<PAGE>
As filed with the Securities and Exchange Commission on April 3, 2000
Registration No. 333-91723
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM SB-2/A-3
(Amendment No. 3)
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ESYNCH CORPORATION
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(Name of small business issuer in its charter)
Delaware 5961 87-0461856
State or other jurisdiction (Primary Standard (IRS Employer
of incorporation or Industrial Classification Identification Number)
organization) Code Number)
15502 Mosher Avenue, Tustin, California 92780 (714) 258-1900
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(Address and telephone number of registrant's principal executive offices)
15502 Mosher Avenue, Tustin, California 92780
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(Address of principal place of business)
Thomas Hemingway
15502 Mosher Avenue, Tustin, California 92780
(714) 258-1900
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(Name, address and telephone number of agent for service)
Please send a copy of all communications to:
Nicholas J. Yocca, Esq.
Stradling Yocca Carlson & Rauth, P.C.
660 Newport Center Drive, #1600
Newport Beach, California 92660
Telephone (949) 725-4120 Fax (949) 823-5120
Approximate date of commencement of proposed sale to the public: From time to
time after the registration statement becomes effective.
If this form is filed to register additional securities for an offering under
Rule 462(b) under the Securities Act of 1933, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. / /
If this form is a post-effective amendment filed under Rule 462(c) under the
Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. / /
<PAGE>
If this form is a post-effective amendment filed under Rule 462(d) under the
Securities Act, check the following box and list the Securities Act
Registration Statement number of the earlier effective Registration Statement
for the same offering. / / If delivery of the prospectus is expected to be
made under Rule 434, please check the following box. / / If any of the
securities being registered on this form are to be offered on a delayed or
continuous basis under Rule 415 of the Securities Act, check the following
box. /XX/
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Title of Each Proposed Maximum Proposed Maximum
Class of Securities Amount Being Offering Price Per Aggregate Amount of
To Be Registered Registered Unit/Share(1) Offering Price Registration Fee
<S> <C> <C> <C> <C>
Common Stock,
par value $.001 (3) 150,000(5) $6.03125 $ 904,688 $ 278.65
Common Stock,
par value $.001,
underlying Series J
Convertible Preferred
Stock (2)(3) 1,571,424(4) $6.03125 $ 9,477,655 $2,502.10
Common Stock,
par value $.001,
underlying Warrants (2)(3) 393,750(4) $6.03125 $ 2,374,805 $ 626.95
Total registration fee $3,407.70
Registration fee previously paid $3,407.70
Registration fee due with this amendment $ .00
</TABLE>
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(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c) based on the average of the high ($6.3125) and the
low ($5.75) sale prices reported on the Over-the-Counter bulletin board on
January 10, 2000, which was within 5 trading days prior to the filing of
Amendment Number 1 of this Form SB-2, filed January 18, 2000.
(2) Under Rule 416 there are also being registered such additional shares as
may be issued as a result of the anti-dilution provisions of the Series J
Convertible Preferred Stock and the accompanying Warrants.
(3) Securities being registered for resale only.
(4) Equal to 200% of the number of shares of Common Stock initially issuable
upon conversion or exercise of the Series J Convertible Preferred Stock and
accompanying Warrants.
(5) Represents a reduction of 25,000 from the number as set forth in the
previous Form SB-2/A, which is amended hereby. No reduction is made in the
fee.
The registrant hereby amends this registration statement on such date or
dates as may be necessary to delay its effective date until the registrant
shall file a further amendment which specifically states that this
registration statement shall become effective on that date in accordance with
Section 8(a) of the Securities Act or until the registration statement shall
become effective on such date as the Commission, acting under said Section
8(a), may determine.
<PAGE>
PROSPECTUS
up to 2,115,174 shares of Common Stock, par value $.001 each
------------------
eSynch Corporation
15502 Mosher Avenue, Tustin, California 92780
(714) 258-1900
------------------
Selling security holders are offering shares of common stock
underlying warrants and convertible preferred stock. The Common Stock may be
offered from time to time by the selling security holders. They are offering
all of the Common Stock for their own benefit.
Our Common Stock is listed on the OTC Bulletin Board maintained by
the NASD under the symbol "ESYN." On March 30, 2000, the last reported sale
price of the Company's Common Stock was $13.0625.
- --------------------------------------------------------------------------------
THESE ARE SPECULATIVE SECURITIES AND THIS INVESTMENT INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 2.
- --------------------------------------------------------------------------------
Information regarding the selling security holders is set forth in
"Selling Security Holders" and "Plan of Distribution." All or a portion of
the shares of Common Stock offered hereby may be offered for sale, from time
to time, on the over-the-counter bulletin board, or otherwise, at prices and
terms then obtainable, or in negotiated transactions.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved these securities or passed
upon the adequacy of the prospectus. Any representation to the contrary is a
criminal offense.
The date of this prospectus is March 31, 2000
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
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<S> <C>
PROSPECTUS SUMMARY 1
RISK FACTORS 2
FORWARD-LOOKING AND CAUTIONARY STATEMENTS 9
USE OF PROCEEDS 9
SELLING SECURITY HOLDERS 10
PLAN OF DISTRIBUTION 12
LEGAL PROCEEDINGS 14
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 15
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 20
DESCRIPTION OF SECURITIES 22
INTEREST OF NAMED EXPERTS AND COUNSEL 29
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES 30
DESCRIPTION OF BUSINESS 31
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS 38
DESCRIPTION OF PROPERTY 42
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 43
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 44
EXECUTIVE COMPENSATION 45
FINANCIAL STATEMENTS 49
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 95
</TABLE>
Electronic Digital Distribution, eSynch, Kiss Software, Kissco, AtoZWare,
AtoZWare.com, Modem Wizard, NetMonitor, WebSnake, Speed Surfer Internet
Toolbox, Oxford Media, and all product or service names of eSynch used in
this Prospectus, are unregistered trademarks, service marks and trade names
of eSynch. The logos associated with such names are unregistered trademarks
and service marks of eSynch. Other brand names or trademarks appearing in
this prospectus are the property of their respective owners.
<PAGE>
ESYNCH CORPORATION PROSPECTUS SUMMARY
INTRODUCTION
Please read this prospectus carefully. We have not authorized anyone to
provide you with any information except the information contained in this
prospectus. You must not rely on any unauthorized information.
The information contained in this prospectus is accurate only as of the date
of this prospectus, regardless of the time of delivery of this prospectus or
of any sale of common stock.
This prospectus does not offer to sell or buy any shares in any jurisdiction
where it is unlawful.
In this prospectus, "eSynch," "we," "us, "our" and the "Company" refer to
eSynch Corporation and subsidiaries.
THE OFFERING
Common stock offered up to 2,115,174 shares (1)
Use of Proceeds: The proceeds from the sale
of each selling security
holder's Common Stock will
belong to the selling
security holder. The
Company will not receive
any of the proceeds, except any amount
thereof paid to the Company by selling
security holders as the
exercise price of warrants.
Trading Symbol ESYN
Trading Market Over-the-Counter Bulletin Board (OTCBB)
(1) The total amount registered includes 1,965,174 shares of Common Stock for
sale by certain of the selling security holders. This amount is equal to 200%
of the number of shares of Common Stock initially issuable to the selling
security holders upon their conversion of shares of preferred stock and their
exercise of warrants. We are initially required to register this amount of
shares by agreement with these selling security holders.
-1-
<PAGE>
RISK FACTORS
Before you invest in our common stock, you should be aware that there are
various risks, including those described below. Additional risks, and
uncertainties not presently known to us or that we currently deem immaterial,
may also impair our business operations. If any of the following risks
actually occur, our business could be harmed. In such case, the shares of our
common stock that you purchase could decline in value and you may lose all or
part of your investment. You should consider carefully these risk factors
before you decide to purchase our shares.
We have a limited operating history and revenues have been minimal to date
- --------------------------------------------------------------------------
To date we have generated only minimal revenues. As a result, we have not yet
generated cash from operations and have had to rely on proceeds from sales of
our shares to fund our operations. Also we have only a limited operating
history on which our business can be evaluated and our business must be
considered in light of the risks, uncertainties, expenses and difficulties
frequently encountered by companies in their early stages of development that
are entering into new and rapidly evolving markets. These risks include the
following:
* The limited resources that we have to compete with more established
competitors who have greater brand name recognition and greater resources.
* The need to raise additional capital to sustain operations and the absence
of any assurance that such financing will be obtainable, when needed, on
acceptable terms, if at all.
* The need to establish alliances or partnerships with established companies.
* The need to develop brand name recognition and to continually strengthen
customer loyalty and satisfaction.
* Uncertainty as to our business model.
* Anticipated continued losses from operations.
* The difficulties of managing growth.
* The difficulty of anticipating and adapting to technological, market and
other changes.
* The difficulties of attracting, integrating and motivating qualified
personnel.
We must, among other things, successfully implement and execute our business
and strategy, continue to develop and upgrade our technology, enhance our
services and products to meet the needs of a changing market, and provide
superior customer service.
-2-
<PAGE>
Our future operating results are unpredictable
- ----------------------------------------------
Our operating results are unpredictable and we expect them to fluctuate in
the future due to a number of factors, many of which are outside our control.
These factors include:
* the ability of competitors to provide services and products that are
competitive with our own.
* competition from larger companies with greater brand name recognition or
greater financial, marketing or management resources that those available
to us.
* adverse changes in consumer trends or general economic conditions.
* our ability to keep pace with technological developments.
As a strategic response to changes in the competitive environment, we may
from time to time make certain decisions that temporarily harm our business.
As a result, our operating results at times may be below expectations. If
this happens, it is likely that the value of our common stock would decline.
We need additional capital
- --------------------------
Our business model indicates that it is likely that we will incur operating
losses over the next several months. As a result of those losses and the
funds needed for managing acquisitions, working capital and infrastructure
development, we anticipate that we will have to raise substantial additional
capital to sustain us during this period. We may not be able to obtain the
financing that our business requires. Even if we can obtain financing when it
is needed, it may not be on favorable terms. In addition, a financing could
have the effect of reducing the percentage of our shares owned by our
existing stockholders, including investors purchasing shares in this
offering. A financing could have the additional effect of diluting or
reducing the value of the outstanding shares. We may sell shares or grant
options or warrants to buy shares at prices lower than the prevailing value
of your shares.
Management owns a controlling interest in eSynch Corporation
- ------------------------------------------------------------
Our officers and directors currently own or control a substantial majority of
our outstanding common stock. If they act in concert, they will continue to
be able to exercise voting control over eSynch for the foreseeable future and
will be able to elect the entire Board of Directors and generally determine
our management policy. Also this management control could prevent, or make
more difficult, a sale of eSynch.
The loss of key personnel could adversely affect operations
- -----------------------------------------------------------
Thomas Hemingway and others play a key role in our operations and in the
further development of our business. The loss of the services of any of them
could adversely impact our business and chances for success.
-3-
<PAGE>
A failure to attract key personnel could adversely affect our plans
- -------------------------------------------------------------------
Our performance also will greatly depend on our ability to hire, train,
retain and motivate additional officers and other key employees. However,
competition for highly skilled managerial, technical, marketing and customer
service personnel is intense. We may not be able to successfully attract,
integrate or retain sufficiently qualified personnel and, in that event, our
business could suffer.
We face competition in the markets we serve
- -------------------------------------------
There is intense competition among companies selling services and products on
the Internet. Increased competition is likely to bring both strong price and
quality competition. As a result, in order to remain competitive, we might
have to make additional expenditures on research and development, marketing,
and customer service or to reduce our pricing, or both, which would adversely
affect our ability to achieve and maintain profitability.
There are several other companies involved in media and digital distribution
channels that have far greater financial and management resources and greater
name brand recognition than we have. Their competition could make it
difficult for us to attract new and retain existing users of our services.
There is a sporadic trading market for our common stock
- -------------------------------------------------------
The public market for our common stock is sporadic. After this offering, you
may not be able to resell your shares at or above the public offering price
due to a number of factors, including:
* actual or anticipated fluctuations in our operating results.
* changes in expectations as to our future financial performance.
* availability of additional shares of common stock for public sale.
* changes in securities analysts' financial estimates.
* the operating and stock price performance of our competitors and other
comparable companies.
Volatility and stock market risk
- --------------------------------
In addition, the stock market in general, and the stocks of web-based
businesses in particular, have experienced extreme volatility that often has
been unrelated to the operating performance of particular companies. These
broad market and industry fluctuations may adversely affect the trading price
of our common stock, regardless of our actual operating performance.
-4-
<PAGE>
A large amount of shares will become available for future sale
- --------------------------------------------------------------
We expect the trading price of our Common Stock to fluctuate depending on the
supply of our shares in the public market. We estimate that the amount of our
shares traded publicly has not been more than 2,300,000. That represents less
than 22% of the number of shares that are outstanding on a fully diluted
basis. Many of the other shares that are outstanding or issuable are, or will
within the next 6 months become, available for sale in the public market.
Rule 144, this offering, and our registration of shares under the 1999 Stock
Incentive Plan or other options will result in a large number of shares being
available for public sale as compared with the number of shares historically
traded. A large supply of shares, unless met by an equal or greater demand,
could result in lower trading prices.
Sales by the selling security holders could depress our stock price
- -------------------------------------------------------------------
The availability of shares and the trading prices may fluctuate based upon
factors other than intrinsic value of our stock. The selling security holders
may act independently of each other and cause confusion in the market. The
selling security holders have not informed us of an intention to sell shares
through underwriters and may sell through ordinary broker transactions.
Purchasers of Common Stock in this offering may be affected by subsequent
sales by the selling security holders. Because the conversion rate of the
Series J Preferred Shares will increase when the share price of the Common
Stock is lower, the holders of Series J Preferred Stock may elect to exercise
at times when it is disadvantageous to holders of Common Stock.
Future issuances of stock could adversely affect holders of common stock
- ------------------------------------------------------------------------
The Board of Directors is authorized to issue additional shares of preferred
stock without approval from holders of common stock. Preferred stock can have
rights and preferences, as may be determined by the Board of Directors, that
are senior to the common stock. The Board of Directors is authorized to issue
additional shares of common stock without approval from holders of common
stock. Additional common stock may be issued or reserved for issuance on
terms and at prices as may be determined by the Board of Directors. Among
other things, such authority may make it more difficult for a person to
acquire eSynch. In turn, this may make it less likely that holders of common
stock will receive a premium price for their shares.
-5-
<PAGE>
We run a risk of system capacity constraints and system failure
- ---------------------------------------------------------------
We are largely dependent upon our communications and computer hardware and
software. A high volume of traffic and transactions on our servers could
exceed their capacity. If our digital content were to load slowly, this may
potentially drive away customers. Based on our experience and the experience
of other e-commerce companies, we anticipate that we will experience periodic
system interruptions in the future. Any system interruptions that result in
the unavailability of our service or in reduced customer activity could lead
our users to seek out our competitors. In such an event, we might find it
difficult and might have to incur additional marketing costs to get our users
to return to our servers. Also our systems are vulnerable to damage from
earthquake, fire, flood, power loss, telecommunication failure, break-in and
similar catastrophic events. A substantial interruption in the operability of
these systems would harm our business. We also do not have any business
interruption insurance that would compensate us for any resulting losses we
might incur.
Our Internet business is vulnerable to third party misconduct
- -------------------------------------------------------------
Despite our implementation of network and firewall security, our servers are
vulnerable to computer viruses, physical or electronic break-ins, deliberate
attempts by third parties to exceed the capacity of our systems and similar
disruptive problems. Computer viruses, break-ins or other problems caused by
third parties could lead to interruptions, delays, and losses of data. The
occurrence of any of these risks could harm our business.
We rely on trade secret protection to protect some of our rights
- ----------------------------------------------------------------
To date we have relied to a significant degree on trade secret laws and
technical measures to establish and protect our proprietary rights. Secrecy,
copyrights and other methods to protect our intellectual property rights may
prove to be ineffective or inadequate to prevent imitation of our services or
products or to prevent others from claiming violations of their proprietary
rights by us. In addition, others may assert rights in our proprietary
rights. Our customer lists are also of great value to our business, and if a
competitor acquired these lists, it could harm our business.
We will depend on acceptance of our brand names
- -----------------------------------------------
We believe that the development of brand name recognition is critical to the
success of most businesses, including our own, particularly with the recent
and growing increase in the number of companies that are conducting business
on the Internet. Development and awareness of the eSynch brand name will
depend largely on our success in increasing our customer base and strategic
relationships. If consumers do not perceive us as offering a desirable way to
access digital content and software or other e-commerce companies do not
perceive us as an effective marketing and sales channel for their products or
services, we would be unsuccessful in promoting our brand name.
-6-
<PAGE>
We need to protect our business names
- -------------------------------------
We have only recently commenced a program designed to obtain trademark
registrations for our software and our business names and service mark
registrations for our service names. We may be unable to obtain such
protections. Registrations or other protections of names may prove to be
inadequate to prevent imitation of our names or to prevent others from
claiming violations of their trademarks and service marks by us. In addition,
others may assert rights in our trademarks and service marks.
We could face liability for materials disseminated through the Internet
- -----------------------------------------------------------------------
The law relating to the liability of Internet service companies for
information carried on or disseminated through their services is currently
unsettled. It is possible that claims could be made against Internet service
companies under both U.S. and foreign law for defamation, libel, invasion of
privacy, negligence, copyright or trademark infringement, or other theories
based on the nature and content of the materials disseminated through their
services. Furthermore, the growth and development of the market for Internet
commerce may prompt calls for more stringent consumer protection laws that
may impose additional burdens on companies conducting business over the
Internet. The adoption of any additional laws or regulations may decrease the
growth of the Internet, which, in turn, could decrease the demand for our
Internet auctions and other services. This could increase our cost of doing
business or otherwise harm our business.
Our evolving business plan may change
- -------------------------------------
We intend to continue to develop our business plan and to explore
opportunities to expand the breadth and depth of our products and services.
Changes in how business is generally conducted could prevent us from
achieving our business objectives. Financially more powerful providers that
offer competitive services or products could also prevent us from achieving
our business objectives.
Effect of Announced Acquisitions
- --------------------------------
Risks and uncertainties can be foreseen as a result of the proposed
acquisitions of Post Modern Edit and HyperDisk Media Inc. which are expected
to be completed in April, 2000. The acquisitions have not been completed.
Definitive agreements have not been signed.
-7-
<PAGE>
Additional Risks
- ----------------
In addition to matters affecting the Company's industry generally, factors
which could cause actual results to differ from expectations include, but are
not limited to (i) sales of the Company's products which may not rise to the
level of profitability; (ii) due to the rapidly changing and intensely
competitive nature of the industry, competitors may introduce new products
with significant competitive advantages over the Company's products; (iii)
the Company may not have sufficient resources, including any future financing
it is able to obtain, to sustain marketing and other operations; (iv) the
Company may be unable to attract and retain sufficient management and
technical expertise, or may lose key employees; (v) the Company's contractual
or legal efforts to protect its confidential information or intellectual
property may be inadequate or ineffective to provide protection, and the
Company may be unable financially to pursue legal remedies that may be
available; (vi) the Company's selection, due diligence, execution, and
integration of acquisitions may not prove effective or reasonable; (vii) the
Company may suffer in material respects from the direct or indirect effects
of hackers on public utilities, telecommunications networks, customers,
vendors, service providers, web site hosting services, and the economy or
financial markets generally; (viii) the Company may suffer from other
technical or communications problems, such as power outages, system failures,
system crashes, or sabotage; and (ix) the Company may be subjected to unknown
or unanticipated risks and uncertainties, or be unable to assess or address
risks and uncertainties as may exist.
-8-
<PAGE>
FORWARD-LOOKING AND CAUTIONARY STATEMENTS
This prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 (the "Securities Act") and Section
21E of the Securities Exchange Act of 1934 (the "Exchange Act") and such
forward-looking statements are subject to the safe harbors created thereby.
For this purpose, any statements contained in this prospectus except for
historical information may be deemed to be forward-looking statements. Also,
words such as "may," "will," "expect," "believe," "anticipate," "intend,"
"could," "estimate" or "continue" or the negative or other variations thereof
or comparable terminology are intended to help you identify forward-looking
statements. In addition, any statements that refer to expectations,
projections or other characterizations of future events or circumstances are
forward-looking statements. Forward-looking statements include, but are not
limited to, statements regarding:
* Our expectations about the marketplace and consumer acceptance.
* Our marketing and sales plans.
* Our expectations regarding the growth of our business and that our business
model will succeed.
* Our ability to introduce new services and products and improve technology.
* The success of our technology.
These statements are not guarantees of future performance. Future performance
is subject to risks, uncertainties and assumptions that are difficult to
predict and may be beyond our control. Therefore, our actual results could
differ materially from anticipated results. These risks and uncertainties
include those noted in "Risk Factors" above.
We do not undertake any obligation to update or revise any forward-looking
statements contained in this prospectus for any reason, even if new
information becomes available or other events occur in the future.
USE OF PROCEEDS
The proceeds from the sale of each selling security holder's Common Stock
will belong to the selling security holder. The Company will not receive any
proceeds from such sales of the Common Stock, except any amount thereof paid
by selling security holders to the Company in payment of the exercise price
of warrants. The shares of Common Stock that may be sold in this offering
include some shares that may be purchased by selling security holders upon
exercise of warrants that they hold.
-9-
<PAGE>
SELLING SECURITY HOLDERS
SHARES BENEFICIALLY OWNED
<TABLE>
<CAPTION>
BEFORE THE OFFERING AFTER THE OFFERING
SERIES J PREFERRED COMMON(1) PREFERRED COMMON(1)
------------------ --------------- --------- ---------
NAME OF SELLING SECURITY HOLDER NUMBER PERCENT NUMBER PERCENT NUMBER NUMBER
------------------------------- ------ ------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Amro International, S.A.(2)(3) 50 18.2% 180,357 1.7% (15) (15)
Austinvest Anstalt Balzers(3)(4) 50 18.2% 180,357 1.7% (15) (15)
Esquire Trade & Finance Inc.(3)(5) 50 18.2% 180,357 1.7% (15) (15)
Manchester Asset Management, Ltd(6)(7) 40 14.5% 144,285 1.4% (15) (15)
Gilston Corporation, Ltd.(6)(8) 35 12.7% 126,250 1.2% (15) (15)
Triton Private Equity Fund L.P.(9) 25 9.1% 90,178 0.9% (15) (15)
Talbiya Investments Ltd.(10) 12.5 4.5% 45,089 0.4% (15) (15)
Intercoastal Financial
Services Corp.(12) 12.5 4.5% 35,714 0.3% (15) (15)
Sam Katz (13) 0 0 75,000 0.7% (15) (15)
Harrington, Chase, PLC (14) 0 0 75,000 0.7% (15) (15)
Total (selling security holders
combined)(15) 275.0 100.0% 1,132,587 10.8%(11) (15) (15)
</TABLE>
- ------------
(1) Beneficial ownership of Common Stock for purposes of this table is
calculated based on the maximum number of shares of Common Stock issuable
upon conversion of Series J Preferred Stock (assuming a conversion price of
$3.50), and exercise of all of the warrants. However, the terms of the
Series J Preferred Stock will not permit the conversion of Series J
Preferred Stock by a selling security holder if it and its affiliates would
thereby own more than 4.99% of the outstanding Common Stock. The Series J
conversion price is initially equal to $3.50, subject to adjustment (see
"Description of Securities-Preferred Stock-Series J Preferred Stock"). The
Series J Preferred Stock became convertible on January 28, 2000.
(2) Address: 40 Ultra Finance, Grossmuenster Platz, #6, Zurich, Switzerland
CH822.
(3) Includes 37,500 shares issuable upon exercise of warrants and 142,857
shares issuable upon conversion of preferred stock.
(4) Address: Landstrasse 938, 9494 Furstentum, Vaduz/Liechtenstein, Austria.
(5) Address: P.O. Box 146, Road Town, Tortola, British Virgin Islands.
(6) Address: P.O. Box N-9204, Charlotte House, Charlotte Street, Nassau,
Bahamas.
(7) Includes 30,000 shares issuable upon exercise of warrants and 114,285
shares issuable upon conversion of preferred stock.
(8) Includes 26,250 shares issuable upon exercise of warrants and 100,000
shares issuable upon conversion of preferred stock.
(footnotes continue on next page)
-10-
<PAGE>
(Footnotes continued)
(9) Address: 225 North Market Street, Suite 220, Wichita, Kansas 67202.
Includes 18,750 shares issuable upon exercise of warrants and 71,428 shares
issuable upon conversion of preferred stock.
(10) Address: Ragnall House, 18 Peel Road, Douglas, Isle of Man, 1M14L2 United
Kingdom. Includes 9,375 shares issuable upon exercise of warrants and
35,714 shares issuable upon conversion of preferred stock.
(11) A total of 196,875 shares are issuable upon exercise of warrants and
785,712 shares are issuable upon conversion of preferred stock. This would
aggregately represent 9.4% beneficial ownership. Under the terms of the
Series J Preferred Stock, the selling security holders cannot convert
shares of Series J Preferred Stock to the extent that a holder and its
affiliates would then own more than 4.99% of the outstanding Common Stock.
The selling security holders disclaim beneficial ownership of any shares
issuable upon conversion to the extent that any holder and its affiliates
would then own more than 4.99% of the outstanding Common Stock.
(12) Address: 760 US Highway One - Suite 206, North Palm Beach, FL 33408.
(13) Address: 1180 Nassau Street, Delray Beach, FL 33483-6716.
(14) Address: 21 Bedford Square, London, WC1 B3HH United Kingdom.
(15) Selling security holders may offer any or all of the shares of Common Stock
from time to time. The selling security holders are not required to sell
any or all of the shares of Common Stock. They may retain the Common Stock
indefinitely.
-11-
<PAGE>
PLAN OF DISTRIBUTION
The Company is presently aware of no arrangements or understandings, formal
or informal, pertaining to the distribution of the shares of Common Stock
described herein. The Company may file a supplemented Prospectus, pursuant to
Rule 424(b) under the Securities Act, if it is required to do so and if it is
notified by a selling security holder that any material arrangement has been
entered into with a broker-dealer for the sale of shares of Common Stock
bought through a block trade, special offering, exchange distribution or
secondary distribution.
All or a portion of the shares of Common Stock offered hereby may be offered
for sale, from time to time, on the over-the-counter bulletin board, or
otherwise, at fixed prices which may be changed, at market prices at the time
of sale, at prices related to market prices, at prices and terms then
obtainable, or in negotiated transactions. In addition, the shares of Common
Stock offered hereby may be sold by one or more of the following: (a) a block
trade in which the broker or dealer so engaged will attempt to sell the
shares of Common Stock as agent, but may position and resell a portion of the
block as principal to facilitate the transaction; (b) purchases by a broker
or dealer as principal and resale by such broker or dealer for its account
pursuant to this Prospectus; and (c) ordinary brokerage transactions and
transactions in which the broker solicits purchasers. In effecting sales,
brokers or dealers engaged by the selling security holders may arrange for
other brokers or dealers to participate.
The selling security holders may effect these transactions by selling the
common stock to or through broker-dealers, who may receive compensation in
the form of discounts, concessions or commissions from the selling security
holders or the purchasers of the common stock for whom the broker-dealer may
act as an agent or to whom they may sell the common stock as a principal, or
both. The compensation to a particular broker-dealer may be in excess of
customary commissions.
Each selling security holder may indemnify any broker-dealer that
participates in transactions involving sales of the shares against certain
liabilities, including liabilities arising under the Securities Act.
The selling security holders and broker-dealers who act in connection with
the sale of the common stock may be considered "underwriters" within the
meaning of the Securities Act, and any commissions received by such
broker-dealers and profits on any resale of the common stock as a principal
may be considered underwriting discounts and commissions under the Securities
Act.
-12-
<PAGE>
We have agreed to bear expenses in connection with the registration and sale
of the common stock offered by the selling security holders (other than
selling commissions). The selling security holders will pay all brokers'
commissions, concessions or discounts. Our obligation includes paying the
filing fees and costs of filings. Filings will be made with the SEC, markets
on which our Common Stock trades, and state securities or "blue sky"
commissioners. We also will pay attorneys' fees and costs of a special legal
counsel to the selling security holders to a maximum of $25,000. We have also
agreed to indemnify the selling security holders (and their brokers, agents
investment advisors and controlling persons) from liabilities arising under
the Securities Act, except liabilities relating to information provided by
the selling security holder specifically for inclusion in this prospectus.
We estimate our out-of-pocket costs will be $150,000 initially, including
payment of related legal fees of selling security holders. Also we have
agreed to keep this prospectus updated continuously until the securities are
sold or the selling security holders are able to sell the securities under
Rule 144(k). We estimate the out-of-pocket costs for such updating at
approximately $25,000 per year. The updating obligation could reasonably be
expected to continue for up to five years.
Under our registration rights agreement with the holders of Series J
Preferred Stock, we are required to pay damages to holders of Series J
Preferred Stock in the event we fail to file the registration statement that
includes this prospectus on November 30, 1999, the SEC does not declare that
registration statement effective by February 28, 2000, amendments are not
filed within 20 days after they are required, amendments of the registration
statement are not declared effective within 30 days after filing, our stock
is delisted from the over-the-counter bulleting board, or we breach in any
material respect our agreements with the holders of Series J Preferred Stock.
The damages payable are equal to 2% of the holder's original purchase price
for a 30-day period or portion thereof, until the breach or event is cured,
not pro-rated for periods of breach of less than 30 days. Additional damages
are 3% of such holder's purchase price for each subsequent 30-day period
until the breach is cured, with this amount pro-rated for periods of less
than 30 days.
-13-
<PAGE>
LEGAL PROCEEDINGS
eSynch and Subsidiaries
- -----------------------------------------
We are involved in several lawsuits in the normal course of business and all
amounts for exposure to these lawsuits have been recorded in our financial
statements except as noted below.
SoftKat
- ------------
We acquired SoftKat, Inc. ("SoftKat") in November 1998 and sold SoftKat in
1999.
Although we sold SoftKat, various claims were asserted against us for alleged
liabilities or obligations of SoftKat based upon the theory of successor
liability or alter ego. The Company prevailed in eight suits which have been
dismissed. Other claims may be asserted against us by creditors of SoftKat,
Inc., but we are unaware of any pending claims at this time. The following
represents the only remaining lawsuit regarding SoftKat to which the Company
is a party:
On May 18, 1999, Frank Grange filed a complaint against us in the Sonoma
County Superior Court, State of California. The complaint alleges that we owe
$84,801.40 for damages resulting from a lease between that plaintiff and
SoftKat, Inc., and a judgment obtained against SoftKat for unpaid rent, based
on a theory of successor liability. We have filed an answer denying that we
are obligated to pay any of these claims, and we intend to vigorously oppose
any attempt to impose successor liability.
Intermark
- ----------------
Intermark Corporation became our subsidiary on August 5, 1998.
In September, 1999, U.S. Print Corporation filed a complaint in Orange County
Superior Court, State of California. The complaint seeks to recover from the
Company $92,414.69 for services allegedly purchased but not paid for by
Intermark. A reserve to cover the Company's potential liability has been
accrued in the financial statements.
In September, 1999, a lawsuit was filed by C-Group in United States District
Court, District of Maryland, against Intermark seeking $99,110 for goods that
were claimed to be purchased by Intermark. In October, 1999, the plaintiff
amended the complaint and reduced the amount it is seeking to $81,326. The
Company has filed a motion to dismiss for lack of personal jurisdiction. The
Federal District Court has remanded the case to a state court in Maryland to
rule on the motion to dismiss. The Maryland court has not yet ruled on the
motion.
-14-
<PAGE>
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The following table and paragraphs set forth the names of and
certain information concerning the directors of the Company:
<TABLE>
<CAPTION>
NAME POSITION(S) WITH THE COMPANY AGE
------------------------------------------------------------------------
<S> <C> <C>
Thomas Hemingway Director and Chief Executive Officer 43
T. Richard Hutt Director, Vice President and 60
Secretary/Treasurer
James H. Budd Director and Vice President 58
Donald C. Watters, Jr. Director and President and 42
Chief Operating Officer
Norton Garfinkle Director 68
David Lyons(1) Director 50
Robert Orbach(1) Director 48
</TABLE>
- -----------
The Company does not have a nominating committee of the Board of
Directors.
(1) A member of the audit committee of the Board of Directors of the Company.
The Board of Directors acting as a whole performs the functions of the
compensation committee.
-15-
<PAGE>
Thomas ("Tom") Hemingway
- ------------------------
On August 5, 1998, Mr. Hemingway became the Chief Executive Officer and a
director of the Company pursuant to the Agreement and Plan of Share Exchange
among the Company, Intermark Corporation, a California corporation
("Intermark"), and Intermark's securityholders upon the consummation of that
transaction. A co-founder of Intermark, from October 1995 to the present Mr.
Hemingway has served as Chief Executive Officer and in other senior
management positions at Intermark, a software publishing, sales and marketing
company. From August 1994 to September 1995, Mr. Hemingway operated a
consulting business specializing in software sales and marketing. From
January 1994 to July 1994, Mr. Hemingway was chief operating officer at
Ideafisher Systems, an artificial intelligence / associative processing
software company. From August 1993 to December 1993, Mr. Hemingway was
serving as a consultant with L3, an edutainment software company. From
January 1993 to July 1993, Mr. Hemingway was involved in computer-related
consulting in the capacity of chief executive officer of Becker/Smart House,
LV, a home automation enterprise. In 1992, Mr. Hemingway was involved in
making private investments in various industries. Previously, from 1987 to
1991, Mr. Hemingway founded and served as president of Intellinet Information
Systems, a provider of network services and systems. Earlier in his career,
Mr. Hemingway was a founder of Omni Advanced Technologies, a research and
development firm developing products for the computer and communications
industry.
James H. ("Jim") Budd
- ---------------------
Mr. Budd was elected to the Board of Directors on October 27, 1998. In
August, 1998, Mr. Budd became a Vice President of the Company pursuant to the
Agreement and Plan of Share Exchange among the Company, Intermark and
Intermark's securityholders. A co-founder of Intermark, from October 1995 to
the present Mr. Budd has served as Vice President of Marketing and in other
executive capacities of Intermark, a software publishing, sales and marketing
company. From August 1994 to September 1995, Mr. Budd operated a consulting
business specializing in software sales and marketing. From March 1994 to
July 1994, Mr. Budd was vice president of marketing at Ideafisher Systems, an
artificial intelligence / associative processing software company. From
November 1993 to February 1994, Mr. Budd was involved in making private
investments in various industries. Previously, from July 1978 to October
1993, Mr. Budd was founder and chief executive officer of Command Business
Systems, a developer of business software products. Earlier in his career,
Mr. Budd held marketing and sales management positions at Unisys, Nixdorf,
Tymshare, and Prime Computer.
T. Richard ("Dick") Hutt
- ------------------------
Mr. Hutt was elected to the Board of Directors on October 27, 1998. In
August, 1998, Mr. Hutt became a Vice President and the Secretary of the
Company pursuant to the Agreement and Plan of Share Exchange among the
Company, Intermark and Intermark's securityholders. A co-founder of
Intermark, from October 1995 to the present Mr. Hutt has served as Vice
President of Sales and Secretary of Intermark. From September 1992 to
September 1995, Mr. Hutt was distribution sales manager for Strategic
Marketing Partners, a leading national software and technology marketing
firm. Previously, he was in the communications and mini-computer industry
with TRW where he formed the Canadian subsidiary as vice president of sales.
He moved to TRW's Redondo Beach headquarters and managed the western division
until Fujitsu acquired the business unit. Before joining TRW, he was with
NCR's financial sales division in Canada. Prior to that he managed the VAR
division at Wang Laboratories. Moving to Matsushita, he played a key role in
the development of the distribution channel for their Panasonic products.
-16-
<PAGE>
Donald C. Watters, Jr.
- ----------------------
Donald Watters, Jr. was elected to the Board of Directors on November 15,
1999. From April 1, 1999 to the present, Mr. Watters has been the President
and Chief Operating Officer of eSynch Corporation. Formerly, Mr. Watters was
President and CEO of Kiss Software Corporation (KISSCO), a
publisher/developer of Internet software utilities. Prior to Kissco, Mr.
Watters was vice president of worldwide sales of Touchstone Software (Nasdaq:
TSSW).
Norton Garfinkle
- ----------------
Norton Garfinkle, who was elected to the Board of Directors on November 15,
1999, is Chairman of Oxford Management Corporation, an investment company
that specializes in building new technology companies, a position he has held
since June 1994. He also serves as Chairman of several of these portfolio
companies, including: Cambridge Parallel Processing, Cambridge Management
Advanced Systems Corporation and ERS International.
David Lyons
- -----------
Mr. Lyons was appointed to the Board of Directors in January, 2000. From 1997
to the present, Mr. Lyons has been employed by Communications Systems U.S.A.,
Inc., a start-up consolidation venture financed by Northwestern (NYSE:NOR) to
acquire telecommunications voice and data companies. Serving as Vice
President Acquisitions, Eastern Region. Since inception in November, 1997
CSUSA has acquired 14 companies with gross revenues of over $180,000,000.
From 1996 to 1997, Mr. Lyons was employed by Extel Communications, Inc., a
telecommunications installation and maintenance company, as Executive Vice
President. He was responsible for the expansion of the customer base through
the company's merger and acquisition program as well as identifying
opportunities for required outside financing. From 1992 to 1996, David served
as the principal in Sherman Investment Group, Inc., a Merchant Banking
Company which invests in and provides managerial assistance to medium sized
public and private companies. Mr. Lyons previously served as a member of
Board of Directors from October 27, 1998 to November 15, 1999.
Robert Orbach
- -------------
Mr. Orbach was appointed to the Board of Directors in January, 2000. Mr.
Orbach is the founder and president of Orbach, Inc., providing high level
consulting and advisory services for PC hardware and software companies,
regarding acquisitions and strategic partnering as well as marketing, and has
served in that capacity since May 1990. In addition, Mr. Orbach is on the
Board of Directors of Midisoft and In10city. Mr. Orbach previously served as
a member of the Board of Directors from October 27, 1998 to November 15, 1999.
-17-
<PAGE>
BOARD MEETINGS AND COMMITTEES
There were 3 meetings of the Board of Directors of the Company during the
fiscal year of the Company ended December 31, 1999. The Board of Directors
established a standing Audit Committee and a Compensation Committee. In the
fiscal year ended December 31, 1998, the Audit Committee held 2 meetings and
the Compensation Committee held 2 meetings. Each of the directors attended at
least 75% of the meetings of the Board and committees on which the director
served during fiscal 1998.
The Audit Committee's function is to review, act on, and report to the Board
of Directors with respect to various auditing and accounting matters,
including the selection of the Company's independent public accountants, the
scope of the annual audits, the nature of non-audit services, fees to be paid
to the independent public accountants, the performance of the Company's
independent public accountants, and the accounting practices of the Company.
The Compensation Committee's function is to review the performance of the
executive officers of the Company and review the compensation programs for
other key employees, including salary and cash incentive payment levels and
option grants.
There is no standing nominating committee or other committee performing a
similar function.
COMPENSATION OF DIRECTORS
We issued a warrant to purchase 350,000 shares of Common Stock at a price per
share of $1.00 to Mr. Norton Garfinkle upon his election to the Board of
Directors.
We have engaged the consulting services of Mr. Garfinkle in connection with
developing our "video-on-demand" business, and have agreed to issue him
additional warrants to purchase 100,000 shares of Common Stock at a price per
share of $1.00.
Our non-employee Directors are not currently compensated for attendance at
Board of Director meetings. Non-employee directors from time to time have
been, and in the future may be, granted, on an ad hoc basis, stock options
upon being appointed to the Board. The Company may adopt a formal director
compensation plan in the future. All of the Directors are reimbursed for
their expenses for each Board and committee meeting attended.
-18-
<PAGE>
EXECUTIVE OFFICERS
For information on the business background of Messrs. Hemingway,
Budd, Hutt and Watters, see "Directors" above. The following table and
paragraphs set forth the names of and certain information concerning other
executive officers of the Company:
<TABLE>
<CAPTION>
NAME OF EXECUTIVE POSITION(S) WITH THE COMPANY AGE
- -------------------- -----------------------------------------------
<S> <C> <C>
David Noyes Chief Financial Officer 57
Robert B. Way Vice President 57
</TABLE>
David Noyes
- -----------
Mr. Noyes became the Chief Financial Officer of the Company in July 1999. Mr.
Noyes also currently is President of Monarch Capital, a business consulting
Firm (1993 to Present), and President, Chief Financial Officer and a Director
of Directional Recovery Systems, LLC, an oil services company (1995 to
Present). In addition he was Chief Executive Officer, Chief Financial Officer
and a Director of American Furnishings Corp. and California Mattress (1996 to
1997), President, Chief Financial Officer and Director of California Software
Products, Inc. (1996) and Director and Interim Chief Financial Officer of
Griswold Industries(1994 to 1995). He was Chief Financial Officer and Chief
Operating Officer of General Power Systems from 1987 through 1994 and Chief
Financial Officer and Chief Operating Officer of AMF Scientific Drilling
International from 1976 through 1984.
Robert B. Way
- -------------
Mr. Way became a Vice President of the Company in April 1999. Previously, Mr.
Way was the Senior Vice President and General Manager of Kiss Software
Corporation, where he served in that capacity from January, 1997. Before
that, Mr. Way was an independent consultant in software business management
specializing in product planning, development and support. Mr. Way was Vice
President and General Manager of California Software Products, Inc. from 1976
to 1995.
EXECUTIVE COMPENSATION AND OTHER INFORMATION
See "Executive Compensation."
-19-
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
MANAGEMENT. The following table sets forth as of March 29, 2000, information
regarding beneficial ownership of the Company's stock by each director and
each executive officer, and by all directors and executive officers of the
Company as a group. Each named person and all directors and executive
officers as a group are deemed to be the beneficial owners of shares that may
be acquired within 60 days upon exercise of stock options. Accordingly, the
number of shares and percentages set forth next to the name of such person
and all directors and executive officers as a group include the shares
issuable upon stock options exercisable within 60 days. However, the shares
so issuable upon such exercise by any such person are not included in
calculating the percentage of shares beneficially owned by any other
stockholder. Based in part upon the absence of any Schedule 13G or Schedule
13D filings, the Company is not aware of any other person or group with
beneficial ownership in excess of 5% of the Common Stock.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
------------------------------
COMMON PREFERRED
---------------- ----------------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
------------------------ --------- ------- ------ -------
<S> <C> <C> <C> <C>
Thomas Hemingway(1) 1,704,609 15.4% 0 0%
T. Richard Hutt(2) 1,230,391 11.6% 0 0%
James H. Budd(3) 1,214,715 11.4% 0 0%
Donald C. Watters, Jr.(4) 1,209,759 10.7% 0 0%
David Noyes(5) 343,750 3.2% 0 0%
Robert Way(6) 301,857 2.8% 0 0%
Norton Garfinkle(7) 910,000 8.3% 0 0%
David Lyons(8) 11,700 0.1% 0 0%
Robert Orbach 11,684 0.1% 0 0%
All Directors and Executive Officers
as a group (9 Persons)(9) 6,938,465 52.8% 0 0%
</TABLE>
- ------------
(1) Includes 542,500 shares which may be purchased pursuant to stock options
which are currently, or within the next 60 days will be, exercisable.
Includes 115,395 shares of Ms. Detra Mauro Hemingway, the spouse of Mr.
Hemingway.
(2) Includes 117,000 shares which may be purchased pursuant to stock options
which are currently, or within the next 60 days will be, exercisable.
(3) Includes 117,000 shares which may be purchased pursuant to stock options
which are currently, or within the next 60 days will be, exercisable.
(4) Includes 748,568 shares which may be purchased pursuant to stock options
and warrants which are currently, or within the next 60 days will be,
exercisable.
(5) Includes 343,750 shares which may be purchased pursuant to stock options
and warrants which are currently, or within the next 60 days will be,
exercisable.
(6) Includes 269,427 shares which may be purchased pursuant to stock options
which are currently, or within the next 60 days will be, exercisable.
(7) Includes shares held by a corporation and two trusts that are controlled
by him and 450,000 shares which may be purchased pursuant to warrants which
are currently exercisable.
(8) Includes 11,700 shares which may be purchased pursuant to stock options
which are currently, or within the next 60 days will be, exercisable.
(9) Includes all of the shares and options referred to in notes (1) through
(8) above.
-20-
<PAGE>
STOCK OWNERSHIP OF SELLING SECURITY HOLDERS
- -------------------------------------------
The table under "Selling Security Holders" sets forth information regarding
ownership of the Preferred Stock and the Common Stock by those individuals or
groups who own more than five percent (5%) of the Series J Preferred Stock
outstanding. See "Selling Security Holders."
-21-
<PAGE>
DESCRIPTION OF SECURITIES
AUTHORIZED AND OUTSTANDING STOCK
- --------------------------------
The authorized capital stock of eSynch consists of 50,000,000 shares of Common
Stock, $.001 par value, and 1,000,000 shares of Preferred Stock, $.001 par
value. 275 shares of the Preferred Stock are designated as Series J Preferred
Stock and 250 shares are designated as Series K Preferred Stock.
As of March 29, 2000, there were 10,532,463 shares of Common Stock outstanding,
which were held by approximately 350 stockholders of record and held by
approximately 1,279 stockholders beneficially. At the same date, there were 275
shares of Series J Preferred Stock outstanding and 212.5 shares of Series K
Preferred Stock outstanding. (See "Preferred Stock," below.)
The Company previously issued Series A, Series C, Series D, Series E, Series F,
Series G, Series H, and Series I Preferred shares, none of which remain
outstanding.
COMMON STOCK
- ------------
Subject to legal and contractual restrictions on payment of dividends, the
holders of common stock are entitled to receive such lawful dividends as may be
declared by the Board of Directors. In the event of liquidation, dissolution or
winding up of eSynch, the holders of shares of common stock are entitled to
receive all of the remaining assets of eSynch available for distribution to its
stockholders after satisfaction of all its liabilities and the preferences on
Preferred Stock. Holders of our common stock do not have any preemptive,
conversion or redemption rights and there are no sinking fund provisions
applicable to our common stock.
Record holders of our common stock are entitled to vote at all meetings of
stockholders and at those meetings are entitled to cast one vote for each share
of record that they own on all matters on which stockholders may vote.
Stockholders do not presently have cumulative voting rights in the election of
eSynch's directors. As a result, the holders of a plurality of the outstanding
shares can elect all of the directors of eSynch, and the holders of the
remaining shares are not able to elect any of eSynch's directors.
All outstanding shares of common stock are fully paid and nonassessable, and all
shares of common stock to be offered and sold in this offering will be fully
paid and nonassessable.
-22-
<PAGE>
COMMON STOCK OPTIONS
- --------------------
eSynch has a 1999 Stock Incentive Plan. 3,000,000 shares of common stock have
been reserved under the 1999 Stock Incentive Plan for grants. The grants may be
in the form of options, stock purchase rights or stock grants. The Board of
Directors, or a committee designated by the Board of Directors, has discretion
to determine the terms of the grants and the recipients of grants.
Options can be issued with an option term of up to ten years. Options and
restricted stock may be subject to vesting restrictions. Vesting may be either
(a) over a period of time, (b) immediately upon grant, (c) upon the occurrence
of certain events, (d) upon attainment of performance goals, or (e) a
combination of any of these.
At March 29, 2000, apart from the 1999 Stock Incentive Plan, there were
outstanding options to purchase another 2,030,560 shares of common stock,
approximately.
PREFERRED STOCK
- ---------------
The Board of Directors has the authority, without further action by the
stockholders, to issue the authorized and unissued shares of preferred stock in
one or more series and to fix the rights, preferences and privileges thereof,
including voting rights, terms of redemption, redemption prices, liquidation
preferences, number of shares constituting any series or the designation of such
series, without further vote or action by the stockholders. Although it
presently has no intention to do so, the Board of Directors, without stockholder
approval, may issue preferred stock with voting and conversion rights which
could adversely affect the voting power of the holders of common stock. This
provision may be deemed to have a potential anti-takeover effect, and the
issuance of preferred stock in accordance with such provision may delay or
prevent a change of control of eSynch.
-23-
<PAGE>
Series J Preferred Stock
- ------------------------
The Series J Preferred Stock was issued for an original issue price of $10,000
per share.
The holders of Series J Preferred Stock are entitled to dividends at the rate of
7% per year. The dividends are not required to be paid until conversion or
redemption of the shares or an acquisition of eSynch; however unpaid dividends
will cumulate. We have the option of paying the dividends either in cash or in
our common stock (in the latter case, based on the conversion price then in
effect).
The holders of Series J Preferred Stock are entitled to a preference in the
event we liquidate our corporation. That preference is in an amount of $10,000
per share, plus cumulated and unpaid dividends. The Series J Preferred Stock and
the Series K Preferred Stock are on a parity as to liquidation preferences. Any
and all of the remaining assets could be distributed to holders of junior
securities (e.g., other shares of preferred stock or Common Stock), in order of
seniority.
We must give holders of Series J Preferred Stock 45 days' notice prior to a
merger or acquisition of eSynch. Such a transaction can only be effected if the
holders of the Series J Preferred Stock maintain their relative rights,
preferences and privileges. A transaction that is inconsistent with this
provision is prohibited.
Holders of Series J Preferred Stock are not entitled to vote in the election of
directors. The vote of holders of three-fourths of the Series J Preferred Stock
outstanding is required, however, to reclassify any of our outstanding
securities (e.g., a stock split), to make a distribution with respect to any
stock that is junior to the Series J Preferred Stock (e.g., any dividend to
holders of Common Stock), or to authorize any securities senior to the Series J
Preferred Stock.
The Series J Preferred Stock became convertible into Common Stock on January 28,
2000. Also, the terms of the Series J Preferred Stock will not permit the
conversion of Series J Preferred Stock by a selling security holder if it and
its affiliates would thereby own more than 4.99% of the outstanding Common
Stock.
The Series J conversion price was initially equal to $3.50, subject to
adjustment. The conversion price of Series J Preferred Stock was subject to a
floor price of $3.50 until January 28, 2000. At the $3.50 price, the number of
shares of Common Stock issuable upon conversion of one share of Series J
Preferred Stock would be $10,000.00 plus accrued and unpaid dividends divided by
$3.50.
After January 28, 2000, the conversion price is the lower of $3.50 or 80% of the
average of the six lowest closing bid prices in the twenty-trading-day period
ending on the day before conversion.
-24-
<PAGE>
For illustration, the shares of Series J Preferred Stock would be convertible
into the following numbers of shares of Common Stock at these trailing average
prices as of a day when the Series J Preferred Stock are converted:
<TABLE>
<CAPTION>
Average Per Series J Common Stock Percentage of
of Lowest Conversion Conversion Issuable Outstanding
Closing Bids Price Rate on Full Conversion Common Stock
- ------------ --------- ---------- ------------------ ----------
<S> <C> <C> <C> <C>
$4.375 or more $3.50 2,857 shs. 785,714 7.8%
$4.25 $3.40 2,941 shs. 808,823 8.0%
$3.75 $3.00 3,333 shs. 916,666 8.9%
$3.25 $2.60 3,846 shs. 1,057,692 10.2%
$2.75 $2.20 4,545 shs. 1,250,000 11.8%
</TABLE>
For instance, if the lowest closing bid prices of the Common Stock, in the
twenty-trading-day period ended on the day before conversion, were $2.8125,
$2.9375, $3.2812, $3.5312, $3.5312, and $3.50, their average is $3.2656, which
would result in a conversion price of $2.61.
The conversion price is also subject to ordinary adjustments to prevent
dilution. Cash is payable in lieu of issuing any fractional shares upon
conversion.
The Series J Preferred Stock would be automatically converted into Common Stock
on the third anniversary of the issuance of the Series J Preferred Stock (the
third anniversaries falling between August and October, 2002), with extensions
in certain events until not more than two years later. The conversion price is
the same as the normal conversion price that is applicable on the date
conversion becomes mandatory.
We have the right to redeem all or any of the outstanding Series J Preferred
Stock for cash. The redemption price is $12,000 per share, plus cumulated
dividends. eSynch is required to give the holders 30 days' notice and to deposit
the redemption price in escrow.
In the event of our merger, acquisition, or sale of all of our assets, we are
required to redeem all of the outstanding Series J Preferred Stock. The
redemption price in this event will be the greater of $12,500 per share or the
value of the number of shares of Common Stock issuable upon conversion based on
the closing bid price of the Common Stock, on the day preceding the consummation
of the transaction. The redemption price in such event is payable at least
$12,500 per share in cash and the balance, if any, in cash or our shares of
Common Stock, at our election.
Each holder of Series J Preferred Stock has a right to require us to redeem all
or a portion of his Series J Preferred Stock for cash if we breach any agreement
or representation made to the holders of Series J Preferred Stock in a material
respect, or in the event the registration statement that includes this
prospectus is not declared effective by February 28, 2000, its effectiveness
lapses or trading is suspended for a period of five consecutive business days,
or if we fail to perform our obligations to such holders concerning delivery of
Common Stock upon conversion within ten business days. The redemption price in
this event will be the greater of $12,500 per share or the value of the number
of shares of Common Stock issuable upon conversion based on the closing bid
price of the Common Stock, on the day preceding the triggering event.
-25-
<PAGE>
Series K Preferred Stock
- ------------------------
The Series K Preferred Stock was issued for an original issue price of $10,000
per share.
The holders of Series K Preferred Stock are entitled to dividends at the rate of
7% per year. The dividends are not required to be paid until conversion or
redemption of the shares or an acquisition of eSynch; however unpaid dividends
will cumulate. We have the option of paying the dividends either in cash or in
our common stock (in the latter case, based on the conversion price then in
effect).
The holders of Series K Preferred Stock are entitled to a preference in the
event we liquidate our corporation. That preference is in an amount of $10,000
per share, plus cumulated and unpaid dividends. The Series J Preferred Stock and
the Series K Preferred Stock are on a parity as to liquidation preferences. Any
and all of the remaining assets could be distributed to holders of junior
securities (e.g., other shares of preferred stock or Common Stock), in order of
seniority.
We must give holders of Series K Preferred Stock 45 days' notice prior to a
merger or acquisition of eSynch. Such a transaction can only be effected if the
holders of the Series K Preferred Stock maintain their relative rights,
preferences and privileges. A transaction that is inconsistent with this
provision is prohibited.
Holders of Series K Preferred Stock are not entitled to vote in the election of
directors. The vote of holders of three-fourths of the Series K Preferred Stock
outstanding is required, however, to reclassify any of our outstanding
securities (e.g., a stock split), to make a distribution with respect to any
stock that is junior to the Series K Preferred Stock (e.g., any dividend to
holders of Common Stock), or to authorize any securities senior to the Series K
Preferred.
The Series K Preferred Stock does not become convertible into Common Stock until
April 29, 2000 or any earlier date on which the SEC determines that a
registration statement for such offering becomes effective. Also, the terms of
the Series K Preferred Stock will not permit the conversion of Series K
Preferred Stock by a selling security holder if it and its affiliates would
thereby own more than 4.99% of the outstanding Common Stock.
The Series K conversion price is initially equal to $3.50, subject to
adjustment. The conversion price of Series K Preferred Stock is subject to a
floor price of $3.50 until April 29, 2000. At the floor price, the number of
shares of Common Stock issuable upon conversion of one share of Series K
Preferred Stock would be $10,000.00 plus accrued and unpaid dividends divided by
$3.50.
After April 29, 2000, the conversion price is the lower of $3.50 or 80% of the
average of the six lowest closing bid prices in the twenty-trading-day period
ending on the day before conversion.
-26-
<PAGE>
For illustration, the shares of Series K Preferred Stock would be convertible
into the following numbers of shares of Common Stock at these trailing average
prices as of a day when the Series K Preferred Stock are converted:
<TABLE>
<CAPTION>
Average Per Series K Common Stock Percentage of
of Lowest Conversion Conversion Issuable Outstanding
Closing Bids Price Rate on Full Conversion Common Stock
- ------------ --------- ---------- ------------------ ----------
<S> <C> <C> <C> <C>
$4.375 or more $3.50 2,857 shs. 785,714 7.8%
$4.25 $3.40 2,941 shs. 808,823 8.0%
$3.75 $3.00 3,333 shs. 916,666 8.9%
$3.25 $2.60 3,846 shs. 1,057,692 10.2%
$2.75 $2.20 4,545 shs. 1,250,000 11.8%
</TABLE>
For instance, if the lowest closing bid prices of the Common Stock in the
twenty-trading-day period ended on the day before conversion date were $3.828,
$4.313, $4.875, $5.188, $5.438, and $5.625, their average is $4.878, which would
result in a conversion price of $3.50 because 80% of $4.878 is $3.90, which is
not less than $3.50. See also the illustration above regarding Series J
Preferred Stock, which applies here equally.
The conversion price is also subject to ordinary adjustments to prevent
dilution. Cash is payable in lieu of issuing any fractional shares upon
conversion.
The Series K Preferred Stock would be automatically converted into Common Stock
on the third anniversary of the issuance of the Series K Preferred Stock (the
third anniversaries falling between December, 2002 and January 2003), with
extensions in certain events until not more than two years later. The conversion
price is the same as the normal conversion price that is applicable on the date
conversion becomes mandatory.
We have the right to redeem all or any of the outstanding Series K Preferred
Stock for cash. The redemption price is $12,000 per share, plus cumulated
dividends. eSynch is required to give the holders 30 days' notice and to deposit
the redemption price in escrow.
In the event of our merger, acquisition, or sale of all of our assets, we are
required to redeem all of the outstanding Series K Preferred Stock. The
redemption price in this event will be the greater of $12,500 per share or the
value of the number of shares of Common Stock issuable upon conversion based on
the closing bid price of the Common Stock, on the day preceding the consummation
of the transaction. The redemption price in such event is payable at least
$12,500 per share in cash and the balance, if any, in cash or our shares of
Common Stock, at our election.
Each holder of Series K Preferred Stock has a right to require us to redeem all
or a portion of his Series K Preferred Stock for cash if we breach any agreement
or representation made to the holders of Series K Preferred Stock in a material
respect, or in the event a registration statement to register the Common Stock
issuable upon conversion of the Series K Preferred Stock is not declared
effective by May 29, 2000, its effectiveness lapses or trading is suspended for
a period of five consecutive business days, or if we fail to perform our
obligations to such holders concerning delivery of Common Stock upon conversion
within ten business days. The redemption price in this event will be the greater
of $12,500 per share or the value of the number of shares of Common Stock
issuable upon conversion based on the closing bid price of the Common Stock, on
the day preceding the triggering event.
-27-
<PAGE>
WARRANTS
- --------
The warrants held by the selling security holders entitle those holders to
purchase shares of Common Stock. They include warrants expiring August 13, 2002
to purchase 112,500 shares at approximately $3.00 each, warrants expiring
September 30, 2000 to purchase 75,000 shares at approximately $5.17 each, and an
additional warrant expiring October 29, 2002 to purchase 9,375 shares at a price
of approximately $3.45 per share.
The Company has warrants outstanding, issued to the initial holders of Series K
Preferred Stock, entitling them to purchase 150,000 shares of Common Stock.
These include warrants expiring December 31, 2002 to purchase up to 112,500
shares at an initial price of $6.47 per share and warrants expiring January 31,
2003 to purchase up to 37,500 shares at $12.36 per share, initially.
Also, there are warrants outstanding held by others to purchase approximately an
additional 1,719,133 shares at various prices and expiring at various times.
These warrants generally are at prices ranging from $0.50 to $1.25 and generally
expire 5 years after issuance.
DELAWARE LAW AND CERTAIN CHARTER PROVISIONS
- -------------------------------------------
The Delaware Corporations Code, certain terms of the Series J Preferred Stock or
Series K Preferred Stock, and our ability to issue the authorized and available
shares of Preferred Stock and Common Stock, each may prevent or delay a takeover
of our company. Thus the holders of Common Stock might not be able to realize a
premium price for their shares.
REGISTRATION RIGHTS
- -------------------
This offering is being registered with the SEC pursuant to a registration rights
agreement with the holders of Series J Preferred Stock and warrants and pursuant
to piggyback registration rights agreements with two holders of Common Stock.
See "Plan of Distribution."
In addition, we have granted demand registration rights to the holders of the
Company's Series K Preferred Stock.
We also have granted piggyback registration rights to holders of shares of
Common Stock, warrants or options. In addition to the shares in this offering,
those shares of Common Stock may become eligible for registration.
TRANSFER AGENT AND REGISTRAR
- ----------------------------
The stock transfer agent and registrar for our common stock is Interwest
Transfer Company, Inc., located at 1981 E. Murray Holladay Road, Salt Lake City,
Utah 84117.
-28-
<PAGE>
DIVIDEND POLICY
- ---------------
Under applicable law, dividends cannot be paid until we have generated earnings.
Also we are prohibited from paying cash dividends to the holders of Common Stock
while any Series J Preferred Stock or Series K Preferred Stock is outstanding.
However, it will be our policy to retain internally generated funds to support
future expansion of our business. Accordingly, even if we do generate earnings,
and even if we are not prohibited from paying dividends, we will not declare or
pay cash dividends on our common stock, at least for the foreseeable future.
INTEREST OF NAMED EXPERTS AND COUNSEL
LEGAL MATTERS AND EXPERT
- ------------------------
Legal Matters
The validity of the issuance of the Common Stock issuable or held by the Selling
Security holders and offered hereby is being passed upon for the Company by
Stradling Yocca Carlson & Rauth, P.C. Members of the firm own shares of our
Common Stock or options to acquire such shares in an aggregate amount of less
than 1% of the number of shares presently outstanding.
Experts
The consolidated financial statements of eSynch Corporation and Subsidiaries as
of December 31, 1999 and for each of the two years in the period ended December
31, 1999, the financial statements of SoftKat,Inc. as of December 31, 1998 and
for each of the two years in the period ended December 31, 1998, and the
financial statements of Kiss Software Corporation as of December 31, 1998, for
the year ended December 31, 1998 and for the period from February 14, 1997 (date
of inception) through December 31, 1997, each included in this Prospectus, have
been audited by Hansen, Barnett & Maxwell, independent certified public
accountants, as indicated in their reports with respect thereto, and are
included herein in reliance upon the authority of such firm as experts in
accounting and auditing.
-29-
<PAGE>
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION
FOR SECURITIES ACT LIABILITIES
eSynch's Restated Certificate of Incorporation requires eSynch to indemnify any
and all persons who may serve or who have served at any time as directors or
officers, or who, at the request of the board of directors of eSynch, may serve,
or at any time have served as directors or officers of another corporation in
which eSynch at such time owned or may own shares of stock, or which it was or
may be a creditor, and the respective heirs, administrators, successors, and
assigns. Indemnification is required to the full extent permitted by the General
Corporation Law of Delaware as it may from time to time be amended. Subject to
that limitation, eSynch is required to provide indemnification against any and
all expenses, including amounts paid on judgment, counsel fees, and amounts paid
in settlement (before or after suit is commenced), actually or necessarily by
such persons in connection with the defense or settlement or any claim, action,
suit, or proceeding in which they, or any of them, are made parties, or a party,
or which may be assessed against them or any of them, by reason of being or
having been directors or officers of eSynch, or such other corporation.
eSynch's Restated Certificate of Incorporation provides that a director of
eSynch shall have no personal liability to eSynch or its stockholders for
monetary damages for breach of fiduciary duty as a director, except (i) for any
breach of a director's duty of loyalty to eSynch or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under section 174 of the General Corporation Law
of Delaware as it may from time to time be amended or any successor provision
thereto (which concerns unlawful payment of dividends or stock redemptions), or
(iv) for any transaction from which a director derived an improper personal
benefit.
The Bylaws of eSynch permit indemnification of persons who were directors,
officers, employees or agents of eSynch or of another enterprise if the person
was serving at the request of the board of directors of eSynch as a director,
officer, employee or agent of that enterprise. The indemnification is permitted
either (a) if the person is successful on the merits in defending the claim or
(b) if indemnification is authorized in the specific instance by eSynch. If
claims are brought in eSynch's name against the indemnified person,
indemnification is permitted only if the person was acting in good faith and in
a manner reasonably believed to be in the best interests of eSynch. If the
person is unsuccessful in defending a claim brought in eSynch's name,
indemnification is only permitted if the court acting in the matter specifically
allows it. eSynch is authorized to advance expenses to a person upon that
person's agreement to repay eSynch if ultimately such person is not entitled to
indemnification.
eSynch has indemnification agreements with its directors and certain officers.
These agreements require us to indemnify the parties to these agreements to the
maximum extent permitted by applicable law and to advance expenses to that party
upon that party's agreement to repay eSynch if ultimately such person is not
entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities Act may
be permitted to our directors, officers and controlling persons pursuant to the
foregoing provisions, or otherwise, we have been advised that in the opinion of
the SEC such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable.
-30-
<PAGE>
DESCRIPTION OF BUSINESS
Introduction
- ------------
eSynch Corporation, a Delaware corporation founded in 1994 (OTC BB:ESYN), is a
developer of Electronic Digital Distribution-TM- (EDD) technology, and is the
forerunner in the video-on-demand systems and solutions. The Company provides
live streaming video, and download capabilities which deliver video and audio on
demand. Live streaming includes both live events and video and audio services
such as continuous radio broadcasts, post television programs and movies.
eSynch's on-demand services allow the users to access stored video and audio
through eSynch's Web site, ChoiceCinema.com. eSynch is a full-service solutions
provider, offering all of the services necessary for video-on-demand, including
production, encoding, up-linking, web site integration, distribution, reporting,
digital conversion and archiving.
The Company has two complementary operational groups focused on media and
technology.
The eSynch Media Group provides broadcasting, video-on-demand and related
services to Internet users.
eSynch Media is fully automated and is the Internet broadcasting and on-demand
delivery service that allows Internet users to stream and download audio and
video-on-demand through the our web site, ChoiceCinema.com. This is an ideal
solution for business-to-business, education, investor relations, and the home
sectors. eSynch's proprietary process known as Electronic Digital Distribution
(EDD) when married to video-on-demand, allows content providers to securely view
movie or audio clips for a preauthorized amount of time or accesses.
eSynch Production Services offer editing, authoring, encoding and compression,
post production services and digitization for various major movie studios,
airlines and others that use digital content. We offer encoding in a number of
digital formats including AVI, JPEG, Microsoft-Registered Trademark- Windows
Media-TM-, MPEG-1,2 and 4, QuickTime-TM-, Real Audio-Registered Trademark-, and
RealVideo-Registered Trademark-. Movie studios and other content owners that
deliver content through the eSynch Media Network can be assured of the highest
quality pictures and audio, while being secure in the knowledge that the
Company's proprietary EDD products will prevent unauthorized copying and
duplication.
The eSynch Technologies Group provides products and services to Internet users
through its two functional areas, Kissco and AtoZware.com.
Kissco is the developer and publisher of various products that are marketed over
the Internet. NetMonitor is typical of Kissco's product set and market plan.
Following its release in early July 1999, ZDNet voted NetMonitor one of their
top ten downloads for 1999. Within the first five months of its existence,
NetMonitor produced over 70 million click through to various eSynch owned web
sites. NetMonitor helps drive Web site traffic to the ChoiceCinema.com web site
so viewers can stream live events. NetMonitor has become an established and
acceptable way of bringing user traffic to the several sites owned by eSynch. In
addition to NetMonitor, Kissco is well known for their Internet advertising and
marketing abilities.
eSynch also offers online shopping through one of its AtoZware.com e-tail store.
AtoZware.com was developed in conjunction with Ingram Micro and offers over
55,000 computer-related products. AtoZware.com is also used to drive traffic to
other sites owned by eSynch. AtoZware offers a vast array of computer hardware
and software products that may be needed to expand and enhance a user's computer
experience.
-31-
<PAGE>
The Market
- ----------
The combined emphasis of the Company's market encompasses Internet software and
Electronic Digital Distribution (EDD). Internet software is focused on high-tech
Internet products that can be sold and distributed electronically as well as
through Company owned distribution channels. With the emergence of broadband,
two way digital cable systems have opened a new venue for EDD, video-on-demand
entertainment and informational services.
Broadband subscribers will have the ability to choose from a number of movies,
programs, and information at any time during the day or night. video-on-demand
entertainment provides Broadband subscribers convenience, control, flexibility
and choice over their viewing options. video-on-demand equates to having the
video rental store right in their home.
With eSynch Media's ChoiceCinema.com, the subscriber has access to "virtual
movie rentals", the ability to select from a vast library of movies, sound
tracks, television and New Releases. Once a subscriber chooses a program, they
have full control of the program. With the touch of a mouse or via remote
control, the selection can be rewound, fast-forwarded, stopped, paused and
restarted. When the viewing window ends so does the rental, so there will never
be late fees for failure to return a movie on time.
eSynch's ChoiceCinema.com is a video-on-demand system that works seamlessly with
the users computer and Broadband connection. With ChoiceCinema.com, users can
browse through hundreds of movies and television shows, and watch previews, and
order movies on demand.
The Company expects to maximize the revenue earning potential of video-on-demand
by offering diverse selections and services, such as advertising, purchasing,
and post programming options. eSynch Media will generate automatic branding and
advertising banners, specific to the client. This unprecedented capability pulls
together video-on-demand, content, technology and marketing into one powerful
system with substantial revenue earning potential.
Products and Services
- --------------------------------------
We also offer proprietary software, including:
* Modem Wizard and NetMonitor
* Undo & Recover Toolbox
* WebSnake
* CoolCat
* Speed Surfer Internet Toolbox
Modem Wizard is our best-selling software utility. It is an Internet optimizer,
troubleshooter, and fix-it tool that works on any Internet connection (including
cable modem, DSL, and T1). In May, we began shipping Modem Wizard 4.0. Recently
we also announced and began shipping Modem Wizard, version 4.5, with several
added features.
NetMonitor is a stand-alone program within Modem Wizard. In just six weeks, our
offer of free downloads of NetMonitor generated 15 million visits to our web
site and approximately 7 million banner views. The increase in web site visits
produced a record month for eSynch's Internet sales. In the beginning of June,
NetMonitor premiered on ZDNet, and within 48 hours, had amassed over 50,000
downloads---making it the #1 download of the week on the ZDNet web site. Shortly
thereafter, due to the massive response our free NetMonitor received, we
partnered with Ziff-Davis (NYSE: ZD) to distribute our free NetMonitor, through
CD-ROM to all Ziff-Davis publications (including PC Magazine, PC Computing,
etc.)
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<PAGE>
Undo & Recover Toolbox is a utility to undo step-by-step any changes the user
has made to computer setup files. In the August issue of PC World, Undo &
Recover Toolbox was given a "Best Buy" award by the editors at the publication.
WebSnake automates Web searching, filters Web data and retrieves specified
information, so you can review it later at PC speeds, bypassing Web bottlenecks.
CoolCat is an easy-to-use HTML editor, with professional features such as
comprehensive project-wide document management with integrated FTP, a built-in
preview browser, and extended support for HTML layout features.
Speed Surfer Internet Toolbox is a browser optimization and web security utility
that provides the user with an enhanced Internet experience.
We face intense competition in the software utilities market, including from
much larger, well-financed software developers and publishers. Microsoft
Corporation, for instance, has historically succeeded at incorporating utilities
into its operating systems. . Numerous other software companies compete in the
software utilities area, and numerous software utilities are available without
charge from their providers.
Competition
- -----------
The markets for the Company's Internet offerings are highly competitive and are
characterized by pressures to reduce prices, incorporate new features and
accelerate the release of new versions. A number of companies currently offer
services or products that compete directly or indirectly with one or more
aspects of the Company's offerings.
Existing or new competitors could develop a service or product which competes
with all or some aspects of those the Company offers. Many current and potential
competitors are larger, better established, and have greater financial resources
than the Company. These include Microsoft, AT&T, IBM, JVC, Matsushita
Electronics Corporation, Broadcast.com, NTT, Philips, Sony, US West, Inc. and
Enron Corporation. Such competitors have the ability to more aggressively market
and price their products than the Company.
We also face other competitors which are discussed below. We believe, however,
that due to the unique combination of our proprietary technology, our
comprehensive service offerings and our dedication of resources in targeted
areas, we can maintain our position as a leading provider of EDD.
VideoSeeker is an on-demand video service owned by NBC, which has demonstrated
that it is a leader among traditional media companies and broadcasters in
Internet and new media businesses. NBC maintains a number of Internet and
enhanced broadcasting services, including an equity stake in Snap!, the internet
portal service operated in partnership with CNET.
Pixelon offers a total technology system that delivers full screen TV video and
audio content to viewers worldwide over the Internet. Content on Pixelon.com
includes sports, special interest programming and news clips.
Intervu is a service provider for Internet video delivery solutions. The company
offers turnkey solutions to deliver live and on-demand audio and video streaming
over the Internet. The company's streaming media services are utilized for
different types of business uses including entertainment, news reporting,
corporate communications, investor relations and distance learning.
OpenTV Corp. designs, develops, markets and supports software and related
components to enable digital interactive television worldwide.
-33-
<PAGE>
GoTo.com has created and operates an online marketplace that presents an
alternative way of finding a Web site of interest. In contrast to a search
engine, GoTo claims to be able to provide a faster, easier and more relevant way
of finding information on the Web.
On2.com offers full-motion, full-screen, television-quality video over the web
and claims to be building a revolutionary entertainment network exclusively for
broadband consumers covering such areas interests as movies, music, travel,
games and sports.
Other competitors in parallel markets include Madge Networks, headquartered in
the Netherlands, a global networking and Internet services provider specializing
in managed networks, web and application hosting, enterprise LAN products and
video networking.
Earlier this year, AOL and Time Warner released information regarding a merger
to further develop video-on-demand. By adding interactivity to television,
advertisers will have the chance to market their products simultaneously on
television and the Internet while reaching the same audience.
There are several smaller companies attempting to promote or develop
video-on-demand. To date, we recognize no other companies as major competitors.
However, we anticipate additional joint ventures and new companies to emerge.
Proprietary rights, patents, trademarks and copyrights
- ------------------------------------------------------
The Company regards certain features of its products and services 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 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 current 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
- ---------
As of March 2000, eSynch had 30 full-time employees and no part-time employees.
Of our full-time employees, 5 were in marketing and sales, 6 were in senior
management, 6 were in administration, 8 were in development and 5 were in
operations. We also plan to hire approximately 20 people to handle customer
support functions.
We believe that our relations with our employees are satisfactory. We are not a
party to any collective bargaining agreements and we have never experienced any
work stoppage. As eSynch continues to grow and introduce more products and
services, we expect to hire additional personnel.
Company History
- ---------------
We were incorporated in Delaware on December 21, 1988, as Tri-Nem, Inc. On
October 5, 1994, the Company changed its name to Innovus Corporation. On
November 9, 1998, the Company changed its name to eSynch Corporation.
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<PAGE>
On August 5, 1998, we were acquired through a reverse merger agreement with
Intermark Corporation. Our headquarters was moved from Utah to Southern
California.
During the first half of 1998, the Innovus operations were reduced dramatically
in order to conserve cash. We stopped manufacturing or developing our multimedia
authoring software. After the acquisition, we focused our efforts on debt
reduction and winding up the former business of Innovus Multimedia Corporation.
We began a new business direction with the software publishing and distribution
business of Intermark and development of its proprietary Electronic Digital
Delivery technology.
In November 1998, all of the shares of common stock were reclassified and
combined in a one-for-ten reverse stock split.
In November 1998, we acquired the stock of SoftKat, Inc. SoftKat was sold in May
1999 which was consistent with the Company's decision to further strengthen its
focus of Electronic Software distribution and e-commerce. We believed that the
SoftKat business could not be economically converted to one that would emphasize
electronic software distribution over traditional physical goods distribution,
and determined that SoftKat's financial condition and prospects generally were
poorer than anticipated, including matters that resulted in litigation that were
not known to the Company prior to the SoftKat acquisition.
On April 1, 1999, we acquired the stock of Kiss Software Corporation (KISSCO),
of Newport Beach, California. Kissco develops, publishes and sells Internet
utility products.
On September 30, 1999, we acquired the stock of Oxford Media Corporation, a
leading designer and developer of digital technologies for video-on-demand.
Recent Announcements
- --------------------
In July 1999, we entered a licensing agreement with Ingram Micro,
headquartered in Santa Ana, Calif., one of the largest wholesale providers of
technology products and services. Under the agreement, eSynch is entitled to
offer Ingram Micro's entire product line through the eSynch e-commerce
system. Our associated web site is in the development and testing phase. We
anticipate intense competition from the numerous competitors in this area.
In November 1999, Modem Wizard 4.5 was named one of the 100 best home office
products of 1999 by Home Office Computing, the technology and productivity
magazine for telecommuters, entrepreneurs, and the rest of today's work-at-home
workforce. Modem Wizard was one of only four winners in the category of
Communication Tools/Remote Access Software. Winners were picked based on value,
performance, ease of use, innovation, and suitability for home offices.
On January 10, 2000, we announced that we have teamed with Jungle.com, the
largest online computer, software, music and video retailer in the United
Kingdom, to sell our full line of Kissco-branded products. Under the
partnership, Kissco's award-winning products -- Modem Wizard 4.5, Speed
Surfer Internet Toolbox, Undo & Recover Toolbox, CoolCat and WebSnake - are
being sold via electronic download directly from the Jungle.com Web site,
providing the Company distribution of products throughout Europe.
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<PAGE>
On January 10, 2000, we announced our NetMonitor product had been selected by
ZDNet's popular downloads Web site (www.zdnet.com/downloads) as a Top 100
Download for 1999. ZDNet is the leading Web destination for people who want to
buy, use and learn about technology. When first released, the new version 2.5
was awarded five stars from ZDNet editors -- winning it a prestigious spot on
the ZDNet All-Star List. With nearly 200,000 downloads during it debut week on
ZDNet's LaunchPad, NetMonitor also garnered a No. 1 download honor during its
premiere week.
In February, 2000, we entered into two Letters of Intent to acquire HyperDisk
Media Corporation and Post Modern Edit, LLC. Both acquisitions are pending at
the date hereof.
On February 8, 2000, we announced a partnership with Interep Interactive (Nasdaq
NM: IREP), the largest independent Internet sales and marketing company, to
increase advertising revenue and enhance visibility of the Company's Web sites.
Under the partnership, Interep Interactive, a division of Interep, is expanding
awareness of eSynch through various media including Web site and radio
promotion.
On March 20, 2000, we announced an agreement to create a new interactive
streaming media channel for WomansAct.com using our proprietary eSynchTIME(TM)
(Total Internet Media Engine) technology. WomansAct.com is a leading online
resource targeted at women that provides personal financial information and
education. Using eSynchTIME, WomansAct will be able to meet their goal of
keeping financial solutions simple through new efficient technology. The
streaming media channel is currently under development by eSynch.
Costs to comply with environmental laws
- ---------------------------------------
We have not incurred any substantial cost related to complying with any
environmental laws (federal, state and local) and do not foresee any such
substantial costs.
More information available from the SEC
- ---------------------------------------
We file reports with the Securities and Exchange Commission. We have filed
reports with the SEC on Forms 10-KSB, 10-QSB, 8-K, and Schedule 14A. The SEC
maintains an Internet site that contains reports, proxy and information
statements, and other information regarding us and other issuers that file
electronically with the SEC. The address of the site is http:\\www.sec.gov.
Also, you may read and copy any materials we file with the SEC at the SEC's
Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The
public may obtain information on the Public Reference Room by calling the SEC at
1-800-SEC-0330.
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<PAGE>
Governmental Regulation and Legal Uncertainties
- -----------------------------------------------
eSynch is currently subject to various laws and regulations relating to our
business. Few laws or regulations are currently directly applicable to our
current and expected activities on the Internet. However, new laws and
regulations relating to the following areas may be adopted because of the
Internet's popularity and growth:
* Online content.
* User privacy.
* Taxation.
* Access charges.
* Copyrights.
* Characteristics and quality of products and services.
* Consumer protection.
Such government regulation may impose additional burdens on our business. They
may also impede the growth in Internet use and thereby decrease the demand for
our products and services or otherwise have a material adverse effect on our
business, operations and financial condition.
Additionally, U.S. and foreign laws applicable to e-commerce or Internet
communications are becoming more prevalent. These laws have been recently
enacted and there is uncertainty regarding their impact on the marketplace. Any
new legislation or regulation regarding the Internet, or the application of
existing laws and regulations to the Internet, could materially adversely affect
us. If we were alleged to violate federal, state or foreign civil or criminal
laws, even if we could successfully defend such claims, it could materially
adversely affect us.
Several telecommunications carriers are supporting regulation of the Internet by
the FCC in the same manner that the FCC regulates other telecommunications
services. These carriers have alleged that the growing popularity and use of the
Internet has burdened the existing telecommunications infrastructure, resulting
in interruptions in phone service. Local telephone carriers such as Pacific
Bell, a subsidiary of SBC Communications Inc., have petitioned the FCC to
regulate Internet service providers in a manner similar to long-distance
telephone carriers and to impose access fees on Internet service providers. Any
such regulations could substantially increase the costs of communicating on the
Internet. This, in turn, could slow the growth in Internet use and thereby
decrease the demand for our products and services or otherwise have a material
adverse effect on our business, financial condition and operating results.
-37-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS
The following Selected Financial Data should be read in conjunction with the
financial statements and notes thereto found elsewhere herein.
The following discussions contain forward-looking statements regarding eSynch
and its wholly owned subsidiaries, its business, prospects and results of
operations which are subject to certain risks and uncertainties posed by many
factors and events that could cause eSynch's actual business and results of
operations to differ materially from those that may be expressed or implied by
such forward-looking statements. Additional risks and uncertainties can be
foreseen as a result of the proposed acquisitions of Post Modern Edit and
HyperDisk Media Inc. which are expected to be completed in March, 2000.
Overview
- --------
eSynch Corporation, a Delaware corporation founded in 1994 (OTC BB:ESYN), is a
developer of Electronic Digital Distribution (EDD) technology, and is the
forerunner in video-on-demand systems and solutions. The Company provides live
streaming video and download capabilities which deliver video and audio on
demand. Live streaming includes both live events and video and audio services
such as continuous radio broadcasts, post television programs and movies. The
Company's on-demand services allow the users to access stored video and audio
through the Company's Web site, ChoiceCinema.com. The Company is an all-in-one
solutions provider, offering the full range of video-on-demand services
including production, encoding, up-linking, web site integration, distribution,
reporting, digital conversion and archiving.
The Company has two complementary divisions:
eSynch Media Group
- ------------------
eSynch Media-TM -- eSynch Media is the Company's fully automated Internet
broadcasting and video-on-demand service division allowing Internet users to
stream and download audio and video on demand from ChoiceCinema.com and other
sites. This is an ideal solution for business-to-business markets, education,
investor relations, and the home sector. The Company's proprietary distribution
process, Electronic Digital Distribution (EDD), and its video-on-demand
facilities allow content providers the secure feeling that a movie or audio clip
can be delivered and viewed for a predetermined amount of time or accesses.
Production Services - eSynch Production Services offers editing, authoring,
encoding and compression, post production services and digitization for movie
studios and others that utilize digitized video for entertainment, education or
promotion. Production Services offers encoding in a number of digital formats,
including AVI, JPEG, Microsoft-Registered Tradmark- Windows Media-TM-, MPEG-1,2
and 4, QuickTime-TM-, Real Audio-Registered Tradmark-, and RealVideo-Registered
Tradmark-. Movie studios that deliver content through the eSynch Media Network
can be assured of the highest quality pictures and audio, while being secure in
the knowledge that the Company's proprietary EDD products will prevent
unauthorized copying and duplication.
-38-
<PAGE>
eSynch Technologies Group
- -------------------------
Kissco-TM -- Kissco provides a variety of software products and services
including its highly acclaimed NetMonitor. NetMonitor has become an established,
successful and acceptable way of driving traffic to one of several web sites
owned by eSynch. In the case of ChoiceCinema.com, NetMonitor attracts viewers
who can stream live events to their desktop. Following the release of NetMonitor
in July 1999, ZDNet voted the product one of their top ten downloads for 1999.
Within the first five months of its existence, NetMonitor produced over 70
million click throughs to various eSynch owned web sites. In addition to
NetMonitor, Kissco is well known for its Internet advertising and marketing
abilities.
AtoZware.com-TM -- eSynch also offers online shopping through one of its valued
web sites, AtoZware.com. AtoZware.com has been developed in conjunction with
Ingram Micro to offer over 55,000 computer-related products. AtoZware.com is
also used to drive traffic to specific sites owned by eSynch. AtoZware's vast
array of computer hardware and software products provides customers of all
levels from novice to expert with a complete on-line computer store.
Revenue
- -------
The Company has generated revenue from services and technology software
delivered over the Internet and will generate future revenue from video related
services, including digital production, live and on-demand video, and web site
integration.
Internet and Software Licenses: The company derives revenue from Internet
services, software, and e-commerce via the Internet. The company typically
bundles varying product and service offerings that it sells through its web
sites, email databases and Internet partner sites.
New Media: The company derives revenue by delivering live, on-demand video and
audio content over the Internet and by providing related services, including
production, post production, compression, encoding, web site design and
integration, distribution, reporting, advertising, sponsorships, co-branding,
e-commerce, revenue sharing and partnerships. The fees can vary from a fixed
monthly charge to a per item charge depending on the bundle of services provided
and agreed upon. To the extent that the customer exceeds agreed upon storage and
delivery limits, eSynch will charge variable fees based upon usage, time and
incremental services used by the customer.
Advertising: The Company derives advertising revenue based on traffic and unique
visitors to our web sites and use of our micro portal products.
Cost Of Revenue
- ---------------
Cost of Internet and Software License Fees: Cost of license fees includes costs
of product media, duplication, manuals, packaging materials, amounts paid for
licensed technology, and fees paid to third-party vendors for order fulfillment.
Cost of service revenue includes the cost of in-house and contract personnel
providing support and other services and expenses incurred in expanding our
streaming media hosting services.
Cost of New Media: Cost of new media consists of production expense, which
includes salaries and costs associated with event production, bandwidth and
monthly fees paid to Internet Service Providers and depreciation of servers
included in the Company's global network.
Cost of Advertising Revenue: Cost of advertising revenue includes the cost of
personnel associated with content creation and maintenance and fees paid to
third parties for content and reporting included in our websites.
-39-
<PAGE>
Expenses
- --------
eSynch expenses consist of system development, sales and marketing, and general
and administrative expenses. System development expenses consist primarily of
salaries and payroll related expenses, fees to outside contractors and
consultants, allocation of rent and depreciation on equipment. Sales and
marketing and general and administrative expenses consist of salaries and
related benefits, commissions, promotional expenses, public relations services,
professional services, stock issued for services, stock-based compensation due
to the issuance of stock options, amortization of goodwill, and general
operating costs.
Results of Operations
- ---------------------
The Company has incurred losses from operations and negative cash flows from
operating activities and has accumulated a deficit at December 31, 1999 in the
amount of $15,507,000. The Company's net loss of $8,677,000 in 1999 included
non-cash operating expenses of $5,961,000 for Stock Based Compensation and
Services, and Amortization of Goodwill and Licenses, and $204,000 for impairment
on assets to be sold with the remaining loss being $2,513,000. The 1998 net loss
of $4,978,000 included $934,000 for Stock Based Compensation and Services and
amortization and $2,324,000 for impairment on assets to be sold with the
remaining loss being $1,720,000.
<TABLE>
<CAPTION>
Year Ended December 31, 1999 December 31, 1998
----------------- -----------------
<S> <C> <C>
Sales $ 988,485 $ 203,571
Cost of Sales 529,576 156,617
Gross Profit 458,909 46,954
Operating Expenses
General and Administrative 2,925,665 1,649,173
Stock Issued for Services 1,685,000 280,877
Stock Based Compensation 2,975,309 69,290
Amortization of Goodwill 1,300,626 228,330
Interest 81,346 132,641
Amortization of Debt Discount 355,567
Impairment loss on assets to be sold 203,690 2,323,841
Loss Before Extraordinary Item (8,712,727) (4,992,765)
Debt Forgiveness 35,234 14,423
Net Loss $ (8,677,493) $ (4,978,342)
Preferred Dividends (1,178,065)
Loss Applicable to Common Shares $ (9,855,558) $ (4,978,342)
</TABLE>
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
- ---------------------------------------------------------------------
Net sales were $988,485 in 1999 compared to $203,571 in 1998. 1998 included
$109,000 from SoftKat operations for the period November 17, 1998 through
December 31, 1998. The increased revenue in 1999 was a result of the Kiss and
Oxford acquisitions.
The cost of product sold in 1999 was 54% compared to 77% in 1998. This was due
to the sales of the higher margin Kiss product mix as compared to the SoftKat
product set offered in 1998.
-40-
<PAGE>
General and administrative expenses were $2,925,665 in 1999 compared with
$1,649,173 in 1998. The increase was due to expenses for operating acquired
companies of $868,000, increases in outside consulting and services of
$344,000 and increase in salaries of $156,000. In 1999, interest expense was
$81,346 versus $132,641 in 1998. In 1998 the costs associated with the
beneficial conversion feature of notes payable was $355,567 while there was
no such expense in 1999. In addition, cost associated with the issuance of
stock for services was $1,685,000 in 1999 as compared with $280,877 in 1998.
Stock-based compensation was $2,975,309 in 1999 compared with $69,290 in 1998.
Amortization of goodwill and licenses in 1999 was $1,300,626 and represented
amortization of the goodwill generated by the Kiss Software and the software
license obtained in Oxford Media acquisitions compared to $228,330 in 1998 which
represented amortization of the goodwill generated by the SoftKat acquisition of
$6,882,300. No amortization of goodwill associated with SoftKat was taken in
1999 since it was written off in 1998 as Impairment of Assets to be sold in the
net amount of $2,323,841. In 1999, $230,690 was taken as an Impairment of Asset
loss associated with the sale of SoftKat. SoftKat was sold on May 25, 1999 to a
third party for $50,000 cash and a note receivable for $100,000 which resulted
in the above loss.
Liquidity and Capital Resources
- -------------------------------
At December 31, 1999 the Company had $1,320,000 of cash and cash equivalents and
a deficit in working capital (current liabilities in excess of current assets)
of $1,260,000. Included in current liabilities is an accrual for expenses of
$1,294,000 for matters related to Innovus and Intermark prior to the acquisition
in August 1998. No amounts have been assessed by any creditors. The Company
issued 310,377 shares for net cash and notes receivable (later paid) in the
amount of $636,000, 972,500 shares for services totaling $1,699,000 and 228,322
shares for retirement of Notes and related interest in the amount of $584,000.
In addition the Company issued Preferred Stock for gross proceeds of $4,625,000
($500,000 received in January 2000, see below).
In addition to the above in 1999, the Company issued 199,999 shares of common
stock for conversion of Series I Preferred Stock valued at $600,000, 1,428,134
for the acquisition of Kiss Software valued at $3,568,907, 450,000 shares for
the acquisition of Oxford Media Corporation valued at $720,000, 9,303 in
settlement of a royalties claims at $31,526 and the exercise of stock options
for 17,000 shares in the amount of $26,750.
The Company estimates that during the fourth fiscal quarter of 1999 it was using
$225,000 more cash each month than was being generated by operations. The
Company intends to raise additional capital to fund continuing operations and
acquisitions.
In August, September and October 1999, the Company received proceeds in the
aggregate amount of $2,351,096, net of $273,904 cash offering cost for 275
shares of Series J Convertible Preferred Stock and accompanying warrants.
In December 1999 and January 2000, the Company received proceeds in the
aggregate amount of $1,925,000, net of $75,000 cash offering cost for 212.5
shares of Series K Convertible Preferred Stock and accompanying warrants.
-41-
<PAGE>
DESCRIPTION OF PROPERTY
In 1999, our headquarters was moved to a single-tenant facility in Tustin,
California of approximately 30,000 square feet under a long-term lease.
Management believes that the space will adequately provide for our warehousing
and distribution requirements, as well as expansion of our publishing, marketing
and sales operations. The condition of the property is good. The property is
located in an office and industrial area with nearby access to freeways and
airports.
-42-
<PAGE>
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On April 1, 1999, the Company acquired Kiss Software Corporation, a California
corporation ("Kissco"). Donald C. Watters, Jr. was a major shareholder of Kissco
and received in that acquisition 381,270 shares of Common Stock, and the Company
also assumed a Kissco option entitling Mr. Watters to acquire 48,568 shares of
Common Stock at a price of $ 2.11 per share. Robert B. Way was also a
shareholder of Kissco and received in the acquisition 32,430 shares of Common
Stock, and the Company also assumed a Kissco option entitling Mr. Way to acquire
19,427 shares of Common Stock at $ 2.11 per share.
On September 30, 1999, the Company acquired Oxford Media Corporation, a Delaware
corporation, for 450,000 shares of the Company's Common Stock. Oxford Media
Corporation was controlled by Mr. Norton Garfinkle. In addition, for consulting
services and services as a director of the Company, Mr. Garfinkle has received
warrants to purchase 350,000 shares of Common Stock.
On March 27, 2000, the Company filed a Registration Statement on Form S-8 for
the purpose of registering a Reoffer Prospectus associated with certain Stock
Option Agreements, Warrants, and Consulting Agreements. Certain executive
Officers and Directors plus two unrelated parties are named as Selling
Stockholders. The Company is registering 505,700 shares, 300,000 shares and
18,000 shares related to Stock Options, Warrants, and Consulting Agreements,
respectively.
CHANGE IN CONTROL
On August 5, 1998, the Company finalized an Agreement and Plan of Share Exchange
with Intermark Corporation ("Intermark"). Under the Agreement, as amended, the
shareholders of Intermark exchanged all of the outstanding capital stock of
Intermark for 1,033,669 shares of common stock of the Company and for 78,706
shares of the Company's newly created Series H Preferred stock convertible into
approximately 4,427,213 shares of Common Stock. In addition, the Company assumed
Intermark options which are now exercisable to purchase up to 631,800 shares of
the Company's common stock.
On May 8, 1998, after the close of business, the Company had entered into an
Agreement and Plan of Share Exchange dated as of May 8, 1998 (the "Agreement")
by and among the Company and Intermark Corporation, a California corporation
("Intermark"), and the securityholders of Intermark Corporation ("Exchanging
Securityholders"). On June 17, 1998, the Company entered into the First
Amendment of Agreement and Plan of Share Exchange dated as of May 8, 1998. On
July 30, 1998, the Company entered into the Second Amendment of Agreement and
Plan of Share Exchange dated as of May 8, 1998 ("Second Amendment").
The closing of the transactions contemplated by the Agreement ("Closing")
occurred on August 5, 1998. The Closing resulted in a change in control of the
Company. The Agreement, as amended by the First Amendment and the Second
Amendment, provided for the Exchanging Securityholders to deliver and exchange
all of the outstanding capital stock of Intermark and options or other rights to
purchase such capital stock for capital stock of the Company aggregately having
voting power equal to 77.5% of the capital stock of the Company aggregately
outstanding as of immediately after the Closing. Accordingly Messrs. Hemingway,
Budd and Hutt became the beneficial owners of approximately 62% of the Company's
capital stock as of the Closing. Intermark became a wholly-owned subsidiary of
the Company upon the Closing.
-43-
<PAGE>
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Common Stock is currently quoted on the OTC Bulletin Board, Symbol ESYN. The
following table reflects the high and low closing bid quotations reported by the
OTC Bulletin Board. Such prices represent inter-dealer quotations, do not
include markups, markdowns, or commissions and may not reflect actual
transactions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C>
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 Ended December 31, 1999
------------------------------------------
January 1 to March 31, 1999 $ 4.87 $ 1.00
April 1 to June 30, 1999 $ 3.50 $ 2.06
July 1 to September 30, 1999 $ 4.75 $ 1.69
October 1, 1999 to December 31, 1999 $ 7.25 $ 2.81
Year Ending December 31, 2000
------------------------------------------
January 1 to March 30, 2000 $ 15.19 $ 5.62
</TABLE>
The Company has not paid any cash dividends since its inception. The Company is
prohibited from paying dividends on its Common Stock while it has outstanding
any shares of Series J Preferred Stock or Series K Preferred Stock and until it
has surplus funds legally available. The Company currently intends to retain
future earnings in the operation and expansion of its business and does not
expect to pay any cash dividends in the foreseeable future.
From November, 1995 to November, 1997, the Company's Common Stock was listed on
the Nasdaq SmallCap market. In November, 1997, the Company was de-listed from
Nasdaq. The Over-The-Counter Bulletin Board is a quotation medium, and should
not be confused with The Nasdaq Stock Market(SM).
As of March 30, 2000 there were approximately 2100 beneficial owners of the
Common Stock of which approximately 500 are holders of record.
-44-
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth compensation received by the Company's Chief
Executive Officer and by each of the persons who were, for the fiscal year ended
December 31, 1999, the other four most highly compensated executive officers of
the Company whose total compensation during that year exceeded $100,000 (the
"Named Officers"), for the three fiscal years ended December 31, 1999 or for the
shorter period during which the Named Officer was compensated by the Company.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM COMPENSATION
------------------------------
ANNUAL COMPENSATION AWARDS PAYOUTS
------------------------------ --------------------- -------
NAME AND RESTRICTED SECURITIES
PRINCIPAL OTHER ANNUAL STOCK UNDERLYING LTIP ALL OTHER
POSITION YEAR SALARY BONUS COMPENSATION(1) AWARD(S) OPTIONS(#) PAYOUTS COMPENSATION(2)
- ------------------- ---- ------ ----- --------------- ---------- ----------- ------- ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Thomas C. Hemingway 1999 $150,000 250,000 shs. $350,000
CEO 1998 $ 88,789 292,500 shs. -
Donald C. Watters 1999 $112,500 700,000 shs. $530,000
President
James H. Budd 1999 $115,000 - -
Vice President 1998 $ 52,868 117,000 shs. -
T. Richard Hutt 1999 $115,000 - -
Vice President 1998 $ 64,281 117,000 shs. -
Robert B. Way 1999 $ 82,500 250,000 shs. $234,500
Vice President
David P. Noyes 1999 $116,894 500,000 shs. $337,067
CFO
</TABLE>
(1) Perquisites and other personal benefits did not for any Named Officer in
the aggregate equal or exceed the lesser of $50,000 or 10% of the total of
annual salary and bonus reported in this table for such person.
(2) Represents the difference between the exercise price and the fair value at
the date of grant of the stock options.
-45-
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company has an employment agreement with each Executive Officers listed
below. The terms of those employment agreements are summarized in the following
table:
<TABLE>
<CAPTION>
CURRENT BASE OPTION OTHER BENEFITS DUE ON
NAME COMPENSATION GRANT BENEFITS TERMINATION
- ------------------- ------------ -------- ------------- ----------------------------------
<S> <C> <C> <C> <C>
Thomas C. Hemingway $150,000 250,000 Any If he is terminated by the Company
CEO at $1.00 benefits without cause, he is paid an amount
each, for other equal to 12 months' base salary and
fully officers, all other benefits and perquisites
vested and 3 weeks continue for 12 months and
vacation the Company will be
per year required to repurchase
all his stock and options
at the 30-day average market price.
Donald Watters, Jr. $150,000 250,000 Any If he is terminated by the Company
President and COO at $1.00 each, benefits without cause, he is paid an amount
fully vested for other equal to 12 months' base salary and
and 450,000 officers, all other benefits and perquisites
shares and 3 weeks continue for 12 months and
at $0.50 vacation the Company will be
each, per year required to repurchase
fully vested all his stock and options
at the 30-day average market price.
James H. Budd $130,000 Any If he is terminated by the Company
Vice President benefits without cause, he is paid an amount
for other equal to 3 months' base salary and
officers, all other benefits and perquisites
and 2 weeks continue for 3 months and all stock
vacation options held by him vest and
per year become exercisable.
Robert Way $110,000 250,000 Any If he is terminated by the Company
Vice President at $1.00 each, benefits without cause, he is paid an amount
fully vested for other equal to 3 months' base salary and
officers, all other benefits and perquisites
and 3 weeks continue for 3 months and all stock
vacation options held by him vest and
per year become exercisable.
T. Richard Hutt $130,000 Any If he is terminated by the Company
Vice President benefits without cause, he is paid an amount
for other equal to 3 months' base salary and
officers, all other benefits and perquisites
and 2 weeks continue for 3 months and all stock
vacation options held by him vest and become
per year exercisable.
David P. Noyes $150,000 250,000 at Any If he is terminated by the Company
CFO $1.00 each, benefits without cause, he is paid an amount
fully vested, for other equal to 6 months' base salary and
and 250,000 officers all other benefits and perquisites
at $1.00 each, and 3 weeks continue for 6 months and all stock
vesting vacation options held by him vest and become
ratably over per year exercisable.
two years
</TABLE>
-46-
<PAGE>
OPTION GRANTS DURING FISCAL 1999
The following table sets forth information on all grants of stock
options during the fiscal year ended December 31, 1999, to Named Officers:
OPTION GRANTS TABLE
OPTION GRANTS IN FISCAL YEAR 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
-------------------------------------------------- REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE
UNDERLYING EMPLOYEES EXERCISE APPRECIATION FOR
OPTIONS IN FISCAL PRICE EXPIRATION OPTION TERM($)(3)
NAME GRANTED YEAR(1) ($/SHARE) DATE(2) 5% 10%
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Thomas C. Hemingway 250,000 10.6% $1.00 Mar, 2009 $1,827,336 $2,882,452
Donald C. Watters 48,568 (4) 2.1% $2.11 Feb, 2003 $ 199,209 $ 232,970
250,000 10.6% $1.00 Mar, 2009 $1,827,336 $2,882,452
450,000 19.2% $0.50 Mar, 2009 $3,644,795 $5,749,324
David P. Noyes 500,000 21.3% $1.00 Sep, 2009 $3,751,353 $6,073,291
Robert B. Way 19,427 (4) 0.8% $2.11 Feb, 2008 $ 102,276 $ 153,365
250,000 10.6% $1.00 Apr, 2009 $1,835,096 $2,906,935
</TABLE>
- ---------
(1) Options to purchase an aggregate of 1,915,000 shares of common stock were
granted by the Company to employees, including the Named Officers, during
the fiscal year ended December 31, 1999. In addition, options to purchase
163,187 shares of common stock were assumed in the Kiss Software
acquisition. Subsequently, a total of 69,427 options expired or were
voided.
(2) Options held by the Named Officers have a term of 5 and 10 years, subject
to earlier termination in certain events related to termination of
employment.
(3) These columns present hypothetical future values of the stock obtainable
upon exercise of the options net of the options' exercise price, assuming
that the closing market price of the Company's common stock, as reported
on the OTC Bulletin Board on December 31, 1999, appreciates at a 5% and
10% compound annual rate over the term of the options. The 5% and 10%
rates of stock price appreciation are presented as examples pursuant to
the rules and regulations of the Securities and Exchange Commission
("SEC") and do not necessarily reflect management's estimate or projection
of the Company's future stock price performance. The potential realizable
values presented are not intended to indicate the value of the options.
(4) Stock options assumed by the Company that had been granted by Kiss
Software Corporation. Each option is exercisable in full.
-47-
<PAGE>
OPTION EXERCISES IN FISCAL 1999 AND YEAR-END OPTION VALUES
The following table sets forth information concerning stock options
which were exercised during, or held at the end of, fiscal 1999 by the Named
Officers:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES VALUE AT FISCAL YEAR END(#) AT FISCAL YEAR END($)(1)
ACQUIRED ON REALIZED -----------------------------------------------------
NAME EXERCISE ($)(1) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Thomas C. Hemingway - - 542,500 - $2,526,613 -
Donald C. Watters - - 748,568 - $3,632,730 -
James H. Budd - - 117,000 - $ 548,145 -
T. Richard Hutt - - 117,000 - $ 548,145 -
David P. Noyes - - 312,500 187,500 $1,445,313 $867,187
Robert B. Way - - 269,427 - $1,224,342 -
</TABLE>
- ------------
(1) Market value of underlying securities at exercise date or year end, as
the case may be, minus the exercise or base price of "in-the-money"
options. The value of options is based on the closing sale price for the
Company's common stock as of December 31, 1999 as reported on the OTC
Bulletin Board, which was $5.625, minus the exercise price.
-48-
<PAGE>
ESYNCH CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
ESYNCH CORPORATION AND SUBSIDIARIES
Report of Independent Certified Public Accountants 50
Consolidated Balance Sheet - December 31, 1999 51
Consolidated Statements of Operations for the Years Ended
December 31, 1999 and 1998 52
Consolidated Statements of Stockholders' Deficit for the
Years Ended December 31, 1999 and 1998 53
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1999 and 1998 54
Notes to Consolidated Financial Statements 55
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 69
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the Year Ended December 31, 1999 70
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the Year Ended December 31, 1998 71
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements 71
SOFTKAT, INC.
Report of Independent Certified Public Accountants 73
Balance Sheet - December 31, 1998 74
Statements of Operations for the Years Ended
December 31, 1998 and 1997 75
Statements of Stockholders' Deficit for the
Years Ended December 31, 1997 and 1998 76
Statements of Cash Flows for the Years
Ended December 31, 1998 and 1997 77
Notes to Financial Statements 78
KISS SOFTWARE CORPORATION
Report of Independent Certified Public Accountants 82
Balance Sheet - December 31, 1998 83
Statements of Operations for the Year Ended
December 31,1998 and for the Period from February 14,
1997(Date of Inception) through December 31, 1997 84
Statements of Stockholders' Deficit for the Period
from February 14,1997 (Date of Inception) through
December 31, 1997 and for the Year Ended December 31, 1998 85
Statements of Cash Flows for the Year Ended December 31,
1998 and for the Period from February 14, 1997
(Date of Inception) through December 31, 1997 86
Notes to Financial Statements 87
</TABLE>
-49-
<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 sheets of eSynch
Corporation and Subsidiaries as of December 31, 1999 and 1998 and the related
consolidated statements of operations, stockholders' equity (deficit), and cash
flows for the years then ended. 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, 1999 and 1998 and the results of their
operations and their cash flows for the years then ended in conformity with
generally accepted accounting principles.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 3, 2000
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<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
------------- -------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash..................................................................... $ 1,319,971 $ 1,413
Accounts receivable...................................................... 19,153 -
Inventory................................................................ 15,943 13,693
Receivable from officers................................................. 24,296 -
Prepaid expense.......................................................... 21,814 -
------------- -------------
TOTAL CURRENT ASSETS.................................................. 1,401,177 15,106
------------- -------------
EQUIPMENT.................................................................... 679,438 162,194
Less accumulated depreciation............................................ (57,800) (109,988)
------------- -------------
NET EQUIPMENT............................................................ 621,638 52,206
------------- -------------
ASSETS TO BE SOLD - PRIMARILY GOODWILL....................................... - 4,552,847
GOODWILL, NET OF ACCUMULATED AMORTIZATION.................................... 4,142,901 -
OTHER ASSETS, NET OF ACCUMULATED AMORTIZATION................................ 156,948 -
------------- -------------
TOTAL ASSETS................................................................. $ 6,322,664 $ 4,620,159
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY(DEFICIT)
CURRENT LIABILITIES
Trade accounts payable................................................... $ 443,164 $ 412,717
Accrued liabilities...................................................... 893,491 106,810
Accrued preacquisition liabilities....................................... 1,293,594 1,293,594
Notes payable - current portion.......................................... 31,250 406,661
Liabilities relating to assets to be sold................................ - 4,502,847
------------- -------------
TOTAL CURRENT LIABILITIES............................................. 2,661,499 6,722,629
------------- -------------
NOTES PAYABLE - LONG-TERM.................................................... 77,150 --
------------- -------------
REDEEMABLE PREFERRED STOCK - $0.001 par value; 600,000 shares
authorized; 0 and 600,000 shares of Series I issued and outstanding......... - 600,000
------------- -------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock - $0.001 par value; 400,000 shares authorized; Series J -
275 shares designated; 275 and 0 shares issued and
outstanding; liquidation preference of $2,750,000..................... 2,418,612 -
Series K - 250 shares designated; 157.5 and 0 shares issued and
outstanding; liquidation preference of $1,575,000..................... - -
Common stock - $0.001 par value; 50,000,000 shares authorized;
10,505,464 and 6,889,829 shares issued and outstanding................. 10,506 6,889
Additional paid-in capital............................................... 17,044,450 2,941,895
Unearned compensation.................................................... (382,741) -
Accumulated deficit...................................................... (15,506,812) (5,651,254)
------------- -------------
TOTAL STOCKHOLDERS' EQUITY (DEFICIT).................................. 3,584,015 (2,702,470)
------------- -------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)......................... $ 6,322,664 $ 4,620,159
============== =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-51-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
-------------------------------
1999 1998
------------ -------------
<S> <C> <C>
PRODUCT SALES............................................................... $ 988,485 $ 203,571
COST OF GOODS SOLD.......................................................... 529,576 156,617
------------ -------------
GROSS PROFIT................................................................ 458,909 46,954
------------ -------------
OPERATING AND OTHER EXPENSES
Selling, general and administrative ................................... 2,925,665 1,649,173
Stock issued for services.............................................. 1,685,000 280,877
Stock based compensation............................................... 2,975,309 69,290
Amortization of goodwill............................................... 1,300,626 228,330
Interest............................................................... 81,346 132,641
Amortization of debt discount.......................................... - 355,567
Impairment loss on assets sold......................................... 203,690 2,323,841
------------ -------------
TOTAL OPERATING AND OTHER EXPENSES................................ 9,171,636 5,039,719
------------ -------------
LOSS BEFORE EXTRAORDINARY ITEM.............................................. (8,712,727) (4,992,765)
EXTRAORDINARY GAIN FROM DEBT FORGIVENESS.................................... 35,234 14,423
------------ -------------
NET LOSS ................................................................... (8,677,493) (4,978,342)
PREFERRED DIVIDENDS......................................................... (1,178,065) -
------------ -------------
LOSS APPLICABLE TO COMMON SHARES............................................ $ (9,855,558) $ (4,978,342)
============ =============
BASIC AND DILUTED LOSS PER COMMON SHARE
Loss before extraordinary item......................................... $ (0.97) $ (0.91)
Extraordinary gain from debt forgiveness............................... (0.00) -
------------ -------------
NET LOSS............................................................... $ (0.97) $ (0.91)
============ =============
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
USED IN PER SHARE CALCULATION............................................ 8,941,652 5,476,874
============ =============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-52-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
PREFERRED STOCK COMMON STOCK
------------------------ ------------------
SHARES AMOUNT SHARES AMOUNT
-------- ------------ ------------ ------------
<S> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1997 ... 68,166.0 68 89,357 89
Shares issued for services .... 1,112.0 1 1,461 1
Conversion of notes payable
and accrued interest ........ 9,428.0 9 12,546 13
Acquisition of Innovus ........ -- -- 1,215,375 1,215
Shares issued for services .... 1,580.0 2 -- --
Conversion of notes payable and
accrued interest ............ -- -- 160,002 160
Conversion of preferred shares. (80,286.0) (80) 4,516,088 4,516
Beneficial debt conversion
feature ..................... -- -- -- --
Acquisition of SoftKat ........ -- -- 720,000 720
Shares issued for services .... -- -- 100,000 100
Conversion of accounts payable -- -- 20,000 20
Shares issued for interest
on note ..................... -- -- 55,000 55
Compensation relating to grant
of stock options ............ -- -- -- --
Net loss for the year ......... -- -- -- --
-------- ------------ ------------ ------------
BALANCE - DECEMBER 31, 1998 ... -- -- 6,889,829 6,889
Shares issued for cash ........ -- -- 75,000 75
Shares issued for services .... -- -- 972,500 972
Acquisition of Kiss Software
Corporation ................. -- -- 1,428,134 1,429
Acquisition of Oxford Media
Corporation ................. -- -- 450,000 450
Shares issued in settlement
of suit ..................... -- -- 9,303 9
Shares issued for notes
receivable, satisfied
through the conversion of
notes and services .......... -- -- 235,377 236
Compensation related to the
grant of stock options ...... -- -- -- --
Amortization of unearned
compensation ................ -- -- -- --
Exercise of warrants .......... -- -- 17,000 17
Conversion of notes payable and
related accrued interest .... -- -- 228,322 229
Conversion of redeemable
Series I preferred stock .... -- -- 199,999 200
Issuance of Series J
convertible preferred stock
and 196,875 warrants, net
of $237,500 offering costs .. 275.0 1,582,870 -- --
Issuance of Series K
convertible preferred stock
and 112,500 warrants, net of
$100,000 offering costs ..... 157.5 -- -- --
Recognition of preferred
dividend and beneficial
conversion feature on
redeemable Series I
preferred stock .............. -- -- -- --
Amortization of discount on
preferred stock as a
preferred dividend .......... -- 835,742 -- --
Preferred dividends accrued ... -- -- -- --
Net Income .................... -- -- -- --
-------- ------------ ------------ ------------
BALANCE - DECEMBER 31, 1999 ... 432.5 $ 2,418,612 10,505,464 $ 10,506
======== ============ ============ ============
<CAPTION>
ADDITIONAL TOTAL
PAID-IN UNEARNED ACCUMULATED STOCKHOLDERS'
CAPITAL COMPENSATION DEFICIT EQUITY (DEFICIT)
------------ ------------ ------------ ---------------
<S> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1997 ... 259,008 $ -- (672,912) $ (413,747)
Shares issued for services .... 164,874 -- -- 164,876
Conversion of notes payable
and accrued interest ........ 393,077 -- -- 393,099
Acquisition of Innovus ........ (861,286) -- -- (860,071)
Shares issued for services .... 112,107 -- -- 112,109
Conversion of notes payable and
accrued interest ............ 174,841 -- -- 175,001
Conversion of preferred shares. (4,436) -- -- --
Beneficial debt conversion
feature ..................... 355,567 -- -- 355,567
Acquisition of SoftKat ........ 2,069,280 -- -- 2,070,000
Shares issued for services .... 115,900 -- -- 116,000
Conversion of accounts payable 24,980 -- -- 25,000
Shares issued for interest
on note ..................... 68,695 -- -- 68,750
Compensation relating to grant
of stock options ............ 69,288 -- -- 69,288
Net loss for the year ......... -- -- (4,978,342) (4,978,342)
------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 1998 ... 2,941,895 -- (5,651,254) (2,702,470)
Shares issued for cash ........ 149,925 -- -- 150,000
Shares issued for services .... 1,698,378 -- -- 1,699,350
Acquisition of Kiss Software
Corporation ................. 3,964,142 -- -- 3,965,571
Acquisition of Oxford Media
Corporation ................. 719,550 -- -- 720,000
Shares issued in settlement
of suit ..................... 31,517 -- -- 31,526
Shares issued for notes
receivable, satisfied
through the conversion of
notes and services .......... 485,833 -- -- 486,069
Compensation related to the
grant of stock options ...... 3,358,050 (3,358,050) -- --
Amortization of unearned
compensation ................ -- 2,975,309 -- 2,975,309
Exercise of warrants .......... 26,733 -- -- 26,750
Conversion of notes payable and
related accrued interest .... 583,998 -- -- 584,227
Conversion of redeemable
Series I preferred stock .... 879,799 -- -- 879,999
Issuance of Series J
convertible preferred stock
and 196,875 warrants, net
of $237,500 offering costs .. 804,630 -- -- 2,387,500
Issuance of Series K
convertible preferred stock
and 112,500 warrants, net of
$100,000 offering costs ..... 1,400,000 -- -- 1,400,000
Recognition of preferred
dividend and beneficial
conversion feature on
redeemable Series I
preferred stock .............. -- -- (279,999) (279,999)
Amortization of discount on
preferred stock as a
preferred dividend .......... -- -- (835,742) --
Preferred dividends accrued ... -- -- (62,324) (62,324)
Net Income .................... -- -- (8,677,493) (8,677,493)
------------ ------------ ------------ ------------
BALANCE - DECEMBER 31, 1999 ... $ 17,044,450 $ (382,741) $(15,506,812) $ 3,584,015
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-53-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
1999 1998
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss......................................................................... $ (8,677,493) $ (4,978,342)
Adjustments to reconcile net loss to net cash used by operating activities:
Amortization of goodwill....................................................... 1,292,293 228,330
Depreciation and amortization.................................................. 104,975 36,910
Stock issued for interest...................................................... - 68,750
Amortization of debt discount.................................................. - 355,567
Note receivable settled for services........................................... 202,635 -
Stock issued for services...................................................... 1,685,000 392,985
Stock issued for settlement of lawsuit......................................... 31,526 -
Compensation from stock options................................................ 2,975,309 69,288
Impairment loss on assets to be sold........................................... - 2,323,841
Forgiveness of debt............................................................ (33,254) (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........................................ 26,750 -
Changes in operating assets and liabilities, net of effects of
acquisitions:
Accounts receivable......................................................... (19,153) 25,000
Inventory................................................................... 93,646 (13,693)
Prepaid assets.............................................................. 30,858 -
Other assets................................................................ (41,849) -
Accounts payable............................................................ (414,845) 259,305
Accrued liabilities......................................................... 133,241 410,490
------------ ------------
NET CASH USED BY OPERATING ACTIVITIES............................................ (2,610,361) (724,633)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for the purchase of equipment........................................... (165,974) (5,823)
Advances to Kiss previous to acquisition......................................... (50,000) -
Cash received in Kiss acquisition................................................ 46,994 -
Proceeds from sale of SoftKat.................................................... 50,000 -
Loans to officers................................................................ (24,297) -
------------ ------------
NET CASH USED BY INVESTING ACTIVITIES............................................ (143,276) (5,823)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Stock issued for cash............................................................ 150,000 -
Proceeds from issuance of preferred shares....................................... 3,787,500 --
Proceeds from issuance of debt................................................... 533,567 806,071
Principal payments on notes payable.............................................. (398,872) (74,202)
------------ ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES........................................ 4,072,195 731,869
------------ ------------
NET INCREASE (DECREASE) IN CASH..................................................... 1,318,558 1,413
CASH - BEGINNING OF YEAR............................................................ 1,413 -
------------ ------------
CASH - END OF YEAR................................................................. $ 1,319,971 $ 1,413
============ ============
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION AND NONCASH INVESTING AND FINANCING
ACTIVITIES -- NOTE 8
The accompanying notes are an integral part of these financial statements.
-54-
<PAGE>
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"). On May 25, 1999, 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, SoftKat Inc., Kiss Software
Corporation and Oxford Media Corporation and video on demand services through
the internet, video streaming and software sold 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.,
Kiss Software Corporation and Oxford Media Corporation from the dates of
their acquisitions on August 5, 1998, November 17, 1998, April 1, 1999 and
September 30, 1999, respectively. SoftKat, Inc. was disposed of on May 25,
1999. 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
have 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 was adjusted by the
impairment loss on the sale of SoftKat.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
BUSINESS CONDITION - The financial statements have been prepared 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, 1999 in the amount of $15,506,812.
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. However, realization of the
proceeds from these potential transactions is not assured. These financial
statements do not include any adjustments relating to the recoverability and
classification of recorded assets or amounts and classifications of
liabilities that might be necessary should the Company be unable to continue
as a going concern.
CONCENTRATION OF RISK AND MAJOR CUSTOMERS - The Company operates exclusively
in the software industry, accordingly, segment information relating to
operations in different industries is not presented in these financial
statements. The concentration of business in the highly competitive software
industry subjects the Company to concentrated market risk. Sales to any major
customer in 1999 and 1998 were not significant.
FAIR VALUES OF FINANCIAL INSTRUMENTS - The amounts reported as cash, accounts
payable, notes payable, and liabilities relating to assets to be sold are
considered to be reasonable approximations of their fair values. The fair
value estimates were based on market information available to management at
the time of the preparation of the financial statements.
-55-
<PAGE>
INVENTORY - Inventory is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. Inventory balance at
year-end consisted of packaged software.
EQUIPMENT - Equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the equipment, which
are three 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 $65,617 and none during the years ended December
31, 1999 and 1998, 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 5,308,523 and
1,751,800 potentially issuable common shares outstanding at December 31, 1999
and 1998, respectively, were excluded from the calculation of diluted loss
per share for the years ended December 31, 1999 and 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. The subsidiary
Oxford Media recognizes revenue when the product is completed and the goods
are shipped to the customer.
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
outstanding Intermark common shares for 1,033,669 shares of common stock and
78,706 shares of Series H preferred stock of Innovus (now eSynch) 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
-56-
<PAGE>
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.
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. 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 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 consolidated financial statements from the date of
acquisition and consisted of sales of $109,317 and a net loss of $111,359.
Goodwill was originally being amortized on a 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 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 amount of the impairment loss was determined by the
excess of the carrying amount of the SoftKat assets in excess of the $50,000
subsequently collected and the amount of the related SoftKat liabilities. 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.
KISS SOFTWARE - Effective April 1, 1999, the Company completed the
acquisition of Kiss Software Corporation, 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 $2.11 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 stock and options
issued, has been estimated at $3,965,571. Of this amount, $3,568,908 is
applicable to the common stock issued in the Kiss acquisition and $396,663 is
applicable to the stock options issued to the Kiss employees. The excess of
the purchase price over the estimated fair value of the identifiable acquired
assets less liabilities assumed was $5,315,094, which was recognized as
goodwill. Goodwill is being amortized over approximately 3 years on a
straight-line basis.
OXFORD MEDIA - Effective September 30, 1999, the Company completed the
acquisition of Oxford Media Corp. ("Oxford"), engaged in DVD video encoding,
compression and authoring. Under the Agreement the shareholders of Oxford
exchanged all the outstanding shares of Oxford common stock for 450,000
shares of the Company's common stock. The acquisition was accounted for using
the purchase method of accounting and the purchase price of the acquired
assets was computed to be $720,000 which was attributed to the assets
acquired including software licenses in the amount of $100,000 and goodwill
in the amount of $119,900. Oxford received a non-exclusive
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<PAGE>
license from Oxford Management Corporation, a Nevada corporation, which is a
license of proprietary software and source code for a video-on-demand hotel
pay-for-view system. The value of the software license is included in other
assets and is being amortized over three years. Amortization recognized
during 1999 was $8,333. The goodwill is also being amortized over three years.
NOTE 3--EQUIPMENT
Equipment consisted of the following at December 31, 1999 and 1998:
<TABLE>
<CAPTION>
1999 1998
------------- -------------
<S> <C> <C>
Furniture and fixtures................................. $ 58,752 $ 3,233
Computer equipment..................................... 592,049 155,882
Leasehold improvements................................. 28,637 --
Office equipment....................................... -- 3,079
------------- -------------
Total.................................................. $ 679,438 $ 162,194
============== =============
</TABLE>
Depreciation expense for the years ended December 31, 1999 and 1998 was $96,642
and $36,910, respectively.
NOTE 4--NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<CAPTION>
DECEMBER 31,
1999 1998
-------------- -------------
<S> <C> <C>
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
7% Note payable to a shareholder; interest due quarterly; principal
payable $14,754 quarterly beginning March 2001; unsecured............ 77,150 --
10% Series A Convertible debentures; secured by all assets of the
Company; due March 31, 2000.......................................... 25,000 75,000
Note payable to a shareholder; no stated rate of interest; payable on
demand; unsecured.................................................... -- 8,000
10% Note payable to a shareholder; payable on demand; unsecured........ 6,250 --
-------------- -------------
TOTAL NOTES PAYABLE.................................................... $ 108,400 $ 406,661
============== =============
</TABLE>
Of the notes payable at December 31, 1999, $31,250 is due in the current year
and $77,150 is due in 2001.
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 was
guaranteed by three officers of the Company and bore interest at 3% over the
prime rate (12% at December 31, 1998). This loan was paid in full during the
year ended December 31, 1999 by principal payments of $22,893 plus accrued
interest.
The $300,000 note payable to a shareholder was convertible into common shares
at $3.00 per share. The conversion period began on the date of the note and
terminated on the due date of March 15, 1999 unless the entire principal
payment of the note was not made by the due date, in which case, the
conversion rights were to revert 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, $125,000 was paid in cash and the remainder was
adjusted as an over accrual through interest expense, as further explained in
Note 8.
-58-
<PAGE>
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 amounts, together with
accrued interest, into shares of the Company's common stock at a conversion
price of $1.25 per share. During 1999, two of the note holders converted
their debentures into common stock. The remaining note has been extended by
the holder to be due on March 31, 2000.
RELATED PARTY NOTES PAYABLE - During 1999, the Company converted a noted to
an officer and shareholder into shares of the Company's common stock.
Interest accrued on the note at the rate of 7%. The note and outstanding
interest were settled with the issuance of 79,921 shares of common stock at
$2.81 per share.
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, 1999 and 1998 are
shown below:
<TABLE>
<CAPTION>
1999 1998
------------ ------------
<S> <C> <C>
Operating loss carry forwards...................................... $ 2,838,506 $ 1,190,549
Stock-based compensation........................................... 1,378,442 -
Valuation Allowance ............................................. (4,216,948) (1,190,549)
------------ ------------
NET DEFERRED TAX ASSET............................................. $ - $ --
============ ============
</TABLE>
For tax reporting purposes, the Company has net operating loss carry forwards
in the amount of approximately $7,070,000 which will expire beginning in the
year 2011. During the year ended December 31, 1999 the deferred tax valuation
increased by $2,864,302 from operations and by $162,097 as a result of the
purchase of Kiss Software Corporation. The valuation allowance increased by
$919,440 during the year ended December 31, 1998.
The following is a reconciliation of the amount of tax (benefit) that would
result from applying the federal statutory rate to pretax loss with the
provision for income taxes.
<TABLE>
<CAPTION>
FOR THE YEARS ENDED
DECEMBER 31,
1999 1998
------------ -------------
<S> <C> <C>
Tax at statutory rate (34%)........................................ $ (2,950,348) $ (1,692,637)
Amortization of goodwill........................................... 520,794 92,017
Loss on disposition of SoftKat..................................... 82,087 936,508
Excess benefit from stock options exercised........................ (27,757) -
Non-deductible expenses............................................ 57,604 54,597
Change in valuation allowance...................................... 2,864,302 919,440
State tax benefit, net of federal tax effect....................... (546,682) (313,636)
Change in effective tax rate....................................... - 3,711
------------ -------------
PROVISION FOR INCOME TAXES......................................... $ - $ -
============ =============
</TABLE>
NOTE 6--ACCRUED LIABILITIES
Included in accrued preacquisition liabilities are $612,170 in obligations to
state and the federal governments for payroll taxes from previous years and
estimated interest and penalties owing on such tax obligations. The account
also includes liabilities assumed in the acquisition of Innovus.
-59-
<PAGE>
NOTE 7--COMMITMENTS AND CONTINGENCIES
CONSULTING AGREEMENTS - On August 27, 1999, the Company signed a consulting
agreement with a shareholder. Under the agreement, the consultant is to
received 20,000 shares of the common stock of the Company per quarter and
$2,500 per month. The term of the agreement is for one year.
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 $45,000.
LEASE COMMITMENTS - The Company leases office and warehouse facilities under
a five-year agreement classified as an operating lease. Lease expense for the
years ended December 31, 1999 and 1998 was $226,152 and $56,400. In May 1999,
the Company moved to a new office and warehouse facility and entered into a
new five-year operating lease. 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.
<TABLE>
<CAPTION>
YEARS ENDING DECEMBER 31:
<S> <C>
2000........................................ $ 246,523
2001........................................ 256,384
2002........................................ 263,310
2003........................................ 273,842
2004........................................ 90,034
------------
Total....................................... $ 1,130,093
============
</TABLE>
LITIGATION - The Company is a defendant in a lawsuit filed by a third-party
claiming damages for a breach of an oral agreement and for unpaid principal
on a promissory note. Due to the uncertainty of the claim at December 31,
1999, no provision for possible loss from this proceeding has been accrued in
the accompanying financial statements. During March 2000, a settlement was
reached whereby the Company agreed to pay the third party $38,000 in cash and
in turn, the third party will return approximately 70,000 shares of common
stock to the Company. The settlement will be recognized in the first quarter
2000.
The Company is a defendant in a lawsuit filed by a third-party for unpaid
rent payments relating to a prior lease agreement entered into by SoftKat, a
former affiliate. In February 1999, a default judgment was obtained by the
plaintiff against SoftKat for $38,273. Subsequently, the plaintiff sued the
Company seeking damages of the original $38,273 plus $46,528 for additional
losses incurred by the plaintiff in conjunction with SoftKat's departure from
the premises under lease.
The Company feels there may be additional creditors of SoftKat which may seek
to satisfy their claims against the Company on theory of either successor
liability or alter ego. Based on a lack of adequate information, the Company
is unable to estimate the probability of an unfavorable outcome on any of
these pending, threatened or unasserted claims. The Company had eight such
suits dismissed.
The Company has settled a lawsuit filed by a third-party claiming damages for
copyright infringement and breach of contract for 9,303 shares of the
Company's common stock and $150,000 cash, of which $100,000 has been paid by
the Company's insurance carrier.
-60-
<PAGE>
NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION AND NONCASH INVESTING AND
FINANCING ACTIVITIES
SUPPLEMENTAL CASH FLOW INFORMATION - The Company paid $35,023 and $256 for
interest during the years ended December 31, 1999 and 1998, respectively.
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 $9,969 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:
<TABLE>
<S> <C>
Fair value of assets acquired................. $ 46,670
Common stock issued........................... 860,071
-----------
LIABILITIES ASSUMED........................... $ 906,741
===========
</TABLE>
On November 17, 1998, the Company issued 600,000 shares of Series I
mandatorily redeemable 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:
<TABLE>
<S> <C>
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
============
</TABLE>
On May 25, 1999, the capital stock of SoftKat was sold to a third party for
$50,000 cash 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. The impairment loss was determined by the excess of
the carrying amount of the assets in excess of the $50,000 collected and the
amount of the related liabilities. The carrying amount of the assets sold was
$4,552,847 and the related liabilities were $4,502,847.
During 1999, the Company issued shares of common stock for services that had
not yet been performed. The value of these services was $14,350 and has been
classified as a prepaid asset. Amortization of the discount on the Series J
preferred stock in the amount of $835,742 was recognized as preferred
dividends. Notes payable of $520,082 and related accrued interest of $64,146
were converted into shares of common stock. Also, $283,434 of notes payable
were offset against a note receivable from shareholders. Preferred
shareholders converted 600,000 shares of Series I preferred stock carried at
$600,000 into 199,999 shares of common stock.
-61-
<PAGE>
On April 1, 1999, the Company issued 1,428,134 shares of common stock in
exchange for all of the issued and outstanding common stock of Kiss Software
Corporation. In conjunction with the acquisition, liabilities were assumed as
follows:
<TABLE>
<S> <C>
Fair value of assets acquired other than goodwill........... $ 170,437
Goodwill.................................................... 5,315,294
Common stock and stock options issued....................... (3,965,570)
-----------
LIABILITIES ASSUMED......................................... $ 1,520,161
===========
</TABLE>
On September 30, 1999, the Company issued 450,000 shares of common stock in
exchange for all of the issued and outstanding common stock of Oxford Media.
The fair value of the assets acquired was $600,100, goodwill was $119,900 and
the stock issued was valued at $720,000.
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 (pre-split) 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.
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 $112,109 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.
During 1998, the Company issued 9,428 shares of Series H Preferred stock and
12,546 common shares for notes payable and accrued interest valued at
$393,099.
During September through December 1998, the Company issued 160,002 common
shares upon conversion of notes payable and accrued interest valued at
$175,001.
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 the
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.
-62-
<PAGE>
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 were
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.
The Series I redeemable preferred stock had a liquidation preference of $1.00
per share. The Company was 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 to redeem an additional 200,000 shares of preferred stock upon
obtaining an additional $3,000,000 in funding. Dividends on the preferred
stock were payable prior to 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
was 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 had voting rights equivalent to the number of
common shares into which it could be converted and had additional voting
rights with respect to approval of any issuance of a senior series of
preferred shares. The market price of the common stock was $4.40 per share on
November 16, 1999, accordingly, the Company recognized a beneficial
conversion feature of $1.40 per share, or $279,999, as a preferred dividend
during 1999. On December 9, 1999, the Series I shareholders converted the
preferred shares into 199,999 shares of common stock at the rate of $3.00 per
share.
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. 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.
During 1999 the Company issued 75,000 common shares for cash of $150,000. The
Company issued 972,500 shares of common stock for services. The services were
valued at $1,699,350 of which $1,685,000 was expensed during the year and
$14,350 of which were classified as a prepaid expense for services that had
yet to be performed at December 31, 1999.
The Company issued 235,377 shares of common stock for a note receivable of
$565,440 with a discount of $79,371 on the note. The note receivable was
reduced by off-setting $283,434 of notes payable and services of $202,635.
The value of the services was determined based upon the trading price of the
Company's common stock on the date of issuance. Also, the Company issued
9,303 shares of common stock valued at $31,526 in settlement of a lawsuit and
17,000 shares for exercise of stock options by shareholders for expenses paid
by the shareholders. The amount of the expenses paid was $26,750. The Company
converted notes payable and accrued interest valued at $584,227 into 228,322
shares of common stock. The Company also recognized $2,975,309 of
compensation expense on stock options issued to employees and non employees
during 1999.
On April 1, 1999, the Company purchased Kiss for 1,428,134 shares of common
stock. The purchase price based on the fair value of the stock issued was
$3,965,571. On September 30, 1999, the Company purchased Oxford Media for
450,000 shares of the common stock of the Company. The purchase price based
on the fair value of the stock issued was $720,000.
-63-
<PAGE>
During July 1999, the Company authorized the issuance of 275 shares of Series
J Convertible Preferred Stock at $10,000 per share. Dividends are cumulative
and accrue at the rate of 7% per annum. The dividends are not required to be
paid until conversion or redemption of the shares or an acquisition of the
Company. The Company has the option of paying the dividend either in cash or
in common shares, based on the conversion price then in effect. The Series J
shares have a liquidation preference in the amount of $10,000 per share plus
accumulated and unpaid dividends and may be redeemed at the Company's option
for $12,000 per share plus accumulated dividends. The conversion price of the
Series J shares is the lower of $3.50 per share or 80% of the average of the
six lowest closing bid prices in the twenty-trading-day period ending on the
day before conversion. The Series J shares became convertible into common
stock on January 28, 2000 and will automatically be converted into common
stock on the third anniversary of the issuance date, subject to extensions
from certain events until not more than two years later. For each $1,000,000
invested in Series J, the Company issued 75,000 warrants to purchase shares
of common stock. A pro rata number of warrants will be granted for amounts
less than $1,000,000. The warrants are exercisable at a price equal to 115%
of the closing stock price on the date before the warrants were issued and
expire three years from the date of issuance. During 1999, the Company issued
275 Series J preferred shares and 196,875 warrants and had received proceeds
of $2,387,500 net of $237,500 of offering costs.
The Company is obligated, at its expense, to register the common stock
issuable upon conversion of the Series J preferred shares by February 15,
2000 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.
The proceeds from the issuance of the Series J Preferred stock and warrants
were allocated to the financial instruments based upon their relative fair
values. The warrants were valued based upon their fair value determined by
use of an option pricing model. The beneficial conversion feature of the
preferred stock was determined based upon the difference between the fair
value of the Company's common stock on the dates the preferred shares were
issued and the conversion rate. The preferred stock was allocated the
remainder of the proceeds. The proceeds received were allocated $518,916 to
the warrants, $285,714 to the beneficial conversion feature and $1,582,870 to
the preferred stock. The resulting discount on the preferred stock over the
gross proceeds received of $2,625,000 is being recognized as preferred
dividends over the period from the date issued through January 28, 2000, the
date they are first convertible. Amortization of the discount of $835,742 was
recognized as preferred dividends during the year ended December 31, 1999.
During the fourth quarter 1999, the Company authorized the issuance of 250
shares of Series K convertible preferred stock at $10,000 per share.
Dividends are cumulative and accrue at the rate of 7% per annum. The
dividends are not required to be paid until conversion or redemption of the
shares or an acquisition of the Company. The Company has the option of paying
the dividend either in cash or in common shares, based on the conversion
price then in effect. The Series K preferred shares have a liquidation
preference in the amount of $10,000 per share plus accumulated and unpaid
dividends and may be redeemed at the Company's option for $12,000 per share
plus accumulated dividends upon 30 days notice. The conversion price of the
Series K shares is the lower of $3.50 or 80% of the average of the six lowest
closing bid prices in the twenty-trading-day period ending on the day before
conversion. The Series K shares do not become convertible into common stock
until April 29, 2000 and will automatically be converted into common stock on
the third anniversary of the issuance date, subject to extensions from
certain events until not more than two years later. For each $1,000,000
invested in Series K, the Company will issue 75,000 warrants to purchase
shares of common stock. The warrants are exercisable at a price
-64-
<PAGE>
equal to 115% of the closing stock price on the date before the warrants are
issued and expire three years from the date of issuance. The Company is
obligated, at its expense, to register the common stock issuable upon
conversion of the Series K preferred shares within 150 days of the issued
date 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.
As of December 31, 1999, the Company had not yet closed the Series K
offering, but had received $1,400,000, net of $100,000 of offering costs,
under the offering. At December 31, 1999, the proceeds from the issuance of
the Series K Preferred stock and warrants were allocated to the financial
instruments based upon their relative fair values. The warrants were valued
based upon their fair value determined by use of an option pricing model. The
beneficial conversion feature of the preferred stock was determined based
upon the difference between the fair value of the Company's common stock on
the dates the preferred shares were issued and the conversion rate. The
proceeds received were allocated $506,666 to the warrants and $893,334 to the
beneficial conversion feature. The resulting discount on the preferred stock
over its liquidation value of $1,500,000 is being recognized as preferred
dividends over the period from the date issued through April 29, 2000, the
date they are first convertible. The related preferred dividend recognized
during the year ended December 31, 1999 was $0.
Subsequent to December 31, 1999, the Company received an additional $500,000
as a result of the Series K offering. This resulted in a total of 212.5
shares of Series K preferred shares and 150,000 warrants to purchase shares
of the Company's common stock. In addition, after the $500,000 were received,
the total proceeds from offering were allocated $828,897 to the warrants and
$970,103 to the beneficial conversion feature. The resulting discount on the
preferred stock over its liquidation value of $2,000,000 will be recognized
as preferred dividends over the period from the date the share are issued
through the date they are first convertible.
NOTE 10 - FORGIVENESS OF DEBT
The Company negotiated reductions in accounts payable during the year ended
December 31, 1998 and paid the negotiated amounts. The amount of the debt
forgiveness is $14,423 and has been accounted for as an extraordinary gain.
During 1999, the Company negotiated reduction in accounts payable. The amount
of the forgiveness during the year ended December 31, 1999 was $35,234.
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<PAGE>
NOTE 11 - STOCK OPTIONS AND WARRANTS
The Company has issued stock options to employees and consultants under a
stock-based compensation plan and under individual contracts. Under the 1999
Stock Incentive Plan, which was approved by the shareholders in November 1999,
the Company may grant options to its employees and consultants for up to
3,000,000 shares of common stock. Under the 1998 Stock Option Plan, options may
be granted to employees and consultants for up to 600,000 common shares. Options
were also granted in exchange for options outstanding under stock option plans
of Innovus and Kiss in connection with their purchases. The exercise price of
each option under the plans and the individual contracts have generally been
below the market price of the Company's stock on the date of grant. Options
generally vest from immediately to over three years and are exercisable for up
to five to ten years.
OPTIONS GRANTED TO EMPLOYEES AND CONSULTANTS - A summary of the status of the
Company's stock options as of December 31, 1999 and 1998 and changes during the
years then ended are presented below:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING
----------------------------------------------------
1999 1998
------------------------- -------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------------ ---------- ----------- ----------
<S> <C> <C> <C> <C>
Outstanding at beginning of year............. 1,221,675 $ 1.45 - $ -
Granted...................................... 2,078,187 1.00 1,221,675 1.45
Forfeited.................................... (419,428) 1.05 - -
Exercised.................................... (17,000) 1.57 - -
------------ -----------
Outstanding at end of year................... 2,863,434 1.18 1,221,675 1.45
============ ===========
Options exercisable at end of year........... 2,376,416 1.20 821,675 1.67
============ ===========
Weighted-average fair value of
options granted during year................. $ 1.90 $ 0.91
============ ===========
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------------ ---------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- --------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$ 0.25- 0.50 531,900 8.93years $ 0.46 531,900 $ 0.46
1.00- 1.10 2,004,900 7.78 1.03 1,549,900 1.03
1.50- 2.00 162,875 1.42 1.75 162,875 1.75
2.11- 3.00 153,759 8.02 2.27 121,741 2.27
42.50-45.00 10,000 1.50 43.75 10,000 43.75
--------- ---------
$ 0.25-45.00 2,863,434 7.62 1.18 2,376,416 1.20
========= =========
</TABLE>
The Company measures compensation under stock-based options and plans using the
intrinsic value method prescribed in Accounting Principles Board Opinion 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations.
Compensation relating to the options granted to employees is being recognized
over the vesting period of the options. Stock-based compensation charged to
operations was $1,716,020 and $69,288 for the years ended December 31, 1999 and
1998, respectively. Had compensation cost for the Company's options been
determined based on the fair value
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<PAGE>
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 years ended December 31, 1999 and 1998:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1999 1998
----------- ------------
<S> <C> <C>
Net Loss
As reported.................... $(8,677,493) $ (4,978,342)
Pro forma...................... (9,952,812) (5,415,327)
Basic and Diluted Loss per Share
As reported.................... $ (0.97) $ (0.91)
Pro forma...................... (1.24) (0.99)
</TABLE>
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 1999 and 1998; dividend yield of 0% and 0%;
expected volatility of 131% and 73%; risk-free interest rate of 4.7% and 5.6%
and expected life of the options of 9.87 years and 5.10 years.
OPTIONS AND WARRANTS GRANTED TO NON-EMPLOYEES - During the year ended December
31, 1999, the Company granted options to third-parties exercisable at $1.25 per
share as compensation for services. During September 1999, the Company granted
350,000 warrants to a member of the Board of Directors as compensation for
services. The Company granted an additional 100,000 warrants to the same
director in October 1999. The warrants are exercisable at $1.00 per share. The
options and warrants are exercisable for periods from five to ten years. The
options and warrants are summarized as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Granted and outstanding at end of year............. 900,000 $ 1.13
==========
Warrants exercisable at end of year................ 800,000 1.14
==========
Weighted-average fair value of
options granted during period..................... $ 1.57
==========
</TABLE>
The following table summarizes information about non-employee stock options
outstanding at December 31, 1999:
<TABLE>
<CAPTION>
OUTSTANDING EXERCISABLE
------------------------------------------------ ------------------------------
WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER WEIGHTED-AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
--------------- ----------- ---------------- ---------------- ----------- ----------------
<S> <C> <C> <C> <C> <C>
$1.00 450,000 8.16 years $1.00 350,000 $1.00
1.25 450,000 3.94 1.25 450,000 1.25
----------- -----------
$1.00-1.25 900,000 7.12 1.13 800,000 1.14
=========== ===========
</TABLE>
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<PAGE>
Compensation from non-employee options and warrants was determined based on the
fair value at the grant dates consistent with the method set forth under
Statement of Financial Accounting Standards No. 123, ACCOUNTING FOR STOCK-BASED
COMPENSATION. The fair value of each option or warrant granted was estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions: dividend yield of 0%; underlying common
stock value - $1.73; expected life of the options - 6.49 years; expected
volatility - 129% and risk-free interest rate - 4.7%. Compensation relating to
the options and warrants is being recognized over their vesting periods.
Stock-based compensation charged to operations for non-employees was $1,259,288
for the year ended December 31, 1999.
NOTE 12 - SUBSEQUENT EVENTS
As described in Note 9, the Company issued 55 Series K preferred shares for
gross proceeds of $500,000 on January 31, 2000.
On February 7, 2000, the Company reached an agreement with a third party whereby
for certain consideration, the third party accepted as settlement of a lawsuit
involving a guarantee of a liability by the Company, 12,000 shares of the
Company's common stock and $35,000 in cash. The related expense was recognized
during the year ended December 31, 1999.
During February 2000, a shareholder exercised options to purchase shares of the
Company's common stock. The shareholder exercised 15,000 options that were
exercisable at $1.50 per share. The total proceeds from the exercise of the
options was $22,500.
-68-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
On November 17, 1998, eSynch Corporation ("eSynch") acquired all of the
outstanding common stock of SoftKat, Inc ("SoftKat") by issuing 720,000 common
shares and 600,000 shares of Series I redeemable, convertible preferred shares.
Up to an additional 720,000 common shares were 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. In
February 1999, the Company disposed of SoftKat.
On April 1, 1999, eSynch acquired all of the outstanding common stock of Kiss
Software Corporation ("Kiss") by issuing 1,428,134 shares of common stock and
the assumption of the obligation under the Kiss stock options for the equivalent
of 163,187 eSynch common shares. The purchase was accounted for using the
purchase method of accounting.
The following unaudited pro forma condensed consolidated statement of operations
has been prepared to present the results of operations assuming the acquisition
of Kiss and SoftKat had occurred on January 1, 1998 and the disposition of
SoftKat occurred on December 31, 1998.
The following financial information was derived from, and should be read in
conjunction with the separate historical financial statements of eSynch, Kiss
and SoftKat and the related notes to those financial statements which are
included elsewhere herein. The unaudited pro forma condensed consolidated
statement of operations has been included herein for comparative purposes only
and does not purport to be indicative of the results of operations which
actually would have been obtained had the reorganizations occurred January 1,
1998, or the results of operations which may be obtained in the future. In
addition, future results may vary significantly from the results reflected in
these pro forma financial statements.
-69-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended December 31, 1999
-------------------------------------------------------------------------
Pro Forma Pro Forma
eSynch Kiss Adjustments Results
------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C>
Product sales $ 988,485 $ 399,094 $ 0 $ 1,387,579
Cost of goods sold 529,576 103,845 0 633,421
------------- ------------- ---------------- -------------
Gross Profit 458,909 295,249 0 754,158
General and administrative expense 2,925,665 579,841 3,505,506
Stock issued for services 1,685,000 1,685,000
Stock based compensation 2,975,309 2,975,309
Interest expense 81,346 6,386 0 87,732
Amortization of goodwill 1,300,626 0 (4) 427,274 1,727,900
Impairment loss on assets sold 203,690 (1) (203,690) 0
------------- ------------- ---------------- -------------
Total Operating Expenses 9,171,636 586,228 223,584 9,981,448
Extraordinary gain from debt
forgiveness 35,234 (6) (35,234) 0
------------- ------------- ---------------- -------------
Net Loss (8,677,493) (290,979) (258,818) (9,227,290)
Preferred dividends (1,178,065) (28,982) (5) 28,982 (1,178,065)
------------- ------------- ---------------- -------------
Loss Applicable to Common Shares $ (9,855,558) $ (319,961) $ (229,836) $(10,405,355)
============= ============= ============ =============
Basic and diluted loss
per common share $ (0.97) $ (0.93)
============= =============
Weighted average number of common
shares used in per share
calculation 8,941,652 9,893,742
============= =============
</TABLE>
Notes to the unaudited pro forma condensed consolidated statements of operations
are presented on the following page.
-70-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Year Ended December 31, 1998
-------------------------------------------------------------------------
Pro Forma Pro Forma
eSynch SoftKat Kiss Adjustments Results
------------- ------------- ------------- ---------------- -------------
<S> <C> <C> <C> <C> <C>
Product sales $ 203,571 $ 6,519,588 $ 1,596,375 (1) $ (109,317)
(3) (6,519,588) $ 1,690,629
Cost of goods sold 156,617 5,007,015 415,380 (1) (82,000)
(3) (5,007,015) 489,997
------------- ------------- ------------- ------------ -------------
Gross Profit 46,954 1,512,573 1,180,995 (1,539,890) 1,200,632
------------- ------------- ------------- ------------ -------------
General and administrative expense 1,999,340 5,487,149 1,201,053 (1) (126,652)
(3) (5,487,149) 3,073,741
Selling and marketing expense 0 0 1,118,312 0 1,118,312
Amortization of goodwill 228,330 0 (2) 1,683,420
(3) (1,911,750)
(4) 1,626,719 1,626,719
Interest expense 132,641 160,684 25,545 (1) (12,024)
(3) (160,684) 146,162
Amortization of debt discount 355,567 0 0 355,567
Impairment loss 2,323,841 2,880,418 (1) (2,323,841)
(3) (2,880,418) 0
Loss on sale of securities 0 0 9,502 0 9,502
------------- ------------- ------------- ------------ -------------
Total Operating and
Other Expenses 5,039,719 8,528,251 2,354,412 (9,592,379) 6,330,003
------------- ------------- ------------- ------------ -------------
Interest income 0 23,783 0 (3) (23,783) 0
------------- ------------- ------------- ------------ -------------
Loss from Continuing
Operations Before
Extraordinary Item (4,992,765) (6,991,895) (1,173,417) 8,028,706 (5,129,371)
Preferred dividends 0 (115,929) (5) 115,929 0
------------- ------------- ------------- ------------ -------------
Loss from Continuing
Operations Applicable
to Common Shares $ (4,992,765) $ (6,991,895) $ (1,289,346) $ 8,144,635 $ (5,129,371)
============= ============= ============= ============ =============
Basic and diluted loss per common
share from continuing operations
before extraordinary item $ (0.91) $ (0.69)
============= =============
Weighted average number of common
shares used in per share
calculation 5,476,874 7,477,953
============= =============
</TABLE>
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(1) To eliminate operations of SoftKat for the period from November 18, 1998
through December 31, 1998 which were also included in the consolidated
operations of eSynch for the year ended December 31, 1998. Also to eliminate
the operations of SoftKat for the period January 1, 1999 through May 1999
which were included in the consolidated operations of eSynch for the year
ended December 31, 1999.
(2) To recognize amortization of goodwill from the SoftKat acquisition for a
full year. Goodwill of $6,882,300 was being amortized over 3.6 years on a
straight-line basis prior to the recognition of impairment.
(3) SoftKat was sold in May 1999; accordingly, the operations of SoftKat are
eliminated for all of 1998.
-71-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(CONTINUED)
(4) To recognize amortization on the goodwill obtained in the purchase of
Kiss assuming the acquisition occurred on January 1, 1998. The goodwill
acquired was $5,315,094 and it is being amortized over its estimated useful
life of approximately 3.1 years. The effect on the pro forma statement of
operations for the year ended December 31, 1998 is an increase of $1,626,719
and for the year ended December 31, 1999 is an increase of $427,274 in
amortization expense.
(5) As a result of the April 1, 1999 acquisition of Kiss, all Kiss preferred
stock which was issued during 1998, was exchanged for eSynch common stock.
The pro forma statement of operations for the year ended December 31, 1998,
reflects the elimination of the preferred dividends payable.
(6) To reverse the forgiveness of debt that is not to be included in the
proforma financial information.
-72-
<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
Softkat, Inc.
We have audited the accompanying balance sheet of Softkat, Inc. as of
December 31, 1998 and the related 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.
As described in Note 1 to the financial statements, the Company commenced
liquidation in May 1999 and as a result, changed its basis of accounting from
the going-concern basis to the liquidation basis for the year ended December
31, 1998.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Softkat, Inc. as of December
31, 1998 and the results of its operations and its cash flows for the year
ended December 31, 1998 in conformity with generally accepted accounting
principles applied on the liquidation basis of accounting and the results of
its operations and its cash flows for the year ended December 31, 1997 in
conformity with generally accepted accounting principles applied on the
going-concern basis.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
December 20, 1999
-73-
<PAGE>
SOFTKAT, INC.
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash $ 32,968
Inventory 75,000
-----------
TOTAL CURRENT ASSETS $ 107,968
===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Bank overdraft $ 60,002
Amounts due under asserted and unasserted claims 4,653,963
Notes payable 986,531
-----------
TOTAL CURRENT LIABILITIES 5,700,496
-----------
STOCKHOLDERS' DEFICIT
Common stock - no par value; 5,000,000 shares authorized;
3,275,968 shares issued and outstanding 2,685,562
Accumulated deficit (8,278,090)
-----------
TOTAL STOCKHOLDERS' DEFICIT (5,592,528)
-----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 107,968
===========
</TABLE>
-74-
<PAGE>
SOFTKAT, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
YEARS ENDED
DECEMBER 31,
------------------------------------
1998 1997
----------------- ---------------
<S> <C> <C>
PRODUCT SALES $ 6,519,588 $ 3,804,648
COST OF GOODS SOLD 5,007,015 2,866,539
----------------- ---------------
GROSS PROFIT 1,512,573 938,109
----------------- ---------------
OPERATING EXPENSES
General and administrative 5,487,149 2,026,640
Impairment of assets 2,880,418 --
TOTAL OPERATING EXPENSES 8,367,567 2,026,640
----------------- ---------------
OTHER INCOME AND EXPENSES
Interest income 23,783 26,293
Interest expense (160,684) (98,918)
Other income -- 170,964
----------------- ---------------
TOTAL OTHER INCOME AND EXPENSES (136,901) 98,339
----------------- ---------------
NET LOSS $ (6,991,895) $ (990,192)
================= ===============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (2.13) $ (0.45)
================= ===============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES USED IN PER SHARE CALCULATION 3,275,968 2,192,126
================= ===============
</TABLE>
-75-
<PAGE>
SOFTKAT, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
TOTAL
COMMON STOCK ACCUMULATED
SHAREHOLDERS'
SHARES AMOUNT DEFICIT DEFICIT
--------- ----------- ------------ --------------
<S> <C> <C> <C> <C>
BALANCE - DECEMBER 31, 1996 2,376,544 $ 268,000 $ (296,003) $ (28,003)
Stock issued to shareholders for
failure to meet financial
performance goals as specified
in the Rights Agreement 129,424 33,650 -- 33,650
Redemption and retirement of shares (340,000) (100,000) -- (100,000)
Stock issued upon conversion of debt 127,500 255,000 -- 255,000
Stock issued for cash, net of
$536,088 offering costs 982,500 1,428,912 -- 1,428,912
Net loss -- -- (990,192) (990,192)
--------- ----------- ------------ --------------
BALANCE - DECEMBER 31, 1997 3,275,968 1,885,562 (1,286,195) 599,367
Contributed capital from the
Parent Company -- 800,000 -- 800,000
Net loss -- -- (6,991,895) (6,991,895)
--------- ----------- ------------ --------------
BALANCE - DECEMBER 31, 1998 3,275,968 $ 2,685,562 $(8,278,090) $(5,592,528)
========= =========== ============ ==============
</TABLE>
-76-
<PAGE>
SOFTKAT, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEARS
ENDED
DECEMBER 31,
---------------------------------
1998 1997
-------------- ---------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $(6,991,895) $ (990,192)
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation 30,634 19,459
Impairment of assets 2,880,418 --
Stock issued for compensation -- 33,650
Changes in operating assets and liabilities:
Prepaid expenses 165,759 (24,325)
Inventory 121,007 (1,719,387)
Other assets 60,030 (117,441)
Accounts payable 2,796,158 320,087
Accrued liabilities 750,242 163,154
----------- -----------
NET CASH USED BY OPERATING ACTIVITIES (187,647) (2,314,995)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Payments for the purchase of equipment (35,841) (71,258)
----------- -----------
NET CASH USED BY INVESTING ACTIVITIES (35,841) (71,258)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Repurchase of common stock -- (100,000)
Bank overdraft 60,002 --
Proceeds from bridge loan -- 255,000
Principal payments on capital lease obligation (5,538) --
Proceeds from line of credit 355,000 650,000
Principal payments on notes payable (513,469) (5,000)
Proceeds from issuance of common stock -- 1,428,912
----------- -----------
NET CASH PROVIDED BY (USED BY)
FINANCING ACTIVITIES (104,005) 2,228,912
----------- -----------
NET DECREASE IN CASH (327,493) (157,341)
CASH - BEGINNING OF YEAR 360,461 517,802
----------- -----------
CASH - END OF YEAR $ 32,968 $ 360,461
=========== ===========
SUPPLEMENTAL CASH FLOW INFORMATION:
Cash paid for interest $ 137,351 $ 99,378
=========== ===========
</TABLE>
SUPPLEMENTAL DISCLOSURE OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
During November 1998 , as part of an agreement to purchase all the Company's
common stock, $800,000 of Softkat Corporation subordinated notes payable were
converted into 600,000 shares of eSynch Corporation Series I Convertible
Preferred Stock.
During the year ended December 31, 1997, a capital lease obligation of
$17,480 was incurred when the Company entered into a lease for new equipment
and notes payable of $255,000 were converted into 127,500 shares of common
stock.
-77-
<PAGE>
SOFTKAT, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS - Softkat, Inc. (the "Company" or
"Softkat"), formerly known as The Kat, Inc. was incorporated in California in
June 1995 to distribute discounted low cost software. The Company sells to
retail customers primarily in the United States
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts in the financial
statements and accompanying notes. Actual results could differ from those
estimates.
LIQUIDATION OF THE COMPANY - The accompanying financial statements as of
December 31, 1998 and for the year then ended were prepared on the
liquidation basis of accounting. In May 1999, all the stock of the Company
was sold to a third party and shortly thereafter, the Company commenced
liquidation. As a result, effective January 1, 1998, the Company changed its
method of accounting from the going-concern basis to the liquidation basis.
The change to the liquidation basis method of accounting from the going
concern basis did not have a material effect on the financial statements as
of December 31, 1998 or for the year then ended. The accompanying financial
statements for the year ended December 31, 1997 were prepared on the basis of
the Company continuing as a going concern.
CONCENTRATION OF RISK AND MAJOR CUSTOMERS - The Company operates exclusively
in the software industry, accordingly, segment information relating to
operations in different industries is not presented in these financial
statements. The concentration of business in the highly competitive software
industry subjects the Company to concentrated market risk. Sales to any major
customer in 1997 and 1998 were not significant.
FAIR VALUES OF FINANCIAL INSTRUMENTS - The amounts reported as bank
overdraft, amounts due under asserted and unasserted claims, debt to related
party and notes payable are considered to reasonable approximations of their
fair value. The fair value estimates are based on managements' estimates of
market information available at the time of the preparation of the financial
statements.
INVENTORY - During 1997, inventory was stated at the lower of cost or market,
cost was determined using the first-in, first-out method and consisted of
packaged software. The cost of products consigned from publishers is not
reflected in the financial statements until sold and revenue is recognized.
During the year ended December 31, 1998, based on managements' estimate of
the liquidation market value of the inventory, the Company recognized an
impairment loss relating to the inventory in the amount of $2,501,654.
ADVERTISING COSTS - Advertising costs have been recognized as expense when
incurred. Advertising costs were $129,595 and $83,685 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
-78-
<PAGE>
payable except during loss periods when those potentially issuable common
shares would decrease the loss per share. There were no potentially issuable
common shares outstanding at December 31, 1998.
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. The cost of products sold is recognized
at the date the sale is recognized less an estimate for sales returns. Until
the sale is recognized, the cost of products consigned from publishers is not
reflected in the financial statements.
NOTE 2 - NOTES PAYABLE
Notes payable consisted of a 9.75% line of credit payable to a bank; secured
by all assets of the Company; payment due on demand; in default for $986,531.
During October 1996, the Company received a line of credit with a bank that
provided borrowing up to the lessor of $1,500,000 or 65% of eligible accounts
receivable and 100% of all certificates of deposit held by the bank. The loan
agreement required the Company to maintain financial covenants as specified
in the loan agreement. During the year ended December 31, 1996, the Company
borrowed $500,000 on the line of credit. During the year ended December 31,
1997, the Company borrowed $650,000 and made principal payments of $5,000.
During the year ended, December 31, 1998, the Company was in violation of the
loan covenants and was in default on the loan. Accordingly, a certificate of
deposit held by the bank in the amount of $513,468, consisting of $500,000
principal and $13,468 of accrued interest, was applied against the loan
leaving a balance owing of $986,531.
NOTE 3 - DEBT TO RELATED PARTY
During September 1996, the Company issued 7% subordinated notes payable to
certain shareholders in the amount of $800,000 in exchange for cash proceeds
of the same amount. During November 1998, these notes were converted into
600,000 shares of eSynch's Series I Convertible Preferred stock.
NOTE 4 - IMPAIRMENT CHARGES
The Company's management has estimated the net present value of its assets
based on expected future sales and estimated future cash flows. During the
year ended December 31, 1998, impairment charges of $2,880,418 were
recognized. The impairment charges included the recognition of $2,501,654 for
obsolete software inventory and $378,764 for the impairment of other assets.
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:
<TABLE>
<S> <C>
Operating loss carry forwards $ 2,030,843
Valuation Allowance (2,030,843)
----------------
NET DEFERRED TAX ASSET $ --
================
</TABLE>
For tax reporting purposes, the Company has net operating loss carry forwards
in the amount of $5,359,399 which will expire beginning in the year 2011.
-79-
<PAGE>
The following is a reconciliation of the amount of benefit that would result
from applying the federal statutory rate to pretax loss with the provision
for income taxes.
<TABLE>
<CAPTION>
FOR THE
YEARS ENDED
DECEMBER 31,
--------------------------
1998 1997
------------- ----------
<S> <C> <C>
Tax benefit at statutory rate (34%) $ (2,262,231) $ (336,665)
Non-deductible expenses 1,156,200 --
Change in valuation allowance 1,514,564 397,463
State tax benefit, net of federal tax effect (408,533) (60,798)
------------- ----------
NET INCOME TAX BENEFIT $ -- $ --
============ ==========
</TABLE>
NOTE 6 - COMMITMENTS AND CONTINGENCIES
OPERATING LEASE - During November 1996, the Company entered into a lease
agreement for a facility located in Petaluma, California through December
2001. Monthly payments of $14,000 were required under the lease subject to
periodic increases based on the Consumer Price Index. In early 1999, the
Company discontinued using the Petaluma facility and sought to terminated the
lease. Subsequently, the owner of the Petaluma facility filed suit against
Softkat for the unpaid rent. In February 1999, a default judgment was
obtained by the plaintiff against the Company for $38,273. Subsequently, the
plaintiff filed a complaint against the Company seeking damages of the
original $38,273 plus $8,255 in interest for a total of $46,528. The
complaint is scheduled to be heard during April 2000. The stage of the
proceedings does not allow the Company to estimate the probability of an
unfavorable outcome at this time. The default judgment of $38,273 has been
accrued in the financial statements and is included in amounts due under
asserted and unasserted claims.
Rent expense was approximately $89,010 and $96,900 for the years ended
December 31, 1998 and 1997, respectively.
LITIGATION - The Company is a defendant in a lawsuit filed by a third-party
for alleged breach of distribution and licensing agreements. The amount
claimed is $100,000. The Company asserts that it has paid money and
substantial merchandise to the plaintiff in satisfaction of a large portion
of the amount due under the agreements. The Company believes that the
potential exposure is much less than the amount claimed. The stage of the
proceedings does not allow the Company to estimate the probability of an
unfavorable. No provision for a possible loss from this proceeding has been
accrued in the accompanying financial statements.
The Company is a defendant in a number of lawsuits and collection actions
filed by various third-parties. The damages asserted in these claims have
been accrued in the accompanying financial statements and are included in
amounts due under asserted and unasserted claims.
NOTE 7 - STOCKHOLDERS' DEFICIT
During 1997, the Company issued 982,500 shares of common stock for cash of
$1,428,912, net of $536,088 of offering costs, resulting in net proceeds from
the offering of $1.45 per share.
During 1997, notes payable totaling $255,000 were converted to equity by the
Company issuing 127,500 shares of its common stock.
-80-
<PAGE>
Also during 1997, the Company issued 129,424 shares of common stock valued at
$33,650, or $0.26 per share, to shareholders as a result of the Company's
failure to meet financial results as specified in a rights agreement dated
September 20, 1996.
During January 1997, the Company repurchased 340,000 shares of common stock
shares held by a former employee due to the termination of his employment.
The purchase price of the common stock was $100,000, or $0.29 per share. No
other rights were acquired from the former employee in the transaction.
NOTE 8 - SUBSEQUENT EVENTS
On May 25, 1999, all of the stock of the Company was sold by eSynch to an
unrelated third party for $50,000 of cash. Shortly thereafter, the Company
commenced liquidation.
-81-
<PAGE>
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
MEMBER OF AICPA DIVISION OF FIRMS Fax (801) 532-7944
MEMBER OF SECPS 345 East Broadway, Suite 200
MEMBER OF SUMMIT INTERNATIONAL ASSOCIATES Salt Lake City, Utah 84111-2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
Kiss Software Corporation
We have audited the accompanying balance sheet of Kiss Software Corporation
as of December 31, 1998 and the related statements of operations,
stockholders' deficit, and cash flows for the year ended December 31, 1998
and for the period from February 14, 1997 (date of inception) through
December 31, 1997. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Kiss Software Corporation as
of December 31, 1998 and the results of its operations and its cash flows for
the year ended December 31, 1998 and for the period from February 14, 1997
(date of inception) through December 31, 1997 in conformity with generally
accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered substantial and recurring
losses from operations and negative cash flows from operating activities. At
December 31, 1998, the Company has negative working capital and a capital
deficiency. These factors raise substantial doubt about the Company's ability
to continue as a going concern. Management's plan in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
July 1, 1999
-82-
<PAGE>
KISS SOFTWARE CORPORATION
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
ASSETS
<S> <C>
CURRENT ASSETS
Cash ............................................................................ $ 11,601
Inventory ....................................................................... 101,857
Prepaid expenses................................................................. 21,185
Other assets..................................................................... 22,784
----------------
TOTAL ASSETS........................................................................... $ 157,427
================
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Trade accounts payable........................................................... $ 297,874
Accrued liabilities.............................................................. 405,344
Notes payable - current portion.................................................. 11,355
----------------
TOTAL CURRENT LIABILITIES................................................... 714,573
----------------
LONG-TERM NOTES PAYABLE, NET........................................................... 584,798
----------------
MANDATORILY REDEEMABLE PREFERRED STOCK - $0.001 par value; 1,818,750 series A
shares authorized; 1,577,803 shares issued and outstanding; liquidation
preference - $690,925........................................................... 739,405
----------------
STOCKHOLDERS' DEFICIT
Preferred Stock - $0.001 par value; 1,181,250 shares
authorized; none issued and outstanding.......................................... --
Common stock - $0.001 par value; 20,000,000 shares
authorized; 4,030,000 issued and outstanding.................................. 4,030
Additional paid-in capital....................................................... 398,970
Accumulated deficit.............................................................. (2,284,349)
-----------------
TOTAL STOCKHOLDERS' DEFICIT................................................. (1,881,349)
-----------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT............................................ $ 157,427
================
</TABLE>
The accompanying notes are an integral part of these financial statements.
-83-
<PAGE>
KISS SOFTWARE CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
PERIOD
FEBRUARY 14,
1997
(DATE OF
FOR THE INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
----------------- ----------------
<S> <C> <C>
PRODUCT SALES.................................................$ 1,596,375 $ 1,144,358
COST OF GOODS SOLD............................................ 415,380 261,147
----------------- ----------------
GROSS PROFIT ................................................. 1,180,995 883,211
----------------- ----------------
OPERATING AND OTHER EXPENSES
General and administrative ................................. 1,201,053 831,741
Selling and marketing....................................... 1,118,312 981,437
Interest.................................................... 25,545 --
Loss on sale of securities.................................. 9,502 65,036
----------------- ----------------
TOTAL OPERATING AND OTHER EXPENSES.......................... 2,354,412 1,878,214
----------------- ----------------
NET LOSS .................................................... (1,173,417) (995,003)
PREFERRED DIVIDENDS........................................... (115,929) --
----------------- ----------------
LOSS APPLICABLE TO COMMON SHAREHOLDERS........................$ (1,289,346) $ (995,003)
================= ================
</TABLE>
The accompanying notes are an integral part of these financial statements.
-84-
<PAGE>
KISS SOFTWARE CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL ACCUMULATED
---------------------------- PAID-IN STOCKHOLDERS' TOTAL
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
------------- ----------- ------------ ----------------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE - FEBRUARY 14, 1997
(DATE OF INCEPTION)................. - $ - $ - $ - $ -
Shares issued for cash................ 500,000 500 49,500 - 50,000
Shares issued for marketable
securities.......................... 3,500,000 3,500 244,880 - 248,380
Shares issued for services............ 30,000 30 2,970 - 3,000
Compensation relating to the
contribution of marketable
securities........................... - - 101,620 - 101,620
Net loss for the period............... - - - (995,003) (995,003)
------------- ----------- ------------ ----------------- ----------------
BALANCE - DECEMBER 31, 1997........... 4,030,000 4,030 398,970 (995,003) (592,003)
Accrued preferred dividends........... - - - (115,929) (115,929)
Net loss for the year................. - - - (1,173,417) (1,173,417)
------------- ----------- ------------ ----------------- ---------------
BALANCE - DECEMBER 31, 1998........... 4,030,000 $ 4,030 $ 398,970 $ (2,284,349) $ (1,881,349)
============= =========== ============ ================= ===============
</TABLE>
The accompanying notes are an integral part of these financial statements.
-85-
<PAGE>
KISS SOFTWARE CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE PERIOD
FEBRUARY 14, 1997
FOR THE (DATE OF INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
---------------- -------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss ......................................................... $ (1,173,417) $ (995,003)
Adjustments to reconcile net loss to net cash used
by operating activities:
Amortization of intangible assets.................................. 49,958 81,022
Realized loss on sale of securities................................ 6,375 61,924
Stock issued for services.......................................... - 3,000
Compensation relating to the issuance of shares
for contribution of stock.......................................... - 101,620
Payment of company expenses by officers............................ - 412,021
Changes in operating assets and liabilities:
Inventory...................................................... 57,893 (159,750)
Prepaid assets................................................. 15,930 (37,115)
Intangibles and other assets................................... (20,963) (132,781)
Accounts payable............................................... 142,231 403,481
Accrued liabilities............................................ 190,900 214,444
-------------- -----------
NET CASH USED BY OPERATING ACTIVITIES.................................. (731,093) (47,137)
-------------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from the sale of securities................................... 12,375 167,706
-------------- -----------
NET CASH PROVIDED BY INVESTING ACTIVITIES.............................. 12,375 167,706
-------------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of common stock................................. - 50,000
Proceeds from the issuance of mandatorily redeemable
preferred stock (net of $23,426 offering costs)........................ 623,474 -
Principal payments on notes payable.................................... (6,000) (57,724)
--------------- -----------
NET CASH PROVIDED BY (USED BY) FINANCING ACTIVITIES.................... 617,474 (7,724)
-------------- ------------
NET INCREASE (DECREASE) IN CASH ........................................ (101,244) 112,845
CASH - BEGINNING OF PERIOD............................................... 112,845 -
--------------- -----------
CASH - END OF PERIOD.................................................... $ 11,601 $ 112,845
============== ===========
</TABLE>
SUPPLEMENTAL CASH FLOW INFORMATION AND NONCASH INVESTING AND
FINANCING ACTIVITIES - NOTE 4
The accompanying notes are an integral part of these financial statements.
-86-
<PAGE>
KISS SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT POLICIES
ORGANIZATION AND NATURE OF OPERATIONS - Kiss Software Corporation was
incorporated under the laws of California on February 14, 1997. The primary
activities of Kiss have consisted of distributing computer utility software
principally through wholesale distribution channels. On April 1, 1999, Kiss
completed the terms of an Agreement and Plan of Merger with eSynch Corporation
whereby Kiss became a wholly owned subsidiary of eSynch Corporation.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
BUSINESS CONDITION - The financial statements have been prepared in conformity
with generally accepted accounting principles, which contemplates continuation
of Kiss as a going concern. Kiss has incurred losses from operations and
negative cash flows from operating activities and has accumulated a deficit at
December 31, 1998 in the amount of $2,284,349. These conditions raise
substantial doubt about the Kiss's ability to continue as a going concern.
Effective April 1, 1999, Kiss was acquired by eSynch. eSynch's management plans
to mitigate the impact of these conditions by obtaining additional equity
financing through the issuance of eSynch's common stock, convertible preferred
stock or warrants. However, realization of the proceeds from these potential
transactions is not assured. These financial statements do not include any
adjustments relating to the recoverability or classification of recorded assets
or amounts and classifications of liabilities that might be necessary should
Kiss be unable to continue as a going concern
FAIR VALUES OF FINANCIAL INSTRUMENTS - The amounts reported as cash, trade
accounts payable, notes payable, and accrued liabilities are considered to be
reasonable approximations of their fair values. The fair value estimates were
based on market information available to management at the time of the
preparation of the financial statements.
INVENTORY - Inventory is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. Inventory balance at year-end
consisted of packaged software.
INVESTMENT IN SECURITIES - During the year ended December 31, 1998 Kiss held
investments in marketable securities which were designated as
available-for-sale. Realized gains and losses have been recorded using the
first-in first-out method. During the year ended December 31, 1998 and the
period ended December 31, 1997, total proceeds from the sale of securities were
$12,375 and $167,706, respectively, with gross realized losses of $6,375 and
$53,174, respectively.
-87-
<PAGE>
KISS SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
INTANGIBLES - Kiss has various intangible assets which were amortized over a
period of twelve months. Amortization expense was $49,958 and $81,022 during the
year ended December 31, 1998 and the period ended December 31, 1997,
respectively.
STOCK-BASED COMPENSATION - Stock-based compensation to employees is measured by
the intrinsic value method. This method recognizes compensation expense related
to stock options granted to employees based on the difference between the fair
value of the underlying common stock and the exercise price of the stock option
on the date granted. Compensation expense related to stock options and warrants
granted to non-employees is determined based upon the fair value of the stock
options and warrants on the date granted.
RETIREMENT BENEFIT PLANS - During the year ended December 31, 1998, Kiss
established a 401(k) profit sharing plan for its employees. In order to be
eligible, an employee must be 21 years of age, be employed full-time and be
employed for a period of six months. Employees are allowed to voluntarily
contribute to the Plan. Kiss is not obligated to make contributions to the Plan.
During the year ended December 31, 1998, Kiss did not make a contribution to the
plan but paid $2,875 in management fees associated with the plan.
ADVERTISING COSTS - Advertising costs have been recognized as expenses at the
time the advertising occurs. These expenses amounted to $294,957 and $128,169
during the year ended December 31, 1998 and the period ended December 31, 1997,
respectively.
REVENUE RECOGNITION - Kiss sells software products at fixed prices for which the
right to return is granted to the buyer. Accordingly, revenue is recognized when
the buyer has paid for the products and the amount of future returns can be
reasonably estimated. Cost of products sold is recognized at the date the sale
is recognized.
CONCENTRATION OF RISK AND MAJOR CUSTOMERS - Kiss operates exclusively in the
software industry, accordingly, segment information relating to operations in
different industries is not presented in these financial statements. The
concentration of business in one industry subjects Kiss to concentrated market
risk. During the year ended December 31, 1998 sales to two major customers
totaled 44 % and 25 % of sales, respectively. During the period ended December
31, 1997, sales to three major customers totaled 32%, 32%, and 16% of sales,
respectively.
MAJOR SUPPLIERS - Kiss' inventory planning, production and distribution is
completed by a third party, pursuant to a fulfillment and distribution turnkey
agreement Under the terms of the agreement, the third party purchases raw
materials in accordance with Kiss' production forecast. The raw material, until
converted to the finished product, remains the property of the third party.
Substantially all costs of sales included in the accompanying statement of
operations relate to amounts paid under the terms of this agreement. As of
December 31, 1998, this vendor accounted for 15% of trade accounts payable.
NEW ACCOUNTING STANDARDS - In March 1998, the AICPA issued SOP 98-1, ACCOUNTING
FOR THE COSTS OF COMPUTER SOFTWARE DEVELOPED OR OBTAINED FOR INTERNAL USE. Kiss
is required to adopt this standard in 1999 and does not expect this statement to
have a material impact on Kiss' financial position, results of operations or
cash flows.
-88-
<PAGE>
KISS SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
The Financial Accounting Standard Board issued SFAS No. 133, ACCOUNTING FOR
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES in June 1998. This statement is
effective for the year beginning January 1, 2000 and will not require
retroactive restatement of prior period financial statements. Kiss does not
believe the new statement will have any impact on Kiss' financial position,
results of operations or cash flows.
NOTE 2--NOTES PAYABLE
Notes payable consisted of the following:
<TABLE>
<S> <C>
7% Convertible promissory note payable to an officer; interest due quarterly;
principal payable $29,534 quarterly beginning March 2001; unsecured .................... $ 236,270
7% Convertible promissory note payable to a shareholder;
interest due quarterly; principal payable $14,754 quarterly
beginning March 2001; unsecured......................................................... 118,027
6.25% Promissory note payable to an unrelated party; principal
and interest payable $3,000 monthly through January 15, 1999, principal and
interest payable $4,000 monthly thereafter; unsecured; in default ...................... 241,856
-------------
TOTAL NOTES PAYABLE..................................................................... 596,153
LESS: CURRENT PORTION................................................................... (11,355)
--------------
LONG-TERM NOTES PAYABLE................................................................. $ 584,798
=============
</TABLE>
The 7% promissory notes payable to the officer and to the shareholder are
convertible into shares of Kiss' common stock at a conversion price of $.41 per
share provided the aggregate principal amount per note to be converted does not
exceed $41,000. Subsequent to December 31, 1998, $41,000 of the officer's note
payable and $41,000 of the shareholder's note payable were converted into a
total of 200,000 shares of Kiss' common stock.
The annual interest rate on the 6.25% promissory note changes to 15% annual
interest on unpaid, mature, principal amounts. Kiss has not made any payments on
the loan since January 1999 and the loan is currently in default.
NOTE 3--INCOME TAXES
There was no provision for or benefit from income tax for any period. The
components of the net deferred tax asset at December 31, 1998 are shown below:
<TABLE>
<S> <C>
Operating loss carry forwards............................................ $ 868,264
Valuation Allowance ................................................... (868,264)
NET DEFERRED TAX ASSET................................................... $ --
===============
</TABLE>
Kiss has net operating loss carry forwards in the amount of $1,990,425 which
will expire beginning in the year 2011.
-89-
<PAGE>
KISS SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
The following is a reconciliation of the amount of tax (benefit) that would
result from applying the federal statutory rate to pretax loss with the
provision for income taxes.
<TABLE>
<CAPTION>
FOR THE PERIOD
FEBRUARY 14, 1997
FOR THE DATE OF INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
----------------------------------------
<S> <C> <C>
Tax at statutory rate (34%)................................................ $ (398,962) $ (338,301)
Non-deductible expenses.................................................... 1,518 587
Change in valuation allowance.............................................. 469,474 398,790
State tax benefit, net of federal tax effect............................... (73,925) (62,685)
Change in effective tax rate............................................... 1,895 1,609
--------------- -----------------
Net Income Tax Expense..................................................... $ -- $ --
=============== =================
</TABLE>
NOTE 4 - SUPPLEMENTAL CASH FLOW INFORMATION AND NONCASH
INVESTING AND FINANCING ACTIVITIES
SUPPLEMENTAL CASH FLOW INFORMATION -
<TABLE>
<CAPTION>
FOR THE PERIOD
FEBRUARY 14, 1997
FOR THE (DATE OF INCEPTION)
YEAR ENDED THROUGH
DECEMBER 31, DECEMBER 31,
1998 1997
--------------- -------------------
<S> <C> <C>
Cash paid for interest ................................................ $ 2,637 $ --
=============== ===================
</TABLE>
NONCASH INVESTING AND FINANCING ACTIVITIES - During the year ended December 31,
1998, Kiss converted $247,856 of accounts payable to notes payable and accrued
dividends payable to the holders of Series A Preferred Shares in the amount of
$44,025. Kiss recognized $71,905 of additional dividends as a result of a
beneficial conversion feature relating to the issuance of Series A Preferred
shares.
During the period ended December 31, 1997, Kiss issued 3,500,000 common stock in
exchange for marketable securities. The market value of the securities at the
dates of contribution was $248,380.
NOTE 5 - STOCKHOLDERS' EQUITY
Under the terms of its articles of incorporation, Kiss is authorized to issue
20,000,000 shares of common stock, par value $0.001 per share, and 3,000,000
shares of preferred stock, par value $0.001 per share. The shares of preferred
stock may be issued in any number of series, as determined by the board of
directors. The board may fix the designation and number of shares of any such
series, and may determine, alter or revoke the rights, preferences, privileges
and restrictions pertaining to any wholly unissued class or series of shares of
preferred stock. The board may thereafter in the same manner increase or
decrease the number of shares of any such series (but not below the number of
shares of that series then outstanding).
-90-
<PAGE>
KISS SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
On February 23, 1998, the board of directors designated 1,818,750 shares of
preferred stock as Series A convertible preferred stock ("Series A shares").
Series A shares have a liquidation preference of $0.41 per share. Cumulative
dividends accrue at 7% annually from the date issued and are payable when and as
declared by the board of directors. The Series A shares are convertible into
common stock at $0.41 by the conversion price which was defined as $0.41
initially and was adjustable based upon future unaudited gross revenues and net
income of Kiss.
During the year ended December 31, 1998, Kiss issued 1,577,803 shares of
redeemable Series A Preferred Stock for $623,474 cash, net of offering costs.
Holders of Series A Preferred Stock were entitled to receive cumulative
dividends which accrued on the last day of each March, June, September and
December at the rate per annum of 7% per share, calculated as a percentage of
the $0.41 liquidation amount per share. The accumulated amount of dividends as
of December 31, 1998 was $44,024. The Series A Preferred Shares were subject to
automatic redemption on March 1, 2002 and the redemption price for each share of
Series A Preferred was $0.41 per share plus any accrued but unpaid dividends.
The total amount of the redemption as of December 31, 1998 was $690,925.
During the year ended December 31, 1998, Kiss recognized $71,905 of additional
dividends as a result of the beneficial conversion feature associated with the
issuance of the Series A Preferred shares. On the date issued, the conversion
price of $2.39 was less than the market value of the related common stock into
which it was convertible.
During the period ended December 31, 1997, Kiss issued 500,000 shares of common
stock for $50,000 cash and 30,000 common shares for services valued at $3,000,
or $.10 per common share. The value of the services was determined based upon
the value at which common shares were issued for cash during 1997. During the
period ended December 31, 1997, Kiss issued 3,500,000 common shares for
marketable securities with a market value on the date received of $248,380, or
approximately $.07 per common share. In association with this issuance, Kiss
recognized $101,620 of compensation expense relating to the beneficial
conversion of the stock for the marketable securities.
NOTE 6 - STOCK OPTIONS
On May 16, 1997, the Board of Directors approved the 1997 Stock Option Plan
("the Plan") which authorizes options to purchase 600,000 shares of common
stock. Throughout 1997, options to purchase 640,000 common shares were granted,
40,000 of which were granted outside of the Plan. Options granted under the Plan
are exercisable over periods determined by the Board of Directors, not to exceed
10 years from the date of grant. Options generally vest from immediately to four
years. The exercise price of all options granted under the Plan was equivalent
to the fair value of Kiss' common stock on the date of grant, or $.41 per share.
The options expire in 2007. No compensation expense was recognized as result of
the granting of these options.
On December 31, 1998, additional options to purchase 200,000 common shares were
granted. These options were granted outside of any existing stock option plan.
These options vested immediately and expire on December 31, 2008. The exercise
price of these options is $.51 per share. No compensation expense was recognized
as a result of the granting of these options.
-91-
<PAGE>
KISS SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
A summary of the status of the Kiss' stock options as of December 31, 1998 and
1997 and changes during the year and period then ended are presented below:
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------------------------------------------
1998 1997
-----------------------------------------------------------------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
------------- ------------ ------------- -----------
<S> <C> <C> <C> <C>
Outstanding at beginning of period....... 640,000 $ 0.41 -- $ 0.00
Granted .............................. 200,000 0.51 640,000 0.41
Outstanding at end of period............. 840,000 0.43 640,000 0.41
============= =============
Options exercisable at end of
period............................. 546,670 0.45 200,000 0.41
============= =============
Weighted-average fair value of
options granted during period............ $ 0.00 $ 0.00
================ =============
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
WEIGHTED-
RANGE OF AVERAGE WEIGHTED- WEIGHTED-
EXERCISE NUMBER REMAINING AVERAGE NUMBER AVERAGE
PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$0.41-0.51 840,000 8.89 years $0.43 546,670 $0.45
</TABLE>
Kiss measures compensation under stock-based options and plans using the
intrinsic value method prescribed in Accounting Principles Board Opinion 25,
ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES, and related interpretations.
Stock-based compensation charged to operations was $0 and $0 for the year and
period ended December 31, 1998 and 1997. Had compensation cost for Kiss' options
been determined based on the fair value at the grant dates consistent with the
alternative method set forth under Statement of Financial Accounting Standards
No. 123, ACCOUNTING FOR STOCK-BASED COMPENSATION, net loss would have increased
to the pro forms amounts indicated below. The weighted average assumptions used
to estimate the fair value of each option grant using the Black-Scholes
options-pricing model are presented below:
<TABLE>
<CAPTION>
1998 1997
-------------- ------------
<S> <C> <C>
NET LOSS
As reported................................................................ $ (1,173,417) $ (995,003)
Pro forma.................................................................. (1,173,417) (995,003)
WEIGHTED-AVERAGE ASSUMPTIONS
Dividend yield............................................................ 0.0% 0.0%
Expected volatility....................................................... 0.0% 0.0%
Risk-free interest rate................................................... 5.0% 5.0%
Expected life of options in years......................................... 10.0 10.0
</TABLE>
-92-
<PAGE>
KISS SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
NOTE 7 - RELATED PARTY TRANSACTIONS
For the period ended December 31, 1997, Kiss owed two majority shareholders
reimbursable expenses of $236,270 and $118,027, respectively. On February 27,
1998, these accruals were converted into notes payable (See Note 2).
NOTE 8 - COMMITMENTS AND CONTINGENCIES
Litigation and Other Contingencies - Kiss is a defendant in a lawsuit filed by a
third-party seeking payment for marketing commissions earned after the plaintiff
had been terminated by Kiss for alleged lack of performance. The plaintiff
contends that they are due compensation for commissions that would have been
earned had they not been prematurely terminated by Kiss. The amount the
plaintiff is seeking is undisclosed. Kiss' legal counsel believes that the
amount the plaintiff is seeking is not in excess of $25,000. Kiss is vigorously
defending against the suit claiming that the plaintiff did not perform as
agreed. Kiss is unable to estimate the likelihood of an unfavorable outcome of
this lawsuit at this time. No provision for a possible loss from this proceeding
has been accrued in the accompanying financial statements.
A third-party has asserted a claim in the amount of $53,539 against Kiss seeking
payment for raw inventory materials purchased by the third-party on behalf of
Kiss. The claim asserts that the inventory was purchased on behalf of Kiss as a
result of Company purchase orders and is therefore the Kiss' liability. Kiss
vigorously denies this claim, asserting that the third-party was negligent in
purchasing the material and is therefore liable for the loss. Kiss is unable to
estimate the likelihood of an unfavorable outcome of this claim at this time. No
provision for a possible loss from this claim has been accrued in the
accompanying financial statements.
Kiss is a defendant in a lawsuit in which the plaintiff is seeking $18,000 for
non-payment of services performed by the plaintiff on behalf of Kiss. Kiss and
the plaintiff are currently in negotiations to settle the suit for approximately
$11,500. Kiss has accrued the estimated negotiated settlement of $11,500 in the
accompanying financial statements.
Lease Commitments - Kiss leases office facilities accounted for as an operating
lease. Lease expense for the year ended December 31, 1998 and for the period
ended December 31, 1997 was $14,541 and $3,272, respectively. Future minimum
rental payments on the lease for the year ended December 31, 1999 are $17,396.
The lease expires in 1999.
NOTE 9 - SUBSEQUENT EVENTS
On April 1, 1999, Kiss was acquired by eSynch Corporation, ("eSynch") a
California corporation. Under the agreement, shareholders of Kiss agreed to
exchange each of their common shares for .181557136 common shares of eSynch,
each of their Series A Preferred shares for .4183964 common shares of eSynch and
each of their common stock options for .194270501 common stock options of
eSynch. Under the agreement, eSynch adopted the Kiss option plan and the Kiss
options become exercisable into eSynch common shares upon their exercise at the
original exercise price adjusted for the exchange. The exchange resulted in
eSynch issuing 1,428,134 common shares to Kiss shareholders. Under the option
conversion plan, an additional 163,187 common shares are potentially issuable to
Kiss shareholders as Kiss options are exercised.
-93-
<PAGE>
KISS SOFTWARE CORPORATION
NOTES TO FINANCIAL STATEMENTS
Subsequent to December 31, 1998 but prior to eSynch's purchase of Kiss, $41,000
of the officer's note payable and $41,000 of the shareholder's note payable were
converted into a total of 200,000 shares of Kiss' common stock. Upon eSynch's
acquisition of Kiss, these 200,000 common shares were converted into 36,311
eSynch common shares at a conversion rate of .181557136 (unaudited).
-94-
<PAGE>
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
On June 1, 1998, the Company's Board of Directors elected to retain Hansen
Barnett & Maxwell, a professional corporation as its independent auditor and to
dismiss Grant Thornton LLP ("Grant"). Theretofore Grant had acted as the
Company's independent auditor for each of the two years in the period ended
December 31, 1996. The decision to change auditors was recommended by the
Company's Board of Directors.
The reports of Grant on the financial statements of the Company for each of the
two fiscal years in the period ended December 31, 1996, did not contain any
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles. The reports state that the
financial statements were prepared on the basis of the Company continuing as a
going concern, but that there was substantial doubt about the Company's ability
to continue as a going concern. Grant had not issued an audit report for the
year ended December 31, 1997.
During the Company's two most recent fiscal years and all subsequent interim
periods preceding such change in auditors, there was no disagreement with Grant
on any matter of accounting principles or practices, financial statement
disclosure, or auditing scope or procedure, which, if not resolved to the
satisfaction of the former accountant, would have caused it to make a reference
to the subject matter of the disagreements in connection with its report; nor
has Grant ever presented a written report, or otherwise communicated in writing
to the Company or its Board of Directors the existence of any "disagreement" or
"reportable event" within the meaning of Item 304 of Regulation S-K.
Hansen Barnett & Maxwell had previously audited the Company's financial
statements for the three years ended December 31, 1994.
-95-
<PAGE>
up to 1,965,174 SHARES
ESYNCH CORPORATION
COMMON STOCK,
PAR VALUE $.001 EACH
PROSPECTUS
MARCH 31, 2000
PROSPECTUS DELIVERY OBLIGATIONS
Until ________, _____, all dealers that effect transactions in these securities,
whether or not participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers' obligation to deliver a
prospectus when acting as underwriters and with respect to their unsold
allotments or subscriptions.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers
The information set forth under the heading "DISCLOSURE OF COMMISSION POSITION
ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES" is incorporated herein by
this reference.
Item 25. Other Expenses of Issuance and Distribution
The following sets forth the costs and expenses, all of which shall be borne by
eSynch, in connection with the offering pursuant to this registration statement:
<TABLE>
<CAPTION>
<S> <C>
SEC registration fees $ 8,200.00*
Legal fees and expenses 50,000.00*
Accounting fees and expenses 30,000.00*
Blue sky filing fees
and printing 10,000.00*
Miscellaneous 1,800.00*
-----------
TOTAL $ 100,000.00*
</TABLE>
- --------------
* Estimated.
II-1
<PAGE>
Item 26. Recent Sales of Unregistered Securities
The Company issued the following shares without registration under the
Securities Act of 1933 during the following periods:
Year end December 31, 1997
- --------------------------
The Company issued 60,954 shares of Preferred Stock and 80,059 shares of Common
Stock for services.
The Company also issued approximately 184,069 common shares on conversion of
previously outstanding Series C Preferred Stock. The shares were issued to a
single accredited investor in exchange for outstanding securities of the
Company.
Year end December 31, 1998
- --------------------------
The Company issued 1,033,669 shares of common stock of the Company and 78,706
shares of the Company's newly created Series H Preferred Stock for all of the
issued and outstanding stock of Intermark Corporation. In addition, the Company
assumed Intermark options which are now exercisable to purchase up to 631,800
shares of the Company's common stock. Subsequently, the Series H Preferred Stock
was automatically converted to Common Stock, concurrent with the Company's
November 1998 one-for-ten reverse stock split, into approximately 4,427,213
shares of Common Stock, at the rate of 56.25 shares of Common Stock
(post-reverse-split) per share of Series H Preferred Stock. These issuances were
made pursuant to Section 4(2).
The Company issued approximately 600,000 shares of Series I Preferred Stock and
720,000 shares of Common Stock. The Series I Preferred Stock was initially
convertible into an aggregate of approximately 200,000 shares of Common Stock.
The shares of Common Stock were issued in exchange for all of the outstanding
common stock of SoftKat, Inc. These issuances were made pursuant to Section 4(2)
and Regulation D.
The Company also issued 121,461 shares of Common Stock and 2,692 of Preferred
Stock for services in the amount of $417,985 and 55,000 shares of Common Stock
for interest in the amount of $68,750 and 172,548 shares of Common Stock and
9,428 shares of Preferred Stock for conversion of notes payable and accrued
interest in the amount of $568,100.
Year End December 31, 1999
- --------------------------
The Company issued 1,428,134 shares of Common Stock in exchange for all of the
outstanding common stock and preferred stock of Kiss Software Corporation on
April 1, 1999 and issued options to purchase 163,187 shares of Common Stock of
the Company in exchange for the outstanding options of Kiss Software
Corporation. There were approximately 15 shareholders of Kiss Software
Corporation, all of whom were accredited investors.
The Company issued 450,000 shares of Common Stock in exchange for all of the
outstanding stock of Oxford Media Corporation on September 30, 1999. This
issuance was made pursuant to Section 4(2). There were two shareholders of
Oxford Media Corporation.
The Company also issued Common Stock as follows: 310,377 shares for cash and
notes in the amount $636,069; 972,500 shares for services in the amount of
$1,699,350; 199,999 shares for conversion of the Series I Preferred Stock;
228,322 shares for payment of Notes Payable and accrued interest in the amount
of $584,227; 9,303 shares in settlement of a claim in the amount of $31,526; and
17,000 shares in exercise of stock options and warrants. These issuances were
made pursuant to Section 4(2).
II-2
<PAGE>
The Company also issued 275 shares of Series J Preferred Stock and Warrants to
purchase 196,875 shares of Common Stock in exchange for $2,625,000 in cash. The
Series J Preferred Stock is initially convertible into an aggregate of 785,714
shares of Common Stock. The purchasers were sophisticated, institutional
investors, some of whom were non-US persons. The sales were made pursuant to
Section 4(2), Regulation D Rules 505 and/or 506, Section 4(6) and Regulation S.
The Company also issued 157.5 shares of Series K Preferred Stock and Warrants to
purchase 112,500 shares of Common Stock in exchange for $1,500,000 in cash. The
Series K Preferred Stock is initially convertible into an aggregate of 450,000
shares of Common Stock. The purchasers were sophisticated, institutional
investors, some of whom were non-US persons. The sales were made pursuant to
Section 4(2), Regulation D Rules 505 and/or 506, Section 4(6) and Regulation S.
The Company issued employee stock options to purchase 1,215,000 shares of Common
Stock. The Company also issued warrants to purchase 700,000 shares of Common
Stock to two officers/employees; issued warrants to a Director to purchase
450,000 shares of Common Stock, and issued warrants to consultants to purchase
450,000 shares of Common Stock. These issuances were made pursuant to Section
4(2).
Year End December 31, 2000
- --------------------------
The Company issued 55 shares of Series K Preferred Stock and Warrants to
purchase 37,500 shares of Common Stock in exchange for $500,000 in cash. The
Series K Preferred Stock is initially convertible into an aggregate of 157,142
shares of Common Stock. The purchasers were sophisticated, institutional
investors, some of whom were non-US persons. The sales were made pursuant to
Section 4(2), Regulation D Rules 505 and/or 506, Section 4(6) and Regulation S.
The Company issued 15,000 shares of Common Stock upon the exercise of a warrant
and issued 12,000 shares of Common Stock in settlement of a legal claim.
The Company believes such issuances were exempt pursuant to Regulation D,
Regulation S, Section 4(2) and/or 4(6) of the Securities Act of 1933.
II-3
<PAGE>
Item 27. Exhibits
(c) Exhibits
<TABLE>
<CAPTION>
Exhibit No. Description
<S> <C>
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:
(") Form of Certificate of Designation of
Series H Convertible Preferred Stock;
(B) Intermark Corporation Financial Statements
(Unaudited) for its 1997 Fiscal Year;
(C) Confidentiality Agreement dated March 1998
between the Registrant and Intermark
Corporation;
(D) Disclosure Schedule of Intermark Corporation;
(E) Disclosure Schedule of the Registrant.
2.2(2) First Amendment, dated as of June 17, 1998, of
Agreement and Plan of Share Exchange dated as of
May 8, 1998 among the Company; Intermark
Corporation, a California corporation; and the
Exchanging Security holders of Intermark Corporation
2.3(2) Second Amendment, dated as of July 30, 1998, of
Agreement and Plan of Share Exchange dated as of
May 8, 1998 among the Company; Intermark
Corporation, a California corporation; and the
Exchanging Security holders of Intermark Corporation
2.4(9) Agreement and Plan of Merger dated as of
February 26, 1999 among the Company; SoftKat, Inc.,
a California corporation ("SoftKat"); certain
stockholders, of SoftKat, and INUS-Softkat Acquisition
Corporation, a wholly-owned subsidiary of the
Company. Omitted are the following schedules
or ancillary documents to the agreement identified
immediately above:
(A) Disclosure Schedule of SoftKat;
(B) Disclosure Schedule of the Company.
II-4
<PAGE>
2.5(4) Agreement and Plan of Merger dated as of
February 26, 1999 among the Company; Kiss
Software Corporation, a California corporation
("Kissco"); certain stakeholders,
of Kissco; and ESYN Kissco Acquisition
Corporation, a wholly-owned subsidiary of the
Registrant. Omitted are the following schedules
or ancillary documents to the agreement identified
immediately above:
(A) Escrow Agreement;
(B) Disclosure Schedule of Kissco;
(C) Disclosure Schedule of the Registrant.
2.6(11) Agreement and Plan of Reorganization dated as of
September 30, 1999 among the Registrant, OMC
Acquisition Corp., a Delaware corporation, Oxford
Media Corp., a Delaware corporation ("OMC") and
Norton Garfinkle, individually and as trustee of
each of The Gillian Garfinkle S Corporation Trust
and The Nicholas Garfinkle S Corporation Trust.
Omitted from this Form 8-K filing are the following
schedules or ancillary documents to the agreement
identified immediately above: List of Assets of OMC
2.7(11) Non-Exclusive License Agreement between Oxford
Management Corporation, a Nevada corporation,
and Oxford Media Corporation.
2.8(13) Registration Rights Agreement dated September 30, 1999 between
the Registrant and Norton Garfinkle, individually and as
trustee of each of The Gillian Garfinkle S Corporation Trust
and The Nicholas Garfinkle S Corporation Trust
2.9(16) Agreement of Purchase and Sale of Stock dated as of May 25,
1999 between the Registrant and Kilburn Consultants, Inc., an
Isle of Man corporation.
3.1(13) Restated Certificate of Incorporation of the Company
3.2(8) Bylaws of the Company
4.1(6) January 1999 Stock Plan, including 310,000
shares of Esynch Common Stock granted and
issued to individual consultants named on the
attached Corporate Resolutions**
4.2(6) Corporate Resolutions relating to January, 1999 Stock Plan**
4.11(7) Certificate of Designation - Series I Preferred Stock
4.19.1(13) Certificate of Designation - Series J Preferred Stock
4.19.2(13) First Amendment of Certificate of Designation - Series J
Preferred Stock
4.19.3(13) Second Amendment of Certificate of Designation - Series J
Preferred Stock
II-5
<PAGE>
4.20(15) Certificate of Designation of Relative Rights
and Preferences of Series K Preferred Stock
5.0(17) Opinion of counsel to the Company
10.4(7) Registration Rights Agreement dated August 4, 1998 among the
Company and those holders of the Company's stock listed in
Exhibit A thereto
10.5(7) Form of Stock Option Agreement dated April 24, 1998
between Intermark Corporation and each of Thomas
Hemingway, T. Richard Hutt and James Budd**
10.6(2) Instrument of Option Assumption dated August 4,
1998 between the Company and each of the optionees
named in Exhibit 10.5, among others, resulting in
the Company's assumption of options as follows:
Thomas Hemingway 331,541 shares of common stock at $.83 each
T. Richard Hutt 132,616 shares of common stock at $.83 each
James Budd 132,616 shares of common stock at $.83 each**
10.7.1(10) Employment Agreement dated as of March 1, 1999 between the
Company and Thomas Hemingway.**
10.7.2(11) Employment Agreement dated as of March 1, 1999 between the
Company and Donald C. Watters, Jr.;
Employment Agreement dated as of April 1, 1999 between the
Company and James H. Budd;
Employment Agreement dated as of April 1, 1999 between the
Company and T. Richard Hutt;
Employment Agreement dated as of April 1, 1999 between the
Company and Robert Way; and
Employment Agreement dated as of September 8, 1999 between the
Company and David Noyes.**
10.8(14) 1999 Stock Incentive Plan.**
10.9(14) Form of Indemnification Agreement entered into with certain
officers and directors of the Company.**
10.10(14) Lease agreement for the Company's headquarters
10.11.1(14) Series J Convertible Preferred Stock Purchase Agreement
dated as of July 22, 1999
10.11.2(14) Amendment dated as of October 29, 1999 to the Series J
Convertible Stock Purchase Agreement
10.12(14) Registration Rights Agreement dated as of July 22, 1999
II-6
<PAGE>
10.13(14) Form of Warrant issued in the placement of Series J Preferred
Stock in the following respective amounts:
Exp. Exercise
Date Amount Holder Price
-------- -------- ---------------------------- ---------
08/13/02 37,500 Amro International, S.A. $3.00
09/30/02 37,500 Austinvest Anstalt Balzers $5.17
09/30/02 37,500 Esquire Trade & Finance Inc. $5.17
08/13/02 30,000 Manchester Asset Management,
Ltd. $3.00
08/13/02 26,250 Gilston Corporation, Ltd. $3.00
08/13/02 18,750 Triton Private Equity Fund L.P. $3.00
10/29/02 9,375 Talbiya Investments Ltd. $3.45
10.14(15) Series K Convertible Preferred Stock Purchase Agreement dated as
of December 30, 1999 among the Registrant and the Purchasers
named therein
10.15(15) Registration Rights Agreement dated as of December 30, 1999
among the Registrant and the Purchasers named therein
10.16(15) Form of Warrant to Purchase Shares of Common Stock of the
Registrant dated as of December 30, 1999 issued by the
Registrant in the following respective amounts:
Approximate
Exp. Exercise
Date Amount Holder Price
-------- -------- ---------------------------- ---------
01/31/03 37,500 Aqua Wellington Small Cap
Value Fund Limited $12.36
12/31/02 45,000 Dandee, Ltd. $ 6.47
12/31/02 22,500 Lightline Limited $ 6.47
12/31/02 22,500 Roseworth Group Limited $ 6.47
12/31/02 22,500 Tonga Partners, L.P. $ 6.47
12/31/02 5,625 Intercoastal Financial
Services Corp. $ 6.47
01/31/03 3,750 Intercoastal Financial
Services Corp. $12.36
23.1 Consent of Hansen Barnett & Maxwell, LLP, independent certified
public accountants.
23.2(17) Consent of the Company's legal counsel (included in exhibit 5.0).
25.0(13) Power of Attorney (included on the signature page).
99(9) Press Release on sale of SoftKat, Inc.
</TABLE>
II-7
<PAGE>
--------------
** Indicates management compensation arrangements.
(1) Incorporated by reference to the like-numbered exhibit to the
Company's Form 8-K filed May 12, 1998.
(2) Incorporated by reference to the like-numbered exhibit to the
Company's Form 8-K filed August 20, 1998.
(4) Incorporated by reference to the like-numbered exhibit to the
Company's Form 8-K filed April 19, 1999.
(5) Incorporated by reference to Exhibit A to the Company's Schedule 14A
filed October 7, 1998.
(6) Incorporated by reference to the like-numbered exhibit to the
Company's Form S-8 filed February 1, 1999.
(7) Incorporated by reference to the like-numbered exhibit to the
Company's Form 10-QSB filed November 25, 1998.
(8) Incorporated by reference to the like-numbered exhibit to the
Company's Registration Statement (Registration No. 33-33136-D).
(9) Incorporated by reference to the like-numbered exhibit to the
Company's Form 10-KSB filed June 25, 1999.
(10) Incorporated by reference to the like-numbered exhibit to the
Company's Form 10-QSB filed August 19, 1999.
(11) Incorporated by reference to the like-numbered exhibit to the
Company's Form 8-K filed October 15, 1999.
(12) Incorporated by reference to the like-numbered exhibit to the
Company's Form 10-QSB filed November 15, 1999.
(13) Incorporated by reference to the like-numbered exhibit to the
Company's Form SB-2 filed November 29, 1999.
(14) Incorporated by reference to the like-numbered exhibit to the
Company's Form SB-2/A filed January 18, 2000.
(15) Incorporated by reference to the like-numbered exhibit to the
Company's Form 8-K filed February 15, 2000.
(16) Incorporated by reference to the like-numbered exhibit to the
Company's Form 8-K filed February 8, 2000.
(17) Incorporated by reference to the like-numbered exhibit to the
Company's Form SB-2/A filed February 15, 2000.
II-8
<PAGE>
Item 28. Undertakings
(a) The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement.
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be deemed the
initial bona fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities that remain unsold at the end of the offering.
(e) Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, the small
business issuer has been advised that in the opinion of the SEC such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the small business issuer of
expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
(f) (1) For determining any liability under the Securities Act, treat the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer under Rule 424(b)(1), or (4) or
497(h) under the Securities Act (sections 230.424(b)(1), (4) or 230.497(h)) as
part of this registration statement as of the time the Commission declared it
effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of securities at that time as the initial bona fide offering
of those securities.
II-9
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements of filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, in the City of Tustin,
State of California, on March 31, 2000.
ESYNCH CORPORATION
By: /s/ THOMAS C. HEMINGWAY
--------------------------------------------
Thomas C. Hemingway, Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
Signature Title Date
- --------- ----- ----
/s/ THOMAS C. HEMINGWAY Chairman, Chief Executive March 31, 2000
- ------------------------ Officer and Director
Thomas C. Hemingway
/s/ T. RICHARD HUTT* Secretary, Vice President March 31, 2000
- ------------------------ and Director
T. Richard Hutt
/s/ DAVID NOYES* Chief Financial Officer March 31, 2000
- ------------------------ (Chief Financial and
David Noyes Accounting Officer)
/s/ DONALD WATTERS, JR.* President and Director March 31, 2000
- ------------------------
Donald Watters, Jr.
/s/ JAMES H. BUDD* Vice President and Director March 31, 2000
- ------------------------
James H. Budd
/s/ NORTON GARFINKLE* Director March 31, 2000
- ------------------------
Norton Garfinkle
/s/ DAVID LYONS* Director March 31, 2000
- ------------------------
David Lyons
/s/ ROBERT ORBACH* Director March 31, 2000
- ------------------------
Robert Orbach
* By: /s/ THOMAS C. HEMINGWAY
------------------------
Attorney-in-Fact
II-10
<PAGE>
[LETTERHEAD]
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We consent to the incorporation by reference of our report dated March 3,
2000, with respect to the consolidated financial statements of eSynch
Corporation and Subsidiaries as of December 31, 1999 and 1998 and for the two
years then included in the Registration Statement on Form SB-2 and related
Prospectus of eSynch Corporation for the registration of up to 2,115,174
shares of common stock (the "Registration Statement").
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
March 31, 2000
