts. Our obligation includes paying the filing fees and
costs of filings. Filings will be made with the SEC, markets on which our Common
Stock trades, and state securities or "blue sky" commissioners. We also will pay
attorneys' fees and costs of a special legal counsel to the selling security
holders to a maximum of $25,000. We have also agreed to indemnify the selling
security holders (and their brokers, agents investment advisors and controlling
persons) from liabilities arising under the Securities Act, except liabilities
relating to information provided by the selling security holder specifically for
inclusion in this prospectus.
We estimate our out-of-pocket costs will be $150,000 initially, including
payment of related legal fees of selling security holders. Also we have agreed
to keep this prospectus updated continuously until the securities are sold or
the selling security holders are able to sell the securities under Rule 144(k).
We estimate the out-of-pocket costs for such updating at approximately $25,000
per year. The updating obligation could reasonably be expected to continue for
up to five years.
Under our registration rights agreement with the holders of Series J Preferred
Stock, we are required to pay damages to holders of Series J Preferred Stock in
the event we fail to file the registration statement that includes this
prospectus on November 30, 1999, the SEC does not declare that registration
statement effective by February 28, 2000, amendments are not filed within 20
days after they are required, amendments of the registration statement are not
declared effective within 30 days after filing, our stock is delisted from the
over-the-counter bulleting board, or we breach in any material respect our
agreements with the holders of Series J Preferred Stock. The damages payable are
equal to 2% of the holder's original purchase price for 30-day period or portion
thereof, until the breach or event is cured, not pro rated for periods of breach
of less than 30 days. Additional damages are 3% of such holder's purchase price
for each subsequent 30-day period until the breach is cured, with this amount
pro rated for periods of less than 30 days.
-13-
<PAGE>
LEGAL PROCEEDINGS
ESYNCH
- ------
On April 15, 1999, Bremer Public Relations, Inc. obtained a default judgment in
the amount of $32,980.85 against us based on a complaint filed in the Third
Judicial District for the City of Salt Lake City, State of Utah. The Company has
been attempting to negotiate a settlement of the amounts owed but has not done
so to date.
SOFTKAT
- -------
We acquired SoftKat, Inc. in November 1998 and sold SoftKat, Inc. in 1999.
Although SoftKat has been sold by us, there may be asserted and unasserted
claims against us based on alleged SoftKat, Inc. liabilities or obligations.
Some of the claims against SoftKat have been asserted either in pending
litigation or threatened litigation. We are aware of several other creditors of
SoftKat, Inc., which have made claims against SoftKat for amounts owed based on
good and/or services provided to SoftKat. In most cases, we do not know the
identity of these creditors, the amounts that they claim are due and owing or
the circumstances of their claims. Regarding unasserted claims against SoftKat,
there is a reasonable likelihood that some of the plaintiffs/creditors will seek
to satisfy their claims against the Company on theories of either successor
liability or alter ego.
Three lawsuits against us that were based upon a theory that we succeeded to
SoftKat, Inc.'s liability, were dismissed in the quarter ended September 30,
1999.
In a SoftKat related matter, we recently obtained a summary judgment in our
favor in a lawsuit filed against us in the Sonoma County Superior Court, State
of California. On September 25, 1998, Diamar Interactive Corp. had filed a
complaint in that court alleging that we owe $44,183 for goods and services
provided to SoftKat, Inc., based on a theory of successor liability. We filed an
answer denying that we are obligated to pay any amounts incurred by SoftKat, and
later we filed a motion for summary judgment, which the court granted us.
We recently obtained a summary judgment in our favor in a lawsuit filed against
us in the Orange County Superior Court, State of California. On January 21,
1999, Interplay Entertainment Corp. had filed a complaint in that court. The
complaint alleged that we owe Interplay $86,041 for goods and services provided
to SoftKat, Inc., based on a theory of successor liability. We filed an answer
denying that we are obligated to pay any liability incurred by SoftKat, and
later we filed a motion for summary judgment, which the court granted us.
-14-
<PAGE>
On February 2, 1999, RPS, Inc. filed a complaint against us in the United States
District Court, Central District of California. The complaint alleges that we
owe $52,555.58 for delivery services provided to SoftKat, Inc., based on a
theory of successor liability. We have filed an answer denying that we are
liable for any amounts owed by SoftKat.
On February 24, 1999, Muramatsu, Inc. filed a complaint against us in the Orange
County Superior Court, State of California. The complaint alleges that we and a
subsidiary, Intermark, owe $42,207.65 for convention display services provided
to SoftKat, Inc., based on a theory of successor liability. We have filed an
answer denying that they are obligated to pay any amounts due from SoftKat.
Recently a plaintiff voluntarily dismissed its complaint against us. On April 7,
1999, Sunclipse, Inc. had filed the complaint against us in the Orange County
Superior Court, State of California. The complaint alleged that we owe
$131,752.06 for goods and services provided to SoftKat, Inc., based on a theory
of successor liability. On May 24, 1999, Sunclipse filed a first amended
complaint seeking the same relief against us as it sought in its original
complaint. We filed an answer denying that we are obligated to pay any debts
incurred by SoftKat. Sunclipse decided not to pursue the complaint after the
case had proceeded into the discovery phase.
On April 30, 1999, Digital Leisure, Inc. filed a complaint against us in the
Orange County Superior Court, State of California. The complaint alleges that we
owe $125,715 for goods and services provided to SoftKat, Inc., based on a theory
of successor liability. We have filed an answer denying that we are obligated to
pay any amounts due that were incurred by SoftKat.
On May 18, 1999, Frank Grange filed a complaint against us in the Sonoma County
Superior Court, State of California. The complaint alleges that we owe
$84,801.40 for damages resulting from a lease between that plaintiff and
SoftKat, Inc., and a judgment obtained against SoftKat for unpaid rent, based on
a theory of successor liability. We have filed an answer denying that we are
obligated to pay any of these claims.
We recently obtained a summary judgment in our favor in another lawsuit filed
against us concerning SoftKat, Inc. On May 25, 1999, Transworld Systems, Inc.
had filed suit against us for $3,998.15 for collection work done on behalf of
SoftKat, Inc. We filed an answer denying that we are obligated to pay any claims
for amounts owed by SoftKat, and later we filed a motion for summary judgment,
which the court granted us.
On June 4, 1999, Cambrix Publishing, Inc. filed a complaint against us in the
Orange County Superior Court, Harbor Justice Center, State of California. The
complaint alleges that we owe $12,067.05 for goods and services provided to
SoftKat, Inc., based on a theory of successor liability. We have filed an answer
denying any liability for these amounts.
-15-
<PAGE>
INTERMARK
- ---------
Intermark Corporation became our subsidiary on August 5, 1998.
On February 5, 1999, Lawrence Tyson filed a complaint against us and a
subsidiary, Intermark, in the San Mateo County Superior and Municipal Courts,
State of California. The complaint alleges that we owe $8,000 on a promissory
note issued by Intermark. We have filed an answer denying that any amount is
owed.
In September, 1999, a lawsuit was filed against Intermark seeking $99,110 for
goods that were claimed to be purchased by Intermark. In October, 1999, the
plaintiff amended the complaint and reduced the amount it is seeking to $81,326.
KISS SOFTWARE CORPORATION
- -------------------------
Kiss Software Corporation became our subsidiary on April 1, 1999.
In July, 1999, a third party claim of $53,539 against Kiss was settled for
$25,000.
-16-
<PAGE>
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table and paragraphs set forth the names of and certain
information concerning the directors of the Company:
<TABLE>
<CAPTION>
NAME POSITION(S) WITH THE COMPANY AGE
------------------------------------------------------------------------
<S> <C> <C>
Thomas Hemingway Director and Chief Executive Officer 43
T. Richard Hutt Director, Vice President and 60
Secretary/Treasurer
James H. Budd Director and Vice President of Marketing 58
Donald C. Watters, Jr. Director and President and 42
Chief Operating Officer
Norton Garfinkle Director 68
</TABLE>
- -----------
(1) The Company does not have a nominating committee of the Board of
Directors.
(2) The members of the audit committee of the Board of Directors of the
Company, neither of whom is an employee of the Company.
(3) The members of the compensation committee of the Board of Directors of
the Company, neither of whom is an employee of the Company.
-17-
<PAGE>
Thomas ("Tom") Hemingway
- ------------------------
On August 5, 1998, Mr. Hemingway became the Chief Executive Officer and a
director of the Company pursuant to the Agreement and Plan of Share Exchange
among the Company, Intermark Corporation, a California corporation
("Intermark"), and Intermark's securityholders upon the consummation of that
transaction. A co-founder of Intermark, from October 1995 to the present Mr.
Hemingway has served as Chief Executive Officer and in other senior
management positions at Intermark, a software publishing, sales and marketing
company. From August 1994 to September 1995, Mr. Hemingway operated a
consulting business specializing in software sales and marketing. From
January 1994 to July 1994, Mr. Hemingway was chief operating officer at
Ideafisher Systems, an artificial intelligence / associative processing
software company. From August 1993 to December 1993, Mr. Hemingway was
serving as a consultant with L3, an edutainment software company. From
January 1993 to July 1993, Mr. Hemingway was involved in computer-related
consulting in the capacity of chief executive officer of Becker/Smart House,
LV, a home automation enterprise. In 1992, Mr. Hemingway was involved in
making private investments in various industries. Previously, from 1987 to
1991, Mr. Hemingway founded and served as president of Intellinet Information
Systems, a provider of network services and systems. Earlier in his career,
Mr. Hemingway was a founder of Omni Advanced Technologies, a research and
development firm developing products for the computer and communications
industry.
James H. ("Jim") Budd
- ---------------------
Mr. Budd was elected to the Board of Directors on October 27, 1998. In
August, 1998, Mr. Budd became a Vice President of the Company pursuant to the
Agreement and Plan of Share Exchange among the Company, Intermark and
Intermark's securityholders. A co-founder of Intermark, from October 1995 to
the present Mr. Budd has served as Vice President of Marketing and in other
executive capacities of Intermark, a software publishing, sales and marketing
company. From August 1994 to September 1995, Mr. Budd operated a consulting
business specializing in software sales and marketing. From March 1994 to
July 1994, Mr. Budd was vice president of marketing at Ideafisher Systems, an
artificial intelligence / associative processing software company. From
November 1993 to February 1994, Mr. Budd was involved in making private
investments in various industries. Previously, from July 1978 to October
1993, Mr. Budd was founder and chief executive officer of Command Business
Systems, a developer of business software products. Earlier in his career,
Mr. Budd held marketing and sales management positions at Unisys, Nixdorf,
Tymshare, and Prime Computer.
-18-
<PAGE>
T. Richard ("Dick") Hutt
- ------------------------
Mr. Hutt was elected to the Board of Directors on October 27, 1998. In August,
1998, Mr. Hutt became a Vice President and the Secretary of the Company pursuant
to the Agreement and Plan of Share Exchange among the Company, Intermark and
Intermark's securityholders. A co-founder of Intermark, from October 1995 to the
present Mr. Hutt has served as Vice President of Sales and Secretary of
Intermark. From September 1992 to September 1995, Mr. Hutt was distribution
sales manager for Strategic Marketing Partners, a leading national software and
technology marketing firm. Previously, he was in the communications and
mini-computer industry with TRW where he formed the Canadian subsidiary as vice
president of sales. He moved to TRW's Redondo Beach headquarters and managed the
western division until Fujitsu acquired the business unit. Before joining TRW,
he was with NCR's financial sales division in Canada. Prior to that he managed
the VAR division at Wang Laboratories. Moving to Matsushita, he played a key
role in the development of the distribution channel for their Panasonic
products.
Donald C. Watters, Jr.
- ----------------------
Donald Watters, Jr. was elected to the Board of Directors on November 15, 1999.
From April 1, 1999 to the present, Mr. Watters has been the President and Chief
Operating Officer of eSynch Corporation. Formerly, Mr. Watters was President and
CEO of Kiss Software Corporation (KISSCO), a publisher/developer of Internet
software utilities. Prior to Kissco, Mr. Watters was vice president of worldwide
sales of Touchstone Software (Nasdaq: TSSW).
Norton Garfinkle
- ----------------
Norton Garfinkle, who was elected to the Board of Directors on November 15,
1999, is Chairman of Oxford Management Corporation, an investment company
that specializes in building new technology companies. He also serves as
Chairman of several of these portfolio companies, including: Cambridge
Parallel Processing, Cambridge Management Advanced Systems Corporation and
ERS International.
-19-
<PAGE>
BOARD MEETINGS AND COMMITTEES
There were 3 meetings of the Board of Directors of the Company during the fiscal
year of the Company ended December 31, 1998. The Board of Directors established
a standing Audit Committee and a Compensation Committee. In the fiscal year
ended December 31, 1998, the Audit Committee held 2 meetings and the
Compensation Committee held 2 meetings. Each of the directors attended at least
75% of the meetings of the Board and committees on which the director served
during fiscal 1998.
The Audit Committee's function is to review, act on, and report to the Board of
Directors with respect to various auditing and accounting matters, including the
selection of the Company's independent public accountants, the scope of the
annual audits, the nature of non-audit services, fees to be paid to the
independent public accountants, the performance of the Company's independent
public accountants, and the accounting practices of the Company.
The Compensation Committee's function is to review the performance of the
executive officers of the Company and review the compensation programs for other
key employees, including salary and cash incentive payment levels and option
grants.
There is no standing nominating committee or other committee performing a
similar function.
COMPENSATION OF DIRECTORS
We issued a warrant to purchase 350,000 shares of Common Stock to Mr. Norton
Garfinkle upon his election to the Board of Directors.
We have engaged the consulting services of Mr. Garfinkle in connection with our
"pay-per-view" business, and have agreed to issue him additional warrants to
purchase shares of Common Stock.
Our non-employee Directors are not currently compensated for attendance at
Board of Director meetings. Non-employee directors from time to time have
been, and in the future may be, granted, on an ad hoc basis, stock options
upon being appointed to the Board. The Company may adopt a formal director
compensation plan in the future. All of the Directors are reimbursed for
their expenses for each Board and committee meeting attended.
-20-
<PAGE>
EXECUTIVE OFFICERS
For information on the business background of Messrs. Hemingway, Budd,
Hutt and Watters, see "Directors" above. The following table and paragraphs set
forth the names of and certain information concerning other executive officers
of the Company:
<TABLE>
<CAPTION>
NAME OF EXECUTIVE POSITION(S) WITH THE COMPANY AGE
--------------------------------------------------------------------
<S> <C> <C>
David Noyes Chief Financial Officer 56
Robert B. Way Vice President 56
</TABLE>
David Noyes -- Mr. Noyes became the Chief Financial Officer of the
Company in July 1999. Previously, Mr. Noyes was President of Monarch Capital
(1993 to Present) and President, Chief Financial Officer and a Director of
Directional Recovery Systems, LLC (1995 to Present). In addition he was Chief
Executive Officer, Chief Financial Officer and a Director of American
Furnishings Corp. and California Mattress (1996 to 1997), President, Chief
Financial Officer and Director of California Software Products, Inc. (1996)
and Director and Interim Chief Financial Officer of Griswold Industries(1994
to 1995).
Robert B. Way -- Mr. Way became a Vice President of the Company in
April 1999. Previously, Mr. Way was the Senior Vice President and General
Manager of Kiss Software Corporation , where he served in that capacity from
January, 1997. Before that, Mr. Way was an independent consultant in software
business management specializing in product planning, development and
support. Mr. Way was Vice President and General Manager of California
Software Products, Inc. from 1976 to 1995.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
See "Executive Compensation."
-21-
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
MANAGEMENT. The following table sets forth as of November 15, 1999, information
regarding beneficial ownership of the Company's stock by each director and each
executive officer, and by all directors and executive officers of the Company as
a group. Each named person and all directors and executive officers as a group
are deemed to be the beneficial owners of shares that may be acquired within 60
days upon exercise of stock options. Accordingly, the number of shares and
percentages set forth next to the name of such person and all directors and
executive officers as a group include the shares issuable upon stock options
exercisable within 60 days. However, the shares so issuable upon such exercise
by any such person are not included in calculating the percentage of shares
beneficially owned by any other stockholder. Based in part upon the absence of
any Schedule 13G or Schedule 13D filings, the Company is not aware of any other
person or group with beneficial ownership in excess of 5% of the Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------
COMMON PREFERRED
------ ---------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
------------------------ ------ ------- ------ -------
<S> <C> <C> <C> <C>
Thomas Hemingway(1) 1,730,609 16.8% 0 0%
T. Richard Hutt(2) 1,234,091 12.5% 0 0%
James H. Budd(3) 1,227,715 12.4% 0 0%
Donald C. Watters, Jr.(4) 1,128,838 10.7% 0 0%
David Noyes(5) 250,000 2.5% 0 0%
Robert Way(6) 295,381 2.9% 0 0%
Norton Garfinkle(7) 460,000 4.7% 0 0%
All Directors and Executive Officers
as a group 7 Persons)(8) 6,327,634 53.6% 0 0%
</TABLE>
- ------------
(1) Includes 542,500 shares which may be purchased pursuant to stock options
which are currently, or within the next 60 days will be, exercisable. Includes
140,395 shares of Ms. Detra Mauro Hemingway, the spouse of Mr.
Hemingway.
(2) Includes 117,000 shares which may be purchased pursuant to stock options
which are currently, or within the next 60 days will be, exercisable.
(3) Includes 117,000 shares which may be purchased pursuant to stock options
hich are currently, or within the next 60 days will be, exercisable.
(4) Includes 748,568 shares which may be purchased pursuant to stock options
which are currently, or within the next 60 days will be, exercisable.
(5) Includes 250,000 shares which may be purchased pursuant to stock options
which are currently, or within the next 60 days will be, exercisable.
(6) Includes 262,951 shares which may be purchased pursuant to stock options
which are currently, or within the next 60 days will be, exercisable.
(7) Includes shares held by a corporation and two trusts that are controlled
by him.
(8) Includes all of the shares and options referred to in notes (1) through
(7) above.
-22-
<PAGE>
HOLDERS OF SERIES I PREFERRED STOCK. The following table sets forth information
as of November 15, 1999 regarding ownership of outstanding shares of the
Preferred Stock by those individuals or groups who owned more than five percent
(5%) of the Series I Preferred Stock. As of November 17, 1999 the Series I
Preferred Stock became convertible into Common Stock at the option of the
holder. The Company has received conversion notices from some of such holders,
effective November 17, 1999.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
SERIES I PREFERRED COMMON(1)
-------------------- -------------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
------------------------ ------ ------- ------ -------
<S> <C> <C> <C> <C>
Quad City Partners (2) 60,000 10.0% 38,292 0.4%
Lawrence E. Kaplan (2) 75,000 12.5% 47,865 0.5%
Eileen Kaplan (2) 35,000 5.8% 25,260 0.3%
Walnut Capital Corp. (3) 120,000 20.0% 76,585 0.8%
The Holding Company (4) 30,000 5.0% 26,453 0.3%
American High Growth Equities (5) 34,999 5.8% 22,337 0.2%
Michael Miller (6) 100,000 16.7% 63,820 0.7%
Dune Holdings (7) 100,000 16.7% 63,820 0.7%
</TABLE>
- -----------
(1) Beneficial ownership of Common Stock in each case is equal to the number of
shares of Common Stock issuable upon conversion of Series I Preferred Stock and
the number of shares of Common Stock held One share of Common Stock is issuable
upon conversion of three shares of Series I Preferred Stock, subject to
customary adjustments to protect against dilution. To the knowledge of the
Company, based upon the absence of any filings made by such holders on Schedule
13-D, such holders do not beneficially own any additional shares of Common
Stock.
(2) Address: c/o G-V Capital Group, 150 Vanderbilt Motor Parkway, Huappauge, NY
22182.
(3) Address: 8000 Towers Crescent Drive, Suite 1070, Vienna, VA 22182.
(4) Address: c/o Linda Diane Enterprises, Inc., N8939 Waterpower Road,
Deerbrook, WI 54424.
(5) Address: 725 Fifth Avenue, 24th Floor, New York, NY 10022.
(6) Address: 485 Madison Avenue, Suite 1100, New York, NY 10022.
(7) Address: 132 Dune Road, Westhampton Beach, NY 11978
STOCK OWNERSHIP OF SELLING SECURITY HOLDERS
- -------------------------------------------
The table under "Selling Security Holders" sets forth information regarding
ownership of the Preferred Stock and the Common Stock by those individuals or
groups who own more than five percent (5%) of the Series J Preferred Stock
outstanding. See "Selling Security Holders."
-23-
<PAGE>
DESCRIPTION OF SECURITIES
AUTHORIZED AND OUTSTANDING STOCK
- --------------------------------
The authorized capital stock of eSynch consists of 50,000,000 shares of Common
Stock, $.001 par value, and 1,000,000 shares of Preferred Stock, $.001 par
value.
As of September 27, 1999, there were 9,327,143 shares of Common Stock
outstanding, which were held by approximately 342 stockholders of record and
held by approximately 1,279 stockholders beneficially. At the same date, 599,999
shares of Series I Preferred Stock were outstanding (convertible into
approximately 200,000 shares of Common Stock). There are 262 and one-half shares
of Series J Preferred Stock outstanding on the date hereof. There will be a
maximum of 275 shares of Series J Preferred Stock issued and outstanding, of
which 12 and one-half are intended to be issued and sold after the date hereof.
At the date hereof, if the selling security holders were to convert all 275
shares of Series J Preferred Stock and were to exercise all of the accompanying
warrants, there would be 10,319,105 shares of Common Stock outstanding. (See
"Preferred Stock-Series J Preferred Stock," below.) These amounts exclude
approximately 200,000 shares of Common Stock that are issued, subject to
completions of stock administrative matters.
COMMON STOCK
- ------------
Subject to legal and contractual restrictions on payment of dividends, the
holders of common stock are entitled to receive such lawful dividends as may be
declared by the Board of Directors. In the event of liquidation, dissolution or
winding up of eSynch, the holders of shares of common stock are entitled to
receive all of the remaining assets of eSynch available for distribution to its
stockholders after satisfaction of all its liabilities and the preferences on
Preferred Stock. Holders of our common stock do not have any preemptive,
conversion or redemption rights and there are no sinking fund provisions
applicable to our common stock.
Record holders of our common stock are entitled to vote at all meetings of
stockholders and at those meetings are entitled to cast one vote for each share
of record that they own on all matters on which stockholders may vote.
Stockholders do not presently have cumulative voting rights in the election of
eSynch's directors. As a result, the holders of a plurality of the outstanding
shares can elect all of the directors of eSynch, and the holders of the
remaining shares are not able to elect any of eSynch's directors.
All outstanding shares of common stock are fully paid and nonassessable, and
all shares of common stock to be offered and sold in this offering will be
fully paid and nonassessable.
-24-
<PAGE>
COMMON STOCK OPTIONS
- --------------------
eSynch has a 1999 Stock Incentive Plan. 3,000,000 shares of common stock have
been reserved under the 1999 Stock Incentive Plan for grants. The grants may be
in the form of options, stock purchase rights or stock grants. The Board of
Directors, or a committee designated by the Board of Directors, has discretion
to determine the terms of the grants and the recipients of grants.
Options can be issued with an option term of up to ten years. Options and
restricted stock may be subject to vesting restrictions. Vesting may be either
(a) over a period of time, (b) immediately upon grant, (c) upon the occurrence
of certain events, (d) upon attainment of performance goals, or (e) a
combination of any of these.
At September 30, 1999, apart from the 1999 Stock Incentive Plan, there were
outstanding options to purchase another 2,900,000 shares of common stock,
approximately.
PREFERRED STOCK
- ---------------
The Board of Directors has the authority, without further action by the
stockholders, to issue the authorized and unissued shares of preferred stock in
one or more series and to fix the rights, preferences and privileges thereof,
including voting rights, terms of redemption, redemption prices, liquidation
preferences, number of shares constituting any series or the designation of such
series, without further vote or action by the stockholders. Although it
presently has no intention to do so, the Board of Directors, without stockholder
approval, may issue preferred stock with voting and conversion rights which
could adversely affect the voting power of the holders of common stock. This
provision may be deemed to have a potential anti-takeover effect, and the
issuance of preferred stock in accordance with such provision may delay or
prevent a change of control of eSynch.
Series I Preferred Stock
- ------------------------
The Series I Preferred Stock was issued on November 17, 1999 in exchange for
securities of SoftKat, Inc. The Series I Preferred Stock is convertible into
Common Stock at a rate of one share of Common Stock for every three shares of
Series I Preferred Stock.
The holders of Series I Preferred Stock are entitled to a redemption payment of
$3.00 per share of Series I Preferred Stock surrendered for redemption. The
Company is required by the terms of the Series I Preferred Stock to redeem up to
200,000 shares for $200,000 in cash, subject to prior conversion by the holders.
eSynch has not redeemed any of the Series I Preferred Stock yet. Holders of
approximately two-thirds of the outstanding Series I Preferred Stock have
submitted elections to convert their shares.
-25-
<PAGE>
Series J Preferred Stock
- ------------------------
The Series J Preferred Stock was issued for cash in the amount of $10,000 per
share.
The holders of Series J Preferred Stock are entitled to dividends at the rate of
7% per year. The dividends are not required to be paid until conversion or
redemption of the shares or an acquisition of eSynch; however unpaid dividends
will cumulate. We have the option of paying the dividends either in cash or in
our common stock (in the latter case, based on the conversion price then in
effect).
The holders of Series J Preferred Stock are entitled to a preference in the
event we liquidate our corporation. That preference is in an amount of $10,000
per share, plus cumulated and unpaid dividends. Any and all of the remaining
assets could be distributed to holders of junior securities (e.g., other shares
of preferred stock or Common Stock), in order of seniority.
We must give holders of Series J Preferred Stock 45 days' notice prior to a
merger or acquisition of eSynch. Such a transaction can only be effected if the
holders of the Series J Preferred Stock maintain their relative rights,
preferences and privileges. A transaction that is inconsistent with this
provision is prohibited.
Holders of Series J Preferred Stock are not entitled to vote in the election of
directors. The vote of holders of three-fourths of the Series J Preferred Stock
outstanding is required, however, to reclassify any of our outstanding
securities (e.g., a stock split), to make a distribution with respect to any
stock that is junior to the Series J Preferred Stock (e.g., any dividend to
holders of Common Stock), or to authorize any securities senior to the Series J
Preferred Stock or having rights on a parity with the Series J Preferred stock.
The Series J Preferred Stock does not become convertible into Common Stock until
January 28, 2000 or any earlier date on which the SEC determines this offering
becomes effective. Also, the terms of the Series J Preferred Stock will not
permit the conversion of Series J Preferred Stock by a selling security holder
if it and its affiliates would thereby own more than 4.99% of the outstanding
Common Stock.
The Series J conversion price is initially equal to $3.50, subject to
adjustment. The conversion price of Series J Preferred Stock is subject to a
floor price of $3.50 until January 28, 2000. At the floor price, the number of
shares of Common Stock issuable upon conversion of one shares of Series J
Preferred Stock is $10,000.00 divided by $3.50.
After January 28, 2000, the conversion price is the lower of $3.50 or the
average of the six lowest closing bid prices in a twenty-trading-day period
ending on the day before conversion.
-26-
<PAGE>
For illustration, the shares of Series J Preferred Stock would be convertible
into the following numbers of shares of Common Stock at these trailing average
prices as of a day when the Series J Preferred Stock are converted:
<TABLE>
<CAPTION>
Average Per Series J Common Stock Percentage of
of Lowest Conversion Conversion Issuable Outstanding
Closing Bids Price Rate on Full Conversion Common Stock
- ------------ --------- ---------- ------------------ ----------
<S> <C> <C> <C> <C>
$4.375 or more $3.50 2,857 shs. 785,714 7.8%
$4.25 $3.40 2,941 shs. 808,823 8.0%
$3.75 $3.00 3,333 shs. 916,666 8.9%
$3.25 $2.60 3,846 shs. 1,057,692 10.2%
$2.75 $2.20 4,545 shs. 1,250,000 11.8%
</TABLE>
For instance, the lowest closing bid prices of the Common Stock, in the
period ended November 26, 1999, were $2.8125, $2.9375, $3.2812, $3.5312,
$3.5312, and $3.50. Their average is $3.2656.
The conversion price is also subject to ordinary adjustments to prevent
dilution. Cash is payable in lieu of issuing any fractional shares upon
conversion.
The Series J Preferred Stock would be automatically converted into Common
Stock on the third anniversary of the issuance of the Series J Preferred
Stock (the third anniversaries falling between August and December, 2002),
with extensions in certain events until not more than two years later. The
conversion price is the same as the normal conversion price that is
applicable on the date conversion becomes mandatory.
We have the right to redeem all or any of the outstanding Series J Preferred
Stock for cash. The redemption price is $12,000 per share, plus cumulated
dividends. eSynch is required to give the holders 30 days' notice and to
deposit the redemption price in escrow.
In the event of our merger, acquisition, or sale of all of our assets, we are
required to redeem all of the outstanding Series J Preferred Stock. The
redemption price in this event will be the greater of $12,500 per share or
the value of the number of shares of Common Stock issuable upon conversion
based on the closing bid price of the Common Stock, on the day preceding the
consummation of the transaction. The redemption price in such event is
payable at least $12,500 per share in cash and the balance, if any, in cash
or our shares of Common Stock, at our election.
Each holder of Series J Preferred Stock has a right to require use to redeem
all or a portion of his Series J Preferred Stock for cash if we breach any
agreement or representation made to the holders of Series J Preferred Stock
in a material respect, or in the event the registration statement that
includes this prospectus is not declared effective by February 28, 2000, its
effectiveness lapses or trading is suspended for a period of five consecutive
business days, or if we fail to perform our obligations to such holders
-27-
<PAGE>
concerning delivery of Common Stock upon conversion within ten business days.
The redemption price in this event will be the greater of $12,500 per share or
the value of the number of shares of Common Stock issuable upon conversion based
on the closing bid price of the Common Stock, on the day preceding the
triggering event.
WARRANTS
- --------
The warrants held by the selling security holders entitle those holders to
purchase shares of Common Stock. They include warrants expiring August 13, 2002
to purchase 112,500 shares at approximately $3.00 each, warrants expiring
September 30, 2000 to purchase 75,000 shares at approximately $5.17 each, and an
additional warrant to purchase 9,375 shares at a price to be determined based on
the closing bid price for Common Stock as of the date prior to issuance.
Also, there are warrants outstanding held by others to purchase approximately an
additional 890,000 shares at various prices and expiring at various times.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
- -------------------------------------------
The Delaware Corporations Code, certain terms of the Series J Preferred Stock,
and our ability to issue the authorized and available shares of Preferred Stock
and Common Stock, each may prevent of delay a takeover of our company. Thus the
holders of Common Stock might not be able to realize a premium price for their
shares.
REGISTRATION RIGHTS
- -------------------
This offering is being registered with the SEC pursuant to a registration rights
agreement with the holders of Series J Preferred Stock. See "Plan of
Distribution."
We also have granted piggyback registration rights to holders of shares of
Common Stock, warrants or options. In addition to the shares in this offering,
those shares of Common Stock may become eligible for registration.
TRANSFER AGENT AND REGISTRAR
- ---------------------------
The stock transfer agent and registrar for our common stock is Interwest
Transfer Company, Inc., located at 1981 E. Murray Holladay Road, Salt Lake City,
Utah 84117.
-28-
<PAGE>
DIVIDEND POLICY
- ---------------
Under applicable law, dividends cannot be paid until we have generated earnings.
Also we are prohibited from paying cash dividends to the holders of Common Stock
while any Series J Preferred Stock is outstanding.
However, it will be our policy to retain internally generated funds to support
future expansion of our business. Accordingly, even if we do generate earnings,
and even if we are not prohibited from paying dividends, we will not declare or
pay cash dividends on our common stock, at least for the foreseeable future.
INTEREST OF NAMED EXPERTS AND COUNSEL
We are indebted to Stradling Yocca Carlson & Rauth, P.C. for unpaid fees and
costs in the amount of approximately $100,000. Members of the firm own shares of
our Common Stock or options to acquire such shares in an aggregate amount of
less than 1% of the number of shares presently outstanding.
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
eSynch's Restated Certificate of Incorporation requires eSynch to indemnify any
and all persons who may serve or who have served at any time as directors or
officers, or who, at the request of the board of directors of eSynch, may serve,
or at any time have served as directors or officers of another corporation in
which eSynch at such time owned or may own shares of stock, or which it was or
may be a creditor, and the respective heirs, administrators, successors, and
assigns. Indemnification is required to the full extent permitted by the General
Corporation Law of Delaware as it may from time to time be amended. Subject to
that limitation, eSynch is required to provide indemnification against any and
all expenses, including amounts paid on judgment, counsel fees, and amounts paid
in settlement (before or after suit is commenced), actually or necessarily by
such persons in connection with the defense or settlement or any claim, action,
suit, or proceeding in which they, or any of them, are made parties, or a party,
or which may be assessed against them or any of them, by reason of being or
having been directors or officers of eSynch, or such other corporation.
eSynch's Restated Certificate of Incorporation provides that a director of
eSynch shall have no personal liability to eSynch or its stockholders for
monetary damages for breach of fiduciary duty as a director, except (i) for
any breach of a director's duty of loyalty to eSynch or its stockholders,
(ii) for acts or omissions not in good faith or which involve intentional
misconduct or a knowing violation of law, (iii) under section 174 of the
General Corporation Law of Delaware as it may from time to time be amended or
any successor provision thereto (which concerns unlawful payment of dividends
or stock redemptions), or (iv) for any transaction from which a director
derived an improper personal benefit.
-29-
<PAGE>
The Bylaws of eSynch permit indemnification of persons who were directors,
officers, employees or agents of eSynch or of another enterprise if the person
was serving at the request of the board of directors of eSynch as a director,
officer, employee or agent of that enterprise. The indemnification is permitted
either (a) if the person is successful on the merits in defending the claim or
(b) if indemnification is authorized in the specific instance by eSynch. If
claims are brought in eSynch's name against the indemnified person,
indemnification is permitted only if the person was acting in good faith and in
a manner reasonably believed to be in the best interests of eSynch. If the
person is unsuccessful in defending a claim brought in eSynch name,
indemnification is only permitted if the court acting in the matter specifically
allows it. eSynch is authorized to advance expenses to a person upon that
person's agreement to repay eSynch if ultimately such person is not entitled to
indemnification.
eSynch has indemnification agreements with its directors and certain officers.
These agreements require to indemnify the parties to these agreements to the
maximum extent permitted by applicable law and to advance expenses to that party
upon that party's agreement to repay eSynch if ultimately such person is not
entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant
to the foregoing provisions, or otherwise, we have been advised that in the
opinion of the SEC such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable.
-30-
<PAGE>
DESCRIPTION OF BUSINESS
We were incorporated in Delaware on December 21, 1988, as Tri-Nem, Inc. On
October 5, 1994, the Company changed its name to Innovus Corporation. On
November 9, 1998, the Company changed its name to ESYNCH CORPORATION.
On August 5, 1998, we were acquired through a reverse merger agreement with
Intermark Corporation. Our headquarters was moved from Utah to Southern
California. See "Certain Relationships and Related Transactions."
During the first half of 1998, we shrunk our operations in order to conserve
cash. We stopped manufacturing or developing our multimedia authoring
software. After the acquisition, we focused our efforts on debt reduction and
winding up the former business of Innovus Multimedia Corporation. We began a
new business direction with the software publishing and distribution business
of Intermark and development of its proprietary Electronic Digital Delivery
technology.
In November 1998, all of the shares of common stock were reclassified and
combined in a one-for-ten reverse stock split.
In November 1998, we acquired the stock of SoftKat, Inc. We experienced
difficulties with its business and finances, and sold the company in 1999.
On April 1, 1999, we acquired the stock of Kiss Software Corporation
(KISSCO), of Newport Beach, California. Kissco develops, publishes and sells
Internet utility products.
On September 30, 1999 eSynch acquired the stock of Oxford Media Corporation,
a leading designer and developer of digital technologies for video on-demand.
eSynch strategy
- ---------------
Our business objective is to become a market leader for digital distribution.
We provide advanced computer Internet utility programs and video-on-demand
products, and we market and sell software and video on the Internet. We
believe that we will become a leader in Electronic Digital Distribution.
Electronic Digital Distribution is the delivery of software, video or audio
content from a wide range of sources.
We employ a proprietary Electronic Digital Distribution system that allows a
digital product to be wrapped in a secure digital envelope and distributed
across the Internet and cable and satellite networks. We also employ the
system in eSynch's online malls. The ESD system automates an optimized
electronic delivery, security, tracking, and accountability protocol. Our
target customers include dealers, resellers and end-users. We generate
revenue by selling digital content or software and by selling advertising
space in our digital delivery process, which allows for banner advertising.
We face competition in the electronic delivery market, including competition
from larger, well-financed companies.
-31-
<PAGE>
Recent Announcements
- --------------------
During the first quarter of 1999, we opened 800MALL.com, a web ite that sells
software, directly to consumers, through Yahoo!, and also began to sell our
"Health Optimizer" software on AOL. In 1999 to September 30, visits to eSynch
web sites exceeded 22 million. In the same period, we estimate that 32 percent
of our electronic revenues were generated through international sales. Our
Internet malls are accessible to 118 countries.
In the first quarter, Kissco, our new wholly-owned subsidiary, through its
Japanese partners, Winning Run and Supreme Resources International, and in
conjunction with MediaVision, established channel bundling agreements with Canon
Sales. Canon is the major distributor of Compaq in Japan. Canon has bundled
Kissco's Speed Surfer-J and MediaVision's Web Driver with Compaq and IBM
computers in Japan.
In July 1999, we entered a licensing agreement with Ingram Micro, headquartered
in Santa Ana, Calif., one of the largest wholesale providers of technology
products and services. Under the agreement, eSynch is entitled to offer Ingram
Micro's entire product line through the eSynch e-commerce system. eSynch is the
latest of six designated e-commerce resellers selected to sell the more than
55,000 hardware and software products via the Internet, including; Amazon.com,
iBuy.com, Beyond.com and on-sale.com. Our associated web site is in the
development and testing phase. We anticipate intense competition from the
companies named above and others.
In August, we commenced a bundling arrangement with MindSpring Enterprises Inc.,
a leading national Internet service provider. Under terms of the agreement,
customers who purchase eSynch/Kissco utilities, including Modem Wizard 4.0, Undo
& Recover Toolbox, and WebSnake, will find the MindSpring software included with
the utility. The software will allow customers to start a free 30-day trial
subscription to MindSpring's Internet Service and they will waive the $25
activation fee.
With our recent introduction of "video-on-demand," we believe we can become a
leader in the Electronic Digital Distribution-TM- market. Oxford is now a
leader in DVD development, working with several film libraries and
independent production companies to digitize film and video. Oxford offers
the full range of MPEG compression/encoding, Dolby Digital audio, authoring,
graphics and design, with capabilities for multiple languages, subtitling,
interactivity and Internet access. Oxford Media Corp., revolutionized the
video on-demand industry with new innovative proprietary digital programming
technologies in MPEG 1 and MPEG 2. Oxford became one of the first companies
to utilize MPEG compression for full-length movies and play on-demand high
quality images.
-32-
<PAGE>
We also offer proprietary software, including:
* Modem Wizard (and * NetMonitor)
* Undo & Recover Toolbox
* WebSnake
* CoolCat
* World Wide Web SafteyNet
* Speed Surfer-J
Modem Wizard is our best-selling software utility. It is an Internet optimizer,
troubleshooter, and fix-it tool that works on any Internet connection (including
cable modem, DSL, and T1). In May, we had begun shipping Modem Wizard 4.0.
recently we also announced Modem Wizard, version 4.5, with several added
features.
NetMonitor is a stand-alone program within Modem Wizard. In just six weeks, our
offer of free downloads of NetMonitor generating 15 million visits to our web
site, and 7 million banner views. The increase in web site visits produced a
record month for eSynch's Internet sales. In the beginning of June, NetMonitor
premiered on ZDNet, and within 48 hours, had amassed over 50,000
downloads---making it the #1 download of the week on the ZDNet web site. Shortly
thereafter, due to the massive response our free NetMonitor received, we
partnered with Ziff-Davis (NYSE: ZD) to distribute our free NetMonitor, through
CD-ROM to all Ziff-Davis publications (including PC Magazine, PC Computing,
etc.)
Undo & Recover Toolbox is a utility to undo step-by-step any changes the user
has made to computer setup files. In the August issue of PC World, Undo &
Recover Toolbox was given a "Best Buy" award by the editors at the publication.
WebSnake automates Web searching, filters Web data and retrieves specified
information, so you can review it later at PC speeds, bypassing Web bottlenecks.
CoolCat is an easy-to-use HTML editor, with professional features such as tag
sets for every flavor of HTML, WebTV, Cold Fusion and JavaScript; comprehensive
project-wide document management with integrated FTP; a built-in preview
browser, and extended support for every significant HTML layout feature. It has
pop-up property windows for links, font sizing and colors, horizontal rules,
text formatting, and easy table and image layout handling.
World Wide Web SafetyNet is a modem turbocharger and firewall, which allows a
single modem to control several devices and a multitude of communications
protocols simultaneously. Among the devices are those found in homes and small
businesses, such as: TV's, receivers, computers, and many new smart devices
found in the small office/home office environment.
We face intense competition in the software utilities market, including from
much larger, well-financed software developers and publishers. Microsoft
Corporation, for instance, has historically succeeded at incorporating utilities
into its operating systems.
-33-
<PAGE>
Patents, trademarks and copyrights
- ----------------------------------
We have a non-exclusive license from Oxford Management Corporation to its
video-on-demand technology and patents. We have applied for federal registration
of various trademarks and service marks." If we receive the registration for
these trademarks, the trademark will be effective for ten (10) years and may be
renewed every ten (10) years indefinitely. Under common law, these trademarks
have an unlimited duration. We have not applied for federal copyright
registration for our software.
Employees
- ---------
As of November, 1999, eSynch had 30 full-time employees and no part- time
employees. Of our 30 full-time employees, 5 were in marketing and sales, 6 were
in senior management, 4 were in administration, 3 were in development and 17
were in operations. We also plan to hire approximately 20 people to handle
customer support functions.
We believe that our relations with our employees are satisfactory. We are not a
party to any collective bargaining agreements and we have never experienced any
work stoppage. As eSynch continues to grow and introduce more products and
services, we expect to hire additional personnel.
Research and Development
- ------------------------
We estimate that during the past two years we have spent approximately $ on
research and development activities. We have borne substantially all of this
cost ourselves without receiving research and development payments from our
customers.
Costs to comply with environmental laws
- ---------------------------------------
We have not incurred any substantial cost related to complying with any
environmental laws (federal, state and local) and do not foresee any such
substantial costs.
More information available from the SEC
- ---------------------------------------
We file reports with the Securities and Exchange Commission. We have filed
reports with the SEC on Forms 10-KSB, 10-QSB, 8-K, and Schedule 14A. The SEC
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding us and other issuers that file
electronically with the SEC. The address of the site is http:\\www.sec.gov.
Also, you may read and copy any materials we file with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The
public may obtain information on the Public Reference Room by calling the SEC at
1-800-SEC-0330.
-34-
<PAGE>
Governmental Regulation and Legal Uncertainties
- -----------------------------------------------
eSynch is currently subject to various laws and regulations relating to our
business. Few laws or regulations are currently directly applicable to our
current and expected activities on the Internet. However, new laws and
regulations relating to the following areas may be adopted because of the
Internet's popularity and growth:
* Online content.
* User privacy.
* Taxation.
* Access charges.
* Copyrights.
* Characteristics and quality of products and services.
* Consumer protection.
Such government regulation may impose additional burdens on our business. They
may also impede the growth in Internet use and thereby decrease the demand for
our products and services or otherwise have a material adverse effect on our
business, operations and financial condition.
Additionally, U.S. and foreign laws applicable to e-commerce or Internet
communications are becoming more prevalent. These laws have been recently
enacted and there is uncertainty regarding their impact on the marketplace. Any
new legislation or regulation regarding the Internet, or the application of
existing laws and regulations to the Internet, could materially adversely affect
us. If we were alleged to violate federal, state or foreign civil or criminal
laws, even if we could successfully defend such claims, it could materially
adversely affect us.
Several telecommunications carriers are supporting regulation of the Internet
by the FCC in the same manner that the FCC regulates other telecommunications
services. These carriers have alleged that the growing popularity and use of
the Internet has burdened the existing telecommunications infrastructure,
resulting in interruptions in phone service. Local telephone carriers such as
Pacific Bell, a subsidiary of SBC Communications Inc., have petitioned the
FCC to regulate Internet service providers in a manner similar to
long-distance telephone carriers and to impose access fees on Internet
service providers. Any such regulations could substantially increase the
costs of communicating on the Internet. This, in turn, could slow the growth
in Internet use and thereby decrease the demand for our products and services
or otherwise have a material adverse effect on our business, financial
condition and operating results.
-35-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following Selected Financial Data should be read in conjunction with the
financial statements and notes thereto bound elsewhere herein.
The financial statements have been prepared on the basis of the Company
continuing as a going concern. The Company has incurred losses from operations
and negative cash flows from operating activities and has accumulated a negative
tangible net worth at September 30, 1999 in the amount of $1,902,264. These
conditions raise substantial doubt regarding the Company's ability to continue
as a going concern. The financial statements do not include any adjustments that
might result from the outcome of this uncertainty.
<TABLE>
<CAPTION>
Year Ended December 31,1998 December 31, 1997
---------------- -----------------
<S> <C> <C>
Sales $ 203,571 $ 496,070
Cost of Sales 156,617 229,032
Gross Profit 46,954 267,038
Operating Expenses
General and Administrative 1,999,340 857,094
Amortization of Goodwill 228,330
Interest 132,641 16,253
Amortization of Debt Discount 355,567
Impairment loss on assets to be sold 2,323,841
Loss Before Extraordinary Item (4,992,765) (606,309)
Debt Forgiveness 14,423
Net Loss $ (4,978,342) $ (606,309)
</TABLE>
Year ended December 31, 1998 compared to year ended December 31, 1997
- ---------------------------------------------------------------------
Net sales were $203,571 in 1998 compared to $496,070 in 1997. 1998 included
$109,000 from SoftKat operations for the period November 17, 1998 through
December 31, 1998. The Company's decision in 1998 to focus on ESD reduced the
direct product sales activity and marketing services were discontinued.
Substantial customer returns and credits reduced SoftKat sales activity from
operational activity prior to its acquisition.
The cost of product sold in 1998 was 77% compared to 46% in 1997. This was
due to the sales of the lower margin SoftKat product through its retail
distribution and lower sales activity.
-36-
<PAGE>
General and administrative expenses were $ 1,999,340 in 1998 compared with
$857,094 in 1997. Legal and accounting expenses increased to $321,000 in 1998
from $24,855 due to costs incurred with the Innovus merger and with the SoftKat
acquisition. Costs associated with the beneficial conversion feature of notes
payable was $355,567 and interest expense was $132,641 in 1998 versus $16,253 in
1997, respectively. In addition, cost associated with the issuance of stock was
$393,000 and stock options $69,000 in 1998 versus $251,000 and $0 in 1997. Costs
associated with amounts accrued for payroll taxes and penalties were $362,000 in
1998 versus $129,000 in 1997. Outside services were $201,000 in 1998 versus
$58,000 in 1997 with the increase activity in stockholder relations of being a
public Company.
Amortization of goodwill was $228,330 and represented amortization of the
goodwill generated by the SoftKat acquisition of $2,670,000 and written off on
the straight-line basis using an estimated useful life of 3.63 years.
The net loss was $ 4,978,342 for 1998 compared with $606,309 in 1997. The loss
in 1998 included $2,323,841 on the loss recorded on the sale of SoftKat,
$228,330 on the amortization of the goodwill generated by the SoftKat
acquisition and SoftKat operating loss for the period November 17, 1998 through
December 31, 1998 in the amount of $111,359. In addition, the Company has
accrued additional expenses for the SoftKat disposal of $100,000 and estimated
that other expenses incurred in 1998 relating to the SoftKat acquisition and
operations approximated $250,000 which were included in general and
administrative expenses. On May 25, 1999 SoftKat was sold to a third party for
$50,000 cash and a note receivable of $100,000 which resulted in the above loss
of $2,323,841. Only the $50,000 cash received is recognized in the calculation
of the loss. The subsequent sale and resulting loss provided evidence of
conditions for accounting purposes.
Nine months ended September 30, 1999 compared to the nine months ended
September 30, 1998
- ----------------------------------------------------------------------
During the nine months ended September 30, 1999, net sales were $917,400
compared to $15,293 for the comparable period of the prior year. The sales
amount for the nine months ended September 30, 1999 included sales for SoftKat
in the amount of $477,011. SoftKat has been sold to a third party.
The costs of products sold in the nine months ended September 30, 1999 was
$459,944 compared with $ 9,940 for the comparable period in the prior year.
Operating losses for the nine months ended September 30, 1999 were $6,533,658
compared to an operating loss of $1,192,503 for the comparable period in the
prior year. The increased operating loss was due to the difficulties associated
with SoftKat operations and increased public relations due to the Company being
a publicly traded company.
Stock issued for services was $1,622,164 for the nine months ended September 30,
1999 and stock based compensation associated with stock options and warrants
amounted to $2,021,347 for the same period in the 1998 fiscal year.
-37-
<PAGE>
Liquidity and Capital Resources
- -------------------------------
At September 30 1999 the Company had $734,490 of cash and a deficit in working
capital (current liabilities in excess of current assets) of $2,555,066.
The Company had been relying upon short-term borrowings from affiliates and
others, as well as proceeds from issuances of common stock and preferred stock
The Company estimates that during the third fiscal quarter of 1999 it was using
approximately $300,000 more cash each month than was generated by operations.
At December 31, 1998 the Company had $1,413 of cash and cash equivalents and a
deficit in working capital (current liabilities in excess of current assets) of
$2,154,676. The Company has been relying upon short-term borrowings and proceeds
from issuances of stock. The proceeds from the issuance of long-term debt were
$558,000 in 1998 versus $85,000 in 1997. In addition stock was issued for
services of $393,000 in 1998 versus $251,000 in 1997.
Subsequent to December 31, 1998, the Company issued 310,377 shares of stock for
cash and notes in the amount of $715,000 and issued 168,500 shares of stock for
services in the amount $477,000.
In August and September 1999, the Company received an investment in the
aggregate amount of $2,500,000 for 250 shares of Series J Preferred Stock and
accompanying warrants.
-38-
<PAGE>
DESCRIPTION OF PROPERTY
In 1999, our headquarters was moved to a single-tenant facility in Tustin,
California of approximately 30,000 square feet under a long-term lease.
Management believes that the space adequately provides for our warehousing
and distribution capabilities, as well as expansion of our publishing,
marketing and sales operations. Management believes the amount of space will
be adequate for the foreseeable future. The condition of the property is
generally good. The property is located in an office and industrial area with
nearby access to freeways and airports.
-39-
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 1, 1999, the Company acquired Kiss Software Corporation, a
California corporation ("Kissco"). Donald C. Watters, Jr. was a major
shareholder of Kissco and received in that acquisition 381,270 shares of Common
Stock, and the Company also assumed a Kissco option entitling Mr. Watters to
acquire 48,568 shares of Common Stock at a price of $ 2.11 per share. Robert B.
Way was also a shareholder of Kissco and received in the acquisition 32,430
shares of Common Stock, and the Company also assumed a Kissco option entitling
Mr. Way to acquire 19,427 shares of Common Stock at $ 2.11per share.
On September 30, 1999, the Company acquired Oxford Media Group, a Delaware
corporation, for 450,000 shares of the Company's Common Stock. Oxford Media
Group was controlled by Mr. Norton Garfinkle. In addition, for consulting
services and services as a director of the Company, Mr. Garfinkle has received
warrants to purchase 350,000 shares of Common Stock.
CHANGE IN CONTROL
On August 5, 1998, the Company finalized an Agreement and Plan of Share Exchange
with Intermark Corporation ("Intermark"). Under the Agreement, as amended, the
shareholders of Intermark exchanged all of the outstanding capital stock of
Intermark for 103,367 shares of common stock of the Company and for 2,665 shares
of the Company's newly created Series H Preferred stock convertible into
approximately 4,427,224 shares of Common Stock. In addition, the Company assumed
Intermark options which are now exercisable to purchase up to 631,800 shares of
the Company's common stock.
On May 8, 1998, after the close of business, the Company had entered into an
Agreement and Plan of Share Exchange dated as of May 8, 1998 (the "Agreement")
by and among the Company and Intermark Corporation, a California corporation
("Intermark"), and the securityholders of Intermark Corporation
("Exchanging Securityholders"). On June 17, 1998, the Company entered into the
First Amendment of Agreement and Plan of Share Exchange dated as of May 8, 1998.
On July 30, 1998, the Company entered into the Second Amendment of Agreement and
Plan of Share Exchange dated as of May 8, 1998 ("Second Amendment").
The closing of the transactions contemplated by the Agreement ("Closing")
occurred on August 5, 1998. The Closing resulted in a change in control of
the Company. The Agreement, as amended by the First Amendment and the Second
Amendment, provided for the Exchanging Securityholders to deliver and
exchange all of the outstanding capital stock of Intermark and options or
other rights to purchase such capital stock for capital stock of the Company
aggregately having voting power equal to 77.5% of the capital stock of the
Company aggregately outstanding as of immediately after the Closing.
Accordingly Messrs. Hemingway, Budd and Hutt became the beneficial owners of
approximately 62% of the Company's capital stock as of the Closing. Intermark
became a wholly-owned subsidiary of the Company upon the Closing.
-40-
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is currently quoted on the OTC Bulletin Board, Symbol ESYN. The
following table reflects the high and low closing bid
quotations reported by the OTC Bulletin Board. Such prices represent
inter-dealer quotations, do not include markups, markdowns, or commissions and
may not reflect actual transactions.
<TABLE>
<CAPTION>
High Low
---- ---
Year Ended December 31, 1997
(As adjusted for 1 for 10 reverse stock split)
-----------------------------
<S> <C> <C>
January 1 to March 31, 1997 $45.00 $22.50
April 1 to June 30, 1997 $35.00 $21.30
July 1 to September 30, 1997 $26.90 $ 5.00
October 1 to December 31, 1997 $ 7.50 $ 1.60
Year Ended December 31, 1998
(As adjusted for 1 for 10 reverse stock split)
-----------------------------
January 1 to March 31, 1998 $ 2.10 $ 0.70
April 1 to June 30, 1998 $ 4.20 $ 1.50
July 1 to September 30, 1998 $ 3.20 $ 1.20
October 1 to December 31, 1998 $ 1.56 $ 1.00
1999 Year to Date -- to September 30, 1999
------------------------------------------
January 1 to March 31, 1999 $ 4.87 $ 1.00
April 1 to June 30, 1999 $ 3.50 $ 2.06
July 1 to September 30, 1999 $ 4.75 $ 1.69
</TABLE>
The Company has not paid any cash dividends since its inception. The Company is
prohibited from paying dividends on its Common Stock while it has outstanding
any shares of Series I Preferred Stock or Series J Preferred Stock and until it
has surplus funds legally available. The Company currently intends to retain
future earnings in the operation and expansion of its business and does not
expect to pay any cash dividends in the foreseeable future.
From November, 1995 to November, 1997, the Company's Common Stock was listed
on the Nasdaq SmallCap market. In November, 1997, the Company was de-listed
from Nasdaq.
As of September 27, 1999 there were 342 holders of record of the Common
Stock.
-41-
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth compensation received by the Company's Chief
Executive Officer and by each of the persons who were, for the fiscal year ended
December 31, 1998, the other four most highly compensated executive officers of
the Company whose total compensation during that year exceeded $100,000 (the
"Named Officers"), for the three fiscal years ended December 31, 1998 or for the
shorter period during which the Named Officer was compensated by the Company.
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE
ANNUAL COMPENSATION LONG-TERM COMPENSATION
---------------------------------- --------------------------
NAME AND SECURITIES
PRINCIPAL OTHER ANNUAL UNDERLYING ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS(#)(2) COMPENSATION
- - ------------- ---- ------ ----- -------------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C>
Thomas C. Hemingway 1998 $ 88,789 292,500 shs.
CEO
James H. Budd 1998 $ 52,868 117,000 shs.
Vice President
T. Richard Hutt 1998 $ 64,281 117,000 shs.
Vice President
</TABLE>
- - ----------
(1) Perquisites and other personal benefits did not for any Named Officer in
the aggregate equal or exceed the lesser of $50,000 or 10% of the total of
annual salary and bonus reported in this table for such person.
(2) The amounts in the table represent shares of the Company's Common Stock
covered by stock options of the named individual assumed by eSynch
Corporation from Intermark Corporation effective August 5, 1998.
-42-
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company has an employment agreement with each Executive Officers listed
below. The terms of those employment agreements is summarized in the following
table:
<TABLE>
<CAPTION>
CURRENT BASE OPTION OTHER BENEFITS DUE ON
NAME COMPENSATION GRANT BENEFITS TERMINATION
- ----------- ------------ -------- ------------- ----------------------------------
<S> <C> <C> <C> <C>
Thomas C. Hemingway $150,000 250,000 Any If he is terminated by the Company
CEO at $1.00 benefits without cause, he is paid an amount
each, for other equal to 12 months' base salary and
fully officers, all other benefits and perquisites
vested and 3 weeks continue for 12 months and
vacation the Company will be
per year required to repurchase
all his stock and options
at the 30-day average market price.
Donald Watters, Jr. $150,000 250,000 Any If he is terminated by the Company
President and COO at $1.00 each, benefits without cause, he is paid an amount
fully vested for other equal to 12 months' base salary and
and 450,000 officers, all other benefits and perquisites
shares and 3 weeks continue for 12 months and
at $0.50 vacation the Company will be
each, per year required to repurchase
fully vested all his stock and options
at the 30-day average market price.
James H. Budd $130,000 Any If he is terminated by the Company
Vice President benefits without cause, he is paid an amount
for other equal to 3 months' base salary and
officers, all other benefits and perquisites
and 2 weeks continue for 3 months and all stock
vacation options held by him vest and
per year become exercisable.
Robert Way $110,000 250,000 Any If he is terminated by the Company
Vice President at $1.00 each, benefits without cause, he is paid an amount
fully vested for other equal to 3 months' base salary and
officers, all other benefits and perquisites
and 3 weeks continue for 3 months and all stock
vacation options held by him vest and
per year become exercisable.
T. Richard Hutt $130,000 Any If he is terminated by the Company
Vice President benefits without cause, he is paid an amount
for other equal to 3 months' base salary and
officers, all other benefits and perquisites
and 2 weeks continue for 3 months and all stock
vacation options held by him vest and become
per year exercisable.
David P. Noyes $150,000 250,000 at Any If he is terminated by the
Company $1.00 each, benefits without cause, he is paid an amount
CFO fully vested, for other equal to 6 months' base salary and
and 250,000 officers. all other benefits and perquisites
at $1.00 each, and 3 weeks continue for 6 months and all stock
vesting vacation options held by him vest and become
ratably over per year exercisable.
two years
</TABLE>
-43-
<PAGE>
OPTION GRANTS DURING FISCAL 1998
The following table sets forth information on all grants of stock
options during the fiscal year ended December 31, 1998, to Named Officers:
<TABLE>
<CAPTION>
OPTION GRANTS TABLE
OPTION GRANTS IN FISCAL YEAR 1998
INDIVIDUAL GRANTS POTENTIAL
-------------------------------------------------- REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE
UNDERLYING EMPLOYEES EXERCISE APPRECIATION FOR
OPTIONS IN FISCAL PRICE EXPIRATION OPTION TERM($)(4)
NAME GRANTED(1) YEAR(2) ($/SHARE) DATE(3) 5% 10%
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Thomas C. Hemingway 292,500 46.3% $0.94 April, 2008 $1,386,148 $2,193,861
James H. Budd 117,000 18.5% $0.94 April, 2008 $ 554,459 $ 877,545
T. Richard Hutt 117,000 18.5% $0.94 April, 2008 $ 554,459 $ 877,545
</TABLE>
- - --------
(1) The amounts in the table represent shares of the Company's Common Stock
covered by stock options assumed by the Company that had been granted by
Intermark Corporation. Each option is exercisable in full.
(2) Options to purchase an aggregate of 631,800 shares of common stock were
assumed by the Company during the fiscal year ended December 31, 1998 that
had been granted to employees, including the Named Officers.
(3) Options held by the Named Officers have a term of 10 years, subject to
earlier termination in certain events related to termination of
employment.
(4) These columns present hypothetical future values of the stock obtainable
upon exercise of the options net of the options' exercise price, assuming
that the closing market price of the Company's common stock, as reported
on the Nasdaq over-the-counter Bulleting Board on October 5, 1999,
appreciates at a 5% and 10% compound annual rate over the ten year term of
the options. The 5% and 10% rates of stock price appreciation are
presented as examples pursuant to the rules and regulations of the
Securities and Exchange Commission ("SEC") and do not necessarily reflect
management's estimate or projection of the Company's future stock price
performance. The potential realizable values presented are not intended to
indicate the value of the options.
-44-
<PAGE>
OPTION EXERCISES IN FISCAL 1998 AND YEAR-END OPTION VALUES
The following table sets forth information concerning stock options
which were exercised during, or held at the end of, fiscal 1998 by the Named
Officers:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES VALUE AT FISCAL YEAR END(#) AT FISCAL YEAR END($)(1)
ACQUIRED ON REALIZED -----------------------------------------------------
NAME EXERCISE ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Tom Hemingway -0- -0- 542,500 -0- $1,509,425 -0-
James H. Budd -0- -0- 117,000 -0- $ 328,770 -0-
T,. Richard Hutt -0- -0- 117,000 -0- $ 328,770 -0-
</TABLE>
- - ----------
(1) Market value of underlying securities at exercise date or year end, as
the case may be, minus the exercise or base price of "in-the-money"
options. The value of options is based on the closing sale price for the
Company's common stock as of October 5, 1999 as reported on the Nasdaq
OTC Bulletin Board, which was $3.75, minus the exercise price.
-45-
<PAGE>
FINANCIAL STATEMENTS
ESYNCH CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
<S> <C>
Report of Independent Certified Public Accountants 47
Consolidated Balance Sheet - December 31, 1998 48
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997 50
Consolidated Statements of Stockholders' Deficit for the
Years Ended December 31, 1997 and 1998 51
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998 and 1997 52
Notes to Consolidated Financial Statements 53
</TABLE>
-46-
<PAGE>
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
Member of AICPA Division of Firms Fax (801) 532-7944
Member of SECPS 345 East Broadway, Suite 200
Member of Summit International Associates Salt Lake City, Utah 84111-2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
eSynch Corporation and Subsidiaries
We have audited the accompanying consolidated balance sheet of eSynch
Corporation and Subsidiaries as of December 31, 1998 and the related
consolidated statements of operations, stockholders' deficit, and cash flows for
each of the two years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of eSynch Corporation
and Subsidiaries as of December 31, 1998 and the results of their operations and
their cash flows for each of the two years in the period ended December 31, 1998
in conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 in the
financial statements, the Company has suffered substantial and recurring losses
from operations and negative cash flows from operating activities. At December
31, 1998, the Company has negative working capital and a capital deficiency.
These factors raise substantial doubt about the Company's ability to continue as
a going concern. Management's plan in regard to these matters are also described
in Note 1. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
June 10, 1999
-47-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Pro Forma
Historical (Note 2)
---------- -----------
(Unaudited)
ASSETS
<S> <C> <C>
Current Assets
Cash $ 1,413 $ 1,413
Inventory 13,693 13,693
Other receivable - 50,000
----------- ----------
Total Current Assets 15,106 65,106
----------- ----------
Equipment 162,194 162,194
Less accumulated depreciation (109,988) (109,988)
----------- ----------
Net Equipment 52,206 52,206
----------- ----------
Assets to be sold - primarily goodwill 4,552,847 -
----------- ----------
Total Assets
$ 4,620,159 $ 117,312
=========== ==========
</TABLE>
-48-
<PAGE>
<TABLE>
<CAPTION>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<S> <C> <C>
Current Liabilities
Trade accounts payable $1,120,281 $1,120,281
Accrued liabilities 692,840 692,840
Notes payable 406,661 406,661
Liabilities relating to assets to be sold 4,502,847 -
---------- ----------
Total Current Liabilities 6,722,629 2,219,782
---------- ----------
Redeemable Preferred Stock - $0.001 par value;
600,000 shares authorized; 600,000 shares of
Series I issued and outstanding; liquidation
preference - $600,000 600 600
---------- ----------
Stockholders' Deficit
Preferred stock - $0.001 par value; 400,000 shares
authorized; none issued or outstanding - -
Common stock - $0.001 par value; 20,000,000 shares
authorized; 6,889,829 issued and outstanding 6,889 6,889
Additional paid-in capital 3,541,295 3,541,295
Accumulated deficit (5,651,254) (5,651,254)
---------- ----------
Total Stockholders' Deficit (2,103,070) (2,103,070)
---------- ----------
Total Liabilities and Stockholders' Deficit $4,620,159 $ 117,312
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-49-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Product Sales $ 203,571 $ 496,070
Cost of Goods Sold 156,617 229,032
----------- ----------
Gross Profit 46,954 267,038
----------- ----------
Operating and Other Expenses
General and administrative 1,999,340 857,094
Amortization of goodwill 228,330 -
Interest 132,641 16,253
Amortization of debt discount 355,567 -
Impairment loss on assets to be sold 2,323,841 -
----------- ----------
Total Operating and Other Expenses 5,039,719 873,347
----------- ----------
Loss Before Extraordinary Item (4,992,765) (606,309)
Extraordinary Gain From Debt Forgiveness 14,423 -
----------- ----------
Net Loss $(4,978,342) $ (606,309)
=========== ==========
Basic and Diluted Loss per Common Share
Loss before extraordinary item $ (0.91) $ (12.54)
Extraordinary gain from debt forgiveness - -
----------- ----------
Net Loss $ (0.91) $ (12.54)
=========== ==========
Weighted Average Number of Common Shares
Used in Per Share Calculation 5,476,874 48,345
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-50-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Total
--------------------- ------------------ Paid-In Accumulated Stockholder
Shares Amount Shares Amount Capital Deficit Deficit
--------- ---------- ---------- ------ -------- ---------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1996 16,378 $ 16 21,350 $ 21 $ 7,963 (66,603) (58,603)
Shares issued for services 51,788 52 68,007 68 251,045 - 251,165
Net loss for the year - - - - - (606,309) (606,309)
--------- ----- ---------- ------- ---------- --------- -----------
Balance - December 31, 1997 68,166 68 89,357 89 259,008 (672,912) (413,747)
Shares issued for services 2,692 3 1,461 1 276,981 - 276,985
Acquisition of Innovus - - 1,215,375 1,215 (861,286) - (860,071)
Conversion of preferred shares (80,286) (80) 4,516,088 4,516 (4,436) - -
Beneficial conversion feature - - - - 355,567 - 355,567
Shares issued for conversion of
notes payable and accrued interest 9,428 9 172,548 173 567,918 - 568,100
Acquisition of SoftKat - - 720,000 720 2,668,680 - 2,669,400
Shares issued for services - - 100,000 100 115,900 - 116,000
Shares issued for conversion of
accounts payable - - 20,000 20 24,980 - 25,000
Shares issued for interest payment
on note payable - - 55,000 55 68,695 - 68,750
Compensation relating to the grant
of stock options - - - - 69,288 - 69,288
Net loss for the year - - - - - (4,978,342) (4,978,342)
--------- ----- ---------- ------- ---------- ----------- -----------
Balance - December 31, 1998 - - 6,889,829 $ 6,889 $3,541,295 $(5,651,254) $(2,103,070)
========= ===== ========== ======= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-51-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $(4,978,342) $ (606,309)
Adjustments to reconcile net loss to net
cash used by operating activities:
Amortization of goodwill 228,330 -
Depreciation 36,910 5,254
Stock issued for interest 68,750 -
Amortization of debt discount 355,567 -
Stock issued for services 392,985 251,165
Compensation from stock options granted 69,289 -
Impairment loss on assets to be sold 2,323,841 -
Forgiveness of debt (14,423) -
Changes in assets to be sold 610,103 -
Changes in liabilities relating to assets
to be sold (498,744) -
Payment of company expenses by employee - 4,507
Changes in operating assets and liabilities,
net of effects of businesses acquired:
Accounts receivable 25,000 3,220
Inventory (13,693) -
Other receivables - 40,000
Accounts payable 259,305 99,950
Accrued liabilities 410,489 166,099
------------ ----------
Net Cash Used By Operating Activities (724,633) (36,114)
------------ ----------
Cash Flows From Investing Activities
Payments for the purchase of equipment (5,823) (19,923)
------------ ----------
Net Cash Used By Investing Activities (5,823) (19,923)
------------ ----------
Cash Flows From Financing Activities
Proceeds from issuance of debt 806,071 73,482
Principal payments on notes payable (74,202) (19,048)
------------ ----------
Net Cash Provided By Financing Activities 731,869 54,434
------------ ----------
Net Increase (Decrease) In Cash 1,413 (1,603)
Cash - Beginning of Year - 1,603
------------ ----------
Cash - End of Year $ 1,413 $ -
============ ==========
</TABLE>
Supplemental cash flow information and noncash investing and
Financing activities - Note 8
The accompanying notes are an integral part of these financial statements.
-52-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS - Intermark Corporation ("Intermark") was
incorporated under the laws of the State of California in October 1995. On
August 5, 1998, Intermark was reorganized into Innovus Corporation, a
publicly-held shell corporation, as explained in Note 2. By shareholder action,
Innovus Corporation, the parent company, changed its name to eSynch Corporation
("eSynch") on November 9, 1998. On November 17, 1998, eSynch acquired SoftKat
Inc. ("SoftKat"). Subsequent to December 31, 1998, SoftKat was sold to a
third-party. See Note 2.
The primary activities of eSynch, the consolidated company, have consisted of
raising capital, acquiring Innovus Corporation and SoftKat Inc., and limited
retail and turnkey sales of software games and various other programs and
related marketing services through distribution channels and through the
Internet.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of Intermark Corporation ("Intermark") for all
periods presented, the accounts of Innovus Corporation and SoftKat, Inc. from
the dates of their acquisitions on August 5, 1998 and November 17, 1998,
respectively. These entities are collectively referred to as "eSynch" or the
"Company". All inter-company transactions and balances have been eliminated in
consolidation. In accordance with the accounting treatment on the impairment of
long-lived assets to be disposed of, the accounts of SoftKat has been
consolidated under two line items on the financial statements, "Assets to be
sold" and "Liabilities relating to assets to be sold", respectively. The
carrying amount of assets to be sold has been adjusted by the impairment loss
on the subsequent sale of SoftKat.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumption that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
BUSINESS CONDITION - The financial statements have been prepared on the basis
of the Company continuing as a going concern. The Company has incurred losses
from operations and negative cash flows from operating activities and has
accumulated a deficit at December 31, 1998 in the amount of $5,651,253. These
conditions raise substantial doubt regarding the Company's ability to continue
as a going concern. Management's plan to mitigate the impact of these
conditions is to obtain additional equity financing through the issuance of the
Company's common stock, convertible preferred stock or warrants. As discussed
in Note 12, the Company has obtained a signed commitment from an investment
source for equity financing in the aggregate amount of $2,500,000. The Company
is also currently in negotiations for additional financing arrangements.
However, realization of the proceeds form these potential transactions is not
assured. These financial statements do not include any adjustments relating to
the
-53-
<PAGE>
recoverability and classification of recorded assets or amounts and
classifications of liabilities that might be necessary should the Company be
unable to continue.
CONCENTRATION OF RISK AND MAJOR CUSTOMERS - The Company operates exclusively in
the software industry, accordingly, segment information relating to operations
in different industries is not presented in these financial statements. The
concentration of business in the highly competitive software industry subjects
the Company to concentrated market risk. During the year ended December 31,
1997, sales to three major customers totaled 31%, 19%, and 15% of sales,
respectively. Sales to any major customer in 1998 were not significant.
FAIR VALUES OF FINANCIAL INSTRUMENTS - The amounts reported as cash, accounts
payable, notes payable, and liabilities relating to assets to be sold are
considered to reasonable approximations of their fair values. The fair value
estimates were based on market information available to management at the time
of the preparation of the financial statements.
INVENTORY - Inventory is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. Inventory balance at year-end
consisted of packaged software.
EQUIPMENT - Equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the equipment, which
are five to seven years. Maintenance and repairs of equipment are charged to
operations and major improvements are capitalized. Upon retirement, sale, or
other disposition of equipment, the cost and accumulated depreciation are
eliminated from the accounts and gain or loss is included in operations.
STOCK-BASED COMPENSATION - Stock-based compensation to employees is measured by
the intrinsic value method. This method recognizes compensation expense related
to stock options granted to employees based on the difference between the fair
value of the underlying common stock and the exercise price of the stock option
on the date granted. Compensation expense related to stock options granted to
non-employees is determined based upon the fair value of the stock options on
the date granted.
ADVERTISING COSTS - Advertising costs have been recognized as expense when
incurred, and amounted to none and $13,056 during the years ended December 31,
1998 and 1997, respectively
LOSS PER SHARE - The Company computes basic and diluted loss per share in
accordance with Statement of Financial Accounting Standards No. 128, ("SFAS
128"), "Earnings Per Share." Basic loss per common share is computed by
dividing net loss available to common stockholders by the weighted-average
number of common shares outstanding during the period. Diluted loss per share
is calculated to give effect to stock warrants, options and convertible notes
payable except during loss periods when those potentially
-54-
<PAGE>
issuable common shares would decrease the loss per share. The effects of
1,751,800 potentially issuable common shares outstanding at December 31, 1998
were excluded from the calculation of diluted loss per share for the year ended
December 31, 1998, as they would have decreased the loss per share.
REVENUE RECOGNITION - The Company sells software products at fixed prices for
which the right to return is granted to the buyer. Accordingly, revenue is
recognized when the buyer has paid for the products and the amount of future
returns can be reasonably estimated. Cost of products sold is recognized at the
date the sale is recognized less an estimate for sales returns. Until the sale
is recognized, products purchased from publishers are accounted for as
consigned product from publishers and the related cost is not reflected in the
financial statements with the exception of a limited amount of software
inventory owned by the Company at year-end.
NEW ACCOUNTING STANDARDS - In March 1998, the AICPA issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The Company is currently analyzing the impact of this statement,
which is required to be adopted in 1999, and does not expect this statement to
have a material impact on the Company's financial position, results of
operations or cash flows.
The Financial Accounting Standard Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" in June 1998. This statement is
effective for the year beginning January 1, 2000 and will not require
retroactive restatement of prior period financial statements. The Company does
not believe the new statement will have any impact on the financial statements
but it has not completed its evaluation of SFAS 133.
NOTE 2--ACQUISITIONS
INNOVUS - In May 1998, Intermark entered into an Agreement and Plan of Share
Exchange (the "Agreement") with Innovus Corporation (Innovus), a publicly held
Delaware corporation, which had discontinued its operations by May 1998.
Innovus had 1,215,375 (post 1-for-10 split) common shares outstanding on August
5, 1998 when the Agreement was completed. Under the terms of the Agreement, the
shareholders of Intermark exchanged all of the 3,783,875 Intermark common
shares for 1,033,669 shares of common stock and 78,706 shares of Series H
preferred stock of Innovus and Intermark was reorganized into a newly-formed
subsidiary of Innovus. The Series H preferred shares had voting rights
equivalent to the 4,427,213 common shares into which they were convertible. As
a result, the Intermark shareholders became the majority shareholders of the
Company in a transaction intended to qualify as a tax-free reorganization. The
transactions were accounted for as the recapitalization of Intermark at
historical cost and the issuance of common stock in exchange for the net
liabilities of Innovus in the amount of $860,071 which were recorded at their
historical cost. The operations of Innovus were not significant to the
operations of the Company; therefore, pro forma results of operations are not
presented.
-55-
<PAGE>
SOFTKAT - On November 17, 1998, the Company acquired SoftKat, Inc,. a
California corporation primarily engaged in the wholesale distribution of
computer software games. In exchange for the SoftKat common shares, the Company
issued 720,000 common shares and 600,000 shares of Series I redeemable,
convertible preferred shares. Up to an additional 720,000 common shares are
contingently issuable based upon the difference between the market price of the
common stock one year from the date of acquisition and a target market price of
$3.00 per share. The acquisition was accounted for using the purchase method of
accounting. The acquisition purchase price, based upon the fair value of the
common and preferred stock issued and the addition contingently issuable common
shares, was $2,670,000. The excess of the purchase price over the estimated
fair value of the identifiable acquired assets less liabilities assumed was
$6,882,300, which was recognized as goodwill. The results of operations of
SoftKat have been included in the 1998 consolidated financial statements from
the date of acquisition and consisted of sales of $109,317 and a net loss of
$111,359. Goodwill expense was recognized from the acquisition date on the
straight-line basis using an estimated useful life of 3.6 years.
In February 1999, Management of the Company decided to dispose of SoftKat
because it did not meet the core business objectives of the Company. On May 25,
1999, SoftKat was sold to a third party for $50,000 cash and a note receivable
for $100,000 which resulted in the recognition of an impairment loss of
$2,323,841. The subsequent sale and resulting loss provided evidence of
conditions that existed at December 31, 1998; therefore, an impairment loss was
recognized in 1998 in accordance with SFAS No. 121, "Accounting for Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." The
impairment loss was determined by the excess of the carrying amount of the
assets in excess of the $50,000 subsequently collected and the amount of the
related liabilities. The $100,000 note receivable was not considered in the
computation of the impairment loss or the resulting carrying value of the
assets to be sold, but will be recognized when and if collected. The resulting
amount of the assets to be sold and the related liabilities assumed by the
buyer have been presented separately in the accompanying balance sheet. The
unaudited pro forma consolidated balance sheet is to present the Company's
financial position had the disposition of SoftKat occurred on December 31,
1998.
Pro forma information, assuming the acquisition and subsequent sale occurred on
January 1, 1998 and 1997, would have exact opposite reporting effects,
effectively netting to the pro forma results presented in the historical
operations of the Company. Therefore, pro forma operating information relating
to SoftKat is not presented.
-56-
<PAGE>
NOTE 3--EQUIPMENT
Equipment consisted of the following:
Furniture and fixtures $ 3,233
Computer equipment 155,882
Office equipment 3,079
---------
Total $ 162,194
=========
Depreciation expense for the years ended December 31, 1998 and 1997 was $36,910
and $ 5,254, respectively.
NOTE 4--NOTES PAYABLE
Notes payable consisted of the following:
Capital lease obligations for equipment $ 768
12% Line of credit payable to a bank; secured by all
assets of the Company; due September 30, 1998; in default 22,893
40% Convertible note payable to a shareholder; unsecured;
due March 15, 1999 300,000
10% Series A Convertible debentures payable to three
shareholders; secured by all assets of the Company;
due October 31, 1998; in default 75,000
Note payable to a shareholder; no stated rate of
interest; payable on demand; unsecured 8,000
---------
Total Notes Payable $ 406,661
=========
In September 1997, the Company established a line of credit with a limit of
$25,000, with a bank. The note was due September 8, 1998. The loan is
guaranteed by three officers of the Company and bears interest at 3% over the
prime rate (12% at December 31, 1998). The Company has not made any principal
payments since the inception of the loan and the loan is currently in default.
From January through October 1998, the Company issued convertible notes payable
totaling $495,500. The notes bore interest at 10% in addition to the
amortization of the discount resulting from the beneficial conversion feature.
The notes were converted into 142,383 shares of common stock and 9,428 shares
of Series H preferred stock in October 1998.
-57-
<PAGE>
The $300,000 note payable to a shareholder is convertible into common shares at
$3.00 per share. The conversion period began on the date of the note and
terminates on the due date of March 15, 1999 unless the entire principal
payment of the note is not made by the due date at which time the conversion
right reverts back to the holder indefinitely. In December 1998, the Company
issued 55,000 common shares to the note holder as interest on the note. The
amount recorded as interest expense for these shares was $68,750. During 1999,
the Company made cash payments of $30,000 interest and $125,000 principal to
the holder. The Company is currently in default on the remaining balance of the
loan.
The 10% Series A convertible debentures in the amount of $25,000 each were
issued in April 1998 to three shareholders. The note holders are entitled, at
their option, to convert the debenture principal face amount then outstanding,
together with accrued interest, into shares of the Company's common stock at a
conversion price of $0.125 per share. The Company is currently in default on
the debentures.
NOTE 5--INCOME TAXES
There was no provision for or benefit from income tax for any period. The
components of the net deferred tax asset at December 31, 1998 are shown below:
Operating loss carry forwards $ 1,190,549
Valuation Allowance (1,190,549)
-----------
Net Deferred Tax Asset $ -
===========
For tax reporting purposes, the Company has net operating loss carry forwards
in the amount of $2,896,848 which will expire beginning in the year 2011.
The following is a reconciliation of the amount of tax (benefit) that would
result from applying the federal statutory rate to pretax loss with the
provision for income taxes.
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Tax at statutory rate (34%) $(1,692,637) $ (206,145)
Non-deductible expenses 1,083,122 10,327
Change in valuation allowance 919,440 233,075
State tax benefit, net of federal
tax effect (313,636) (38,197)
Change in effective tax rate 3,711 940
----------- ----------
Net Income Tax Expense $ - $ -
=========== ==========
</TABLE>
-58-
<PAGE>
NOTE 6--ACCRUED LIABILITIES
Included in accrued liabilities are $612,170 in obligations to states and the
federal government for overdue payroll taxes from previous years and the
estimated interest and penalties owing on such tax and obligations for
estimated payroll taxes, interest and penalties on 1996, 1997, and 1998 officer
wages and 1998 employee wages that have not been reported to the respective
governmental agencies.
NOTE 7--COMMITMENTS AND CONTINGENCIES
CONSULTING AGREEMENTS - On January 5, 1998, the Company entered into a software
programming consulting agreement with an unrelated third party. Under the terms
of the agreement, the consultant received cash payments of $2,000 in 1998 and
$10,000 in 1999 upon completion of the project on April 12, 1999. The
consultant was also issued 45,000 shares of common stock on April 12, 1999. The
amount of expense recognized during 1999 on the shares issued was $146,250.
On August 27, 1998, the Company entered into a marketing consulting agreement
with an unrelated third party. Under the terms of the agreement, the consultant
was issued 30,000 shares of common stock for $100. The Company is obligated to
issue 30,000 common shares each three months to the consultant. The agreement
is through August 1999 and is cancelable by either party. The amount of expense
recognized on the shares issued under this agreement is calculated using the
market value of the stock at the end of the three month period.
LEASE COMMITMENTS - The Company leases office and warehouse facilities under
two-year agreements accounted for as operating leases. Lease expense for the
years ended December 31, 1998 and 1997 was $56,400 and $51,875. In July 1998,
the Company renewed one lease through May 31, 2000 at $4,700 per month. In May
1999, the Company moved to a new office and warehouse facility and entered into
a new five-year operating lease. The lessor of the existing lease granted the
Company an unconditional release from the lease effective as of the date of
relocation. Monthly minimum rental payments on the new lease are $20,010 to be
adjusted upwards by 4% for each succeeding year during the term of the lease.
The following is a schedule of future minimum rental payments required under
existing leases and the new lease.
Years Ending December 31:
1999 $ 178,880
2000 249,725
2001 259,714
2002 270,102
2003 280,906
Thereafter 97,381
----------
Total $1,336,708
==========
-59-
<PAGE>
NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION AND NONCASH
INVESTING AND FINANCING ACTIVITIES
Supplemental Cash Flow Information -
For the Years Ended
December 31,
------------------------
1998 1997
----------- ----------
Cash paid for interest $ 256 $ 3,876
NONCASH INVESTING AND FINANCING ACTIVITIES -
During the year ended December 31, 1998, the Company converted $25,000 of
accounts payable to common stock. The Company also converted notes payable in
the amount of $558,131 and accrued interest in the amount of $9,967 into common
stock.
During August 1998, the Company issued 1,215,375 shares of common stock in
exchange for the assets and liabilities of Innovus Corporation.
Liabilities were assumed as follows:
Fair value of assets acquired $ 46,670
Common stock issued 860,071
-----------
Liabilities Assumed $ 906,741
===========
On November 17, 1998, the Company issued 600,000 shares of Series I Preferred
Stock and 720,000 shares of common stock in exchange for all of the issued and
outstanding common stock of SoftKat, Inc. In conjunction with the acquisition,
liabilities were assumed as follows:
Fair value of assets acquired
other than goodwill $ 789,670
Goodwill 6,882,300
Common and preferred stock issued (2,670,000)
-----------
Liabilities Assumed $ 5,001,591
===========
-60-
<PAGE>
NOTE 9 - STOCKHOLDERS' EQUITY
On August 5, 1998, Intermark was recapitalized as discussed in Note 2. To
effect the recapitalization, the Intermark shareholders at that date
exchanged all of the 3,783,875 outstanding Intermark common shares for
78,706 shares of Series H preferred stock and 1,033,669 common shares of
Innovus (now eSynch Corporation). The recapitalization of Intermark was
accounted for at historical cost. The accompanying financial statements,
including the following description of equity transactions, have been
restated for all periods presented to reflect the preferred and common
shares issued in the recapitalization. On November 9, 1998, the shareholders
approved a 1-for-10 reverse stock split of all common shares outstanding at
that date. The accompanying financial statements have also been restated for
all periods presented to reflect the stock split on a retroactive basis.
The Series I redeemable preferred stock has a liquidation preference of $1.00.
The Company is required to redeem 200,000 shares of the preferred stock at
$1.00 per share upon obtaining financing of $1,500,000 or more from any source
and must redeem an additional 200,00 shares of preferred stock upon obtaining
an additional $3,000,000 in funding. Dividends on the preferred stock are
payable prior and in preference to any declaration or payment of any dividends
on the common stock, when, as, and if declared by the Board of Directors.
However, there is no stated dividend rate. The preferred stock is convertible,
at the option of the holder, into common stock at the lesser of $3.00 per share
or the average closing bid price of the common stock over the ten trading days
ending on either November 16, 1999 or an earlier date on which the Company
receives a second funding of at least $3,000,000 mentioned above. The preferred
stock has voting rights equivalent to the number of common shares into which it
can be converted and has additional voting rights with respect to approval of
any issuance of a senior series of preferred shares.
On October 3, 1995, the Company issued 16,254 shares of Series H preferred
stock and 21,350 common shares for $8,000 cash at $0.01 per common equivalent
share. On May 19, 1997, the Company issued 44,697 shares of Series H preferred
stock and 58,699 common shares to members of the Board of Directors as
compensation for their services during 1995. The shares were valued at $22,000,
or $0.01 per common equivalent share, which was the fair value of the services
provided and the fair value of the preferred and common shares issued as
established by management of the Company and based upon the value at which
shares were issued for cash during 1995. The Company issued 7,091 shares of
Series H preferred stock and 9,308 common shares effectively in July 1997 for
services valued at $229,165, or $0.56 per share.
-61-
<PAGE>
On August 5, 1998, 1,112 shares of Series H preferred stock and 1,461 common
shares were issued for services valued at $164,876, or $2.58 per common
equivalent share. The value of these services was determined based upon the
trading price of the Company's common stock at that date. On September 16,
1998, the Company issued 1,580 shares of Series H preferred stock to third
parties for services. The services were valued at $112,108 based upon the
trading price of the Company's common shares into which the preferred shares
were convertible, or $1.26 per common equivalent share on the date issued.
On August 5, 1998, for financial reporting purposes, the Company issued
1,215,375 common shares to acquire Innovus, as further discussed in Note 2.
Innovus was a shell corporation with no operations and nominal assets.
Therefore, the shares were recorded at the historical cost of the net
liabilities assumed of $860,071.
During 1998, the Company issued 9,428 shares of Series H Preferred stock and
172,548 common shares for notes payable and accrued interest. The value of the
notes converted was $558,131 and the value of the accrued interest converted
was $9,969.
On November 9, 1998, the Series H preferred shareholders converted 80,286
shares of Series H preferred stock, pursuant to their terms, into 4,516,088
common shares at the rate of 56.25 common shares for each preferred share
converted.
The Company recognized $355,567 of interest expense relating to beneficial debt
conversion features associated with notes payable issued during 1998. The value
of the conversion feature was determined based upon the difference between the
fair value of the Company's common stock on the dates the notes were issued and
the conversion rates. The proceeds received were allocated $355,567 to the
beneficial conversion feature and the remainder to the notes. The resulting
discount on the notes was recognized as interest expense through the dates the
notes were first convertible which were the same dates as the notes were
issued.
On November 17, 1998, the Company acquired SoftKat, Inc. in exchange for the
issuance of 720,000 common shares and 600,000 redeemable, convertible Series I
preferred shares. Up to an additional 720,000 common shares are contingently
issuable based upon the difference between the market price of the common stock
one year from the date of acquisition and a target price of $3.00 per share.
The purchase price, based upon the fair value of the common and preferred stock
issued was $2,670,000.
An officer of SoftKat was issued 100,000 common shares as compensation. The
value of these shares was $116,000. The value of the services was determined
based upon the fair value of the services provided and the fair value of the
preferred and common shares.
On December 18, 1998, the Company issued 20,000 common shares as a settlement
of accounts payable. The value of the accounts payable was $25,000.
-62-
<PAGE>
As described in Note 4, on December 8, 1998, the Company issued 55,000 common
shares to a note holder as interest on a note payable. The value of these
shares was $68,750 and was determined using the fair value of the common shares
on the date of issuance.
NOTE 10 - FORGIVENESS OF DEBT
The Company negotiated reductions in accounts payable during 1998 and paid the
negotiated amounts. The amount of the debt forgiveness is $14,423 and has been
accounted for as an extraordinary gain.
NOTE 11 - STOCK OPTIONS
The Board of Directors approved a stock option plan in April of 1998 which
authorized options to purchase 600,000 shares of common stock. Options to
purchase 540,000 common shares were granted under the plan on April 24, 1998,
with a weighted-average exercise price of $0.99 per shares. The Plan was
approved and the options were granted. The options became exercisable
immediately. 450,000 of the unexercised options expire on April 24, 2003 and
the remaining 90,000 unexercised options expire on April 24, 2008. Compensation
relating to the options of $69,288 was recognized when the shares vested which
was on the date of grant. After the merger with Innovus, the number of options
and the price of the options were recalculated. The number of options now
exercisable is 631,800 with a weighted average exercise price of $0.90. 549,900
of the options expire on April 24, 2003 and the remaining 81,900 options expire
on April 24, 2008. No additional expense needs to be recognized in association
with the recalculation of the options outstanding and the exercise price.
A summary of the status of the Company's stock options as of December 31, 1998
and changes during the year then ended are presented below:
<TABLE>
<CAPTION>
1998
-----------------------------
Weighted-Average
Shares Exercise Price
------------ ----------------
<S> <C> <C>
Outstanding at beginning of year - -
Granted 1,031,800 $ 0.90
------------
Outstanding at end of year 1,031,800 0.90
============
Options exercisable at year-end 631,800 0.84
============
Weighted-average fair value of
of options granted during the year $ 0.91
============
</TABLE>
-63-
<PAGE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------- ------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Prices At 12/31/98 Life Price At 12/13/98 Price
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$0.25 81,900 9.32 years $0.21 81,900 $0.21
$0.855 - $1.00 949,900 4.70 $0.96 549,900 $0.94
</TABLE>
The Company measures compensation under stock-based options and plans using the
intrinsic value method prescribed in Accounting Principles Board Opinion 25,
Accounting for Stock Issued to Employees, and related interpretations.
Stock-based compensation charged to operations was $69,288 and $0 for the years
ended December 31, 1998 and 1997. Had compensation cost for the Company's
options been determined based on the fair value at the grant dates consistent
with the alternative method set forth under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, net loss and loss
per share would have increased to the pro forma amounts indicated below for the
year ended December 31, 1998:
Net loss:
As reported $ (4,978,342)
Pro forma (5,415,327)
Basic and diluted loss per share:
As reported $ (0.91)
Pro forma (0.99)
The fair value of each option granted was estimated on the date of grant using
the Black-Scholes option-pricing model with the following weighted-average
assumptions used for grants in 1998 and 1997, respectively: dividend yield of
0.0% for both periods; expected volatility of 73.0% and 0%; risk-free interest
rate of 5.63%, 5.68% and 0% and expected life of the options of 5.0 years, 10.0
years and 0.0 years.
NOTE 12 - SUBSEQUENT EVENTS
On January 13, 1999, the Company entered into a one-year agreement with a
consulting firm to provide financial advisory services for the Company. As
consideration for these services, the Company issued 200,000 five-year warrants
to purchase shares of the Company's common stock at $1.25 per share. In
addition, the Company has agreed to compensate the consulting firm based on the
total consideration the Company receives in the future from the consulting
firm's efforts as follows: 5% on the first $1,000,000, 4% on the next
$1,000,000, 3% on the next $1,000,000, and 2% on any balance.
-64-
<PAGE>
On January 28, 1999, the Company entered into consulting agreements whereby
the consultants are to provide various services to the Company including
negotiating contracts on behalf of the Company and introducing the Company
to various Internet companies. As consideration for these services, the
consultants received 310,000 shares of common stock. The 1999 expense
recognized for these shares will be $450,500.
On April 1,1999, the Company acquired Kiss Software Corporation ("Kiss"), a
California corporation engaged in the wholesale and retail distribution of
computer and Internet utility software products. Under the agreement,
shareholders of Kiss agreed to exchange each of their common shares for
0.181557136 common shares of eSynch and each of their preferred shares for
0.4183964 common shares of eSynch. The exchange resulted in the Company issuing
1,428,134 common shares to Kiss shareholders. The Company also issued 163,187
options in conjunction with the purchase. These options are exercisable at
$2.05 each. The acquisition has been accounted for using the purchase method of
accounting. The acquisition purchase price, based upon the fair value of the
common stock and options issued, was estimated at $4,141,978 (unaudited). The
excess of the purchase price over the estimated fair value of the identifiable
acquired assets less liabilities assumed was $5,237,979 (unaudited), which will
be recognized as goodwill. Goodwill will be amortized over 3.11 years on a
straight-line basis.
On March 19, 1999, the Company borrowed $250,000 from an unrelated third party.
The related note is unsecured and interest accrues at the rate of 5.0% per
annum. The note and accrued interest are payable on or before July 5, 1999.
On March 15, 1999, the Company entered into a lease agreement for new
facilities. The base monthly rental is $20,010 and is adjusted each year by 4%
over the previous years base rent after adjustment. The term of the lease is
for five years and the Company has the option to extend the lease for an
additional five years.
On March 25, 1999, an officer of the Company loaned the Company $90,000 at an
interest rate of 10%. The principal amount of the note was repaid shortly
thereafter.
On April 22, 1999, the Company entered into a one year agreement with a
consultant to assist the Company in raising equity financing. The advisor is to
receive 5% of the gross amount of the proceeds of any equity financing
consummated by the Company during the term of the agreement.
On May 25, 1999, the Company sold all of the stock of SoftKat, Inc. to an
unrelated third party for $50,000 cash and a note receivable of $100,000 due
180 days after the date of sale. See Note 2.
-65-
<PAGE>
On June 1, 1999, the Company entered into a one year agreement with a
consulting firm whereby the firm is to provide ongoing stock market support for
the Company. The agreement is renewable for successive one year periods. As
consideration for these services, the Company is to pay $48,000 ($4,000
monthly) plus reasonable expenses. For the period of June 1, 1999 through
August 31, 1999, the monthly amount is to be paid in commons shares of the
Company. The first cash payment of $4,000 was due September 1, 1999.
On June 10, 1999, the Company issued 75,000 shares of common stock for
$150,000 in cash. (Unaudited.)
On June 11, 1999, the Company agreed to pay $50,000 in cash and agreed to issue
9,039 shares of common stock as a compromise and settlement of a lawsuit
relating to a legal dispute between Kiss Corporation and a third-party.
(Unaudited.)
Subsequent to December 31, 1998, the Company issued 478,500 shares of common
stock to various individuals for services provided to the Company. The expense
recognized from the issuance of these shares will be $927,175.
(Unaudited.)
Effective August 13, 1999, the Company entered into an Agreement from an
investing source for equity financing in an aggregate amount of $2,500,000,
subject to certain terms and conditions. The financing is in the form of
preferred stock and warrants issued by the Company. The Company issued 262.5
shares of Series J Preferred Stock, with each share convertible into common
stock under certain conditions as described. In addition the Company issued
warrants to purchase 187,500 shares of the Company common stock at a price
equal to 115% of the closing stock price on the date before the closing date.
The Company has agreed to sell, for $125,000 in cash, an additional 12.5 shares
of Series J Preferred Stock and warrants to purchase 9,375 shares of Common
Stock.
The Series J Preferred Stock is convertible into the Company's common stock at
a price equal to the lower of 80% of the average closing bid price on the
lowest six trading days in the consecutive 20 days prior to conversion or the
average closing price for the five trading days before closing, subject to a
$3.50 floor in the conversion price to January 28, 1999.
The Company is obligated, at its expense, to file for the registration of the
common stock issuable upon conversion within 60 days of closing, with an
effective date within 150 days after closing or the investors will be entitled
to a registration payment equal to 2% of the purchase price for the first 30
days the Company is tardy and 3% for every 30 day period thereafter.
-66-
<PAGE>
INTERIM FINANCIAL STATEMENTS
(UNAUDITED)
ESYNCH CORPORATION
TABLE OF CONTENTS
Condensed Consolidated Balance Sheet - September 30, 1999
(Unaudited)
Condensed Consolidated Statements of Operations for the
Nine Months Ended September 30, 1999 and 1998 (Unaudited)
Condensed Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998 (Unaudited)
Notes to Condensed Consolidated Financial Statements
(Unaudited)
-67-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEET
September 30, 1999
(UNAUDITED)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Current Assets
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . $ 734,490
Inventory . . . . . . . . . . . . . . . . . . . . . . . 87,593
Other receivable. . . . . . . . . . . . . . . . . . . . 14,608
Prepaid expenses. . . . . . . . . . . . . . . . . . . . 92,203
-----------
Total Current Assets. . . . . . . . . . . . . . . . . 928,894
-----------
Property and Equipment, net . . . . . . . . . . . . . . . . 668,724
Deposits. . . . . . . . . . . . . . . . . . . . . . . . . . 67,788
Software licenses 144,902
Goodwill. . . . . . . . . . . . . . . . . . . . . . . . . . 4,247,815
-----------
Total Assets. . . . . . . . . . . . . . . . . . . . . $ 6,058,123
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable . . . . . . . . . . . . . . . . . . . . $ 1,589,134
Accrued liabilities. . . . . . . . . . . . . . . . . . . 879,306
Value of Common Stock to be Issued . . . . . . . . . . . 440,625
Notes payable. . . . . . . . . . . . . . . . . . . . . . 380,491
-----------
Total Current Liabilities . . . . . . . . . . . . . . 3,289,556
Notes Payable . . . . . . . . . . . . . . . . . . . . . . . 422,153
Redeemable Preferred Stock - Series I, $0.001 par value;
600,000 shares authorized; 600,000 shares issued
and outstanding; liquidation preference - $600,000. . . . . 600
Redeemable Preferred Stock - Series J, $0.001 par value
275 shares authorized: 262.5 shares and outstanding;
liquidation preference - $2,625,000 263
-----------
Stockholders' Equity
Preferred stock - $0.001 par value; 400,000 shares
authorized; none issued or outstanding. . . . . . . . . -
Common stock - $0.001 par value; 20,000,000 shares
authorized; 9,797,143 shares issued and outstanding . . 9,797
Additional paid-in capital. . . . . . . . . . . . . . . 14,683,713
Note receivable from shareholder . . . . . . . . . . . . (163,047)
Accumulated deficit. . . . . . . . . . . . . . . . . . . (12,184,912)
-----------
Total Stockholders' Equity. . . . . . . . . . . . . . 2,345,551
-----------
Total Liabilities and Stockholders' Equity. . . . . . . . . $ 6,058,123
===========
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
-68-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net Product Sales. . . . . . . . . $ 917,400 $ 15,293
----------- -----------
Costs and Operating Expenses
Costs of products sold . . . . . 459,944 9,940
General and administrative . . . 2,555,008 738,068
Stock Issued for Services. . . . 1,622,164 112,108
Stock Based Compensation . . . . 2,021,347 -
Amortization of Debt
Discount . . . . . . . . . . . 355,567
Amortization of Goodwill . . . . 818,756 -
----------- -----------
Total Costs and Operating
Expenses. . . . . . . . . . . 7,477,219 1,215,683
----------- -----------
Operating Loss . . . . . . . . . . (6,559,819) (1,200,390)
Other Income . . . . . . . . . . . 87,000 13,458
Interest expense . . . . . . . . . (60,839) (5,571)
----------- -----------
Net Loss . . . . . . . . . . $(6,533,658) $(1,192,503)
=========== ===========
Basic and Diluted Loss Per
Common Share . . . . . . . . . . . $ (.78) $ (.26)
=========== ===========
Weighted average number of
common shares used in per
share calculation . . . . . . . . 8,389,358 4,548,202
=========== ===========
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
-69-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
-------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss. . . . . . . . . . . . . . . . . . . . $(6,533,658) $(1,192,503)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization. . . . . . . . 27,765 29,834
Amortization of goodwill . . . . . . . . . . 818,756
Stock issued for services. . . . . . . . . . 1,429,944 112,108
Amortization of Debt Discount. . . . . . . . 355,567
Liability for stock to be issued for
services . . . . . . . . . . . . . . . . 440,625 -
Stock issued for settlement of lawsuit . . . 26,456 -
Stock Based Compensation . . . . . . . . . . 2,021,347 -
Changes in operating assets and liabilities
net of the effects of the acquisitions
Accounts receivable . . . . . . . . . . . . ( 2,353) 54,767
Inventory . . . . . . . . . . . . . . . . . (12,211) -
Prepaid expenses . . . . . . . . . . . . . . (53,881) -
Other assets . . . . . . . . . . . . . . . . (56,611) -
Accounts payable . . . . . . . . . . . . . . ( 9,723) 223,221
Accrued liabilities. . . . . . . . . . . . . (168,766)
----------- -----------
Net Cash Used in Operating Activities . . . . (2,072,310) (417,006)
----------- -----------
Cash Flows From Investing Activities
Proceeds from sale of SoftKat, net. . . . . . . 50,000 -
Acquisition of property and equipment . . . . . ( 69,185) -
Kiss cash acquired. . . . . . . . . . . . . . . 49,233 -
----------- -----------
Net Cash Used in Investing Activities . . . . 30,048 (771)
----------- -----------
Cash Flows From Financing Activities
Stock issued for cash 2,650,000 -
Cash received on notes receivable issued for
common stock . . . . . . . . . . . . . . . . . 322,509 -
Proceeds from borrowing . . . . . . . . . . . . 371,070 428,071
Payments on notes payable . . . . . . . . . . . (568,240) -
----------- -----------
Net Cash Provided by Financing Activities. . 2,775,339 428,071
----------- -----------
Net Increase in Cash . . . . . . . . . . . . . . . 733,077 11,065
Cash at Beginning of Period. . . . . . . . . . . . 1,413 -
----------- -----------
Cash at End of Period. . . . . . . . . . . . . . . $ 734,490 $ 11,065
=========== ===========
</TABLE>
See the accompanying notes to the condensed consolidated financial statements.
-70-
<PAGE>
eSYNCH CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS -- Intermark Corporation("Intermark") was
incorporated under the laws of the State of California in October 1995. On
August 5, 1998, Intermark was reorganized into Innovus Corporation, a
publicly-held shell corporation. By shareholder action, Innovus Corporation, the
parent company, changed its name to eSynch Corporation ("eSynch") on November 9,
1998. On November 17, 1998, eSynch acquired SoftKat Inc. ("SoftKat"). On May 25,
1999, SoftKat was sold to a third-party. See Note 2.
On April 1, 1999, eSynch consummated an acquisition of Kiss Software Corporation
("Kiss")whereby under the terms of an Agreement and Plan of Merger Kiss became a
wholly owned subsidiary of eSynch. Kiss was incorporated under the laws of
California on February 14, 1997. The primary activities of Kiss have consisted
of distributing computer utility software principally through wholesale
distribution channels.
On September 30, 1999, eSynch consummated an acquisition of Oxford Media Corp.
("Oxford") whereby under the terms of an Agreement and Plan of Merger, Oxford
became a wholly owned subsid1ary of eSynch. Oxford was incorporated in January,
1999 and is a developer of digital technologies for video-on-demand and DVD
Conversion.
The primary activities of eSynch, the consolidated company, have consisted of
raising capital, and acquiring Companies in the Internet, Software and related
areas.
PRINCIPLES OF CONSOLIDATION -- The accompanying consolidated financial
statements include the accounts of Intermark and eSynch for all periods
presented, and the accounts of SoftKat, Inc. to May 25, 1999, the accounts of
Kiss since April 1, 1999 and Oxford Media Corp. since September 30, 1999. These
entities are collectively referred to as "eSynch" or the "Company". All
inter-company transactions and balances have been eliminated in consolidation.
USE OF ESTIMATES -- The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumption that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
INTERIM UNAUDITED FINANCIAL INFORMATION -- The accompanying condensed financial
statements have been prepared by the Company and are not audited. In the opinion
of management, all adjustments necessary for a fair presentation have been
included and consist only of normal recurring adjustments except as disclosed
herein. The financial position and results of operations presented in the
accompanying financial statements are not necessarily indicative of the results
to be generated for the remainder of 1999.
-71-
<PAGE>
These financial statements have been condensed pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information
and disclosures normally included in financial statements have been condensed
or omitted. These financial statements should be read in connection with
annual financial statements included in the Company's Form 10-KSB dated
December 31, 1998.
BUSINESS CONDITION -- The financial statements have been prepared on the basis
of the Company continuing as a going concern. The Company has incurred losses
from operations and negative tangible net worth of $1,902,264. These conditions
raise substantial doubt regarding the Company's ability to continue as a going
concern. Management's plan to mitigate the impact of these conditions is to
obtain additional equity financing through the issuance of the Company's common
stock, convertible preferred stock or warrants.
The Company is also currently in negotiations for additional financing
arrangements. However, realization of the proceeds from these potential
transactions is not assured. These financial statements do not include any
adjustments relating to the recoverability and classification of recorded assets
or amounts and classifications of liabilities that might be necessary should the
Company be unable to continue as a going concern.
CONCENTRATION OF RISK AND MAJOR CUSTOMERS -- The Company operates exclusively in
the software industry, accordingly, segment information relating to operations
in different industries is not presented in these financial statements. The
concentration of business in the highly competitive software industry subjects
the Company to concentrated market risk. Sales to any major customer during the
quarters and nine months September 30, 1999 and 1998 were not significant.
FAIR VALUES OF FINANCIAL INSTRUMENTS -- The amounts reported as cash, accounts
payable, notes payable, and liabilities relating to assets to be sold are
considered to reasonable approximations of their fair values. The fair value
estimates were based on market information available to management at the time
of the preparation of the financial statements.
LOSS PER SHARE -- The Company computes basic and diluted loss per share in
accordance with Statement of Financial Accounting Standards No. 128, ("SFAS
128"), Earnings Per Share. Basic loss per common share is computed by dividing
net loss available to common stockholders by the weighted-average number of
common shares outstanding during the period. Diluted loss per share is
calculated to give effect to stock warrants, options and convertible notes
payable except during loss periods when those potentially issuable common shares
would decrease the loss per share. 3,560,026 and 151,133 potentially issuable
common shares outstanding at September 30, 1999 and 1998 were excluded from the
calculation of diluted loss per share for the quarters ended September 30, 1999
and 1998, as they would have decreased the loss per share, respectively.
-72-
<PAGE>
REVENUE RECOGNITION -- The Company sells software products at fixed prices for
which the right to return is granted to the buyer. Accordingly, revenue is
recognized when the buyer has paid for the products and the amount of future
returns can be reasonably estimated. Cost of products sold is recognized at the
date the sale is recognized less an estimate for sales returns. Until the sale
is recognized, products purchased from publishers are accounted for as consigned
product from publishers and the related cost is not reflected in the financial
statements with the exception of a limited amount of software inventory owned by
the Company at period-end.
NOTE 2--ACQUISITIONS
SOFTKAT -- On November 17, 1998, the Company acquired SoftKat, Inc,. a
California corporation primarily engaged in the wholesale distribution of
computer software games. In exchange for the SoftKat common shares, the Company
issued 720,000 common shares and 600,000 shares of Series I redeemable,
convertible preferred shares. Up to an additional 720,000 common shares are
contingently issuable based upon the difference between the market price of the
common stock one year from the date of acquisition and a target market price. In
November, 1999 the target market price was achieved and the share were no longer
issuable. The acquisition was accounted for using the purchase method of
accounting. The acquisition purchase price, based upon the fair value of the
common and preferred stock issued and the additional contingently issuable
common shares, was $2,670,000. The excess of the purchase price over the
estimated fair value of the identifiable acquired assets less liabilities
assumed was $6,882,300, which was recognized as goodwill. The results of
operations of SoftKat have been included in the June 30, 1999 (through May 25,
1999 date of sale) condensed consolidated financial statements.
In February 1999, Management of the Company decided to dispose of SoftKat
because it did not meet the core business objectives of the Company. On May 25,
1999, SoftKat was sold to a third party for $50,000 cash and a note receivable
for $100,000 which resulted in the recognition of an impairment loss of
$2,323,841. The subsequent sale and resulting loss provided evidence of
conditions that existed at December 31, 1998; therefore, an impairment loss was
recognized in 1998 in accordance with SFAS No. 121, Accounting for Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. The impairment
loss was determined by the excess of the carrying amount of the assets in excess
of the $50,000 subsequently collected and the amount of the related liabilities.
The $100,000 note receivable was not considered in the computation of the
impairment loss or the resulting carrying value of the assets to be sold, but
will be recognized when collected. The resulting amount of the assets to be sold
and the related liabilities assumed by the buyer have been presented separately
in the accompanying balance sheet.
-73-
<PAGE>
Effective April 1, 1999, the Company completed the acquisition of Kiss Software
Corporation, California corporation engaged in the wholesale and retail
distribution of computer and Internet utility software products. Under the
agreement, shareholders of Kiss agreed to exchange each of their common shares
for.181557136 common shares of eSynch and each of their preferred shares for
.4183964 common shares of eSynch. The exchange resulted in the Company issuing
1,428,134 common shares to Kiss shareholders. The Company also issued 163,187
options in conjunction with the purchase. These options are exercisable at $2.05
per share. During the second quarter 1999, the acquisition was accounted for
using the purchase method of accounting. The acquisition purchase price, based
upon the fair value of the common stock and options issued, has been estimated
at $3,965,570. The excess of the purchase price over the estimated fair value of
the identifiable acquired assets less liabilities assumed was $5,061,571
(unaudited), which was recognized as goodwill. Goodwill is being amortized over
approximately 3 years on a straight-line basis.
Effective September 30, 1999, the Company completed the acquisition of Oxford
Media Corp., ("Oxford") engaged in DVD video encoding, compression and
authoring. Under the Agreement the shareholders of Oxford exchanged all the
outstanding shares of
-74-
<PAGE>
Oxford Common Stock for 450,000 shares of the Company's Common Stock. During the
third quarter, the acquisition was accounted for using the purchase method of
accounting and the purchase price of the acquired assets was computed to be
$720,000 which was attributed to the assets acquired including software licenses
in the amount of $144,902. Oxford received a non-exclusive license from Oxford
Management Corporation, a Nevada corporation, which is a license of proprietary
software and source code -on-demand hotel pay-for-view system. The value of the
licenses is being amortized over three years.
In addition, the Company entered into another license agreement with Oxford
Management. In this license agreement, the Company granted Oxford Management a
license to sell advertising and promotional offers that will be displayed by
means of operation of certain software products of the Company or its
subsidiaries.
NOTE 3--PREPAID EXPENSES
In June 1999, the Company prepaid consulting services by issuing 54,000 common
shares of stock to third-party consultants. The prepaid services recognized from
the issuance of these shares was $111,380. As of September 30, 1999, $57,751 of
the prepaid services had been performed by the consultants and therefore, were
expensed by the Company.
NOTE 4--NOTES PAYABLE
In August 1999, the Company repaid $250,000 borrowed from a third-party. Notes
Payable long-term include a note to an Officer-Shareholder in the amount of
$195,270.
NOTE 5--STOCK BASED COMPENSATION
The Company issued stock options for 885,000 shares of Common stock to Officers
and Employees in connection with Employment Agreements signed on April 1,
1999.The options allowed for the exercise of options over various periods at a
price of $1.00 per share. In addition, on April 1, 1999, an officer of the
Company was granted warrants to purchase 400,000 shares of common stock at $0.05
per share. In September, 1999 the Company modified the previously granted
warrants to 450,000 shares at $0.50 per share and granted new stock options
under Employment Agreements of 390,000 shares at a price of $1.00 per share and
granted an officer warrants to purchase 250,000 shares at $1.00 per share. The
charge under stock based compensation was $204,000 and $2,021,347 for the three
months and nine months ended September 30, 1999.
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<PAGE>
NOTE 6--STOCKHOLDERS' EQUITY
On July 16, 1999 the Company issued 2,000 shares of common stock for interest of
$6,000.
During the three months ended September 30, 1999, the Company issued 105,000 and
shares of common stock for services. The value of the services was determined
based upon the trading price of the Company's common stock on the date of
issuance. The services were valued at $308,238 and were expensed in the three
month period ended September 30, 1999.
The Series I redeemable preferred stock has a liquidation preference of $1.00.
The Company is required to redeem 200,000 shares of the preferred stock at $1.00
per share upon obtaining financing of $1,500,000 or more
from any source and must redeem an additional 200,000 shares of preferred stock
upon obtaining an additional $3,000,000 in funding. Dividends on the preferred
stock are payable prior and in preference to any declaration or payment of any
dividends on the common stock, when, as, and if declared by the Board of
Directors. However, there is no stated dividend rate. The preferred stock is
convertible, at the option of the holder, into common stock at the lesser of
$3.00 per share. The preferred stock has voting rights equivalent to the number
of common shares into which it can be converted and has additional voting rights
with respect to approval of any issuance of a senior series of preferred shares.
Effective August 13, 1999, the Company entered into an Agreement from an
investing source for equity financing in an aggregate amount of $2,625,000,
subject to certain terms and conditions. The financing is in the form of
preferred stock and warrants issued by the Company. The Company will have issued
275 shares of Series J Preferred Stock aggregately, with each share convertible
into common stock under certain conditions as described. In addition the Company
issued warrants to purchase 187,500 shares of the Company common stock at a
price equal to 115% of the closing stock price on the date before the closing
date. The Series J Preferred Stock is convertible into the Company's common
stock at a price equal to the lower of 80% of the average closing stock price
the lowest six trading days in the consecutive 20 days prior to conversion
subject to a floor in the conversion price. The Company had received $2,500,000
of the total amount as of September 30, 1999. The shares are redeemable by the
Company for cash upon 30 days prior written notice for a price of 120% of the
original issue price plus accrued dividends. Dividends accrue at the rate of 7%
of from the original issue date, but are payable only upon conversion or
redemption.
The Company is obligated, at its expense, to file for the registration of the
common stock issuable upon conversion within 60 days of September 30, 1999,
with an effective date within 150 days after September 30, 1999 or the
investors will be entitled to a registration payment equal to 2% of the
purchase price for the first 30 days the Company is tardy and 3% for every 30
day period thereafter.
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<PAGE>
NOTE 7--COMMITMENTS AND CONTINGENCIES
Litigation:
The Company has been name as an additional defendant in claims against SoftKat
under the theory of successor liability. Whereas the Company has been successful
in obtaining dismissals of several such suits, there is no certainty that the
Company will successfully defend the suits in the future. No provisions have
been made for possible loss from these claims.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On June 1, 1998, the Company's Board of Directors elected to retain Hansen
Barnett & Maxwell, a professional corporation as its independent auditor and to
dismiss Grant Thornton LLP ("Grant"). Theretofore Grant had acted as the
Company's independent auditor for each of the two years in the period ended
December 31, 1996. The decision to change auditors was recommended by the
Company's Board of Directors.
The reports of Grant on the financial statements of the Company for each of the
two fiscal years in the period ended December 31, 1996, did not contain any
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles. The reports state that the
financial statements were prepared on the basis of the Company continuing as a
going concern, but that there was substantial doubt about the Company's ability
to continue as a going concern. Grant had not issued an audit report for the
year ended December 31, 1997.
During the Company's two most recent fiscal years and all subsequent interim
periods preceding such change in auditors, there was no disagreement with Grant
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which, if not resolved to the
satisfaction of the former accountant, would have caused it to make a reference
to the subject matter of the disagreements in connection with its report; nor
has Grant ever presented a written report, or otherwise communicated in writing
to the Company or its Board of Directors the existence of any "disagreement" or
"reportable event" within the meaning of Item 304 of Regulation S-K.
Hansen Barnett & Maxwell had previously audited the Company's financial
statements for the three years ended December 31, 1994.
-77-
<PAGE>
up to 1,965,174 SHARES
ESYNCH CORPORATION
COMMON STOCK,
PAR VALUE $.001 EACH
PROSPECTUS
NOVEMBER 29, 1999
PROSPECTUS DELIVERY OBLIGATIONS
Until ________, _____, all dealers that effect transactions in these
securities, whether or not participating in this offering, may be required to
deliver a prospectus. This is in addition to the dealers' obligation to
deliver a prospectus when acting as underwriters and with respect to their
unsold allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The information set forth under the heading "DISCLOSURE OF COMMISSION
POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES" is incorporated
herein by this reference.
Item 25. Other Expenses of Issuance and Distribution
The following sets forth the costs and expenses, all of which shall be borne by
eSynch, in connection with the offering pursuant to this registration statement:
SEC registration fees $ 1,912.12*
Legal fees and expenses 125,000.00*
Accounting fees and expenses 10,000.00*
Blue sky filing fees 10,000.00*
Miscellaneous 3,088.88*
-----------
TOTAL $ 150,000.00*
- --------------
* Estimated.
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities
During the fourth quarter of 1997, the Company issued the following shares
without registration under the Securities Act of 1933:
The Company issued approximately 184,069 common shares on conversion of
previously outstanding Series C Preferred Stock. The shares were issued to a
single accredited investor in exchange for outstanding securities of the
Company. The Company believes such issuance was exempt pursuant to Sections
3(a)(9), 4(2) and 4(6) of the Securities Act of 1933.
During the third quarter of 1998, the Company issued Series H Preferred Stock
and Common Stock to the shareholders of Intermark in exchange for their shares.
Subsequently, the Series H Preferred Stock was automatically converted to Common
Stock, concurrent with the Company's one-for-ten reverse stock split.
During the fourth quarter of 1998, the Company issued the following shares
without registration under the Securities Act of 1933:
The Company issued approximately 600,000 shares of Series I Preferred Stock and
720,000 shares of Common Stock. The Series I Preferred shares were issued in
exchange for the notes payable by SoftKat, Inc. The shares of Common Stock were
issued in exchange for common stock of SoftKat, Inc.
The Company issued shares of Common Stock in exchange for securities of Kiss
Software Corporation.
The Company also issued 335,000 additional shares for reduction of a note and
services.
Subsequent to December 31, 1998, the Company issued 310,377 shares of stock for
cash and notes in the amount of $715,000 and issued 478,500
shares of stock for services in the amount $927,175 and the Company issued
shares of Series J Preferred Stock and accompanying warrants to the selling
security holders.
The Company believes such issuances were exempt pursuant to Regulation D,
Section 4(2) and/or 4(6) of the Securities Act of 1933.
II-2
<PAGE>
Item 27. Exhibits
(c) Exhibits
Exhibit No. Description
2.1(1) Agreement and Plan of Share Exchange dated as of
May 8, 1998 among the Company; Intermark
Corporation, a California corporation; and the
Exchanging Security holders of Intermark Corporation
Omitted are the following schedules or attachments
to the agreement identified immediately above:
(A) Form of Certificate of Designation of
Series H Convertible Preferred Stock;
(B) Intermark Corporation Financial Statements
(Unaudited) for its 1997 Fiscal Year;
(C) Confidentiality Agreement dated March 1998
between the Registrant and Intermark
Corporation;
(D) Disclosure Schedule of Intermark Corporation;
(E) Disclosure Schedule of the Registrant.
2.2(2) First Amendment, dated as of June 17, 1998, of
Agreement and Plan of Share Exchange dated as of
May 8, 1998 among the Company; Intermark
Corporation, a California corporation; and the
Exchanging Security holders of Intermark Corporation
2.3(2) Second Amendment, dated as of July 30, 1998, of
Agreement and Plan of Share Exchange dated as of
May 8, 1998 among the Company; Intermark
Corporation, a California corporation; and the
Exchanging Security holders of Intermark Corporation
2.4(9) Agreement and Plan of Merger dated as of
February 26, 1999 among the Company; SoftKat, Inc.,
a California corporation ("SoftKat"); certain
stockholders, of SoftKat, and INUS-Softkat Acquisition
Corporation, a wholly-owned subsidiary of the
Company. Omitted are the following schedules
or ancillary documents to the agreement identified
immediately above:
(A) Disclosure Schedule of SoftKat;
(B) Disclosure Schedule of the Company.
II-3
<PAGE>
2.5(4) Agreement and Plan of Merger dated as of
February 26, 1999 among the Company; Kiss
Software Corporation, a California corporation
("Kissco"); certain stakeholders,
of Kissco; and ESYN Kissco Acquisition
Corporation, a wholly-owned subsidiary of the
Registrant. Omitted are the following schedules
or ancillary documents to the agreement identified
immediately above:
(A) Escrow Agreement;
(B) Disclosure Schedule of Kissco;
(C) Disclosure Schedule of the Registrant.
2.6(11) Agreement and Plan of Reorganization dated as of
September 30, 1999 among the Registrant, OMC
Acquisition Corp., a Delaware corporation, Oxford
Media Corp., a Delaware corporation ("OMC") and
Norton Garfinkle, individually and as trustee of
each of The Gillian Garfinkle S Corporation Trust
and The Nicholas Garfinkle S Corporation Trust.
Omitted from this Form 8-K filing are the following
schedules or ancillary documents to the agreement
identified immediately above: List of Assets of OMC
2.7(11) Non-Exclusive License Agreement between Oxford
Management Corporation, a Nevada corporation,
and Oxford Media Corporation.
2.8 Registration Rights Agreement dated September 30,
1999 between the Registrant and Norton Garfinkle,
individually and as trustee of each of The Gillian
Garfinkle S Corporation Trust and The Nicholas
Garfinkle S Corporation Trust
3.1 Restated Certificate of Incorporation of the Company
3.2(8) Bylaws of the Company
4.1(6) January 1999 Stock Plan, including 310,000
shares of Esynch Common Stock granted and
issued to individual consultants named on the
attached Corporate Resolutions**
4.2(6) Corporate Resolutions relating to January, 1999 Stock Plan**
4.11(7) Certificate of Designation - Series I Preferred Stock
4.19.1 Certificate of Designation - Series J Preferred Stock
4.19.2 First Amendment of Certificate of Designation - Series J
Preferred Stock
4.19.3 Second Amendment of Certificate of Designation - Series J
Preferred Stock
II-4
<PAGE>
5.0* Opinion of counsel to the Company
10.4(7) Registration Rights Agreement dated August 4, 1998 among the
Company and those holders of the Company's stock listed in
Exhibit A thereto
10.5(7) Form of Stock Option Agreement dated April 24, 1998
between Intermark Corporation and each of Thomas
Hemingway, T. Richard Hutt and James Budd**
10.6(2) Instrument of Option Assumption dated August 4,
1998 between the Company and each of the optionees
named in Exhibit 10.5, among others, resulting in
the Company's assumption of options as follows:
Thomas Hemingway 331,541 shares of common stock at $.83 each
T. Richard Hutt 132,616 shares of common stock at $.83 each
James Budd 132,616 shares of common stock at $.83 each**
10.7.1(10) Employment Agreement dated as of March 1, 1999 between the
Company and Thomas Hemingway.**
10.7.2(11) Employment Agreement dated as of March 1, 1999 between the
Company and Donald C. Watters, Jr.;
Employment Agreement dated as of April 1, 1999 between the
Company and James H. Budd;
Employment Agreement dated as of April 1, 1999 between the
Company and T. Richard Hutt;
Employment Agreement dated as of April 1, 1999 between the
Company and Robert Way; and
Employment Agreement dated as of September 8, 1999 between the
Company and David Noyes.**
10.8* 1999 Stock Incentive Plan.**
10.9* Form of Indemnification Agreement entered into with certain
officers and directors of the Company.**
10.10* Lease agreement for the Company's headquarters
10.11.1* Series J Convertible Preferred Stock Purchase Agreement
dated as of July 22, 1999
10.11.2* Amendment dated as of October 29, 1999 to the Series J
Convertible Stock Purchase Agreement
10.12* Registration Rights Agreement dated as of July 22, 1999
10.13* Form of Warrant issued in the placement of Series J
Preferred Stock
23.2* Consent of the Company's legal counsel.
23.1* Consent of accountants.
II-5
<PAGE>
25.0 Power of Attorney (included on the signature page).
99(9) Press Release on sale of SoftKat, Inc.
--------------
* To be filed by amendment.
** Indicates management compensation arrangements.
(1) Incorporated by reference to the like-numbered exhibit to the
Company's Form 8-K filed May 12, 1998.
(2) Incorporated by reference to the like-numbered exhibit to the
Company's Form 8-K filed August 20, 1998.
(4) Incorporated by reference to the like-numbered exhibit to the
Company's Form 8-K filed April 19, 1999.
(5) Incorporated by reference to Exhibit A to the Company's Schedule 14A
filed October 7, 1998.
(6) Incorporated by reference to the like-numbered exhibit to the
Company's Form S-8 filed February 1, 1999.
(7) Incorporated by reference to the like-numbered exhibit to the
Company's Form 10-QSB filed November 25, 1998.
(8) Incorporated by reference to the like-numbered exhibit to the
Company's Registration Statement (Registration No. 33-33136-D).
(9) Incorporated by reference to the like-numbered exhibit to the
Company's Form 10-KSB filed June 25, 1999.
(10) Incorporated by reference to the like-numbered exhibit to the Company's
Form 10-QSB filed August 19, 1999.
(11) Incorporated by reference to the like-numbered exhibit to the Company's
Form 8-K filed October 15, 1999.
(12) Incorporated by reference to the like-numbered exhibit to the Company's
Form 10-QSB filed November 15, 1999.
II-6
<PAGE>
Item 28. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement.
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities
Act, treat each post-effective amendment as a new
registration statement of the securities offered, and the offering of the
securities at that time to be deemed the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(e) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(f) (1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4) or
497(h) under the Securities Act (sections 230.424(b)(1), (4) or 230.497(h)) as
part of this registration statement as of the time the Commission declared it
effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration
statement, and that offering of securities at that time as the initial bona
fide offering of those securities.
II-7
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Tustin,
State of California, on November 23, 1999.
ESYNCH CORPORATION
By: THOMAS C. HEMINGWAY
--------------------------------------------
Thomas C. Hemingway, Chief Executive Officer
Power of Attorney
We, the undersigned directors and officers of eSynch Corporation do hereby
constitute and appoint Thomas C. Hemingway and T. Richard Hutt, or any one of
them, as our true and lawful attorneys and agents, to do any and all acts and
things in our name and behalf in our capacities as directors and officers and to
execute any and all instruments for us and in our names in the capacities
indicated below, which said attorneys and agents, or either of them, may deem
necessary or advisable to enable said corporation to comply with the Securities
Act, as amended, and any rules, regulations and requirements of the SEC in
connection with this Registration Statement, including specifically, but without
limitation, power and authority to sign for us or any of us in our names and in
the capacities indicated below, any and all amendments (including post-effective
amendments) hereto or any related registration statement that is to be effective
upon filing pursuant to Rule 462(b) under the Securities Act, as amended; and we
do hereby ratify and confirm all that the said attorneys and agents, or either
of them, shall do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
Signature Title Date
- --------- ----- ----
/s/ THOMAS C. HEMINGWAY Chairman, Chief Executive November 23, 1999
- ------------------------ Officer and Director
Thomas C. Hemingway
/s/ T. RICHARD HUTT Secretary, Vice President November 29, 1999
- ------------------------ and Director
T. Richard Hutt
/s/ DAVID NOYES Chief Financial Officer November 23, 1999
- ------------------------ (Chief Financial and
David Noyes Accounting Officer)
/s/ DONALD WATTERS, JR. President and Director November 23, 1999
- ------------------------
Donald Watters, Jr.
/s/ JAMES H. BUDD Vice President and Director November 23, 1999
- ------------------------
James H. Budd
/s/ NORTON GARFINKLE Director November 23, 1999
- ------------------------
Norton Garfinkle
II-8
<PAGE>
EXHIBIT 2.8
EXHIBIT B
REGISTRATION RIGHTS AGREEMENT
Registration Rights Agreement dated as of September 24, 1999, between
eSynch Corporation, a Delaware corporation (hereinafter referred to as the
"Corporation"), and Norton Garfinkle, individually and as trustee of each of The
Gillian Garfinkle S Corporation Trust and The Nicholas Garfinkle S Corporation
Trust (hereinafter referred to, collectively, as the "Stockholders").
W I T N E S S E T H :
- - - - - - - - - -
WHEREAS, the Corporation and the Stockholders, INTER ALIA, are parties
to an Agreement and Plan of Reorganization dated the date hereof (hereinafter
referred to as the "Merger Agreement") providing for, among other matters, the
acquisition by the Corporation of Oxford Media Corporation in exchange for an
aggregate of 450,000 shares (hereinafter referred to as the "Shares") of the
common stock, $.001 par value (as the same may be constituted from time to time
hereinafter referred to as the "Common Stock"), of the Corporation; and
WHEREAS, it is a condition of the Merger Agreement that the Corporation
execute and deliver this Agreement to the Stockholders;
NOW, THEREFORE, in consideration of the premises and the covenants and
agreements herein contained the parties hereto hereby agree as follows:
ARTICLE I
DEFINITIONS
As used in this Agreement, the following additional terms shall have
the following respective meanings:
The term "DEMAND REGISTRATION" shall have the meaning set forth in
Paragraph A of Article III hereof.
The term "EXCHANGE ACT" shall mean the Securities Exchange Act of 1934,
as amended from time to time.
The term "INCIDENTAL REGISTRATION" shall have the meaning set forth in
Paragraph B of Article IV.
The term "A MAJORITY OF THE REGISTRABLE SECURITIES" shall mean more
than 50% of the number of shares of the Registrable Securities, and shall apply
MUTATIS MUTANDI whenever a percentage of Registrable Securities greater than a
majority is required in this Agreement.
The term "PERSON" shall mean an individual, partnership, corporation,
trust or unincorporated organization, or a government or agency or political
subdivision thereof.
<PAGE>
The term "PROSPECTUS" shall mean the prospectus included in any
Registration Statement, as amended or supplemented by, any prospectus
supplement with respect to the terms of the offering of any portion of the
Registrable Securities covered by the Registration Statement and all other
amendments and supplements to the Prospectus, including post-effective
amendments and all material incorporated by reference in such Prospectus.
The term "REGISTRATION EXPENSES" shall have the meaning set forth in
Article VII.
The term "REGISTRABLE SECURITIES" shall mean (i) the Shares, and
(ii) any securities issued or issuable with respect to the Common Stock
referred to in clause (i) immediately preceding by way of a stock dividend or
stock split or in connection with a combination of shares, recapitalization,
merger, consolidation or other reorganization; provided, however, that a
security ceases to be a Registrable Security when it is no longer a
Restricted Security.
The term "REGISTRATION STATEMENT" shall mean any registration
statement of the Corporation which covers Registrable Securities pursuant to
the provisions of this Agreement, including the Prospectus, amendments
(including post-effective amendments) and supplements to such Registration
Statement, all exhibits and all material incorporated by reference in such
Registration Statement.
The term "RESTRICTED SECURITIES" shall mean any security unless or
until: (i) it has been effectively registered under the Securities Act and
disposed of in accordance with the Registration Statement covering it; (ii)
it is distributed to the public pursuant to Rule 144 (or any similar
provisions then in force) under the Securities Act; or (iii) it has otherwise
been transferred and a new certificate or other evidence of ownership for it
not bearing a restrictive legend pursuant to the Securities Act and not
subject to any stop transfer order has been delivered by or on behalf of the
Corporation and no other restriction on transfer exists.
The term "SECURITIES ACT" shall mean the Securities Act of 1933, as
amended from time to time.
The term "SELLING EXPENSES" shall have the meaning set forth in
Article VII.
The term "SEC" shall mean the Securities and Exchange Commission.
The term "UNDERWRITTEN REGISTRATION" or "UNDERWRITTEN OFFERING"
shall mean a registration in which securities of the Corporation are sold
pursuant to a firm commitment underwriting to an underwriter at a fixed price
for reoffering or pursuant to agency or best efforts arrangements with an
underwriter.
ARTICLE II
SECURITIES SUBJECT TO THIS AGREEMENT
A. REGISTRABLE SECURITIES. The securities entitled to the benefits of
this Agreement are the Registrable Securities.
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<PAGE>
B. HOLDERS OF REGISTRABLE SECURITIES. A Person is deemed to be a
holder of Registrable Securities whenever such Person owns Registrable
Securities or has the right to acquire such Registrable Securities, whether
or not such acquisition has actually been effected, and whether or not such
Registrable Securities or such rights are in the name of a nominee or
custodian, and disregarding any legal restrictions upon the exercise of such
right.
ARTICLE III
DEMAND REGISTRATION
The following registration rights shall exist until terminated
pursuant to Paragraph B of Article XI hereof:
A. REQUESTS FOR REGISTRATION. Subject to the provisions of Paragraph
B of this Article III hereof, any holder or holders of at least 225,000 of
the Registrable Securities may, subsequent to six months after the date
hereof, make a written request for a registration with the SEC under and in
accordance with the provisions of the Securities Act of all or part of his
Registrable Securities (herein referred to as a "Demand Registration").
Within ten days after receipt of such request, the Corporation shall give
written notice of such registration request to all holders of Registrable
Securities and shall include in any such registration all Registrable
Securities with respect to which the Corporation shall have received written
requests for inclusion therein within 15 business days after the receipt by
the applicable holder of the Corporation's notice. All requests made pursuant
to this Paragraph A shall specify the number of Registrable Securities to be
registered and shall also specify the intended methods of disposition
thereof; provided, however, that if the holders of a majority of the
Registrable Securities requested to be included in such registration request
an underwritten offering, the method of disposition shall be such an offering.
B. RESTRICTIONS ON REGISTRATIONS. The holders of Registrable
Securities shall be entitled to two Demand Registrations; provided, however,
in all cases that either such obligation shall be deemed satisfied only when
a Registration Statement or Registration Statements covering all Restricted
Securities specified in a request for a Demand Registration received as
aforesaid, for sale in accordance with the method of disposition specified in
such request, shall have become effective and, if such method of disposition
is a firm commitment underwritten public offering, all such shares have been
sold pursuant thereto. The Corporation shall not be obligated to proceed with
any Demand Registration if the Corporation shall deliver to the holders of
Registrable Securities demanding a registration an opinion reasonably
satisfactory in form and substance to such holders, of counsel, reasonably
satisfactory to such holders, that the registration of such Registrable
Shares is not necessary to permit such sale in the manner set forth in such
holders' request. In addition, the Corporation shall not be obligated to
proceed with any Demand Registration during any period during which the
Corporation would be required to undertake an audit in order to have
available for inclusion in the registration statement current financial
statements as required in accordance with the Securities Act, unless the
holders of Registrable Securities demanding a registration undertake to bear
the reasonable costs of such audit. In each case in which the Corporation is
not required to take any action, such holders shall be deemed not to have
given the request giving rise thereto, and shall be free to deliver a new
notice requesting the registration of Registrable Securities.
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C. EXPENSES. The Corporation shall pay all Registration Expenses
related to such registration, whether or not the Registration Statement with
respect to such registration has become effective, and all other expenses
incurred by the Corporation in complying with this Article III. All Selling
Expenses related to such registration shall be borne by the participating
sellers (including the Corporation, if a seller), in proportion to the number
of shares sold by each, or by such sellers as they may agree.
D. INCIDENTAL RIGHTS TO DEMAND REGISTRATIONS
(i) CONDITIONS. Neither the Corporation nor any of its
securityholders (other than the holders of Registrable
Securities) shall have the right to include any of the
Corporation's securities in any registration initiated as a
Demand Registration unless:
(a) such securities are of the same class as the Registrable
Securities included in such registration;
(b) if any of the Registrable Securities covered by such
registration are sold in an underwritten offering, the
Corporation or such securityholders, as applicable, agree in
writing to sell their securities on the same terms and
conditions as apply to the Registrable Securities being
sold; and
(c) if any of the Registrable Securities covered by such
registration are to be sold in an underwritten offering, the
managing underwriters shall not have advised the Corporation
or the holders of Registrable Securities demanding a
registration that, in their opinion, the total number of
dollar amount of the securities requested to be included in
such registration by the Corporation and/or such other
securityholders, together with the Registrable Securities
demanded to be registered hereunder, exceeds the number of
securities which can be sold in such offering.
(ii) If the Corporation registers any of its securities on its own behalf
in a registration initiated as a Demand Registration (in accordance
with the provisions of this Paragraph D), such Demand Registration
shall not count for the purpose of determining the number of Demand
Registrations to which the holders of Registrable Securities are
entitled under Paragraph B of this Article III and the Corporation
shall pay the Registration Expenses of such registration.
(iii) If any securityholders of the Corporation (other than the holders of
Registrable Securities in such capacity) register securities of the
Corporation in a Demand Registration (in accordance with the
provisions of this Paragraph D), such holders shall pay the fees and
expenses of counsel to such holders and the incremental amount of
Registration Expenses incurred as a result of their participation
unless the Corporation has agreed to pay such expenses and, in the
opinion of counsel to the Corporation, such payment shall not affect
the ability of the Registrable Shares to be qualified under the blue
sky laws of any jurisdiction.
E. SELECTION OF UNDERWRITERS. If any of the Registrable Securities
covered by a Demand Registration are to be sold in an underwritten offering, the
investment banker or investment bankers and manager or managers that will
administer the offering shall be selected by the holders of a
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<PAGE>
majority of the Registrable Securities included in such offering; provided,
however, that such investment bankers and managers must be reasonably
satisfactory to the Corporation.
ARTICLE IV
INCIDENTAL REGISTRATIONS
A. NOT A DEMAND. A registration of Registrable Securities pursuant
to this Article IV shall not be counted as a Demand Registration under
Article III hereof.
B. NOTICE AND REQUEST FOR INCIDENTAL REGISTRATION. Whenever, after
January 1, 2000, the Corporation proposes to register any of its securities
under the Securities Act, other than pursuant to a Demand Registration or a
registration on Forms S-4 or S-8 or comparable forms (hereinafter referred to
as an "Incidental Registration"), the Corporation shall give written notice
to all holders of Registrable Securities of its intention to effect such a
registration not later than the earlier to occur of (i) the tenth day
following receipt by the Corporation of notice of exercise of other demand
registration rights or (ii) 45 days prior to the anticipated filing date.
Subject to the provisions of Paragraphs D and E of this Article IV, the
Corporation shall include in such Incidental Registration all Registrable
Securities with respect to which the Corporation has received written
requests for inclusion therein within 15 business days after the receipt by
the applicable holder of the Corporation's notice. The holders of Registrable
Securities shall be permitted to withdraw all or any part of the Registrable
Securities from an Incidental Registration at any time prior to the effective
date of such Incidental Registration. If an Incidental Registration is an
underwritten offering effected:
(i) under Paragraph D of this Article IV hereof, all Persons whose
securities are included in the Incidental Registration shall be
obligated to sell their securities on the same terms and conditions as
apply to the securities being issued and sold by the Corporation; or
(ii) under Paragraph E of this Article IV hereof, all Persons whose
securities are included in the Incidental Registration shall be
obligated to sell their securities on the same terms and conditions as
apply to the securities being sold by the Person or Persons who
initiated the Incidental Registration under said paragraph.
C. INCIDENTAL REGISTRATION EXPENSES. The Corporation shall pay all
Registration Expenses related to such registration, or incurred as a result
of the participation in an Incidental Registration of the holders of
Registrable Securities, whether or not the Registration Statement with
respect to such registration has become effective, and all other expenses
incurred by the Corporation in complying with this Article IV. All Selling
Expenses related to such registration shall be borne by the participating
sellers (including the Corporation, if a seller), in proportion to the number
of shares sold by each, or by such sellers as they may agree.
D. PRIORITY ON UNDERWRITTEN PRIMARY REGISTRATION. If an Incidental
Registration is an underwritten primary registration on behalf of the
Corporation, and the managing underwriters advise the Corporation in writing
that in their opinion the total number or dollar amount of securities
requested to be included in such registration exceeds the number or dollar
amount of securities which can be sold in such offering, the Corporation
shall include in such registration:
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<PAGE>
(i) first, all securities the Corporation proposes to sell; and
(ii) second, the Registrable Securities and such other securities
(provided such securities are of the same class as the securities being
sold by the Corporation) requested to be included in such registration
in excess of the number of securities the Corporation proposes to sell
which, in the opinion of such underwriters, can be sold (allocated pro
rata among the holders of such Registrable Securities and other
securities on the basis of the number of securities requested to be
included therein by each such holder).
E. PRIORITY ON UNDERWRITTEN SECONDARY REGISTRATION. If an Incidental
Registration is an underwritten secondary registration on behalf of holders of
the Corporation's securities, and the managing underwriters advise the
Corporation in writing that in their opinion the number of securities requested
to be included in such registration exceeds the number of securities which can
be sold in such offering, the Corporation shall include in such registration:
(i) first, all securities requested to be included in such
registration by the securityholders initiating such registration; and
(ii) second, up to the full number of Registrable Securities and
such other securities (provided such securities are of the same class
as the securities being sold by the Corporation) requested to be
included in such registration in excess of the number of securities the
securityholders initiating such registration propose to sell which, in
the opinion of such underwriters, can be sold (allocated pro rata
among the holders of such Registrable Securities and other securities
on the basis of the number of securities requested to be included
therein by each such holder).
F. SELECTION OF UNDERWRITERS. If any Incidental Registration is an
underwritten offering, the Corporation shall have the right to select the
investment banker or investment bankers and manager or managers to administer
the offering.
ARTICLE V
HOLDBACK AGREEMENTS
A. RESTRICTIONS ON PUBLIC SALE BY HOLDER OF REGISTRABLE SECURITIES.
Each holder of Registrable Securities whose Registrable Securities are covered
by a Registration Statement filed pursuant to Article III or IV hereof agrees,
if requested by the managing underwriters, not to effect any public sale or
distribution of securities of the Corporation of the same class as the
securities included in such Registration Statement, including a sale pursuant to
Rule 144 under the Securities Act (except as part of such underwritten
registration) during the ten-day period prior to, and during the 90-day period
beginning on, the closing date of each underwritten offering (or best efforts
underwritten offering in the case of a Registration Statement filed under
Article III) of Registrable Securities made pursuant to such Registration
Statement, to the extent timely notified in writing by the Corporation or the
managing underwriters. The foregoing provisions shall not apply to any holder of
Registrable Securities if such holder is prevented by applicable statue or
regulation from entering any such agreement; provided, however, that any such
holder shall undertake, in its request to participate in any such underwritten
offering, not to effect any public sale or distribution of the applicable class
of Registrable Securities commencing on the date of sale of such applicable
class of
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Registrable Securities unless it has provided 45 days' prior written notice
of such sale or distribution to the underwriter or underwriters.
B. RESTRICTIONS ON PUBLIC SALE BY THE CORPORATION AND OTHERS. The
Corporation agrees:
(i) not to effect any public or private sale or distribution of its equity
securities, or any securities convertible into or exchangeable or
exercisable for such equity securities, including a sale pursuant to
Regulation D under the Securities Act, during the ten-day period prior
to, and during the 90-day period beginning on, the closing date of
each underwritten offering made pursuant to a Registration Statement
filed under Section 3 hereof, without the consent of the managing
underwriters of such underwritten offering, to the extent timely
notified in writing by a holder of Registrable Securities or the
managing underwriters (except as part of such underwritten
registration or pursuant to registrations on Form S-4 or S-8 or any
successor form to such Forms); and
(ii) to cause each officer and director of the Corporation who is a holder
of its equity securities, or any securities convertible into or
exchangeable or exercisable for such equity securities to agree not to
effect any public sale or distribution of any such securities during
such period, including a sale pursuant to Rule 144 under the
Securities Act (except as part of such underwritten registration, if
permitted, or with the consent of the managing underwriter of such
underwritten offering).
ARTICLE VI
REGISTRATION PROCEDURES
Whenever the holders of Registrable Securities have requested that any
Registrable Securities be registered pursuant to this Agreement, the Corporation
shall use its best efforts to effect such registration to permit the sale of
such Registrable Securities in accordance with the intended method or methods of
disposition thereof, and pursuant thereto the Corporation shall as expeditiously
as possible:
A. prepare and file with the SEC, not later than six months after
receipt of a request to file a Registration Statement for a Demand Registration,
a Registration Statement on a form for which the Corporation then qualifies
which is satisfactory to the Corporation and the holders of a majority of the
Registrable Securities being registered (unless the offering is made on an
underwritten basis, including on a best efforts underwriting basis, in which
event the managing underwriter or underwriters shall determine the form to be
used) and which form shall be available for the sale of the Registrable
Securities in accordance with the intended method or methods of distribution
thereof, and use its best efforts to cause such Registration Statement to become
effective; provided, however, that before filing a Registration Statement or
Prospectus or any amendments or supplements thereto, including documents
incorporated by reference after the initial filing of the Registration
Statement, the Corporation shall furnish to the holders of the Registrable
Securities covered by such Registration Statement and the underwriters, if any,
copies of all such documents proposed to be filed, which documents will be
subject to the review of such holders and underwriters, and the Corporation
shall not file any Registration Statement or amendment thereto or any Prospectus
or any supplement thereto (including such documents incorporated by reference)
to which
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the holders of a majority of the Registrable Securities covered by such
Registration Statement or the underwriters, if any, shall reasonably object;
B. prepare and file with the SEC such amendments and post-effective
amendments to the Registration Statement as may be necessary to keep the
Registration Statement effective for a period of not less than six months, or
such shorter period which will terminate when all Registrable Securities covered
by such Registration Statement have been sold or withdrawn; cause the Prospectus
to be supplemented by any requested Prospectus supplement, and as so
supplemented to be filed pursuant to Rule 424 under the Securities Act; and
comply with the provisions of the Securities Act with respect to the disposition
of all securities covered by such Registration Statement during the applicable
period in accordance with the intended methods of disposition by the sellers
thereof set forth in such Registration Statement or supplement to the
Prospectus;
C. notify the selling holders of Registrable Securities and the
managing underwriters, if any, promptly, and (if requested by any such Person)
confirm such advice in writing,
(i) when the Prospectus or any Prospectus supplement or post-effective
amendment has been filed, and, with respect to the Registration
Statement or any post-effective amendment, when the same has become
effective;
(ii) of any request by the SEC for amendments or supplements to the
Registration Statement or the Prospectus or for additional
information;
(iii)of the issuance by the SEC of any stop order suspending the
effectiveness of the Registration Statement or the initiation of any
proceedings for that purpose;
(iv) if at any time the representations and warranties of the Corporation
contemplated by Paragraph o below cease to be true and correct in all
material respects;
(v) of the receipt by the Corporation of any notification with respect to
the suspension of the qualification of the Registrable Securities for
sale in any jurisdiction or the initiation or threatening of any
proceeding for such purpose; and
(vi) of the happening of any event which makes any statement made in the
Registration Statement, the Prospectus or any document incorporated
therein by reference untrue or which requires the making of any
changes in the Registration Statement, the Prospectus or any document
incorporated therein by reference in order to make the statements
therein not misleading;
D. make every reasonable effort to obtain the withdrawal of any order
suspending the effectiveness of the Registration Statement at the earliest
possible moment;
E. if requested by the managing underwriters or a holder of
Registrable Securities being sold, immediately incorporate in a Prospectus
supplement or post-effective amendment such information as the managing
underwriters and the holders of a majority of the Registrable Securities
being sold and their respective counsel reasonably conclude should be
included in the Registration Statement, so that such Registration Statement
conforms in both form and substance to the requirements of the Securities
Act, including without limitation with respect to the number of Registrable
Securities being sold to such underwriters, the purchase price being paid
therefor by such
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underwriters and with respect to any other terms of the underwritten offering
of the Registrable Securities to be sold in such offering; and make all
required filings of such Prospectus supplement or post-effective amendment as
soon as notified of the matters to be incorporated in such Prospectus
supplement or post-effective amendment;
F. promptly prior to the filing of any document which is to be
incorporated by reference into the Registration Statement or the Prospectus
(after initial filing of the Registration Statement) provide copies of such
document to counsel to the selling holders of Registrable Securities and to the
managing underwriters, if any, make the Corporation's representatives available
for discussion of such document and make such changes in such document prior to
the filing thereof as counsel for such selling holders or underwriters may
reasonably request;
G. furnish to each selling holder of Registrable Securities and each
managing underwriter, without charge, at least one signed copy of the
Registration Statement and any post-effective amendment thereto, including
financial statements and schedules, all documents incorporated therein by
reference and all exhibits (including those incorporated by reference);
H. deliver to each selling holder of Registrable Securities and the
underwriters, if any, without charge, as many copies of the Prospectus
(including each preliminary prospectus) and any amendment or supplement thereto
as such Persons may reasonably request (and the Corporation hereby consents to
the use of the Prospectus or any amendment or supplement thereto by each of the
selling holders of Registrable Securities and the underwriters, if any, in
connection with the offering and sale of the Registrable Securities covered by
the Prospectus or any amendment or supplement thereto);
I. prior to any public offering of Registrable Securities, register or
qualify or cooperate with the selling holders of Registrable Securities, the
underwriters, if any, and their respective counsel in connection with the
registration or qualification of such Registrable Securities for offer and sale
under the securities or blue sky laws of such jurisdictions as any seller or
underwriter reasonably requests in writing and do any and all other acts or
things necessary or advisable to enable the disposition in such jurisdictions of
the Registrable Securities covered by the Registration Statement; provided,
however, that the Corporation shall not be required to qualify generally to do
business in any jurisdiction where it is not then so qualified or to take any
action which would subject it to general service of process in any such
jurisdiction where it is not then so subject;
J. cooperate with the selling holders of Registrable Securities and the
managing underwriters, if any, to facilitate the timely preparation and delivery
of certificates representing Registrable Securities to be sold and not bearing
any restrictive legends; and enable such Registrable Securities to be in such
denominations and registered in such names as the managing underwriters may
request at least two business days prior to any sale of Registrable Securities
to the underwriters;
K. use its best efforts to cause the Registrable Securities covered by
the Registration Statement to be registered with or approved by such other
governmental agencies or authorities as may be necessary to enable the seller or
sellers thereof or the underwriters, if any, to consummate the disposition of
such Registrable Securities.
L. upon the occurrence of any event contemplated by clause (vi) of
Paragraph C of this Article VI, prepare a supplement or post-effective amendment
to the Registration Statement or the Prospectus or any document incorporated
therein by reference or file any other required document so
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that, as thereafter delivered to the purchasers of the Registrable
Securities, the Prospectus shall not contain an untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading;
M. cause all Registrable Securities covered by the Registration
Statement to be listed on each securities exchange on which similar
securities issued by the Corporation are then listed if requested by the
holders of a majority of such Registrable Securities or the managing
underwriters, if any;
N. provide a transfer agent and registrar for all Registrable
Securities and a CUSIP number for all Registrable Securities, in each case
not later than the effective date of such registration statement;
O. enter into such agreements (including an underwriting agreement
reasonably satisfactory to the Corporation, containing customary
representations, warranties and agreements) and take all such other actions in
connection therewith in order to expedite or facilitate the disposition of such
Registrable Securities and in such connection, whether or not an underwriting
agreement is entered into and whether or not the registration is an underwritten
registration:
(i) make such representations and warranties to the holders of such
Registrable Securities and the underwriters, if any, in such form,
substance and scope as are customarily made by issuers to underwriters
in primary underwritten offerings and covering matters including but
not limited to, those set forth in the Merger Agreement;
(ii) obtain opinions of counsel to the Corporation and updates
thereof (which counsel and opinions, in form, scope and substance,
shall be reasonably satisfactory to the managing underwriters, if
any, and the holders of a majority of the Registrable Securities
being sold) addressed to each selling holder and the underwriters,
if any;
(iii) obtain "cold comfort" letters and updates thereof from the
Corporation's independent certified public accountants addressed to
the selling holders of Registrable Securities and the underwriters,
if any, such letters to be in customary form and covering matters of
the type customarily covered in "cold comfort" letters to
underwriters in connection with primary underwritten offerings;
(iv) if an underwriting agreement is entered into, cause the same
to set forth in full the indemnification and contribution provisions
and procedures of Article VIII hereof, or language at least as
favorable to the holders of the Registrable Securities, with respect
to all parties to be indemnified pursuant to said Article; and
(v) deliver such documents and certificates as may be requested
by the holders of a majority of the Registrable Securities being
sold and the managing underwriters, if any, to evidence compliance
with clause (i) of this Paragraph o and with any customary
conditions contained in the underwriting agreement or other
agreement entered into by the Corporation.
The obligations under this Paragraph o above shall be performed at each closing
under such underwriting or similar agreement or as and to the extent required
thereunder.
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P. make available for inspection by a representative of the sellers
of Registrable Securities, any underwriter participating in any disposition
pursuant to such registration statement, and any attorney, accountant or
other agent retained by the sellers or underwriter, all financial and other
records, pertinent corporate documents and properties of the Corporation, and
cause the Corporation's officers, directors and employees to supply all
information reasonably requested by any such representative, underwriter,
attorney, accountant or agent solely for use in connection with such
registration statement; provided, however, that any records, information or
documents that are designated by the Corporation in writing as confidential
shall be kept confidential by such Persons pursuant to such reasonable
confidentiality agreements as the Corporation may request;
Q. otherwise use its best efforts to comply with all applicable
rules and regulations of the SEC, and make generally available to its
security holders, earnings statements satisfying the provisions of Section
11(a) of the Securities Act, no later than 45 days after the end of any
twelve-month period (or 90 days, if such period is a fiscal year): (i)
commencing at the end of any fiscal quarter in which Registrable Securities
are sold to underwriters in an underwritten offering, or, if not sold to
underwriters in such an offering; and (ii) beginning with the first month of
the Corporation's first fiscal quarter commencing after the effective date of
the Registration Statement, which statements shall cover said twelve-month
periods.
ARTICLE VII
REGISTRATION AND SELLING EXPENSES
For purposes of this Agreement, all underwriting discounts and selling
commissions applicable to the sale of Registrable Securities (all such expenses
being herein referred to as "Selling Expenses"), and all expenses incident to
the Corporation's performance of or compliance with this Agreement, including
without limitation:
A. all registration and filing fees (including with respect to filings
required to be made with the National Association of Securities Dealers, Inc.);
B. fees and expenses of compliance with securities or blue sky laws
(including fees and disbursements of counsel for the underwriters in connection
with blue sky qualifications of the Registrable Securities and determination of
their eligibility for investment under the laws of such jurisdictions as the
managing underwriters or holders of a majority of the Registrable Securities
being sold may designate);
C. printing, messenger, telephone and delivery expenses;
D. fees and disbursements of counsel for the Corporation, the
underwriters and for the sellers of the Registrable Securities;
E. fees and disbursements of all independent certified public
accountants of the Corporation (including the expenses of any "cold comfort"
letters required by or incident to such performance);
F. fees and disbursements of underwriters (excluding Selling Expenses);
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G. securities acts liability insurance if the Corporation so desires or
if the underwriters or selling holders of Registrable Securities so require;
H. reasonable fees and expenses of any special experts retained by
selling holders of Registrable Securities, by the Corporation at its own
initiative or at the request of the managing underwriters in connection with
such registration; and
I. fees and expenses of other Persons retained by the Corporation;
(all such expenses being herein called "Registration Expenses") shall be borne
as provided in this Agreement; it being understood and agreed that the
Corporation shall, in any event, pay its internal expenses (including, without
limitation, all salaries and expenses of its officers and employees performing
legal or accounting duties), the expense of any annual audit conducted at the
end of the Corporation's fiscal year in the ordinary course of business, and the
fees and expenses incurred in connection with the listing of the securities to
be registered on each securities exchange and securities association.
ARTICLE VIII
INDEMNIFICATION
A. INDEMNIFICATION BY CORPORATION. The Corporation agrees to
indemnify, to the full extent permitted by law, each holder of Registrable
Securities, its officers, directors, employees and Agents and each Person who
controls such holder (within the meaning of the Securities Act) against all
losses, claims, damages, liabilities and expenses caused by any untrue or
alleged untrue statement of a material fact contained in any Registration
Statement, Prospectus or preliminary prospectus or any omission or alleged
omission to state therein a material fact required to be stated therein or
necessary to make the statements therein not misleading, except insofar as
the same are caused by or contained in any information furnished in writing
to the Corporation by such holder expressly for use therein or by such
holder's failure to deliver a copy of the Registration Statement or
Prospectus after the Corporation has furnished such holder with a sufficient
number of copies of the same. The Corporation shall also indemnify
underwriters, selling brokers, dealer managers and similar securities
industry professionals participating in the distribution, their officers and
directors and each Person who controls such Persons (within the meaning of
the Securities Act) to the same extent as hereinabove provided with respect
to the indemnification of the holders of Registrable Securities.
B. INDEMNIFICATION BY HOLDER OF REGISTRABLE SECURITIES. In
connection with any Registration Statement in which a holder of Registrable
Securities is participating, each such holder will furnish to the Corporation
in writing such information and affidavits as the Corporation reasonably
requests for use in connection with any Registration Statement or Prospectus
and agrees to indemnify, to the full extent permitted by law, the
Corporation, its directors and officers and each Person who controls the
Corporation (within the meaning of the Securities Act) against any losses,
claims, damages, liabilities and expenses resulting from any untrue or
alleged untrue statement of a material fact or any omission or alleged
omission of a material fact required to be stated in the Registration
Statement or Prospectus or preliminary Prospectus or necessary to make the
statements therein not misleading, to the extent, but only to the extent,
that such untrue statement or omission is contained in any information or
affidavit so furnished in writing by such holder to the Corporation
specifically for inclusion in such Registration Statement or Prospectus. In
no event shall the liability
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of any selling holder of Registrable Securities hereunder be greater in
amount than the dollar amount of the proceeds received by such holder upon
the sale of the Registrable Securities giving rise to such indemnification
obligation. The Corporation shall be entitled to receive indemnities from
underwriters, selling brokers, dealer managers and similar securities
industry professionals participating in the distribution, to the same extent
as provided above with respect to information so furnished in writing by such
Persons specifically for inclusion in any Prospectus or Registration
Statement.
C. CONDUCT OF INDEMNIFICATION PROCEEDINGS. Any Person entitled to
indemnification hereunder shall (i) give prompt notice to the indemnifying
party of any claim with respect to which it seeks indemnification and (ii)
permit such indemnifying party to assume the defense of such claim with
counsel reasonably satisfactory to the indemnified party; provided, however,
that any Person entitled to indemnification hereunder shall have the right to
employ separate counsel and to participate in the defense of such claim, but
the fees and expenses of such counsel shall be at the expense of such Person
unless (a) the indemnifying party has agreed to pay such fees or expenses, or
(b) the indemnifying party shall have failed to assume the defense of such
claim and employ counsel reasonably satisfactory to such Person, or (c) in
the reasonable judgment of any such Person and the indemnifying party, based
upon advice of their respective counsel, a conflict of interest may exist
between such Person and the indemnifying party with respect to such claims
(in which case, if the Person notifies the indemnifying party in writing that
such Person elects to employ separate counsel at the expense of the
indemnifying party, the indemnifying party shall not have the right to assume
the defense of such claim on behalf of such Person). If such defense is not
assumed by the indemnifying party, the indemnifying party shall not be
subject to any liability for any settlement made without its consent (but
such consent will not be unreasonably withheld). No indemnifying party shall
be required to consent to entry of any judgment or enter into any settlement
which does not include as an unconditional term thereof the giving by the
claimant or plaintiff to such indemnified party of a release from all
liability in respect to such claim or litigation. An indemnifying party who
is not entitled to, or elects not to, assume the defense of a claim will not
be obligated to pay the fees and expenses of more than one counsel for all
parties indemnified by such indemnifying party with respect to such claim,
unless in the reasonable judgment of any indemnified party a conflict of
interest may exist between such indemnified party and any other of such
indemnified parties with respect to such claim, in which event the
indemnifying party shall be obligated to pay the fees and expenses of such
additional counsel or counsels.
D. CONTRIBUTION. If the indemnification provided for in this Article
VIII is unavailable or insufficient to hold harmless an indemnified party
under Paragraphs A or B immediately preceding, then each indemnifying party
shall contribute to the amount paid or payable by such indemnified party as a
result of the losses, claims, damages or liabilities referred to in said
Paragraphs A or B, in such proportion as is appropriate to reflect the
relative fault of the Corporation, on the one hand, and the participating
holders of Registrable Securities, on the other, in connection with the
statements or omissions that resulted in such losses, claims, damages or
liabilities, as well as any other relevant equitable considerations. The
relative fault shall be determined by reference to, among other things,
whether the untrue or alleged untrue statement of a material fact or the
omission or alleged omission to state a material fact relates to information
supplied by the Corporation on the one hand or such holders on the other, and
the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such untrue statement or omission. The
parties agree that it would not be just and equitable if contributions
pursuant to this Paragraph D were to be determined by pro rata allocation or
by any other method of allocation that does not take account of the equitable
considerations referred to in the prior provisions of this Paragraph D. The
amount paid by an
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indemnified party as a result of the losses, claims, damages or liabilities
referred to in the prior provisions of this Paragraph D shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending against any action or claim
that is the subject of this Paragraph D. Notwithstanding the provisions of this
Paragraph D, no participating holder of Registrable Securities shall be required
to contribute any amount in excess of the amount by which the net proceeds
received from the sale of its shares exceeds the amount of any damages that it
has otherwise been required to pay by reason of such untrue or alleged untrue
statement or omission or alleged omission. For purposes of this Paragraph D no
person guilty of fraudulent misrepresentation (within the meaning of Section
11(f) of the Securities Act) shall be entitled to contribution from any person
who was not guilty of such fraudulent misrepresentation.
ARTICLE IX
RULE 144
The Corporation covenants that it shall file the reports required to be
filed by it under the Securities Act and the Exchange Act and the rules and
regulations adopted by the SEC thereunder, and it shall take such further action
as any holder of Registrable Securities may reasonably request, all to the
extent required from time to time to enable such holder to sell Registrable
Securities without registration under the Securities Act within the limitation
of the exemptions provided by (i) Rule 144 under the Securities Act, as such
rule may be amended from time to time, or (ii) any similar rule or regulation
hereafter adopted by the SEC. Upon the request of any holder of Registrable
Securities, the Corporation shall deliver to such holder a written statement as
to whether it has complied with such information and requirements.
ARTICLE X
PARTICIPATION IN UNDERWRITTEN REGISTRATIONS
No Person may participate in any underwritten registration hereunder
unless such Person (i) agrees to sell such Person's securities on the basis
provided in any underwriting arrangements approved by the Persons entitled
hereunder to approve such arrangements and (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents required under the terms of such underwriting arrangements.
ARTICLE XI
MISCELLANEOUS
A. REMEDIES. Each holder of Registrable Securities, in addition to
being entitled to exercise all rights provided herein or granted by law,
including recovery of damages, shall be entitled to specific performance of its
rights under this Agreement. The Corporation agrees that monetary damages would
not be adequate compensation for any loss incurred by reason of a breach by it
of the provisions of this Agreement and hereby agrees to waive the defense in
any action for specific performance that a remedy at law would be adequate.
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<PAGE>
B. TERM. The registration rights granted under Article III hereof
shall terminate on the tenth anniversary of the date hereof, and the
registration rights granted under Article IV hereof shall terminate on the
third anniversary of the maturity of the Note.
C. NOTICES. All notices, requests or instructions hereunder shall be
in writing and delivered personally or sent by registered or certified mail,
postage prepaid, as follows:
(i) if to the Corporation:
15502 Mosher
Tustin, California 92780
(ii) if to the Stockholders:
133 East 62nd Street
New York, New York 10021
Any of the above addresses may be changed at any time by notice given as
provided above; provided, however, that any such notice of change of address
shall be effective only upon receipt.
D. ENTIRE AGREEMENT. This Agreement and the documents referred to
herein contain the entire agreement of the parties hereto with respect to the
transactions contemplated hereby, and supersede all prior understandings,
arrangements, and agreements with respect to the subject matter hereof. No
modification hereof shall be effective unless in writing and signed by the
party against which it is sought to be enforced.
E. FURTHER ACTION. Each of the parties hereto shall use such party's
best efforts to take such actions as may be necessary or reasonably requested
by the other party hereto to carry out and consummate the transactions
contemplated by this Agreement.
F. SUCCESSORS AND ASSIGNS. The registration rights granted to the
Stockholders under Article III and under Article IV may be transferred to a
transferee who acquires any Shares, which transfer shall be effective when
the Corporation is given written notice by the transferor at the time of such
transfer stating the name and address of the transferee and identifying the
securities with respect to which the rights under Article III and IV are
being assigned.
G. NOTICE OF SHARES. All references herein to numbers of shares of
Registrable Securities shall be subject to appropriate adjustment for stock
splits, stock dividends and recapitalizations of the Corporation.
H. GOVERNING LAW. This Agreement shall be governed by and construed
in accordance with the laws of the State of New York applicable in the case
of agreements made and to be performed entirely within such State.
I. CAPTIONS. The captions appearing herein are for the convenience
of the parties only and shall not be construed to affect the meaning of the
provisions of this Agreement.
J. COUNTERPARTS. This Agreement may be executed in counterparts,
each of which shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
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IN WITNESS WHEREOF, the parties have executed this Agreement as of the
date first written above.
eSynch Corporation
By:
-----------------------------------------
--------------------------------------------
Morton Garfinkle
--------------------------------------------
Morton Garfinkle, as Trustee of The Gillian
Garfinkle S Corporation Trust
--------------------------------------------
Morton Garfinkle, as Trustee of The Nicholas
Garfinkle S Corporation Trust
<PAGE>
EXHIBIT C
NONEXCLUSIVE LICENSE AGREEMENT
Oxford Management Corporation (Oxford Management), a Nevada
corporation, with a principal place of business at 133 East 62nd Street, New
York, New York 10021, and Oxford Media Corporation (Oxford Media), a Delaware
corporation, with a principal place of business at 16861 Armstrong Avenue,
Irvine, California 92606, agree as follows:
Oxford Management is the owner of proprietary software and source code
related to the Oxford Management movies-on-demand hotel pay-for-view system.
Effective as of January 13, 1999, and for the consideration of $1.00 and other
good and valuable consideration, Oxford Management grants to Oxford Media a
fully paid, nonexclusive, worldwide license under the proprietary software and
source code to make, use, sell, and lease products using and/or incorporating
the proprietary software and source code. The license shall be perpetual and
shall be assignable at any time with the business and goodwill of Oxford Media
Corporation.
OXFORD MANAGEMENT CORPORATION
By:
----------------------------------------
Norton Garfinkle, Chairman
-------------------------------------------
Date
OXFORD MEDIA CORPORATION
By:
----------------------------------------
Rita Buttolph, Corporate Secretary
-------------------------------------------
Date
January 13, 1999
C-1
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RESTATED CERTIFICATE OF INCORPORATION
OF
ESYNCH CORPORATION
(Originally incorporated under the name TRI-NEM, INC.)
(Original Certificate of Incorporation filed December 21, 1988)
(Formerly known as INNOVUS CORPORATION)
ESYNCH CORPORATION, a corporation duly organized and existing under the
General Corporation Law of Delaware (the "Corporation"), does hereby certify as
follows:
1. The following provisions of the Restated Certificate of
Incorporation of the Corporation shall be and become the restated certificate of
incorporation of the Corporation effective at 5:00 o'clock p.m. on Monday,
November 29, 1999 (the "Effective Time"), and the Restated Certificate of
Incorporation of the Corporation shall hereby be amended and restated to read in
its entirety as follows:
RESTATED
CERTIFICATE OF INCORPORATION
OF
ESYNCH CORPORATION
ARTICLE I
NAME
The name of the corporation (the "Corporation") is as follows:
ESYNCH CORPORATION
ARTICLE II
DURATION
The Corporation shall continue in existence perpetually unless sooner
dissolved according to law.
ARTICLE III
PURPOSES
The purposes for which the Corporation is organized are:
To seek, investigate, acquire interests in, and dispose of business
opportunities, ventures, and assets; to own and operate any lawful enterprise
whatsoever; to acquire, hold, and dispose of real or personal properties of any
kind or nature whether tangible or intangible; and generally to do or perform
any act necessary or desirable in connection with the foregoing;
To acquire by purchase or otherwise, own, hold, lease, rent, mortgage,
or otherwise trade with and deal in real estate, lands, and interests in lands
and all other property of every kind and nature;
<PAGE>
To borrow money and to execute notes and obligations and security
contracts therefor, and to lend any of the monies or funds of the Corporation
and to take evidence of indebtedness therefor, and also to negotiate loans; to
carry on a general mercantile business and to purchase, sell, and deal in such
goods and supplies, and merchandise as are necessary or desirable in connection
therewith;
To do all and everything necessary, suitable, convenient, or proper for
the accomplishment of any of the purposes or the attainment of any one or more
of the objects herein enumerated or incidental to the powers herein named or
which shall at any time appear conducive or expedient for the protection or
benefit of the Corporation, with all the powers hereafter conferred by the laws
under which this Corporation is organized; and
To engage in any and all other lawful purposes, activities, and
pursuits, whether similar or dissimilar to the foregoing, for which corporations
may be organized under the General Corporation Law of Delaware and to exercise
all powers allowed or permitted thereunder.
ARTICLE IV
AUTHORIZED SHARES
The Corporation shall have authority to issue an aggregate of
51,000,000 shares, of which 1,000,000 shares shall be preferred stock, $0.001
par value (hereinafter the "Preferred Stock"), and 50,000,000 shares shall be
common stock, $0.001 par value (hereinafter the "Common Stock"). The powers,
preferences, and rights, and the qualifications, limitations, and restrictions
of the shares of stock of each class and series which the Corporation shall be
authorized to issue are as follows:
(a) PREFERRED STOCK. Shares of Preferred Stock may be issued from time
to time in one or more series as may from time to time be determined by the
board of directors. Each series shall be distinctly designated. All shares of
any one series of the Preferred Stock shall be alike in every particular, except
that there may be different dates from which dividends thereon, if any, shall be
cumulative, if made cumulative. The powers, preferences, participating,
optional, and other rights of each such series and qualifications, limitations,
or restrictions thereof, if any, may differ from those of any and all other
series at any time outstanding. Except as hereinafter provided, the board of
directors of this Corporation is hereby expressly granted authority to fix by
resolution or resolutions adopted prior to the issuance of any shares of each
particular series of Preferred Stock, the designation, powers, preferences, and
relative participating, optional, and other rights and the qualifications,
limitations, and restrictions thereof, if any, of such series, including,
without limiting the generality of the foregoing, the following:
(i) The distinctive designation of, and the number of shares
of Preferred Stock which shall constitute each series, which number may be
increased (except as otherwise fixed by the board of directors) or decreased
(but not below the number of shares thereof outstanding) from time to time by
action of the board of directors;
(ii) The rate and times at which, and the terms and conditions
on which, dividends, if any, on the shares of the series shall be paid; the
extent of preferences or relation, if any, of such dividends to the dividends
payable on any other class or classes of stock of this Corporation or on any
series of Preferred Stock and whether such dividends shall be cumulative or
noncumulative;
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(iii) The right, if any, of the holders of the shares of the
same series to convert the same into, or exchange the same for, any other class
or classes of stock of this Corporation and the terms and conditions of such
conversion or exchange;
(iv) Whether shares of the series shall be subject to
redemption and the redemption price or prices, including, without limitation, a
redemption price or prices payable in shares of any other class or classes of
stock of the Corporation, cash, or other property and the time or times at
which, and the terms and conditions on which, shares of the series may be
redeemed;
(v) The rights, if any, of the holders of shares of the series
on voluntary or involuntary liquidation, merger, consolidation, distribution, or
sale of assets, dissolution, or winding up of this Corporation;
(vi) The terms of the sinking fund or redemption or purchase
account, if any, to be provided for shares of the series; and
(vii) The voting powers, if any, of the holders of shares of
the series which may, without limiting the generality of the foregoing, include
(A) the right to more or less than one vote per share on any or all matters
voted on by the shareholders, and (B) the right to vote as a series by itself or
together with other series of Preferred Stock or together with all series of
Preferred Stock as a class, on such matters, under such circumstances, and on
such conditions as the board of directors may fix, including, without
limitation, the right, voting as a series by itself or together with other
series of Preferred Stock or together with all series of Preferred Stock as a
class, to elect one or more directors of this Corporation in the event there
shall have been a default in the payment of dividends on any one or more series
of Preferred Stock or under such other circumstances and upon such conditions as
the board of directors may determine.
(b) COMMON STOCK. The Common Stock shall have the following powers,
preferences, rights, qualifications, limitations, and restrictions:
(i) After the requirements with respect to preferential
dividends of Preferred Stock, if any, shall have been met and after this
Corporation shall comply with all the requirements, if any, with respect to the
setting aside of funds as sinking funds or redemption or purchase accounts and
subject further to any other conditions which may be required by the General
Corporation Law of Delaware, then, but not otherwise, the holders of Common
Stock shall be entitled to receive such dividends, if any, as may be declared
from time to time by the board of directors without distinction to series;
(ii) After distribution in full of any preferential amount to
be distributed to the holders of Preferred Stock, if any, in the event of a
voluntary or involuntary liquidation, distribution or sale of assets,
dissolution, or winding up of this Corporation, the holders of the Common Stock
shall be entitled to receive all of the remaining assets of the Corporation,
tangible and intangible, of whatever kind available for distribution to
stockholders, ratably in proportion to the number of shares of Common Stock held
by each without distinction as to series; and
(iii) Except as may otherwise be required by law or this
Certificate of Incorporation, in all matters as to which the vote or consent of
stockholders of the Corporation shall be required or be taken, including, any
vote to amend this Certificate of Incorporation, to increase or decrease the par
value of any class of stock, effect a stock split or combination of shares, or
alter or change the powers, preferences, or special rights of any class or
series of stock, the holders of the
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<PAGE>
Common Stock shall have one vote per share of Common Stock on all such matters
and shall not have the right to cumulate their votes for any purpose.
(c) OTHER PROVISIONS.
(i) The board of directors of the Corporation shall have
authority to authorize the issuance, from time to time without any vote or other
action by the stockholders, of any or all shares of the Corporation of any class
at any time authorized, and any securities convertible into or exchangeable for
such shares, in each case to such persons and for such consideration and on such
terms as the board of directors from time to time in its discretion lawfully may
determine; PROVIDED, however, that the consideration for the issuance of shares
of stock of the Corporation having par value shall not be less than such par
value. Shares so issued, for which the full consideration determined by the
board of directors has been paid to the Corporation, shall be fully paid stock,
and the holders of such stock shall not be liable for any further call or
assessments thereon.
(ii) Unless otherwise provided in the resolution of the board
of directors providing for the issue of any series of Preferred Stock, no holder
of shares of any class of the Corporation or of any security or obligation
convertible into, or of any warrant, option, or right to purchase, subscribe
for, or otherwise acquire, shares of any class of the Corporation, whether now
or hereafter authorized, shall, as such holder, have any preemptive right
whatsoever to purchase, subscribe for, or otherwise acquire shares of any class
of the Corporation, whether now or hereafter authorized.
(iii) Anything herein contained to the contrary
notwithstanding, any and all right, title, interest, and claim in and to any
dividends declared or other distributions made by the Corporation, whether in
cash, stock, or otherwise, which are unclaimed by the stockholder entitled
thereto for a period of six years after the close of business on the payment
date, shall be and be deemed to be extinguished and abandoned; and such
unclaimed dividends or other distributions in the possession of the Corporation,
its transfer agents, or other agents or depositories, shall at such time become
the absolute property of the Corporation, free and clear of any and all claims
of any person whatsoever.
ARTICLE V
LIMITATION ON LIABILITY
A director of the Corporation shall have no personal liability to the
Corporation or its stockholders for monetary damages for breach of fiduciary
duty as a director, except (i) for any breach of a director's duty of loyalty to
the Corporation or its stockholders, (ii) for acts or omissions not in good
faith or which involve intentional misconduct or a knowing violation of law,
(iii) under section 174 of the General Corporation Law of Delaware as it may
from time to time be amended or any successor provision thereto, or (iv) for any
transaction from which a director derived an improper personal benefit.
ARTICLE VI
BUSINESS COMBINATIONS WITH INTERESTED STOCKHOLDERS
The Corporation elects not to be governed by the provisions of section
203 of the General Corporation Law regarding business combinations with
interested shareholders.
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ARTICLE VII
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Corporation shall indemnify any and all persons who may serve or
who have served at any time as directors or officers, or who, at the request of
the board of directors of the Corporation, may serve, or at any time have served
as directors or officers of another corporation in which the Corporation at such
time owned or may own shares of stock, or which it was or may be a creditor, and
the respective heirs, administrators, successors, and assigns, against any and
all expenses, including amounts paid on judgment, counsel fees, and amounts paid
in settlement (before or after suit is commenced), actually or necessarily by
such persons in connection with the defense or settlement or any claim, action,
suit, or proceeding in which they, or any of them, are made parties, or a party,
or which may be assessed against them or any of them, by reason of being or
having been directors or officers of the Corporation, or such other corporation,
to the full extent permitted by the General Corporation Law of Delaware as it
may from time to time be amended.
ARTICLE VIII
OFFICERS AND DIRECTORS CONTRACTS
No contract or other transaction between the Corporation and any other
firm or corporation shall be affected by the fact that a director or officer of
the Corporation has an interest in, or is a director or officer of the
Corporation or any other corporation. Any officer or director individually or
with others, may be a party to, or may have an interest in, any transaction of
the Corporation, or any transaction in which the Corporation is a party or has
an interest. Each person who is not or may become an officer or director of the
Corporation is hereby relieved from liability he might otherwise obtain in the
event such officer or director contracts with the Corporation for the benefit of
himself or any firm or other corporation in which he may have an interest;
PROVIDED, such officer or director acts in good faith.
ARTICLE IX
REGISTERED OFFICE AND REGISTERED AGENT
The name and address of the Corporation's registered agent in the state
of Delaware is Corporation Service Company, 1013 Centre Road, in the city of
Wilmington, county of New Castle, Delaware 19805. Either the registered office
or the registered agent may be changed in the manner provided by law.
ARTICLE X
AMENDMENT
The Corporation reserves the right to amend, alter, change, or repeal
all or any portion of the provisions contained in its Certificate of
Incorporation from time to time in accordance with the laws of the state of
Delaware, and all rights conferred on stockholders herein are granted subject to
this reservation.
ARTICLE XI
ADOPTION AND AMENDMENT OF BYLAWS
The initial bylaws of the Corporation shall be adopted by the board of
directors. The power to alter, amend, or repeal the bylaws or adopt new bylaws
shall be vested in the board of directors, but the stockholders of the
Corporation may also alter, amend, or repeal the bylaws or adopt new
5
<PAGE>
bylaws. The bylaws may contain any provisions for the regulation or management
of the affairs of the Corporation not inconsistent with the laws of the state of
Delaware now or hereafter existing.
ARTICLE XII
DIRECTORS
The governing board of the Corporation shall be known as the board of
directors. The number of directors comprising the board of directors shall be
fixed and may be increased or decreased from time to time in the manner provided
in the bylaws of the Corporation, except that at no time shall there be less
than three nor more than fifteen directors.
2. The Board of Directors of the Corporation duly adopted resolutions
that set forth the foregoing Restated Certificate of Incorporation (which
restates and integrates and also further amends the Corporation's certificate of
incorporation, as heretofore amended or supplemented), declared the proposed
amendment and restatement to be advisable, and directed that the amendment and
restatement be submitted to the Corporation's stockholders for adoption.
3. The Restated Certificate of Incorporation was duly adopted by the
holders of a majority of voting power of all shares outstanding of Common Stock
and Series I Preferred Stock, voting together as one single class, being the
holders of all shares outstanding of capital stock entitled to vote thereon, at
a duly held meeting in accordance with the applicable provisions of Sections 242
and 245 of the General Corporation Law of Delaware upon notice as provided in
Section 222 of the General Corporation Law of Delaware.
IN WITNESS WHEREOF, the Corporation has caused this instrument to be
executed as of the 29th day of November, 1999 and each of the signatories to
this instrument acknowledges or affirms under penalties of perjury that this
instrument is the act and deed of the Corporation and that the matters set forth
in this instrument are true.
ESYNCH CORPORATION
By:
----------------------------
Thomas Hemingway,
Chief Executive Officer
ATTEST:
By:
----------------------------
T. Richard Hutt, Secretary
Secretary
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CERTIFICATE OF DESIGNATION OF THE RELATIVE RIGHTS AND
PREFERENCES
OF THE
SERIES J CONVERTIBLE PREFERRED STOCK
OF
ESYNCH CORPORATION
The undersigned, the Chief Executive Officer of eSynch Corporation, a
Delaware corporation (the "Company"), in accordance with the provisions of the
Delaware General Corporation Law, does hereby certify that, pursuant to the
authority conferred upon the Board of Directors by the Certificate of
Incorporation of the Company, the following resolution creating a series of
Series J Convertible Preferred Stock, was duly adopted on July 23, 1999:
RESOLVED, that pursuant to the authority expressly granted to and
vested in the Board of Directors of the Company by provisions of the Restated
Certificate of Incorporation of the Company (the "Certificate of
Incorporation"), there hereby is created out of the shares of Preferred Stock,
par value $.001 per share, of the Company authorized in Article IV of the
Certificate of Incorporation (the "Preferred Stock,"), a series of Preferred
Stock of the Company, to be named "Series J Convertible Preferred Stock,"
consisting of Two Hundred Fifty (250) shares, which series shall have the
following designations, powers, preferences and relative and other special
rights and the following qualifications, limitations and restrictions:
1. Designation and Rank. The designation of such series of the
Preferred Stock shall be the Series J Convertible Preferred Stock, par value
$.001 per share (the "Series J Convertible Preferred Stock"). The maximum number
of shares of Series J Convertible Preferred Stock shall be 250 Shares. The
Series J Convertible Preferred Stock shall have a liquidation preference of
$10,000 per share. The Series J Convertible Preferred Stock shall rank (i) prior
to the common stock, par value $.001 per share (the "Common Stock"), and to all
other classes and series of equity securities of the Company which by its terms
does not rank senior to the Series J Preferred Stock ("Junior Stock"), (ii) on
parity with the Series I Preferred Stock and with any class and series of equity
securities which by its terms shall rank on parity with the Series J Preferred
Stock, and (iii) junior to any class or series of equity securities which by its
terms shall rank senior to the Series J Preferred Stock. The Series J
Convertible Preferred Stock shall be subordinate to and rank junior to all
indebtedness of the Company now or hereafter outstanding.
2. Dividends.
(a) Payment of Dividends. The holders of record of shares of
Series J Convertible Preferred Stock shall be entitled to receive, out of any
assets at the time legally available therefor and when and as declared by the
Board of Directors, dividends at the rate of seven percent (7%) of the stated
Liquidation Preference Amount (as defined below) per share per annum (the
"Dividend Payment"), and no more, payable at the option of the Company in cash
or in shares of Common Stock in an amount equal to the quotient of (i) the
Dividend Payment divided by (ii) the Conversion Price (as defined in Section
5(d) below). In the case of shares of Series J Preferred Stock outstanding for
less than a frill year, dividends shall be pro rated based on the portion of
each year during which such shares are outstanding. Such dividends on the Series
J Preferred Stock shall be cumulative, shall
<PAGE>
accrue and be payable only at conversion of the Series J Preferred Stock into
shares of Common Stock and shall accrue until the Mandatory Conversion Date (as
defined in Section 5(c)(ii) without regard to Section 5(c)(ii)(x)(A)). Such
dividends on the Series J Preferred Stock are prior and in preference to any
declaration or payment of any distribution (as defined below) on any outstanding
shares of Common Stock or any other equity securities of the Company ranking
junior to the Series J Preferred Stock as to the payment of dividends. Such
dividends shall accrue on each share of Series J Preferred Stock from day to day
from the date of initial issuance thereof whether or not earned or declared so
that if such dividends with respect to any previous dividend period at the rate
provided for herein have not been paid on, or declared and set apart for, all
shares of Series J Preferred Stock at the time outstanding, the deficiency shall
be fully paid on, or declared and set apart for, such shares on a pro rata basis
with all other equity securities of the Company ranking on a parity with the
Series J Preferred Stock as to the payment of dividends before any distribution
shall be paid on, or declared and set apart for Common Stock or any other equity
securities of the Company ranking junior to the Series J Preferred Stock as to
the payment of dividends.
(b) So long as any shares of Series J Preferred Stock are
outstanding, the Company shall not declare, pay or set apart for payment any
dividend or make any distribution on any Junior Stock (other than dividends or
distributions payable in additional shares of Junior Stock), unless at the time
of such dividend or distribution the Company shall have paid all accrued and
unpaid dividends on the outstanding shares of Series J Preferred Stock.
(c) In the event of a dissolution, liquidation or winding up
of the Company pursuant to Section 4, all accrued and unpaid dividends on the
Series J Preferred Stock shall be payable on the day immediately preceding the
date of payment of the preferential amount to the holders of Series J Preferred
Stock. In the event of (i) a mandatory redemption pursuant to Section 9 or (ii)
a redemption upon the occurrence of a Major Transaction (as defined in Section
8(c)) or a Triggering Event (as defined in Section 8(d)) or at the election of
the Company pursuant to Section 8, all accrued and unpaid dividends on the
Series J Preferred Stock shall be payable on the day immediately preceding the
date of such redemption. In the event of a voluntary conversion pursuant to
Section 5(a), all accrued and unpaid dividends on the Series J Preferred Stock
being converted shall be payable on the day immediately preceding the Voluntary
Conversion Date (as defined in Section 5(b)(i)) and in the event of a mandatory
conversion pursuant to Section 5(c), all accrued and unpaid dividends on the
Series J Preferred Stock being converted shall be payable on the day immediately
preceding the Mandatory Conversion Date.
(d) For purposes hereof, unless the context otherwise
requires, "distribution" shall mean the transfer of cash or property without
consideration, whether by way of dividend or otherwise, payable other than in
shares of Common Stock or other equity securities of the Company, or the
purchase or redemption of shares of the Company (other than redemptions set
forth in Paragraph 8 below or repurchases of Common Stock held by employees or
consultants of the Corporation upon termination of their employment or services
pursuant to agreements providing for such repurchase or upon the cashless
exercise of options held by employees or consultants) for cash or property.
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3. Voting Rights
(a) Class Voting Rights. The Series J Convertible Preferred
Stock shall have the following class voting rights (in addition to the voting
rights set forth in Section 3(b) hereof). So long as any shares of the Series J
Convertible Preferred Stock remain outstanding, the Company shall not, without
the affirmative vote or consent of the holders of at least three-quarters (3/4)
of the shares of the Series J Convertible Preferred Stock outstanding at the
time, given in person or by proxy, either an writing or at a meeting, in which
the holders of the Series J Convertible Preferred Stock vote separately as
class: (i) authorize, create, issue or increase the authorized or issued amount
of any class or series of stock, including but not limited to the issuance of
any more shares of previously authorized Common Stock or Preferred Stock,
ranking prior to the Series J Convertible Preferred Stock, with respect to the
distribution of assets on liquidation, dissolution or winding up; (ii) amend,
alter or repeal the provisions of the Series J Convertible Preferred Stock,
whether by merger, consolidation or otherwise, so as to adversely affect any
right, preference, privilege or voting power of the Series J Convertible
Preferred Stock; provided, however, that any creation and issuance of another
series of Junior Stock shall not be deemed to adversely affect such rights,
preferences, privileges or voting powers; (iii) repurchase, redeem or pay
dividends on, shares of the Company's Junior Stock; (iv) amend the Certificate
of Incorporation or By-Laws of the Company so as to affect materially and
adversely any right, preference, privilege or voting power of the Series J
Convertible Preferred Stock; provided however, that any creation and issuance of
another series of Junior Stock or any other class or series of equity securities
which by its terms shall rank on parity with the Series J Convertible Preferred
Stock shall not be deemed to materially and adversely affect such rights,
preferences privileges or voting powers; (v) effect any distribution with
respect to Junior Stock; or (vi) reclassify the Company's outstanding
securities.
(b) General Voting Rights. Except with respect to
transactions upon which the Series J Convertible Preferred Stock shall be
entitled to vote separately as a class pursuant to Section 3(a) above and except
as otherwise required by Delaware law, the Series J Convertible Preferred Stock
shall have no voting rights. The Common Stock into which the Series J
Convertible Preferred Stock is convertible shall, upon issuance, have all of the
same voting rights as other issued and outstanding Common Stock of the Company.
4. Liquidation Preference.
(a) In the event of the liquidation, dissolution or winding
up of the affairs of the Company, whether voluntary or involuntary, after
payment or provision for payment of the debts and other liabilities of the
Company, the holders of shares of the Series J Convertible Preferred Stock then
outstanding shall be entitled to receive, out of the assets of the Company
whether such assets are capital or surplus of any nature, an amount equal to
$10,000 per share (the "Liquidation Preference Amount") of the Series J
Convertible Preferred Stock plus any accrued and unpaid dividends before any
payment shall be made or any assets distributed to the holders of the Common
Stock or any other Junior Stock. If the assets of the Company are not sufficient
to pay in full the Liquidation Preference Amount plus any accrued and unpaid
dividends payable to the holders of outstanding shares of the Series J
Convertible Preferred Stock and any series of preferred stock or any other class
of stock on a parity, as to rights on liquidation, dissolution or winding up,
with the Series J Convertible Preferred
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<PAGE>
Stock, then all of said assets will be distributed among the holders of the
Series J Convertible Preferred Stock and the other classes of stock on a parity
with the Series J Convertible Preferred Stock, if any, ratably in accordance
with the respective amounts that would be payable on such shares if all amounts
payable thereon were paid in full. The liquidation payment with respect to each
outstanding fractional share of Series J Convertible Preferred Stock shall be
equal to a ratably proportionate amount of the liquidation payment with respect
to each outstanding share of Series J Convertible Preferred Stock. All payments
for which this Section 4(a) provides shall be in cash, property (valued at its
fair market value as determined by the Company's independent, outside
accountant) or a combination thereof; provided, however, that no cash shall be
paid to holders of Junior Stock unless each holder of the outstanding shares of
Series J Convertible Preferred Stock has been paid in cash the full Liquidation
Preference Amount plus any accrued and unpaid dividends to which such holder is
entitled as provided herein. After payment of the full Liquidation Preference
Amount plus any accrued and unpaid dividends to which each holder is entitled,
such, holders of shares of Series J Convertible Preferred Stock will not be
entitled to any further participation as such in any distribution of the assets
of the Company.
(b) A consolidation or merger of the Company with or into any
other corporation or corporations, or a sale of all or substantially all of the
assets of the Company, or the effectuation by the Company of a transaction or
series of transactions in which more than 50% of the voting shares of the
Company is disposed of or conveyed, shall not be deemed to be a liquidation,
dissolution, or winding up within the meaning of this Section 4. In the event of
the merger or consolidation of the Company with or into another corporation, the
Series J Convertible Preferred Stock shall maintain its relative powers,
designations and preferences provided for herein and no merger shall result
inconsistent therewith.
(c) Written notice of any voluntary or involuntary
liquidation, dissolution or winding up of the affairs of the Company, stating a
payment date and the place where the distributable amounts shall be payable,
shall be given by mail, postage prepaid, no less than 45 days prior to the
payment date stated therein, to the holders of record of the Series J
Convertible Preferred Stock at their respective addresses as the same shall
appear on the books of the Company.
5. Conversion. The holder of Series J Convertible Preferred
Stock shall have the following conversion rights (the "Conversion Rights"):
(a) Right to Convert. At any time on or after the earlier of
(i) ninety (90) days from the Closing Date (as such term is defined in the
Securities Purchase Agreement dated as of July 22, 1999 between the Company and
the initial holders of the Series J Convertible Preferred Stock (the "Securities
Purchase Agreement")) or (ii) the effective date of the Registration Statement
(as such term is defined in the Registration Rights Agreement dated as of July
22, 1999 by and among the Company and the initial holders of the Series J
Convertible Preferred Stock (the "Registration Rights Agreement"), the holder of
any such shares of Series J Convertible Preferred Stock may, at such holder's
option, subject to the limitations set forth in Section 7 herein, elect to
convert (a "Voluntary Conversion") all or any portion of the shares of Series J
Convertible Preferred Stock held by such person into a number of fully paid and
nonassessable shares of Common Stock (the "Conversion Rate") equal to the
quotient of (i) the Liquidation Preference Amount of the shares of
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<PAGE>
Series J Convertible Preferred Stock being converted divided by (ii) the
Conversion Price (as defined in Section 5(d)(iii) below) then in effect as of
the date of the delivery by such holder of its notice of election to convert,
provided, that if during the period of 120 consecutive days immediately
following the Closing Date the Conversion Price is less than 90% of the Five Day
Average Share Price (as defined in Section 5(d)(ii))(the "Floor Price"), then
the Conversion Rate shall be equal to the quotient of (A) the Liquidation
Preference Amount of the shares of Series J Convertible Preferred Stock being
converted divided by (B) the Floor Price.
(b) Mechanics of Voluntary Conversion. The Voluntary
Conversion of Series J Convertible Preferred Stock shall be conducted in the
following manner:
(i) Holder's Delivery Requirements. To convert Series
J Convertible Preferred Stock into full shares of Common Stock on any date (the
"Voluntary Conversion Date"), the holder thereof shall (A) transmit by facsimile
(or otherwise deliver), for receipt on or prior to 5:00 p.m., Pacific Time on
such date, a copy of a fully executed notice of conversion in the form attached
hereto as Exhibit I (the "Conversion Notice"), to the Company, and (B) surrender
to a common carrier for delivery to the Company as soon as practicable following
such date, the original certificates representing the shares of Series J
Convertible Preferred Stock being converted (or an indemnification undertaking
with respect to such shares in the case of their loss, theft or destruction)
(the "Preferred Stock Certificates") and the originally executed Conversion
Notice.
(ii) Company's Response. Upon receipt by the Company
of a facsimile copy of a Conversion Notice, the Company shall immediately send,
via facsimile, a confirmation of receipt of such Conversion Notice to such
holder. Upon receipt by the Company of the Preferred Stock Certificates to be
converted pursuant to a Conversion Notice, together with the originally executed
Conversion Notice, the Company or its designated transfer agent (the "Transfer
Agent")(as applicable) shall, on the next business day following the date of
receipt by the Company of both (or the second business day following the date of
receipt by the Company of both if received after 11:00 a.m. Pacific Time), issue
and surrender to a common carrier for overnight delivery to the address as
specified in the Conversion Notice; a certificate, registered in the name of the
holder or its designee, for the number of shares of Common Stock to which the
holder shall be entitled. If the number of Preferred Shares represented by the
Preferred Stock Certificate(s) submitted for conversion is greater than the
number of shares of Series J Convertible Preferred Stock being converted, then
the Company shall, as soon as practicable and in no event later than three (3)
business days after receipt of the Preferred Stock Certificate(s) and at the
Company's expense, issue and deliver to the holder a new Preferred Stock
Certificate representing the number of shares of Series J Convertible Preferred
Stock not converted.
(iii) Dispute Resolution. In the case of a dispute as
to the determination of the Average Share Prices (as defined in Section 5(d)
below) or the Conversion Price or the arithmetic calculation of the number of
shares of Common Stock to be issued upon conversion, the Company shall promptly
issue to the holder the number of shares of Common Stock that is not disputed
and shall submit the disputed determinations or arithmetic calculations to the
holder via facsimile as soon as possible, but in no event later than two (2)
business days after receipt of such holder's Conversion Notice. If such holder
and the Company are unable to agree upon the
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<PAGE>
determination of the Average Share Prices or the Conversion Price or the
arithmetic calculation of the number of shares of Common Stock to be issued upon
such conversion within one (1) business day of such disputed determination or
arithmetic calculation being submitted to the holder, then the Company shall
within one (1) business day submit via facsimile (A) the disputed determination
of the Average Share Prices or the Conversion Price to an independent, reputable
investment bank or (B) the disputed arithmetic calculation of the number of
shares of Common Stock to be issued upon such conversion to its independent,
outside accountant. The Company shall cause the investment bank or the
accountant, as the case may be, to perform the determinations or calculations
and notify the Company and the holder of the results no later than seventy-two
(72) hours from the time it receives the disputed determinations or
calculations. Such investment bank's or accountant's determination or
calculation, as the case may be, shall be binding upon all parties absent
manifest error. The reasonable expenses of such investment bank or accountant in
making such determination shall be paid by the Company, in the event the
holder's calculation or determination was correct, or by the holder, in the
event the Company's calculation or determination was correct, or equally by the
Company and the holder in the event that neither the Company's or the holder's
calculation or determination was correct The period of time in which the Company
is required to effect conversions or redemptions under this Certificate of
Designations shall be tolled with respect to the subject conversion or
redemption pending resolution of any dispute by the Company made in good faith
and in accordance with this Section 5(b)(iii).
(iv) Record Holder. The person or persons entitled to
receive the shares of Common Stock issuable upon a conversion of the Series J
Convertible Preferred Stock shall be treated for all purposes as the record
holder or holders of such shares of Common Stock on the Conversion Date.
(v) Company's Failure to Timely Convert. If within
five (5) business days of the Company's receipt of the Conversion Notice and the
Preferred Stock Certificates to be converted and the Conversion Notice (the
"Share Delivery Period") the Company shall fail to issue a certificate to a
holder for the number of shares of Common Stock to which such holder is entitled
upon such holder's conversion of the Series J Convertible Preferred Stock or to
issue a new Preferred Stock Certificate representing the number of shares of
Series J Convertible Preferred Stock to which such holder is entitled pursuant
to Section 5(b)(ii) (a "Conversion Failure"), in addition to all other available
remedies which such holder may pursue hereunder and under the Securities
Purchase Agreement (including indemnification pursuant to Article thereof), the
Company shall pay additional damages to such holder on each business day after
such fifth (5th) business day that such conversion is not timely effected in an
amount equal 0.5% of the product of (A) the sum of the number of shares of
Common Stock not issued to the holder on a timely basis pursuant to Section
5(b)(ii) and to which such holder is entitled and, in the event the Company has
failed to deliver a Preferred Stock Certificate to the holder on a timely basis
pursuant to Section 5(b)(ii), the number of shares of Common Stock issuable upon
conversion of the shares of Series J Convertible Preferred Stock represented by
such Preferred Stock Certificate, as of the last possible date which the Company
could have issued such Preferred Stock Certificate to such holder without
violating Section 5(b)(ii) and (B) the Closing Bid Price (as defined in Section
5(d) below) of the Common Stock on the last possible date which the Company
could have issued such Common Stock and such Preferred Stock Certificate, as the
case may be, to such holder without violating Section 5(b)(ii). If the Company
fails
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<PAGE>
to pay the additional damages set forth in this Section 5(b)(v) within five
business days of the date incurred, then such payment shall bear interest at the
rate of 2% per month (pro rated for partial months) until such payments are
made.
(c) Mandatory Conversion.
(i) Each share of Series J Convertible Preferred
Stock outstanding on the Mandatory Conversion Date shall, automatically and
without any action on the part of the holder thereof, convert into a number of
fully paid and nonassessable shares of Common Stock equal to the quotient of (i)
the Liquidation Preference Amount of the shares of Series J Convertible
Preferred Stock outstanding on the Mandatory Conversion Date divided by (ii) the
Conversion Price in effect on the Mandatory Conversion Date.
(ii) As used herein, a "Mandatory Conversion Date"
shall be the date which is three (3) years after the date of issuance of the
applicable Preferred Shares (the "Issuance Date"), provided that the Mandatory
Conversion Date shall be extended for a period of up to two (2) years for any
shares of Series J Convertible Preferred Stock (x) for as long as (A) the
conversion of such share of Preferred Stock would violate Section 7, (B) a
Triggering Event (as defined in Section 8(d)) shall have occurred and be
continuing or (C) any event shall have occurred and be continuing which with the
passage of time and the failure to cure would result in a Triggering Event and
(y) pursuant to Section 7(e) of the Registration Rights Agreement, which
extension shall be one day for each days In any Blackout Period (as defined in
Section 3(n) of the Registration Rights Agreement). The Mandatory Conversion
Date and the Voluntary Conversion Date collectively are referred to in this
Certificate of Designations as the "Conversion Date."
(iii) On the Mandatory Conversion Date, the
outstanding shares of Series J Convertible Preferred Stock shall be converted
automatically without any further action by the holders of such shares and
whether or not the certificates representing such shares are surrendered to the
Company or its transfer agent; provided, however, that the Company shall not be
obligated to issue certificates evidencing the shares of Common Stock issuable
upon conversion of any shares of Series J Convertible Preferred Stock unless
certificates evidencing such shares of Series J Convertible Preferred Stock are
either delivered to the Company or the holder notifies the Company that such
certificates have been lost, stolen, or destroyed, and executes an agreement
satisfactory to the Company to indemnify the Company from any loss incurred by
it in connection therewith. Upon the occurrence of the automatic conversion of
the Series J Convertible Preferred Stock pursuant to this Section 5, the holders
of the Series J Convertible Preferred Stock shall surrender the Preferred Stock
Certificates representing the Series J Convertible Preferred Stock for which the
Mandatory Conversion Date has occurred to the Company and the Company shall
deliver the shares of Common Stock issuable upon such conversion (in the same
manner set forth in Section. 5(b)(ii)) to the holder within thee (3) business
days of the holder's delivery of the applicable Preferred Stock Certificates.
(d) Conversion Price.
(i) The term "Six Day Average Share Price" shall mean
the average of the six (6) lowest Closing Bid Prices of the Company's shares of
Common Stock (as reported by
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<PAGE>
Bloomberg Financial Markets ("Bloomberg")) in the over-the-counter market on the
electronic bulletin board for such security (the "OTC Bulletin Board") (or on
such other United States stock exchange or public trading market ("Alternative
Exchange") on which the shares of the Company trade if, at the time of the
conversion, they are not trading in the OTC Bulletin Board), during the twenty
(20) consecutive trading days ending on the trading day immediately preceding
the Conversion Date.
(ii) The term "Five Day Average Share Price" shall
mean the average of the Closing Bid Prices of the Company's shares of Common
Stock in the OTC Bulletin Board as reported by Bloomberg (or on such other
Alternative Exchange on which the shares of the Company trade if, at the time of
the conversion, they are not trading in the OTC Bulletin Board), during the five
(5) consecutive trading days ending on the trading day immediately preceding the
Closing Date. The Six Day Average Share Price and the Five Day Average Share
Price collectively referred to herein as the "Average Share Prices".
(iii) The term "Conversion Price" shall mean, with
respect to any conversion of Series J Convertible Preferred Stock, the lesser of
(A) 100% of the Five Day Average Share Price (the "Fixed Conversion Price"), or
(II) 100% of the "Floating Conversion Price" where "Floating Conversion Price"
shall mean 80% of the Six Day Average Share Price on the Voluntary Conversion
Date or Mandatory Conversion Date for such conversion, as applicable.
(iv) The term "Closing Bid Price" shall mean, for any
security as of any date, the last closing bid price of such security in the OTC
Bulletin Board for such security as reported by Bloomberg, or, if no closing bid
price is reported for such security by Bloomberg, the last closing trade price
of such security as reported by Bloomberg, or, if no last closing trade price is
reported for such security by Bloomberg, the average of the bid prices of any
market makers for such security as reported in the "pink sheets" by the National
Quotation Bureau, Inc. If the Closing Bid Price cannot be calculated for such
security on such date on any of the foregoing bases, the Closing Bid Price of
such security on such date shall be the fair market value as mutually determined
by the Company and the holders of a majority of the outstanding shares of Series
J Convertible Preferred Stock. If the Company and the holders of Series J
Convertible Preferred Stock are unable to agree upon the fair market value of
the Common Stock, then such dispute shall be resolved pursuant to Section
5(b)(iii) above with the term "Closing Bid Price" being substituted for the term
"Average Share Prices." (All such determinations to be appropriately adjusted
for any stock dividend, stock split or other similar transaction during such
period).
(e) Adjustments of Conversion Price.
(i) Adjustments for Stock Splits and Combinations. If
the Company shall at any time or from time to time after the Issuance Date,
effect a stock split of the outstanding Common Stock, the applicable Fixed
Conversion Price in effect immediately prior to the stock split shall be
proportionately decreased. If the Company shall at any time or from time to time
after the Issuance Date, combine the outstanding shares of Common Stock, the
applicable Fixed Conversion Price in effect immediately prior to the combination
shall be proportionately increased. Any
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<PAGE>
adjustments under this Section 5(e)(i) shall be effective at the close of
business on the date the stock split or combination occurs.
(ii) Adjustments for Certain Dividends an
Distributions. If the Company shall at any time or from time to time after the
Issuance Date, make or issue or set a record date for the determination of
holders of Common Stock entitled to receive a dividend or other distribution
payable in shares of Common Stock, then, and in each event, the applicable Fixed
Conversion Price in effect immediately prior to such event shall be decreased as
of the time of such issuance or, in the event such record date shall have been
fixed, as of the close of business on such record date, by multiplying, as
applicable, the applicable Fixed Conversion Price then in effect by a fraction:
(A) the numerator of which shall be the total number
of shares of Common Stock issued and outstanding immediately prior to the time
of such issuance or the close of business on such record date; and
(B) the denominator of which shall be the total
number of shares of Common Stock issued and outstanding immediately prior to the
time of such issuance or the close of business on such record date plus the
number of shares of Common Stock issuable in payment of such dividend or
distribution.
(iii) Adjustment for Other Dividends and
Distributions. If the Company shall at any time or from time to time after the
Issuance Date, make or issue or set a record date for the determination of
holders of Common Stock entitled to receive a dividend or other distribution
payable in other than shares of Common Stock, then, and in each event, an
appropriate revision to the applicable Fixed Conversion Price shall be made and
provision, shall be made (by adjustments of the Conversion Price or otherwise)
so that the holders of Series J Convertible Preferred Stock shall receive upon
conversions thereof, in addition to the number of shares of Common Stock
receivable thereon, the number of securities of the Company which they would
have received had their Series J Convertible Preferred Stock been converted into
Common Stock on the date of such event and had thereafter, during the period
from the date of such event to and including the Conversion Date, retained such
securities (together with any distributions payable thereon during such period),
giving application to all adjustments called for during such period under this
Section 5(e)(iii) with respect to the rights of the holders of the Series J
Convertible Preferred Stock.
(iv) Adjustments for Reclassification, Exchange or
Substitution. If the Common Stock issuable upon conversion of the Series
Convertible Preferred Stock at any time or from time to time after the Issuance
Date shall be changed to the same or different number of shares of any class or
classes of stock, whether by reclassification, exchange, substitution or
otherwise (other than by way of a stock split or combination of shares or stock
dividends provided for in Sections 5(e)(i), (ii) and (iii), or a reorganization,
merger, consolidation, or sale of assets provided for in Section 5(e)(v)), then,
and in each event, an appropriate revision to the Fixed Conversion Price shall
be made and provisions shall be made (by adjustments of the Conversion Price or
otherwise) so that the holder of each share of Series J Convertible Preferred
Stock shall have the right thereafter to convert such share of Series J
Convertible Preferred Stock into the kind and amount of shares of stock and
other securities receivable upon reclassification, exchange, substitution or
other change,
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by holders of the number of shares of Common Stock into which such share of
Series J Convertible Preferred Stock might have been converted immediately prior
to such reclassification, exchange, substitution or other change, all subject to
further adjustment as provided herein.
(v) Adjustments for Reorganization, Merger,
Consolidation or Sales of Assets. If at any time or from time to time after the
Issuance Date there shall be a capital reorganization of the Company (other than
by way of a stock split or combination of shares or stock dividends or
distributions provided for in Section 5(e)(i), (ii) and (iii), or a
reclassification, exchange or substitution of shares provided for in Section
5(e)(iv)), or a merger or consolidation of the Company with or into another
corporation, or the sale of all or substantially all of the Company's properties
or assets to any other person (an "Organic Change"), then as a part of such
Organic Change an appropriate revision to the Conversion Price shall be made and
provision shall be made (by adjustments of the Conversion Price or otherwise) so
that the holder of each share of Series J Convertible Preferred Stock shall have
the right thereafter to convert such share of Series J Convertible Preferred
Stock into the kind and amount of shares of stock and other securities or
property of the Company or any successor corporation resulting from Organic
Change. In any such case, appropriate adjustment shall be made in the
application of the provisions of this Section 5(e)(v) with respect to the rights
of the holders of the Series J Convertible Preferred Stock after the Organic
Change to the end that the provisions of this Section 5(e)(v) (including any
adjustment in the applicable Conversion Price then in effect and the number of
shares of stock or other securities deliverable upon conversion of the Series J
Convertible Preferred Stock) shall be applied after that event in as nearly an
equivalent manner as may be practicable.
(vi) Consideration for Stock. In case any shares of
Common Stock or any securities convertible into or exchangeable for, directly or
indirectly, Common Stock ("Convertible Securities"), other than the Series J
Convertible Preferred Stock, or any rights or warrants or options to purchase
any such Common Stock or Convertible Securities, shall be issued or sold:
(A) in connection with any merger or consolidation in
which the Company is the surviving corporation (other than any consolidation or
merger in which the previously outstanding shares of Common Stock of the Company
shall be changed to or exchanged for the stock or other securities of another
corporation), the amount of consideration therefore shall be, deemed to be the
fair value, as determined reasonably and in good faith by the Board of Directors
of the Company, of such portion of the assets and business of the nonsurviving
corporation as such Board may determine to be attributable to such shares of
Common Stock, Convertible Securities, rights or warrants or options, as the case
may be; or
(B) in the event of any consolidation or merger of
the Company in which the Company is not the surviving corporation or in which
the previously outstanding shares of Common Stock of the Company shall be
changed into or exchanged for the stock or other securities of another
corporation, or in the event of any sale of all or substantially all of the
assets of the Company for stock or other securities of any corporation, the
Company shall be deemed to have issued a number of shares of its Common Stock
for stock or securities or other property of the other corporation computed on
the basis of the actual exchange ratio on which the transaction was predicated,
and for a consideration equal to the fair market value on the date of such
transaction of
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all such stock or securities or other property of the other corporation. If any
such calculation results in adjustment of the applicable Fixed Conversion Price,
or the number of shares of Common Stock issuable upon conversion of the Series J
Convertible Preferred Stock, the determination of the applicable Fixed
Conversion Price or the number of shares of Common Stock issuable upon
conversion of the Series J Convertible Preferred Stock immediately prior to such
merger, consolidation or sale, shall be made after giving effect to such
adjustment of the number of shares of Common Stock issuable upon conversion of
the Series J Convertible Preferred Stock.
(vii) Record Date. In case the Company shall take
record of the holders of its Common Stock or any other Preferred Stock for the
purpose of entitling them to subscribe for or purchase Common Stock or
Convertible Securities, then the date of the issue or sale of the shares of
Common Stock shall be deemed to be such record date.
(viii) Certain Issues Excepted. Anything herein to
the contrary notwithstanding, the Company shall not be required to make any
adjustment of the number of shares of Common Stock issuable upon conversion of
the Series J Convertible Preferred Stock upon the grant after the Issuance Date
of, or the exercise after the Issuance Date of, options or warrants or rights to
purchase stock under the Company's stock option plan.
(D No Impairment. The Company shall not, by amendment of its
Certificate of Incorporation or through any reorganization, transfer of assets,
consolidation, merger, dissolution, issue or sale of securities or any other
voluntary action, avoid or seek to avoid the observance or performance of any of
the terms to be observed or performed hereunder by the Company, but will at all
times in good faith, assist in the carrying out of all the provisions of this
Section 5 and in the taking of all such action as may be necessary or
appropriate in order to protect the Conversion Rights of the holders of the
Series J Convertible Preferred Stock against impairment.
(g) Certificates as to Adjustments. Upon occurrence of each
adjustment or readjustment of the Fixed Conversion Price or number of shares of
Common Stock issuable upon conversion of the Series J Convertible Preferred
Stock pursuant to this Section 5, the Company at its expense shall promptly
compute such adjustment or readjustment in accordance with the terms hereof and
furnish to each holder of such Series J Convertible Preferred Stock a
certificate setting forth such adjustment and readjustment, showing in detail
the facts upon which such adjustment or readjustment is based. The Company
shall, upon written request of the holder of such affected Series J Convertible
Preferred Stock, at any time, furnish or cause to be furnished to such holder a
like certificate setting forth such adjustments and readjustments, the
applicable Fixed Conversion Price in effect at the time, and the number of
shares of Common Stock and the amount, if any, of other securities or property
which at the time would be received upon the conversion of a share of such
Series J Convertible Preferred Stock. Notwithstanding the foregoing, the Company
shall not be obligated to deliver a certificate unless such certificate would
reflect an increase or decrease of at least one percent of such adjusted amount.
(h) Issue Taxes. The Company shall pay any and all issue and
other taxes, excluding federal, state or local income taxes, that may be payable
in respect of any issue or delivery of shares of Common Stock on conversion of
shares of Series J Convertible Preferred Stock pursuant
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thereto; provided however, that the Company shall not be obligated to pay any
transfer taxes resulting from any transfer requested by any holder in connection
with any such conversion.
(i) Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally or by
facsimile or three (3) business days following being mailed by certified or
registered mail, postage prepaid, return-receipt requested, addressed to the
holder of record at its address appearing on the books of the Company. The
Company will give written notice to each holder of Series J Convertible
Preferred Stock at least twenty (20) days prior to the date on which the Company
closes its books or takes a record (I) with respect to any dividend or
distribution upon the Common Stock, (II) with respect to any pro rata
subscription offer to holders of Common Stock, or (III) for determining rights
to vote with respect to any Organic Change, dissolution, liquidation or
winding-up and in no event shall such notice be provided to such holder prior to
such information being made known to the public. The Company will also give
written notice to each holder of Series J Convertible Preferred Stock at least
twenty (20) days prior to the date on which any Organic Change, dissolution,
liquidation or winding-up will take place and in no event shall such notice be
provided to such holder prior to such information being made known to the
public.
(j) Fractional Shares. No fractional shares of Common Stock
shall be issued upon conversion of the Series J Convertible Preferred Stock. In
lieu of any fractional shares to which the holder would otherwise be entitled,
the Company shall pay cash equal to the product of such fraction multiplied by
the average of the Closing Bid Prices of the Common Stock for the five
consecutive trading days immediately preceding on the Voluntary Conversion Date
or Mandatory Conversion Date, as applicable.
(k) Reservation of Common Stock. The Company shall, so long
as any shares of Series J Convertible Preferred Stock are outstanding, reserve
and keep available out of its authorized and unissued Common Stock, solely for
the purpose of effecting the conversion of the Series J Convertible Preferred
Stock, such number of shares of Common Stock as shall from time to time be
sufficient to effect the conversion of all of the Series J Convertible Preferred
Stock then outstanding; provided that the number of shares of Common Stock so
reserved shall at no time be less than 200% of the number of shares of Common
Stock for which the shares of Series J Convertible Preferred Stock are at any
time convertible. The initial number of shares of Common Stock reserved for
conversions of the Series J Convertible Preferred Stock and each increase in the
number of shares so reserved shall be allocated pro rata among the holders of
the Series J Convertible Preferred Stock based on the number of shares of Series
J Convertible Preferred Stock held by each holder at the time of issuance of the
Series J Convertible Preferred Stock or increase in the number of reserved
shares, as the case may be. In the event a holder shall sell or otherwise
transfer any of such holder's shares of Series J Convertible Preferred Stock,
each, transferee shall be allocated a pro rata portion of the number of reserved
shares of Common Stock reserved for such transferor. Any shares of Common. Stock
reserved and which remain allocated to any person or entity which does not hold
any shares of Series J Convertible Preferred Stock shall be allocated to the
remaining holders of Series J Convertible Preferred Stock, pro rata based on the
number of shares of Series J Convertible Preferred Stock then held by such
holder. The Company shall, from time to time in accordance with the Delaware
General Corporation Law, as amended, increase the authorized number of shares of
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Common Stock if at any time the unissued number of authorized shares shall not
be sufficient to satisfy the Company's obligations under this Section 5(k).
(l) Retirement of Series J Convertible Preferred Stock.
Conversion of Series J Convertible Preferred Stock shall be deemed to have been
effected on the applicable Voluntary Conversion Date or Mandatory Conversion
Date, and such date is referred to herein as the "Conversion Date". Upon
conversion of only a portion of the number of shares of Series J Convertible
Preferred Stock represented by a certificate surrendered for conversion, the
Company shall issue and deliver to such holder at the expense of the Company, a
new certificate covering the number of shares of Series J Convertible Preferred
Stock representing the unconverted portion of the certificate so surrendered as
required by Section 5(b)(ii).
(m) Regulatory Compliance. If any shares of Common Stock to
be reserved for the purpose of conversion of Series J Convertible Preferred
Stock require registration or listing with or approval of any governmental
authority, stock exchange or other regulatory body under any federal or state
law or regulation or otherwise before such shares may be validly issued or
delivered upon conversion, the Company shall, at its sole cost and expense, in
good faith and as expeditiously as possible, endeavor to secure such
registration, listing or approval, as the case may be.
6. No Preemptive Rights. Except as provided in Section 5 hereof
and in the Securities Purchase Agreement, no holder of the Series J Convertible
Preferred Stock shall be entitled to rights to subscribe for, purchase or
receive any part of any new or additional shares of any class, whether now or
hereinafter authorized, or of bonds or debentures, or other evidences of
indebtedness convertible into or exchangeable for shares of any class, but all
such new or additional shares of any class, or any bond, debentures or other
evidences of indebtedness convertible into or exchangeable for shares, may be
issued and disposed of by the Board of Directors on such terms and for such
consideration (to the extent permitted by law), and to such person or persons as
the Board of Directors in their absolute discretion may deem advisable.
7. Conversion Restrictions. Notwithstanding anything to the
contrary set forth in Section 5 of this Certificate of Designations, in no event
shall any holder be entitled to convert Series J Preferred Stock in excess of
that number of shares of Series J Convertible Preferred Stock which, upon giving
effect to such conversion, would cause the aggregate number of shares of Common
Stock beneficially owned by the holder and its affiliates to exceed 4.99% of the
outstanding shares of the Common Stock following such conversion. For purposes
of the foregoing proviso, the aggregate number of shares of Common Stock
beneficially owned by the holder and its affiliates shall include the number of
shares of Common Stock issuable upon conversion of the shares of Series J
Convertible Preferred Stock with respect to which the determination of such
proviso is being made, but shall exclude the number of shares of Common Stock
which would be issuable upon (i) conversion of the remaining, nonconverted
shares of Series J Convertible Preferred Stock beneficially owned by the holder
and its affiliates, and (ii) exercise or conversion of the unexercised or
unconverted portion of any other securities of the Company (including without
limitation, any warrants) subject to a limitation on conversion or exercise
analogous to the limitation contained herein beneficially owned by the holder
and its affiliates. Except as set forth in the preceding
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sentence, for purposes of this Section 7, beneficial ownership shall be
calculated in accordance with Section 13(d) of the Securities Exchange Act of
1934, as amended.
8. Redemption.
(a) Redemption Option Upon Major Transaction. In addition to
all other rights of the holders of Series J Convertible Preferred Stock
contained herein, simultaneous with the occurrence of a Major Transaction (as
defined below), each bolder of Series J Convertible Preferred Stock shall have
the right, at such holder's option, to require the Company to redeem all or a
portion of such holder's shares of Series J Convertible Preferred Stock at a
price per share of Series J Convertible Preferred Stock equal to the greater of
(i) 125% of the Liquidation Preference Amount and (ii) the product of(A) the
Conversion Rate and (B) the Closing Bid Price of the Common Stock on the trading
date immediately preceding such Major Transaction ("Major Transaction Redemption
Price"), provided, that the Major Transaction Redemption Price shall be paid by
the Company as follows: (x) an amount equal to 125% of the Liquidation
Preference Amount shall be paid in cash and (y) the balance, if any, shall be
paid in shares of Common Stock or cash, at the Company's election.
(b) Redemption Option Upon Triggering Event. In addition to
all other rights of the holders of Series J Convertible Preferred Stock
contained herein, after a Triggering Event (as defined below), each holder of
Series J Convertible Preferred Stock shall have the right, at such holder's
option, to require the Company to redeem all or a portion of such holder's
shares of Series J Convertible Preferred Stock at a price per share of Series J
Convertible Preferred Stock equal to the greater of (i) 125% of the Liquidation
Preference Amount and (ii) the product of (A) the Conversion Rate (as defined in
Section 5(a)) at such time and (B) the Closing Bid Price of the Common Stock
calculated as of the date immediately preceding such Triggering Event on which
the exchange or market on which the Common Stock is traded is open ("Triggering
Event Redemption Price" and, collectively with "Major Transaction Redemption
Price," the "Redemption Price"), provided that the Triggering Event Redemption
Price shall be paid by the Company as follows; (x) an amount equal to 125% of
the Liquidation Preference Amount shall be paid in cash and (y) the balance, if
any, shall be paid in shares of Common Stock or cash, at the Company's election.
(c) "Major Transaction". A "Major Transaction" shall be
deemed to have occurred at such time as any of the following events:
(i) the consolidation, merger or other business
combination of the Company with or into another Person (other than (A) pursuant
to a migratory merger effected solely for the purpose of changing the
jurisdiction of incorporation of the Company or (B) a consolidation, merger or
other business combination in which holders of the Company's voting power
immediately prior to the transaction continue after the transaction to hold,
directly or indirectly, the voting power of the surviving entity or entities
necessary to elect a majority of the members of the board of directors (or their
equivalent if other than a corporation) of such entity or entities).
(ii) the sale or transfer of all or substantially all
of the Company's assets; or
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(iii) consummation of a purchase, tender or exchange
offer made to the holders of more than 30% of the outstanding shares of Common
Stock.
(d) "Triggering Event". A "Triggering Event" shall be
deemed to have occurred at such time as any of the following events:
(i) the failure of the Registration Statement to be
declared effective by the SEC on or prior to the date which is 150 days after
the Closing Date;
(ii) while the Registration Statement is required to
be maintained effective pursuant to the terms of the Registration Rights
Agreement, the effectiveness of the Registration Statement lapses for any reason
(including, without limitation, the issuance of a stop order) or is unavailable
to the holder of the Series J Convertible Preferred Stock for sale of the
Registrable Securities (as defined in the Registration Rights Agreement) in
accordance with the terms of the Registration Rights Agreement, and such lapse
or unavailability continues for a period of ten consecutive trading days,
provided that the cause of such lapse or unavailability is not due to factors
solely within the control, of such holder of Series J Convertible Preferred
Stock;
(iii) the suspension from listing or the failure of
the Common Stock to be listed on the OTC Bulletin Board, the Nasdaq SmallCap
Market, the Nasdaq National Market, The New York Stock Exchange, Inc. or The
American Stock Exchange, Inc., as applicable, for a period of five consecutive
days;
(iv) the Company's notice to any holder of Series J
Convertible Preferred Stock including by way of public announcement, at any
time, of its inability to comply (including for any of the reasons described in
Section 9) or its intention not to comply with proper requests for conversion of
any Series J Convertible Preferred Stock into shares of Common Stock;
(v) the Company's failure to comply with a Conversion
Notice tendered in accordance with the provisions of this Certificate of
Designations within 10 business days after the receipt by the Company of the
Conversion Notice and the Preferred Stock Certificates; or
(vi) the Company breaches any representation,
warranty, covenant or other term or condition of the Securities Purchase
Agreement, the Registration Rights Agreement, this Certificate of Designations
or any other agreement, document, certificate or other instrument delivered in
connection with the transactions contemplated thereby or hereby, except to the
extent that such breach would not have a Material Adverse Effect (as defined in
Section 2.1(e) of the Securities Purchase Agreement) and except, in the case of
a breach of a covenant which is curable, only if such breach continues for a
period of a least ten days.
(e) Mechanics of Redemption at Option of Buyer Upon Major
Transaction. No sooner than 15 days nor later than 10 days prior to the
consummation of a Major Transaction, but not prior to the public announcement of
such Major Transaction, the Company shall deliver written notice thereof via
facsimile and overnight courier ("Notice of Major Transaction") to each holder
of Series J Convertible Preferred Stock. At any time after receipt of a Notice
of Major Transaction (or,
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in the event a Notice of Major Transaction is not delivered at least 10 days
prior to a Major Transaction, at any time within 10 days prior to a Major
Transaction), any holder of Series J Convertible Preferred Stock then
outstanding may require the Company to redeem, effective immediately prior to
the consummation of such Major Transaction, all of the holder's Series J
Convertible Preferred Stock then outstanding by delivering written notice
thereof via facsimile and overnight courier ("Notice of Redemption at Option of
Buyer Upon Major Transaction") to the Company, which Notice of Redemption at
Option of Buyer Upon Major Transaction shall indicate (i) the number of shares
of Series J Convertible Preferred Stock that such holder is electing to redeem
and (ii) the applicable Major Transaction Redemption Price, as calculated
pursuant to Section 8(a) above.
(f) Mechanics of Redemption at Option of Buyer Upon
Triggering Event. Within one (1) day after the occurrence of a Triggering Event,
the Company shall deliver written notice thereof via facsimile and overnight
courier ("Notice of Triggering Event") to each holder of Series J Convertible
Preferred Stock. At any time after the earlier of a holder's receipt of a Notice
of Triggering Event and such holder becoming aware of a Triggering Event, any
holder of Series J Convertible Preferred Stock then outstanding may require the
Company to redeem all of the Series J Convertible Preferred Stock by delivering
written notice thereof via facsimile and overnight courier ("Notice of
Redemption at Option of Buyer Upon Triggering Event") to the Company, which
Notice of Redemption at Option of Buyer Upon Triggering Event shall indicate (i)
the number of shares of Series J Convertible Preferred Stock that such holder is
electing to redeem and (ii) the applicable Triggering Event Redemption Price, as
calculated pursuant to Section 8(b) above.
(g) Payment of Redemption Price. Upon. the Company's receipt
of a Notice(s) of Redemption at Option of Buyer Upon Triggering Event or a
Notice(s) of Redemption at Option of Buyer Upon Major Transaction from any
holder of Series J Convertible Preferred Stock, the Company shall immediately
notify each holder of Series J Convertible Preferred Stock by facsimile of the
Company's receipt of such Notice(s) of Redemption at Option of Buyer Upon
Triggering Event or Notice(s) of Redemption at Option of Buyer Upon Major
Transaction and each holder which has sent such a notice shall promptly submit
to the Company such holder's Preferred Stock Certificates which such holder has
elected to have redeemed. The Company shall deliver the applicable Triggering
Event Redemption Price, in the case of a redemption pursuant to Section 8(f), to
such holder within five (5) business days after the Company's receipt of a
Notice of Redemption at Option of Buyer Upon Triggering Event and, in the case
of a redemption pursuant to Section 8(e), the Company shall deliver the
applicable Major Transaction Redemption Price immediately prior to the
consummation of the Major Transaction; provided that a holder's Preferred Stock
Certificates shall have been so delivered to the Company; provided however that
if the Company is unable to redeem all of the Series J Convertible Preferred
Stock to be redeemed, the Company shall redeem an amount from each holder of
Series J Convertible Preferred Stock being redeemed equal to such holder's
pro-rata amount (based on the number of shares of Series J Convertible Preferred
Stock held by such holder relative to the number of shares of Series J
Convertible Preferred Stock outstanding) of all Series J Convertible Preferred
Stock being redeemed. If the Company shall fail to redeem all of the Series J
Convertible Preferred Stock submitted for redemption (other than pursuant to a
dispute as to the arithmetic calculation of the Redemption Price), in addition
to any remedy such holder of Series J Convertible Preferred Stock may have under
this Certificate of Designations and the Securities
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Purchase Agreement, the applicable Redemption Price payable in respect of such
unredeemed Series J Convertible Preferred Stock shall bear interest at the rate
of 2.0% per month (prorated for partial months) until paid in full. Until the
Company pays such unpaid applicable Redemption Price in full to a holder of
shares of Series J Convertible Preferred Stock submitted for redemption, such
bolder shall have the option (the "Void Optional Redemption Option") to, in lieu
of redemption, require the Company to promptly return to such holder(s) all of
the shares of Series J Convertible Preferred Stock that were submitted for
redemption by such holder(s) under this Section 8 and for which the applicable
Redemption Price has not been paid, by sending written notice thereof to the
Company via facsimile (the "Void Optional Redemption Notice"). Upon the
Company's receipt of such Void Optional Redemption Notice(s) and prior to
payment of the full applicable Redemption Price to such holder, (i) the
Notice(s) of Redemption at Option of Buyer Upon Triggering Event or the
Notice(s) of Redemption at Option of Buyer Upon Major Transaction, as the case
may be, shall be null and void with respect to those shares of Series J
Convertible Preferred Stock submitted for redemption and for which the
applicable Redemption Price has not been paid, (ii) the Company shall
immediately return any Series J Convertible Preferred Stock submitted to the
Company by each holder for redemption under this Section 8(g) and for which the
applicable Redemption Price has not been paid and (iii) the Fixed Conversion
Price of such returned shares of Series J Convertible Preferred Stock shall be
adjusted to the lesser of(A) the Fixed Conversion Price as in effect on the date
on which the Void Optional Redemption Notice(s) is delivered to the Company and
(B) the lowest Closing Bid Price during the period beginning on the date on
which the Notice(s) of Redemption of Option of Buyer Upon Major Transaction or
the Notice(s) of Redemption at Option of Buyer Upon Triggering event, as the
case may be, is delivered to the Company and ending on the date on which the
Void Optional Redemption Notice(s) is delivered to the Company; provided that no
adjustment shall be made if such adjustment would result in an increase of the
Fixed Conversion Price then in effect. Notwithstanding the foregoing, in the
event of a dispute as to the determination of the Closing Bid Price or the
arithmetic calculation of the Redemption Price, such dispute shall be resolved
pursuant to Section 5(b)(iii) above with the term "Closing Bid Price" being
substituted for the term "Average Share Prices" and the tern "Redemption Price"
being substituted for the term "Conversion Price". A holder's delivery of a Void
Optional Redemption Notice and exercise of its rights following such notice
shall not effect the Company's obligations to make any payments which have
accrued prior to the date of such notice. Payments provided for in this Section
8 shall have priority to payments to other stockholders in connection with a
Major Transaction.
(h) Company's Redemption Option. The Company may redeem all
or a portion of the Series J Convertible Preferred Stock outstanding upon thirty
(30) days prior written notice (the "Company's Redemption Notice") at a price
per share of Series J Convertible Preferred Stock equal to 120% of the
Liquidation Preference Amount, plus any accrued but unpaid dividends (the
"Company's Redemption Price"); provided, that if a holder has delivered a
Conversion Notice to the Company or delivers a Conversion Notice within thirty
(30) days of receipt of the Company's Redemption Notice, the shares of Series J
Convertible Preferred Stock designated to be converted may not be redeemed by
the Company; provided further that if during the period between delivery of the
Company's Redemption Notice and the Redemption Date a holder shall become
entitled to deliver a Notice of Redemption at Option of Buyer Upon Major
Transaction or Notice of Redemption at Option of Buyer upon Triggering Event,
then the right of such holder shall take precedence over the previously
delivered Company Redemption Notice. The Company's Redemption Notice shall
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state the date of redemption which date shall be the thirty-first (31st) day
after the Company has delivered the Company's Redemption Notice (the "Redemption
Date"), the Company's Redemption Price and the number of shares to be redeemed
by the Company. The Company shall deliver the Company's Redemption Price to the
Escrow Agent (as defined in the Purchase Agreement) within five (5) business
days after the Company has delivered the Company's Redemption Notice, provided
that if the holder(s) delivers a Conversion Notice before the Redemption Date,
then the portion of the Redemption Price which would be paid to redeem the
shares of Series J Convertible Preferred Stock covered by such Conversion Notice
shall be returned to the Company upon delivery of the Common Stock issuable in
connection with such Conversion Notice to the bolder(s). On the Redemption Date,
the Escrow Agent shall pay the Company's Redemption Price, subject to any
adjustment pursuant to the immediately preceding sentence, to the holder(s) on a
pro rata basis, provided, however, that upon receipt by the Escrow Agent of the
Preferred Stock Certificates to be redeemed pursuant to this Section 8(h), the
Escrow Agent shall, on the next business day following the date of receipt by
the Escrow Agent of such Preferred Stock Certificates, pay the Company's
Redemption Price to the holder(s) on a pro rata basis. If the Company fails to
pay the Redemption Price by the fifth (5th) business day after the Company has
delivered the Company's Redemption Notice, the redemption will be declared null
and void and the Company shall lose its right to serve a Company's Redemption
Notice in the future.
9. Inability to Fully Convert.
(a) Holder's Option if Company Cannot Fully Convert. If, upon
the Company's receipt of a Conversion Notice or on the Mandatory Conversion
Date, the Company cannot issue shares of Common Stock registered for resale
under the Registration Statement for any reason, including, without limitation,
because the Company (x) does not have a sufficient number of shares of Common
Stock authorized and available, (y) is otherwise prohibited by applicable law or
by the rules or regulations of any stock exchange, interdealer quotation system
or other self-regulatory organization with jurisdiction over the Company or its
Securities from issuing all of the Common Stock which is to be issued to a
holder of Series J Convertible Preferred Stock pursuant to a Conversion Notice
or (z) fails to have a sufficient number of shares of Common Stock registered
for resale under the Registration Statement, then the Company shall issue as
many shares of Common Stock as it is able to issue in accordance with such
holder's Conversion Notice and pursuant to Section 5(b)(ii) above and, with
respect to the unconverted Series J Convertible Preferred Stock, the holder,
solely at such holder's option, can elect, within five (5) business days after
receipt of notice from the Company thereof to:
(i) require the Company to redeem from such holder
those Series J Convertible Preferred Stock for which the Company is unable to
issue Common Stock in accordance with such holder's Conversion Notice
("Mandatory Redemption") at a price per share equal to the Triggering Event
Redemption Price as of such Conversion Date (the "Mandatory Redemption Price");
(ii) if the Company's inability to fully convert
Series J Convertible Preferred Stock is pursuant to Section 9(a)(z) above,
require the Company to issue restricted shares of Common Stock in accordance
with such holder's Conversion Notice and pursuant to Section 5(b)(ii) above;
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<PAGE>
(iii) void its Conversion Notice and retain or have
returned, as the case may be, the shares of Series J Convertible Preferred Stock
that were to be converted pursuant to such holder's Conversion Notice (provided
that a holder's voiding its Conversion Notice shall not effect the Company's
obligations to make any payments which have accrued prior to the date of such
notice).
(b) Mechanics of Fulfilling Holder's Election. The Company
shall immediately send via facsimile to a holder of Series J Convertible
Preferred Stock, upon receipt of a facsimile copy of a Conversion Notice from
such holder which cannot be fully satisfied as described in Section 9(a) above,
a notice of the Company's inability to fully satisfy such holder's Conversion
Notice (the "Inability to Fully Convert Notice"). Such Inability to Fully
Convert Notice shall indicate (i) the reason why the Company is unable to fully
satisfy, such holder's Conversion Notice, (ii) the number of Series J
Convertible Preferred Stock which cannot be converted and (iii) the applicable
Mandatory Redemption Price. Such holder shall notify the Company of its election
pursuant to Section 9(a) above by delivering written notice via facsimile to the
Company ("Notice in Response to Inability to Convert").
(c) Payment of Redemption Price. If such holder shall elect to
have its shares redeemed pursuant to Section 9(a)(i) above, the Company shall
pay the Mandatory Redemption Price in cash to such holder within thirty (30)
days of the Company's receipt of the holder's Notice in Response to Inability to
Convert, provided that prior to the Company's receipt of the holder's Notice in
Response to Inability to Convert the Company has not delivered a notice to such
holder stating, to the satisfaction of the holder, that the event or condition
resulting in the Mandatory Redemption has been cured and all Conversion Shares
issuable to such holder can and will be delivered to the holder in accordance
with the terms of Section 2(g). If the Company shall fail to pay the applicable
Mandatory Redemption Price to such holder on a timely basis as described in this
Section 9(c) (other than pursuant to a dispute as to the determination of the
arithmetic calculation of the Redemption Price), in addition to any remedy such
holder of Series J Convertible Preferred Stock may have under this Certificate
of Designation and the Securities Purchase Agreement, such unpaid amount shall
bear interest at the rate of 2.0% per month (prorated for partial months) until
paid in full. Until the full Mandatory Redemption Price is paid in full to such
holder, such holder may (i) void the Mandatory Redemption with respect to those
Series J Convertible Preferred Stock for which the full Mandatory Redemption
Price has not been paid, (ii) receive back such Series J Convertible Preferred
Stock, and (iii) require that the Fixed Conversion Price of such returned Series
J Convertible Preferred Stock be adjusted to the lesser of (A) the Fixed
Conversion Price as in effect on the date on which the holder voided the
Mandatory Redemption and (B) the lowest Closing Bid Price during the period
beginning on the Conversion Date and ending on the date the holder voided the
Mandatory Redemption. Notwithstanding the foregoing, if the Company fails to pay
the applicable Mandatory Redemption Price within such thirty (30) days time
period due to a dispute as to the determination of the arithmetic calculation of
the Redemption Rate, such dispute shall be resolved pursuant to Section
5(b)(iii) above with the term "Redemption Price" being substituted for the tern
"Conversion Price".
(d) Pro-rata Conversion and Redemption. In the event the
Company receives a Conversion Notice from more than one holder of Series J
Convertible Preferred Stock on the same
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<PAGE>
day and the Company can convert and redeem some, but not all, of the Series J
Convertible Preferred Stock pursuant to this Section 9, the Company shall
convert and redeem from each holder of Series J Convertible Preferred Stock
electing to have Series J Convertible Preferred Stock converted and redeemed at
such time an amount equal to such holder's pro-rata amount (based on the number
shares of Series J Convertible Preferred Stock held by such holder relative to
the number shares of Series J Convertible Preferred Stock outstanding) of all
shares of Series J Convertible Preferred Stock being converted and redeemed at
such time.
10. Vote to Change the Terms of or Issue Preferred Stock. The
affirmative vote at a meeting duly called for such purpose or the written
consent without a meeting, of the holders of not less than three-fourths (3/4)
of the then outstanding shares of Series J Convertible Preferred Stock, shall be
required (a) for any change to this Certificate of Designations or the Company's
Certificate of Incorporation which would amend, alter, change or repeal any of
the powers, designations; preferences and rights of the Series J Convertible
Preferred Stock or (b) for the issuance of shares of Series J Convertible
Preferred Stock other than pursuant to the Securities Purchase Agreement.
11. Lost or Stolen Certificates. Upon receipt by the Company of
evidence satisfactory to the Company of the loss, theft, destruction or
mutilation of any Preferred Stock Certificates representing the shares of Series
J Convertible Preferred Stock, and, in the case of loss, theft or destruction,
of any indemnification undertaking by the holder to the Company and, in the case
of mutilation, upon surrender and cancellation of the Preferred Stock
Certificate(s), the Company shall execute and deliver new preferred stock
certificate(s) of like tenor and date; provided, however the Company shall not
be obligated to re-issue Preferred Stock Certificates if the holder
contemporaneously requests the Company to convert such shares of Series J
Convertible Preferred Stock into Common Stock.
12. Remedies, Characterizations, Other Obligations, Breaches and
Injunctive Relief. The remedies provided in this Certificate of Designations
shall be cumulative and in addition to all other remedies available under this
Certificate of Designations, at law or in equity (including a decree of specific
performance and/or other injunctive relief), no remedy contained herein shall be
deemed a waiver of compliance with the provisions giving rise to such remedy and
nothing herein shall limit a holder's right to pursue actual damages for any
failure by the Company to comply with the terms of this Certificate of
Designations. Amounts set forth or provided for herein with respect to payments,
conversion and the like (and the computation thereof) shall be the amounts to be
received by the holder thereof and shall not, except as expressly provided
herein, be subject to any other obligation of the Company (or the performance
thereof). The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the holders of the Series J Convertible
Preferred Stock and that the remedy at law for any such breach may be
inadequate. The Company therefore agrees that, in the event of any such breach
or threatened breach, the holders of the Series J Convertible Preferred Stock
shall be entitled, in addition, to all other available remedies, to an
injunction restraining any breach, without the necessity of showing economic
loss and without any bond or other security being required.
13. Specific Shall Not Limit General; Construction. No specific
provision contained in this Certificate of Designations shall limit or modify
any more general provision contained herein.
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<PAGE>
This Certificate of Designations shall be deemed to be jointly drafted by the
Company and all initial purchasers of the Series J Convertible Preferred Stock
and shall not be construed against any person as the drafter hereof.
14. Failure or Indulgence Not Waiver. No failure or delay on the part
of a holder of Series J Convertible Preferred Stock in the exercise of any
power, right or privilege hereunder shall operate as a waiver thereof, nor shall
any single or partial exercise of any such power, right or privilege preclude
other or further exercise thereof or of any other right, power or privilege.
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<PAGE>
IN WITNESS WHEREOF, the undersigned has executed and subscribed this
Certificate and does affirm the foregoing as true this 23rd day of July, 1999.
ESYNCH CORPORATION
By: Thomas Hemingway
Name: Thomas Hemingway
Title: Chief Executive Officer
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<PAGE>
Exhibit I
ESYNCH CORPORATION
CONVERSION NOTICE
Reference is made to the Certificate of Designation of the Relative Rights and
Preferences of the Series J Convertible Preferred Stock of eSynch Corporation
(the "Certificate of Designations"). In accordance with and pursuant to the
Certificate of Designation, the undersigned hereby elects to convert the number
of shares of Series J Convertible Preferred Stock, par value $.001 per share
(the "Preferred Shares"), of eSynch Corporation, a Delaware corporation (the
"Company"), indicated below into shares of Common Stock, par value $.001 per
share (the "Common Stock"), of the Company, by tendering the stock
certificate(s) representing the share(s) of Preferred Shares specified below as
of the date specified below._
Date of Conversion: _________________________________________________
Number of Preferred Shares to be converted: _________________________
Stock certificate no(s). of Preferred Shares to be converted: ________
The Common Stock have been sold pursuant to the Registration Statement
(as defined in the Registration
Rights Agreement): YES ____ NO____
Please confirm the following information:
Conversion Price: ____________________________________________________
Number of shares of Common Stock to be issued:________________________
Please issue the Common Stock into which the Preferred Shares are being
converted and, if applicable, any check drawn on an account of the Company in
the following name and to the following address:
Issue to: ____________________________________
____________________________________
Facsimile Number: ____________________________________
Authorization: ____________________________________
By: ________________________________
Title: _____________________________
Dated:
PRICES ATTACHED
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<PAGE>
----------------------------------------
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF DESIGNATION
(SERIES J PREFERRED STOCK)
OF
ESYNCH CORPORATION
Pursuant to Section 151 of the General
Corporation Law of the State of Delaware
----------------------------------------
It is hereby certified that:
1. The name of the corporation (hereinafter called the
"Corporation") is eSynch Corporation.
2. The Certificate of Designation (Series J Preferred Stock) of the
Corporation was filed with the Secretary of State of Delaware on August 2,
1999.
3. No shares of Series J Preferred Stock have been issued.
4. The Certificate of Designation (Series J Preferred Stock) of the
Corporation is hereby amended by deleting the resolution adopted by the Board
of Directors of the Corporation and the second sentence of Section 1 thereof
and by substituting in lieu thereof the following (i) new resolution adopted
by the Board of Directors of the Corporation to increase the number of shares
of Series D Preferred Stock from "250" to "275" and (ii) a new second
sentence of Section 1:
i. "RESOLVED, that pursuant to the authority
expressly granted to and vested in the Board of Directors of the
Company by the provisions of the Restated Certificate of
Incorporation of the Company (the "Certificate of
Incorporation"), there hereby is created, out of the shares of
Preferred Stock, par value $0.001 per share, of the Company
authorized in Article IV of the Certificate of Incorporation (the
"Preferred Stock"), a series of the Preferred Stock of the
Company, to be named "Series J Convertible Preferred Stock,"
consisting of Two Hundred Seventy Five (275) shares, which series
shall have the following designations, powers, preferences and
relative and other rights and the following qualifications,
limitations and restrictions:"
<PAGE>
ii. "The maximum number of shares of Series J
Convertible Preferred Stock shall be Two Hundred Seventy Five
(275) shares."
5. The Certificate of Designation (Series J Preferred Stock) of the
Corporation is hereby amended by deleting the proviso in the last sentence of
section 5(a) and by substituting in lieu thereof the following new proviso:
"PROVIDED, that if during the period of 120 consecutive
days immediately following the Closing Date the Conversion Price
is less than 90% of the Five Day Average Share Price (as defined
in Section 5(d)(ii) (the "Floor Price"), then, and only during
such 120 day period, the Conversion Rate shall be equal to the
quotient of (A) the Liquidation Preference Amount of the Shares
of Series J Convertible Preferred Stock being converted divided
by (b) the Floor Price."
6. The Certificate of Designation (Series J Preferred Stock) of the
Corporation is hereby amended by deleting section 5(a)(i) and substituting in
lieu thereof the following new section 5(a)(i):
"(i) ninety (90) days from the Final Closing Date (as such
term is defined in the Series J Convertible Preferred Stock
Purchase Agreement dated as of July 22, 1999 between the Company
and the initial holders of the Series J Convertible Preferred
Stock (the "Securities Purchase Agreement") and hereinafter
referred to as the "Closing Date") or"
7. The amendment to the Certificate of Designation (Series J
Preferred Stock) herein certified has been duly adopted in accordance with
the provisions of Section 151(g) of the General Corporation Law of the State
of Delaware.
Signed on August 11, 1999.
ESYNCH CORPORATION
By: /s/ Thomas Hemingway
--------------------------------------
Name: Thomas Hemingway
Title: Chief Executive Officer
-2-
<PAGE>
-----------------------------------------
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF DESIGNATION
(SERIES J PREFERRED STOCK)
OF
ESYNCH CORPORATION
Pursuant to Section 242(b) of the General
Corporation Law of the State of Delaware
-----------------------------------------
It is hereby certified that:
1. The name of the corporation (hereinafter called the
"Corporation") is eSynch Corporation.
2. The Certificate of Designation (Series J Preferred Stock) of the
Corporation was filed with the Secretary of State of Delaware on August 2,
1999 and amended pursuant to a Certificate of Amendment filed with the
Secretary of State of Delaware on August 12, 1999.
3. The Certificate of Designation (Series J Preferred Stock) of the
Corporation is hereby amended by deleting the proviso in the last sentence of
section 5(a) and by substituting in lieu thereof the following new proviso:
"PROVIDED, that if during the period of 120 consecutive
days immediately following the Closing Date the Conversion Price
is less than the Fixed Conversion Price (as defined in Section
5(d)(ii)) (the "Floor Price"), then, and only during such 120 day
period, the Conversion Rate shall be equal to the quotient of (A)
the Liquidation Preference Amount of the Shares of Series J
Convertible Preferred Stock being converted divided by (B) the
Floor Price."
4. The Certificate of Designation (Series J Preferred Stock) of the
Corporation is hereby amended by deleting section 5(d)(ii) in its entirety
and substituting in lieu thereof the following new section 5(d)(ii):
<PAGE>
"(ii) The term "Fixed Conversion Price" shall mean $3.50.
The Six Day Average Share Price is referred to herein as the
"Average Share Prices."
5. The Certificate of Designation (Series J Preferred Stock) of the
Corporation is hereby amended by deleting section 5(d)(iii)(A) in its
entirety and substituting in lieu thereof the following new section
5(d)(iii)(A):
"(A) the Fixed Conversion Price, or"
6. The Certificate of Designation (Series J Preferred Stock) of the
Corporation is hereby amended by deleting "(II)" in the third line of section
5(d)(iii) and substituting in lieu thereof "(B)".
7. The Certificate of Designation (Series J Preferred Stock) of the
Corporation is hereby amended by adding to the end of section 5(f) the
following new sentence:
"In the event a holder shall elect to convert any shares
of Series J Convertible Preferred Stock as provided herein, the Company
cannot refuse conversion based on any claim that such holder or any one
associated or affiliated with such holder has been engaged in any violation
of law, unless, an injunction from a court, on notice, restraining and/or
adjoining conversion of all or of said shares of Series J Convertible
Preferred Stock shall have been issued and the Company posts a surety bond
for the benefit of such holder in the amount of the difference between the
Conversion Price and the Closing Bid Price on the trading day preceding the
date of the attempted conversion multiplied by the number of shares of Series
J Convertible Preferred Stock sought to be converted, which bond shall remain
in effect until the completion of arbitration/litigation of the dispute and
the proceeds of which shall be payable to such holder in the event it obtains
judgment."
8. The amendment to the Certificate of Designation (Series J
Preferred Stock) herein certified has been duly adopted in accordance with
the provisions of Section 242(b) of the General Corporation Law of the State
of Delaware.
Signed on September 30, 1999.
ESYNCH CORPORATION
By: /s/ Thomas Hemingway
-------------------------------
Name: Thomas Hemingway
Title: Chief Executive Officer
-2-
