SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
November 17, 1998
-------------------
Date of Report (Date of earliest event reported)
ESynch Corporation
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(Exact name of Registrant as specified in its charter)
Delaware 0-26790 87-0461856
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(State or other (Commission File Number) (IRS Employer
jurisdiction of Identification No.)
Incorporation)
15502 Mosher Avenue
Tustin, California 92780
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(Address of principal executive offices) (Zip Code)
(714) 258-1900
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(Registrant's telephone number, including area code)
Not applicable
----------------
(Former name or address, if changed since last report.)
<PAGE>
Item 2. Acquisition or Disposition of Assets
(a)
On November 17, 1998, the Company signed and consummated an agreement
to acquire an entity known as SoftKat, Inc. in exchange for the issuance of
720,000 common shares, and 600,000 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 the acquisition was consummated and a target market price of
$3.00 per share. The Company will be required to redeem 200,000 shares of
the preferred stock at $1.00 per share upon obtaining $1,500,000 of funding
from any source and must further redeem an additional 200,000 shares of
preferred stock upon obtaining an additional $3,000,000 of funding. The
preferred stock issued has voting rights equivalent to the number of common
shares into which they could be converted and have additional voting rights
in respect to approval of any issuance of a senior series of preferred shares
and have a liquidation preference of $1.00 per share and will be convertible
beginning on the first anniversary of the acquisition at the lesser of $3.00
per share or the closing bid price of the common stock on that date.
The purchase price, based upon the fair value of the common and preferred
stock issued, has been preliminarily estimated to be $2,463,000. The
information set forth in Item 5 of this Report is incorporated herein by
this reference.
<PAGE>
(b)
Softkat, Inc. became a wholly-owned subsidiary of the Registrant on the
Closing of the transactions contemplated in the Agreement.
Softkat, Inc. was sold by the Company on May 25, 1999.
The information set forth in Item 5 of this Report is incorporated
herein by this reference.
<PAGE>
Item 7. Financial Statements and Exhibits
(a) Financial statements of business acquired.
The financial statements required by this Item 7(a) are attached.
(b) Pro forma financial information.
The pro forma financial information required by this Item 7(b) will be
filed by amendment.
(c) Exhibits. The following exhibits are incorporated herein
by this reference.
Exhibit No. Description of Exhibit
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2.4* Agreement and Plan of Merger dated as of
November 17, 1998 among the Registrant;
Softkat, Inc., a California corporation; and
the certain stockholders of Softkat, Inc.
Omitted from this Form 8-K filing
are the following schedules or attachments to
the agreement identified immediately above:
(A) Form of Certificate of Designation of
Series H Convertible Preferred Stock;
(B) Intermark Corporation Financial Statements
(Unaudited) for its 1997 Fiscal Year;
(C) Confidentiality Agreement dated March 1998
between the Registrant and Intermark
Corporation;
(D) Disclosure Schedule of Intermark
Corporation;
(E) Disclosure Schedule of the Registrant.
4.__* Certificate of Designation - Series I Preferred
Stock
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* Incorporated by reference to Exhibit 4.__to the Form 10-KSB filed June 25,
1999 by the Registrant with the Securities and Exchange Commission.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
ESYNCH CORPORATION
Date: January 25, 2000. By /s/ Tom Hemingway
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Tom Hemingway,
Chief Executive Officer
By /s/ David Noyes
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David Noyes
Chief Financial Officer
<PAGE>
SOFTKAT, INC.
TABLE OF CONTENTS
Page
Report of Independent Certified Public Accountants F-1
Balance Sheet - December 31, 1998 F-2
Statements of Operations for the Years Ended
December 31, 1998 and 1997 F-3
Statements of Stockholders' Deficit for the
Years Ended December 31, 1997 and 1998 F-4
Statements of Cash Flows for the Years
Ended December 31, 1998 and 1997 F-5
Notes to Financial Statements F-6
____________
<PAGE>
HANSEN, BARNETT & MAXWELL
A Professional Corporation
CERTIFIED PUBLIC ACCOUNTANTS
(801) 532-2200
Member of AICPA Division of Firms Fax (801) 532-7944
Member of SECPS 345 East Broadway, Suite 200
Member of Summit International Associates Salt Lake City, Utah 84111-2693
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors
Softkat, Inc.
We have audited the accompanying balance sheet of Softkat, Inc. as of
December 31, 1998 and the related statements of operations, stockholders'
deficit, and cash flows for each of the two years in the period ended
December 31, 1998. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As described in Note 1 to the financial statements, the Company commenced
liquidation in May 1999 and as a result, changed its basis of accounting
from the going-concern basis to the liquidation basis for the year
ended December 31, 1998.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Softkat, Inc. as of
December 31, 1998 in conformity with generally accepted accounting
principles applied on the liquidation basis of accounting and the results
of its operations and its cash flows for the year ended December 31, 1997
in conformity with generally accepted accounting principles applied on
the going-concern basis.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
December 20, 1999
F-1
<PAGE>
SOFTKAT, INC.
BALANCE SHEET
DECEMBER 31, 1998
ASSETS
Current Assets
Cash $ 32,968
Inventory 75,000
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Total Current Assets $ 107,968
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LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Bank overdraft $ 60,002
Amounts due under asserted and unasserted claims 4,653,963
Debt to related party 800,000
Notes payable 986,531
-----------
Total Current Liabilities 6,500,496
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Stockholders' Deficit
Common stock - no par; 5,000,000 shares authorized;
3,275,968 issued and outstanding 1,885,562
Accumulated deficit (8,278,090)
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Total Stockholders' Deficit (6,392,528)
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Total Liabilities and Stockholders' Deficit $ 107,968
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F-2
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SOFTKAT, INC.
STATEMENTS OF OPERATIONS
For the Years Ended
December 31,
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1998 1997
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Product Sales $ 6,519,588 $ 3,804,648
Cost of Goods Sold 5,007,015 2,866,539
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Gross Profit 1,512,573 938,109
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Operating Expenses
General and administrative 5,448,303 2,026,640
Impairment of assets 378,764 -
Impairment for obsolete inventory 2,501,654 -
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Total Operating Expenses 8,328,721 2,026,640
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Other Income and Expenses
Interest income 23,783 26,293
Interest expense (160,684) (98,918)
Other expenses (38,846) -
Other income - 170,964
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Total Other Income and Expenses (175,747) 98,339
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Net Loss $(6,991,895) $ (990,192)
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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
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F-3
<PAGE>
SOFTKAT, INC.
STATEMENTS OF STOCKHOLDERS' DEFICIT
<TABLE>
<CAPTION>
Common Stock Total
---------------------- 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 as 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
Net loss - - (6,991,895) (6,991,895)
---------- ---------- ---------- -----------
BALANCE - DECEMBER 31, 1998 3,275,968 $1,885,562 $(8,278,090) $(6,392,528)
========== ========== =========== ===========
</TABLE>
F-4
<PAGE>
SOFTKAT, INC.
STATEMENTS OF CASH FLOWS
For the Years Ended
December 31,
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1998 1997
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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 378,764 -
Impairment of obsolete inventory 2,501,654 -
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
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Net Cash Used By Operating Activities (187,647) (2,314,995)
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Cash Flows From Investing Activities
Payments for the purchase of equipment (35,841) (71,258)
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Net Cash Used By Investing Activities (35,841) (71,258)
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Cash Flows From Financing Activities
Repurchase of common stock - (100,000)
Bank overdraft 60,002 -
Proceeds from bridge loan - 255,000
Principal payment on capital lease (5,538) -
Proceeds from issuance of debt 355,000 645,000
Principal payments on notes payable (513,469) -
Proceeds from issuance of common stock - 1,428,912
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Net Cash (Used) Provided By Financing Activities (104,005) 2,228,912
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Net Decrease In Cash (327,493) (157,341)
Cash - Beginning of Year 360,461 517,802
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Cash - End of Year $ 32,968 $ 360,461
============ ===========
Supplemental Cash Flow Information:
Cash paid for interest $ 137,351 $ 99,37
============ ==========
Supplemental Disclosure of Non-Cash Investing
and Financing Activities:
During the year ended December 31, 1997, the Company acquired equipment
valued at $17,480 through a capital lease agreement and converted a bridge
loan of $255,000 to equity by issuing 127,500 shares of its common stock.
F-5
<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 accompanying
financial statements for the year ended December 31, 1997, were
prepared on the basis of the Company continuing as a going concern.
For the year ended December 31, 1997, the Company incurred losses
from operations and had negative cash flows from operating
activities. These conditions raised substantial doubt regarding
the Company's ability to continue as a going concern.
CONCENTRATION OF RISK AND MAJOR CUSTOMERS - The Company operates
exclusively in the software industry, accordingly, segment
information relating to operations in different industries is not
presented in these financial statements. The concentration of
business in the highly competitive software industry subjects the
Company to concentrated market risk. Sales to any major customer
in 1997 and 1998 were not significant.
FAIR VALUES OF FINANCIAL INSTRUMENTS - The amount reported as
inventory, accounts payable, notes payable, and accrued
liabilities are considered to reasonable approximations of their
fair value. The fair value estimate is 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
at year-end consisted of packaged software. During the year ended
December 31, 1998, based on managements estimate of the market
value under the liquidation basis of accounting, the Company
recognized an impairment against the value of 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 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.
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.
F-6
<PAGE>
NOTE 2 - SALE OF COMPANY INTEREST
On November 17, 1998, eSynch Corporation ("eSynch") acquired all
the Company's common stock. In exchange for the Company's common
stock, eSynch issued 720,000 of its common stock and 600,000
shares of Series I redeemable, convertible preferred shares
("Series I"). The Series I shares were issued in exchange for
certain subordinated notes issued by the Company to certain
shareholders. Up to an additional 720,000 shares of eSynch common
stock 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 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.
NOTE 3--NOTES PAYABLE
Notes payable consisted of the following:
9.75% Line of credit payable to a bank; secured
by all assets of the Company; payment due on demand;
in default $ 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. The Company did not make any principal payments during
the year ended December 31, 1998. At December 31, 1998, the
company was in violation of the loan covenants and was in default
on the loan. During the year ended December 31, 1998, a
certificate of deposit held by the bank in the amount of
$512,162.56, consisting of $500,000 principal and $12,162.56 of
accrued interest, was applied against the loan leaving a balance
owing of $986,531.
NOTE 4- DEBT TO RELATED PARTY
During September 1996, the Company issued 7% subordinated notes to
certain shareholders in the amount of $800,000. The full amount
of principal and accrued interest was payable upon the earlier to
occur of: (i) an initial public offering of the Company's
securities, or the successful completion of any other type of
equity financing, which results in the proceeds of $5,000,000 or
more; (ii) any change in the number of shares of the Company's
stock owned by the shareholders of the Company as of August 1,
1996 such that results in an aggregate change in ownership of more
than forty percent (40%) of the common stock of the Company; or
(iii) five years from the date of issuance.
During November of 1998, pursuant to the acquisition and merger
agreement, see Note 2 for details, eSynch, issued 600,000 shares
of its Series I Preferred shares in satisfaction of all $800,000
of subordinated notes held by Softkat shareholders. The $800,000
debt has been reclassified as owed to eSynch.
NOTE 5 - 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 $1,360,029 were recognized. The impairment charges included
the recognition of $981,265 for obsolete software inventory and
$378,764 for the impairment of property and equipment. In May 1999,
the Company changed to the liquidation basis of accounting which
presents assets at amounts expected to be realized in liquidation.
F-7
<PAGE>
NOTE 6 --INCOME TAXES
There was no provision for or benefit from income tax for any
period. The components of the net deferred tax asset at December
31, 1998 are shown below:
Operating loss carry forwards $ 2,030,843
Valuation Allowance (2,030,843)
-----------
Net Deferred Tax Asset $ -
===========
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 tax (benefit)
that would result from applying the federal statutory rate to
pretax loss with the provision for income taxes.
For the Years Ended
December 31,
-------------------------
1998 1997
----------- -----------
Tax 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 Expense $ - $ -
=========== ===========
NOTE 7--COMMITMENTS AND CONTINGENCIES
OPERATING LEASE - During November 1996, the Company entered into
a lease agreement for a facility located in Petaluma California
which was set to expire in 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, eSynch moved
the Softkat inventory and facilities from the Petaluma site to
eSynch's facility in Newport Beach, California and 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.
The total 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 Company's management claims it has paid money and
substantial merchandise to the plaintiff in satisfaction of a
large portion of the debt. 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 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.
F-8
<PAGE>
NOTE 8 - STOCKHOLDERS' DEFICIT
During 1997, the Company entered into a "best efforts" offering
agreement with an investment group to offer a minimum of 750,000
shares and a maximum of 1,000,000 shares of common stock for $2.00
per share. A total of 982,500 shares of common stock were issued
related to the offering for cash of $1,428,912 net of $536,088 of
offering costs or a net of $1.45 per share.
In connection with the "best efforts" offering, the Company received
cash of $255,000 representing a bridge loan. During 1997, the debt
was converted to equity by issuing 127,500 shares of its common stock
in satisfaction of the loan.
Also during 1997, the Company issued 129,424 shares of common
stock valued at $33,650, or $0.26 per share, to shareholders as a
result of the Company's failure to meet financial results as specified
in the Rights Agreement dated September 20, 1996. Under the Rights
Agreement, the sale of shares by the shareholders is restricted under
certain circumstances as specified in the agreement.
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. The shares repurchased were
retired.
NOTE 9 - SUBSEQUENT EVENTS
On May 25, 1999, all of the stock of the Company was purchased
from eSynch by an unrelated third party for $50,000 cash. Shortly
thereafter, the Company commenced liquidation.
F-9
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