UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-KSB
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13
OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File Number 0-26790
eSYNCH CORPORATION
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(Name of small business issuer as specified in its charter)
Delaware 87-0461856
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
15502 Mosher
Tustin, CA 92780
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(Address of principal executive offices)
Issuer's telephone number, including area code: (714)258-1900
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g) of the Act: Common Stock,
$0.001 par value
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the past 12
months (or for such shorter period that the registrant was required to
file such reports),and (2) has been subject to such filing requirements
for the past 90 days. Yes No X
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained in this form, and no disclosure will
be contained, to the best of registrant's knowledge, in definitive proxy
or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. |_|
The issuer's revenues for the fiscal year ended December 31, 1998 were
$203,571.
As of June 21, 1999, 9,106,840 of the issuer's common shares were
issued and outstanding, approximately 4,598,409 of which were held by
non-affiliates. As of June 21, 1999, the aggregate market value of shares
held by non-affiliates was approximately $13,381,370 based upon the closing
bid and asked quotation on the OTC Bulletin Board.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format: Yes_____ No X
PART I
ITEM 1. BUSINESS
eSynch Corporation(the "Company")formerly Innovus Corporation
"Innovus"), had been engaged in the sale of multimedia authoring and
presentation software, with related templates and media packages since
inception and to approximately May1998. Innovus moved operations from
Salt Lake City, Utah, May 1998 to Newport Beach, California. On August 5,
1998 Intermark Corporation ("Intermark") was reorganized into Innovus
whereby the Intermark shareholders became the majority shareholders of
the Company. Intermark has been engaged in software marketing services
from its inception through August 1998. By shareholder action, Innovus
changed its name to eSynch Corporation on November 9,1998.
The primary activities of eSynch, the consolidated company, have
consisted of raising capital and limited retail and turnkey sales of
software and related marketing services through distribution channels
and through the Internet. The Company has currently under development
and in limited operation an electronic software distribution system
("ESD") through the Internet.
The Sales of Innovus Multimedia, the wholly owned subsidiary
of Innovus, and related products during 1998 and 1997 were minimal,
despite the Company's efforts to re-focus the target market and
re-price the software. Due to lack of resources, Innovus Multimedia
ceased active operations in March 1998. The Company has no plans to
market or sell the Innovus Multimedia products.
On November 17, 1998, eSynch acquired Softkat Inc. and on
May 25, 1999 eSynch sold Softkat Inc. Softkat Inc. ("Softkat")
published, distributed and sold non-proprietary software through
national and regional retailers. Sales for the products were minimal
for the period from November 17, 1998 through December 31, 1998.
Softkat was sold on May 25, 1999 which was consistent with the Company's
decision to further strengthen its focus of Electronic Software
distribution and e-commerce. The Company believed that the Softkat
business could not be economically converted to one that emphasizes
electronic software distribution over traditional physical goods
distribution, and determined that Softkat's financial condition and
prospects generally were poorer than anticipated, including matters
presently in litigation that were not known to the Company prior to
the Softkat acquisition.
Following the end of the year, the Company acquired Kiss Software
Corporation. Kiss is a developer and publisher programs such as: Modem
Wizard, ShortCuts, Speed Surfer Internet Toolbox Undo and Recover Toolbox.
Company Strategy
The Company has since August 1998 focused its business on its ESD
product, Internet utility software products and the acquisition of related
Internet e-commerce companies.
Sales and distribution of digital content is an important factor in
the success of the electronic commerce arena, especially since digital
content can be delivered instantly. eSynch Corporation is a pioneer in this
area and has developed highly scalable and powerful ESD technologies that
enable digital content to be downloaded fast and securely. Although the
Company's ESD technology is still in development, there is potential
for its current ESD solutions to grow and mature. This is intended to be
accomplished by providing valuable features such as software rentals,
pay-per-use options, feature licensing, both audio and video, and software
subscriptions. The amount of growth depends on the flexibility of current
ESD architectures. The Company believes that eSynch's proprietary software
maintains the flexibility needed for growth, while providing ESD solutions
relevant to resellers.
With the influx of online users and their demand for real-time
satisfaction, Electronic Software Distribution represents the maturing of
the computer industry by providing secure and fast delivery of software
products and seems to be becoming the software acquisition method of
choice for Internet users.
The Company's belief is that each computer with a connection to the
Internet is a potential customer. This is particularly important with
respect to the planned growth of the Company's worldwide distribution.
Traditional retail outlets are limited in the range of products they can
carry simply by virtue of having limited shelf space. The Web does not
have such space limitations.
In addition, the Company is currently seeking high-tech Internet
software companies for a roll up strategy. Company profiles are focused
on high tech Internet and utility software products that the Company will
sell through its distribution channels. At this time no acquisitions are
at the likely or committed stage, and no assurances of successful future
acquisitions are intended.
Marketing and Sales
During 1998 the Company's Marketing and sales efforts were focused
on publishing high technology Internet software. eSynch owns titles such
as: WebSnake, CoolCat and a proprietary Electronic Software Distribution
system, eSynchESDtm currently under development.
In addition to sales through traditional retail, the Company has been
pursuing new and innovative ways to sell and market its software using ESD
and the Internet. eSynch's proprietary software produces several
advantages over traditional retail. For instance, since customers are not
sold a physical product, there are no costs associated with physical goods.
The Company's system should allow a series of products to evolve into ESD
solutions quickly and naturally.
The technology required to facilitate electronic commerce in the consumer
market is a subset of the technology required to service the corporate
market because the corporate market requires solutions to problems such as
network licensing and the accompanying pricing and management issues. The
Company's ESD system is being designed as a complete solution in each
market.
Competition
The markets for the Company's products are highly competitive and
are characterized by pressures to reduce prices, incorporate new
features and accelerate the release of new product versions. A number of
companies currently offer products that compete directly or indirectly with
one or more aspects of the Company's products.
Competitors or new competitors could develop a product, which competes with
all aspects of the Company's products. Most current and potential
competitors are larger, better established, and have greater financial
resources than the Company. Such competitors will have the ability to more
aggressively market and price their products than the Company. Competitors
and potential competitors include virtually all software manufacturers and
distributors, especially distributors of software via the Internet such as
Beyond.Com, Digital River, and Amazon.com.
Proprietary Rights
The Company regards certain features of its products as
proprietary and relies on a combination of copyright, trademark and trade
secret laws, confidentiality procedures and contractual provisions to
protect its proprietary information. The Company holds no patents applicable
to its business and has no patent applications pending. The Company seeks to
protect its products and related documentation and other written materials
under trade secret and copyright laws (as described below) which afford
only limited protection, and are dependent on numerous factors. The
Company seeks to protect its product names under common law trademark and
unfair competition laws, although none of the Company's product names are
registered trademarks. Despite the Company's efforts to protect its
proprietary rights, unauthorized parties may attempt to copy aspects of the
Company's products or obtain and use information that the Company regards
as proprietary.
Employees
The Company has eighteen full time employees as of June 15, 1999. Of
the total employees, 5 are engaged in management and administration and
4 in sales and marketing. The Company believes its relationship with its
employees to be good.
Company History
The Company was incorporated in 1988 as a Delaware corporation.
Innovus Multimedia, Inc., the predecessor to the Company's operating
subsidiary, was founded in 1987, and acted as a value-added reseller of
multimedia hardware and software in the form of stand alone kiosks until
1993. In September of 1994, as part of Innovus' transition to a business
oriented multimedia software developer, and to enhance its capital raising
ability. In 1998, Intermark in a reverse acquisition acquired Innovus.
Subsequently, new management joined the Company, and the Company
de-emphasized its multimedia business, and focused on business oriented ESD
and Internet Utility software development. As part of this transition, the
Company hired new software developers, marketing personnel, and others, and
secured equity financing for research and development to date.
ITEM 2. DESCRIPTION OF PROPERTY
At June 21, 1999, the Company's executive offices were located in
approximately 30,000 square feet of office space rented from a third
party in Tustin, CA. The Company's rental agreement expires on April 30,
2004. The Company's current monthly rent is $20,010.
ITEM 3. LEGAL PROCEEDINGS
In a Softkat related matter, on September 25, 1998, Diamar Interactive
Corp. filed a complaint against the Company in the Sonoma County Superior
Court, State of California. The complaint alleges that the Company owes
$44,183 for goods and services provided to Softkat, Inc., a former
subsidiary of the Company, based on a theory of successor liability. The
Company has filed an answer denying that it is obligated to pay any amounts
incurred by Softkat.
In a Softkat related matter, on January 21, 1999, Interplay
Entertainment Corp. filed a complaint against the Company and Innovus in
the Orange County Superior Court, State of California. The complaint
alleges that the Company and Innovus owe $86,041 for goods and services
provided to Softkat, Inc., a former subsidiary of the Company and Innovus,
based on a theory of successor liability. The Company and Innovus have
filed an answer denying that they are obligated to pay any amounts
incurred by Softkat.
In a Softkat related matter, on February 2, 1999, RPS, Inc. filed a
complaint against the Company in the United States District Court, Central
District of California. The complaint alleges that the Company owes
$52,555.58 for delivery services provided to Softkat, Inc., a former
subsidiary of the Company, based on a theory of successor liability. The
Company has filed an answer denying that it is obligated to pay any amounts
incurred by Softkat.
On February 5, 1999, Lawrence Tyson filed a complaint against
Intermark and Innovus in the San Mateo County Superior and Municipal
Courts, State of California. The complaint alleges that the Intermark and
Innovus owe $8,000 on a promissory note given by Intermark. The Company
believes that the Complaint has not been properly served on Intermark and
Innovus and, therefore, no answers or appearances have been filed. The
Company denies any amount is owed.
In a Softkat related matter, on February 24, 1999, Muramatsu, Inc.
filed a complaint against the Company and Intermark in the Orange County
Superior Court, State of California. The complaint alleges that the Company
and Intermark owe $42,207.65 for convention display services provided to
Softkat, Inc., a former subsidiary of the Company and Intermark, based on a
theory of successor liability. The Company and Intermark have filed an
answer denying that they are obligated to pay any amounts incurred by
Softkat.
In a Softkat related matter, on April 7, 1999, Sunclipse, Inc.
filed a complaint against the Company in the Orange County Superior Court,
State of California. The complaint alleges that the Company owes $131,752.06
for goods and services provided to Softkat, Inc., a former subsidiary of
the Company, based on a theory of successor liability. On May 24, 1999,
Sunclipse filed a first amended complaint seeking the same relief against
the Company as it sought in its original complaint. The Company intends to
file an answer denying that it is obligated to pay any amounts incurred by
Softkat.
On April 15, 1999, Bremer Public Relations, Inc. obtained a default
judgment in the amount of $32,980.85 against Innovus 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.
In a Softkat related matter, on April 30, 1999, Digital Leisure, Inc. filed
a complaint against the Company and Innovus in the Orange County Superior
Court, State of California. The complaint alleges that the Company and
Innovus owe $125,715 for goods and services provided to Softkat, Inc., a
former subsidiary of the Company and Innovus, based on a theory of
successor liability. The Company and Innovus have filed an answer denying
that they are obligated to pay any amounts incurred by Softkat.
In a Softkat related matter, on May 18, 1999, Frank Grange filed a
complaint against the Company in the Sonoma County Superior Court, State of
California. The complaint alleges that the Company owes $84,801.40 for
damages resulting from a lease between Plaintiff and Softkat, Inc., a
former subsidiary of the Company, and a Judgment obtained against Softkat
for unpaid rent, based on a theory of successor liability. The Company has
not yet responded to the Complaint but intends to file an answer denying
that it is obligated to pay any amounts incurred by Softkat.
In a Softkat related matter, on June 4, 1999, Cambrix Publishing, Inc.
filed a complaint against the Company in the Orange County Superior Court
Harbor Justice Center, State of California. The complaint alleges that the
Company owes $12,067.05 for goods and services provided to Softkat, Inc., a
former subsidiary of the Company, based on a theory of successor liability.
On September 25, 1998; Diamar Interactive Corp. filed a complaint against the
Company in the Sonoma County Superior Court, State of California. The
complaint alleges that the Company owes $44,183 for goods and services
provided to Softkat, Inc., a former subsidiary of the Company, based on a
theory of successor liability. The Company has not yet responded to the
Complaint but intends to file an answer denying that it is obligated to
pay any amounts incurred by Softkat.
In a Softkat related matter, on May 25, 1999, Transworld Systems,
Inc. filed suit against the Company for $3,998.15 for collection work done
on behalf of Softkat Inc., a former subsidiary of the Company.
Although Softkat has been sold there may be asserted and unasserted
claims against Softkat or the Company:
The Company is aware of several other creditors of Softkat, Inc.,
which have 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. Some of the claims against Softkat have
been asserted either in pending litigation or threatened litigation.
Regarding these 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The following matters were submitted to a vote of the security
holders during the fourth quarter of the calendar year ended December 31,
1998:
On Tuesday, October 27, 1998, the Company held its Annual Meeting of
Stockholders to consider and act upon the following matters,
1. To elect a board of five directors to serve until the next
annual meeting of the Company's stockholders and until their
successors have been elected and qualify;
Voting results:
Thomas Hemingway
For:
Against:
Abstain:
T. Richard Hutt
For:
Against:
Abstain:
James H. Budd
For:
Against:
Abstain:
Robert Orbach
For:
Against:
Abstain:
David Lyons
For:
Against:
Abstain:
2. To authorize a reverse stock split (the "Reverse Stock
Spilt" in which each ten (10) shares of the Company's
Common Stock, par value $.001, then outstanding would be
reclassified into one (1) share of the Company's Common
Stock, par value $.001, as presently classified (herein
called "Common Stock");
Voting results:
For:
Against:
Abstain:
3. To authorize a change in the Company's name (the "Name
Change") to ESYNCH CORPORATION
Voting results:
For:
Against:
Abstain:
PART II
ITEM 5. MARKET FOR COMMON SHARES AND RELATED SHAREHOLDER MATTERS
The Common Stock is currently quoted on the OTC Bulletin Board,
Symbol ESYN. On June 21, 1999, the closing bid and asked quotations for
the Common Stock on the OTC Bulletin Board were $2.91 and $3.06,
respectively. 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.
High Low
---- ---
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
Year to Date -- Ending June 16, 1999
-----------------------------
January 1 to March 31, 1999 $4.87 $1.00
April 1 to June 23, 1999 $3.62 $2.06
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 shares of Series I Preferred Stock and until it has
current earnings. 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.
Sale of Unregistered Shares
During the fourth quarter of 1998, the Company issued the
following shares without registration under the Securities Act of 1933:
During the quarter, 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 also issued 335,000 additional shares for reduction of a
note and services.
Subsequently 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.
The Company believes such issuance was exempt pursuant to Section
3(a)(9), Regulation D, Section 4(2) and/or 4(6) of the Securities Act of
1933.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following Selected Financial Data should be read in
conjunction with the financial statements and notes thereto bound elsewhere
herein.
Year Ended December 31,1998 December 31, 1997
---------------- -----------------
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)
The following discussion should be read in conjunction with the
financial statements and notes thereto found elsewhere herein. The
financial statements have been prepared on the basis of the Company being a
going concern. The Company has had continued losses, and currently has a
substantial accumulated deficit.
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.
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 cost incurred with the Innovus merger and 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. 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 will 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 Softkat disposal of $100,000
and estimated that other expenses incurred in 1998 related to the
Softkat acquisition and operations to approximate $250,000 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 recognize in the calculation of the loss. The subsequent sale and
resulting loss provided evidence of conditions
Liquidity and Capital Resources
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 the issuance 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.
Subsequently 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 June 1999, the Company received a signed commitment from an
investing source for equity financing in the aggregate amount of $2,500,000,
subject to certain terms and conditions. The financing is to be in the form
of convertible preferred stock and warrants issued by the Company. The
Company is obligated, at its expense, to register the stock 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 2% for every
30 day period thereafter. In no event will the shares be sold except
pursuant to an effective registration statement pursuant to the Securities
Act of 1933 and the required delivery of a prospectus. No assurance is
possible that such financing will be completed.
Forward Looking Statements.
This report contains both historical statements of fact and
forward-looking statements. Statements regarding the Company's expectations
as to future sales of its products, future revenue and cash flow, future
developments of plans to continue as a going concern and certain other
Information presented in this report constitute forward-looking statements
within the meaning of the Private Securities Litigation Reform Act of 1995.
When used in this Form 10-KSB or other filings by the Company with the
Securities and Exchange Commission, in the Company's press releases or
other public or shareholder communications, or in oral statements made with
the approval of an authorized officer of the Company's executive officers,
the words or phrases "would be," "will allow," "intends to," "will likely
result," "are expected to, "will continue," "is anticipated," "estimate,"
"project," or similar expressions are intended to identify forward-looking
statements. Although the Company believes that its expectations with
respect thereto are based on reasonable assumptions within the bounds of
its knowledge of its business and operations, there can be no assurance
that actual results will not differ materially from its expectations. In
addition to matters affecting the economy and the Company's industry
generally, factors, which could cause actual results to differ from
expectations, include the following:
Continued lack of market acceptance of other Company products
Lack of profitability
Inability to obtain additional needed capital or capital on
favorable terms
Inability to devise a viable business plan, and intentions to
conduct
Business on an untested business plan
Product and technological obsolescence
Competition
The Company does not undertake, and specifically disclaims any
obligation, to update any forward-looking statements to reflect occurrences
or unanticipated events or circumstances after the date of such statements.
ITEM 7. FINANCIAL STATEMENTS
Financial statements are filed as part of this report on pages F-1
through F-15
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL STATEMENT DISCLOSURE.
Information required by this Item has been "previously reported"
(as defined in Rule 12b-2) in the Company's Form 8-K dated June 1, 1998.
Such Form 8-K reported change in independent auditors from Grant Thornton
LLP to Hansen Barnett & Maxwell.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Executive Officers and Directors
Set forth below is information regarding (i) the directors of the
Company as of June 21, 1999, who will serve until the next annual meeting
of shareholders or until their successors are elected or appointed and
qualified, and (ii) the executive officers of the Company as of June 15,
1999, who are elected to serve at the discretion of the Board of Directors.
The Company's executive officers and directors are as follows:
Name Age Position
Thomas Hemingway. . . . . 43 Chairman and Chief Executive Officer
Donald C. Watters . . . . 41 President and Chief Operating Officer
David Noyes . . . . . . . 55 Interim, Chief Financial Officer
James Budd. . . . . . . . 57 Director and Vice President
T. Richard Hutt . . . . . 58 Director, Secretary/Treasurer
David Lyons . . . . . . . 53 Director
Robert Orbach . . . . . . 47 Director
THOMAS HEMINGWAY - (Chairman) co-founder and Chief Executive Officer of
eSynch. Mr. Hemingway devotes his full time to business development. Prior
to co-founding the Company, Mr. Hemingway was chief operating officer at
Ideafisher Systems, an artificial intelligence / associative processing
software company. Previously, Mr. Hemingway served as CEO of Becker/Smart
House, LV, a home automation enterprise, and founder and 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, an R&D firm developing products for the computer and
communications industry.
DONALD C. WATTERS - 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.
During this time, Mr. Watters was directly responsible for the companies
rapid growth of the Kissco's product line -- leading to several prestigious
product awards -- including PC World's Editor's Pick, 5 Stars from ZDNet,
and in the 'Top 100 Products of 1998' for both Windows Magazine and Computer
Shopper. Prior to Kissco, Mr. Watters was vice president of worldwide sales
of Touchstone Software and one of its major shareholders where during a
four-year period; he increased sales 369 percent and raised the company
market capitalization from $700K to $129M.
DAVID P. NOYES - Interim, Chief Financial Officer of eSynch Corporation,
and a Certified Public Accountant with a MBA from the Anderson school of
management at UCLA. Mr. Noyes was a senior manager with Ernst and Young and
has 24 years management experience as either Chief Executive Officer or
Chief Financial Officer with several high technology companies including
companies in computer software and hardware, electronics and oil field
services. Mr. Noyes, has significant mergers and acquisition experience,
turnaround experience and has successfully managed and provided strategic
leadership to a number of very successful rapidly growing companies.
JAMES BUDD - (Director) co-founder and Vice President of Web Strategies of
Intermark. Prior to co-founding the Company, Mr. Budd was vice president of
marketing at Ideafisher Systems, an artificial intelligence / associative
processing software company. Previously, he was founder and CEO 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.
T. RICHARD HUTT - (Director) co-founder, Vice President and
Secretary/Treasurer. Prior to co-founding the Company, 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.
The Board of Directors of the Company has voted to establish two
committees, the Compensation Committee, and the Audit Committee. Neither
committee met during 1998 and all activities of the respective committees
were undertaken by the Board as a whole.
Compliance with Section 16(a) of the Exchange Act.
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers and directors, and persons who own more than ten percent
of a registered class of the Company's equity securities, to file reports
of ownership and changes in ownership with the Securities and Exchange
Commission and the National Association of Securities Dealers. Officers,
directors and greater than ten-percent shareholders are required by
Securities and Exchange Commission regulations to furnish the Company with
copies of all Section 16(a)forms they file. Based solely on a review of
the copies of such forms furnished to the Company between January 1, 1998
and December 31, 1998, on year-end reports furnished to the Company after
December 31, 1998 and on representations that no other reports were
required, the Company has determined that during the last fiscal year all
applicable 16(a) filing requirements were met except as follows: none
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth the aggregate cash compensation
paid by the Company for services rendered during the last year to the
Company's Chief Executive Officer as of December 31, 1998 and to each of
the Company's other executive officers whose annual salary and bonus
exceeded $100,000.
SUMMARY COMPENSATION
Annual Compensation Long Term Compensation
Year Other Annual
Name and Compensation Ended Salary Stock Options
Principal Position 12/31 ($) ($)
Thomas Hemingway(1) 1998 $ 88,789 250,000
.
Stock Options Granted in Last Fiscal Year
Information concerning 1998 grants to named executive officers is
reflected in the table below. The amounts shown for each of the named
executive officers as potential realizable values are based on arbitrarily
assumed annualized rates of stock price appreciation of five percent and
ten percent over the full terms of the options. These potential realizable
values are based solely on arbitrarily assumed rates of price appreciation
required by applicable SEC regulations. Actual gains, if any, on option
exercises and common stockholdings are dependent on the future performance
of the Company and overall stock market conditions. There can be no
assurance that the potential realizable values shown in this table will be
achieved.
Individual Grants
--------------------------------------------------------------------
% of Total
Options Options Exercise price
Name Granted (#)
Thomas Hemingway 292,500 46.3% $ .94
James Budd 117,000 18.5 .94
T. Richard Hutt 117,000 18.5 .94
David Lyons 11,700 1.9 .21
=====================================================================
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:
Weighted-Average
Shares Exercise Price
----------- --------------
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
options granted during the year $ 0.91
===========
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: dividend yield of
0.0%; expected volatility of 73.0%; risk-free interest rate of 5.63%
and 5.68% and expected life of the options of 5.0 years and 10.0 years.
At the time these options were granted, Intermark was a private company
and its transaction with the Company had not been contemplated.
Nonetheless, amounts are presented based on an estimate of value as if the
transaction were relatively certain to occur.
Compensation of Directors
The Company's non-employee Directors are not currently
compensated for attendance at Board of Directors meetings. Non-employee
directors have been 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.
- 18 -
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The following table sets forth information regarding Common
Stock of the Company beneficially owned as of June 21, 1999 by: (i) each
person known by the Company to beneficially own 5% or more of the
outstanding Common Stock, (ii)by each director and director nominee, and
(iii) by all officers and directors as a group.
=============================================================================
Name of Officers and Directors
and Names and Addresses of Amount of Common
Principal Stockholders Shares* Percentage
-----------------------------------------------------------------------------
Thomas Hemingway(1) 1,415,216 14.5%
15502 Mosher Ave
Tustin, CA 92780
-----------------------------------------------------------------------------
James Budd(2) 1,239,716 12.7%
15502 Mosher Ave
Tustin, CA 92780
-----------------------------------------------------------------------------
T. Richard Hutt(3) 1,239,716 12.7%
15502 Mosher Ave
Tustin, CA 92780
-----------------------------------------------------------------------------
David Lyons(4) 11,700 .1%
15502 Mosher Ave
Tustin, CA 92780
-----------------------------------------------------------------------------
Robert Orbach 11,686 .1%
15502 Mosher Ave
Tustin, CA 92780
Donald C. Watters 354,573 3.9%
15502 Mosher Ave
Tustin, CA 92780
-----------------------------------------------------------------------------
All Directors and Executive 4,272,607 43.9%
Officers (6 persons)
=============================================================================
(1) Includes options presently exercisable to purchase 292,500 shares.
(2) Includes options presently exercisable to purchase 117,000 shares.
(3) Includes options presently exercisable to purchase 117,000 shares.
(4) Includes options presently exercisable to purchase 11,700 shares.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
In April, 1999 the Company entered into short term bridge
financing arrangements with Mr. Hemingway, whereby the Company borrowed
$90,000 from
Mr. Hemingway. The bridge financing had a stated interest rate of 10% per
annum. Mr. Hemingway has since been paid in full for this financing.
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a) INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
Page No.
Title of Documents
Report of Hansen, Barnett & Maxwell, Independent Certified
Public Accountants, on the December 31, 1998 and 1997
Financial Statements............................................ F-1
Consolidated Financial Statements:
Consolidated Balance Sheets as of December 31, 1998.......... F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997................................. F-3
Consolidated Statements of Stockholders' Equity (Deficit)
for the Years Ended December 31, 1997 and 1998.............. F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1998 and 1997................................. F-5
Notes to Consolidated Financial Statements........................ F-6
Financial Statement Schedules:
All schedule are omitted because they are not applicable or the required
information is shown in the financial statements or the notes thereto.
(b) Reports on Form 8-K
The Company filed on October 19, 1999, on Form 8-K/A, an amendment to
its current report filed August 20, 1998 reporting Acquisition and
Disposition of Assets.
(c) Exhibits
The following documents are included as exhibits to this report.
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 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.
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.
3.1(5) Restated Certificate of Incorporation of the Company
3.2(8) By-laws
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
4.10(2) Certificate of Designation - Series H Preferred Stock
4.11(7) Certificate of Designation - Series I Preferred Stock
4.12(7) Certificate of Elimination - Series A Preferred Stock
4.13(7) Certificate of Elimination - Series C Preferred Stock
4.14(7) Certificate of Elimination - Series D Preferred Stock
4.15(7) Certificate of Elimination - Series E Preferred Stock
4.16(7) Certificate of Elimination - Series F Preferred Stock
4.17(7) Certificate of Elimination - Series G Preferred Stock
4.18(7) Certificate of Elimination - Series H Preferred Stock
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
27.1 Financial Data Schedule
99 Press Release on sale of Softkat,Inc.
(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).
SIGNATURE
In accordance with Section 13 or 15(d) of the Exchange Act, the Company
caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
INNOVUS CORPORATION
Dated: June 21, 1999 By /s/Thomas Hemingway
---------------------------
Thomas Hemingway
24
ESYNCH CORPORATION AND SUBSIDIARIES
TABLE OF CONTENTS
Page
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheet - December 31, 1998 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997 F-3
Consolidated Statements of Stockholders' Deficit for the
Years Ended December 31, 1997 and 1998 F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998 and 1997 F-5
Notes to Consolidated Financial Statements F-6
<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
F-1
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
Pro Forma
Historical (Note 2)
---------- -----------
(Unaudited)
ASSETS
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
========== ==========
LIABILITIES AND STOCKHOLDERS' DEFICIT
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
========== ==========
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
------------------------
1998 1997
----------- ----------
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
=========== ==========
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Total
---------------------- ---------------------- Paid-In Accumulated Stockholders'
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)
========== ========== ========== ========== ========== =========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
F-5
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
------------------------
1998 1997
----------- ----------
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 $ -
============ ==========
Supplemental cash flow information and noncash investing and
Financing activities - Note 8
The accompanying notes are an integral part of these financial statements.
F-5
<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
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.
F-6
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
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.
F-7
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.
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.
F-8
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.
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.
F-9
For the Years Ended
December 31,
------------------------
1998 1997
----------- ----------
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 $ - $ -
=========== ==========
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 cancellable 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
==========
F-10
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
===========
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.
F-11
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.
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.
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.
F-12
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:
1998
-----------------------------
Weighted-Average
Shares Exercise Price
------------ ------------
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
============
The following table summarizes information about stock options outstanding
at December 31, 1998:
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
---------- ---------- ---------- ---------- ----------- ----------
$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
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:
F-13
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.
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 March 9,1999, 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
.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 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.
F-14
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 is 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.)
On June 11, 1999, the Company received a signed commitment from an
investing source for equity financing in an aggregate amount of $2,500,000,
subject to certain terms and conditions. The financing is to be in the form
of convertible preferred stock and warrants issued by the Company. The
Company is obligated, at its expense, to register the stock 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. (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.)
F-15
[DESCRIPTION] EX 2.4
Agreement and Plan of Merger--Softkat
AGREEMENT AND PLAN OF MERGER
AMONG
ESYNCH CORPORATION,
IN-US SOFTKAT ACQUISITION CORPORATION,
AND
SOFTKAT, INC.
DATED AS OF NOVEMBER 17, 1998
<PAGE>
AGREEMENT AND PLAN
OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (the "Agreement"), is
made as of this 17th day of November, 1998, by and among ESYNCH
CORPORATION, a Delaware corporation ("ESYNCH"), IN-US SOFTKAT
ACQUISITION CORPORATION, a Delaware corporation ("Acquisition Sub");
SOFTKAT, INC., a California corporation ("Softkat"); and the present
or former stakeholders of Softkat identified as such on the
signature pages hereto ("Softkat Holders").
WHEREAS, the parties desire to adopt a plan of
reorganization intended to effect a tax-free Merger under
SectionSection 361(a) and 368(a)(1)(A) of the Internal Revenue Code
of 1986, as amended (the "Code"), pursuant to which Softkat will
merge with Acquisition Sub, with Softkat being the surviving
corporation, and all of the capital stock of Softkat will be
cancelled in exchange for voting stock of ESYNCH (the "Merger");
WHEREAS, the Boards of Directors of ESYNCH, Acquisition
Sub and Softkat, and the shareholder(s) of Acquisition Sub and
Softkat each (i) has determined that this Agreement and the
transactions contemplated hereby, including the Merger (as defined
hereinafter) are fair to it and in its best interests, and (ii)
approved this Agreement and the transactions contemplated hereby,
including the Merger, all on the terms and subject to the conditions
set forth in this Agreement.
NOW, THEREFORE, for good and valuable considerations,
receipt and sufficiency of which are hereby acknowledged, the
parties hereby agree as follows:
SECTION 1. CERTAIN DEFINITIONS.
"Adverse Consequences" means all actions, suits, proceedings,
hearings, investigations, charges, complaints, claims, demands,
injunctions, judgments, orders, decrees, rulings, damages, dues,
penalties, fines, costs, amounts paid in settlement, Liabilities,
obligations, Taxes, liens, losses, expenses, and fees, including
court costs and attorneys' fees and expenses, in each case (a) net
of any insurance recoveries (except to the extent such recoveries
increase the cost of insurance, through retrospective adjustments or
otherwise), and (b) net of any tax benefit, after taking into
account any tax detriment, of any indemnity.
"CGCL" means the California General Corporation Law.
"Dissenting Shares" shall have the meaning given in Section 1300 et
seq. of the CGCL.
"Effective Time" means the time the Merger becomes effective in
accordance with the CGCL.
"EXCHANGE RATIO" MEANS THE NUMBER THAT IS FOUND BY EXECUTING THE
FOLLOWING CALCULATION: (I) 720,000 ESYNCH NEW COMMON SHARES;
DIVIDED BY (II) THE NUMBER OF FULLY-DILUTED SOFTKAT SHARES.
"Excluded Shares" shall mean any Softkat Shares held of record as of
the Effective Time by ESYNCH or any subsidiary of ESYNCH.
"Fully-Diluted Softkat Shares" means the sum of (a) the number of
Softkat Common Shares issued and outstanding, plus (b) the number of
Softkat Common Shares that are subject to issuance upon exercise or
conversion of outstanding preferred stock, stock warrants, stock
options, conversion rights and other similar rights, whether or not
such warrants, options and rights are currently exercisable or
convertible or are subject to any contingency, in each case
determined as of the Closing Date.
"ESYNCH Old Common Shares" means shares of Common Stock, par value
$.001 per share, of ESYNCH as authorized and classified prior to the
Reclassification.
"ESYNCH Contingent Common Shares" means ESYNCH New Common Shares as
authorized as of immediately after the effectiveness of the
Reclassification and issuable pursuant to Section 2(b)(iii) of this
Agreement, subject to proportional adjustments in the event of the
reclassification or merger or the like in which the ESYNCH New
Common Shares are exchanged for or converted into a different kind
or amount of securities or property after the Reclassification.
"ESYNCH New Common Shares" means the shares of common stock, par
value $.001 per share, as have been authorized and reclassified as
of immediately after the effectiveness of the Reclassification.
"ESYNCH Series I Preferred Shares" means shares of Series I
Convertible Preferred Stock, par value $0.001 per share, of ESYNCH,
on substantially the terms and conditions of the Certificate of
Designation of Series I Preferred Stock, which is attached hereto as
Exhibit A, subject to proportional adjustments in the event of the
reclassification or merger or the like after the Reclassification in
which the ESYNCH Series I Preferred Shares or ESYNCH New Common
Shares are exchanged for or converted into a different kind or
amount of securities or property.
"ESYNCH Shares" means collectively ESYNCH Series I Preferred Shares,
the ESYNCH New Common Shares, and the ESYNCH Contingent Common
Shares, and any securities or other property into which the
foregoing may be converted, exchanged or reclassified, in one or
more transactions (adjusted in number, kind and price in accordance
with their respective rights or designations as provided in the
ESYNCH certificate of incorporation and designations, as amended).
"Intellectual Property" means (a) all inventions (whether patentable
or unpatentable and whether or not reduced to practice), all
improvements thereto, and all patents, patent applications, and
patent disclosures, together with all reissuances, continuations,
continuations-in-part, revisions, extensions, and reexaminations
thereof, (b) all trademarks, service marks, trade dress, logos,
trade names, and corporate names, together with all translations,
adaptations, derivations, and combinations thereof and including all
goodwill associated therewith, and all applications, registrations,
and renewals in connection therewith, (c) all copyrightable works,
all copyrights, and all applications, registrations, and renewals in
connection therewith, (d) all trade secrets and confidential
business information (including ideas, research and development,
know-how, compilations, compositions, processes and techniques,
technical data, designs, drawings, specifications, customer and
supplier lists, pricing and cost information, and business and
marketing plans and proposals), (e) all computer software (including
data and related documentation), source code, algorithms, and object
code, and (f) all other proprietary rights, and (g) all copies and
tangible embodiments thereof (in whatever form or medium).
"Liability" means any liability (whether known or unknown, whether
asserted or unasserted, whether absolute or contingent, whether
accrued or unaccrued, whether liquidated or unliquidated, and
whether due or to become due), including any liability for Taxes.
"Reclassification" means the one-for-ten reverse stock split of the
ESYNCH Old Common Shares which was effective as of November 9, 1998
in which each 10 ESYNCH Old Common Shares were exchanged for 1
ESYNCH New Common Share, subject to payment in lieu of fractional
shares, as further described in the Restated Certificate of
Incorporation of ESYNCH attached hereto as Exhibit B, and pursuant
to which all then outstanding ESYNCH Series H Preferred Shares, par
value $.001 (the "ESYNCH Series H Preferred Shares"), were
automatically converted into 56 1/4 ESYNCH New Common Shares, and
the ESYNCH Series H Preferred Shares are no longer issued and
outstanding.
"Softkat Holder" means a holder of Softkat Shares, Softkat Warrants
or Softkat Subordinated Notes, or such holder's representative, as
identified on the signature pages hereto.
"Softkat Subordinated Notes" means the $800,000 in original
principal amount of subordinated indebtedness of Softkat represented
by promissory notes.
"Softkat Warrants" means the warrants to purchase originally an
aggregate of 1,031,625 Softkat Common Shares at a price of $2.00 per
share.
"Softkat Common Shares" means the issued and outstanding shares of
Common Stock, without par value, of Softkat determined as of the
Closing Date.
"Softkat Shares" means (a) Softkat Common Shares that are issued and
outstanding, plus (b) Softkat Common Shares that are subject to
issuance upon exercise or conversion of outstanding convertible
notes, preferred stock, stock warrants, stock options, conversion
rights and other similar rights, whether or not such warrants,
options and rights are currently exercisable or convertible or are
subject to any contingency, specifically including Softkat Warrants,
in each case determined as of the Closing Date.
"Surviving Corporation" shall have the meaning given in Section 2(a)
of this Agreement.
"Tax" means any federal, state, local, or foreign income, gross
receipts, license, payroll, employment, excise, severance, stamp,
occupation, premium, windfall profits, environmental (including
taxes under Code Sec. 59A), customs duties, capital stock,
franchise, profits, withholding, social security (or similar),
unemployment, disability, real property, personal property, sales,
use, transfer, registration, value added, alternative or add-on
minimum, estimated, or other tax of any kind whatsoever, including
any interest, penalty, or addition thereto, whether disputed or not.
"Trading Price" shall mean (A) the closing sale price of the ESYNCH
New Common Shares as reported by the principal trading market of the
ESYNCH New Common Shares if they are traded on a national securities
exchange or quoted on a national quotation system of a national
association of securities dealers (such as the Nasdaq National
Market or Nasdaq SmallCap Market) on the day concerned, and if no
sales occur on such day, then the closing sale price on the first
prior trading day on which at least one sale occurs on such
principal market, or (B) if the ESYNCH New Common Shares are not
traded on a national securities exchange or quoted on such a
national quotation system, then the closing bid price of the ESYNCH
New Common Shares, if a closing bid price is reported on such day on
the over-the-counter bulletin board, and if not, then the reported
closing bid price on the first prior trading day on which such a
closing bid price is reported for the ESYNCH New Common Shares or
(C) if the prices for ESYNCH New Common Shares have not been
reported on any national securities exchange, automated quotation
systems of a national association of securities dealers or the
over-the-counter bulletin board for the immediately preceding ten
(10) trading days, then the opening bid price for the ESYNCH New
Common Shares on the next trading day on which so reported.
SECTION 2. The Merger; Other Exchanges of Securities.
(a) The Merger. Softkat and Acquisition Sub shall be the
constituent corporations in the Merger. Subject to the terms and
conditions of this Agreement, at the Effective Time, the Merger
shall be implemented by means of a merger (hereinafter sometimes
referred to as the "Merger") of Acquisition Sub with and into
Softkat in accordance with Section 1100 et seq. of the CGCL, to be
effected by the filing of the Merger Agreement, substantially in the
form attached hereto as Exhibit C, with the California Secretary of
State and the various certificates required by such law. In
accordance with such statutes, at the Effective Time, the
Acquisition Sub shall be merged with and into Softkat, the separate
corporate existence of Acquisition Sub shall cease, and Softkat
shall be the surviving corporation (the "Surviving Corporation") and
shall continue its corporate existence under the laws of the State
of California. From and after the Effective Time and thereafter
until amended as provided by law, the Articles of Incorporation of
Softkat as in effect immediately prior to the effective time shall
become the Articles of Incorporation of the Surviving Corporation.
From and after the Effective Time and thereafter until amended as
provided by law, the Bylaws of Softkat as in effect immediately
prior to the effective time shall become the Bylaws of the Surviving
Corporation, except that the Bylaws of the Surviving Corporation
shall be amended such that the number of directors shall be one,
which number may be changed from time to time, by a resolution duly
adopted by the shareholders or a majority of the directors then in
office. The directors and officers of the Surviving Corporation
shall be as set forth in Exhibit C, and each such director or
officer shall serve until his or her successor has been duly elected
or appointed and qualified or until his or her earlier death,
resignation or removal in accordance with the terms of the Surviving
Corporation's Articles of Incorporation and Bylaws.
(b) Treatment of Softkat Shares and Acquisition Sub Stock.
(i) Conversion of Softkat Common Shares and
Acquisition Sub Stock. At the Effective Time, each of the Softkat
Common Shares issued and outstanding immediately prior to the
Effective Time (other than Dissenting Shares and Excluded Shares, if
any) shall, by virtue of the Merger and without any action on the
part of the holder thereof, be converted into the right to receive a
number of ESYNCH New Common Shares equal to the product of
multiplying the number of Softkat Common Shares by the Exchange
Ratio (the "Merger Consideration"). All Softkat Common Shares
shall, as of the Effective Time, no longer be outstanding and shall
automatically be cancelled and shall cease to exist, and each
certificate previously representing any such shares shall thereafter
represent only the right to receive the Merger Consideration into
which the shares of Softkat Common Shares represented by such
certificate have been converted. As of the Effective Time, all
Excluded Shares, if any, shall cease to exist and the certificates
for such shares shall, as promptly as practicable thereafter, be
cancelled and no payments shall be made in consideration therefor.
Notwithstanding anything in this Agreement to the contrary,
Dissenting Shares shall not be converted into the right to receive,
or be exchangeable for, the Merger Consideration provided for in
Section 2(b)(i) hereof, but, instead, the holders thereof shall be
entitled to payment for such Dissenting Shares in accordance with
the provisions of Chapter 13 of the CGCL, a copy of which is
attached hereto as Exhibit D, unless and until a holder of
Dissenting Shares shall have failed to perfect or shall have
effectively withdrawn or lost such holder's rights to appraisal and
payment, as the case may be. Softkat shall (a) comply with the
provisions of Sections 1300 et seq. of the CGCL applicable to it in
a prompt and expeditious manner, (b) give ESYNCH prompt written
notice of (i) the identities of all Softkat shareholders who have
perfected rights to dissent pursuant to the CGCL and (ii) the
receipt of any notice from any Softkat shareholder demanding the
purchase of his, her or its Softkat Common Shares, (c) not settle or
offer to settle any such demands without the prior written consent
of ESYNCH, and (d) not, without the prior written consent of ESYNCH,
waive any vote in favor of the Merger or failure of any Softkat
shareholder timely to take any other action required under CGCL. At
the Effective Time, the shares of common stock of Acquisition Sub
then issued and outstanding shall be converted into a like number of
shares of common stock of the Surviving Corporation, which
thereafter shall constitute all of the issued and outstanding shares
of common stock of the Surviving Corporation.
(ii) Exchange of Certificates. After the
Effective Time, each holder of a certificate or certificates
theretofore representing issued and outstanding Softkat Common
Shares (other than the Dissenting Shares and Excluded Shares) shall,
upon the surrender of such certificates to ESYNCH, or an exchange
agent designated by ESYNCH, be entitled to receive, in exchange for
each of the shares represented by such certificate or certificates
so surrendered, an amount in ESYNCH New Common Shares equal to the
Merger Consideration, less any required withholding of Taxes (as
hereinafter defined). The holder of a certificate that prior to the
Merger represented issued and outstanding Softkat Common Shares
shall have no rights, after the Effective Time, with respect to such
shares except to surrender the certificate in exchange for the
Merger Consideration, without interest thereon or, if applicable, to
perfect such rights as a holder of Dissenting Shares as such holder
may have pursuant to the applicable provisions of Chapter 13 of the
CGCL. Within five (5) business days after the Effective Time, the
Surviving Corporation will send to each holder of Softkat Common
Shares at the Effective Time a letter of transmittal for use in such
exchange. In the event any certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the
person claiming such certificate to be lost, stolen or destroyed
and, if required by the Surviving Corporation, the posting by such
person of a bond in such amount as the Surviving Corporation may
direct as indemnity against any claim that may be made against it
with respect to such certificate, ESYNCH will deliver, or cause to
be delivered, in exchange for such lost, stolen or destroyed
certificate, certificates representing the Merger Consideration
payable in respect thereof.
(iii) ESYNCH Contingent Common Shares. Within
five (5) business days following the first anniversary of the
Closing Date ("Anniversary Date"), ESYNCH shall issue and cause to
be delivered to the holders of Softkat Common Shares (other than
Dissenting Shares or Excluded Shares) as of immediately prior to the
Effective Time ("Recipients") additional ESYNCH New Common Shares
("ESYNCH Contingent Common Shares") if and only if the Trading Price
of the ESYNCH New Common Shares shall not have equaled or exceeded
$3.00 on any one or more of the trading days during the 30-day
period ending on the Anniversary Date. Subject to the terms and
conditions in the foregoing sentence, ESYNCH shall issue ESYNCH New
Common Shares, represented by certificates registered in the name of
the Recipients, pro rata, in the aggregate amount equal to the
lesser of (A) 720,000 ESYNCH Contingent Common Shares, and (B) a
number equal to 720,000 multiplied by the difference between (a)
$3.00 (subject to proportionate adjustment in the event of any
split, reverse split, or stock dividend of the ESYNCH New Common
Shares), and (b) the average Trading Price of the ESYNCH New Common
Shares over the 10 trading days ending on the first trading day
prior to the Anniversary Date. The aggregate amount determined as
set forth above, if any, shall be allocated among the Recipients pro
rata according to the number of Softkat Common Shares registered in
the name of each of them as of immediately prior to the Effective
Time. In the event that Softkat has willfully and fraudulently
concealed any material adverse information regarding the historical
business operations or historical financial condition of Softkat
from ESYNCH, and such information has a direct material adverse
effect on the Trading Price, ESYNCH shall be entitled to reduce the
number of ESYNCH Contingent Common Shares by a number equal to the
actual out-of-pocket damages suffered by ESYNCH directly resulting
from such concealed information, divided by the average Trading
Price of the ESYNCH New Common Shares over the 10 trading days
ending on the first trading day prior to the Anniversary Date.
(iv) Certain Taxes. If any certificates
representing Merger Consideration are to be registered in a name
other than that in which the certificate surrendered in exchange
therefor is registered, it shall be a condition of such delivery of
Merger Consideration that the certificate so surrendered shall be
properly endorsed (or accompanied by an appropriate instrument of
transfer) and otherwise in proper form for transfer, and that the
person requesting such exchange shall pay to ESYNCH, in advance, any
transfer or other Taxes required by reason of the payment to a
person other than the registered holder of the certificate
surrendered, or required for any other reason, or shall establish to
the satisfaction of ESYNCH that such Tax has been paid or is not
payable.
(v) Closing of Transfer Books. At the
Effective Time, the transfer books for Softkat Common Shares shall
be closed, and no transfer of Softkat Common Shares shall thereafter
be made on such books. If, after the Effective Time, certificates
representing any such shares are presented for transfer to ESYNCH,
they shall be cancelled and exchanged for the Merger Consideration
as provided in this Section 2.
(c) Treatment of Softkat Warrants. Softkat shall take all
actions necessary to provide that, as to those holders of Softkat
Warrants who so agree, at the Effective Time, each Softkat Warrant
shall be exercised and cancelled. The aggregate exercise price paid
in cash by holders of the Softkat Warrants, as amended, to Softkat
shall equal $193,000 or more. Further, such holders of Softkat
Warrants shall agree (A) not to trade in the ESYNCH Shares with the
purpose or effect of manipulating the Trading Price of the ESYNCH
New Common Shares through the Anniversary Date, (B) to confirm the
amounts of Softkat securities owned by it, and (C) to approve the
Merger and this Agreement as holder of all of the Softkat Common
Shares owned by it or its affiliates immediately prior to the
Effective Time. Prior to the Effective Time, Softkat shall use
reasonable efforts to (i) obtain any consents from holders of
Softkat Warrants and (ii) make any amendments to the terms of such
Softkat Warrants that are necessary to give effect to the
transactions contemplated by this Section. To the extent that
holders of Softkat Warrants do not exercise the Softkat Warrants,
Softkat shall grant new warrants on the terms anticipated in the
amended warrants, all of which shall also be included in the
calculation of Fully-Diluted Softkat Shares, and shall be otherwise
treated as Softkat Warrants and exercised as described above.
(d) Treatment of Softkat Subordinated Notes. Prior to the
Effective Time, Softkat shall deposit with a bank, trust, escrow
company or exchange agent (the "Paying Agent"), for the benefit of
the holders of Softkat Subordinated Notes, cash in the aggregate
amount equal to $204,374.50 or more. $185,000 thereof is to
comprise a principal payment to the holders of Softkat Subordinated
Notes, $8.00 is to cover cash in lieu of fractional ESYNCH Series I
Preferred Shares, and $19,366.50 thereof is to cover attorneys' fees
and costs incurred by Softkat in connection with the Merger and the
other transactions contemplated in this Agreement. Barack
Ferrazzano Kirschbaum Perlman & Nagelberg shall release Softkat from
any additional amounts of fees and costs then remaining due or
accrued thereafter in excess of $8,000. Certain founders of Softkat
shall deposit with the Paying Agent promptly following the Closing
1,260,000 Softkat Common Shares, and Softkat will deposit with the
Paying Agent promptly following the Closing an additional number of
Softkat Common Shares based on $0.035 per Softkat Common Share to
equal the deficiency between (a) the aggregate of the $185,000 cash
payment described above plus the $600,000 payment made in the form
of 600,000 ESYNCH Series I Preferred Shares plus 1,060,000 Softkat
Common Shares deposited by the founders and (b) the amount due under
the Softkat Subordinated Notes. Other than the aggregate of
$600,000 principal amount thereof to be exchanged for ESYNCH Series
I Preferred Shares as described below, the amount due the holders of
Softkat Subordinated Notes is equal to $200,000, representing unpaid
principal, plus accrued and unpaid interest of $32,666.66 to October
31, 1998, plus $153.42 per day thereafter to the Closing Date.
Softkat will therefore deposit Softkat Common Shares in an aggregate
number equal to approximately 358,889 Softkat Common Shares as of
November 13, 1998. ESYNCH shall deposit with the Paying Agent
promptly following the Closing 600,000 ESYNCH Series I Preferred
Shares, evidenced by certificates in appropriate denominations and
registered in the names of the record holders of the Softkat
Subordinated Notes, all for payment and delivery to the holders of
Softkat Subordinated Notes on the Payment Date. The amounts in cash
and shares required to be deposited with the Paying Agent are
hereinafter called the "Funds." $19,000 of the cash Funds shall be
disbursed as of the Closing Date to Barack Ferrazzano Kirschbaum
Perlman & Nagelberg to pay Transaction Costs incurred by Softkat in
connection with this Agreement and the Merger. The remaining Funds
shall be disbursed to each respective former holder of a Softkat
Subordinated Note as of or after the Closing Date on the first
business day following the receipt by the Paying Agent, for the
account of Softkat, of the Softkat Subordinated Note surrendered for
cancellation (such date herein called the "Payment Date"). The
$185,000 in cash; 600,000 shares of ESYNCH Series I Preferred Stock;
and approximately 1,420,000 Softkat Common Shares shall be paid and
allocated pro rata among those holders of Softkat Subordinated
Notes, according to the respective original principal amounts
thereof, who shall have agreed, on or prior to the Effective Time,
to surrender such Softkat Subordinated Notes for cancellation in
exchange for this right to receive Funds. Prior to the Effective
Time, Softkat shall use reasonable efforts to (i) obtain any
consents from holders of Softkat Subordinated Notes and (ii) make
any amendments to the terms of such Softkat Subordinated Notes that
are necessary to give effect to the transactions contemplated by
this Section. Notwithstanding the foregoing, neither ESYNCH, the
Surviving Corporation, nor any other person shall be liable to any
holder of Softkat Subordinated Notes for the payment to a public
official of any unclaimed portion of the Fund pursuant to applicable
abandoned property laws. In the event any such Softkat Subordinated
Note shall have been lost, stolen or destroyed upon the making of an
affidavit of that fact by the person claiming such certificate to be
lost, stolen or destroyed and, if required by ESYNCH or Softkat, the
posting by such person of a bond in such amount as either of such
parties may direct, whichever is greater, as indemnity against any
claim that may be made against Softkat with respect to such
promissory note, the Paying Agent shall deliver the pro rata portion
thereof, payable the holder in respect to such lost, stolen or
destroyed Softkat Subordinated Note. Further, each of the holders
of Softkat Subordinated Notes shall agree (A) not to trade in the
ESYNCH Shares with the purpose or effect of manipulating the Trading
Price of the ESYNCH New Common Shares through the Anniversary Date,
(B) to confirm the amounts of Softkat securities owned by it, and
(C) to approve the Merger and this Agreement as holder of all of the
Softkat Common Shares owned by it or its affiliates immediately
prior to the Effective Time. The terms of the ESYNCH Series I
Preferred Shares anticipate the Reclassification, and the conversion
rights therein are expressed in terms of ESYNCH New Common Shares.
(e) Treatment of Softkat Options. All of the options,
warrants and other rights to acquire Softkat Shares (other than the
Softkat Warrants) shall be cancelled prior to the Merger without
payment therefor pursuant to agreements between Softkat and the
holders thereof in form and substance satisfactory to ESYNCH.
(f) Fractional Shares. No certificates or scrip
representing fractional share interests in ESYNCH New Common Shares
will be issued, and no such fractional share interest will entitle
the holder thereof to vote, or to any rights of a stockholder of the
Company. A holder of Softkat Common Shares shall receive, in lieu
of any fraction of a ESYNCH Common Share to which the holder would
otherwise be entitled, a cash payment therefor, rounded to the
nearest cent, on the basis of the average of the closing bid and
asked quotations price of the ESYNCH New Common Shares as reported
by the over-the-counter bulletin board on the Effective Date (or in
the event the Company's New Common Shares are not so quoted on the
Effective Date, such closing quotations on the next preceding day on
which such stock was quoted). If more than one certificate
representing Softkat Common Shares shall be surrendered at one time
for the account of the same stockholder, the number of full ESYNCH
New Common Shares which shall be issued shall be computed on the
basis of the aggregate number of shares represented by the Softkat
Common Share certificates so surrendered. In the event that the
Company's Exchange Agent determines that a holder of Softkat Common
Shares has not tendered all his certificates for exchange, the
Exchange Agent may carry forward any fractional share until all
certificates of that holder have been presented for exchange such
that payment for fractional shares to any one person shall not
exceed the value of one share.
SECTION 3. Other Agreements.
(a) Promptly following the execution and delivery of this
Agreement, the parties shall issue a joint press release in a form
mutually to be agreed upon. The parties shall not, and shall
instruct their representatives not to, issue or cause the
publication of any press release or other public announcement with
respect to, or otherwise make any public statement concerning, this
Agreement or the Merger without the consent of the other party,
which consent shall not be unreasonably withheld. Notwithstanding
the foregoing, in the event that any party determines, based upon
the advice of counsel, that a press release, disclosure in a public
filing, or other public disclosure of or reference to this
Agreement, the Merger or the other party is required by law, the
former party shall first use reasonable efforts to notify the latter
party of the potential disclosure, and use reasonable efforts to
afford the latter party a reasonable opportunity to review and
comment on the proposed disclosure, provided that the consent of the
latter party for such publication shall not be required in any such
instance. In addition, ESYNCH shall file on a timely basis a
Current Report on Form 8-K reporting this transaction as an
acquisition, and make any additional filings and reports as may be
required or advisable under applicable law.
(b) ESYNCH HAS EFFECTED THE RECLASSIFICATION, PURSUANT TO
WHICH ALL OF THE SERIES H PREFERRED STOCK HAS AUTOMATICALLY
CONVERTED INTO ESYNCH NEW COMMON SHARES. ESYNCH HAS FILED A
CERTIFICATE OF ELIMINATION OF THE SERIES H PREFERRED STOCK.
(c) Promptly following the date of execution of this
Agreement, ESYNCH shall file Form D with the SEC regarding the
Merger, and make all other necessary or advisable filings under
California, New York and other applicable state securities laws, as
necessary or advisable to obtain appropriate exemptions from
registration or qualification under federal and applicable state
securities laws. Except as expressly disclosed in writing by
Softkat, ESYNCH shall understand that the Softkat shareholders are
residents of California, Alabama, Connecticut, Delaware, Florida,
Georgia, Illinois, Iowa, Kansas, Massachusetts, Montana, New Jersey,
New York, Ohio, Oklahoma, Pennsylvania, South Carolina, Virginia or
Washington. In order to perfect such exemptions as are available
under Regulation D and the California Corporate Securities Law, and
other applicable laws, Softkat shall require that prior to the
Effective Time the holders of Softkat Common Shares, Softkat
Warrants and Softkat Subordinated Notes consent and acknowledge in
writing that the ESYNCH Shares being acquired by the Softkat Holder
are being acquired for the person's personal account, for investment
purposes only, and not with a view to the distribution, resale or
other disposition thereof, that ESYNCH is issuing the ESYNCH Shares
without registering such shares under the Securities Act of 1933
(the "Act") on the basis of certain exemptions from such
registration requirement, and accordingly that the person
acknowledges that the certificates evidencing the ESYNCH Shares
shall bear a legend indicating such non-registration under the Act
and the resulting restrictions on transfer, and the person may be
required to hold the ESYNCH Shares indefinitely unless they are
subsequently registered for resale under the Act or an exemption
from such registration is available, and that the person has
received a copy of the Filings (as defined below) and understands
that all rights and obligations connected with this Agreement are
set forth in this Agreement, acknowledges having had an opportunity
to request and receive additional information from ESYNCH, its being
experienced and sophisticated in financial and business matters
sufficient to protect its interests in this transaction and to
evaluate the merits and risks of the Merger and its being in such
financial condition so as to be able to invest in illiquid
securities for an indefinite period of time.
(d) On the Closing Date, Softkat shall cause to be
delivered to ESYNCH and Acquisition Sub such resignations of
directors and officers of Softkat and cause to take effect such
amendments of its bylaws as may be necessary or appropriate to elect
Thomas Hemingway and other designates of Acquisition Sub to
constitute all of the members of Softkat's and Sonoma's Board of
Directors and officers.
(e) Following the Closing, ESYNCH shall continue to file
reports with the Securities and Exchange Commission as required in
Rule 144(c)(1), or any successor rule, for a period of at least
twenty-four (24) months immediately following the Closing, or such
longer period as any Recipient shall be deemed an affiliate of
ESYNCH on account of being an officer or director of ESYNCH or its
receipt and holding of Merger Consideration or ESYNCH Contingent
Common Shares, or such shorter time as any ESYNCH New Common Shares
or ESYNCH Series I Preferred Shares are outstanding, and ESYNCH
shall take all other actions as may reasonably be required of ESYNCH
in order that Rule 144, or any successor rule, may be available to
the shareholders of ESYNCH who satisfy the provisions of the rule
applicable to the holder or its offer or sale of securities.
(f) Until five years from the Effective Time, unless
otherwise required by applicable law, the articles of incorporation
and bylaws of the Surviving Corporation shall contain provisions no
less favorable with respect to the elimination of liability of
directors and the indemnification of (and advancement of expenses
to) directors, officers, employees and agents that are set forth in
the articles of incorporation and bylaws of Softkat, as in effect on
the date hereof. The articles and bylaws of Softkat are attached as
Exhibit E. The purpose of this provision is to assure that the
Surviving Corporation does not deny indemnity claims under its
articles of incorporation or bylaws that would be allowed as to
actions or inactions that occurred prior to the Effective Time but
for such subsequent amendment, and shall not be construed to cover
any actions or inactions occurring after the Effective Time.
SECTION 4. Representations and Warranties of Softkat. As of the
date hereof, and as of the Closing Date, Softkat hereby represents
and warrants to ESYNCH, except as set forth on Softkat's Disclosure
Schedule, as follows:
(a) Softkat is a corporation duly organized and existing
and in good standing under the laws of the State of California and
Softkat has all necessary corporate power and authority to own and
conduct its business as currently conducted. Softkat is not
required by the nature of its business or properties to be qualified
to do business as a foreign corporation in any jurisdiction outside
California. Softkat has no subsidiaries other than Sonoma
MultiMedia, Inc., a California corporation ("Sonoma"), and owns no
similar interest in any other entity. Softkat holds of record and
beneficially all right, title and interest in all of the outstanding
capital stock of Sonoma, free and clear of any lien, claim,
encumbrance or adverse interest of any kind, and such stock is
validly issued, fully-paid and non-assessable.
(b) Other than approval of the shareholders of Softkat
required by applicable law and other than the agreements
contemplated in Sections 2(c), 2(d) or 2(e), Softkat has obtained
all necessary corporate authorizations and material approvals
required for the execution, delivery and consummation of the
transactions provided for in this Agreement. This Agreement, and
when executed and delivered each of the other agreements
contemplated by this Agreement, to which Softkat is to be a party,
constitutes the valid and binding obligations of Softkat,
enforceable against Softkat in accordance with its terms except as
such enforcement may be limited by bankruptcy laws or other laws
affecting creditors' rights generally.
(c) Softkat has authorized capital of 5,000,000 shares of
Common Stock, without par value, of which a total of 3,403,468
shares of Common Stock are issued and outstanding, 1,031,625 shares
are reserved for issuance under outstanding Softkat Warrants (prior
to the amendments thereof contemplated in this Agreement which shall
result in the cancellation thereof prior to the Effective Time), and
no other shares are reserved for issuance under outstanding
convertible notes or other securities or arrangements except other
stock options listed in the Disclosure Schedule, all of which shall
be cancelled prior to the Effective Time. There are no preemptive
rights or similar rights as to Softkat's capital stock. All of the
Softkat Common Shares that are outstanding are, and all of the
Softkat Common Shares which shall have become outstanding prior to
the Effective Time shall be when issued, validly issued, fully-paid
and non-assessable and were or shall have been issued in compliance
with all applicable federal and state securities laws. Sonoma has
authorized capital of 1,000,000 shares of capital stock, without par
value, of which a total of 1,000,000 shares are issued and
outstanding, and all of which are registered in the name of Softkat,
and are held by Softkat free and clear of any encumbrance, pledge,
lien, claim or restriction (other than restrictions on resale under
federal and state securities laws) and no other shares are
outstanding or reserved for issuance under outstanding convertible
notes or other securities or arrangements.
(d) The execution and delivery of this Agreement by
Softkat, and the consummation of the transactions and obligations
contemplated hereby, do not conflict with or result in a material
breach of the terms, conditions or provisions of, or constitute a
material default (or an event that would upon notice or lapse of
time or both would become a default) under, or result in the
creation of a lien or encumbrance of any kind on any of its assets
pursuant to (i) its Articles of Incorporation, as amended, or
bylaws, as amended, (ii) any material agreement, document or
instrument to which Softkat or Sonoma is a party or by which Softkat
or Sonoma is bound, or (iii) any judgment, decree, order, statute,
rule or regulation applicable to Softkat or Sonoma.
(e) The audited and the unaudited financial statements of
Softkat, on a consolidated basis with Sonoma, attached hereto as
Exhibit F fairly present the consolidated financial condition of
Softkat for the periods and at the dates stated therein, subject in
the case of unaudited financial statements to normal audit
adjustments and the absence of footnotes. No fact or condition is
known to Softkat that materially adversely affects, or that is
reasonably expected to materially adversely affect Softkat's or
Sonoma's business or financial condition, taken as a whole.
(f) Neither Softkat nor Sonoma (i) is involved in any
pending or, to its knowledge, threatened investigation, litigation
or legal proceeding that may have a material adverse effect upon its
financial condition, business or prospects, or (ii) is subject to
any order, judgment or decree that would reasonably be likely to
have such effect. All known, current or potential, or threatened
claims that could reasonably be anticipated to result in a material
claim against Softkat for indemnity are set forth in the Softkat
Disclosure Schedule.
(g) At the Closing Date, all of the assets of Softkat and
Sonoma shall be free and clear of any and all liens, liabilities,
claims or encumbrances of any kind or nature whatsoever, except
those in favor of Comerica Bank and the holders of the Softkat
Subordinates Notes, or as otherwise expressly provided herein or as
arises in favor of ESYNCH.
(h) Except as set forth in the Softkat Disclosure Schedule,
to the best knowledge of Softkat, neither Softkat nor Sonoma has
infringed or is now infringing, any patent, trade name, trademark,
service mark, copyright, trade secret, technology, know-how or
process belonging to any other person, firm or corporation, which
infringement would have an material adverse effect on Softkat or
Sonoma. Neither Softkat nor Sonoma has received any written notice
or other written indication of any such claim of infringement.
(i) Softkat has not utilized the services of, and that it
does not and will not have any liability to, any broker or finder in
connection with this Agreement or the transactions contemplated
hereby. Neither Softkat nor any holder of Softkat securities has
any liability or obligation to pay any fees or commissions to any
broker, finder, or agent with respect to the transactions
contemplated by this Agreement for which ESYNCH, Acquisition Sub,
Softkat or any of the other person could become liable or obligated
or otherwise. The solicitations of holders of Softkat Common
Shares, Softkat Warrants, Softkat Subordinated Notes, or other
securities as contemplated by this Agreement do not and shall not
involve any advertisement, general solicitation, or payment of
commissions or other amounts, directly or indirectly, to persons
soliciting consents, approvals, exchanges or proxies or any
violations of registration or qualification requirements of
applicable federal or state securities laws. The holders of Softkat
securities include no unsophisticated investors and fewer than 35
non-accredited investors.
(j) The Softkat Disclosure Schedule lists all employee
pension plans (as defined in Section 3(2) of the Employee Retirement
Income Security Act of 1974, as amended ("ERISA")), all material
employee welfare plans (as defined in Section 3(1) of ERISA), and
all other bonus, stock option, stock purchase, incentive, deferred
compensation, supplemental retirement, severance and other similar
fringe or employee benefit plans, programs or arrangements, and any
material current or former employment, executive compensation,
consulting or severance agreements, written or otherwise, for the
benefit of, or relating to, any employee of or consultant (or former
employee of or consultant) to Softkat, any trade or business
(whether or not incorporated) which is a member of a controlled
group including Softkat or which is under common control with
Softkat (an "ERISA Affiliate") within the meaning of Section 414 of
the Code, (all such plans, practices and programs are referred to as
the "Softkat Benefit Plans"), excluding agreements with former
employees under which Softkat has no remaining monetary obligations.
Neither Softkat nor any ERISA Affiliate maintains, or has ever
maintained, an Softkat Benefit Plan intended to qualify under
Section 401(a) of the Code or subject to Title IV of ERISA. There
have been made available to ESYNCH copies of (i) each written
Softkat Benefit Plan and (ii) the most recent annual report on Form
5500 series, with accompanying schedules and attachments, filed with
respect to each Softkat Benefit Plan required to make such a filing.
No Softkat Benefit Plans promises or provides retiree medical or
other retiree welfare benefits to any person, and no Softkat Benefit
Plans is a "multiemployer plan" as such term is defined in Section
3(37) of ERISA. There has been no "prohibited transaction," as such
term is defined in Section 406 of ERISA and Section 4975 of the
Internal Revenue Code of 1986, as amended (the "Code") with respect
to any Softkat Benefit Plan, which could result in any material
liability to Softkat. All Softkat Benefit Plans are in material
compliance with the requirements prescribed by any and all statutes
(including ERISA and the Code), orders, or governmental rules and
regulations currently in effect with respect thereto (including all
applicable requirements for notification to participants or the
Department of Labor, IRS or Secretary of the Treasury), and, Softkat
has performed all obligations required to be performed by it under,
are not in any respect in default under or violation of, and Softkat
has no knowledge of any default or violation by any other party to,
any Softkat Benefit Plans; and (iv) all contributions required to be
made to any Softkat Benefit Plan pursuant to the terms of such
Softkat Benefit Plan have been made on or before their due dates.
The Softkat Disclosure Schedule also sets forth a true and complete
list of (i) all employment agreements with officers or key
management personnel of Softkat; (ii) all agreements with
consultants obligating Softkat to make annual cash payments in an
amount exceeding $10,000; (iii) all employees of, or consultants to,
Softkat who have executed a confidentiality or non-competition
agreement with Softkat; (iv) all severance agreements, programs and
policies of Softkat with or relating to its employees, excluding
programs and policies required to be maintained by law; and (v) all
plans, programs, agreements and other arrangements of Softkat with
or relating to its employees which contain change in control
provisions. Except as set forth in the Softkat Disclosure Schedule,
(i) there are no controversies, including any unfair labor practice
complaint, pending or, to the knowledge of Softkat, threatened,
between Softkat and any of its employees, nor to the knowledge of
Softkat, is there any factual basis for any such controversy; and
(ii) Softkat is in compliance with all applicable laws, regulations
and orders respecting employment and employment practices, terms and
conditions of employment and wages and hours and Softkat is not
engaged in any unfair labor practice.
(k) The Softkat Disclosure Schedule includes a list of all
agreements to which Softkat or Sonoma is a party or by which Softkat
or Sonoma is bound (i) under which the consequences of a default,
nonrenewal or termination could have a material adverse effect on
Softkat or Sonoma; or (ii) pursuant to which payments might be
required or acceleration of benefits may be required upon a "change
of ownership" of Softkat. Such list shall include any agreements or
notes or other instruments under which Softkat or Sonoma borrows
money or finances the purchase of any goods or services, that grants
any security interest or other lien or encumbrance on any assets of
Softkat or Sonoma, restricts the scope or nature of or places
geographic restrictions on the business of Softkat or Sonoma, that
governs the provision of services by Softkat or Sonoma its clients,
provides for the sale or issuance of any shares of Softkat or Sonoma
stock or any convertible securities or for the sale of any assets of
Softkat or Sonoma, other than sales of inventory in the ordinary
course of business consistent with past practice (collectively, the
"Material Contracts"). Except as set forth in the Softkat
Disclosure Schedule, all of the Material Contracts are valid and
binding obligations of Softkat and Sonoma, as the case may be, and,
to the knowledge of Softkat, of the other parties thereto, all such
Material Contracts are in full force and effect and there has not
occurred any material default under or breach of any of the Material
Contracts, whether by Softkat or Sonoma or, to the knowledge of
Softkat, by the other parties thereto and, to the knowledge of
Softkat, no events or circumstances have occurred that, with the
passage of time or the giving of notice, or both, would constitute a
material breach or default of any such Material Contract (whether by
Softkat or Sonoma or any of the other parties thereto) under any of
the Material Contracts, or would materially impair Softkat's or
Sonoma's rights or alter the rights or obligations of any third
party under, or give to any of the other parties any rights of
termination, amendment, acceleration or cancellation of any Material
Contract, or result in the creation of a lien or encumbrance on any
of the assets of Softkat or Sonoma.
SECTION 5. Representations and Warranties of ESYNCH. As of the
date hereof and as of the Closing Date, ESYNCH represents and
warrants, except as set forth on the ESYNCH Disclosure Schedule, to
Softkat as follows:
(a) ESYNCH is a corporation duly organized and existing in
good standing under the laws of the State of Delaware and has all
necessary corporate power and authority to own and conduct its
business as now conducted. Acquisition Sub is a corporation duly
organized and existing in good standing under the laws of the State
of Delaware and has all necessary corporate power and authority to
own and conduct its business as now conducted. ESYNCH and each
subsidiary of ESYNCH ("Subsidiary") is qualified to do business as a
foreign corporation in each jurisdiction where the nature of its
business or properties requires.
(b) ESYNCH has authorized capital of 20,000,000 Common
Shares, par value $.001 per share (in this Agreement called "ESYNCH
new Common Shares"), and 1,000,000 shares of Preferred Stock, par
value $.001 per share, of which a total of approximately 6,514,829
ESYNCH New Common Shares are issued and outstanding. Approximately
1,841,670 ESYNCH New Common Shares are reserved for issuance under
outstanding options or warrants. The foregoing exclude the ESYNCH
New Common Shares, ESYNCH Contingent Common Shares, and ESYNCH
Series I Preferred Shares issuable pursuant to this Agreement or
upon subsequent conversion thereof, and shares issuable in private
placements or other financings as contemplated by the terms of the
ESYNCH Series I Preferred Stock. At the Closing Date, ESYNCH shall
have full power and authority to issue the ESYNCH Shares, in the
manner provided herein, free and clear of any liens, claims,
charges, options and encumbrances, other than restrictions that
arise under federal or state securities laws, and all of the ESYNCH
Shares when issued in accordance with the terms of this Agreement
shall be validly issued, fully-paid and non-assessable, and in
reliance on the list of states and the representations and
warranties made by Softkat as to the holders of its securities, and
the further representations as shall be required to be made pursuant
to Section 3(c), will be issued in compliance with exemptions from
registration or qualification requirements of applicable federal and
state securities laws.
(c) ESYNCH has obtained all necessary corporate
authorizations and material approvals required for the execution,
delivery and consummation of the transactions provided for in this
Agreement except for any federal and state securities law filings or
permits as may be required hereafter. This Agreement constitutes a
valid and binding obligation of ESYNCH, enforceable against ESYNCH
in accordance with its terms except as such enforcement may be
limited by bankruptcy laws or other laws affecting creditors' rights
generally.
(d) The execution and delivery of this Agreement by ESYNCH,
and the consummation of the transactions and obligations
contemplated hereby does not conflict with or result in a material
breach of the terms, covenants or provisions of, or constitute a
material default (or an event that would upon notice or lapse of
time or both would become a default) under, or result in the
creation of a lien or encumbrance of any kind on any of the assets
of ESYNCH or any Subsidiary pursuant to (i) its Certificate of
Incorporation, as amended, or bylaws, as amended, (ii) any material
agreement, document or instrument to which ESYNCH is a party or by
which ESYNCH or any Subsidiary is bound, or (iii) any judgment,
decree, order, statute, rule or regulation applicable to ESYNCH or
any Subsidiary.
(e) No fact or condition is known to ESYNCH that materially
adversely affects, or that may materially adversely affect any of
the assets, business, financial condition or prospects of ESYNCH
which is not reflected in the filings (the "Filings") by ESYNCH with
the Securities and Exchange Commission ("SEC"), all of which have
been delivered by ESYNCH to Softkat or are available through the
Electronic Data Gathering and Retrieval System at the SEC's public
website. ESYNCH has not taken any action, or omitted to take any
action, or executed any agreement, instrument or other document,
that would create any liability for ESYNCH, which is not reflected
in the Filings. Since January 1, 1998, ESYNCH has made all Filings
required of it by the SEC or applicable federal or state securities
laws in a timely manner and in compliance with such requirements.
The unaudited financial statements of ESYNCH, consolidated with
Intermark, as set forth in the Form 8-K/A filed by ESYNCH on October
19, 1998 with the SEC fairly present the consolidated financial
position of ESYNCH for the period ended, and at, June 30, 1998,
subject to normal audit adjustments and the absence of footnotes.
No fact or condition is known to ESYNCH and not disclosed in the
Filings that materially adversely affects, or that reasonably is
expected to materially adversely affect, ESYNCH's or its
subsidiaries' business or financial condition taken as a whole.
(f) Neither ESYNCH nor any Subsidiary (i) is involved in
any pending or, to its knowledge, threatened investigation,
litigation or legal proceeding that may have a material adverse
effect upon the business or prospects of ESYNCH, or (ii) is subject
to any order, judgment, or decree that may have such effect.
(g) Except as set forth in the ESYNCH Disclosure Schedule,
to the best knowledge of ESYNCH, ESYNCH has not infringed, and is
not now infringing, any patent, trade name, trademark, service mark,
copyright, trade secret, technology, know-how or process belonging
to any other person, firm or corporation, which infringement would
have an material adverse effect on ESYNCH. ESYNCH has not received
any written notice or other written indication of any such claim of
infringement. Except as set forth in the ESYNCH DISCLOSURE
SCHEDULE, ESYNCH owns, or holds adequate licenses or other rights to
use, all Intellectual Property used in or necessary for the
operation of ESYNCH's business as now conducted.
(h) ESYNCH has not utilized the services of, and that it
does not and will not have any liability to, any broker or finder in
connection with this Agreement or the transactions contemplated hereby.
(i) ESYNCH and Acquisition Sub each is acquiring any
securities it may be deemed to receive in connection with the Merger
for investment, and not with a view toward resale or distribution
thereof, and ESYNCH acknowledges that such securities are neither
registered under the Act, nor qualified under any state securities
laws, and will bear restrictive legends required under such laws.
ESYNCH further acknowledges having had an opportunity to request and
receive additional information from Softkat regarding the merits and
risks to ESYNCH and Acquisition Sub of the Merger, and being
experienced and sophisticated in financial and business matters
sufficient to protect its interests in this transaction and to
evaluate the merits and risks of the Merger.
SECTION 6. Closing; Conditions.
(a) Closing. Unless the parties shall mutually fix another
date, time or place, the closing of the Merger ("Closing") shall
take place at 2:00 P.M. Pacific Time on or before November 17, 1998,
at the offices of Stradling Yocca Carlson & Rauth in Newport Beach,
California. The date on which Closing occurs is referred to herein
as the "Closing Date." Except as otherwise provided herein, all
proceedings to be taken and all documents to be executed at the
Closing shall be deemed to have been taken, delivered and executed
simultaneously as of the Closing Date, and no proceeding shall be
deemed taken nor documents deemed executed or delivered until all
have been taken, delivered and executed.
(b) Conditions to Obligations of ESYNCH. The obligations
of ESYNCH to cause Acquisition Sub to consummate the Merger are
subject to the satisfaction of, or ESYNCH's written waiver of, each
of the following conditions by or before the Termination Date:
(i) Accuracy of Representations and
Warranties. Softkat's representations and warranties contained in
Section 4 of this Agreement shall have been true and correct as of
the dates when made and again as of the Closing Date, except to the
extent that the event or development rendering such representation
or warranty untrue, individually or in the aggregate with all other
events or developments rendering that or any other representation or
warranty of Softkat untrue, shall not have resulted in or
constitute, and could not reasonably be expected to result in or
constitute, a material adverse effect on Softkat or ESYNCH or on the
ability of Softkat, Acquisition Sub, or ESYNCH to consummate the
Merger.
(ii) Compliance with Covenants. Softkat shall
have performed, satisfied and complied with, in all material
respects, each of its agreements and covenants contained in this
Agreement, unless the failure to perform, satisfy or comply, taken
together with all other such failures, does not constitute a
material failure by Softkat to perform its obligations hereunder.
(iii) Receipt of Officers' Certificate. ESYNCH
shall have received from Softkat a certificate, executed by
respectively, the President and Secretary of Softkat and dated as of
the Closing Date, certifying to the fulfillment of the conditions
specified in Section 6(d) (with regard to Softkat only) and Section
6(b), including a certification that each representation or warranty
contained in Section 4 is true and correct as of the Closing Date
(or, if such certification cannot be made, specifying the exceptions
thereto), excepting only representations and warranties which speak
expressly as of an earlier specified date.
(iv) Documents and Instruments in Satisfactory
Form. All corporate and other proceedings in connection with this
Agreement and with the Merger and all documents and instruments
incidental to the Merger shall be reasonably satisfactory in
substance and form to ESYNCH and its counsel, and ESYNCH and its
counsel shall have received all such counterpart originals or
certified or other copies of such documents as they may reasonably
request.
(v) Board and Shareholder Approvals. The
Board of Directors of Softkat shall have unanimously approved this
Agreement and the Merger, and determined that each of them are aware
of all personnel interests of the directors in this transaction, if
any, and that the Merger and the transactions contemplated in this
Agreement are fair from a financial point of view to Softkat and the
shareholders of Softkat and is in Softkat's and such shareholders'
best interests, and shall not have rescinded or qualified such
approval. At least seventy-five percent of the shareholders of
Softkat shall have approved the Merger and this Agreement.
(vi) Dissenting Softkat Shares. There shall be
fewer than nine and nine-tenths percent (9.9%) of the Softkat Common
Shares constituting dissenting shares as defined in Article 13 of
the CGCL. All of the Softkat Warrants shall have been exchanged for
Softkat Common Shares. All of the Softkat Subordinated Notes shall
have, concurrently with the Merger, been exchanged for ESYNCH Series
I Preferred Shares and the right to receive cash Funds as described
in Section 2(d).
(vii) Softkat's Auditors. The auditors of the
Softkat financial statements shall have consented to the use of
their accountants' report in connection with such financial
statements in ESYNCH's filings with the SEC under the Securities
Exchange Act of 1934.
(viii) Shareholder Information. The lists and
information provided by Softkat or Softkat's legal counsel to ESYNCH
or ESYNCH's legal counsel concerning the residencies,
accreditedness, status as institutional investor, and sophistication
of the holders of Softkat securities, as the case may be, shall have
been correct in all material respects as with respect to
availability of exemptions from registration or qualification under
federal and state securities laws, including exemptions under Rule
506 of Regulation D and corresponding state laws and regulations, or
with respect to any relevant exemption for offers and sales of
securities to institutional investors in connection with the Merger
and each of the related transactions contemplated in Section 2.
(c) Conditions to Obligations of Softkat. The obligations
of Softkat to consummate the Merger are subject to the satisfaction
of, or Softkat's written waiver of, each of the following conditions
by or before the Termination Date:
(i) Accuracy of Representations and
Warranties. ESYNCH's representations and warranties contained in
this Agreement shall have been true and correct as of the dates when
made and again as of the Closing Date, except to the extent that
the event or development rendering such representation or warranty
untrue, individually or in the aggregate with all other events or
developments rendering that or any other representation or warranty
of ESYNCH untrue, shall not have resulted in or constitute, and
could not reasonably be expected to result in or constitute, a
material adverse effect on ESYNCH or on the ability of ESYNCH,
Softkat or Acquisition Sub to consummate the Merger.
(ii) Compliance with Covenants. ESYNCH shall
have performed, satisfied and complied with, in all material
respects, each of its agreements and covenants contained in this
Agreement, unless the failure to perform, satisfy or comply, taken
together with all other such failures, does not constitute a
material failure by ESYNCH to perform its obligations hereunder.
(iii) Receipt of Officers' Certificate. Softkat
shall have received from ESYNCH a certificate, executed by
respectively, the President and Chief Financial Officer of ESYNCH
and dated as of the Closing Date, certifying to the fulfillment of
the conditions specified in Section 6(d) (with regard to ESYNCH and
Acquisition Sub only) and Section 6(c), including a certification
that each representation or warranty contained in Section 5 is true
and correct as of the Closing Date (or, if such certification cannot
be made, specifying the exceptions thereto), excepting only
representations and warranties which speak expressly as of an
earlier specified date.
(iv) Documents and Instruments in Satisfactory
Form. All corporate and other proceedings in connection with this
Agreement and with the Merger, and in connection with effecting the
Reclassification, and all documents and instruments incidental to
the Merger or the Reclassification shall be reasonably satisfactory
in substance and form to Softkat and its counsel, and Softkat and
its counsel shall have received all such counterpart originals or
certified or file-stamped or other copies and proofs of filing of
such documents as they may reasonably request.
(v) Transfer of Shares. Ari Freeman, Ivan
Katz and Modie Katz shall have transferred in the aggregate
1,260,000 Softkat Common Shares to the holders of Softkat
Subordinated Notes, allocated pro rata according the original
principal amount thereof, in consideration of the waiver and release
executed by such holder as described in Section 9(e).
(vi) Board and Shareholder Approvals. The
Board of Directors of Acquisition Sub shall have unanimously
approved this Agreement and the Merger, and determined that the
Merger and the transactions contemplated in this Agreement is
entirely fair to ESYNCH, as the sole shareholder of Acquisition Sub
and provides the best available financial value to the shareholder
of Acquisition Sub and is in Acquisition Sub's and such
shareholder's best interests, and shall not have rescinded or
qualified such approval. The sole shareholder of Acquisition Sub
shall have approved the Merger and this Agreement. The stockholders
of ESYNCH shall have approved the Reclassification, and the
Reclassification shall have been effected in accordance with the
Delaware General Corporation Law and shall have resulted in the
conversion of all of the ESYNCH Series H Preferred Shares and
elimination thereof and all of their voting rights in respect of the
Merger and this Agreement and all of the transactions contemplated
hereby. The Board of Directors of ESYNCH shall have unanimously
approved this Agreement, the Merger and the issuances of all ESYNCH
securities contemplated by this Agreement.
(vii) ESYNCH shall continue its current private
placement of stock for a reasonable time on the terms contemplated
in the Private Placement Memorandum attached hereto as Exhibit G.
From a reasonable time following the date this Agreement is
executed, ESYNCH shall have used offering materials in connection
with its private placement that have referred to the uses of
proceeds contemplated by the redemption provisions of the ESYNCH
Series I Preferred Shares.
(d) Conditions to Obligations of Each Party.
(i) There shall be no claim, action, suit,
investigation or other proceeding pending or overtly threatened
before any court or other governmental or regulatory entity that
presents a substantial risk of restraint or prohibition of the
Merger; and no such restraint or prohibition shall be effective as
of the Closing or the Closing Date, whether or not the action in
which the same was entered shall remain pending.
(ii) Softkat shall have obtained, and provided
to ESYNCH copies of, all necessary consents and agreements from all
officers and directors of Softkat to the cancellation and
extinguishment of all options, warrants rights and similar
securities which are held by such officers and directors of Softkat.
SECTION 7. Termination. This Agreement may be terminated, and the
Merger abandoned, prior to the Closing solely by the following means
and with the following effects:
(a) By Mutual Agreement. ESYNCH and Softkat may terminate
this Agreement by mutual written consent at any time.
(b) By Softkat. Softkat may unilaterally terminate this
Agreement: (i) If ESYNCH has breached any of its representations or
warranties or covenants contained in this Agreement and such breach
is of a nature that would, in the reasonable determination of
Softkat, cause the failure of the condition to Softkat's obligations
set forth in Section 6(c), and ESYNCH has failed to cure such breach
within ten (10) business days following written notice to ESYNCH
from Softkat identifying and describing such breach in reasonable
detail; or (ii) Upon written notice to ESYNCH at any time after
November 6, 1998 (the "Termination Date"), if the Closing and the
Closing Date shall not have occurred on or prior to such date,
unless such failure results from Softkat breaching any of its
representations, warranties, covenants or agreements contained in
this Agreement in any material respect.
(c) By ESYNCH. ESYNCH may unilaterally terminate this
Agreement: (i) If Softkat has breached any of its representations
or warranties or covenants contained in this Agreement and such
breach is of a nature that would, in the reasonable determination of
ESYNCH, cause the failure of the condition to ESYNCH's obligations
set forth in Section 6(b), and Softkat has failed to cure such
breach within ten (10) business days following written notice to
Softkat from ESYNCH identifying and describing such breach in
reasonable detail; or (ii) Upon written notice to Softkat after the
Termination Date, if the Closing shall not have occurred on or prior
to such date, unless the failure results from ESYNCH breaching any
of its representations, warranties, covenants or agreements
contained in this Agreement in any material respect.
(d) Effect of Termination; Remedies. In the event of the
termination of this Agreement pursuant to this Section 7, this
Agreement shall forthwith become void and there shall be no
liability on the part of any party hereto or any of its affiliates,
directors, officers or stockholders, and all documents, instruments
and consideration delivered hereunder shall be returned to the
delivering party within two days of such termination. Specifically,
and without limiting the generality of the foregoing, Softkat and
ESYNCH agree that termination of this Agreement shall be their sole
and exclusive remedy for any nonwillful breach by the other party of
its representations, warranties and covenants under this Agreement.
All costs and expenses incurred in connection with this Agreement
shall be paid by the party incurring such cost or expense.
SECTION 8. Remedies for Breaches of this Agreement.
All of the representations and warranties of ESYNCH,
Acquisition Sub and Softkat contained in Sections 4 or 5 shall
survive and continue in full force and effect until and shall expire
at the Effective Time. It is contemplated by the parties, and
constitutes a material inducement for ESYNCH to enter into this
Agreement, that the ESYNCH Contingent Common Shares and the
adjustments to the ESYNCH Series I Preferred Shares' conversion
price shall be in lieu of any claim against ESYNCH or Acquisition Sub.
SECTION 9. Certain Covenants Prior to Closing.
(a) Access. Each party shall make available to the other
all information regarding the party that the other party reasonably
may request and shall authorize all reasonable visits to the party's
premises with such staff, consultants and experts as the other party
may reasonably request. Softkat shall promptly provide ESYNCH's
legal counsel with originals or full and complete copies of
Softkat's and Sonoma's minute books and of Softkat's and Sonoma's
stock ledgers, note ledgers, warrant ledgers, option ledgers and, in
each case, books and records related thereto. Softkat agrees to
coordinate closely all activities concerning it creditor and
security holder relations and renegotiations with ESYNCH's and
Acquisition Sub's CEO. Each party shall conduct any such inquiries
with appropriate discretion and sensitivity to the other party's
relationships with its employees, clients and suppliers. The
parties acknowledge that certain of the information made available
to one another pursuant to this Section 9 and otherwise in
connection with the Merger is confidential, proprietary or otherwise
nonpublic ("Confidential Information"), and each party agrees, for
itself and for each of representatives, that it shall maintain in
confidence and not disclose or use, except as contemplated in this
Agreement or to enforce or interpret this Agreement or as required
by law or judicial order, any Confidential Information, and in
addition agree to keep such material confidential to the same extent
as it maintains the confidentiality of its own sensitive and
confidential information. The confidentiality provisions in this
Section shall survive any termination of this Agreement and the
consummation of the Merger, except that if the Merger is
consummated, the obligations of and restrictions on ESYNCH and
Acquisition Sub hereunder shall thereupon terminate. Each party
shall be responsible on the same basis for any disclosure of
Confidential Information by any of its representatives. Softkat
shall use its best efforts to cause its auditors to provide all
audit work papers and attorney audit letters, and audit reports and
letters to management, to ESYNCH's accountants.
(b) Conduct in Ordinary Course. ESYNCH, Softkat and
Sonoma, respectively, shall (a) conduct its business in the usual,
regular and ordinary course of business consistent with past
practice (except as required by applicable law or by this
Agreement), (b) use all reasonable efforts to maintain and preserve
intact its business organization, employees and advantageous
contractual and business relationships and retain the services of
its officers and key employees (including by causing its current
insurance policies not to be cancelled or terminated or any of the
coverage thereunder to lapse prior to or upon the Closing, unless
simultaneously with such event replacement policies providing
substantially similar coverage for substantially similar (or lesser)
premiums are in full force and effect), (c) conduct relations with
its employees, excluding hiring and terminating practices, only in
the ordinary course of business and consistent with past practice,
and (d) take no action which could reasonably be expected to
materially adversely affect or delay the ability of any party to
this Agreement or any of their respective subsidiaries to obtain any
necessary approvals of any governmental or regulatory entity or
other third persons required for the Merger or for the transactions
contemplated in connection therewith, or to perform its covenants
and agreements under this Agreement.
(c) Operating Restrictions. Without the other party's
prior written consent (which consent shall not be unreasonably
withheld or delayed), and without limiting the generality of the
provisions of this Agreement, ESYNCH, Softkat and Sonoma,
respectively, shall not, except as contemplated by this Agreement:
(i) Amend or otherwise change its Articles of
Incorporation or bylaws;
(ii) Issue, sell, pledge, dispose of or
encumber, or authorize the issuance, sale, pledge, disposition or
encumbrance of, any shares of capital stock of any class (in the
case of ESYNCH, other than ESYNCH's private offering or the exercise
of ESYNCH's warrants or conversions of ESYNCH's convertible
securities in accordance with their terms), any convertible
securities or any other rights of any kind to acquire any shares of
capital stock or convertible securities, or any other ownership
interest (including, without limitation, any phantom interest) in
such party or any subsidiary;
(iii) Declare, set aside, make or pay any
dividend or other distribution (whether in cash, stock or property
or any combination thereof) in respect of any of its capital stock,
or split, combine or reclassify (in the case of ESYNCH, other than
the Reclassification) any of its capital stock or issue or authorize
or propose the issuance of any other securities in respect of, in
lieu of or in substitution for shares of its capital stock, or
amend the terms or change the period of exercisability of, purchase,
repurchase, redeem or otherwise acquire, any of its shares of stock
or propose to do any of the foregoing (in the case of Softkat,
except exchanges of Softkat Warrants and Softkat Subordinated Notes
on terms contemplated in this Agreement);
(iv) Take, or agree in writing or otherwise to
take, any of the actions described in this Section 9(c) expressly
made applicable to such party, or any action which would make any of
its representations or warranties contained in this Agreement untrue
or incorrect or prevent it from performing or cause it not to
perform its covenants in this Agreement.
Prior to the Closing, without the written consent of ESYNCH, neither
Softkat or Sonoma shall do, or agree to do, any of the following:
(v) (a) Acquire (by merger, consolidation, or
acquisition of stock or assets) any corporation, partnership or
other business organization or division thereof; (b) incur any
indebtedness for borrowed money or issue any debt securities or
assume, guarantee or endorse or otherwise as an accommodation become
responsible for, the obligations of any person or, except in the
ordinary course of business consistent with past practice or in
connection with purchases of equipment or capital improvements made
in the ordinary course of business and consistent with past
practices, make any loans or advances, (c) enter into any new or
amend or terminate any existing material contract; (d) authorize any
capital expenditures or purchase of fixed assets which are, in the
aggregate, in excess of $25,000; or (e) enter into or amend any
contract, agreement, commitment or arrangement to effect any of the
matters prohibited by this Section 9(c)(v);
(vi) Increase the compensation payable or to
become payable to its officers or employees, or grant any severance
or termination pay to, or enter into any employment or severance
agreement with any director, officer or other employee of the party
(except as expressly contemplated in this Agreement), or establish,
adopt, enter into or amend any collective bargaining, any employee
benefit plan or other plan, agreement, trust, fund, policy or
arrangement for the benefit of any current or former directors,
officers or employees, except, in each case, as may be required by
law, and promptly disclosed in writing to ESYNCH;
(vii) Take any action to change accounting
policies or procedures (including, without limitation, procedures
with respect to revenue recognition, payments of accounts payable
and collection of accounts receivable);
(viii) Make any material tax election
inconsistent with past practice or settle or compromise any material
federal, state, local or foreign tax liability or agree to an
extension of a statute of limitations, except to the extent the
amount of any such settlement has been reserved for in its financial
statements;
(ix) Pay, discharge or satisfy any claims,
liabilities or obligations (absolute, accrued, asserted or
unasserted, contingent or otherwise), other than the payment,
discharge or satisfaction in the ordinary course of business and
consistent with past practices of current liabilities that have
become mandatorily due and payable and are reflected or reserved
against in its financial statements; or
(x) Sell, pledge, dispose of, grant any
security interest in or encumber any assets of Softkat or Sonoma
(except for (i) sales of assets or inventory in the ordinary course
of business and in a manner consistent with past practice, (ii)
dispositions of obsolete or worthless assets, (iii) sales of
immaterial assets not in excess of $10,000 individually or $25,000
in the aggregate, (iv) exchanges of Softkat Warrants and Softkat
Subordinated Notes on terms contemplated in this Agreement, and (v)
as otherwise expressly permitted in this Agreement);
(d) Prior to the Closing Date, proceeds of each sale of
securities, or exercise of warrants or options to purchase
securities, of Softkat shall be used only as described in Section
2(d). Softkat will use its reasonable efforts to negotiate
settlement agreements with all of its creditors whose claims are
disputed evidenced by agreements and documents satisfactory to
Acquisition Sub.
(e) On or prior to the Closing Date, Softkat shall present
to Acquisition Sub written evidence that Softkat has taken all
necessary action in order to effect the following, under agreements
with third parties on terms acceptable to Softkat and Acquisition
Sub: (a) the exercise and cancellation of the Softkat Warrants and
the exchange of the Softkat Subordinated Notes as described in this
Agreement, (b) the obtaining of agreements from the holders of
Softkat Subordinated Notes and the Softkat Warrants that they shall
unconditionally waive and release any and all claims, suits,
damages, against Softkat (and ESYNCH to the extent that it may be
deemed to assume such liability) or any of their respective
directors, officers, employees, agents, placement agents, investment
bankers, insurers, attorneys, accountants, or other representatives,
in connection with or directly or indirectly related to the
performance of Softkat, the value of any equity interest therein, or
the Merger and other transactions contemplated by this Agreement,
including the Exhibits hereto, and (c) the releasing by the holders
of Softkat Warrants and Softkat Subordinate Notes and the management
of Softkat of any claim for indemnification by Softkat or ESYNCH or
any affiliate thereof by reason of the fact that he or it or any
affiliate shall be at any time after the Effective Time a director,
officer, employee, or agent of any such entity or was serving at the
request of any such entity as a partner, trustee, director, officer,
employee, or agent of another entity (whether such claim is for
judgments, damages, penalties, fines, costs, amounts paid in
settlement, losses, expenses, or otherwise and whether such claim is
pursuant to any statute, charter document, bylaw, agreement, or
otherwise) with respect to any action, suit, proceeding, complaint,
claim, or demand whatsoever except as may be specifically granted by
ESYNCH after the Effective Time.
(f) Each respective parties' Board of Directors will,
subject to their fiduciary duties, recommend that this Agreement and
the transactions contemplated hereby to its stockholders, and,
subject to the requirements of applicable law, Softkat will seek
consent from holders of Softkat Common Shares in writing or at a
special meeting, pursuant to materials to be delivered to Softkat's
shareholders that reasonably describes the material terms and
provisions of the Merger and this Agreement, including all Exhibits
hereto, and any other transactions contemplated by this Agreement or
such Exhibits (the "Softkat Proxy Statement"). ESYNCH will provide,
and be responsible for, all required information about ESYNCH and
its affiliates for inclusion in the Softkat Proxy Statement.
Softkat will be responsible for all other information therein. The
parties and their respective representatives or counsel will consult
each other concerning the form and content thereof. Softkat will
use its best efforts to obtain the necessary approvals by its
shareholders, warrant holders and note holders of this Agreement and
the transactions contemplated hereby and will otherwise comply with
all legal requirements applicable to the Merger. Softkat will
provide Acquisition Sub with a copy of the Softkat Proxy Statement
and all modifications thereto a reasonable time prior to delivery
and will consult with Acquisition Sub in connection therewith.
Softkat will notify Acquisition Sub promptly of the receipt of any
material comments or requests from the shareholders for amendments
or supplements to the Softkat Proxy Statement or for additional
information and will supply Acquisition Sub with copies of all
correspondence between Softkat or any of its representatives, on the
one hand, and the shareholders their representatives, on the other
hand, with respect to the Softkat Proxy Statement or the Merger. If
at any time prior to Softkat's shareholder meeting or the
effectiveness of a written consent of Softkat's shareholders there
shall occur any event that should be set forth in an amendment or
supplement to the Softkat Proxy Statement, Softkat will promptly
prepare and mail to its shareholders such an amendment or
supplement. Attached hereto as Exhibit H are true and correct
copies of all of the correspondence between Softkat, or its
affiliates or representatives, on the one hand, and the holders of
Softkat Shares, Softkat Subordinated Notes, Softkat Warrants, or
other options or securities, on the other hand, for the purposes
contemplated in this Agreement or indicating agreement or rejection
of the proposals made by or for Softkat.
(g) Until this Agreement is terminated, neither Softkat nor
Sonoma nor its respective agents or representatives shall, without
the prior consent of Acquisition Sub, sell, agree to sell, enter
into negotiations to sell , or discuss the sale of the assets of
Softkat or Sonoma or the stock of Softkat or Sonoma, to or with any
party except as disclosed to Acquisition Sub in advance and agreed
upon by both parties and except as contemplated in this Agreement or
as permitted under Section 9(c). Unless and until this Agreement is
terminated in accordance with its terms and except as contemplated
by this Agreement, neither Softkat nor Sonoma nor any of its
respective officers, directors, employees, agents or other
representatives shall (i) solicit, initiate, or encourage, or enter
into discussions or any letter of intent or agreement with respect
to, any inquiries, proposals or offers that contemplate, propose or
relate to any Acquisition Proposal (as hereinbelow defined), (ii)
undertake or consummate, any sale or other disposition of, or grant
of any rights or options with respect to, or any pledge,
hypothecation or encumbrance of, any of the outstanding shares of
capital stock of Softkat or any authorized but unissued shares of
capital stock or convertible securities of Softkat or Sonoma (other
than those contemplated by this Agreement); or (iii) provide
information regarding Softkat or Sonoma or its businesses or assets,
capitalization, financial condition or operating results to any
person (other than as provided in this Agreement, or to a government
agency having jurisdiction over Softkat or Sonoma, or to its
respective creditors in the course of such relationship, or as
otherwise contemplated in this Agreement, or to Softkat's
shareholders, note holders or warrant holders for purposes related
to this Agreement). Softkat shall immediately notify Acquisition
Sub after receipt of any Acquisition Proposal, or any modification
of or amendment to any Acquisition Proposal, or any request for
nonpublic information relating to Softkat or Sonoma in connection
with a possible Acquisition Proposal or for access to the
properties, books or records of Softkat or Sonoma by any person or
entity that informs the Board of Directors of Softkat or Sonoma that
it is considering making, or has made, an Acquisition Proposal.
"ACQUISITION PROPOSAL" shall mean any inquiry, proposal, term sheet,
discussion draft, letter of intent or other communication or
agreement that contemplates, proposes or relates to (i) any possible
sale or disposition by Softkat or Sonoma of, or any mortgage, lien
or encumbrance on, any of its assets (other than sales of assets
that are made in the ordinary course of business consistent with
past practices); (ii) any sales by Softkat or Sonoma or its
management or principal shareholders or issuance of shares of
capital stock or convertible securities of Softkat or Sonoma (except
as contemplated by this Agreement); (iii) any redemption or
repurchase, or any recapitalization, of any of the outstanding
Softkat Common Shares, Softkat Warrants or Softkat Subordinated
Notes, or of any other shares or other securities or debts of
Softkat or Sonoma (other than those contemplated by this Agreement),
(iv) any offer to purchase more than five percent (5%) of the
outstanding shares of capital stock of Softkat, (v) any financing or
refinancing, including any sale-leaseback of the assets of Softkat
or Sonoma that involves the granting of any security interest or
lien on, or the transfer of ownership of any of the assets of
Softkat or Sonoma (other than in the ordinary course of business),
or (vi) any merger or reorganization of Softkat or Sonoma with or
any other business combination between Softkat or Sonoma and any
other entity.
(h) If any "fair price," "control share acquisition" or
"moratorium" statute or other anti-takeover or similar statute or
regulation or any state "blue sky" statute shall become applicable
to the transactions contemplated hereby, each constituent
corporation and the members of the Board of Directors of the
constituent corporation shall grant such approvals and take such
actions as are necessary so that the transactions contemplated
hereby and thereby may be consummated as promptly as practicable on
the terms contemplated hereby and thereby and otherwise act to
minimize the effects of such statute or regulation on the
transactions contemplated hereby or thereby.
(i) Each of the parties shall give prompt notice to the
other party, of: (i) any notice or other communication from any
person alleging that the consent of such person is or may be
required in connection with the transactions contemplated by this
Agreement; (ii) any notice or other communication from any
governmental or regulatory entity in connection with the
transactions contemplated by this Agreement; and (iii) any actions,
suits, claims, investigations or proceedings commenced or, to its
knowledge threatened against, relating to or involving or otherwise
affecting it or any of its subsidiaries which, if pending on the
date of this Agreement would have been required to have been
disclosed in a Disclosure Schedule or which relate to the
consummation of the transactions contemplated by this Agreement.
SECTION 10. Miscellaneous Provisions.
(a) Expenses. If the Closing fails to occur, each of the
parties shall be solely responsible for all of their respective
costs and expenses incurred in connection with the transactions
contemplated herein, including, without limitation, legal fees,
costs and expenses. If the Closing occurs, Acquisition Sub shall
bear the costs and expenses (including reasonable legal fees and
expenses) incurred in connection with this Agreement and the
transactions contemplated hereby by itself.
(b) Binding Effect. This Agreement shall be binding upon
the successors and assigns of the respective parties hereto.
(c) Specific Performance. Each of the parties executing
this Agreement ("Parties") acknowledges and agrees that the other
Parties would be damaged irreparably in the event any of the
provisions of this Agreement are not performed in accordance with
their specific terms or otherwise are breached. Accordingly, each
of the Parties agrees that the other Parties shall be entitled to an
injunction or injunctions to prevent breaches of the provisions of
this Agreement and to enforce specifically this Agreement and the
terms and provisions hereof in any action instituted in any court of
the United States or any state thereof having jurisdiction over the
Parties and the matter, in addition to any other remedy to which
they may be entitled, at law or in equity.
(d) Counterparts. This Agreement may be executed in
facsimile and in any number of counterparts, each of which shall be
deemed to be an original and all of which together shall be deemed
to be one and the same instrument. The execution of this Agreement
by fewer than all of the persons identified on the signature pages
hereto as securityholders of Softkat shall not detract from the
enforceability or binding effect of this Agreement as to all
signatories, and each Softkat Holder is individually intending to be
bound hereby. Signatures on faxed agreements, instruments and
documents shall be considered originals, and shall be followed by
originals by certified mail or messenger if requested.
(e) Headings. The subject headings of the sections and
subsections of this Agreement are included for purposes of
convenience only and shall not affect the construction or
interpretation of any of its provisions.
(f) Waivers. Any party to this Agreement may waive any
right, breach or default which it has the right to waive; provided,
that such waiver will not be effective against the waiving party
unless it is in writing and specifically refers to this Agreement.
No waiver will be deemed to be a waiver of any other matter,
whenever occurring and whether identical, similar or dissimilar to
the matter waived.
(g) Entire Agreement. This Agreement, including the
Exhibits, disclosure schedules and other documents referred to
herein which form a part hereof, embodies the entire agreement and
understanding of the parties hereto, and supersedes all prior or
contemporaneous agreements or understandings (whether written or
oral) among the parties, in respect to the subject matter contained
herein. Without limiting the generality of the foregoing, this
Agreement shall supersede the letter dated October 13, 1998 from
Acquisition Sub addressed to ESYNCH which comprised the letter of
intent between the parties.
(h) Arbitration. All disputes between the parties hereto
shall be determined solely and exclusively by binding arbitration
under, and in accordance with the rules then in effect of, the
Judicial Arbitration and Mediation Service, or any successors hereto
("JAMS"), in Orange County, California, unless the parties otherwise
agree in writing. The parties shall jointly select a single
arbitrator. In the event the parties fail to agree upon an
arbitrator within ten (10) days, then each party shall select an
arbitrator and such arbitrators shall then select a third arbitrator
to serve as the sole arbitrator, provided that if either party, in
such event, fails to select an arbitrator within seven (7) days,
such arbitrator shall be selected by the JAMS upon application of
either party. Judgment upon the award of the agreed upon arbitrator
or the so chosen third arbitrator, as the case may be, shall be
binding and shall be entered into by a court of competent jurisdiction.
(i) Attorneys' Fees. In the event a dispute arises with
respect to this Agreement, the party prevailing in such dispute
shall be entitled to recover all expenses, including, without
limitation, reasonable attorneys' fees and costs, incurred in
determining such party's rights, in preparing to enforce, or in
enforcing such party's rights under this Agreement, whether or not
it was necessary for such party to institute suit and, if
instituted, whether with regard to trial or appeals and shall
separately entitle the prevailing party to the costs for collection
of judgments.
(j) Severability. Any provision of this Agreement which is
illegal, invalid or unenforceable shall be ineffective to the extent
of such illegality, invalidity or unenforceability, without
affecting in any way the remaining provisions hereof.
(k) Notices. All notices and other communications required
or permitted hereunder shall be in writing and shall be mailed by
registered or certified mail, postage prepaid, or otherwise
delivered by hand or by messenger, addressed to the following
address, or any address designated in writing by such party by way
of notice to the other parties:
If to ESYNCH or Acquisition Sub:
ESYNCH Corporation
4600 Campus Drive
Newport Beach, CA 92660
Attention: Thomas Hemingway
And a copy to:
Nicholas J. Yocca
Stradling, Yocca, Carlson & Rauth P.C.
660 Newport Center Drive, Suite 1600
Newport Beach, CA 92660
If to Softkat: Softkat, Inc.
1129 Industrial Avenue
Petaluma, CA 94952
Attention: Ivan Katz, President
And a copy to:
Gretchen Anne Trofa, Esq.
Barack Ferrazzano Kirschbaum Perlman &
Nagelberg
333 West Wacker Drive
Suite 2700
Chicago, Illinois 60606
(l) Governing Law. This Agreement shall be governed by,
and construed in accordance with, the CGCL, as applicable, and
otherwise the laws of the State of California without regard to any
conflict of law principles thereof.
(m) Further Assurances. Each party agrees to cooperate
with the other party to effect the transactions contemplated
hereunder. Without limiting the generality of the foregoing, each
of the parties shall execute, deliver and perform such agreements,
documents and instruments as the other party may request in order to
fully perform and carry out the terms and provisions of this
Agreement. Each of the parties agrees to use all reasonable efforts
to take, or cause to be taken, all actions, and to do, or cause to
be done, and to assist and cooperate with the other party in doing,
all things necessary, proper or advisable to consummate and make
effective, in the most expeditious manner practicable the Merger and
the other transactions contemplated by this Agreement, including (i)
the obtaining of all other necessary actions or nonactions, waivers,
consents and approvals from governmental or regulatory entities and
the making of all other necessary registrations and filings, (ii)
the obtaining of all necessary consents, approvals or waivers from
third parties, (iii) the preparation of the Softkat Proxy Statement,
and (iv) the execution and delivery of any additional instruments
necessary to consummate the transactions contemplated by, and to
fully carry out the purposes of, this Agreement.
(n) No Third Party Beneficiaries. Nothing expressed or
implied in this Agreement is intended, or shall be construed, to
confer upon or give any person other than the parties executing this
Agreement and their respective successors and permitted assigns any
rights or remedies under or by reason of this Agreement. Provided,
however, Section 2(b)(iii) is for the intended benefit of the
Recipients, as defined in that Section.
WHEREAS, the parties hereto have entered into the
foregoing Agreement and Plan of Merger as of the date first above
written.
ESYNCH CORPORATION IN-US SOFTKAT ACQUISITION
a Delaware corporation CORPORATION, a Delaware corporation
By:/S/THOMAS HEMINGWAY By:/S/ THOMAS HEMINGWAY
------------------- -----------------------
Thomas Hemingway, Chief Executive Thomas Hemingway, Chief Executive
Officer and President Officer
By:/S/ T. RICHARD HUTT By:/S/ T. RICHARD HUTT
-------------------- -----------------------
T. Richard Hutt, Secretary T. Richard Hutt, Secretary
By:/S/ JAMES BUDD By:/S/ JAMES BUDD
--------------------- --------------------
James Budd, Vice President James Budd, Vice President
SOFTKAT, INC.
By:/S/ IVAN KATZ
---------------------
Ivan Katz, President
By:/S/ ARI FREEMAN
---------------------
Ari Freeman, Secretary
SOFTKAT HOLDERS:
/S/ IVAN KATZ
----------------------------
Ivan Katz
/S/ MODIE KATZ
-----------------------------
Modie Katz
/S/ ARI FREEMAN
------------------------------
Ari Freeman
Ex.99 Press release re sale of Softkat,Inc
eSynch Corp.
TUSTIN, Calif.--(BUSINESS WIRE)--June 9,
1999--eSynch Corp. (OTC BB:ESYN - news)
Wednesday announced completion of the
sale of Softkat Inc., and its wholly
owned subsidiary, Sonoma Multimedia, to
Kilburn Consultants Ltd.
Under the terms of the Agreement, eSynch
sold its interest in Softkat. The
transaction is consistent with eSynch's
strategy to further strengthen its focus
on electronic software distribution and
e-commerce.
Softkat publishes, distributes, and
sells software to national retailers
such as CompUSA, and Future Shop, as
well as a number of regional retailers
and international exporters. Sonoma
Multimedia licenses and publishes dozens
of software titles, which are
distributed through Softkat.
The Softkat and Sonoma business model
could not be economically converted to
one that emphasizes electronic
distribution over traditional physical
goods distribution. eSynch's ESD
(Electronic Software Distribution)
technology and its related Internet
growth plans, point to expansion and
growth of the e-commerce-based ESD
businesses. Softkat and Sonoma just
could not be adjusted to fit in with
this overall strategy.
Statements herein express management's
beliefs and expectations regarding
future performance and are
forward-looking and involve risks and
uncertainties, including, but not
limited to, the ability to negotiate
outstanding prior debts of acquired
companies; properly identify acquisition
partners; adequately perform due
diligence; manage and integrate acquired
businesses; react to quarterly
fluctuations in results; raise working
capital and secure other financing;
respond to competition and rapidly
changing technology; deal with market
and stock price fluctuations; and other
risks. These risks are and will be
detailed, from time to time, in eSynch's
Securities and Exchange Commission
filings, including Form 10-KSB for the
year ended Dec. 31, 1997 and subsequent
Forms 10-QSB and 8-K. Actual results may
differ materially from management's
expectations.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the balance
sheet as of December 31, 1998, and statements of operations for the twelve
months ended December 31, 1998, and is qualified in its entirety by reference to
such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 1,413
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 13,693
<CURRENT-ASSETS> 15,106
<PP&E> 162,194
<DEPRECIATION> (109,988)
<TOTAL-ASSETS> 4,620,159
<CURRENT-LIABILITIES> 6,722,629
<BONDS> 0
600
0
<COMMON> 6,889
<OTHER-SE> (2,109,959)
<TOTAL-LIABILITY-AND-EQUITY> 4,620,159
<SALES> 203,571
<TOTAL-REVENUES> 203,571
<CGS> 156,617
<TOTAL-COSTS> 156,617
<OTHER-EXPENSES> 4,907,078
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 132,641
<INCOME-PRETAX> (4,992,765)
<INCOME-TAX> 0
<INCOME-CONTINUING> (4,992,765)
<DISCONTINUED> 0
<EXTRAORDINARY> 14,423
<CHANGES> 0
<NET-INCOME> (4,978,342)
<EPS-BASIC> (0.91)
<EPS-DILUTED> (0.91)
</TABLE>
