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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-3
REGISTRATION STATEMENT
Under
The Securities Act of 1933
ESYNCH CORPORATION
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Delaware 87-0461856
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(State or other jurisdiction (I.R.S. Employer I.D. Number)
of incorporation or organization)
15502 Mosher Avenue
Tustin, CA 92780
(714) 258-1900
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(Address and telephone number of registrant's principal executive offices)
Thomas Hemingway
Chief Executive Officer
eSynch Corporation
15502 Mosher Avenue
Tustin, CA 92780
(714) 258-1900
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(Name, Address and telephone number of agent for service)
Copy to:
Nicholas J. Yocca, Esq.
Yocca Patch & Yocca LLP
19900 MacArthur Blvd., Suite 650, Irvine, California 92612
Approximate date of commencement of proposed sale to public: As soon as
practicable after the registration statement is declared effective.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, 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 pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [ X ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration number of the earlier effective
registration statement for the same offering. [ ]
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If this Form is a post-effective amendment filed pursuant to Rule
462(b) under the Securities Act, check the following box and list the Securities
Act registration number of the earlier effective registration statement for the
same offering. [ ]
If delivery of the report is expected to be made pursuant to Rule 434,
please check the following box. [ ]
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 175,000 $1.437 $251,475 $66.39
Par value $.001(2)
Common Stock 1,864,800 $1.437 $2,679,718 $707.45
Par value $.001,
underlying Convertible
Debenture(2)(3)
Common Stock 937,500 $1.437 $1,347,188 $355.66
Par value $.001,
underlying
Warrants(2)(3)
Total Registration Fee $1,129.49
</TABLE>
(1) Pursuant to Rule 457 (c), estimated solely for the purpose of
calculating the registration fee and based on the last sale price on the
Nasdaq Stock Market on December 11, 2000.
(2) Securities being registered for resale only.
(3) Shares of common stock which may be offered pursuant to this
Registration Statement, which shares are issuable upon conversion of the
Secured Convertible Debentures and upon exercise of the related Warrants.
For purposes of estimating the number of shares of common stock to be
included in this Registration Statement, the Company calculated 200% of the
number of shares of common stock issuable upon conversion of the Secured
Convertible Debentures and 150% of the number of shares of common stock
issuable upon exercise of the Warrants. In addition to the shares set forth
in the table, the amount to be registered includes an indeterminate number
of shares issuable upon conversion of or in respect of the Secured
Convertible Debentures and the Warrants, as such number may be adjusted as
a result of stock splits, stock dividends and similar transactions in
accordance with Rule 416.
================================================================================
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 thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the registration statement shall become
effective on such date as the Commission acting pursuant to said Section 8(a),
may determine.
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Subject to Completion; Dated December 15, 2000
Up to 2,977,300 shares of common stock, par value $.001 each
ESYNCH CORPORATION
This Prospectus covers up to 2,977,300 shares of common stock, par
value $.001 each (the "Shares"), of eSynch Corporation (the "Company") to be
sold by certain stockholders (the "Selling Stockholders"). See "Selling
Stockholders." The Selling Stockholders may from time to time sell all or a part
of the Shares at prices then prevailing in the market or at negotiated prices.
See "Plan of Distribution." None of the proceeds from the sale of the Shares
will be received by the Company.
The Selling Stockholders acquired the Shares in transactions exempt
from registration under the Securities Act of 1933, as amended (the "Securities
Act"). Consequently, upon any sale of the Shares, a Selling Stockholder, brokers
executing sales on behalf of a Selling Stockholder and dealers to whom the
Shares may be sold may, under certain circumstances, be considered
"underwriters" within the meaning of Section 2(11) of the Securities Act.
The Company's common stock is traded on the Nasdaq Stock Market under
the symbol "ESYN." On December 11, 2000, the closing price for the common stock
was $1.437 per share.
SEE "RISK FACTORS AND CAUTIONARY STATEMENTS" BEGINNING
AT PAGE 5 HEREOF FOR CERTAIN INFORMATION THAT SHOULD BE CONSIDERED BY
PROSPECTIVE PURCHASERS OF THE SHARES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES
COMMISSION NOR HAS THE COMMISSION OR ANY STATE SECURITIES
COMMISSION PASSED UPON THE ACCURACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN AS CONTAINED HEREIN IN CONNECTION WITH THE OFFERING
CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATION MUST NOT BE RELIED UPON. THIS PROSPECTUS DOES NOT CONSTITUTE AN
OFFERING BY THE SELLING STOCKHOLDERS OF ANY SECURITIES OTHER THAN THOSE TO WHICH
IT RELATES OR IN ANY JURISDICTION IN WHICH SUCH OFFERING MAY NOT LAWFULLY BE
MADE. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL,
UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THERE HAS BEEN NO CHANGE IN
THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
The date of this prospectus is December ___, 2000
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TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 5
RISK FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . 6
FORWARD LOOKING AND CAUTIONARY STATEMENT . . . . . . . . . . . . 13
USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . 14
SELLING STOCKHOLDERS. . . . . . . . . . . . . . . . . . . . . . . 15
PLAN OF DISTRIBUTION. . . . . . . . . . . . . . . . . . . . . . . 17
DESCRIPTION OF SECURED CONVERTIBLE DEBENTURES . . . . . . . . . . 19
DESCRIPTION OF CAPITAL STOCK. . . . . . . . . . . . . . . . . . . 20
INTERESTS OF NAMED EXPERTS AND COUNSEL. . . . . . . . . . . . . . 29
MATERIAL CHANGES. . . . . . . . . . . . . . . . . . . . . . . . . 30
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE . . . . . . . . 31
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES . . . . . 33
</TABLE>
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SUMMARY INFORMATION
The Company provides advanced Internet streaming media products and
services, Internet utility programs and video-on-demand services and products,
and we market and sell software, hardware and video on the Internet.
The Company's target customers include dealers and resellers such as
broadcasting and telecommunications companies that may use our technology to
distribute electronic content on demand to their viewers or subscribers, as well
as end-users who have broadband connections to the Internet. We generate revenue
by selling digital content or software and by selling advertising space in our
digital delivery process, which allows for banner advertising.
To date, our primary activities have consisted of the development of
products and services for the markets we serve, the raising of capital, and
acquiring companies in the on-line, software and related areas.
The Company may be contacted at:
eSynch Corporation
15502 Mosher Avenue
Tustin, CA 92780
telephone: (714) 258-1900
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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 the 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 difficulties 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.
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 than those available to us.
* Adverse changes in consumer trends or general economic conditions.
* Our ability to keep pace with technological developments.
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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 THE COMPANY
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 the Company 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 the Company.
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.
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 reduce our pricing, or both, which would
adversely affect our ability to achieve and maintain profitability.
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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 price you
paid 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.
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 4,800,000. That represents
less than 30% 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 STOCKHOLDERS COULD DEPRESS OUR STOCK PRICE
The availability of shares and trading prices may fluctuate based upon
factors other than the intrinsic value of our stock. The Selling Stockholders
may act independently of each other and cause confusion in the market. The
Selling Stockholders 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 Stockholders. Because the conversion rate of the
Secured Convertible Debentures will increase when the share price of the common
stock is lower, the holders of Secured Convertible Debentures may elect to
convert at times when it is disadvantageous to holders of common stock.
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As of December 13, 2000, $500,000 principal amount of Secured
Convertible Debentures were issued and outstanding. The Secured Convertible
Debentures are convertible into such number of shares of common stock as is
determined by dividing the principal amount thereof by the then current
conversion price. If converted on December 13, 2000, the Secured Convertible
Debentures would have been convertible into approximately 466,200 shares of
common stock, but this number of shares could prove to be significantly greater
in the event of a decrease in the trading price of the common stock. Purchasers
of common stock could therefore experience substantial dilution of their
investment upon conversion of the Secured Convertible Debentures. The Secured
Convertible Debentures are not registered and may be sold only if registered
under the Securities Act or sold in accordance with an applicable exemption from
registration, such as Rule 144. The shares of common stock into which the
Secured Convertible Debentures may be converted are being registered pursuant to
this registration statement.
As of December 13, 2000, Warrants to purchase 250,000 shares of common
stock issued to the purchasers of the Secured Convertible Debentures were
outstanding. These Warrants are exercisable over the next five years at a price
of $1.375, which price may be adjusted from time to time under certain
antidilution provisions. The shares of common stock issuable upon exercise of
these Warrants are being registered pursuant to this registration statement.
As of December 13, 2000, 6,964,519 shares of common stock were reserved
for issuance upon exercise of our outstanding Warrants and options other than
those issued in connection with the Secured Convertible Debentures, and an
additional 2,802,300 shares of common stock were reserved for issuance upon
conversion of the Secured Convertible Debentures and exercise of the Warrants
issued in connection with the Secured Convertible Debentures. At December 13,
2000, there were 14,351,674 shares of common stock outstanding. Of these
outstanding shares, approximately 8,900,000 were freely tradeable without
restriction under the Securities Act unless held by affiliates.
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,
which 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 the
Company. In turn, this may make it less likely that holders of common stock will
receive a premium price for their shares.
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, customer may
be driven away. 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
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unavailability of our service or in reduced customer activity could lead our
users to seek out our competitors. In such an event, we might have to incur
additional marketing costs to get our customers 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 Company brand name
will depend largely on our success in increasing our customer base and strategic
relationships. If consumers do not perceive us as offering a desirable way to
access digital content and software or other e-commerce companies do not
perceive us as an effective marketing and sales channel for their products or
services, we would be unsuccessful in promoting our brand name.
WE NEED TO PROTECT OUR BUSINESS NAMES
We have only recently commenced a program designed to obtain trademark
registrations for our software and our business names and service mark
registrations for our service names. We may be unable to obtain such
protections. Registrations or other protections of names may prove to be
inadequate to prevent imitation of our names or to prevent others from claiming
violations of their trademarks and service marks by us. In addition, others may
assert rights in our trademarks and service marks.
WE COULD FACE LIABILITY FOR MATERIALS DISSEMINATED THROUGH THE INTERNET
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The law relating to the liability of Internet service companies for
information carried on or disseminated through their services is currently
unsettled. It is possible that claims could be made against Internet service
companies under both U.S. and foreign law for defamation, libel, invasion of
privacy, negligence, copyright or trademark infringement, or other theories
based on the nature and content of the materials disseminated through their
services. Furthermore, the growth and development of the market for Internet
commerce may prompt calls for more stringent consumer protection laws that may
impose additional burdens on companies conducting business over the Internet.
The adoption of any additional laws or regulations may decrease the growth of
the Internet, which, in turn, could decrease the demand for our Internet
auctions and other services. This could increase our cost of doing business or
otherwise harm our business.
OUR EVOLVING BUSINESS PLAN MAY CHANGE
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.
CLAIMS AND LEGAL PROCEEDINGS
On May 18, 1999, a complaint was filed against the Company in the
Sonoma County Superior Court, State of California. The complaint alleged that we
owed, based on a theory of successor liability, $84,801.40 for damages resulting
from a lease between that plaintiff and SoftKat, Inc., and a judgment obtained
against SoftKat for unpaid rent. We filed an answer denying that we were
obligated to pay any of these claims and we opposed any attempt to impose
successor liability. At trial, the court rendered a tentative decision in favor
of the Company on all counts. The plaintiff is challenging the tentative
decision. eSynch is awaiting the outcome of the challenge.
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.
Discovery proceedings are currently underway and the Company intends to
vigorously defend its position.
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
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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.
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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 success of our
business model.
* 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.
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USE OF PROCEEDS
The proceeds from the sale of each Selling Stockholder's common stock
will belong to the selling security holder. The Company will not receive any of
the proceeds from such sales of the common stock, except any amount thereof paid
by Selling Stockholders 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 Stockholders upon exercise of
Warrants that they hold.
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SELLING STOCKHOLDERS
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
-------------------------------------------
BEFORE THE OFFERING AFTER THE OFFERING
COMMON(1) COMMON(1)
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NAME OF SELLING SECURITY HOLDER NUMBER PERCENT NUMBER PERCENT
------------------------------- ---------- ------- ---------- -------
<S> <C> <C> <C> <C>
Bristol Investment Fund Ltd.(2)(7) 2,614,800 18.2% 0 0.0%
Bristol Capital, LLC(3) 187,500 1.3% 0 0.0%
Trautman Wasserman & Company
Incorporated(4) 150,000 1.0% 0 0.0%
John Bergeon(5) 25,000 0.2% 0 0.0%
Total (Selling Stockholders
combined)(6) 2,997,300 20.9% 0 0.0%
</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 the Secured Convertible Debentures (assuming a conversion price of
$1.0725), and exercise of all of the Warrants at $1.375. The Secured Convertible
Debentures conversion price is initially equal to $1.0725, subject to adjustment
(see "Description of Securities - Secured Convertible Debenture"). Each Secured
Convertible Debenture is convertible upon issue.
(2) Address: c/o Olympia Capital (Cayman) Limited, Williams House, 20 Reid
Street, Hamilton HM 11, Bermuda. Includes 466,200 shares issuable upon
conversion of the Secured Convertible Debenture and 250,000 shares issuable upon
exercise of Warrants.
(3) Address: 11777 San Vicente Blvd., Suite 702, Los Angeles, CA 90049. Includes
62,500 shares issuable upon exercise of Warrants.
(4) Address: 500 Fifth Avenue, New York, NY 10110
(5) Address: 486 Lincoln Rd, Stamford, VT 05352
(6) Selling security holders may offer any or all of the shares of common stock
from time to time. The Selling Stockholders are not required to sell any or all
of the shares of common stock. They may retain the common stock indefinitely.
(7) The number of shares set forth in the table for Bristol Investment Fund,
Ltd. represents an estimate of the number of shares of common stock to be
offered by Bristol Investment Fund, Ltd. The actual number of shares of common
stock issuable upon conversion of the Secured Convertible Debentures and
exercise of the related Warrants is indeterminate, is subject to adjustment and
could be materially less or more than such estimated number depending on factors
which cannot be predicted by us at this time including, among other factors, the
future market price of the common stock. The actual number of shares of common
stock offered in this prospectus, and included in the registration statement of
which this prospectus is a part, includes such additional number of shares of
common stock as may be issued or issuable upon conversion of the Secured
Convertible Debentures and exercise of the related Warrants by reason of any
stock split, stock dividend or similar transaction involving the common stock,
in accordance with Rule 416 under the Securities Act. Under the terms of the
Secured Convertible Debentures, if the Secured
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<PAGE>
Convertible Debentures had been actually converted on December 13, 2000, the
conversion price would have been $1.0725. The Warrants issued in connection with
the Secured Convertible Debentures are exercisable into 250,000 shares of common
stock at an exercise price of $1.375.
Under the terms of the Secured Convertible Debentures and the related
warrants, the shares of Secured Convertible Debentures are convertible and the
warrants are exercisable by any holder only to the extent that the number of
shares of common stock issuable pursuant to such securities, together with the
number of shares of common stock owned by such holder and its affiliates (but
not including shares of common stock underlying unconverted portions of the
Secured Convertible Debentures or unexercised portions of the warrants) would
not exceed 4.9% of the then outstanding common stock as determined in accordance
with Section 13(d) of the Exchange Act. Accordingly, the number of shares of
common stock set forth in the table for the Selling Stockholder exceeds the
number of shares of common stock that the Selling Stockholder could own
beneficially at any given time through their ownership of the Secured
Convertible Debentures and the warrants. In that regard, the beneficial
ownership of the common stock by the Selling Stockholder set forth in the table
is not determined in accordance with Rule 13d-3 under the Exchange Act.
-16-
<PAGE>
PLAN OF DISTRIBUTION
The shares being offered by the Selling Stockholders or their
respective pledgees, donees, transferees or other successors in interest, will
be sold from time to time in one or more transactions, which may involve block
transactions:
* on the Over-the-Counter Bulletin Board or on such other market on
which the common stock may from time to time be trading;
* in privately-negotiated transactions;
* through the writing of options on the shares;
* short sales; or
* any combination thereof.
The sale price to the public may be:
* the market price prevailing at the time of sale;
* a price related to such prevailing market price;
* at negotiated prices; or
* such other price as the Selling Stockholders determine from time
to time.
The shares may also be sold pursuant to Rule 144. The Selling
Stockholders shall have the sole and absolute discretion not to accept any
purchase offer or make any sale of shares if they deem the purchase price to be
unsatisfactory at any particular time.
The Selling Stockholders or their respective pledgees, donees,
transferees or other successors in interest, may also sell the shares directly
to market makers acting as principals and/or broker-dealers acting as agents for
themselves or their customers. Such broker-dealers may receive compensation in
the form of discounts, concessions or commissions from the Selling Stockholders
and/or the purchasers of shares for whom such broker-dealers may act as agents
or to whom they sell as principal or both, which compensation as to a particular
broker-dealer might be in excess of customary commissions. Market makers and
block purchasers purchasing the shares will do so for their own account and at
their own risk. It is possible that a Selling Stockholder will attempt to sell
shares of common stock in block transactions to market makers or other
purchasers at a price per share which may be below the then market price. The
Selling Stockholders cannot assure that all or any of the shares offered in this
prospectus will be issued to, or sold by, the Selling Stockholders. The Selling
Stockholders and any brokers, dealers or agents, upon effecting the sale of any
of the shares offered in this prospectus, may be deemed "underwriters" as that
term is defined under the Securities Act or the Exchange Act, or the rules and
regulations under such acts.
The Selling Stockholders, alternatively, may sell all or any part of
the shares offered in this prospectus through an underwriter. No Selling
Stockholder has entered into any agreement with a prospective underwriter and
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<PAGE>
there is no assurance that any such agreement will be entered into. If a Selling
Stockholder enters into such an agreement or agreements, the relevant details
will be set forth in a supplement or revisions to this prospectus.
The Selling Stockholders and any other persons participating in the
sale or distribution of the shares will be subject to applicable provisions of
the Exchange Act and the rules and regulations under such act, including,
without limitation, Regulation M. These provisions may restrict certain
activities of, and limit the timing of purchases and sales of any of the shares
by, the Selling Stockholders or any other such person. Furthermore, under
Regulation M, persons engaged in a distribution of securities are prohibited
form simultaneously engaging in market making and certain other activities with
respect to such securities for a specified period of time prior to the
commencement of such distributions, subject to specified exceptions or
exemptions. All of these limitations may affect the marketability of the shares.
We have agreed to indemnify the Selling Stockholders, or their
transferees or assignees, against certain liabilities, including liabilities
under the Securities Act, or to contribute to payments the Selling Stockholders
or their respective pledgees, donees, transferees or other successors in
interest, may be required to make in respect of such liabilities.
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<PAGE>
DESCRIPTION OF SECURED CONVERTIBLE DEBENTURES
The Secured Convertible Debentures were first issued in December 2000
and have a face value of $500,000 each with a total of up to $1,000,000
authorized by the Board of Directors. The Secured Convertible Debentures pay
interest quarterly at the rate of eight percent (8%) per annum with maturity in
three years from issue and are secured by the assets of the Company. At any time
prior to the maturity date, the Secured Convertible Debentures are convertible
into common stock at the lesser of (a) the three lowest closing bid prices in
twenty trading-day period prior to conversion, discounted 22%, and (b) $1.375.
The holders of the Secured Convertible Debentures are entitled to
receive at least 15 days, but not more than 30 days, notice of the record date
of a special stockholders meeting to approve a merger, consolidation, exchange
of shares, recapitalization, reorganization or other similar event or sale of
assets. The holders of the Secured Convertible Debentures shall maintain their
relative rights, preferences and privileges.
The holders of the Secured Convertible Debentures are not entitled to
vote in the election of directors and have no rights as common shareholders
until a notice of conversion has been submitted.
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 terms of the Convertible Debentures will not permit the
conversion of a Secured Convertible Debenture or the exercise of the related
Warrants by a selling security holder if it and its affiliates would thereby own
more than 19.99% of the outstanding common stock on the first issuance of the
Secured Convertible Debenture, a total of 2,868,899.
The Company may redeem the Secured Convertible Debentures on ten days
written notice to the holders of the Secured Convertible Debenture and payment
in an amount equal to 120% of the principal, plus cumulated interest and
penalties.
If the Company is in default of one or more defined events, the
majority in interest of the holders of the Secured Convertible Debentures may
demand the immediate redemption of all Secured Convertible Debentures at 120% of
the principal, plus cumulated interest and penalties.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
AUTHORIZED AND OUTSTANDING STOCK
The authorized capital stock of the Company consists of 50,000,000
shares of common stock, $.001 par value, and 1,000,000 shares of Preferred
Stock, $.001 par value of which 275 shares of the Preferred Stock are designated
as Series J Convertible Preferred Stock, 250 shares are designated as Series K
Convertible Preferred Stock, and 210 shares are designated as Series L
Convertible Preferred Stock.
As of December 11, 2000, there were 14,351,674 shares of common stock
outstanding, which were held by approximately 350 stockholders of record and
held by approximately 1,300 stockholders beneficially. At the same date, there
were 137.5 shares of Series J Convertible Preferred Stock outstanding, 87.5
shares of Series K Convertible Preferred Stock outstanding, and 168 shares of
Series L Convertible 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 the Company, the holders of shares of common stock are entitled
to receive all of the remaining assets of the Company 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
the Company's directors. As a result, the holders of a plurality of the
outstanding shares can elect all of the directors of the Company, and the
holders of the remaining shares are not able to elect any of the Company'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.
COMMON STOCK OPTIONS
The Company has a 1999 Stock Incentive Plan under which 3,000,000
shares of common stock have been reserved for grants under the plan. 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.
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<PAGE>
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 December 11, 2000, apart from the 1999 Stock Incentive Plan, there
were outstanding options to purchase another 1,233,111 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 the Company.
SERIES J CONVERTIBLE PREFERRED STOCK
The Series J Convertible Preferred Stock was issued for an original
issue price of $10,000 per share.
The holders of Series J Convertible 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 the Company;
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 Convertible Preferred Stock are entitled to a
preference in the event the Company is liquidated. That preference is $10,000
per share, plus cumulated and unpaid dividends. The Series J Convertible
Preferred Stock, the Series K Convertible Preferred Stock, and the Series L
Convertible Preferred Stock are on parity as to liquidation preferences but
junior to the Secured Convertible Debentures. 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 Convertible Preferred Stock 45 days'
notice prior to a merger or acquisition of the Company. Such a transaction can
only be effected if the holders of the Series J Convertible Preferred Stock
maintain their relative rights, preferences and privileges. A transaction that
is inconsistent with this provision is prohibited.
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<PAGE>
Holders of Series J Convertible Preferred Stock are not entitled to
vote in the election of directors. The vote of holders of three-fourths of the
Series J Convertible 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
Convertible Preferred Stock (e.g., any dividend to holders of common stock), or
to authorize any securities senior to the Series J Convertible Preferred Stock.
The Series J Convertible Preferred Stock became convertible into common
stock on January 28, 2000. The terms of the Series J Convertible Preferred Stock
will not permit the conversion of Series J Convertible 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 Convertible 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 Convertible Preferred Stock would be equal to $10,000.00 plus accrued
and unpaid dividends divided by $3.50.
After January 28, 2000, the conversion price became 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.
For illustration, the shares of Series J Convertible Preferred Stock
would be convertible into the following numbers of shares of common stock at
these trailing average prices if the 137.5 shares outstanding on the date hereof
are converted:
<TABLE>
<CAPTION>
Average of Conversion common stock Percentage of
Lowest Price Issuable on Outstanding
Closing Bid Full Conversion common stock
---------------- ---------- --------------- --------------
<S> <C> <C> <C>
$4.375 or more $3.50 392,857 2.7%
$4.000 $3.20 429,688 3.0%
$3.000 $2.40 572,917 4.0%
$2.000 $1.60 859,375 6.0%
$1.000 $0.80 1,718,750 12.0%
</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 Convertible Preferred Stock will automatically convert
into common stock on the third anniversary of the issuance of the Series J
Convertible Preferred Stock (the third anniversaries fall between August 2002
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.
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<PAGE>
We have the right to redeem all or any of the outstanding Series J
Convertible Preferred Stock for cash. The redemption price is $12,000 per share,
plus cumulated dividends. The Company is required to give the holders 30 days'
notice and to deposit the redemption price in escrow.
In the event of a merger, acquisition, or sale of all of the Company's
assets, we are required to redeem all of the outstanding Series J Convertible
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 Convertible Preferred Stock has a right to
require us to redeem all or a portion of its Series J Convertible Preferred
Stock for cash if we breach any agreement or representation made to the holders
of Series J Convertible Preferred Stock in a material respect, or in the event
the effectiveness of the registration statement that includes this prospectus
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.
SERIES K CONVERTIBLE PREFERRED STOCK
The Series K Convertible Preferred Stock was issued for an original
issue price of $10,000 per share.
The holders of Series K Convertible 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 the Company;
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 Convertible Preferred Stock are entitled to a
preference in the event the Company is liquidated. That preference is $10,000
per share, plus cumulated and unpaid dividends. The Series J Convertible
Preferred Stock, the Series K Convertible Preferred Stock and the Series L
Convertible Preferred Stock are on a parity as to liquidation preferences but
junior to the Secured Convertible Debentures. 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 Convertible Preferred Stock 45 days'
notice prior to a merger or acquisition of the Company. Such a transaction can
only be effected if the holders of the Series K Convertible Preferred Stock
maintain their relative rights, preferences and privileges. A transaction that
is inconsistent with this provision is prohibited.
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<PAGE>
Holders of Series K Convertible Preferred Stock are not entitled to
vote in the election of directors. The vote of holders of three-fourths of the
Series K Convertible 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
Convertible 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 Convertible Preferred Stock became convertible into common
stock on April 29, 2000. The terms of the Series K Convertible Preferred Stock
will not permit the conversion of Series K Convertible 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 Convertible Preferred Stock was
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 Convertible Preferred Stock would be equal to $10,000.00 plus accrued and
unpaid dividends divided by $3.50.
After April 29, 2000, the conversion price became 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.
For illustration, the shares of Series K Convertible Preferred Stock
would be convertible into the following numbers of shares of common stock at
these trailing average prices if the 87.5 shares outstanding on the date hereof
are converted:
<TABLE>
<CAPTION>
Average of Conversion common stock Percentage of
Lowest Price Issuable on Outstanding
Closing Bid Full Conversion common stock
---------------- ---------- --------------- --------------
<S> <C> <C> <C>
$4.375 or more $3.50 250,000 1.7%
$4.000 $3.20 273,438 1.9%
$3.000 $2.40 364,583 2.5%
$2.000 $1.60 546,875 3.8%
$1.000 $0.80 1,093,750 7.6%
</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 Convertible 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 Convertible Preferred Stock will be automatically
converted into common stock on the third anniversary of the issuance of the
Series K Convertible Preferred Stock (the third anniversaries fall between
December 2002 and January 2003), with extensions in certain events until not
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<PAGE>
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
Convertible Preferred Stock for cash. The redemption price is $12,000 per share,
plus cumulated dividends. The Company is required to give the holders 30 days'
notice and to deposit the redemption price in escrow.
In the event of a merger, acquisition, or sale of all of the Company's
assets, we are required to redeem all of the outstanding Series K Convertible
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 Convertible Preferred Stock has a right to
require us to redeem all or a portion of its Series K Convertible Preferred
Stock for cash if we breach any agreement or representation made to the holders
of Series K Convertible Preferred Stock in a material respect, or in the event
the effectiveness of the registration statement 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.
SERIES L CONVERTIBLE PREFERRED STOCK
The Series L Convertible Preferred Stock was issued for an original
issue price of $10,000 per share on the following terms.
The holders of Series L Convertible Preferred Stock are entitled to
dividends at the rate of 5% per year. The dividends are not required to be paid
until conversion or redemption of the shares or an acquisition of the Company;
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 L Convertible Preferred Stock are entitled to a
preference in the event the Company is liquidated. That preference is $10,000
per share, plus cumulated and unpaid dividends. The Series J Convertible
Preferred Stock, the Series K Convertible Preferred Stock and the Series L
Convertible Preferred Stock are on a parity as to liquidation preferences but
junior to the Secured Convertible Debentures. 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 L Convertible Preferred Stock 45 days'
notice prior to a merger or acquisition of the Company. Such a transaction can
only be effected if the holders of the Series L Convertible Preferred Stock
maintain their relative rights, preferences and privileges. A transaction that
is inconsistent with this provision is prohibited.
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<PAGE>
Holders of Series L Convertible Preferred Stock are not entitled to
vote in the election of directors. The vote of holders of three-fourths of the
Series L Convertible 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 L
Convertible Preferred Stock (e.g., any dividend to holders of common stock), or
to authorize any securities senior to the Series L Convertible Preferred.
The Series L Convertible Preferred Stock will become convertible into
common stock on January 13, 2001. The terms of the Series L Convertible
Preferred Stock will not permit, without prior shareholder approval, the
conversion of Series L Convertible Preferred Stock by a selling security holder
if it and its affiliates would thereby own more than 19.9% of the outstanding
common stock.
The Series L Convertible Preferred Stock conversion price is the lower
of $3.75 or 90% of the average of the three lowest closing bid prices in the
twenty trading-day period ending on the day before conversion.
For illustration, the shares of Series L Convertible Preferred Stock
would be convertible into the following numbers of shares of common stock at
these trailing average prices if the 168 shares outstanding on the date hereof
are converted:
<TABLE>
<CAPTION>
Average of Conversion common stock Percentage of
Lowest Price Issuable on Outstanding
Closing Bid Full Conversion common stock
---------------- ---------- --------------- --------------
<S> <C> <C> <C>
$4.167 or more $3.75 448,000 3.1%
$4.000 $3.60 486,667 3.3%
$3.000 $2.70 622,222 4.3%
$2.000 $1.80 933,333 6.5%
$1.000 $0.90 1,866,667 13.0%
</TABLE>
For instance, if the three lowest closing bid prices of the common
stock, in the twenty trading-day period ended on the day before conversion, were
$2.825, $2.750 and $2.625, their average is $2.733, which would result in a
conversion price of $2.460.
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 L Convertible Preferred Stock will be automatically
converted into common stock on the third anniversary of the issuance of the
Series L Convertible Preferred Stock (the third anniversary being October 2003).
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 L
Convertible Preferred Stock for cash. The redemption price shall be the
outstanding principal amount multiplied by the following factor:
105% if from October 16, 2000 to December 14, 2000;
107% if from December 15, 2000 to February 13, 2001;
109% if from February 14, 2001 to April 13, 2001; and
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<PAGE>
111% if after April 13, 2001
plus cumulated dividends in each case. The Company is required to deposit the
redemption amount in escrow upon notice to the holders. Upon receipt of the
redemption notice, the holders of Series L Convertible Preferred may elect to
convert up to fifty percent (50%) of the redemption amount so long as the
Company receives such election with 24 hours of the holder receiving the
redemption notice.
We have agreed to amend the terms of the Series L Convertible Preferred
Stock and the Warrants issued in connection with the Series L Convertible
Preferred Stock to be consistent with the terms of the Secured Convertible
Debentures and the Warrants, including the applicable conversion price and
exercise price, issued in connection with the Secured Convertible Debentures.
WARRANTS
The Warrants held by the Selling Stockholders entitle those holders to
purchase shares of common stock. They include Warrants expiring December 7, 2005
entitling them to purchase 312,500 shares at $1.375 per share.
The Company has warrants outstanding, issued to the initial holders of
Series J Convertible Preferred Stock, entitling them to purchase 112,500 shares
at approximately $3.00 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 Convertible 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.
The Company has warrants outstanding, issued to the initial holders of
Series L Convertible Preferred Stock, entitling them to purchase 516,667 shares
of common stock expiring September 29, 2005, of which warrants for 133,333
shares have an exercise price of $4.00, for 133,333 have an exercise price of
$6.00 and for 200,000 shares have an exercise price of $3.33.
Also, there are warrants outstanding held by others to purchase
approximately an additional 933,803 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 General Corporation Law, certain terms of the Secured
Convertible Debentures, Series J Convertible Preferred Stock, Series K
Convertible Preferred Stock or Series L Convertible Preferred Stock, and our
ability to issue the authorized and available shares of Preferred Stock and
common stock 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
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<PAGE>
This offering is being registered with the SEC pursuant to a
registration rights agreement with the holders of Secured Convertible Debentures
and warrants and pursuant to piggyback registration rights agreements with two
holders of common stock. See "Plan of Distribution."
In addition, we have granted registration rights to the holders of the
Company's Series J Convertible Preferred Stock, Series K Convertible Preferred
Stock and the Series L Convertible 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.
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 Secured Convertible Debentures, Series J Convertible
Preferred Stock, Series K Convertible Preferred Stock or Series L Convertible
Preferred Stock are 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.
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<PAGE>
INTERESTS OF NAMED EXPERTS AND COUNSEL
LEGAL MATTERS
The validity of the shares of common stock offered hereby will be
passed upon for the Company by Yocca Patch & Yocca, LLP, Irvine, California.
Attorneys who are members of, employed by or of counsel with Yocca Patch &
Yocca, participating in such matter on behalf of such firm beneficially owned as
of December 13, 2000, 160,000 shares of common stock of the Company and warrants
to purchase 75,000 shares of common stock.
EXPERTS
The consolidated financial statements of the Company 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.
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<PAGE>
MATERIAL CHANGES
On September 26, 2000, the Company issued 168 shares of Series L
Convertible Preferred Stock and Warrants to purchase 413,334 shares of common
stock in exchange for $1,600,000 in cash, less offering costs of approximately
$24,000. Based upon the conversion, the Series L Convertible Preferred Stock are
convertible into no fewer than aggregate of 448,000 shares of common stock. See
"PREFERRED STOCK - Series L Convertible Preferred".
On November 3, 2000, at a meeting of the Company's Board of Directors,
the Board authorized an amendment to the Company's Bylaws by replacing in full
Article II, Section 4, "Notification of Business To Be Transacted at Meeting,"
and Article III, Section 2, "Number and Election of Directors." The full text of
the Bylaws, as amended, is included as Exhibit 3.3.1 to this Form S-3.
On November 3, 2000, David P. Noyes, the Company's Chief Financial
Officer, left the employment of the Company.
On December 7, 2000, the Company issued one 8% Secured Convertible
Debenture with a principal amount of $500,000 and Warrants to purchase 250,000
shares of common stock in exchange for $438,000, net of offering costs. Based
upon the conversion provisions, the Secured Convertible Debenture is convertible
into no fewer than 363,636 shares of common stock. See "DESCRIPTION OF SECURED
CONVERTIBLE DEBENTURES".
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<PAGE>
INCORPORATION OF CERTAIN INFORMATION BY REFERENCE
The documents listed below have been filed by the Company with the
Commission under the Exchange Act and are incorporated herein by reference:
a. The Company's Annual Report on Form 10-KSB for the year ended
December 31, 1999, filed March 24, 2000;
b. The Company's Current Report on Form 8-K/A filed on August 13,
1999, reporting under Item 2 Acquisition of Kiss Software
Corporation.
c. Quarterly Report on Form 10-QSB for the period ended March 31,
2000, filed May 15, 2000;
d. Quarterly Report on Form 10-QSB for the period ended June 30,
2000, filed August 14, 2000;
e. Quarterly Report on Form 10-QSB for the period ended September
30, 2000, filed November 20, 2000;
f. The Company's Current Report on Form 8-K filed on January 27,
2000 reporting under Item 2 the acquisition of SoftKat, Inc.;
g. The Company's Current Report on Form 8-K filed on February 8,
2000 reporting under Item 2 the sale of SoftKat, Inc.;
h. The Company's Current Report on Form 8-K filed on February 15,
2000 reporting under Item 5 the sale of Series K Convertible
Preferred Stock and Warrants; and
i. The Company's Current Report on Form 8-K filed on July 26, 2000
reporting under Item 5 the adoption of amended and restated
Bylaws of the Company.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14
or 15(d) of the Exchange Act subsequent to the date of this Report and prior to
the termination of the offering of the Shares shall be deemed to be incorporated
by reference in this Report and to be a part thereof from the date of filing of
such documents.
Any Statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for the purposes of this Report to the extent that a statement contained herein,
or in any other subsequently filed document that also is or is deemed to be
incorporated herein by reference, modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Report.
The public may read and copy any materials that the Company files 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 operation of
the Public Reference Room by calling the SEC at 1-800-SEC-0330. SEC maintains an
Internet site that contains Report, proxy and information statements, and other
information regarding issuers that file electronically with the SEC, the web
address of which is http://www.sec.gov.
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<PAGE>
The Company will provide without charge to each person (including any
beneficial owner) to whom a copy of this Report is delivered, upon the written
or oral request of any such person, a copy of any or all the foregoing documents
incorporated herein by reference (other than exhibits to such documents).
Written or telephone requests should be directed to: T. Richard Hutt, Secretary,
eSynch Corporation, 15502 Mosher Avenue, Tustin, CA 92780, telephone: (714)
258-1900.
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<PAGE>
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES
The Company's Restated Certificate of Incorporation requires the
Company 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 the Company, may serve, or at any time have served as directors or officers
of another corporation in which the Company 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, the Company 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
the Company, or such other corporation.
The Company's Restated Certificate of Incorporation provides that a
director of the Company shall have no personal liability to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except (i) for any breach of a director's duty of loyalty to the Company 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 the Company permit indemnification of persons who were
directors, officers, employees or agents of the Company or of another enterprise
if the person was serving at the request of the board of directors of the
Company 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 the Company. If claims are brought in the Company'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 the Company. If the person is unsuccessful in defending a claim
brought in the Company's name, indemnification is only permitted if the court
acting in the matter specifically allows it. The Company is authorized to
advance expenses to a person upon that person's agreement to repay the Company
if ultimately such person is not entitled to indemnification.
The Company 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 such parties upon that such parties' agreement to repay the Company
if ultimately such parties are not entitled to indemnification.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to our directors, officers and controlling
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<PAGE>
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.
-34-
<PAGE>
PART II
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
All of the following expenses will be paid by the Registrant
<TABLE>
<S> <C>
Registration Fee $1,130
"Blue Sky" Fees $5,000*
Legal fees and expenses $30,000*
Accounting fees and expenses $25,000*
Duplication and miscellaneous $5,000*
----------
$66,130*
==========
</TABLE>
* Estimated
II-1
<PAGE>
INDEMNIFICATION OF OFFICERS AND DIRECTORS
The Company's Restated Certificate of Incorporation requires the
Company 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 the Company, may serve, or at any time have served as directors or officers
of another corporation in which the Company 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, the Company 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
the Company, or such other corporation.
The Company's Restated Certificate of Incorporation provides that a
director of the Company shall have no personal liability to the Company or its
stockholders for monetary damages for breach of fiduciary duty as a director,
except (i) for any breach of a director's duty of loyalty to the Company 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 the Company permit indemnification of persons who were
directors, officers, employees or agents of the Company or of another enterprise
if the person was serving at the request of the board of directors of the
Company 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 the Company. If claims are brought in the Company'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 the Company. If the person is unsuccessful in defending a claim
brought in the Company's name, indemnification is only permitted if the court
acting in the matter specifically allows it. The Company is authorized to
advance expenses to a person upon that person's agreement to repay the Company
if ultimately such person is not entitled to indemnification.
The Company 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 such parties upon such parties' agreement to repay the Company
if ultimately such parties are not entitled to indemnification.
II-2
<PAGE>
EXHIBITS
ESYNCH CORPORATION
FORM S-3 REGISTRATION STATEMENT
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
3.3.1* First Amendment to Bylaws of the Company, dated November 3, 2000
4.22 Form of Secured Convertible Debenture dated as of December 7,
2000 issued by the Registrant
5.1* Opinion of Yocca Patch & Yocca, LLP.
10.20 Securities Purchase Agreement dated as of December 7, 2000 among
the Registrant and the Buyers named therein.
10.21 Registration Rights Agreement dated as of December 7, 2000
among the Registrant and the Initial Investors named therein
10.22 Form of Stock Purchase Warrant to Purchase Shares of common stock
of the Registrant dated as of December 7, 2000 issued by the
Registrant
10.23 Warrant to Purchase 150,000 Shares of common stock of the
Registrant dated as of November 30, 2000 with an expiration
date of November 30, 2005 issued by the Registrant to Trautman
Wasserman & Company Incorporated.
23.1* Consent of Yocca Patch & Yocca, LLP. (included in
Exhibit 5.1).
23.2 Consent of Hansen Barnett & Maxwell
24.1 Power of Attorney
</TABLE>
--------------
* To be filed by amendment.
II-3
<PAGE>
UNDERTAKINGS
(a) The Company hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospecuts required by Section
10(a)(3) of the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represent a fundamental
change in the information set forth in the registration
statement; and
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement;
PROVIDED, HOWEVER, that paragraphs (a)(1)(i) and (a)(1)(ii) do not
apply if the information required to be included in a post-effective amendment
by those paragraphs is contained in periodic Reports filed by the Company
pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at the
termination of the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual Report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered herein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provision, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful
II-4
<PAGE>
defense of any action, suit or proceeding) is asserted by such director, officer
or controlling person in connection with the securities being registered, the
registrant 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 Act and will be governed by the final adjudication of such
issue.
II-5
<PAGE>
SIGNATURES
Pursuant to 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 for filing on Form S-3 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tustin, State of California.
Date: December 14, 2000 ESYNCH CORPORATION
/s/ Thomas Hemingway
By: -------------------------
Thomas Hemingway
Chief Executive Officer
& Director
In accordance with the Securities Exchange Act of 1933, this
registration statement has been signed below by the following persons on behalf
of the registrant and in the capacities and on the dates indicated.
/s/ Thomas Hemingway
Date: December 14, 2000 ----------------------
Chief Executive Officer
& Director
/s/ T. Richard Hutt
Date: December 14, 2000 ----------------------
T. Richard Hutt
Secretary, Vice President and
Director
/s/ Robert W. Hughes
Date: December 14, 2000 ----------------------
Robert W. Hughes
Chief Financial Officer
/s/ James H. Budd
Date: December 14, 2000 ----------------------
James H. Budd
Vice President and Director
/s/ Norton Garfinkle
Date: December 14, 2000 ----------------------
Norton Garfinkle
Director
/s/ David Lyons
Date: December 14, 2000 ----------------------
David Lyons
Director
/s/ Robert Orbach
Date: December 14, 2000 ----------------------
Robert Orbach
Director
II-6
