SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K/A
AMENDMENT NO. 1
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT (DATE OF EARLIEST EVENT REPORTED): APRIL 1, 1999
eSYNCH CORPORATION
------------------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 0-26790 87-0461856
- ---------------------------- -------------- -----------------------
(State or other (Commission (IRS Employer
jurisdiction of incorporation) File No.) Identification No.)
15502 MOSHER
TUSTIN, CALIFORNIA 92780
----------------------------------------
(Address of principal executive offices)
Registrant's telephone number, including area code: (714) 258-1900
<PAGE>
ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
On April 1, 1999, eSynch Corporation ("eSynch") consummated an acquisition
of Kiss Software Corporation, a California corporation ("Kiss"), in exchange
for the issuance of 1,428,134 shares of common Stock, par value $.001 per
share (the "Common Stock"), of eSynch, and the assumption of the obligation
under the Kiss stock options for the equivalent of 163,107 eSynch common
shares. The acquisition was accomplished by Kiss merging with and into a
newly-formed subsidiary of eSynch. The purchase price was determined by
negotiation between the parties. The information set forth in Item 5 of the
Report on Form 8-K filed by the Registrant on April 14, 1999.
Kiss became a wholly-owned subsidiary of eSynch on the closing of the
transactions contemplated in the Agreement and Plan of Merger dated as of
February 26, 1999 (the "Agreement") among eSynch, Kiss, certain stakeholders
of Kiss and ESYN Kissco Acquisition Corporation, a newly formed Delaware
corporation and a wholly-owned subsidiary of eSynch ("Merger Sub"). In the
merger, Merger Sub merged with and into Kiss, and Kiss is the surviving
corporation.
Kiss, located in Newport Beach, California, will be operated as a
wholly-owned subsidiary of eSynch. Kiss will continue in its present
business.
After the Closing, eSynch relocated Kiss to eSynch's facilities in Tustin,
California.
ITEM 7. FINANCIAL STATEMENTS AND EXHIBITS
(a) Financial statements of business acquired
The financial statements of Kiss Software Corporation as of
December 31, 1998 and for the year ended December 31, 1998 and
for the period from February 14, 1997 (date of inception) through
December 31, 1997, together with notes thereto and the report of
Hansen, Barnett, & Maxwell, independent auditors, are located at
page F-6 of this Report.
(b) Pro forma financial information
An unaudited pro forma condensed consolidated balance sheet as of
December 31, 1998 and an unaudited pro forma condensed
consolidated statement of operations for the year ended December
31, 1998, and notes thereto, are located beginning at page F-2 of
this Report.
(c) Exhibits. The following exhibits are incorporated herein by this
reference.
Exhibit No. Description of Exhibit
2.5 * Agreement and Plan of Merger
dated as of February 26, 1999
among eSynch; Kiss Software
Corporation, a California
corporation ("Kiss"); certain
stockholders of Kiss; and
ESYN Kissco Acquisition
Corporation, a wholly-owned
subsidiary of eSynch. Omitted
from this Form 8-K/A filing
are the following schedules
or ancillary documents to the
agreement identified
immediately above:
(A) Escrow Agreement
(B) Disclosure Schedule of Kiss
(C) Disclosure Schedule of eSynch
* Incorporated by reference to the like referenced
exhibit to the Registrant's Report on Form 8-K filed
April 14, 1999.
SIGNATURE
Pursuant to the requirements of the Securities and Exchange Act of
1934, eSynch has duly caused this Amendment No.1 to Current Report on Form
8-K/A to be signed on its behalf by the undersigned thereunto duly authorized.
eSYNCH CORPORATION
/s/ Donald Watters
-------------------------
Donald Watters, President
Date: August 10, 1999
<PAGE>
eSYNCH CORPORATION AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
Page
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS . . . . . F-2
Unaudited Pro Forma Condensed Consolidated Balance Sheet -
December 31, 1998 . . . . . . . . . . . . . . . . . . . . . . . . . . F-3
Unaudited Pro Forma Condensed Consolidated Statement
of Operations for the Year Ended December 31, 1998. . . . . . . . . . F-4
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . F-5
KISS SOFTWARE CORPORATION
Report of Independent Certified Public Accountants. . . . . . . . . . . F-6
Balance Sheet - December 31, 1998 . . . . . . . . . . . . . . . . . . . F-7
Statements of Operations for the Year Ended December 31, 1998
and for the Period from February 14, 1997 (Date of Inception)
through December 31, 1997. . . . . . . . . . . . . . . . . . . . . . . F-8
Statements of Stockholders' Deficit for the Period from
February 14, 1997 (Date of Inception) through December 31,
1997 and for the Year Ended December 31, 1998. . . . . . . . . . . . . F-9
Statements of Cash Flows for the Year Ended December 31, 1998
and for the Period from February 14, 1997 (Date of Inception)
through December 31, 1997. . . . . . . . . . . . . . . . . . . . . . . F-10
Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . F-11
<PAGE>
eSYNCH CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
On April 1, 1999, eSynch Corporation ("eSynch") acquired all of the
outstanding common stock of Kiss Software Corporation ("Kiss") by issuing
1,428,134 shares of common stock and the assumption of the obligation under
the Kiss stock options for the equivalent of 163,107 eSynch common shares.
The acquisition was accomplished by Kiss merging with and into a
newly-formed subsidiary of eSynch. The following unaudited pro forma
condensed consolidated balance sheet has been prepared to present the
financial position of eSynch and subsidiaries as though the acquisition of
Kiss was consummated on December 31, 1998. The following unaudited pro forma
condensed consolidated statement of operations has been prepared to present
the results of operations assuming the acquisition had occurred on January
1, 1998. The purchase was accounted for using the purchase method of
accounting.
The following financial information was derived from, and should be read in
conjunction with the separate historical financial statements of eSynch
included in its December 31, 1998 annual report to shareholders on Form
10-KSB and the financial statements of Kiss and the related notes to those
financial statements which are included elsewhere herein. The unaudited pro
forma condensed consolidated statement of operations has been included
herein for comparative purposes only and does not purport to be indicative
of the results of operations which actually would have been obtained had the
reorganization occurred January 1, 1998, or the results of operations which
may be obtained in the future. In addition, future results may vary
significantly from the results reflected in these pro forma financial
statements.
F-2
eSYNCH CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
Pro Forma Pro Forma
eSynch Kiss Adjustments Results
----------- ---------- ---------- ----------
ASSETS
CURRENT ASSETS
<S> <C> <C> <C> <C> <C>
Cash . . . . . . . . . . . . . $ 1,413 $ 11,601 $ - $ 13,014
Inventory. . . . . . . . . . . 13,693 101,857 - 115,550
Prepaid expenses . . . . . . . - 21,185 - 21,185
Other assets . . . . . . . . . - 22,784 - 22,784
---------- ---------- ---------- ----------
TOTAL CURRENT ASSETS. . . . 15,106 157,427 - 172,533
---------- ---------- ---------- ----------
Equipment, net . . . . . . . . . 52,206 - - 52,206
Goodwill . . . . . . . . . . . . - - (A) 5,061,571 5,061,571
Assets to be sold - primarily
goodwill. . . . . . . . . . . . 4,552,847 - - 4,552,847
---------- ---------- ---------- ----------
TOTAL ASSETS . . . . . . . . . . $4,620,159 $ 157,427 $5,061,571 $9,839,157
========== ========== ========== ==========
</TABLE>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<S> <C> <C> <C> <C> <C>
CURRENT LIABILITIES
Trade accounts payable . . . . $1,120,281 $ 297,874 $ - $1,418,155
Accrued liabilities. . . . . . 692,840 405,344 - 1,098,184
Notes payable - current portion 406,661 11,355 - 418,016
Liabilities relating to assets
to be sold. . . . . . . . . . 4,502,847 - - 4,502,847
---------- ---------- ---------- ----------
TOTAL CURRENT LIABILITIES . 6,722,629 714,573 - 7,437,202
---------- ---------- ---------- ----------
LONG-TERM NOTES PAYABLE, NET . . - 584,798 - 584,798
MANDATORILY REDEEMABLE PREFERRED
STOCK . . . . . . . . . . . . . 600 739,405 (B) (739,405) 600
---------- ---------- ---------- ----------
STOCKHOLDERS' DEFICIT
Common stock . . . . . . . . . 6,889 4,030 (B) (2,602) 8,317
Additional paid-in capital . . 3,541,295 398,970 (B) 3,519,229 7,459,494
Accumulated deficit. . . . . .(5,651,254) (2,284,349) (B) 2,284,349 (5,651,254)
---------- ---------- ---------- ----------
TOTAL STOCKHOLDERS' DEFICIT. .(2,103,070) (1,881,349) 5,800,976 1,816,557
---------- ---------- ---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' DEFICIT . . . . .$4,620,159 $ 157,427 $5,061,571 $9,839,157
========== ========== ========== ==========
</TABLE>
Notes to the Unaudited Condensed Pro Forma Consolidated Financial Statements
are presented on page F-5.
F-3
<PAGE>
eSYNCH CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1998
<TABLE>
<CAPTION>
Pro Forma Pro Forma
eSynch Kiss Adjustments Results
------------ ----------- ----------- -----------
<S> <C> <C> <C><C> <C>
Net product sales. . . . . . . . $ 203,571 $ 1,596,375 $ - $ 1,799,946
Cost of goods sold . . . . . . . 156,617 415,380 - 571,997
------------ ----------- ---------- -----------
Gross Profit . . . . . . . . 46,954 1,180,995 - 1,227,949
General and administrative
expense . . . . . . . . . . . . 1,999,340 1,201,053 - 3,200,393
Selling and marketing. . . . . . - 1,118,312 - 1,118,312
Interest expense . . . . . . . . 132,641 25,55 - 158,186
Amortization of goodwill . . . . 228,330 - (C) 1,626,719 1,855,049
Amortization of debt discount. . 355,567 - - 355,567
Impairment loss on assets to
be sold . . . . . . . . . . . . 2,323,841 - - 2,323,841
Loss from sale of securities . . - 9,502 - 9,502
----------- ----------- ----------- -----------
Total Operating and Other
Expenses. . . . . . . . . . 5,039,719 2,354,412 1,626,719 9,020,850
----------- ----------- ----------- -----------
Loss Before Extraordinary Item . (4,992,765) (1,173,417) (1,626,719) (7,792,901)
Preferred dividends. . . . . . . - (115,929)(D) 115,929 -
----------- ----------- ----------- -----------
Loss from Continuing Operations
Applicable to Common Shares . . $(4,992,765) $(1,289,346) $(1,510,790) $(7,792,901)
=========== =========== =========== ===========
Basic and Diluted Loss from
Continuing Operations Per
Common Share. . . . . . . . . . .$ (0.91) $ (1.13)
========== ===========
Weighted average number of
common shares used in per
share calculation . . . . . . . . 5,476,874 (E) 1,428,134 6,905,008
========== =========== ===========
</TABLE>
Notes to the Unaudited Condensed Pro Forma Consolidated Financial Statements
are presented on page F-5.
F-4
<PAGE>
eSYNCH CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED FINANCIAL STATEMENTS
A- To record the goodwill which resulted in the acquisition of
Kiss. Total value of eSynch's common shares issued to Kiss
shareholders was $3,965,570. The fair value of the Kiss net
assets at February 26, 1999 (valuation date) was $(1,096,001)
resulting in recognition of goodwill of $5,061,571.
B- To record the equity adjustments relating to the purchase of
Kiss. eSynch issued 1,428,134 common shares valued at
$3,568,907 and 163,187 options to purchase common stock valued
at $396,663 for all of Kiss's outstanding preferred and common
shares.
C- To recognize the amortization on the goodwill obtained in
the purchase of Kiss assuming the acquisition occurred on
January 1, 1998. The goodwill acquired was $5,061,571 and
it is being amortized over its estimated useful life of
approximately 3.11 years. The effect on the pro forma
statement of operations for the year ended December 31,
1998 is an increase of $1,626,719 in amortization expense.
D- As a result of the April 1, 1999 acquisition of Kiss, all Kiss
preferred stock which was issued during 1998, was exchanged
for eSynch common stock. The pro forma statement of operations
for the year ended December 31, 1998 reflects the elimination
of the preferred dividends payable.
E- On April 1, 1999, eSynch purchased Kiss. The shareholders of
Kiss exchanged all of their common and preferred shares for
1,428,134 shares of eSynch common stock. These common shares
issued are treated as having been outstanding from January 1,
1998 for purposes of the pro forma statements of operations.
F-5
<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
Kiss Software Corporation
We have audited the accompanying balance sheet of Kiss Software
Corporation as of December 31, 1998 and the related statements of
operations, stockholders' deficit, and cash flows for the year
ended December 31, 1998 and for the period from February 14, 1997
(date of inception) through December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted
auditing standards. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that our
audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Kiss
Software Corporation as of December 31, 1998 and the results of
its operations and its cash flows for the year ended December 31,
1998 and for the period from February 14, 1997 (date of inception)
through December 31, 1997 in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in
Note 1 to 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
July 1, 1999
F-6
<PAGE>
KISS SOFTWARE CORPORATION
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
CURRENT ASSETS
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . . $ 11,601
Inventory . . . . . . . . . . . . . . . . . . . . . . . . 101,857
Prepaid expenses. . . . . . . . . . . . . . . . . . . . . 21,185
Other assets. . . . . . . . . . . . . . . . . . . . . . . 22,784
----------
TOTAL ASSETS . . . . . . . . . . . . . . . . . . . . . . . . $ 157,427
==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Trade accounts payable. . . . . . . . . . . . . . . . . . $ 297,874
Accrued liabilities . . . . . . . . . . . . . . . . . . . 405,344
Notes payable - current portion . . . . . . . . . . . . . 11,355
----------
TOTAL CURRENT LIABILITIES . . . . . . . . . . . . . . 714,573
----------
LONG-TERM NOTES PAYABLE, NET . . . . . . . . . . . . . . . . 584,798
----------
MANDATORILY REDEEMABLE PREFERRED STOCK - $0.001 par value;
1,818,750 series A shares authorized; 1,577,803 shares
issued and outstanding; liquidation preference - $690,925. 739,405
----------
STOCKHOLDERS' DEFICIT
Preferred Stock - $0.001 par value; 1,181,250
shares authorized; none issued and outstanding . . . . . -
Common stock - $0.001 par value; 20,000,000 shares
authorized; 4,030,000 issued and outstanding . . . . . 4,030
Additional paid-in capital. . . . . . . . . . . . . . . . 398,970
Accumulated deficit . . . . . . . . . . . . . . . . . . . (2,284,349)
----------
TOTAL STOCKHOLDERS' DEFICIT . . . . . . . . . . . . . (1,881,349)
----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT. . . . . . . . . $ 157,427
==========
The accompanying notes are an integral part of these financial statements.
F-7
<PAGE>
KISS SOFTWARE CORPORATION
STATEMENTS OF OPERATIONS
For the Period
February 14, 1997
(Date of
For the Inception)
Year Ended Through
December 31, December 31,
1998 1997
----------- -----------
PRODUCT SALES. . . . . . . . . . . . . . . . . . . $ 1,596,375 $ 1,144,358
COST OF GOODS SOLD . . . . . . . . . . . . . . . . 415,380 261,147
----------- -----------
GROSS PROFIT . . . . . . . . . . . . . . . . . . . 1,180,995 883,211
----------- -----------
OPERATING AND OTHER EXPENSES
General and administrative . . . . . . . . . . 1,201,053 831,741
Selling and marketing . . . . . . . . . . . . . 1,118,312 981,437
Interest. . . . . . . . . . . . . . . . . . . . 25,545 -
Loss on sale of securities. . . . . . . . . . . 9,502 65,036
----------- -----------
TOTAL OPERATING AND OTHER EXPENSES. . . . . . . 2,354,412 1,878,214
----------- -----------
NET LOSS . . . . . . . . . . . . . . . . . . . . . (1,173,417) (995,003)
PREFERRED DIVIDENDS. . . . . . . . . . . . . . . . 115,929 -
----------- -----------
LOSS APPLICABLE TO COMMON SHAREHOLDERS . . . . . . $(1,289,346) $ (995,003)
=========== ===========
The accompaning notes are an integral part of these financial
statements.
F-8
<PAGE>
KISS SOFTWARE CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION> Common Stock Additional Total
------------------------ Paid-In Accumulated Stockholders'
Shares Amount Capital Deficit Deficit
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance - February 14, 1997
(Date of Inception). . . . . . $ - $ - $ - $ - $ -
Shares issued for cash . . . . 500,000 500 49,500 - 50,000
Shares issued for marketable
securities. . . . . . . . . . 3,500,000 3,500 244,880 - 248,380
Shares issued for services . . 30,000 30 2,970 - 3,000
Compensation relating to
the contribution of
marketable securities . . . . - - 101,620 - 101,620
Net loss for the period. . . . - - - (995,003) (995,003)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1997. . 4,030,000 4,030 398,970 (995,003) (592,003)
Accrued preferred dividends. . - - - (115,929) (115,929)
Net loss for the year. . . . . - - - (1,173,417) (1,173,417)
----------- ----------- ----------- ----------- -----------
Balance - December 31, 1998. . 4,030,000 $ 4,030 $ 398,970 $(2,284,349) $(1,881,349
=========== =========== =========== =========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-9
<PAGE>
KISS SOFTWARE CORPORATION
STATEMENTS OF CASH FLOWS
For the Period
February 14, 1997
(Date of
For the Inception)
Year Ended Through
December 31, December 31,
1998 1997
----------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss. . . . . . . . . . . . . . . . . . . . .$(1,173,417) $ (995,003)
Adjustments to reconcile net loss to net cash
used by operating activities:
Amortization of intangible assets . . . . . . . 49,958 81,022
Realized loss on sale of securities . . . . . . 6,375 61,924
Stock issued for services . . . . . . . . . . . - 3,000
Compensation relating to the issuance of
shares for contribution of stock . . . . . . . - 101,620
Payment of company expenses by officers . . . . - 412,021
Changes in operating assets and liabilities:
Inventory. . . . . . . . . . . . . . . . . . 57,893 (159,750)
Prepaid assets . . . . . . . . . . . . . . . 15,930 (37,115)
Intangibles and other assets . . . . . . . . (20,963) (132,781)
Accounts payable. . . . . . . . . . . . . 142,231 403,481
Accrued liabilities. . . . . . . . . . . . . 190,900 214,444
----------- -----------
Net Cash Used By Operating Activities . . . . . . (731,093) (47,137)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of securities. . . . . . . 12,375 167,706
----------- -----------
Net Cash Provided By Investing Activities . . . . 12,375 167,706
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock. . . . . . - 50,000
Proceeds from the issuance of mandatorily
redeemable preferred stock (net of $23,426
offering costs). . . . . . . . . . . . . . . . . 623,474 -
Principal payments on notes payable . . . . . . . (6,000) (57,724)
----------- -----------
Net Cash Provided By (Used By)
Financing Activities . . . . . . . . . . . . . . 617,474 (7,724)
----------- -----------
NET INCREASE (DECREASE) IN CASH . . . . . . . . . (101,244) 112,845
CASH - BEGINNING OF PERIOD . . . . . . . . . . . . 112,845 -
----------- -----------
CASH - END OF PERIOD. . . . . . . . . . . . . . . $ 11,601 $ 112,845
=========== ===========
Supplemental cash flow information and noncash investing and
financing activities - Note 4
The accompanying notes are an integral part of these financial statements.
F-10
<PAGE>
KISS SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT POLICIES
ORGANIZATION AND NATURE OF OPERATIONS -- Kiss Software Corporation
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 April 1, 1999, Kiss completed
the terms of an Agreement and Plan of Merger with eSynch
Corporation whereby Kiss became a wholly owned subsidiary of
eSynch Corporation.
USE OF ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts in the financial statements and accompanying
notes. Actual results could differ from those estimates.
BUSINESS CONDITION -- The financial statements have been prepared
in conformity with generally accepted accounting principles, which
contemplates continuation of Kiss as a going concern. Kiss 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 $2,284,349. These conditions raise
substantial doubt about the Kiss's ability to continue as a going
concern. Effective April 1, 1999, Kiss was acquired by eSynch.
eSynch's management plans to mitigate the impact of these
conditions by obtaining additional equity financing through the
issuance of eSynch's common stock, convertible preferred stock or
warrants. However, realization of the proceeds from these
potential transactions is not assured. These financial statements
do not include any adjustments relating to the recoverability or
classification of recorded assets or amounts and classifications
of liabilities that might be necessary should Kiss be unable to
continue as a going concern
FAIR VALUES OF FINANCIAL INSTRUMENTS -- The amounts reported as
cash, trade accounts payable, notes payable, and accrued
liabilities are considered to be 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.
INVESTMENT IN SECURITIES -- During the year ended December 31,
1998 Kiss held investments in marketable securities which were
designated as available-for-sale. Realized gains and losses have
been recorded using the first-in first-out method. During the
year ended December 31, 1998 and the period ended December 31,
1997, total proceeds from the sale of securities were $12,375 and
$167,706, respectively, with gross realized losses of $6,375 and
$53,174, respectively.
INTANGIBLES -- Kiss has various intangible assets which were
amortized over a period of twelve months. Amortization expense was
$49,958 and $81,022 during the year ended December 31, 1998 and
the period ended December 31, 1997, respectively.
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 and
warrants granted to non-employees is determined based upon the
fair value of the stock options and warrants on the date granted.
RETIREMENT BENEFIT PLANS -- During the year ended December 31,
1998, Kiss established a 401(k) profit sharing plan for its
employees. In order to be eligible, an employee must be 21 years
of age, be employed full-time and be employed for a period of six
months. Employees are allowed to voluntarily contribute to the
Plan. Kiss is not obligated to make contributions to the Plan.
During the year ended December 31, 1998, Kiss did not make a
contribution to the plan but paid $2,875 in management fees
associated with the plan.
F-11
<PAGE>
ADVERTISING COSTS -- Advertising costs have been recognized as
expenses at the time the advertising occurs. These expenses
amounted to $294,957 and $128,169 during the year ended December
31, 1998 and the period ended December 31, 1997, respectively.
REVENUE RECOGNITION -- Kiss 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.
CONCENTRATION OF RISK AND MAJOR CUSTOMERS -- Kiss 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 one industry subjects Kiss to concentrated market
risk. During the year ended December 31, 1998 sales to two major
customers totaled 44 % and 25 % of sales, respectively. During the
period ended December 31, 1997, sales to three major customers
totaled 32%, 32%, and 16% of sales, respectively.
MAJOR SUPPLIERS -- Kiss' inventory planning, production and
distribution is completed by a third party, pursuant to a
fulfillment and distribution turnkey agreement Under the terms
of the agreement, the third party purchases raw materials in
accordance with Kiss' production forecast. The raw material,
until converted to the finished product, remains the property of
the third party. Substantially all costs of sales included in the
accompanying statement of operations relate to amounts paid under
the terms of this agreement. As of December 31, 1998, this vendor
accounted for 15% of trade accounts payable.
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. Kiss is required to adopt this standard
in 1999 and does not expect this statement to have material impact
on Kiss' 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. Kiss does not believe the new
statement will have any impact on Kiss' financial position,
results of operations or cash flows.
NOTE 2--NOTES PAYABLE
Notes payable consisted of the following:
7% Convertible promissory note payable to an officer; interest
due quarterly; principal payable $29,534 quarterly beginning
March 2001; unsecured. . . . . . . . . . . . . . . . . . . . . $ 236,270
7% Convertible promissory note payable to a shareholder; interest
due quarterly; principal payable $14,754 quarterly beginning
March 2001; unsecured. . . . . . . . . . . . . . . . . . . . . 118,027
6.25% Promissory note payable to an unrelated party; principal
and interest payable $3,000 monthly through January 15, 1999,
principal and interest payable $4,000 monthly thereafter;
unsecured; in default. . . . . . . . . . . . . . . . . . . . 241,856
---------
Total Notes Payable. . . . . . . . . . . . . . . . . . . . . . 596,153
Less: Current Portion. . . . . . . . . . . . . . . . . . . . . (11,355)
---------
Log-Term Notes Payable . . . . . . . . . . . . . . . . . . . . $ 584,798
=========
F-12
<PAGE>
The 7% promissory notes payable to the officer and to the
shareholder are convertible into shares of Kiss' common stock at a
conversion price of $.41 per share provided the aggregate
principal amount per note to be converted does not exceed
$41,000. Subsequent to December 31, 1998, $41,000 of the officer's
note payable and $41,000 of the shareholder's note payable were
converted into a total of 200,000 shares of Kiss' common stock.
The annual interest rate on the 6.25% promissory note changes to
15% annual interest on unpaid, mature, principal amounts. Kiss has
not made any payments on the loan since January 1999 and the loan
is currently in default.
NOTE 3--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 . . . . . . . . . . . . . . . $ 868,264
Valuation Allowance . . . . . . . . . . . . . . . . . . . . (868,264)
---------
Net Deferred Tax Asset. . . . . . . . . . . . . . . . . . . $ -
=========
Kiss has net operating loss carry forwards in the amount of
$1,990,425 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.
For the Period
February 14, 1997
(Date of
For the Inception)
Year Ended Through
December 31, December 31,
1998 1997
---------- ----------
Tax at statutory rate (34%) . . . . . . . . . . $ (398,962) $ (338,301)
Non-deductible expenses . . . . . . . . . . . . 1,518 587
Change in valuation allowance . . . . . . . . . 469,474 398,790
State tax benefit, net of federal tax effect. . (73,925) (62,685)
Change in effective tax rate. . . . . . . . . . 1,895 1,609
---------- ----------
Net Income Tax Expense. . . . . . . . . . . . . $ - $ -
========== ==========
NOTE 4 -- SUPPLEMENTAL CASH FLOW INFORMATION AND NONCASH
INVESTING AND FINANCING ACTIVITIES
SUPPLEMENTAL CASH FLOW INFORMATION --
For the Period
February 14, 1997
(Date of
For the Inception)
Year Ended Through
December 31, December 31,
1998 1997
---------- ----------
Cash paid for interest . . . . . . . . . . . . . $ 2,637 $ -
F-13
<PAGE>
Noncash Investing and Financing Activities -- During the year
ended December 31, 1998, Kiss converted $247,856 of accounts
payable to notes payable and accrued dividends payable to the
holders of Series A Preferred Shares in the amount of $44,025.
Kiss recognized $71,905 of additional dividends as a result of a
beneficial conversion feature relating to the issuance of Series
A Preferred shares.
During the period ended December 31, 1997, Kiss issued 3,500,000
common stock in exchange for marketable securities. The market
value of the securities at the dates of contribution was $248,380.
NOTE 5 -- STOCKHOLDERS' EQUITY
Under the terms of its articles of incorporation, Kiss is
authorized to issue 20,000,000 shares of common stock, par value
$0.001 per share, and 3,000,000 shares of preferred stock, par
value $0.001 per share. The shares of preferred stock may be
issued in any number of series, as determined by the board of
directors. The board may fix the designation and number of shares
of any such series, and may determine, alter or revoke the rights,
preferences, privileges and restrictions pertaining to any wholly
unissued class or series of shares of preferred stock. The board
may thereafter in the same manner increase or decrease the number
of shares of any such series (but not below the number of shares
of that series then outstanding).
On February 23, 1998, the board of directors designated 1,818,750
shares of preferred stock as Series A convertible preferred stock
("Series A shares"). Series A shares have a liquidation preference
of $0.41 per share. Cumulative dividends accrue at 7% annually
from the date issued and are payable when and as declared by the
board of directors. The Series A shares are convertible into
common stock at $0.41 by the conversion price which was defined as
$0.41 initially and was adjustable based upon future unaudited
gross revenues and net income of Kiss.
During the year ended December 31, 1998, Kiss issued 1,577,803
shares of redeemable Series A Preferred Stock for $623,474 cash,
net of offering costs. Holders of Series A Preferred Stock were
entitled to receive cumulative dividends which accrued on the last
day of each March, June, September and December at the rate per
annum of 7% per share, calculated as a percentage of the $0.41
liquidation amount per share. The accumulated amount of
dividends as of December 31, 1998 was $44,024. The Series A
Preferred Shares were subject to automatic redemption on March 1,
2002 and the redemption price for each share of Series A
Preferred was $0.41 per share plus any accrued but unpaid
dividends. The total amount of the redemption as of December 31,
1998 was $690,925.
During the year ended December 31, 1998, Kiss recognized $71,905
of additional dividends as a result of the beneficial conversion
feature associated with the issuance of the Series A Preferred
shares. On the date issued, the conversion price of $2.39 was less
than the market value of the related common stock into which it
was convertible.
During the period ended December 31, 1997, Kiss issued 500,000
shares of common stock for $50,000 cash and 30,000 common shares
for services valued at $3,000, or $.10 per common share. The value
of the services was determined based upon the value at which
common shares were issued for cash during 1997. During the period
ended December 31, 1997, Kiss issued 3,500,000 common shares for
marketable securities with a market value on the date received of
$248,380, or approximately $.07 per common share. In association
with this issuance, Kiss recognized $101,620 of compensation
expense relating to the beneficial conversion of the stock for the
marketable securities.
NOTE 6 -- STOCK OPTIONS
On May 16, 1997, the Board of Directors approved the 1997 Stock
Option Plan ("the Plan") which authorizes options to purchase
600,000 shares of common stock. Throughout 1997, options to
purchase 640,000 common shares were granted, 40,000 of which were
granted outside of the Plan. Options granted under the Plan are
exercisable over periods determined by the Board of Directors, not
to exceed 10 years from the date of grant. Options generally vest
from immediately to four years. The exercise price of all options
granted under the Plan was equivalent to the fair value of Kiss'
common stock on the date of grant, or $.41 per share. The options
expire in 2007. No compensation expense was recognized as result
of the granting of these options.
On December 31, 1998, additional options to purchase 200,000
common shares were granted. These options were granted outside of
any existing stock option plan. These options vested immediately
and expire on December 31, 2008. The exercise price of these
options is $.51 per share. No compensation expense was recognized
as a result of the granting of these options.
A summary of the status of the Kiss' stock options as of December
31, 1998 and 1997 and changes during the year and period then
ended are presented below:
December 31,
-------------------------------------------
1998 1997
-------------------- ---------------------
Weighted- Weighted-
Average Average
Exercise Exercise
Shares Price Shares Price
--------- --------- --------- ---------
Outstanding at beginning
of period 640,000 $ 0.41 - 0.00
Granted 200,000 0.51 640,000 0.41
Outstanding at end of period 840,000 0.43 640,000 0.41
========= ========
Options exercisable at end
of period 546,670 0.45 200,000 0.41
========= ========
Weighted-average fair value of
options granted during period $ 0.00 $ 0.00
========= ========
The following table summarizes information about stock options
outstanding at December 31, 1998:
Options Outstanding Options Exercisable
------------------------------------------ --------------------------
Weighted-
Range of Average Weighted- Weighted-
Exercise Number Remaining Average Number Average
Prices Outstanding Contractual Life Exercise Price Exercisable Exercise Price
------- ----------- ---------------- -------------- ----------- --------------
$0.41-0.51 840,000 8.89 years $0.43 546,670 $0.45
Kiss 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 $0 and $0 for the year and period ended
December 31, 1998 and 1997. Had compensation cost for Kiss'
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 would have increased to the
pro forms amounts indicated below. The weighted average
assumptions used to estimate the fair value of each option grant
using the Black-Scholes options-pricing model are presented below:
For the Period
February 14, 1997
(Date of
For the Inception)
Year Ended Through
December 31, December 31,
1998 1997
----------- ----------
Net loss
As reported . . . . . . . . . . . . . . . . $(1,173,417) $ (995,003)
Pro forma . . . . . . . . . . . . . . . . . (1,173,417) (995,003)
Weighted-Average assumptions
Dividend yield. . . . . . . . . . . . . . . 0.0% 0.0%
Expected volatility . . . . . . . . . . . . 0.0% 0.0%
Risk-free interest rate . . . . . . . . . . 5.0% 5.0%
Expected life of options in years . . . . . 10.0 10.0
NOTE 7 -- RELATED PARTY TRANSACTIONS
For the period ended December 31, 1997, Kiss owed two majority
shareholders reimbursable expenses of $236,270 and $118,027,
respectively. On February 27, 1998, these accruals were converted
into notes payable (See Note 2).
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
LITIGATION AND OTHER CONTINGENCIES -- Kiss is a defendant in a
lawsuit filed by a third-party seeking payment for marketing
commissions earned after the plaintiff had been terminated by Kiss
for alleged lack of performance. The plaintiff contends that they
are due compensation for commissions that would have been earned
had they not been prematurely terminated by Kiss. The amount the
plaintiff is seeking is undisclosed. Kiss' legal counsel believes
that the amount the plaintiff is seeking is not in excess of
$25,000. Kiss is vigorously defending against the suit claiming
that the plaintiff did not perform as agreed. Kiss is unable to
estimate the likelihood of an unfavorable outcome of this lawsuit
at this time. No provision for a possible loss from this
proceeding has been accrued in the accompanying financial
statements.
A third-party has asserted a claim in the amount of $53,539
against Kiss seeking payment for raw inventory materials purchased
by the third-party on behalf of Kiss. The claim asserts that the
inventory was purchased on behalf of Kiss as a result of Company
purchase orders and is therefore the Kiss' liability. Kiss
vigorously denies this claim, asserting that the third-party was
negligent in purchasing the material and is therefore liable for
the loss. Kiss is unable to estimate the likelihood of an
unfavorable outcome of this claim at this time. No provision for a
possible loss from this claim has been accrued in the accompanying
financial statements.
Kiss is a defendant in a lawsuit in which the plaintiff is seeking
$18,000 for non-payment of services performed by the plaintiff on
behalf of Kiss. Kiss and the plaintiff are currently in
negotiations to settle the suit for approximately $11,500. Kiss
has accrued the estimated negotiated settlement of $11,500 in the
accompanying financial statements.
LEASE COMMITMENTS -- Kiss leases office facilities accounted for
as an operating lease. Lease expense for the year ended December
31, 1998 and for the period ended December 31, 1997 was $14,541
and $3,272, respectively. Future minimum rental payments on the
lease for the the year ended December 31, 1999 are $17,396. The
lease expires in 1999.
NOTE 9 -- SUBSEQUENT EVENTS
On April 1, 1999, Kiss was acquired by eSynch Corporation,
("eSynch")a California corporation. Under the agreement,
shareholders of Kiss agreed to exchange each of their common
shares for .181557136 common shares of eSynch, each of their
Series A Preferred shares for .4183964 common shares of eSynch and
each of their common stock options for .194270501 common stock
options of eSynch. Under the agreement, eSynch adopted the Kiss
option plan and the Kiss options become exercisable into eSynch
common shares upon their exercise at the original exercise price
adjusted for the exchange. The exchange resulted in eSynch issuing
1,428,134 common shares to Kiss shareholders. Under the option
conversion plan, an additional 163,187 common shares are
potentially issuable to Kiss shareholders as Kiss options are
exercised.
Subsequent to December 31, 1998 but prior to eSynch's purchase of
Kiss, $41,000 of the officer's note payable and $41,000 of the
shareholder's note payable were converted into a total of 200,000
shares of Kiss' common stock. Upon eSynch's acquisition of Kiss,
these 200,000 common shares were converted into 36,311 eSynch
common shares at a conversion rate of .181557136 (unaudited).
