<PAGE>
As filed with the Securities and Exchange Commission on February 28, 2000
Registration No. 333-____________
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
ESYNCH CORPORATION
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(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
Delaware 5961 87-0461856
(State or other jurisdiction of (Primary Standard Industrial (IRS Employer Identification
incorporation or organization) Classification Code Number) Number)
</TABLE>
15502 Mosher Avenue, Tustin, California 92780 (714) 258-1900
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(Address and telephone number of registrant's principal executive offices)
15502 Mosher Avenue, Tustin, California 92780
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(Address of principal place of business)
Thomas Hemingway
15502 Mosher Avenue, Tustin, California 92780
(714) 258-1900
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(Name, address and telephone number of agent for service)
Please send a copy of all communications to:
Nicholas J. Yocca, Esq.
Stradling Yocca Carlson & Rauth, P.C.
660 Newport Center Drive, #1600
Newport Beach, California 92660
Telephone (949) 725-4120 Fax (949) 823-5120
Approximate date of commencement of proposed sale to the public: From time to
time after the registration statement becomes effective.
If this form is filed to register additional securities for an offering under
Rule 462(b) under the Securities Act of 1933, please check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. / /
If this form is a post-effective amendment filed under Rule 462(c) under the
Securities Act, check the following box and list the Securities Act registration
statement number of the earlier effective registration statement for the same
offering. / /
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<PAGE>
If this form is a post-effective amendment filed under Rule 462(d) under the
Securities Act, check the following box and list the Securities Act Registration
Statement number of the earlier effective Registration Statement for the same
offering. / / If delivery of the prospectus is expected to be made under Rule
434, please check the following box. / / If any of the securities being
registered on this form are to be offered on a delayed or continuous basis under
Rule 415 of the Securities Act, check the following box. /XX/
CALCULATION OF REGISTRATION FEE
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<CAPTION>
Title of Each Proposed Maximum Proposed Maximum
Class of Securities Amount Being Offering Price Per Aggregate Amount of
To Be Registered Registered Unit/Share(1) Offering Price Registration Fee
<S> <C> <C> <C> <C>
Common Stock,
par value $.001 (3) 19,427 $12.1563 $ 236,159 $ 62.35
Common Stock,
par value $.001,
underlying Series K
Convertible Preferred
Stock (2)(3) 1,214,282(4) $12.1563 $14,761,117 $3,896.93
Common Stock,
par value $.001,
underlying Warrants (2)(3) 300,000(4) $12.1563 $ 3,646,875 $ 962.78
Total registration fee $4,922.06
</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 ($12.4375) and the
low ($11.875) sale prices reported on the Over-the-Counter bulletin board
on February 25, 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 K
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 K Convertible Preferred Stock and
accompanying Warrants.
The registrant hereby amends this registration statement on such date or dates
as may be necessary to delay its effective date until the registrant shall file
a further amendment which specifically states that this registration statement
shall become effective on that date in accordance with Section 8(a) of the
Securities Act or until the registration statement shall become effective on
such date as the Commission, acting under said Section 8(a), may determine.
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<PAGE>
PROSPECTUS
up to 1,533,709 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 February 25, 2000, the last reported sale price
of the Company's Common Stock was $12.4375.
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THESE ARE SPECULATIVE SECURITIES AND THIS INVESTMENT INVOLVES A HIGH DEGREE OF
RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 2.
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Information regarding the selling security holders is set forth in
"Selling Security Holders" and "Plan of Distribution." All or a portion of the
shares of Common Stock offered hereby may be offered for sale, from time to
time, on the over-the-counter bulletin board, or otherwise, at prices and terms
then obtainable, or in negotiated transactions.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or passed upon the
adequacy of the prospectus. Any representation to the contrary is a criminal
offense.
The date of this prospectus is February 28, 2000
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<PAGE>
TABLE OF CONTENTS
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Page
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<S> <C>
PROSPECTUS SUMMARY 1
RISK FACTORS 2
FORWARD-LOOKING AND CAUTIONARY STATEMENTS 8
USE OF PROCEEDS 9
SELLING SECURITY HOLDERS 9
PLAN OF DISTRIBUTION 11
LEGAL PROCEEDINGS 13
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS 16
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 21
DESCRIPTION OF SECURITIES 23
INTEREST OF NAMED EXPERTS AND COUNSEL 30
DISCLOSURE OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT
LIABILITIES 31
DESCRIPTION OF BUSINESS 32
MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS 37
DESCRIPTION OF PROPERTY 40
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS 40
MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS 41
EXECUTIVE COMPENSATION 42
FINANCIAL STATEMENTS 46
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE 101
</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.
-2-
<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 1,533,709 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 1,514,282 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
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To date we have generated only minimal revenues. As a result, we have not yet
generated cash from operations and have had to rely on proceeds from sales of
our shares to fund our operations. Also we have only a limited operating history
on which our business can be evaluated and our business must be considered in
light of the risks, uncertainties, expenses and difficulties frequently
encountered by companies in their early stages of development that are entering
into new and rapidly evolving markets. These risks include the following:
* The limited resources that we have to compete with more established
competitors who have greater brand name recognition and greater resources.
* The need to raise additional capital to sustain operations and the absence
of any assurance that such financing will be obtainable, when needed, on
acceptable terms, if at all.
* The need to establish alliances or partnerships with established companies.
* The need to develop brand name recognition and to continually strengthen
customer loyalty and satisfaction.
* Uncertainty as to our business model.
* Anticipated continued losses from operations.
* The difficulties of managing growth.
* The difficulty of anticipating and adapting to technological, market and
other changes.
* The difficulties of attracting, integrating and motivating qualified
personnel.
We must, among other things, successfully implement and execute our business and
strategy, continue to develop and upgrade our technology, enhance our services
and products to meet the needs of a changing market, and provide superior
customer service.
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<PAGE>
Our future operating results are unpredictable
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Our operating results are unpredictable and we expect them to fluctuate in the
future due to a number of factors, many of which are outside our control. These
factors include:
* the ability of competitors to provide services and products that are
competitive with our own.
* competition from larger companies with greater brand name recognition or
greater financial, marketing or management resources that those available
to us.
* adverse changes in consumer trends or general economic conditions.
* our ability to keep pace with technological developments.
As a strategic response to changes in the competitive environment, we may from
time to time make certain decisions that temporarily harm our business. As a
result, our operating results at times may be below expectations. If this
happens, it is likely that the value of our common stock would decline.
We need additional capital
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Our business model indicates that it is likely that we will incur operating
losses over the next several months. As a result of those losses and the funds
needed for managing acquisitions, working capital and infrastructure
development, we anticipate that we will have to raise substantial additional
capital to sustain us during this period. We may not be able to obtain the
financing that our business requires. Even if we can obtain financing when it is
needed, it may not be on favorable terms. In addition, a financing could have
the effect of reducing the percentage of our shares owned by our existing
stockholders, including investors purchasing shares in this offering. A
financing could have the additional effect of diluting or reducing the value of
the outstanding shares. We may sell shares or grant options or warrants to buy
shares at prices lower than the prevailing value of your shares.
Management owns a controlling interest in eSynch Corporation
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Our officers and directors currently own or control a substantial majority of
our outstanding common stock. If they act in concert, they will continue to be
able to exercise voting control over eSynch for the foreseeable future and will
be able to elect the entire Board of Directors and generally determine our
management policy. Also this management control could prevent, or make more
difficult, a sale of eSynch.
The loss of key personnel could adversely affect operations
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Thomas Hemingway and others play a key role in our operations and in the further
development of our business. The loss of the services of any of them could
adversely impact our business and chances for success.
A failure to attract key personnel could adversely affect our plans
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Our performance also will greatly depend on our ability to hire, train, retain
and motivate additional officers and other key employees. However, competition
for highly skilled managerial, technical, marketing and customer service
personnel is intense. We may not be able to successfully attract, integrate or
retain sufficiently qualified personnel and, in that event, our business could
suffer.
-3-
<PAGE>
We face competition in the markets we serve
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There is intense competition among companies selling services and products on
the Internet. Increased competition is likely to bring both strong price and
quality competition. As a result, in order to remain competitive, we might have
to make additional expenditures on research and development, marketing, and
customer service or to reduce our pricing, or both, which would adversely affect
our ability to achieve and maintain profitability.
There are several other companies involved in media and digital distribution
channels that have far greater financial and management resources and greater
name brand recognition than we have. 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
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The public market for our common stock is sporadic. After this offering, you may
not be able to resell your shares at or above the public offering price due to a
number of factors, including:
* actual or anticipated fluctuations in our operating results.
* 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
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In addition, the stock market in general, and the stocks of web-based businesses
in particular, have experienced extreme volatility that often has been unrelated
to the operating performance of particular companies. These broad market and
industry fluctuations may adversely affect the trading price of our common
stock, regardless of our actual operating performance.
A large amount of shares will become available for future sale
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We expect the trading price of our Common Stock to fluctuate depending on the
supply of our shares in the public market. We estimate that the amount of our
shares traded publicly has not been more than 2,100,000. That represents less
than 20% 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.
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<PAGE>
Sales by the selling security holders could depress our stock price
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The availability of shares and the trading prices may fluctuate based upon
factors other than intrinsic value of our stock. The selling security holders
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 K
Preferred Shares will increase when the share price of the Common Stock is
lower, the holders of Series K 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
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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.
We run a risk of system capacity constraints and system failure
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We are largely dependent upon our communications and computer hardware and
software. A high volume of traffic and transactions on our servers could exceed
their capacity. If our digital content were to load slowly, this may potentially
drive away customers. Based on our experience and the experience of other
e-commerce companies, we anticipate that we will experience periodic system
interruptions in the future. Any system interruptions that result in the
unavailability of our service or in reduced customer activity could lead our
users to seek out our competitors. In such an event, we might find it difficult
and might have to incur additional marketing costs to get our users to return to
our servers. Also our systems are vulnerable to damage from earthquake, fire,
flood, power loss, telecommunication failure, break-in and similar catastrophic
events. A substantial interruption in the operability of these systems would
harm our business. We also do not have any business interruption insurance that
would compensate us for any resulting losses we might incur.
Our Internet business is vulnerable to third party misconduct
- -------------------------------------------------------------
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.
-5-
<PAGE>
We rely on trade secret protection to protect some of our rights
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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
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We believe that the development of brand name recognition is critical to the
success of most businesses, including our own, particularly with the recent and
growing increase in the number of companies that are conducting business on the
Internet. Development and awareness of the eSynch brand name will depend largely
on our success in increasing our customer base and strategic relationships. If
consumers do not perceive us as offering a desirable way to access digital
content and software or other e-commerce companies do not perceive us as an
effective marketing and sales channel for their products or services, we would
be unsuccessful in promoting our brand name.
We need to protect our business names
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We have only recently commenced a program designed to obtain trademark
registrations for our software and our business names and service mark
registrations for our service names. We may be unable to obtain such
protections. Registrations or other protections of names may prove to be
inadequate to prevent imitation of our names or to prevent others from claiming
violations of their trademarks and service marks by us. In addition, others may
assert rights in our trademarks and service marks.
We could face liability for materials disseminated through the Internet
- -----------------------------------------------------------------------
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.
-6-
<PAGE>
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.
Additional Risks
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In addition to matters affecting the Company's industry generally, factors which
could cause actual results to differ from expectations include, but are not
limited to (i) sales of the Company's software which may not rise to the level
of profitability; (ii) due to the rapidly changing and intensely competitive
nature of the industry, competitors may introduce new products with significant
competitive advantages over the Company's products; (iii) the Company may not
have sufficient resources, including any future financing it is able to obtain,
to sustain marketing and other operations; (iv) the Company may be unable to
attract and retain sufficient management and technical expertise, or may lose
key employees; (v) the Company's contractual or legal efforts to protect its
confidential information or intellectual property may be inadequate or
ineffective to provide protection, and the Company may be unable financially to
pursue legal remedies that may be available; (vi) the Company's selection, due
diligence, execution, and integration of acquisitions may not prove effective or
reasonable; (vii) the Company may suffer in material respects from the direct or
indirect effects of 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.
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<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.
-8-
<PAGE>
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.
SELLING SECURITY HOLDERS
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<CAPTION>
SHARES BENEFICIALLY OWNED
BEFORE THE OFFERING AFTER THE OFFERING
SERIES K PREFERRED COMMON(1) PREFERRED COMMON(1)
-------------------- --------------- --------- ---------
NAME OF SELLING SECURITY HOLDER NUMBER PERCENT NUMBER PERCENT NUMBER NUMBER
------------------------------- ------ ------- ------ ------- ------ ------
<S> <C> <C> <C> <C> <C> <C>
Dandee Ltd.(2) 60 28.2% 216,428 2.1% (11) (11)
Acqua Wellington Small Cap
Value Fund(3) 50 23.5% 180,357 1.7% (11) (11)
Lightline Limited(4)(7) 30 14.1% 108,214 1.0% (11) (11)
Roseworth Group Limited(5)(7) 30 14.1% 108,214 1.0% (11) (11)
Tonga Partners, L.P.(6)(7) 30 14.1% 108,214 1.0% (11) (11)
Intercoastal Financial
Services Corp.(8) 12.5 5.9% 35,714 0.3% (11) (11)
Michael E. Johnson (9) 0 0.0% 19,427 0.2% (11) (11)
Total (selling security holders
combined)(11) 212.5 100.0% 776,568 7.4%(10) (11) (11)
</TABLE>
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(1) Beneficial ownership of Common Stock for purposes of this table is
calculated based on the maximum number of shares of Common Stock issuable
upon conversion of Series K Preferred Stock (assuming a conversion price of
$3.50), and exercise of all of the warrants. However, 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 (see
"Description of Securities-Preferred Stock-Series K Preferred Stock"). The
Series K Preferred Stock becomes convertible on April 30, 2000 or any
earlier date on which this offering becomes effective.
(2) Address: Gretton Secretarial Services Ltd., Attn: Director. Includes
45,000 shares issuable upon exercise of warrants and 171,428 shares
issuable upon conversion of preferred stock.
(3) Address: c/o MeesPierson Fund Services (Bahamas) Ltd., Montague Sterling
Centre, East Bay Street, P.O. Box SS-6238, Nassau, Bahamas. Includes 37,500
Shares issuable upon exercise of warrants and 142,857 shares issuable upon
Conversion of preferred stock.
(Footnotes continue on next page)
-9-
<PAGE>
(Footnotes continued)
(4) Address: P.O. Box 146, Road Town, Tortola, British Virgin Islands.
(5) Address: Curzon Capital Corp., c/o Wertminster Securities, 100 Park Avenue,
28th Floor, New York, New York 10017.
(6) Address: 600 California Street, 14th Floor, San Francisco, CA. 94108.
(7) Includes 22,500 shares issuable upon exercise of warrants and 85,714 shares
issuable upon conversion of preferred stock.
(8) Address: 760 US Highway One - Suite 206, North Palm Beach, FL 33408.
(9) Address: 19200 Von Karman Ave, Irvine, CA 92612.
(10) A total of 150,000 shares are issuable upon exercise of warrants and
607,143 shares are issuable upon conversion of preferred stock. This would
aggregately represent 5.8% beneficial ownership. Under the terms of the
Series K Preferred Stock, the selling security holders cannot convert
shares of Series K 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.
(11) 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.
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<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.
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.
-11-
<PAGE>
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 K Preferred
Stock, we are required to pay damages to holders of Series K Preferred Stock in
the event we fail to file the registration statement that includes this
prospectus on February 29, 2000, the SEC does not declare that registration
statement effective by May 29, 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 K Preferred Stock. The damages payable are
equal to 2% of the holder's original purchase price for 30-day period or portion
thereof, until the breach or event is cured, not pro rated for periods of breach
of less than 30 days. Additional damages are 3% of such holder's purchase price
for each subsequent 30-day period until the breach is cured, with this amount
pro rated for periods of less than 30 days.
-12-
<PAGE>
LEGAL PROCEEDINGS
ESYNCH and Subsidiaries
- -----------------------
The Company is involved in several lawsuits in the normal course of its business
and all amounts for exposure to these lawsuits have been recorded in the
financial statements of the Company except as noted below.
SOFTKAT
- -------
We acquired SoftKat, Inc. in November 1998 and sold SoftKat, Inc. in 1999.
Although SoftKat has been sold by us, there may be asserted and unasserted
claims against us based on alleged SoftKat, Inc. liabilities or obligations.
Some of the claims against SoftKat have been asserted either in pending
litigation or threatened litigation. We are aware of several other creditors of
SoftKat, Inc., which have made claims against SoftKat for amounts owed based on
good and/or services provided to SoftKat. In most cases, we do not know the
identity of these creditors, the amounts that they claim are due and owing or
the circumstances of their claims. Regarding unasserted claims against SoftKat,
there is a reasonable likelihood that some of the plaintiffs/creditors will seek
to satisfy their claims against the Company on theories of either successor
liability or alter ego.
On September 25, 1998, Diamar Interactive Corp. filed a complaint against us in
Sonoma County Superior Court, State of California. The complaint alleged that we
owed $44,183 for goods and services provided to SoftKat, Inc., based on a theory
of successor liability. We filed an answer denying that we were obligated to pay
any amounts incurred by SoftKat, and later we filed a motion for summary
judgment. We settled the matter for $2,500.
On January 21, 1999, Interplay Entertainment Corp. filed a complaint against us
in Orange County Superior Court, State of California, alleging that we owe
Interplay $86,041 for goods and services provided to SoftKat, Inc., based on a
theory of successor liability. We filed an answer denying that we are obligated
to pay any liability incurred by SoftKat. Interplay filed a Request for
Dismissal of its action against the Company which the Court granted.
On February 2, 1999, RPS, Inc. filed a complaint against us in the United States
District Court, Central District of California. The complaint alleges that we
owe $52,555.58 for delivery services provided to SoftKat, Inc., based on a
theory of successor liability. We have filed an answer denying that we are
liable and we have been informed by counsel for RPS that they will be filing a
Request for Dismissal of the action against the Company.
On February 24, 1999, Muramatsu, Inc. filed a complaint against us in the Orange
County Superior Court, State of California. The complaint alleges that we and a
subsidiary, Intermark, owe $42,207.65 for convention display services provided
to SoftKat, Inc., based on a theory of successor liability. We have filed an
answer denying that neither we nor Intermark is obligated to pay any amounts due
from SoftKat. Muramatsu filed a Request for Dismissal of its action against the
Company which the Court granted.
On April 7, 1999, Sunclipse, Inc. had filed the complaint against us in the
Orange County Superior Court, State of California. The complaint alleged that we
owe $131,752.06 for goods and services provided to SoftKat, Inc., based on a
theory of successor liability. On May 24, 1999, Sunclipse filed a first amended
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<PAGE>
complaint seeking the same relief against us as it sought in its original
complaint. We filed an answer denying that we are obligated to pay any debts
incurred by SoftKat. Sunclipse filed a Request for Dismissal of its action
against the Company which the Court granted.
On April 30, 1999, Digital Leisure, Inc. filed a complaint against us in the
Orange County Superior Court, State of California. The complaint alleges that we
owe $125,715 for goods and services provided to SoftKat, Inc., based on a theory
of successor liability. We have filed an answer denying that we are obligated to
pay any amounts due that were incurred by SoftKat. Pursuant to a confidential
settlement agreement, we settled this matter and the action should be dismissed
no later than February 28, 2000. The terms of the settlement will not result in
any material effect on the Company's financial position nor results of
operations.
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.
On May 25, 1999, Transworld Systems, Inc. had filed suit against us for
$3,998.15 for collection work done on behalf of SoftKat, Inc., and Transworld
obtained a default judgment as a result of an inadvertent failure to respond to
their complaint. The parties recently agreed to resolve the matter by the
Company paying Transworld the sum of $500. A satisfaction of judgment is in the
process of being filed and recorded.
On June 4, 1999, Cambrix Publishing, Inc. filed a complaint against us in the
Orange County Superior Court, Harbor Justice Center, State of California. The
complaint alleges that we owe $12,067.05 for goods and services provided to
SoftKat, Inc., based on a theory of successor liability. We have filed an answer
denying any liability for these amounts and we intend to vigorously oppose any
attempt to impose successor liability.
On April 7, 1999, LucasArts Entertainment Co. LLC, filed a debt collection
action against SoftKat, Inc., seeking recovery of $64,369.97, for goods and
services allegedly provided to SoftKat. LucasArts recently amended its complaint
to name us as a defendant based upon theories of successor liability or alter
ego. We have not yet answered the amended complaint, but we intend to vigorously
oppose any attempt to impose successor liability or alter ego liability.
INTERMARK
- ---------
Intermark Corporation became our subsidiary on August 5, 1998.
On February 5, 1999, Lawrence Tyson, an individual, filed a complaint in San
Mateo County Superior Court, State of California against Intermark, Innovus, and
certain officers of the Company. The complaint is for $8,000 allegedly owed
under a promissory note plus an unspecified amount of damages for an unrelated
alleged breach of an oral agreement to compensate Tyson for services, alleged to
be the introduction of Intermark to a potential key employee. The case is set
for trial in July 2000.
-14-
<PAGE>
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.
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.
-15-
<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 C. 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.
-16-
<PAGE>
Thomas C. 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. 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 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
-17-
<PAGE>
western division until Fujitsu acquired the business unit. Before joining TRW,
he was with NCR's financial sales division in Canada. Prior to that he managed
the VAR division at Wang Laboratories. Moving to Matsushita, he played a key
role in the development of the distribution channel for their Panasonic
products.
Donald C. Watters, Jr.
- ----------------------
Donald Watters, Jr. was elected to the Board of Directors on November 15, 1999.
From April 1, 1999 to the present, Mr. Watters has been the President and Chief
Operating Officer of eSynch Corporation. Formerly, Mr. Watters was President and
CEO of Kiss Software Corporation (KISSCO), a publisher/developer of Internet
software utilities. Prior to Kissco, Mr. Watters was vice president of worldwide
sales of Touchstone Software (Nasdaq: TSSW).
Norton Garfinkle
- ----------------
Norton Garfinkle, who was elected to the Board of Directors on November 15,
1999, is Chairman of Oxford Management Corporation, an investment company that
specializes in building new technology companies. He also serves as Chairman of
several of these portfolio companies, including: Cambridge Parallel Processing,
Cambridge Management Advanced Systems Corporation and ERS International.
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
Board of Directors from October 27, 1998 to November 15, 1999.
-18-
<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. In the fiscal year ended December 31, 1999, 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 1999.
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.
-19-
<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 P. 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."
-20-
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
MANAGEMENT. The following table sets forth as of February 3, 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) 1,730,609 15.7% 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) 870,000 8.0% 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) 6,924,465 53.0% 0 0%
</TABLE>
- ------------
(1) Includes 542,500 shares which may be purchased pursuant to stock
options which are currently, or within the next 60 days will be,
exercisable. Includes 140,395 shares of Ms. Detra Mauro Hemingway, the
spouse of Mr. Hemingway.
(2) Includes 117,000 shares which may be purchased pursuant to stock
options which are currently, or within the next 60 days will be,
exercisable.
(3) Includes 117,000 shares which may be purchased pursuant to stock
options 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 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 which are currently, or within the next 60 days will be,
exercisable.
(Footnotes continue on next page)
-21-
<PAGE>
(Footnotes continued)
(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 410,000 shares which may be purchased pursuant to
warrants are currently or within 60 days will be 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.
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 K Preferred Stock
outstanding. See "Selling Security Holders."
-22-
<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 February 1, 2000, there were 10,505,463 shares of Common Stock
outstanding, which were held by approximately 350 stockholders of record and
held by approximately 1,750 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.
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.
-23-
<PAGE>
At February 3, 2000, apart from the 1999 Stock Incentive Plan, there were
outstanding options to purchase another 2,180,560 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.
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.
-24-
<PAGE>
The Series J conversion price is 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.
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.
-25-
<PAGE>
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.
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.
-26-
<PAGE>
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 shares 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.
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.
-27-
<PAGE>
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.
WARRANTS
- --------
The warrants held by the selling security holders entitle those holders to
purchase shares of Common Stock. They include warrants expiring December 31,
2002 to purchase 112,500 shares at approximately $6.47 each, and an
additional warrant expiring January 31, 2003 to purchase 37,500 shares at a
price of approximately $12.36 per share.
The Company has warrants outstanding, issued to the initial holders of Series J
Preferred Stock, entitling them to purchase 196,875 shares of Common Stock.
These include warrants expiring August 13, 2002 to purchase up to 112,500 shares
at an initial price of approximately $3.00 per share, warrants expiring
September 30, 2002 to purchase up to 75,000 shares at approximately $5.17 per
share and a warrant expiring October 29, 2002 to purchase up to 9,375 shares at
approximately $3.45 per share, initially.
Also, there are warrants outstanding held by others to purchase approximately an
additional 1,734,133 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.
-28-
<PAGE>
REGISTRATION RIGHTS
- -------------------
This offering is being registered with the SEC pursuant to a registration rights
agreement with the holders of Series K Preferred Stock and warrants and pursuant
to piggyback registration rights agreements with one holder of Common Stock.
See "Plan of Distribution."
In addition, we have granted demand registration rights to the holders of the
Company's Series J 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 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.
-29-
<PAGE>
INTEREST OF NAMED EXPERTS AND COUNSEL
LEGAL MATTERS AND EXPERTS
Members of the firm of Stradling Yocca Carlson & Rauth, P.C. 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.
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.
Experts
The consolidated financial statements of eSynch Corporation and Subsidiaries
as of December 31, 1998 and for each of the two years in the period ended
December 31, 1998, 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.
-30-
<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 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.
-31-
<PAGE>
DESCRIPTION OF BUSINESS
We were incorporated in Delaware on December 21, 1988, as Tri-Nem, Inc. On
October 5, 1994, the Company changed its name to Innovus Corporation. On
November 9, 1998, the Company changed its name to ESYNCH CORPORATION.
On August 5, 1998, we were acquired through a reverse merger agreement with
Intermark Corporation. Our headquarters was moved from Utah to Southern
California. See "Certain Relationships and Related Transactions."
During the first half of 1998, we shrunk our operations in order to conserve
cash. We stopped manufacturing or developing our multimedia authoring software.
After the acquisition, we focused our efforts on debt reduction and winding up
the former business of Innovus Multimedia Corporation. We began a new business
direction with the software publishing and distribution business of Intermark
and development of its proprietary Electronic Digital Delivery technology.
In November 1998, all of the shares of common stock were reclassified and
combined in a one-for-ten reverse stock split.
In November 1998, we acquired the stock of SoftKat, Inc. We experienced
difficulties with its business and finances, and sold the company in 1999.
On April 1, 1999, we acquired the stock of Kiss Software Corporation (KISSCO),
of Newport Beach, California. Kissco develops, publishes and sells Internet
utility products.
On September 30, 1999 eSynch acquired the stock of Oxford Media Corporation, a
leading designer and developer of digital technologies for video-on-demand.
eSynch strategy
- ---------------
Our business objective is to become a market leader for digital distribution. We
provide advanced computer Internet utility programs and video-on-demand
products, and we market and sell software and video on the Internet. We believe
that we will become a leader in Electronic Digital Distribution. Electronic
Digital Distribution is the delivery of software, video or audio content from a
wide range of sources.
The market for digital distribution includes broadcasting and telecommunications
companies which may want to employ our technology to distribute electronic
content on demand, such as video, to their viewers or subscribers, as well as
Internet users with broadband connections to the Internet who may want to
download such content for a fee. Revenue also can be generated through sale of
advertising.
We employ a proprietary Electronic Digital Distribution system that allows a
digital product to be wrapped in a secure digital envelope and distributed
across the Internet and cable and satellite networks. We also employ the system
in eSynch's online malls. The ESD system automates an optimized electronic
delivery, security, tracking, and accountability protocol. Our target customers
include dealers, resellers and end-users. We generate revenue by selling digital
content or software and by selling advertising space in our digital delivery
process, which allows for banner advertising.
-32-
<PAGE>
We face competition in the electronic delivery market and video-on-demand,
including competition from larger, well-financed companies. These include AT&T,
IBM, JVC, Matsushita Electronics Corporation, NTT, Philips, Scientific Atlanta,
Sony, Microsoft Corporation, US West, Inc., Enron Corporation, InterVU, Inc.,
C-Cube Microsystems and other hardware, software, telecommunications or
broadcasting concerns offering competing solutions.
Recent Announcements
- --------------------
During the first quarter of 1999, we opened 800MALL.com, a web site that sells
software, directly to consumers, through Yahoo!, and also began to sell our
"Health Optimizer" software on AOL. In 1999 to September 30, visits to eSynch
web sites exceeded 22 million. In the same period, we estimate that 32 percent
of our electronic revenues were generated through international sales. Our
Internet malls are accessible to 118 countries.
In the first quarter, Kissco, our new wholly-owned subsidiary, through its
Japanese partners, Winning Run and Supreme Resources International, and in
conjunction with MediaVision, established channel bundling agreements with Canon
Sales. Canon is the major distributor of Compaq in Japan. Canon has bundled
Kissco's Speed Surfer-J and MediaVision's Web Driver with Compaq and IBM
computers in Japan.
In July 1999, we entered a licensing agreement with Ingram Micro, headquartered
in Santa Ana, Calif., one of the largest wholesale providers of technology
products and services. Under the agreement, eSynch is entitled to offer Ingram
Micro's entire product line through the eSynch e-commerce system. Our associated
web site is in the development and testing phase. We anticipate intense
competition from the companies named above and others.
In August, we commenced a bundling arrangement with MindSpring Enterprises Inc.,
a leading national Internet service provider. Under terms of the agreement,
customers who purchase eSynch/Kissco utilities, including Modem Wizard 4.0, Undo
& Recover Toolbox, and WebSnake, will find the MindSpring software included with
the utility. The software will allow customers to start a free 30-day trial
subscription to MindSpring's Internet Service and they will waive the $25
activation fee.
With our recent introduction of "video-on-demand," we believe we can become a
leader in the Electronic Digital Distribution-TM- market. Oxford is now a leader
in DVD mastering, working with several film libraries and independent production
companies to digitize film and video. Oxford offers the full range of MPEG
compression/encoding, Dolby Digital audio, authoring, graphics and design, with
capabilities for multiple languages, subtitling, interactivity and Internet
access. Oxford Media Corp., is helping to develop the video-on-demand industry
with new innovative proprietary digital programming technologies in MPEG 1 and
MPEG 2. Oxford became one of the first companies to utilize MPEG compression for
full-length movies and play-on-demand high quality images.
-33-
<PAGE>
We also offer proprietary software, including:
* Modem Wizard and NetMonitor
* Undo & Recover Toolbox
* WebSnake
* CoolCat
* Speed Surfer
Modem Wizard is our best-selling software utility. It is an Internet optimizer,
troubleshooter, and fix-it tool that works on any Internet connection (including
cable modem, DSL, and T1). In May, we had begun shipping Modem Wizard 4.0.
recently we also announced Modem Wizard, version 4.5, with several added
features.
NetMonitor is a stand-alone program within Modem Wizard. In just six weeks, our
offer of free downloads of NetMonitor generating 15 million visits to our web
site, and 7 million banner views. The increase in web site visits produced a
record month for eSynch's Internet sales. In the beginning of June, NetMonitor
premiered on ZDNet, and within 48 hours, had amassed over 50,000
downloads---making it the #1 download of the week on the ZDNet web site. Shortly
thereafter, due to the massive response our free NetMonitor received, we
partnered with Ziff-Davis (NYSE: ZD) to distribute our free NetMonitor, through
CD-ROM to all Ziff-Davis publications (including PC Magazine, PC Computing,
etc.)
Undo & Recover Toolbox is a utility to undo step-by-step any changes the user
has made to computer setup files. In the August issue of PC World, Undo &
Recover Toolbox was given a "Best Buy" award by the editors at the publication.
WebSnake automates Web searching, filters Web data and retrieves specified
information, so you can review it later at PC speeds, bypassing Web bottlenecks.
CoolCat is an easy-to-use HTML editor, with professional features such as tag
sets for every flavor of HTML, WebTV, Cold Fusion and JavaScript; comprehensive
project-wide document management with integrated FTP; a built-in preview
browser, and extended support for every significant HTML layout feature. It has
pop-up property windows for links, font sizing and colors, horizontal rules,
text formatting, and easy table and image layout handling.
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.
-34-
<PAGE>
Patents, trademarks and copyrights
- ----------------------------------
We have a non-exclusive license from Oxford Management Corporation to its
video-on-demand technology and patents. We have applied for federal registration
of various trademarks and service marks." If we receive the registration for
these trademarks, the trademark will be effective for ten (10) years and may be
renewed every ten (10) years indefinitely. Under common law, these trademarks
have an unlimited duration. We have not applied for federal copyright
registration for our software.
Employees
- ---------
As of February 2000, eSynch had 23 full-time employees and no part-time
employees. Of our full-time employees, 4 were in marketing and sales, 6 were in
senior management, 5 were in administration, 5 were in development and 3 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.
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.
-35-
<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.
-36-
<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 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 September 30, 1999 in the amount of $12,184,192. These conditions raise
substantial doubt regarding the Company's ability to continue as a going
concern. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
<TABLE>
<CAPTION>
Year Ended December 31,1998 December 31, 1997
---------------- -----------------
<S> <C> <C>
Sales $ 203,571 $ 496,070
Cost of Sales 156,617 229,032
Gross Profit 46,954 267,038
Operating Expenses
General and Administrative 1,999,340 857,094
Amortization of Goodwill 228,330
Interest 132,641 16,253
Amortization of Debt Discount 355,567
Impairment loss on assets to be sold 2,323,841
Loss Before Extraordinary Item (4,992,765) (606,309)
Debt Forgiveness 14,423
Net Loss $ (4,978,342) $ (606,309)
</TABLE>
Year ended December 31, 1998 compared to year ended December 31, 1997
- ---------------------------------------------------------------------
Net sales were $203,571 in 1998 compared to $496,070 in 1997. 1998 included
$109,000 from SoftKat operations for the period November 17, 1998 through
December 31, 1998. The Company's decision in 1998 to focus on ESD reduced the
direct product sales activity and marketing services were discontinued.
Substantial customer returns and credits reduced SoftKat sales activity from
operational activity prior to its acquisition.
The cost of product sold in 1998 was 77% compared to 46% in 1997. This was due
to the sales of the lower margin SoftKat product through its retail distribution
and lower sales activity.
General and administrative expenses were $ 1,999,340 in 1998 compared with
$857,094 in 1997. Legal and accounting expenses increased to $321,000 in 1998
from $24,855 due to costs incurred with the Innovus merger and with the SoftKat
acquisition. Costs associated with the beneficial conversion feature of notes
payable was $355,567 and interest expense was $132,641 in 1998 versus $16,253 in
1997, respectively. In addition, cost associated with the issuance of stock was
$393,000 and stock options $69,000 in 1998 versus $251,000 and $0 in 1997. Costs
associated with amounts accrued for payroll taxes and penalties were $362,000 in
1998 versus $129,000 in 1997. Outside services were $201,000 in 1998 versus
$58,000 in 1997 with the increase activity in stockholder relations of being a
public Company.
Amortization of goodwill was $228,330 and represented amortization of the
-37-
<PAGE>
goodwill generated by the SoftKat acquisition of $6,882,300 and written off on
the straight-line basis using an estimated useful life of 3.63 years.
The net loss was $ 4,978,342 for 1998 compared with $606,309 in 1997. The loss
in 1998 included $2,323,841 on the loss recorded on the sale of SoftKat,
$228,330 on the amortization of the goodwill generated by the SoftKat
acquisition and SoftKat operating loss for the period November 17, 1998 through
December 31, 1998 in the amount of $111,359. In addition, the Company has
accrued additional expenses for the SoftKat disposal of $100,000 and estimated
that other expenses incurred in 1998 relating to the SoftKat acquisition and
operations approximated $250,000 which were included in general and
administrative expenses. On May 25, 1999 SoftKat was sold to a third party for
$50,000 cash and a note receivable of $100,000 which resulted in the above loss
of $2,323,841. Only the $50,000 cash received is recognized in the calculation
of the loss. The subsequent sale and resulting loss provided evidence of
conditions for accounting purposes.
Nine months ended September 30, 1999 compared to the nine months ended September
30, 1998
- --------------------------------------------------------------------------------
During the nine months ended September 30, 1999, net sales were $917,400
compared to $15,293 for the comparable period of the prior year. The sales
amount for the nine months ended September 30, 1999 included sales for SoftKat
in the amount of $477,011. SoftKat has been sold to a third party.
The costs of products sold in the nine months ended September 30, 1999 was
$459,944 compared with $ 9,940 for the comparable period in the prior year.
Net losses for the nine months ended September 30, 1999 were $6,533,658 compared
to an operating loss of $1,192,503 for the comparable period in the prior year.
The increased operating loss was due to the difficulties associated with SoftKat
operations and increased public relations due to the Company being a publicly
traded company.
Stock issued for services was $1,693,679 for the nine months ended September 30,
1999 and $112,108 for the nine month period ending September 30, 1998.
Liquidity and Capital Resources
- -------------------------------
At September 30 1999 the Company had $734,490 of cash and a deficit in working
capital (current liabilities in excess of current assets) of $2,854,952.
The Company has been relying upon short-term borrowings from affiliates and
others, as well as proceeds from issuances of common stock and preferred stock.
The Company estimates that during the third fiscal quarter of 1999 it was using
approximately $300,000 more cash each month than was generated by operations.
At December 31, 1998 the Company had $1,413 of cash and cash equivalents and a
deficit in working capital (current liabilities in excess of current assets) of
$6,707,523. The Company has been relying upon short-term borrowings and proceeds
from issuances of stock. The proceeds from the issuance of long-term debt were
$806,071 in 1998 versus $73,482 in 1997. In addition stock was issued for
services of $393,000 in 1998 versus $251,000 in 1997.
-38-
<PAGE>
For the year-ended December 31, 1999, the Company issued 310,377 shares of
common stock for cash and notes in the amount of $715,440, issued 872,500 shares
of stock for services in the amount $1,605,304, 245,322 for conversion of notes
and interest in the amount of $604,477, 199,998 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 lawsuit valued at
$26,456, and 100,000 shares of common stock valued at $235,000 in connection to
an indemnification agreement.
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 1/2
shares of Series K Convertible Preferred Stock and accompanying warrants.
-39-
<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. Management believes the amount of space will be adequate
for the foreseeable future. The condition of the property is generally good. The
property is located in an office and industrial area with nearby access to
freeways and airports.
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.
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
-40-
<PAGE>
capital stock as of the Closing. Intermark became a wholly-owned subsidiary of
the Company upon the Closing.
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 Ended December 31, 2000
------------------------------------------
January 1 to February 25, 2000 $ 14.13 $ 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 February 1, 2000 there were approximately 2100 holders of record of the
Common Stock.
-41-
<PAGE>
EXECUTIVE COMPENSATION
The following table sets forth compensation received by the Company's Chief
Executive Officer and by each of the persons who were, for the fiscal year ended
December 31, 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.
-42-
<PAGE>
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company has an employment agreement with each Executive Officers listed
below. The terms of those employment agreements is summarized in the following
table:
<TABLE>
<CAPTION>
CURRENT BASE OPTION OTHER BENEFITS DUE ON
NAME COMPENSATION GRANT BENEFITS TERMINATION
- ------------------ ------------ -------- ------------- ----------------------------------------------------
<S> <C> <C> <C> <C>
Thomas C. Hemingway $150,000 250,000 Any benefits If he is terminated by the Company without cause,
CEO at $1.00 for other he is paid an amount equal to 12 months' base salary
each, officers, and all other benefits and perquisites continue for
fully and 3 weeks 12 months and the Company will be required to
vested vacation per repurchase all his stock and options at the 30-day
year average market price.
Donald Watters, Jr. $150,000 250,000 Any benefits If he is terminated by the Company without cause,
President and COO at $1.00 each, for other he is paid an amount equal to 12 months' base salary
fully vested officers, and all other benefits and perquisites continue for
and 450,000 and 3 weeks 12 months and the Company will be required to
shares at vacation repurchase all his stock and options at the 30-day
$0.50 each, per year average market price.
fully vested
James H. Budd $130,000 Any benefits If he is terminated by the Company without cause,
Vice President for other he is paid an amount equal to 3 months' base salary
officers, and all other benefits and perquisites continue for
and 2 weeks 3 months and all stock options held by him vest and
vacation become exercisable.
per year
Robert Way $110,000 250,000 Any benefits If he is terminated by the Company without cause,
Vice President at $1.00 each, for other he is paid an amount equal to 3 months' base salary
fully invested officers, and all other benefits and perquisites continue for
and 3 weeks 3 months and all stock options held by him vest and
vacation become exercisable.
per year
T. Richard Hutt $130,000 Any benefits If he is terminated by the Company without cause,
Vice President for other he is paid an amount equal to 3 months' base salary
officers, and all other benefits and perquisites continue for
and 2 weeks 3 months and all stock options held by him vest and
vacation become exercisable.
per year
David P. Noyes $150,000 250,000 at Any benefits If he is terminated by the Company without cause,
CFO $1.00 each, for other he is paid an amount equal to 6 months' base salary
fully vested, officers. and all other benefits and perquisites continue for
and 250,000 and 3 weeks 6 months and all stock options held by him vest
at $1.00 each, vacation and become exercisable.
vesting per year
ratably over
two years
</TABLE>
-43-
<PAGE>
OPTION GRANTS DURING FISCAL 1999
The following table sets forth information on all grants of stock
options during the fiscal year ended December 31, 1999, to Named Officers:
OPTION GRANTS TABLE
OPTION GRANTS IN FISCAL YEAR 1999
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL
-------------------------------------------------- REALIZABLE
% OF TOTAL VALUE AT ASSUMED
NUMBER OF OPTIONS ANNUAL RATES OF
SECURITIES GRANTED TO STOCK PRICE
UNDERLYING EMPLOYEES EXERCISE APPRECIATION FOR
OPTIONS IN FISCAL PRICE EXPIRATION OPTION TERM($)(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, 2004 $1,827,336 $2,882,452
Donald C. Watters 48,568(4) 2.1% $2.12 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% $2.12 Feb, 2008 $ 102,276 $ 153,365
250,000 10.6% $1.00 Apr, 2009 $1,835,096 $2,906,935
</TABLE>
- ---------
(1) Options to purchase an aggregate of 2,185,000 shares of common stock were
granted by the Company to employees, including the Named Officers, during
the fiscal year ended December 31, 1999. In addition, options to purchase
163,187 shares of common stock were assumed in the Kiss Software
acquisition. Subsequently, a total of 69,427 options expired or were
voided.
(2) Options held by the Named Officers have a term of 5 and 10 years, subject
to earlier termination in certain events related to termination of
employment.
(3) These columns present hypothetical future values of the stock obtainable
upon exercise of the options net of the options' exercise price, assuming
that the closing market price of the Company's common stock, as reported
on the OTC Bulletin Board on December 31, 1999, appreciates at a 5% and
10% compound annual rate over the term of the options. The 5% and 10%
rates of stock price appreciation are presented as examples pursuant to
the rules and regulations of the Securities and Exchange Commission
("SEC") and do not necessarily reflect management's estimate or projection
of the Company's future stock price performance. The potential realizable
values presented are not intended to indicate the value of the options.
(4) Stock options assumed by the Company that had been granted by Kiss
Software Corporation. Each option is exercisable in full.
-44-
<PAGE>
OPTION EXERCISES IN FISCAL 1999 AND YEAR-END OPTION VALUES
The following table sets forth information concerning stock options
which were exercised during, or held at the end of, fiscal 1999 by the Named
Officers:
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF
SECURITIES UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS
SHARES VALUE AT FISCAL YEAR END(#) AT FISCAL YEAR END($)(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 - $ 328,770 -
T. Richard Hutt - - 117,000 - $ 328,770 -
David P. Noyes - - 281,250 218,750 $1,300,781 $1,011,719
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.
-45-
<PAGE>
ESYNCH CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
-----
<S> <C>
ESYNCH CORPORATION AND SUBSIDIARIES
Consolidated Balance Sheet - December 31, 1998 47
Consolidated Statements of Operations for the Years Ended
December 31, 1998 and 1997 49
Consolidated Statements of Stockholders' Deficit for the
Years Ended December 31, 1997 and 1998 50
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1998 and 1997 51
Notes to Consolidated Financial Statements 52
Consolidated Balance Sheet - September 30, 1999(Unaudited) 64
Consolidated Statements of Operations for the Nine Months Ended
September 30, 1999 and 1998 (Unaudited) 65
Condensed Consolidated Statements of Stockholders' Equity
for the Nine Months Ended September 30, 1999 (Unaudited) 66
Consolidated Statements of Cash Flows for the Nine
Months Ended September 30, 1999 and 1998 (Unaudited) 69
Notes to Consolidated Financial Statements (Unaudited) 70
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS 77
Unaudited Pro Forma Condensed Consolidated Statement of Operations
for the Nine Months Ended September 30, 1999 and
For the Year Ended December 31, 1998 78
Notes to Unaudited Pro Forma Condensed Consolidated
Financial Statements 80
SOFTKAT, INC.
Balance Sheet - December 31, 1998 81
Statements of Operations for the Years Ended
December 31, 1998 and 1997 82
Statements of Stockholders' Deficit for the
Years Ended December 31, 1997 and 1998 83
Statements of Cash Flows for the Years
Ended December 31, 1998 and 1997 84
Notes to Financial Statements 85
KISS SOFTWARE CORPORATION
Balance Sheet - December 31, 1998 89
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 90
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 91
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 92
Notes to Financial Statements 93
</TABLE>
-46-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1998
ASSETS
<TABLE>
<S> <C>
Current Assets
Cash $ 1,413
Inventory 13,693
Other receivable -
----------
Total Current Assets 15,106
----------
Equipment 162,194
Less accumulated depreciation (109,988)
----------
Net Equipment 52,206
----------
Assets to be sold - primarily goodwill 4,552,847
----------
Total Assets $4,620,159
==========
</TABLE>
-47-
<PAGE>
LIABILITIES AND STOCKHOLDERS' DEFICIT
<TABLE>
<S> <C>
Current Liabilities
Trade accounts payable $1,120,281
Accrued liabilities 692,840
Notes payable 406,661
Liabilities relating to assets to be sold 4,502,847
----------
Total Current Liabilities 6,722,629
----------
Redeemable Preferred Stock - $0.001 par value; 600,000 shares
authorized; 600,000 shares of Series I issued and outstanding;
liquidation preference - $600,000 600,000
----------
Stockholders' Deficit
Preferred stock - $0.001 par value; 400,000 shares
authorized; none issued or outstanding -
Common stock - $0.001 par value; 20,000,000 shares
authorized; 6,889,829 issued and outstanding 6,889
Additional paid-in capital 2,941,895
Accumulated deficit (5,651,254)
----------
Total Stockholders' Deficit (2,702,470)
----------
Total Liabilities and Stockholders' Deficit $4,620,159
==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-48-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Product Sales $ 203,571 $ 496,070
Cost of Goods Sold 156,617 229,032
----------- ----------
Gross Profit 46,954 267,038
----------- ----------
Operating and Other Expenses
General and administrative 1,999,340 857,094
Amortization of goodwill 228,330 -
Interest 132,641 16,253
Amortization of debt discount 355,567 -
Impairment loss on assets to be sold 2,323,841 -
----------- ----------
Total Operating and Other Expenses 5,039,719 873,347
----------- ----------
Loss Before Extraordinary Item (4,992,765) (606,309)
Extraordinary Gain From Debt Forgiveness 14,423 -
----------- ----------
Net Loss $(4,978,342) $ (606,309)
=========== ==========
Basic and Diluted Loss per Common Share
Loss before extraordinary item $ (0.91) $ (12.54)
Extraordinary gain from debt forgiveness - -
----------- ----------
Net Loss $ (0.91) $ (12.54)
=========== ==========
Weighted Average Number of Common Shares
Used in Per Share Calculation 5,476,874 48,345
=========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-49-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional Total
-------------------- ------------------ Paid-In Accumulated Stockholders'
Shares Amount Shares Amount Capital Deficit Deficit
---------- -------- ------- --------- -------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1996 16,378 $ 16 21,350 $ 21 $ 7,963 (66,603) (58,603)
Shares issued for services 51,788 52 68,007 68 251,045 - 251,165
Net loss for the year - - - - - (606,309) (606,309)
--------- ----- ---------- --------- ---------- --------- --------
Balance - December 31, 1997 68,166 68 89,357 89 259,008 (672,912) (413,747)
Shares issued for services 1,112 1 1,461 1 164,874 - 164,876
Conversion of notes payable and
accrued interest 9,428 9 12,546 13 393,077 - 393,099
Acquisition of Innovus - - 1,215,375 1,215 (861,286) - (860,071)
Shares issued for services 1,580 2 - - 112,107 - 112,109
Conversion of notes payable and
accrued interest - - 160,002 160 174,841 - 175,001
Conversion of preferred shares (80,286) (80) 4,516,088 4,516 (4,436) - -
Beneficial conversion feature - - - - 355,567 - 355,567
Acquisition of SoftKat - - 720,000 720 2,069,280 - 2,070,000
Shares issued for services - - 100,000 100 115,900 - 116,000
Shares issued for conversion of
accounts payable - - 20,000 20 24,980 - 25,000
Shares issued for interest payment
on note payable - - 55,000 55 68,695 - 68,750
Compensation relating to the grant
of stock options - - - - 69,288 - 69,288
Net loss for the year - - - - - (4,978,342) (4,978,342)
--------- ------ ---------- --------- ---------- ----------- -----------
Balance - December 31, 1998 - - 6,889,829 $ 6,889 $2,941,895 $(5,651,254) $(2,702,470)
========= ====== ========== ========= ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
-50-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Cash Flows From Operating Activities
Net loss $(4,978,342) $ (606,309)
Adjustments to reconcile net loss to net
cash used by operating activities:
Amortization of goodwill 228,330 -
Depreciation 36,910 5,254
Stock issued for interest 68,750 -
Amortization of debt discount 355,567 -
Stock issued for services 392,985 251,165
Compensation from stock options granted 69,288 -
Impairment loss on assets to be sold 2,323,841 -
Forgiveness of debt (14,423) -
Changes in assets to be sold 610,103 -
Changes in liabilities relating to assets
to be sold (498,744) -
Payment of company expenses by employee - 4,507
Changes in operating assets and liabilities,
net of effects of businesses
acquired:
Accounts receivable 25,000 3,220
Inventory (13,693) -
Other receivables - 40,000
Accounts payable 259,305 99,950
Accrued liabilities 410,490 166,099
------------ ----------
Net Cash Used By Operating Activities (724,633) (36,114)
------------ ----------
Cash Flows From Investing Activities
Payments for the purchase of equipment (5,823) (19,923)
------------ ----------
Net Cash Used By Investing Activities (5,823) (19,923)
------------ ----------
Cash Flows From Financing Activities
Proceeds from issuance of debt 806,071 73,482
Principal payments on notes payable (74,202) (19,048)
------------ ----------
Net Cash Provided By Financing Activities 731,869 54,434
------------ ----------
Net Increase (Decrease) In Cash 1,413 (1,603)
Cash - Beginning of Year - 1,603
------------ ----------
Cash - End of Year $ 1,413 $ -
============ ==========
</TABLE>
Supplemental cash flow information and noncash investing and
Financing activities - Note 8
The accompanying notes are an integral part of these financial statements.
-51-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION AND NATURE OF OPERATIONS - Intermark Corporation ("Intermark") was
incorporated under the laws of the State of California in October 1995. On
August 5, 1998, Intermark was reorganized into Innovus Corporation, a
publicly-held shell corporation, as explained in Note 2. By shareholder action,
Innovus Corporation, the parent company, changed its name to eSynch Corporation
("eSynch") on November 9, 1998. On November 17, 1998, eSynch acquired SoftKat
Inc. ("SoftKat"). Subsequent to December 31, 1998, SoftKat was sold to a
third-party. See Note 2.
The primary activities of eSynch, the consolidated company, have consisted of
raising capital, acquiring Innovus Corporation and SoftKat Inc., and limited
retail and turnkey sales of software games and various other programs and
related marketing services through distribution channels and through the
Internet.
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of Intermark Corporation ("Intermark") for all
periods presented, the accounts of Innovus Corporation and SoftKat, Inc. from
the dates of their acquisitions on August 5, 1998 and November 17, 1998,
respectively. These entities are collectively referred to as "eSynch" or the
"Company". All inter-company transactions and balances have been eliminated in
consolidation. In accordance with the accounting treatment on the impairment of
long-lived assets to be disposed of, the accounts of SoftKat has been
consolidated under two line items on the financial statements, "Assets to be
sold" and "Liabilities relating to assets to be sold", respectively. The
carrying amount of assets to be sold has been adjusted by the impairment loss
on the subsequent sale of SoftKat.
USE OF ESTIMATES - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumption that affect the reported amounts in the financial statements and
accompanying notes. Actual results could differ from those estimates.
BUSINESS CONDITION - The financial statements have been prepared on the basis
of the Company continuing as a going concern. The Company has incurred losses
from operations and negative cash flows from operating activities and has
accumulated a deficit at December 31, 1998 in the amount of $5,651,254. These
conditions raise substantial doubt regarding the Company's ability to continue
as a going concern. Management's plan to mitigate the impact of these
conditions is to obtain additional equity financing through the issuance of the
Company's common stock, convertible preferred stock or warrants. As discussed
in Note 12, the Company has obtained a signed commitment from an investment
source for equity financing in the aggregate amount of $2,500,000. The Company
is also currently in negotiations for additional financing arrangements.
However, realization of the proceeds form these potential transactions is not
assured. These financial statements do not include any adjustments relating to
the recoverability and classification of recorded assets or amounts and
classifications of liabilities that might be necessary should the Company be
unable to continue.
CONCENTRATION OF RISK AND MAJOR CUSTOMERS - The Company operates exclusively in
the software industry, accordingly, segment information relating to operations
in different industries is not presented in these financial statements. The
concentration of business in the highly competitive software industry subjects
the Company to concentrated market risk. During the year ended December 31,
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<PAGE>
1997, sales to three major customers totaled 31%, 19%, and 15% of sales,
respectively. Sales to any major customer in 1998 were not significant.
FAIR VALUES OF FINANCIAL INSTRUMENTS - The amounts reported as cash, accounts
payable, notes payable, and liabilities relating to assets to be sold are
considered to reasonable approximations of their fair values. The fair value
estimates were based on market information available to management at the time
of the preparation of the financial statements.
INVENTORY - Inventory is stated at the lower of cost or market. Cost is
determined using the first-in, first-out method. Inventory balance at year-end
consisted of packaged software.
EQUIPMENT - Equipment is stated at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of the equipment, which
are five to seven years. Maintenance and repairs of equipment are charged to
operations and major improvements are capitalized. Upon retirement, sale, or
other disposition of equipment, the cost and accumulated depreciation are
eliminated from the accounts and gain or loss is included in operations.
STOCK-BASED COMPENSATION - Stock-based compensation to employees is measured by
the intrinsic value method. This method recognizes compensation expense related
to stock options granted to employees based on the difference between the fair
value of the underlying common stock and the exercise price of the stock option
on the date granted. Compensation expense related to stock options granted to
non-employees is determined based upon the fair value of the stock options on
the date granted.
ADVERTISING COSTS - Advertising costs have been recognized as expense when
incurred, and amounted to none and $13,056 during the years ended December 31,
1998 and 1997, respectively
LOSS PER SHARE - The Company computes basic and diluted loss per share in
accordance with Statement of Financial Accounting Standards No. 128, ("SFAS
128"), "Earnings Per Share." Basic loss per common share is computed by
dividing net loss available to common stockholders by the weighted-average
number of common shares outstanding during the period. Diluted loss per share
is calculated to give effect to stock warrants, options and convertible notes
payable except during loss periods when those potentially issuable common
shares would decrease the loss per share. The effects of 1,751,800 potentially
issuable common shares outstanding at December 31, 1998 were excluded from the
calculation of diluted loss per share for the year ended December 31, 1998, as
they would have decreased the loss per share.
REVENUE RECOGNITION - The Company sells software products at fixed prices for
which the right to return is granted to the buyer. Accordingly, revenue is
recognized when the buyer has paid for the products and the amount of future
returns can be reasonably estimated. Cost of products sold is recognized at the
date the sale is recognized less an estimate for sales returns. Until the sale
is recognized, products purchased from publishers are accounted for as
consigned product from publishers and the related cost is not reflected in the
financial statements with the exception of a limited amount of software
inventory owned by the Company at year-end.
NEW ACCOUNTING STANDARDS - In March 1998, the AICPA issued SOP 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use." The Company is currently analyzing the impact of this statement,
which is required to be adopted in 1999, and does not expect this statement to
have a material impact on the Company's financial position, results of
operations or cash flows.
-53-
<PAGE>
The Financial Accounting Standard Board issued SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities" in June 1998. This statement is
effective for the year beginning January 1, 2000 and will not require
retroactive restatement of prior period financial statements. The Company does
not believe the new statement will have any impact on the financial statements
but it has not completed its evaluation of SFAS 133.
NOTE 2--ACQUISITIONS
INNOVUS - In May 1998, Intermark entered into an Agreement and Plan of Share
Exchange (the "Agreement") with Innovus Corporation (Innovus), a publicly held
Delaware corporation, which had discontinued its operations by May 1998.
Innovus had 1,215,375 (post 1-for-10 split) common shares outstanding on August
5, 1998 when the Agreement was completed. Under the terms of the Agreement, the
shareholders of Intermark exchanged all of the 3,783,875 Intermark common
shares outstanding for 103,364 shares of common stock and 78,706 shares of
Series H preferred stock of Innovus and Intermark was reorganized into a
newly-formed subsidiary of Innovus. The Series H preferred shares had voting
rights equivalent to the 4,427,213 common shares into which they were
convertible. As a result, the Intermark shareholders became the majority
shareholders of the Company in a transaction intended to qualify as a tax-free
reorganization. The transactions were accounted for as the recapitalization of
Intermark at historical cost and the issuance of common stock in exchange for
the net liabilities of Innovus in the amount of $860,071 which were recorded at
their historical cost. The operations of Innovus were not significant to the
operations of the Company; therefore, pro forma results of operations are not
presented.
SOFTKAT - On November 17, 1998, the Company acquired SoftKat, Inc,. a
California corporation primarily engaged in the wholesale distribution of
computer software games. In exchange for the SoftKat common shares, the Company
issued 720,000 common shares and 600,000 shares of Series I redeemable,
convertible preferred shares. Up to an additional 720,000 common shares are
contingently issuable based upon the difference between the market price of the
common stock one year from the date of acquisition and a target market price of
$3.00 per share. The acquisition was accounted for using the purchase method of
accounting. The acquisition purchase price, based upon the fair value of the
common and preferred stock issued and the addition contingently issuable common
shares, was $2,670,000. The excess of the purchase price over the estimated
fair value of the identifiable acquired assets less liabilities assumed was
$6,882,300, which was recognized as goodwill. The results of operations of
SoftKat have been included in the 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.
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<PAGE>
Unaudited pro forma results of operations assuming the acquisitions occurred at
the beginning of 1997 are as follows:
<TABLE>
<CAPTION>
For the Years Ended
December 31,
-------------------------
1998 1997
----------- -----------
<S> <C> <C>
Product sales $ 6,613,842 $ 4,300,718
Loss from continuing operations before
extraordinary item (9,549,460) (3,705,508)
Basic and diluted loss per common share
from continuing operations before
extraordinary item $ (1.58) $ (1.87)
</TABLE>
NOTE 3--EQUIPMENT
Equipment consisted of the following:
<TABLE>
<S> <C>
Furniture and fixtures $ 3,233
Computer equipment 155,882
Office equipment 3,079
---------
Total $ 162,194
=========
</TABLE>
Depreciation expense for the years ended December 31, 1998 and 1997 was $36,910
and $ 5,254, respectively.
NOTE 4--NOTES PAYABLE
<TABLE>
<S> <C>
Notes payable consisted of the following:
Capital lease obligations for equipment $ 768
12% Line of credit payable to a bank; secured by all
assets of the Company; due September 30, 1998; in default 22,893
40% Convertible note payable to a shareholder; unsecured;
due March 15, 1999 300,000
10% Series A Convertible debentures payable to three
shareholders; secured by all assets of the Company;
due October 31, 1998; in default 75,000
Note payable to a shareholder; no stated rate of
interest; payable on demand; unsecured 8,000
---------
Total Notes Payable $ 406,661
=========
</TABLE>
In September 1997, the Company established a line of credit with a limit of
$25,000, with a bank. The note was due September 8, 1998. The loan is
guaranteed by three officers of the Company and bears interest at 3% over the
prime rate (12% at December 31, 1998). The Company has not made any principal
payments since the inception of the loan and the loan is currently in default.
The $300,000 note payable to a shareholder is convertible into common shares at
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<PAGE>
$3.00 per share. The conversion period began on the date of the note and
terminates on the due date of March 15, 1999 unless the entire principal
payment of the note is not made by the due date at which time the conversion
right reverts back to the holder indefinitely. In December 1998, the Company
issued 55,000 common shares to the note holder as interest on the note. The
amount recorded as interest expense for these shares was $68,750. During 1999,
the Company made cash payments of $30,000 interest and $125,000 principal to
the holder. The Company is currently in default on the remaining balance of the
loan.
The 10% Series A convertible debentures in the amount of $25,000 each were
issued in April 1998 to three shareholders. The note holders are entitled, at
their option, to convert the debenture principal face amount then outstanding,
together with accrued interest, into shares of the Company's common stock at a
conversion price of $0.125 per share. The Company is currently in default on
the debentures.
NOTE 5--INCOME TAXES
There was no provision for or benefit from income tax for any period. The
components of the net deferred tax asset at December 31, 1998 are shown below:
<TABLE>
<S> <C>
Operating loss carry forwards $ 1,190,549
Valuation Allowance (1,190,549)
-----------
Net Deferred Tax Asset $ -
===========
</TABLE>
For tax reporting purposes, the Company has net operating loss carry forwards
in the amount of $2,896,848 which will expire beginning in the year 2011.
The following is a reconciliation of the amount of tax (benefit) that would
result from applying the federal statutory rate to pretax loss with the
provision for income taxes.
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------
1998 1997
----------- ----------
<S> <C> <C>
Tax at statutory rate (34%) $(1,692,637) $ (206,145)
Non-deductible expenses 1,083,122 10,327
Change in valuation allowance 919,440 233,075
State tax benefit, net of federal
tax effect (313,636) (38,197)
Change in effective tax rate 3,711 940
----------- ----------
Net Income Tax Expense $ - $ -
=========== ==========
</TABLE>
If the Company were to change ownership, the net operating losses may be
subject to limitations under Section 382 of the Internal Revenue Code.
NOTE 6--ACCRUED LIABILITIES
Included in accrued liabilities are $612,170 in obligations to states and the
federal government for overdue payroll taxes from previous years and the
estimated interest and penalties owing on such tax and obligations for
estimated payroll taxes, interest and penalties on 1996, 1997, and 1998 officer
wages and 1998 employee wages that have not been reported to the respective
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<PAGE>
governmental agencies.
NOTE 7--COMMITMENTS AND CONTINGENCIES
CONSULTING AGREEMENTS - On January 5, 1998, the Company entered into a software
programming consulting agreement with an unrelated third party. Under the terms
of the agreement, the consultant received cash payments of $2,000 in 1998 and
$10,000 in 1999 upon completion of the project on April 12, 1999. The
consultant was also issued 45,000 shares of common stock on April 12, 1999. The
amount of expense recognized during 1999 on the shares issued was $146,250.
On August 27, 1998, the Company entered into a marketing consulting agreement
with an unrelated third party. Under the terms of the agreement, the consultant
was issued 30,000 shares of common stock for $100. The Company is obligated to
issue 30,000 common shares each three months to the consultant. The agreement
is through August 1999 and is cancelable by either party. The amount of expense
recognized on the shares issued under this agreement is calculated using the
market value of the stock at the end of the three month period.
LEASE COMMITMENTS - The Company leases office and warehouse facilities under
two-year agreements accounted for as operating leases. Lease expense for the
years ended December 31, 1998 and 1997 was $56,400 and $51,875. In July 1998,
the Company renewed one lease through May 31, 2000 at $4,700 per month. In May
1999, the Company moved to a new office and warehouse facility and entered into
a new five-year operating lease. The lessor of the existing lease granted the
Company an unconditional release from the lease effective as of the date of
relocation. Monthly minimum rental payments on the new lease are $20,010 to be
adjusted upwards by 4% for each succeeding year during the term of the lease.
The following is a schedule of future minimum rental payments required under
existing leases and the new lease.
<TABLE>
<CAPTION>
Years Ending December 31:
<S> <C>
1999 $ 178,880
2000 249,725
2001 259,714
2002 270,102
2003 280,906
Thereafter 97,381
----------
Total $1,336,708
</TABLE>
LITIGATION - SoftKat is a defendant in a lawsuit filed by a third-party for
alleged breach of distribution and licensing agreements. Management of SoftKat
claims it has paid money and substantial merchandise to the Plaintiff in
satisfaction of a large portion of the debt. The plaintiff has proposed to file
a first amended complaint naming as defendants the original parties as well as
eSynch and claiming trademark and intellectual property violations. The amount
claimed is $100,000. The Company believes that the potential exposure is much
less than this amount. The stage of the proceedings does not allow the Company
to estimate the probability of an unfavorable outcome at this time. No
provision for a possible loss from this proceeding has been accrued in the
accompanying financial statements.
The Company is a defendant in a lawsuit filed by a third-party claiming damages
for unpaid printing charges. The suit asks for damages of $6,091, plus interest
and attorney fees of $660. The Company is unable to estimate the likelihood of
an unfavorable outcome of this lawsuit at this time. The Company denies the
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<PAGE>
claim and has cross-complained seeking damages in excess of $100,000 claiming
that the printing work was substandard and could not be used with the software
product. The Company intends to vigorously defend against the claim and
prosecute its cross-complaint. No provision for a possible loss from this
lawsuit has been accrued in the accompanying financial statements.
The Company is a defendant in a lawsuit filed by a third-party for unpaid rent
payments relating to a prior lease agreement entered by SoftKat. 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.
SoftKat 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 consolidated financial statements and are included in the
line item "Liabilities relating to assets to be sold." These lawsuits and
collection actions may result in future claims against the Company in the event
that some or all of these claims are not assumed by the buyer in the purchase
of SoftKat.
NOTE 8 - SUPPLEMENTAL CASH FLOW INFORMATION AND NONCASH
INVESTING AND FINANCING ACTIVITIES
Supplemental Cash Flow Information - For the years ended December 31, 1998 and
1997, cash paid for interest was $256 and $3,876, 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 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>
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
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<PAGE>
all of the 3,783,875 outstanding Intermark common shares for 78,706 shares of
Series H preferred stock and 103,364 common shares of Innovus (now eSynch
Corporation). The recapitalization of Intermark was accounted for at historical
cost. The accompanying financial statements, including the following
description of equity transactions, have been restated for all periods
presented to reflect the preferred and common shares issued in the
recapitalization. On November 9, 1998, the shareholders approved a 1-for-10
reverse stock split of all common shares outstanding at that date. The
accompanying financial statements have also been restated for all periods
presented to reflect the stock split on a retroactive basis.
The Series I redeemable preferred stock has a liquidation preference of $1.00
per share. The Company is required to redeem 200,000 shares of the preferred
stock at $1.00 per share upon obtaining financing of $1,500,000 or more from
any source and must redeem an additional 200,000 shares of preferred stock upon
obtaining an additional $3,000,000 in funding. Dividends on the preferred stock
are payable prior and in preference to any declaration or payment of any
dividends on the common stock, when, as, and if declared by the Board of
Directors. However, there is no stated dividend rate. The preferred stock is
convertible, at the option of the holder, into common stock at the lesser of
$3.00 per share or the average closing bid price of the common stock over the
ten trading days ending on either November 16, 1999 or an earlier date on which
the Company receives a second funding of at least $3,000,000 mentioned above.
The preferred stock has voting rights equivalent to the number of common shares
into which it can be converted and has additional voting rights with respect to
approval of any issuance of a senior series of preferred shares.
On October 3, 1995, the Company issued 16,378 shares of Series H preferred
stock and 21,350 common shares for $8,000 cash at $0.01 per common equivalent
share. On May 19, 1997, the Company issued 44,697 shares of Series H preferred
stock and 58,699 common shares to members of the Board of Directors as
compensation for their services during 1995. The shares were valued at $22,000,
or $0.01 per common equivalent share, which was the fair value of the services
provided and the fair value of the preferred and common shares issued as
established by management of the Company and based upon the value at which
shares were issued for cash during 1995. The Company issued 7,091 shares of
Series H preferred stock and 9,308 common shares effectively in July 1997 for
services valued at $229,165, or $0.56 per share.
On August 5, 1998, 1,112 shares of Series H preferred stock and 1,461 common
shares were issued for services valued at $164,876, or $2.58 per common
equivalent share. The value of these services was determined based upon the
trading price of the Company's common stock at that date. On September 16,
1998, the Company issued 1,580 shares of Series H preferred stock to third
parties for services. The services were valued at $112,109 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 August 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.
On August 5, 1998, for financial reporting purposes, the Company issued
1,215,375 common shares to acquire Innovus, as further discussed in Note 2.
Innovus was a shell corporation with no operations and nominal assets.
Therefore, the shares were recorded at the historical cost of the net
liabilities assumed of $860,071.
During September through December 1998, the Company issued 160,002 common
shares upon conversion of notes payable and accrued interest valued at
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<PAGE>
$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 feature associated with notes payable issued during 1998. The
value of the conversion feature was determined based upon the difference between
the fair value of the Company's common stock on the dates the notes were issued
and the conversion rates. The proceeds received were allocated $355,567 to the
beneficial conversion feature and the remainder to the notes. The resulting
discount on the notes was recognized as interest expense through the dates the
notes were first convertible which were the same dates as the notes were issued.
On November 17, 1998, the Company acquired SoftKat, Inc. in exchange for the
issuance of 720,000 common shares and 600,000 redeemable, convertible Series I
preferred shares. Up to an additional 720,000 common shares are contingently
issuable based upon the difference between the market price of the common stock
one year from the date of acquisition and a target price of $3.00 per share. The
purchase price, based upon the fair value of the common and preferred stock
issued and the additional contingently issuable common shares was $2,670,000.
An officer of SoftKat was issued 100,000 common shares as compensation. The
value of these shares was $116,000. The value of the services was determined
based upon the fair value of the services provided and the fair value of the
preferred and common shares.
On December 18, 1998, the Company issued 20,000 common shares as a settlement of
accounts payable. The value of the accounts payable was $25,000.
As described in Note 4, on December 8, 1998, the Company issued 55,000 common
shares to a note holder as interest on a note payable. The value of these shares
was $68,750 and was determined using the fair value of the common shares on the
date of issuance.
NOTE 10 - FORGIVENESS OF DEBT
The Company negotiated reductions in accounts payable during 1998 and paid the
negotiated amounts. The amount of the debt forgiveness is $14,423 and has been
accounted for as an extraordinary gain.
NOTE 11 - STOCK OPTIONS AND WARRANTS
The Board of Directors approved a stock option plan in April of 1998 which
authorized options to purchase 600,000 shares of common stock. Options to
purchase 540,000 common shares were granted under the plan on April 24, 1998,
with a weighted-average exercise price of $0.99 per shares. The Plan was
approved and the options were granted. The options became exercisable
immediately. 450,000 of the unexercised options expire on April 24, 2003 and the
remaining 90,000 unexercised options expire on April 24, 2008. Compensation
relating to the options of $69,288 was recognized when the shares vested which
was on the date of grant. After the merger with Innovus, the number of options
and the price of the options were recalculated. The number of options now
exercisable is 631,800 with a weighted average exercise price of $0.90. 549,900
of the options expire on April 24, 2003 and the remaining 81,900 options expire
on April 24, 2008. No additional expense needs to be recognized in association
with the recalculation of the options outstanding and the exercise price.
During December 1998, options to purchase 400,000 common shares at $1.00 per
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<PAGE>
share were granted as part of an employment agreement with 200,000 options
exercisable on December 7, 1999 and 200,000 options exercisable on December 7,
2000. All of the options are exercisable at $1.00 per share and expire December
7, 2003.
During August 1998, options to purchase 191,133 common shares were accounted for
as issued in connection with the acquisition of Innovus.
A summary of the status of the Company's stock options and warrants as of
December 31, 1998 and changes during the year then ended are presented below:
<TABLE>
<CAPTION>
Weighted-Average
Shares Exercise Price
------------ ------------
<S> <C> <C>
Outstanding at beginning of year - $ -
Granted 1,222,933 1.37
------------
Outstanding at end of year 1,222,933 1.37
============
Exercisable at year-end 822,933 1.60
============
Weighted-average fair value of
of options granted during the year $ 0.91
============
</TABLE>
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------- ------------------------
Weighted-
Average Weighted- Weighted-
Number Remaining Average Number Average
Range of Outstanding Contractual Exercise Exercisable Exercise
Prices At 12/31/98 Life Price At 12/13/98 Price
---------- ---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
$0.25 81,900 9.32 years $0.21 81,900 $0.21
$0.85 - $1.00 949,900 4.70 $0.96 549,900 $0.94
$1.50 - $2.50 181,133 2.30 $1.74 181,133 $1.74
$42.50 - $45.00 10,000 2.50 $43.75 10,000 $43.75
--------- --------
1,222,933 822,933
========= ========
</TABLE>
The Company measures compensation under stock-based options and plans using the
intrinsic value method prescribed in Accounting Principles Board Opinion 25,
Accounting for Stock Issued to Employees, and related interpretations.
Stock-based compensation charged to operations was $69,288 and $0 for the years
ended December 31, 1998 and 1997. Had compensation cost for the Company's
options been determined based on the fair value at the grant dates consistent
with the alternative method set forth under Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation, net loss and loss
per share would have increased to the pro forma amounts indicated below for the
year ended December 31, 1998:
<TABLE>
<S> <C>
Net loss:
As reported $ (4,978,342)
Pro forma (5,415,327)
Basic and diluted loss per share:
As reported $ (0.91)
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<PAGE>
Pro forma (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 1998 and 1997, respectively: dividend yield of
0.0% for both periods; expected volatility of 73.0% and 0%; risk-free interest
rate of 5.63%, 5.68% and 0% and expected life of the options of 5.0 years, 10.0
years and 0.0 years.
NOTE 12 - SUBSEQUENT EVENTS
On January 13, 1999, the Company entered into a one-year agreement with a
consulting firm to provide financial advisory services for the Company. As
consideration for these services, the Company issued 200,000 five-year warrants
to purchase shares of the Company's common stock at $1.25 per share. In
addition, the Company has agreed to compensate the consulting firm based on the
total consideration the Company receives in the future from the consulting
firm's efforts as follows: 5% on the first $1,000,000, 4% on the next
$1,000,000, 3% on the next $1,000,000, and 2% on any balance.
On January 28, 1999, the Company entered into consulting agreements whereby the
consultants are to provide various services to the Company including negotiating
contracts on behalf of the Company and introducing the Company to various
Internet companies. As consideration for these services, the consultants
received 310,000 shares of common stock. The 1999 expense recognized for these
shares will be $450,500.
On April 1,1999, the Company acquired Kiss Software Corporation ("Kiss"), a
California corporation engaged in the wholesale and retail distribution of
computer and Internet utility software products. Under the agreement,
shareholders of Kiss agreed to exchange each of their common shares for
0.181557136 common shares of eSynch and each of their preferred shares for
0.4183964 common shares of eSynch. The exchange resulted in the Company issuing
1,428,134 common shares to Kiss shareholders. The Company also issued 163,187
options in conjunction with the purchase. These options are exercisable at $2.05
each. The acquisition has been accounted for using the purchase method of
accounting. The acquisition purchase price, based upon the fair value of the
common stock and options issued, was estimated at $3,568,907 (unaudited). The
excess of the purchase price over the estimated fair value of the identifiable
acquired assets less liabilities assumed was $4,664,908 (unaudited), which will
be recognized as goodwill. Goodwill will be amortized over 3.11 years on a
straight-line basis.
On March 19, 1999, the Company borrowed $250,000 from an unrelated third party.
The related note is unsecured and interest accrues at the rate of 5.0% per
annum. The note and accrued interest are payable on or before July 5, 1999.
On March 15, 1999, the Company entered into a lease agreement for new
facilities. The base monthly rental is $20,010 and is adjusted each year by 4%
over the previous years base rent after adjustment. The term of the lease is for
five years and the Company has the option to extend the lease for an additional
five years.
On March 25, 1999, an officer of the Company loaned the Company $90,000 at an
interest rate of 10%. The principal amount of the note was repaid shortly
thereafter.
On April 22, 1999, the Company entered into a one year agreement with a
consultant to assist the Company in raising equity financing. The advisor is to
receive 5% of the gross amount of the proceeds of any equity financing
-62-
<PAGE>
consummated by the Company during the term of the agreement.
On May 25, 1999, the Company sold all of the stock of SoftKat, Inc. to an
unrelated third party for $50,000 cash and a note receivable of $100,000 due 180
days after the date of sale. See Note 2.
On June 1, 1999, the Company entered into a one year agreement with a consulting
firm whereby the firm is to provide ongoing stock market support for the
Company. The agreement is renewable for successive one year periods. As
consideration for these services, the Company is to pay $48,000 ($4,000 monthly)
plus reasonable expenses. For the period of June 1, 1999 through August 31,
1999, the monthly amount is to be paid in commons shares of the Company. The
first cash payment of $4,000 was due September 1, 1999.
On June 10, 1999, the Company issued 75,000 shares of common stock for $150,000
in cash. (Unaudited.)
On June 11, 1999, the Company agreed to pay $50,000 in cash and agreed to issue
9,039 shares of common stock as a compromise and settlement of a lawsuit
relating to a legal dispute between Kiss Corporation and a third-party.
(Unaudited.)
Subsequent to December 31, 1998, the Company issued 478,500 shares of common
stock to various individuals for services provided to the Company. The expense
recognized from the issuance of these shares will be $927,175.
(Unaudited.)
-63-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
September 30, 1999
(UNAUDITED)
ASSETS
<TABLE>
<CAPTION>
<S> <C>
Current Assets
Cash ..................................................... $ 734,490
Inventory ................................................ 87,593
Other receivable ......................................... 14,608
Prepaid expenses ......................................... 92,203
------------
Total Current Assets .................................. 928,894
------------
Property and Equipment, net of $207,827 accumulated
depreciation ............................................... 668,724
Deposits .................................................... 67,788
Software licenses ........................................... 144,902
Goodwill, net of amortization ............................... 4,247,815
------------
Total Assets .......................................... $ 6,058,123
============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable ......................................... $ 1,714,134
Accrued liabilities ...................................... 903,470
Liabilities to be settled with common stock .............. 440,625
Payable to officer and director .......................... 195,270
Notes payable ............................................ 530,347
------------
Total Current Liabilities ............................. 3,783,846
------------
Long-Term Notes Payable ..................................... 77,027
------------
Redeemable Preferred Stock
Series I, $0.001 par value; 600,000 shares authorized;
600,000 shares issued and outstanding; liquidation
preference - $600,000 ................................... 600,000
------------
Stockholders' Equity
Preferred Stock - $0.001 par value; 400,000 shares
authorized: Series J - 275 shares designated;
262.5 shares issued and outstanding; liquidation
preference - $2,625,000 .............................. 1,571,488
Series K - 250 shares designated; no shares issued ..... -
Common stock - $0.001 par value; 50,000,000 shares
authorized; 9,797,143 shares issued and outstanding ..... 9,796
Additional paid-in capital ............................... 12,989,585
Unearned compensation .................................... (462,535)
Note receivable from shareholder ......................... (163,047)
Accumulated deficit ...................................... (12,348,037)
------------
Total Stockholders' Equity ............................ 1,597,250
------------
Total Liabilities and Stockholders' Equity................... $ 6,058,123
============
</TABLE>
See the accompanying notes to the consolidated financial statements.
-64-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months
Ended September 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Net Product Sales ........................... $ 917,400 $ 15,293
Cost of Sales ............................... 459,944 9,940
----------- -----------
Gross Profit ................................ 457,456 5,353
----------- -----------
Operating Expenses
General and administrative ................ 2,316,983 738,068
Stock issued for services ................. 1,693,679 112,108
Stock based compensation .................. 2,187,857 -
Amortization of debt discount ............. - 355,567
Amortization of goodwill .................. 818,756 -
----------- -----------
Total Operating Expenses ................ 7,017,275 1,205,743
----------- -----------
Operating Loss .............................. (6,559,819) (1,200,390)
Other Income ................................ 87,000 13,458
Interest expense ............................ (60,839) (5,571)
----------- -----------
Net Loss .................................... (6,533,658) (1,192,503)
Preferred dividends ......................... (163,125) -
----------- -----------
Loss Applicable to Common Shares ............ $(6,696,783) $(1,192,503)
=========== ===========
Basic and Diluted Loss Per Common Share ..... $ (0.80) $ (0.26)
=========== ===========
Weighted average number of common shares used
in per share calculation ................... 8,389,358 4,548,202
=========== ===========
</TABLE>
See the accompanying notes to the consolidated financial statements.
-65-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(Unaudited)
<TABLE>
<CAPTION>
Note
Additional Receivable
Preferred Stock Common Stock Paid-in Unearned From
Shares Amount Shares Amount Capital Compensation Shareholder
------- ------- ---------- ------ ----------- ------------- ------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1998 ...... - - 6,889,829 $6,889 $ 2,941,895 $ - -
Shares issued for cash ........... - - 75,000 75 149,925 - -
Shares issued for services ....... - - 707,500 708 1,252,346 - -
Shares issued for receivable
from shareholder net of $79,884
offerring costs ................. - - 235,377 235 485,321 - (485,556)
Acquisition of Kiss Software
Corporation ..................... - - 1,428,134 1,428 3,567,479 - -
Compensation related to
options granted in
connection to the
acquisition of Kiss
Software Corporation ............ - - - - 396,663 - -
Shares issued in settlement
of suit ......................... - - 9,303 9 26,447 - -
Shares issued as payment of
interest ........................ - - 2,000 2 5,998 - -
Compensation related to the
grant of stock options .......... - - - - 2,650,392 (2,650,392) -
Cash payment on note receivable
from shareholder ................ - - - - - - 322,509
Issuance of Series J Convertible
Preferred Stock - Net of
$273,904 offering costs ......... 262.5 1,432,527 - - - - -
Warrants issued in connection with
Series J Convertible Preferred
Stock ........................... - - - - 507,855 - -
Beneficial conversion feature of
Series J Convertible Preferred
Stock ........................... - - - - 285,714 - -
Preferred dividend resulting
from beneficial conversion
feature ......................... - 138,961 - - - - -
Preferred dividend ............... - - - - - - -
Acquisition of Oxford Media
Corporation ..................... - - 450,000 450 719,550 - -
Amortization of unearned
Compensation .................... - - - - - 2,187,857 -
Net Income ....................... - - - - - - -
----- ---------- --------- ------ ----------- ----------- ---------
Balance - September 30, 1999 ..... 262.5 $1,571,488 9,797,143 $9,796 $12,989,585 $ (462,535) $(163,047)
===== ========== ========= ====== =========== =========== =========
</TABLE>
-66-
<PAGE>
<TABLE>
<CAPTION>
Total
Accumulated Stockholders
Deficit Equity
------------ ------------
<S> <C> <C>
Balance - December 31, 1998 ...... $(5,651,254) $(2,702,470)
Shares issued for cash ........... - 150,000
Shares issued for services ....... - 1,253,054
Shares issued for receivable
from shareholder net of $79,884
deferring costs ................. - -
Acquisition of Kiss Software
Corporation ..................... - 3,568,907
Compensation related to
options granted in
connection to the
acquisition of Kiss
Software Corporation ............ - 396,663
Shares issued in settlement
of suit ......................... - 26,456
Shares issued as payment of
interest ........................ - 6,000
Compensation related to the
grant of stock options .......... - -
Cash payment on note receivable
from shareholder ................ - 322,509
Issuance of Series J Convertible
Preferred Stock - Net of
$273,904 offering costs ......... - 1,432,527
Warrants issued in connection with
Series J Convertible Preferred
Stock ........................... - 507,855
Beneficial conversion feature of
Series J Convertible Preferred
Stock ........................... - 285,714
Preferred dividend resulting
from beneficial conversion
feature ......................... (138,961) -
Preferred dividend ............... (24,164) (24,164)
Acquisition of Oxford Media
Corporation ..................... - 720,000
Amortization of unearned
Compensation .................... - 2,187,857
-67-
<PAGE>
Net Income ....................... (6,533,658) (6,533,658)
----------- -----------
Balance - September 30, 1999 ..... $(12.348,037) $ 1,597,250
=========== ===========
</TABLE>
See the accompanying notes to the consolidated financial statements.
-68-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
For the Nine Months Ended
September 30,
----------------------------
1999 1998
----------- -----------
<S> <C> <C>
Cash Flows from Operating Activities
Net loss ...................................... $(6,533,658) $(1,192,503)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization .............. 27,765 29,834
Amortization of goodwill ................... 818,756
Stock issued for services .................. 1,253,054 112,108
Amortization of Debt Discount .............. 355,567
Liability for stock to be issued for
services ................................ 440,625 -
Stock issued for settlement of lawsuit ..... 26,456 -
Stock Based Compensation ................... 2,187,857 -
Changes in operating assets and liabilities
net of the effects of the acquisitions
Accounts receivable ........................ - 54,767
Inventory .................................. (12,211) -
Prepaid expenses ........................... 57,499 -
Other assets ............................... (58,964) -
Accounts payable ........................... 27,425 223,221
Accrued liabilities ........................ (182,024) -
----------- -----------
Net Cash Used in Operating Activities ....... (1,947,420) (417,006)
----------- -----------
Cash Flows From Investing Activities
Proceeds from sale of SoftKat, net ............ 50,000 -
Acquisition of property and equipment ......... (69,074) -
Kiss cash acquired ............................ 49,233 -
----------- -----------
Net Cash Used in Investing Activities ....... 30,159 -
----------- -----------
Cash Flows From Financing Activities
Stock issued for cash ......................... 2,525,000 -
Cash received on notes receivable issued for
common stock ................................. 322,509 -
Proceeds from borrowing ....................... 371,070 428,071
Payments on notes payable ..................... (568,240) -
----------- -----------
Net Cash Provided by Financing Activities .. 2,650,339 428,071
----------- -----------
Net Increase in Cash ............................. 733,077 11,065
Cash at Beginning of Period ...................... 1,413 -
----------- -----------
Cash at End of Period ............................ $ 734,490 $ 11,065
=========== ===========
</TABLE>
See the accompanying notes to the consolidated financial statements.
-69-
<PAGE>
eSYNCH CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1-MANAGEMENTS' REPRESENTATIONS
INTERIM UNAUDITED FINANCIAL INFORMATION -- The accompanying condensed financial
statements have been prepared by the Company and are not audited. In the opinion
of management, all adjustments necessary for a fair presentation have been
included and consist only of normal recurring adjustments except as disclosed
herein. The financial position and results of operations presented in the
accompanying financial statements are not necessarily indicative of the results
to be generated for the remainder of 1999.
These financial statements have been condensed pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
disclosures normally included in financial statements have been condensed or
omitted. These financial statements should be read in connection with annual
financial statements included elsewhere herein.
The accompanying consolidated financial statements include the accounts of the
Company and its wholly owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Certain items
have been reclassified to conform with the current presentation.
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 has an accumulated deficit of $12,348,037 at September 30,
1999. These conditions raise substantial doubt regarding the Company's ability
to continue as a going concern. Management's plan to mitigate the impact of
these conditions is to obtain additional equity financing through the issuance
of the Company's common stock, convertible preferred stock or warrants.
The Company is also currently in negotiations for additional financing
arrangements. However, realization of the proceeds from these potential
transactions is not assured. These financial statements do not include any
adjustments relating to the recoverability and classification of recorded assets
or amounts and classifications of liabilities that might be necessary should the
Company be unable to continue as a going concern.
NOTE 2--ACQUISITIONS AND DISPOSITIONS
SOFTKAT - On November 17, 1998, the Company acquired SoftKat, Inc., a California
corporation primarily engaged in the wholesale distribution of computer software
games. In exchange for the SoftKat common shares, the Company issued 720,000
common shares and 600,000 shares of Series I redeemable, convertible preferred
shares. Up to an additional 720,000 common shares 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. In November, 1999 the
target market price was achieved and the shares were no longer issuable. The
acquisition was accounted for using the purchase method of accounting. The
acquisition purchase price, based upon the fair value of the common and
preferred stock issued and the additional contingently issuable common shares,
was $2,670,000. The excess of the purchase price over the estimated fair value
of the identifiable acquired assets less liabilities assumed was $6,882,300,
which was recognized as goodwill. The results of operations of SoftKat were
included from the date of acquisition through May 25, 1999, the date of its
sale.
-70-
<PAGE>
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 in 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 impairment loss was determined by the excess of
the carrying amount of the assets in excess of the $50,000 subsequently
collected and the amount of the related liabilities. The 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.
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 $2.05
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 $3,965,570. The excess of
the purchase price over the estimated fair value of the identifiable acquired
assets less liabilities assumed was $5,061,571 (unaudited), which was recognized
as goodwill. Goodwill is being amortized over approximately 3 years on a
straight-line basis.
Effective September 30, 1999, the Company completed the acquisition of Oxford
Media Corp.("Oxford"), engaged in DVD video encoding, compression and authoring.
Under the Agreement the shareholders of Oxford exchanged all the outstanding
shares of Oxford Common Stock for 450,000 shares of the Company's Common Stock.
During the third quarter, the acquisition was accounted for using the purchase
method of accounting and the purchase price of the acquired assets was computed
to be $720,000 which was attributed to the assets acquired including software
licenses in the amount of $144,902. Oxford received a non-exclusive license from
Oxford Management Corporation, a Nevada corporation, which is a license of
proprietary software and source code for a video-on-demand hotel pay-for-view
system. The value of the licenses is being amortized over three years.
In addition, the Company entered into another license agreement with Oxford
Management. In this license agreement, the Company granted Oxford Management a
license to sell advertising and promotional offers that will be displayed by
means of operation of certain software products of the Company or its
subsidiaries.
NOTE 3--PREPAID EXPENSES
In June 1999, the Company prepaid consulting services by issuing 54,000 common
shares of stock to third-party consultants. The prepaid services recognized from
the issuance of these shares was $111,380. As of September 30, 1999, $57,751 of
the prepaid services had been performed by the consultants and therefore, were
expensed by the Company.
NOTE 4--NOTES PAYABLE
Related Party Notes Payable - At September 30, 1999 the Company owed an officer
and shareholder of the Company $195,270. This note accrued interest at 7%.
Subsequent to September 30, 1999, this note and outstanding interest was settled
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<PAGE>
with the issuance of 79,921 shares of common stock at $2.81 per share.
Notes Payable
<TABLE>
<S> <C>
12% Line of credit payable to a bank; secured by
all assets of the Company; due September 30, 1998;
in default. $ 23,055
40% Convertible note payable to a shareholder; unsecured;
due March 15, 1999; subsequent to September 30, 1999
this note was forgiven and written off 175,000
7% Note payable to an individual; note matures beyond one year 77,027
6.25% Note payable to a vendor; amount is currently due 249,292
10% Series A Convertible debentures payable to three
shareholders; secured by all assets of the Company; due
October 31, 1998; in default 75,000
Note payable to a shareholder; no stand rate of interest;
payable on demand; unsecured. 8,000
----------
Total Notes Payable 607,374
Less: current portion (530,347)
----------
Total Long-Term Notes Payable $ 77,027
==========
</TABLE>
NOTE 5--STOCK OPTIONS AND WARRANTS
During the nine-month period ended September 30, 1999, the Company issued stock
options for 1,215,000 shares of Common stock to Officers and Employees in
connection with Employment Agreements. 1,205,000 options are exercisable over
various periods at an exercise price of $1.00 per share. 10,000 options are
exercisable over three years at an exercise price of $2.50 per share. All
options granted during this period expire ten years from the date of grant. In
addition, on January 10, 1999, an officer of the Company was granted warrants to
purchase 450,000 shares of common stock at $0.50 per share.
In July 1999, another officer was granted warrants to purchase 250,000 shares of
common stock at $1.00 per share. In January 1999, the Company granted 200,000
warrants to a third-party 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. Warrants granted
during the period expire between 5 to 10 years. Compensation relating to the
options and warrants of $2,650,392 is being recognized over the vesting period
of which $2,187,857 was recognized in the nine months ended September 30, 1999.
-72-
<PAGE>
A summary of the status of the Company's stock options as of September 30, 1999
and changes during the nine months ended September 30, 1999 are presented below.
<TABLE>
<CAPTION>
WEIGHTED AVERAGE
SHARES EXERCISE PRICE
--------------- ----------------
<S> <C> <C>
Outstanding at beginning of period 1,222,933 1.37
Granted 2,465,000 .96
Conversion of Kiss options at acquisition 163,187 2.23
Forfeited (419,426) 1.05
---------------
Outstanding at end of period 3,431,694 1.41
===============
Exercisable at end of period 2,769,811 1.14
===============
Weighted-average fair value of options
granted during the period 1.08
---------------
</TABLE>
The following table summarizes information about stock options and warrants
outstanding at September 30, 1999
<TABLE>
<CAPTION>
Options and Warrants Options and Warrants
Outstanding Exercisable
--------------------- -------------------------
Average Weighted- Weighted-
Range of Number Average Average Number Weighted
Exercise Outstanding Remaining Exercise Exercisable Exercise
Prices at 9/30/99 Life Price at 9/30/99 Price
- ------------ ---------- ---------- --------- ------------ ----------
<S> <C> <C> <C> <C> <C>
0.50 - 2.50 3,421,694 4.7 years 1.29 2,759,811 .99
42.50 - 45.00 10,000 1.8 years 43.75 10,000 43.75
</TABLE>
The Company measures compensation under stock-based options and plans using the
intrinsic value method prescribed in Accounting Principles Board Opinion 25,
Accounting for Stock Issued to Employees, and related interpretations.
Stock-based compensation charged to operations was $2,187,857 and $0 for the
nine months ended September 30, 1999 and 1998. Had compensation cost for the
Company's options been determined based on the fair value at the grant dates
consistent with the alternative method set forth under Statement of Financial
Accounting Standards No. 123, Accounting for Stock-Based Compensation, net loss
and loss per share would have increased to the pro forma amounts indicated below
for the nine months ended September 30, 1999:
<TABLE>
<S> <C>
Net loss:
As reported $ (6,533,658)
Pro forma (7,734,165)
Basic and diluted loss per share:
As reported (0.80)
Pro forma (0.92)
</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: dividend yield of 0.0% expected volatility
of 123%; risk-free interest rate of 4.65% and expected life of 10.0 years.
NOTE 6--STOCKHOLDERS' EQUITY
On July 16, 1999 the Company issued 2,000 shares of common stock for interest of
$6,000.
During the nine months ended September 30, 1999, the Company issued 75,000
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<PAGE>
common shares for cash of $150,000 and 235,377 shares common share for notes
receivable of $564,875 net of $75,884 offering costs and issued 707,500 shares
of common stock for services. The value of the services was determined based
upon the trading price of the Company's common stock on the date of issuance.
The services were valued at $1,253,054 and were expensed in the nine month
period ended September 30, 1999. Also during the nine months ended September 30,
1999, the Company issued 9,303 shares of common stock valued at $26,456 in
settlement of a lawsuit.
During July 1999,The Company authorized the issuance of 275 shares of Series J
Convertible Preferred Stock at $10,000 per share. Dividends are commutative 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 cumulated and
unpaid dividends and may be redeemed at the Company's option for $12,000 per
share plus cumulated dividends upon 30 days notice.
The conversion price of the Series J 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 J shares do not become
convertible into Common Stock until 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 will issue 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 closing
date and expire three years from the date of issuance.
At September 30, 1999 the Company issued 262.5 Series J shares and 187,500
warrants and had received proceeds of $2,226,096 net of $273,904 of offering
costs.
The Company is obligated, at its expense, to file for the registration of the
common stock issuable upon conversion within 60 days of September 30, 1999, with
an effective date within 150 days after September 30, 1999 or the investors will
be entitled to a registration payment equal to 2% of the purchase price for the
first 30 days the Company is tardy and 3% for every 30 day period thereafter.
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 $507,855 to the warrants, $285,714 to the
beneficial conversion feature and $1,432,527 to the preferred stock. The
resulting discount on the preferred stock over its liquidation value of
$2,500,000 is being recognized as preferred dividends over the period from the
date issued through January 28, 2000, the date they are first convertible. The
related preferred dividend recognized during the nine months ended September 30,
1999 was $138,961.
NOTE 7--COMMITMENTS AND CONTINGENCIES
The Company has been named as an additional defendant in claims against SoftKat
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<PAGE>
under the theory of successor liability. Whereas the Company has been successful
in obtaining dismissals of several such suits, there is no certainty that the
Company will successfully defend the suits in the future. No provisions have
been made for possible loss from these claims.
The Company is a defendant in a lawsuit filed by a third party claiming damages
for unpaid goods. The suit seeked damages of $99,110 which was later reduced to
$81,326. The Company denies the claim and has filed a motion to dismiss based on
lack of jurisdiction. The Company is unable to estimated the likelihood of an
unfavorable outcome of this lawsuit at this time.
NOTE 8--INCOME TAXES
Net operating losses incurred by the Company and its subsidiaries could be
limited if the Company were to change ownership. These limitations include net
operating losses associated with acquisitions and dispositions for the nine
months ended September 30, 1999.
Note 9--SUBSEQUENT EVENTS
On October 1, 1999, the Company issued options to employees to purchase 150,000
shares of the Company's common stock. The options vest over a three year period,
have an exercise price of $1.00, and expire ten years from the date of grant.
The expense recognized from the issuance of these options will be $546,283.
On November 1, 1999 the Company issued warrants to purchase 100,000 shares of
the Company's common stock to an individual for on-going support and as
compensation for serving as a Director to be provided to the Company. The
warrants vest over 14 months, have an exercise price of $1.00, and expire three
years from the date of grant. The expense recognized from the issuance of these
warrants will be $190,042.
On October 31, 1999, upon the receipt of $125,000 the Company issued 12.5 shares
of Series J Convertible Preferred Stock and warrants to purchase 9,375 shares of
the Company's Common Stock.
On October 31, 1999, the Company issued warrants to purchase 200,000 shares of
the Company's common stock to a consulting firm for consulting services to be
provided to the Company. The warrants vest immediately, have an exercise price
of $1.25, and expire in four years. The expense recognized from the issuance of
these warrants will be $391,704.
During December 1999, the Company issued 163,401 shares of common stock for
conversion of notes payable and interest in the amount of $373,899.
On December 30, 1999, the Company issued 79,921 shares of common stock to an
officer-director of the Company in repayment of an existing note and accrued
interest in the amount of $234,578.
During the 3 month period ended December 31, 1999, the Company issued 165,000
shares of common stock for services valued at $352,250, or $2.13 per share.
Effective December 1, 1999, a note payable to a third party with a balance owing
of $175,000 was settled in full by a Settlement and General Mutual Release
Agreement signed by eSynch and the creditor party. The creditor party agreed to
release eSynch from its indebtedness for past consideration paid to the
creditor.
Effective December 30, 1999, the Company authorized 250 shares of Series K
Convertible Preferred Stock and the Company entered into an agreement with an
-75-
<PAGE>
investing source for financing in exchange for preferred stock and warrants. If
issued, the Series K Preferred Stock will be convertible into common stock at a
price equal to the lower of 80% of the average closing stock price the lowest
six trading days in the consecutive 20 days prior to conversion subject to a
floor in the conversion price. On December 31, 1999, for receipts of $1,425,000,
net of offering costs of $75,000, the Company issued 157.5 shares with each
share convertible into common stock under certain conditions as described. In
addition the Company issued warrants to purchase 112,500 shares of the Company
common stock at a price equal to 115% of the closing stock price on the date
before the closing date. On January 31, 2000, for receipts of $500,000, the
Company issued 55 shares with each share convertible into common stock under
certain conditions as described. In addition the Company issued warrants to
purchase 37,500 shares of the Company's common stock at a price equal to 115% of
the closing stock price on the date before the closing date. The preferred
shares are redeemable by the Company for cash upon 30 days prior written notice
for a price of 120% of the original issue price plus accrued dividends.
Dividends accrue at the rate of 7% of from the original issue date, but are
payable only upon conversion or redemption.
On November 15, 1999, the Company adopted an amendment of the Restated
Certificate of Incorporation of the Company to increase the number of authorized
shares of common stock, par value $.001, to 50,000,000 from 20,000,000.
During December, 1999, the Company converted all 600,000 outstanding shares of
Series I Convertible Preferred Stock into 199,999 shares of the Company's common
stock at a conversion price of $3.00 per share, or a total of $600,000.
On December 16, 1999, the Company issued 100,000 shares of its common stock
valued at $235,000, or $2.35 per share, related to an indemnification agreement
whereby the Company and its subsidiaries will be indemnified and held harmless
with respect to disputes arising from the purchase and sale of certain stock.
-76-
<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 163,107 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.
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<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Nine Months Ended September 30, 1999
--------------------------------------------
Pro Forma Pro Forma
eSynch Kiss Adjustments Results
----------- --------- ------------- -----------
<S> <C> <C> <C> <C>
Product sales $ 917,400 $ 399,094 $ - $ 1,316,494
Cost of goods sold 459,944 103,845 - 563,789
----------- --------- --------- -----------
Gross Profit 457,456 295,249 - 752,705
----------- --------- --------- -----------
General and administrative expense 2,316,983 579,841 - 2,896,824
Stock issued for services 1,693,679 - - 1,693,679
Stock based compensation 2,187,857 - - 2,187,857
Interest expense 60,839 6,386 - 67,225
Amortization of goodwill 818,756 - (4) 406,680 1,225,436
----------- --------- --------- -----------
Total Operating Expenses 7,078,114 586,228 406,680 8,071,022
----------- --------- --------- -----------
Other income 87,000 - - 87,000
----------- --------- --------- -----------
Net Loss (6,533,658) (290,979) (406,680) (7,231,317)
Preferred dividends (163,125) (28,982) (5) 28,982 (163,125)
----------- --------- --------- -----------
Loss Applicable to Common Shares $(6,696,783) $(319,961) $(377,698) $(7,394,442)
=========== ========= ========= ===========
Basic and diluted loss per
common share $ (0.82) $ (0.81)
=========== ===========
Weighted average number of common
shares 8,143,333 9,095,423
=========== ===========
</TABLE>
Notes to the unaudited pro forma condensed consolidated statements of operations
are presented on the following page.
-78-
<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> <C>
Product sales $ 203,571 $ 6,519,588 $ 1,596,375 (1) $ (109,317)
(3) (6,519,588) $ 1,316,494
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 - - 1,118,312 - 1,118,312
Amortization of goodwill 228,330 - - (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 - - - 355,567
Impairment loss 2,323,841 2,880,418 - (1) (2,323,841)
(3) (2,880,418) -
Loss on sale of securities - - 9,502 - 9,502
----------- ----------- ----------- ----------- -----------
Total Operating Expenses 5,039,719 8,528,251 2,354,412 (9,592,379) 6,330,003
----------- ----------- ----------- ----------- -----------
Interest income - 23,783 - (3) (23,783) -
----------- ----------- ----------- ----------- -----------
Loss from Continuing Operations
Before Extraordinary Item (4,992,765) (6,991,895) (1,173,417) 8,028,706 $(5,219,371)
Preferred dividends - - (115,929) (5) 115,929 -
----------- ----------- ----------- ----------- -----------
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 7,477,593
=========== ===========
</TABLE>
-79-
<PAGE>
ESYNCH CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(1) To eliminate the 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.
(2) To recognize amortization of goodwill from the SoftKat acquisition for all
of 1998 and 1997. 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.
(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 $5,061,571 and is being amortized over its estimated useful life of
approximately 3.1 years. The effect on the pro forma statement of of
operations for the year ended December 31, 1998 is an increase if $1,626,719
and for the nine months ended September 30, 1999 is an increase Of $406,680
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.
-80-
<PAGE>
SOFTKAT, INC.
BALANCE SHEET
DECEMBER 31, 1998
<TABLE>
<CAPTION>
<S> <C>
ASSETS
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 (5,592528)
---------------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ 107,968
===============
</TABLE>
-81-
<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>
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<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>
-83-
<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.
-84-
<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
payable except during loss periods when those potentially issuable common shares
-85-
<PAGE>
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>
<CAPTION>
<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.
The following is a reconciliation of the amount of benefit that would result
-86-
<PAGE>
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.
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
-87-
<PAGE>
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.
-88-
<PAGE>
KISS SOFTWARE CORPORATION
BALANCE SHEET
DECEMBER 31, 1998
ASSETS.....................
<TABLE>
<CAPTION>
<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.
-89-
<PAGE>
KISS SOFTWARE CORPORATION
STATEMENTS OF OPERATIONS
<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>
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.
-90-
<PAGE>
KISS SOFTWARE CORPORATION
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
ADDITIONAL TOTAL
COMMON STOCK PAID-IN ACCUMULATED
------------------------------------------ STOCKHOLDERS'
SHARES AMOUNT CAPITAL DEFICIT DEFICIT
------------- ----------- ------------ ----------------- ----------------
<S> <C> <C> <C> <C> <C>
BALANCE - FEBRUARY 14, 1997
(DATE OF INCEPTION)..................... - $ - $ - $ - $ -
Shares issued for cash.................... 500,000 500 49,500 - 50,000
Shares issued for marketable
securities.............................. 3,500,000 3,500 244,880 - 248,380
Shares issued for services................ 30,000 30 2,970 - 3,000
Compensation relating to the
contribution of marketable
securities............................... - - 101,620 - 101,620
Net loss for the period................... - - - (995,003) (995,003)
------------- ----------- ------------ ----------------- ---------------
BALANCE B 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.
-91-
<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.
-92-
<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.
-93-
<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.
-94-
<PAGE>
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.
-95-
<PAGE>
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).
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
-96-
<PAGE>
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.
-97-
<PAGE>
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>
-98-
<PAGE>
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.
-99-
<PAGE>
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).
-100-
<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.
-101-
<PAGE>
up to 1,965,174 SHARES
ESYNCH CORPORATION
COMMON STOCK,
PAR VALUE $.001 EACH
PROSPECTUS
FEBRUARY _____, 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.
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>
<S> <C>
SEC registration fees $ 5,339.61*
Legal fees and expenses 75,000.00*
Accounting fees and expenses 30,000.00*
Blue sky filing fees 10,000.00*
Miscellaneous 4,660.39*
-----------
TOTAL $ 125,000.00*
</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 51,788 shares of Preferred Stock and 68,007 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). All of the stockholders of Intermark are believed
to have been accredited investors.
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. All of the stockholders and noteholders of Softkat are
believed to have been accredited investors.
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.
II-2
<PAGE>
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 $715,390; 972,500 shares for services in the amount of
$1,699,350; 199,998 shares for conversion of the Series I Preferred Stock;
288,322 shares for payment of Notes Payable and accrued interest in the amount
of $577,727; 9,303 shares in settlement of a claim in the amount of $21,164; and
17,000 shares in exercise of stock options and warrants. These issuances were
made pursuant to Section 4(2).
The Company also issued 275 shares of Series J Preferred Stock and Warrants to
purchase 196,875 shares of Common Stock in exchange for $2,500,000 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 215 shares of Series K Preferred Stock and Warrants to
purchase 159,375 shares of Common Stock in exchange for $2,000,000 in cash. The
Series K Preferred Stock is initially convertible into an aggregate of 614,285
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 1,365,000 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).
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
Exhibit No. Description
2.1(1) Agreement and Plan of Share Exchange dated as of
May 8, 1998 among the Company; Intermark
Corporation, a California corporation; and the
Exchanging Security holders of Intermark Corporation
Omitted are the following schedules or attachments
to the agreement identified immediately above:
(") 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
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* 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:
<TABLE>
<CAPTION>
Exp. Exercise
Date Amount Holder Price
-------- -------- ---------------------------- ---------
<S> <C> <C> <C> <C>
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
</TABLE>
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:
<TABLE>
<CAPTION>
Approximate
Exp. Exercise
Date Amount Holder Price
-------- -------- ---------------------------- ---------
<S> <C> <C> <C> <C>
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
</TABLE>
23.1* Consent of accountants.
23.2* Consent of the Company's legal counsel.
25.0(13) Power of Attorney (included on the signature page).
99(9) Press Release on sale of SoftKat, Inc.
II-7
<PAGE>
--------------
* To be filed by Amendment.
** Indicates management compensation arrangements.
(1) Incorporated by reference to the like-numbered exhibit to the
Company's Form 8-K filed May 12, 1998.
(2) Incorporated by reference to the like-numbered exhibit to the
Company's Form 8-K filed August 20, 1998.
(4) Incorporated by reference to the like-numbered exhibit to the
Company's Form 8-K filed April 19, 1999.
(5) Incorporated by reference to Exhibit A to the Company's Schedule 14A
filed October 7, 1998.
(6) Incorporated by reference to the like-numbered exhibit to the
Company's Form S-8 filed February 1, 1999.
(7) Incorporated by reference to the like-numbered exhibit to the
Company's Form 10-QSB filed November 25, 1998.
(8) Incorporated by reference to the like-numbered exhibit to the
Company's Registration Statement (Registration No. 33-33136-D).
(9) Incorporated by reference to the like-numbered exhibit to the
Company's Form 10-KSB filed June 25, 1999.
(10) Incorporated by reference to the like-numbered exhibit to the
Company's Form 10-QSB filed August 19, 1999.
(11) Incorporated by reference to the like-numbered exhibit to the
Company's Form 8-K filed October 15, 1999.
(12) Incorporated by reference to the like-numbered exhibit to the
Company's Form 10-QSB filed November 15, 1999.
(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.
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 February 28, 2000.
ESYNCH CORPORATION
By: THOMAS C. HEMINGWAY
--------------------------------------------
Thomas C. Hemingway, Chief Executive Officer
Power of Attorney
We, the undersigned directors and officers of eSynch Corporation do hereby
constitute and appoint Thomas C. Hemingway and T. Richard Hutt, or any one of
them, as our true and lawful attorneys and agents, to do any and all acts and
things in our name and behalf in our capacities as directors and officers and to
execute any and all instruments for us and in our names in the capacities
indicated below, which said attorneys and agents, or either of them, may deem
necessary or advisable to enable said corporation to comply with the Securities
Act, as amended, and any rules, regulations and requirements of the SEC in
connection with this Registration Statement, including specifically, but without
limitation, power and authority to sign for us or any of us in our names and in
the capacities indicated below, any and all amendments (including post-effective
amendments) hereto or any related registration statement that is to be effective
upon filing pursuant to Rule 462(b) under the Securities Act, as amended; and we
do hereby ratify and confirm all that the said attorneys and agents, or either
of them, shall do or cause to be done by virtue hereof.
In accordance with the requirements of the Securities Act of 1933, this
registration statement was signed by the following persons in the capacities and
on the dates stated.
Signature Title Date
- --------- ----- ----
/s/ THOMAS C. HEMINGWAY Chairman, Chief Executive February 28, 2000
- ------------------------ Officer and Director
Thomas C. Hemingway
/s/ DONALD WATTERS, JR. President and Director February 28, 2000
- ------------------------
Donald Watters, Jr.
/s/ T. RICHARD HUTT Secretary, Vice President February 28, 2000
- ------------------------ and Director
T. Richard Hutt
(Signatures continue next page)
II-10
<PAGE>
(Signatures continued)
/s/ DAVID NOYES Chief Financial Officer February 28, 2000
- ------------------------ (Chief Financial and
David Noyes Accounting Officer)
/s/ JAMES H. BUDD Vice President and Director February 28, 2000
- ------------------------
James H. Budd
/s/ NORTON GARFINKLE Director February 28, 2000
- ------------------------
Norton Garfinkle
/s/ DAVID LYONS Director February 28, 2000
- ------------------------
David Lyons
/s/ ROBERT ORBACH Director February 28, 2000
- ------------------------
Robert Orbach
II-11
