UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2003
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to __________
Commission File Number 0-26790
MERGENCE CORPORATION
(FORMERELY ESYNCH CORPORATION)
(Name of small business issuer as specified in its charter)
Delaware 87-0461856
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
One Technology Drive
Building H
Irvine, CA 92618
----------------
(Address of principal executive offices)
(949) 753-0590
--------------
(Issuer's telephone number, including area code)
(Former name, former address and former fiscal year,
if changed since last report)
Esynch Corporation
One Technology Drive
Building H
Irvine, CA 92618
----------------
(Address of principal executive offices)
State the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: at April 12, 2004 8,080,276
shares
Issuer's telephone number, including area code: (949) 753-0590
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK,
$0.001 par value
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes No X
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. |_|
The issuer's revenues for the fiscal year ended December 31, 2003 were $ -0-
As of April 12, 2004 8,080,276 of the issuer's common shares were issued and
outstanding, approximately of which 6,886,757were held by non-affiliates. As of
April 13, 2004 the aggregate market value of shares held by non- affiliates was
approximately $3,236,775 based upon the closing bid and asked quotation on the
OTC Bulletin Board.
DOCUMENTS INCORPORATED BY REFERENCE
None.
Transitional Small Business Disclosure Format: Yes_____ No X
PART I
ITEM 1. BUSINESS
OVERVIEW Mergence Corporation (the "Company") is in the process of a major
transition. We are undergoing a series of transactions intended to transform
the Company and to strategically move forward with new market opportunities
that can better enhance shareholder value. Mergence Corporation, a Delaware
corporation founded in 1994, primary activities have consisted of developing
and marketing media rights management solutions, encryption and key-clearing
services, video-on-demand services and video streaming through the Internet,
software sales through the Internet, video encoding, compression and authoring,
raising capital, and acquiring businesses. The Company also developed PC
utility products, primarily for the Internet user.
During the third quarter of 2002, the Company ceased the marketing and sales of
its digital media products. Sales for these products were $26,292 for the year
2002.
During 2002, The Company continued sales of its utility software products
including RamOptimizer, a PC utility for improving memory management,
InvisibleFolders, a PC utility that allows end-users to easily hide any folder
(or group of folders) with a simple keystroke combination, StartUpManager, a PC
utility to help users manage their startup applications by reducing the amount
of system resources opened at start up, and BroadbandWizard. These sales were
done through Kiss Software Corporation. Beginning in the fourth quarter of 2002
to reduce continued operating losses, the Company wound down this sales
activity. Sales for the year were $145,707. On February 1, 2003, the product
rights of Kiss Software Corporation were disposed of to James Budd for balance
of all moneys due Mr. Budd. These rights were of minimal value.
On July 26, 2002 Mergence acquired irrevocable voting rights of NACIO Systems.
Mergence entered into an irrevocable escrow agreement to acquire all of the
outstanding common and preferred shares of NACIO Systems, subject to a
successful completion of the plan of reorganization. Mergence Corporation,
signed, but had not consummated, an agreement to acquire all of the outstanding
capital stock of Nacio Systems, Inc. ("NSI"), a California corporation. The
acquisition was to be pursuant to an exchange of stock between holders of NSI
stock and the Registrant conducted in accordance with the original Plan of
Reorganization of NSI under Chapter 11 of the U.S. Bankruptcy Code. NSI amended
the Plan on April 25, 2003, which was approved by the Bankruptcy Court's on May
22, 2003 which ordered that the Mergence undo the previous acquisition of NSI
capital stock and undo the stock issuance previously consummated by the
Company. The Company had issued 1,000,150 (post-split) in connection with
this acquisition and all shares have subsequently been voided.
An Action was taken by Written Consent dated July 15, 2003, over 50% of the
Stockholders of the Company on the amendment to the Articles of Incorporation
of the Company, as amended, to provide for a stock combination (reverse split)
of the Common Stock in an exchange ratio to be approved by the Board, ranging
from one newly issued share for each two outstanding shares of Common Stock to
one newly issued share for each forty outstanding shares of Common Stock and
the approval of a name change for the Company from eSynch Corporation to
Mergence Corporation.
In July 2003, the holders of all of the Company's outstanding Series J, K and M
Preferred Stock agreed to exchange the Preferred Stock for 575,000 shares
(post-split) of the Company's common stock. The closing shall take place
simultaneously with the reverse spilt of the Company's common stock at a rate
of 40 for 1.
The name change of the Company and the 40 to 1 reverse spilt was effective on
February 13, 2004. All references to transactions with the Company stock have
been changed to give effect to the post-spilt adjustments.
On March 1, 2004, Oxford Media Corp., a Mergence-owned subsidiary focusing on
acquiring digital video on demand companies, has entered into a letter of
intent to acquire eMOD Systems, Inc, a digital solutions company concentrating
on the secure high quality distribution of digital video content to the hotel
industry.
FORWARD-LOOKING STATEMENTS
Some of the statements in this report are forward looking statements about what
may happen in the future. They include statements regarding our current
beliefs, plans, expectations and assumptions about matters such as our expected
financial position and operating results, our business strategy and our
financing plans. These statements can sometimes be identified by our use of
forward looking words such as "anticipate," "believe," estimate," "expect,"
"intend," "plan," "seek," "should," and similar expressions. We cannot
guarantee that our forward-looking statements will turn out to be correct or
that our beliefs, plans, expectations and assumptions will not change. Any
forward-looking statements in this release are made pursuant to the "safe
harbor" provisions of the private securities litigation act of 1995. Investors
are cautioned that actual results may differ substantially from such forward-
looking statements. Forward-looking statements involve risks and uncertainties
including, but not limited to, the successful completion of proposed funding
raises, which may be necessary for us to implement our plans to develop new
market opportunities, continued acceptance of our products and services in the
marketplace, competitive factors, new products and technological changes, our
successful entry into new markets, our ability to increase our customer base,
as well as general political and other uncertainties related to customer
purchases, instability in market rates in the telecommunication industries, our
ability to sustain adequate cash flow from operations, the ultimate outcome of
pending litigation, and other risks described in "risk factors," "management's
discussion and analysis of financial condition and results of operations"
elsewhere in this report.
RISK FACTORS
The following risk factors apply to the Company and its intended business
operations. If any of the following risks actually occurs, the Company's
business, financial condition or results of operations could be materially
adversely affected.
WE MAY EXPERIENCE FLUCTUATIONS IN OUR FINANCIAL RESULT
AND, AS A RESULT, OUR STOCK PRICE.
As a result of the sale and discontinuance of our core businesses, the Company
intends to commence new business operations, which may experience significant
fluctuations in financial results. Since the Company had insignificant revenue
from its other activities non-there can be no certainty that additional revenue
can be generated from new product lines in the future.
EMPLOYEES
As of April 12, 2004, Mergence had 3 full-time employees and no part-time
employees. Of our full-time employees, 2 are in senior management, and 1 is in
administration. 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 Mergence continues to grow and
introduce more products and services, we expect to hire additional personnel.
COMPANY HISTORY
We were incorporated in Delaware on December 21, 1988, as Tri-Nem, Inc. On
October 5, 1994, the Company changed its name to Innovus Corporation. On
November 9, 1998, the Company changed its name to eSynch Corporation.
On August 5, 1998, we were acquired through a reverse merger agreement with
Intermark Corporation. Our headquarters was moved from Utah to Southern
California.
During the first half of 1998, the Innovus operations were reduced dramatically
in order to conserve cash. We stopped manufacturing or developing our
multimedia authoring software. After the acquisition, we focused our efforts on
debt reduction and winding up the former business of Innovus Multimedia
Corporation. We began a new business direction with the software publishing and
distribution business of Intermark and development of its proprietary
Electronic Digital Delivery technology.
In November 1998, all of the shares of common stock were reclassified and
combined in a one-for-ten reverse stock split.
In November 1998, we acquired the stock of SoftKat, Inc. We sold SoftKat in May
1999 to further strengthen our focus on electronic software distribution and e-
commerce. We believed that the SoftKat business could not be economically
converted to one that would emphasize electronic software distribution over
traditional physical goods distribution. In addition, we determined that
SoftKat's financial condition and prospects generally were poorer than
anticipated and discovered matters unknown to us prior to the SoftKat
acquisition that resulted in litigation.
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. Beginning in the fourth quarter of 2002 to reduce continued
operating losses, the Company wound down the Kissco sales activities. Sales for
the year were $145,707. On February 1, 2003, the product rights of Kiss
Software Corporation were disposed of to James Budd for balance of all moneys
due Mr. Budd. These rights were of minimal value.
On September 30, 1999, we acquired the stock of Oxford Media Corporation, a
leading designer and developer of digital technologies for video-on-demand.
During the third quarter of 2002, the Company ceased the marketing and sales of
its digital media products. Sales for these products were $26,292 for the year
2002.
ITEM 2. DESCRIPTION OF PROPERTY
Our headquarters is an office facility in Irvine, California of approximately
1,000 square feet under a month-to-month lease. Management currently believes
that the space is sufficient for the Company provide for our hosting,
streaming, encoding, encryption, key clearing, publishing, marketing and sales
operations as well as research and development and engineering. The condition
of the property is good. The property is located in an office and industrial
area with nearby access to freeways and airports.
ITEM 3. LEGAL PROCEEDINGS
MERGENCE AND SUBSIDIARIES
We are involved in one lawsuit in the normal course of business and all amounts
for exposure to the lawsuit have been recorded in our financial statements.
The lawsuits that the Company in which the Company has been involved in the
last two years are as follows:
There is a collection action filed on May 9, 2002 wherein Garfinkle Limited
Partnership II ("GLP") alleged breach of a $450,000 promissory note, plus
interest. Additionally, GLP filed a motion for summary judgment against the
Company. All amounts are fully recorded in the financial statements.
During the years 2001 and 2002 several lawsuits were filed against the Company
generally for non-payment of amounts due. These lawsuits resulted in Judgments
against the Company totaling $1,138,000. All amounts have been recorded in the
Company's financial statements as accounts payable. The Company is currently
attempting to negotiate settlements with all creditors.
On August 9, 2001, an action was filed in California Superior Court, County of
Orange, against the Company, certain officers and its current Directors by
Donald C. Watters, the Company's former president, chief operating officer and
director, claiming breaches of contract, good faith and fair dealing, and
fiduciary duty, and tortuous adverse employment action in violation of public
policy. Mr. Watters was seeking general damages of not less than $2,780,000,
punitive damages, interest, attorney's fees and court costs. Mr. Watters was
terminated by the Company for cause. The Company believed that the claims were
without merit and intends to vigorously defend the action. A settlement was
reached in October 2003, which resulted in no cost to the Company.
On July 27, 2001, the Company filed a complaint against eLiberation
Corporation, which was subsequently amended January 3, 2002. The Company seeks
compensatory damages in the amount of $39,671. On September 28, 2001,
eLiberation Corporation filed a cross-complaint against the Company and an
officer claiming that the Company and the officer deliberately misrepresented
and made false representations to eLiberation Corporation. eLiberation
Corporations seeks general and special damages in the amount of not less than
$2,500,000. The Company agreed in August 2002 to a payment from eLiberation
Corporation in full settlement of the lawsuit.
PART II
ITEM 5. MARKET FOR COMMON SHARES AND RELATED SHAREHOLDER MATTERS
The Common Stock is quoted on the OTC Bulletin Board, Symbol MRGN. On April 12,
2004, the high and low prices for the Common Stock on the OTC Bulletin Board
were $0.43 and $0.50, respectively. The Company was quoted from May 30, 2003 to
December 13, 2003 quoted on the Pink Sheets, 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. As of April
12, 2003, there were approximately 260 holders of record of the Common Stock.
High Low
Year Ended December 31, 2003
----------------------------
January 1 to March 31, 2003 $1.20 $0.80
April 1 to June 30, 2003 $0.80 $0.40
July 1 to September 30, 2003 $1.60 $0.40
October 1 to December 31, 2003. $1.20 $0.40
January 1 to April 12, 2004 $0.75 $0.40
----------------------------
January 1 to March 31, 2002 $3.60 $1.60
April 1 to June 30, 2002 $2.00 $0.80
July 1 to September 30, 2002 $2.00 $1.20
October 1 to December 31, 2002 $1.20 $0.40
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
Secured Convertible Debentures or shares of Series J Preferred Stock, Series K
Preferred Stock and Series L Preferred Stock, and until it has current
earnings. The Company currently intends to retain future earnings in the
operation and expansion of its business and does not expect to pay any cash
dividends in the foreseeable future.
SALE OF UNREGISTERED SHARES
The Company issued the following shares without registration under the
Securities Act of 1933 during the year ended December 31, 2002:
The Company issued Common Stock as follows: 77,500 shares (post-split) for
services of $103,000 and 500,000 shares (post-split) for compensation of
$587,500. These issuances were made pursuant to Section 4(2) and/or 4(6) of the
Securities Act of 1933.
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.
The Company issued the following shares without registration under the
Securities Act of 1933 during the year ended December 31, 2003:
The Company issued Common Stock as follows: 737,500 shares (post-split) for
services of $755,200; 806,250 shares (post-split) for compensation of $812,500;
13,750 shares (post-split) in exercise of stock options with a value of
$11,000; 106,250 shares (post-split) for payment of dividends valued at $127,
500 and 1,000,150 shares (post-split) for the purchase of Nacio (later voided).
These issuances were made pursuant to Section 4(2) and/or 4(6) of the
Securities Act of 1933
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
The following Selected Financial Data should be read in conjunction with the
financial statements and notes thereto found elsewhere herein.
The following discussions contain forward-looking statements regarding Mergence
and its wholly owned subsidiaries, its business, prospects and results of
operations which are subject to certain risks and uncertainties posed by many
factors and events that could cause the Company's actual business and results
of operations to differ materially from those that may be expressed or implied
by such forward-looking statements.
OVERVIEW
Mergence Corporation designs, develops, markets and supports intelligent
digital media solutions and services, including media rights management, audio
and video encryption, delivery, tracking, key clearing and measurement tools,
streaming media services. We have developed a suite of software and related
components designed for the delivery of live and on-demand audio and video
through cable, satellite and the Internet. We provide turnkey end-to-end
solutions, offering all of the services necessary to provide secure streaming
media including, strategic consulting, software development and implementation,
development of e- commerce applications, production, encoding and decoding,
encryption, client- side metrics, up-linking, web site development and
integration, distribution, reporting, digital conversion, content management,
pay-per-view streaming, hosting and archiving. Our software helps businesses
securely, profitably, and effectively delivers high-quality video content to
their customers. The Company also develops PC utility products, primarily for
the Internet user.
PRODUCTS
Mergence continues to develop software technologies that address opportunities
in the digital media space. In 2001, we introduced software technologies in the
digital media space and software for the PC utility market. Mergence
MediaOffice(TM) is an advanced set of tools based on the Microsoft Windows
Media Rights Manager platform to provide a fully integrated and readily
available digital rights management system. Mergence SiteStreamer(TM) is the
easy way to display video content within the best graphical interfaceyours.
SiteStreamer(TM) will help you increase customer satisfaction, further promote
your brand, and create additional revenue opportunities.
Mergence MediaPod(TM) is an audiovisual presentation platform with interactive
search and navigation capabilities that enables the user to easily control the
viewing experience. Designed to let viewers interact with information the way
they want, looking at parts that interest them, skipping ahead to others or
going deeper when desired, the MediaPod Player(TM) puts the viewer in control,
thereby permitting them to engage with the content. Mergence MediaMosaic(TM)
provides users a multi-media presentation experience. The drag 'n drop windows
can include one or more of the following: table of contents, transcript, image
viewer, and related documents and HTML pages. Broadband Wizard(TM) 4.0 by
KISSCO is the easiest way to test and optimize the speed of your DSL, cable or
other high speed Internet connection. Invisible Folders Drag and drop any
folder into Invisible Folder's main window, press a button, and the folder will
disappear! Press another button, enter a password, and the folder will
reappear. RAM Optimizer allows you to instantly free up memory when your system
slows down. StartUp Manager allows you to easily turn off any program that
starts with Windows, even those that don't appear in the Windows StartUp
folder.
OXFORD MEDIA CORPORATION, a Mergence-owned subsidiary focusing on acquiring
digital video on demand companies, has signed a letter of intent to acquire
eMOD Systems, Inc ("eMOD"), a digital solutions company concentrating on the
secure high quality distribution of digital video content to the hotel
industry.
EMOD"S HOTEL - VIDEO ON DEMAND system benefits the guest, the hotel and the
content owners. The system is advanced to the competition with proprietary
ordering and billing software, secure Internet delivery of content, rapid
deployment, low cost installation and online service and upgrades. The system
has been in development and testing for over five years. Hotel guests enjoy
high quality video on demand, easily and discreetly.
eMod has co-developed and has exclusive rights to the sale and distribution of
low cost digital set-top boxes for the IPTV (TV over Broadband Internet
Protocol) for business and home use. The low cost digital decoder for IPTV
provides a discreet addressability to each room or TV for improved service and
remote access and maintenance. A new box designed and built which allows the
home viewer to surf the Internet with improved readability or watch near DVD
quality movies.
The "Broadband VOD" system allows small to medium sized telephone companies to
provide a video on demand movie service to their DSL customers. With broadband
speeds as low as 400Kbps, customers can receive near DVD quality movies
streamed to their TVs through digital set-top boxes. We provide the VOD servers
at the Telco head-end, the distribution software and the consumer set-top
boxes. Content is compressed and encrypted at our secure facilities and
downloaded to the servers through a secure Internet pipe. The content is
decrypted at the consumer's set-top box.
REVENUE
The Company generated no revenues in 2003 while going through a transition
period, but has generated revenue from services and technology software
delivered over the Internet and will generate future revenue from video related
services, including digital rights management, encryption, key clearing,
encoding, authoring, digital production, hosting, live and on-demand video, and
web site integration in previous years. The Company will return this business
upon the completion of the eMOD acquisition.
Internet and Software Licenses: The company previously derived revenue from
Internet services, software, and e-commerce via the Internet. The company
typically bundled varying product and service offerings that it sells through
its web sites, email databases and Internet partner sites.
New Media: The company will derive revenue by delivering live, on-demand video
and audio content over the Internet and by providing related services,
including production, post production, compression, encoding, and encryption
upon the completion of the eMOD acquisition.
COST OF REVENUE
Cost of New Media: Cost of new media consists of production expense, which
includes salaries and costs associated with event production, bandwidth and
monthly fees paid to Internet Service Providers and depreciation of servers
included in the Company's global network.
EXPENSES
Mergence expenses consist of system development, sales and marketing, and
general and administrative expenses. System development expenses consist
primarily of salaries and payroll related expenses, fees to outside contractors
and consultants, allocation of rent and depreciation on equipment. Sales and
marketing and general and administrative expenses consist of salaries and
related benefits, commissions, promotional expenses, public relations services,
professional services, stock issued for services, stock-based compensation,
amortization of goodwill, and general operating costs.
RESULTS OF OPERATIONS
The Company has incurred losses from operations, negative cash flows from
operating activities and has accumulated a deficit at December 31, 2003 in the
amount of $58,082,528. The Company net loss of $2,506,932 included non-cash
operating expenses of $1,960,700 for Stock Based Compensation and Services and
$304,654 for general and administrative expenses. The Company's net loss of $
3,587,174 in 2002 included non-cash operating expenses of $1,357,550 for Stock
Based Compensation and Services, $135,784 for impairment loss on assets
disposed and $2,126,009 of general and administrative expense.
FOR THE YEARS ENDED DECEMBER 31,
2003 2002
___________ ____________
SALES $ - $ 201,701
COST OF SALES - 109,759
----------- ----------
GROSS PROFIT - 91,942
----------- ----------
OPERATING AND OTHER EXPENSES
General and administrative 304,653 2,126,009
Research and development 16,111
Stock issued for compensation and services 1,960,700 1,357,550
Interest expense 60,647 72,387
Impairment loss on assets disposed 135,784
----------- ----------
TOTAL OPERATING AND OTHER EXPENSES (2,326,200) (3,707,841)
----------- ----------
GAIN FROM DEBT FORGIVENESS 119,972 -
OTHER INCOME - 28,725
----------- ----------
LOSS (2,206,028) (3,587,174)
PREFERRED STOCK DIVIDENDS (300,904) (219,640)
----------- ----------
LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (2,506,932) $ (3,806,814)
============== ============
YEAR ENDED DECEMBER 31, 2003 COMPARED TO YEAR ENDED DECEMBER 31, 2002
Sales were $ -0- in 2003 compared to $201,701 in 2002.
The cost of product sold in 2003 was -0- % compared to 54% in 2002. The
decrease was due to no operating activities in 2003 while the Company was going
through its transition phase. General and administrative expenses were $304,653
in 2003 compared with $2,126,009 in 2002. The decrease was due to a winding
down of operations beginning in the third quarter of 2002, in 2003, interest
expense was $60,647 versus $72,387in 2002. In addition, cost associated with
the issuance of stock for compensation and services was $1,960,700 in 2003 as
compared with $1,357,550 in 2002.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2003 the Company had $ - 0 - in cash and cash equivalents and a
deficit in working capital (current liabilities in excess of current assets) of
$6,255,891. Included in accounts payable are judgments for $1,138,000. Some
judgment debtors have attempted to levy assets of the Company. The Company is
currently in process of negotiating with creditors.
The Company raised $ -150,000 of cash from financing activities in 2003 and $
247,900 of cash in 2002. This included proceeds from borrowings of $150,000 and
$125,000 in 2003 and 2002, respectively.
The Company estimates that during the fourth fiscal quarter of 2002 it was
using $25,000 more cash each month than was being generated by operations. The
Company intends to raise additional capital to fund continuing operations and
acquisitions. There is no assurance, however, that financing will be available
on terms satisfactory to the Company or at all.
ITEM 7. FINANCIAL STATEMENTS
Financial statements are filed as part of this report on pages F-1 through F-
29.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
EXECUTIVE OFFICERS AND DIRECTORS
Set forth below is information regarding (i) the directors of the Company as of
April 12, 2004, or until their successors are elected or appointed and
qualified, and (ii) the executive officers of the Company as of April12, 2004,
who are elected to serve at the discretion of the Board of Directors.
NAME POSITION(S) WITH THE COMPANY AGE
------------------------------------------------------------------------
Thomas Hemingway Chairman and Chief Executive Officer 47
T. Richard Hutt(1) Director, Vice President and 65
Secretary/Treasurer
James H. Budd Director and Vice President 63
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.
THOMAS HEMINGWAY
On August 5, 1998, Mr. Hemingway became the Chief Executive Officer and
Chairman of the Company pursuant to the Agreement and Plan of Share Exchange
among the Company, Intermark Corporation, a California corporation
("Intermark"), and Intermark's security holders upon the consummation of that
transaction. A co- founder of Intermark, from October 1995 to the present Mr.
Hemingway 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
security holders. 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 security holders. A co-founder of Intermark, from
October 1995 to the present Mr. Hutt has served as Vice President of Sales and
Secretary of Intermark. From September 1992 to September 1995, Mr. Hutt was
distribution sales manager for Strategic Marketing Partners, a leading national
software and technology-marketing firm. Previously, he was in the
communications and mini- computer industry with TRW where he formed the
Canadian subsidiary as vice president of sales. He moved to TRW's Redondo Beach
headquarters and managed the western division until Fujitsu acquired the
business unit. Before joining TRW, he was with NCR's financial sales division
in Canada. Prior to that he managed the VAR division at Wang Laboratories.
Moving to Matsushita, he played a key role in the development of the
distribution channel for their Panasonic products.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange Commission
and the National Association of Securities Dealers. Officers, directors and
greater than ten-percent shareholders are required by Securities and Exchange
Commission regulations to furnish the Company with copies of all Section
16(a) forms they file. Based solely on a review of the copies of such forms
furnished to the Company between January 1, 2000 and December 31, 2003, on
year- end reports furnished to the Company after December 31, 2003.
ITEM 10. 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, 2003, 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,
2003 or for the shorter period during which the Named Officer was compensated
by the Company.
SUMMARY COMPENSATION TABLE
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
------------------- ---- ------ ----- --------------- ---------- ----------- ------- ------------
Thomas C. Hemingway 2003 $ $330,000 $165,000 $495,000
CEO 2002 144,250(A) 317,500 317,500
2001 146,250
James H. Budd 2003 150,000 150,000
Vice President 2002 100,946(B) 150,000 150,000
2001 115,918
T. Richard Hutt 2003 165,000 90,000 255,000
Vice President 2002 102,099(C) 150,000 150,000
2001 108,303
Mark Utzinger 2003 150,000 11,000 161,000
Vice President 2002 125,000 150,000 4,000 154,000
(A) Contributed to the Company
(B) $99,330 contributed to the Company
(C) $95,330 contributed to the Company
(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.
EXECUTIVE EMPLOYMENT AGREEMENTS
The Company has an employment agreement with each Executive Officer listed
below. The terms of those
Employment agreements are summarized in the following table:
CURRENT BASE OTHER BENEFITS DUE ON
NAME COMPENSATION BENEFITS TERMINATION
------------------- ------------ ------------- -----------------------------------
Thomas C. Hemingway $150,000 Any If he is terminated by the Company
CEO benefits without cause, he is paid an amount
for other equal to 12 months' base salary and
officers, all other benefits and perquisites
and 3 weeks continue for 12 months and
vacation the Company will be
per year required to repurchase
all his stock and options
at the 30-day average market price.
James H. Budd $130,000 Any If he is terminated by the Company
Vice President benefits without cause, he is paid an amount
for other equal to 3 months' base salary and
officers, all other benefits and perquisites
and 2 weeks continue for 3 months and all stock
vacation options held by him vest and
per year become exercisable.
T. Richard Hutt $130,000 Any If he is terminated by the Company
Vice President benefits without cause, he is paid an amount
for other equal to 3 months' base salary and, all
officers other benefits and perquisites
and 2 weeks continue for 3 months and all stock
vacation options held by him vest and
per year become exercisable.
STOCK GRANTS AND STOCK OPTIONS GRANTS IN 2003
Stock Grants:
Tom Hemingway: 475,000 shares valued at $495,000
James Budd: 125,000 shares valued at $150,000
T. Richard Hutt: 275,000 shares valued at $255,000
Mark Utzinger: 125,000 shares valued at $150,000
STOCK GRANTS AND STOCK OPTIONS GRANTS IN 2002
Stock Grants:
Tom Hemingway: 75,000 shares valued at $317,500
James Budd: 125,000 shares valued at $150,000
T. Richard Hutt: 125,000 shares valued at $150,000
Mark Utzinger: 125,000 shares valued at $150,000
Stock Option Grants In 2002:
Mark Utzinger: 18,750 shares at $1.20 per share
THERE WERE NO OPTION GRANTS DURING FISCAL 2003.
The following options were cancelled by the Officers in 2002:
Tom Hemingway: 21,062 shares
James Budd: 9,675 shares
T. Richard Hutt: 9,675 shares
The following table sets forth information concerning stock options, which were
exercised during, or held at the end of, fiscal 2003 by the Named Officers:
None
COMPENSATION OF DIRECTORS
The Company's non-employee Director is not currently compensated for attendance
at Board of Directors meetings. 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.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
MANAGEMENT. The following table sets forth as of April 13, 2004, 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.
SHARES BENEFICIALLY OWNED
--------------------------
COMMON PREFERRED
------ ---------
NAME OF BENEFICIAL OWNER NUMBER PERCENT NUMBER PERCENT
------------------------ ------ ------- ------ -------
Thomas Hemingway(1) 438,899 5.4% 0 0%
James H. Budd(2) 275,459 3.4 0 0
T. Richard Hutt(3) 482,072 6.0 0 0
All Directors and Executive
Officers a group (3 Persons) 1,196,430 14.8% 0 0%
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS4.
None during the two years ended December 31, 2003.
..
..
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL SCHEDULES
FINANCIAL STATEMENT SCHEDULES:
All schedules are omitted because they are not applicable or the required
information is shown in the financial statements or the notes thereto.
(a) Exhibits
Exhibit No. Description
2.5(1) 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.
2.6(2) 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.
2.7(2) Non-Exclusive License Agreement between Oxford
Management Corporation, a Nevada corporation,
and Oxford Media Corporation.
2.8(3) Registration Rights Agreement dated September 30, 1999 between
the Company 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(3) Restated Certificate of Incorporation of the Company
3.3.1(5) Bylaws (Effective November 15, 1999 as Amended November 3,
2000).
4.1(6) Form of Stock Certificate
4.2(6) Stock Option Agreement between the Company and Thomas Hemingway**
4.3(6) Stock Option Agreement between the Company and James H. Budd**
4.4(6) Stock Option Agreement between the Company and T. Richard Hutt**
4.5(6) Stock Option Agreement between the Company and David Lyons
4.6(6) Stock Option Agreement between the Company and Robert Way**
4.7(6) Warrant Agreement between the Company and Donald C. Watters,
Jr.**
4.8(6) Warrant Agreement between the Company and David P. Noyes**
4.9(6) Consulting Agreement between the Company and Lee Puglisi
4.11(7) January 1999 Stock Plan**
4.12(8) Corporate Resolutions relating to January, 1999 Stock Plan**
4.19.1(3) Certificate of Designation - Series J Preferred Stock
4.19.2(3) First Amendment of Certificate of Designation - Series J
Preferred Stock
4.19.3(3) Second Amendment of Certificate of Designation - Series J
Preferred Stock
4.20(9) Certificate of Designation of Relative Rights
and Preferences of Series K Preferred Stock
4.21(5) Amended Certificate of Designation of Relative Rights and
Preferences of Series L Preferred Stock.
4.22(10) Form of Secured Convertible Debenture issued by the Registrant.
4.23(11) Certificate of Designation of Relative Rights and Preferences
of Series M Preferred Stock.
10.7.1(12) Employment Agreement dated as of March 1, 1999 between the
Company and Thomas Hemingway.**
10.7.2(2) Employment Agreement dated as of April 1, 1999 between the
Company and T. Richard Hutt;
10.8(13) 1999 Stock Incentive Plan.**
10.9(13) Form of Indemnification Agreement entered into with certain
officers and directors of the Company.**
10.11.1(13) Series J Convertible Preferred Stock Purchase Agreement dated
as of July 22, 1999 among the Company and the Purchasers named
therein.
10.11.2(13) Amendment dated as of October 29, 1999 to the Series J
Convertible Stock Purchase Agreement among the Company and the
Purchasers named therein.
10.12(13) Registration Rights Agreement dated as of July 22, 1999 between
the Company and initial Purchasers of Series J Convertible
Stock.
10.13(13) Form of Warrant issued in the placement of Series J
Preferred Stock.
10.14(9) Series K Convertible Preferred Stock Purchase Agreement dated
as of December 30, 1999 among the Registrant and the Purchasers
named therein.
10.15(9) Registration Rights Agreement dated as of December 30, 1999
among the Registrant and the Purchasers named therein
10.16(9) Form of Warrant issued in the placement of Series K Preferred Stock.
10.24(11) Series M Convertible Preferred Stock Purchase Agreement dated
as of January 18, 2001 among the Registrant and the Purchasers
named therein.
10.26(11) Form of Warrant to Purchase Shares of Common Stock of the
Registrant related to the sale of Series M Convertible
Preferred Stock.
..
** Indicates management compensation arrangements.
(1) Incorporated by reference to the like-numbered exhibit to the Company's Form 8-K filed
April 19, 1999.
(2) Incorporated by reference to the like-numbered exhibit to the Company's Form 8-K filed
October 15, 1999.
(3) Incorporated by reference to the like-numbered exhibit to the Company's Form SB-2
filed November 29, 1999.
(4) Incorporated by reference to the like-numbered exhibit to the Company's Form 8-K filed
February 8, 2000.
(5) Incorporated by reference to the like-numbered exhibit to the Company's Form 8-K filed
December 18, 2000.
(6) Incorporated by reference to the 4.2 exhibit to the Company's Form S-8 filed March 27,
2000.
(7) Incorporated by reference to the 4.1 exhibit to the Company's Form S-8 filed February
1, 1999.
(8) Incorporated by reference to the 4.2 exhibit to the Company's Form S-8 filed February
1, 1999.
(9) Incorporated by reference to the like-numbered exhibit to the Company's Form 8-K filed
February 15, 2000.
(10) Incorporated by reference to the like-numbered exhibit to the Registrant's Form S-3
filed December 15, 2000.
(11) Incorporated by reference to the like-numbered exhibit to the Company's Form 8-K
filed January 26, 2001.
(12) Incorporated by reference to the like-numbered exhibit to the Company's Form 10-QSB
filed August 19, 1999.
(13) Incorporated by reference to the like-numbered exhibit to the Company's Form SB-2/A
filed January 18, 2000.
(14) Incorporated by reference to the like-numbered exhibit to the Company's Form S-3/A
filed February 9, 2001.
(15) Incorporated by reference to the like-numbered exhibit to the Company's Form S-3
filed February 13, 2001.
(16) Incorporated by reference to the like-numbered exhibit to the Company's Form SC-13D
filed February 14, 2001.
(17) Incorporated by reference to the like-numbered exhibit to the Company's Form S-3/A
filed March 9, 2001.
(18) Incorporated by reference to the like-numbered exhibit to the Company's Form 8-K
filed March 9, 2001.
(19) Incorporated by reference to the like-numbered exhibit to the Company's Form S-3/A
filed March 20, 2001.
(20) Incorporated by reference to the like-numbered exhibit to the Company's Form 8-K/A
filed March 29, 2001.
(21) Incorporated by reference to the like-numbered exhibit to the Company's Form S-3/A
filed March 30, 2001.
(22) Incorporated by reference to the like-numbered exhibit to the Company's Form SC-13G/A
filed April 4, 2001.
(23) Incorporated by reference to the like-numbered exhibit to the Company's Form 424B3
filed May 3, 2001.
(24) Incorporated by reference to the like-numbered exhibit to the Company's Form SC-13D
filed May 4, 2001.
(25) Incorporated by reference to the like-numbered exhibit to the Company's Form S-8POS
filed June 11, 2001.
(26) Incorporated by reference to the like-numbered exhibit to the Company's Form S-8
filed September 14, 2001.
(27) Incorporated by reference to the like-numbered exhibit to the Company's Form S-8
filed November 19, 2001.
(28) Incorporated by reference to the like-numbered exhibit to the Company's Form S-8
filed December 13, 2001.
(29) Incorporated by reference to the like-numbered exhibit to the Company's Form 14-C
filed February 25, 2002.
(30) Incorporated by reference to the like-numbered exhibit to the Company's Form S-8
filed March 29, 2002.
(31) Incorporated by reference to the like-numbered exhibit to the Company's Form 10-QSB
filed May 22,2002
(32 Incorporated by reference to the like-numbered exhibit to the Company's Form S-8
filed May 24, 2002
(33) Incorporated by reference to the like-numbered exhibit to the Company's Form 8K filed
July 31, 2002
(34) Incorporated by reference to the like-numbered exhibit to the Company's Form 10-QSB
filed August 19,2002
(35) Incorporated by reference to the like-numbered exhibit to the Company's Form 10-QSB/A
filed August 26,2002
(36) Incorporated by reference to the like-numbered exhibit to the Company's Form 8-K/A
filed September 27,2002
(37) Incorporated by reference to the like-numbered exhibit to the Company's Form S-8
filed September 27, 2002
(38) Incorporated by reference to the like-numbered exhibit to the Company's Form PRE-14C
filed November 8, 2002
(39) Incorporated by reference to the like-numbered exhibit to the Company's Form DEF-14C
filed November 18, 2002
(40) Incorporated by reference to the like-numbered exhibit to the Company's Form 10-QSB
filed November 19, 2002
(41) Incorporated by reference to the like-numbered exhibit to the Company's Form PRE-14C
filed March 27,2003
(42) Incorporated by reference to the like-numbered exhibit to the Company's Form DEF-14C
filed April 8, 2003
(43) Incorporated by reference to the like-numbered exhibit to the Company's Form 8-K
filed July 30, 2003
(44) Incorporated by reference to the like-numbered exhibit to the Company's Form PRE-14C
dated August 1, 2003
(45) Incorporated by reference to the like-numbered exhibit to the Company's Form 10-QSBA
filed September 11, 2003
(46) Incorporated by reference to the like-numbered exhibit to the Company's Form DEF-14C
filed September 12, 2003
(47) Incorporated by reference to the like-numbered exhibit to the Company's Form 10-KSBA
filed September 12, 2003
(48) Incorporated by reference to the like-numbered exhibit to the Company's Form 10-QSBA
filed September 15, 2003
(49) Incorporated by reference to the like-numbered exhibit to the Company's Form 10-QSBA
filed September 15, 2003
(50) Incorporated by reference to the like-numbered exhibit to the Company's Form S-8
filed September 15, 2003
(51) Incorporated by reference to the like-numbered exhibit to the Company's Form PRE-14C
dated September 26, 2003
(52) Incorporated by reference to the like-numbered exhibit to the Company's Form 10-QSB
filed November 14, 2003
(53) Incorporated by reference to the like-numbered exhibit to the Company's Form S-8
filed February 14, 2004
(99.1) Incorporated by reference to exhibit 99 to the Company's Form 10-K filed April 16,
2002.
ITEM 14. CONTROLS AND PROCEDURES.
As of a date within 90 days of the date of this report, the Company's Chief
Executive Officer and Chief Financial Officer evaluated the effectiveness of
the design and operation of the Company's disclosure controls and procedures.
Based upon this evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the disclosure controls and procedures are effective in
ensuring that information required to be disclosed by the Company in the
reports that it files or submits under the Securities and Exchange Act of 1934,
as amended, is recorded, processed, summarized and reported within the time
period specified by the Securities and Exchange Commission's rules and forms.
Additionally, there were no significant changes in the Company's internal
controls that could significantly affect the Company's disclosure controls and
procedures subsequent to the date of their evaluation, nor were there any
significant deficiencies or material weaknesses in the Company's internal
controls. As a result, no corrective actions were required or undertaken.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereto duly
authorized.
MERGENCE CORPORATION
Date April 12,2004 By: /s/ T. Richard Hutt
---------------------------------
Vice President, Secretary -Treasurer
and Chief Financial Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities indicated
on the 12th day of April 2004.
Signature Title
/S/ Thomas Hemingway Chairman, Chief Executive Officer,
------------------------------------ President and Director
Thomas Hemingway
/S/ T. Richard Hutt Vice President, Secretary-Treasurer,
------------------------------------ Chief Financial and Accounting
T. Richard Hutt Officer and Director
/S/ James Budd Director
------------------------------------
James Budd
MERGENCE CORPORATION AND SUBSIDIARIES
FINANCIAL STATEMENTS
TABLE OF CONTENTS
PAGE
Report of Independent Certified Public Accountants F-1
Consolidated Balance Sheets - December 31, 2003 and 2002 F-2
Consolidated Statements of Operations for the Years Ended
December 31, 2003 and 2002 F-3
Consolidated Statements of Stockholders' Deficit
the Years Ended December 31, 2002 and 2003 F-4
Consolidated Statements of Cash Flows for the Years
Ended December 31, 2003 and 2002 F-5
Notes to Consolidated Financial Statements F-6
HANSEN, BARNETT & MAXWELL REGISTERED WITH THE PUBLIC COMPANY
A Professional Corporation ACCOUNTING OVERSIGHT BOARD
CERTIFIED PUBLIC ACCOUNTANTS
5 Triad Center, Suite 750
Salt Lake City, UT 84180-1128
Phone: (801) 532-2200
Fax: (801) 532-7944
www.hbmcpas.com
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and the Stockholders
Mergence Corporation
We have audited the accompanying consolidated balance sheets of Mergence
Corporation and subsidiaries as of December 31, 2003 and 2002 and the related
consolidated statements of operations, stockholders' deficit, and cash flows
for the years then ended. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Mergence
Corporation and subsidiaries as of December 31, 2003 and 2002 and the results
of their operations and their cash flows for the years then ended in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 1 of
the consolidated financial statements, the Company has suffered substantial and
recurring losses from operations and negative cash flows from operating
activities. At December 31, 2003, the Company has a working capital deficiency
and a capital deficiency. The Company has numerous judgments against it and is
unable to pay its current liabilities. These factors raise substantial doubt
about the Company's ability to continue as a going concern. Management's plans
regarding these matters are also described in Note 1. The consolidated
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
HANSEN, BARNETT & MAXWELL
Salt Lake City, Utah
April 14, 2004
F-1
MERGENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
DECEMBER 31,
-------------------------
2003 2002
------------ -----------
ASSETS
CURRENT ASSETS
Cash $ - $ 985
------------ -----------
TOTAL CURRENT ASSETS - 985
------------ -----------
TOTAL ASSETS $ - $ 985
============ ===========
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES
Accounts payable $ 2,419,803 $ 2,559,906
Accounts payable - related party 33,800 -
Accrued liabilities 2,615,821 2,415,175
Notes payable 833,400 683,400
Preferred dividends payable 353,067 179,663
------------ -----------
TOTAL CURRENT LIABILITIES 6,255,891 5,838,144
------------ -----------
STOCKHOLDERS' DEFICIT
Series J convertible preferred stock - $10,000 stated
value per share; 275 shares authorized; 58.2 shares
outstanding, liquidation preference of $457,000 457,000 457,000
Series K convertible preferred stock - $10,000 stated
value per share; 250 shares authorized; 18.3 shares
outstanding; liquidation preference of $58,000 58,000 58,000
Series M convertible preferred stock - $10,000 stated value
per share; 220 shares authorized; 196.9 shares
outstanding; liquidation preference of $1,969,000 2,616,862 2,616,862
Undesignated preferred stock - $0.001 par value, 399,055
shares authorized; no shares outstanding - -
Common Stock - $0.001 par value; 250,000,000 shares
authorized; 4,605,923 and 2,529,673 shares
outstanding 4,606 2,530
Additional paid-in capital 48,690,169 46,604,045
Accumulated deficit (58,082,528) (55,575,596)
------------ -----------
TOTAL STOCKHOLDERS' DEFICIT (6,255,891) (5,837,159)
------------ -----------
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT $ - $ 985
============ ===========
The accompanying notes are an integral part of these consolidated financial
statements.
F-2
MERGENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED
DECEMBER 31,
-----------------------------
2003 2002
-------------- -------------
REVENUE $ - $ 201,701
COST OF PRODUCTS SOLD - 109,759
-------------- -------------
GROSS PROFIT 91,942
-------------- -------------
OPERATING AND OTHER EXPENSES
General and administrative 304,653 2,126,009
Research and development - 16,111
Stock issued for services 852,200 1,207,700
Stock-based compensation to employees and consultants 1,108,500 149,850
Interest expense 60,647 72,387
Impairment loss on assets disposed 135,784
-------------- -------------
TOTAL OPERATING AND OTHER EXPENSES 2,326,000 3,707,841
-------------- -------------
GAIN FROM DEBT FORGIVENESS 119,972 -
OTHER INCOME - 28,725
-------------- -------------
NET LOSS (2,206,028) (3,587,174)
PREFERRED STOCK DIVIDENDS (300,904) (219,640)
-------------- -------------
LOSS APPLICABLE TO COMMON SHAREHOLDERS $ (2,506,932) $ (3,806,814)
============== =============
BASIC AND DILUTED LOSS PER COMMON SHARE $ (.57) $ (2.16)
============== =============
WEIGHTED-AVERAGE NUMBER OF COMMON SHARES
USED IN PER SHARE CALCULATION 4,429,934 1,759,523
============== =============
The accompanying notes are an integral part of these consolidated financial
statements.
F-3
MERGENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
PREFERRED STOCK COMMON SHARES ADDITIONAL TOTAL
----------------------- ------------------- PAID-IN ACCUMULATED STOCKHOLDERS'
SHARES AMOUNTS SHARES AMOUNTS CAPITAL DEFICIT EQUITY (DEFICIT)
---------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 311.90 $3,516,862 922,869 $923 $43,743,007 $(51,768,782) $(4,507,990)
31, 2001
Shares issued for - - 867,750 868 1,069,332 - 1,070,200
services
Shares issued in
settlement of
payroll liabilities - - 125,000 125 137,375 - 137,500
Conversion of Series (14.30) (143,000) 129,879 130 142,870 - -
J preferred stock
Conversion of Series (24.20) (242,000) 189,063 189 241,811 - -
K preferred stock
Shares issued for
payment of preferred
dividends - - 62,830 63 74,167 - 74,230
Beneficial conversion
paid with
common shares - - - - 92,158 - 92,158
Preferred stock - - - - - (219,640) (219,640)
dividend accrual
Exercise of stock - - 164,750 164 112,736 - 112,900
options and warrants
Fair value of options - - - - 149,850 - 149,850
granted
Contribution from - - - - 415,992 - 415,992
Officers/Shareholders
Receipt of - - - - 10,000 - 10,000
shareholder
receivable
Settlement of - - 67,532 68 414,747 - 414,815
dividends
Net loss - - - - - (3,587,174) (3,587,174)
-------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 273.40 3,131,862 2,529,673 2,530 46,604,045 (55,575,596) (5,837,159)
31, 2002
Shares issued for - - 875,000 875 851,325 - 852,200
services
Shares issued for - - 1,081,250 1,081 1,096,419 - 1,097,500
compensation
Preferred stock - - - - - (300,904) (300,904)
dividend accrual
Shares issued for
payment of
preferred dividends - - 106,250 106 127,394 - 127,500
Exercise of stock - - 13,750 14 10,986 - 11,000
options
Net loss - - - - - (2,206,028) (2,206,028)
-------------------------------------------------------------------------------------------------------------------
BALANCE - DECEMBER 273.40 3,131,862 - 4,605,923 - 4,606 48,690,169 - (58,082,528) (6,255,891)
31, 2003
===================================================================================================================
The accompanying notes are an integral part of these consolidated financial
statements.
F-4
MERGENCE CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED
DECEMBER 31,
--------------------------------
2003 2002
-------------- -------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss $ (2,206,028) $( 3,587,174)
Adjustments to reconcile net loss to net cash used by operating activities:
Depreciation and amortization 227,967
Loss on disposal of property and equipment 135,999
Stock issued for services, interest and settlements 852,200 1,207,570
Stock based compensation 1,108,500 149,850
Forgiveness of debt 119,972
Changes in operating assets and liabilities:
Accounts receivable 41,779
Other Assets 250,602
Accounts payable (260,075) 1,154,794
Accounts payable-related party 33,800
Accrued liabilities 200,646 166,915
--------------------- -------------
NET CASH USED IN OPERATING ACTIVITIES (150,985) ( 251,698)
--------------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES
Stock issued for cash -
Purchases of common stock -
Proceeds from the exercise of options and warrants 112,900
Proceeds from issuance of preferred shares, net of costs -
Proceeds from borrowings 150,000 125,000
Payment on receivable from Shareholder 10,000
--------------------- -------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 150,000 247,900
--------------------- -------------
NET INCREASE (DECREASE) IN CASH ( 985) (3,798)
CASH - BEGINNING OF YEAR 985 4,783
--------------------- -------------
CASH - END OF YEAR $ - $ 985
===================== =============
SUPPLEMENTAL CASH FLOW INFORMATION AND NON-CASH INVESTING AND FINANCING
ACTIVITIES - NOTE 7
The accompanying notes are an integral part of these consolidated financial
statements.
F-5
MERGENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1--NATURE OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On February 13, 2004, the shareholders changed the name of the Company from
eSynch Corporation to Mergence Corporation and reverse split the common stock
on a 1-for-40 basis. The accompanying financial statements have been restated
on a retroactive basis for the effects of these changes for all periods
presented.
The primary activities of Mergence Corporation (Mergence or the Company) have
consisted of raising capital, acquiring businesses, developing and marketing
video-on-demand services and video streaming through the Internet, software
sales through the Internet, and DVD video encoding, compression and authoring.
The Company has curtailed all of these activities due to lack of financial
resources. Oxford Media Corporation, a wholly-owned subsidiary, has entered
into a letter of intent to acquire eMOD Systems, Inc, a digital solutions
company concentrating on the secure high quality distribution of digital video
content to the hotel industry, in exchange for a majority interest in Oxford
Media Corporation.
Principles Of Consolidation - The accompanying consolidated financial
statements include the accounts of Mergence and of its wholly owned
subsidiaries. All inter-company transactions and balances have been eliminated
in consolidation.
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 accompanying consolidated financial statements have
been prepared on the basis of the Company continuing as a going concern. The
Company has incurred losses from operations, negative cash flows from operating
activities and has accumulated a deficit at December 31, 2003 in the amount of
$58,082,528. The Company has numerous judgments against it and is unable to pay
its current liabilities. Management's plans are to seek mergers for the Company
and its subsidiaries and to request compromise of existing liabilities. 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.
Fair Values of Financial Instruments - The amounts reported as accounts
payable, accounts payable related party, accrued liabilities, and notes payable
are considered to be reasonable approximations of their fair values. The fair
value estimates were estimated by management and were not based on comparable
debt as the Company is unable to obtain outside financing..
Stock-Based Compensation - Stock-based compensation to employees is recognized
and measured in accordance with the principles of APB Opinion No. 25,
Accounting for Stock Issued to Employees, and related Interpretations. 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.
Compensation relating to the options granted to employees is being recognized
over the vesting period of the options. Stock-based compensation charged to
operations was $1,960,700 and $1,357,550 for the years ended December 31, 2003
and 2002, respectively. The following table illustrates the effect on net loss
and basic and diluted loss per share for the years ended December 31, 2003 and
2002 if the Company had applied the fair value recognition provisions of FASB
Statement No. 123, Accounting for Stock-Based Compensation, to stock-based
employee compensation:
F-6
MERGENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2003 2002
----------- -----------
Net loss, as reported $(2,206,028) $(3,587,174)
Add: Stock-based employee compensation expense
included in reported net loss 1,960,700 1,037,850
Deduct: Total stock-based employee compensation
expense determined under fair value based
method for all awards (1,960,700) (1,104,100)
----------- -----------
Pro Forma, Net Loss $(2,206,028) $(3,653,424)
=========== ===========
Basic and diluted loss per common share:
As reported $ (0.57) $ (2.16)
Pro forma $ (0.57) $ (2.08)
=========== ===========
Loss Per Share - Basic loss per common share is computed by dividing loss
before extraordinary gain and net loss, both adjusted by preferred dividends,
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
convertible preferred stock and convertible notes payable except during loss
periods when those potentially issuable common shares would decrease the loss
per share.
As of December 31, 2003 and 2002, there were 58.2 shares of Series J
convertible preferred shares, 18.3 shares of Series K convertible preferred
shares, and 196.9 shares of Series M convertible preferred shares. As of
December 31, 2003 and 2002, there were options and warrants to purchase 27,875
and 113,540 shares of common stock at December 31, 2003 and 2002, respectively.
These items were not included in the calculation of diluted loss per share for
the years ended December 31, 2003 and 2002, as they would have been anti-
dilutive, thereby decreasing the loss per share.
Revenue Recognition - The Company has sold software products at fixed prices
for which the right to return was granted to the buyer. Accordingly, revenue
was recognized when the buyer has paid for the products and the amount of
future returns could be reasonably estimated. Cost of products sold was
recognized at the date the sale was recognized less an estimate for sales
returns. Until the sale was recognized, products purchased from publishers were
accounted for, as consigned product from publishers and the related cost was
not reflected in the financial statements with the exception of software
inventory owned by the Company. Revenue from DVD video encoding, compression
and authoring and video-on-demand services was recognized when the product or
services was completed, the products were transmitted or shipped to the
customer and accepted by the customer.
New Accounting Standards - In April 2002, the FASB issued Statement of
Financial Accounting Standards No. 145, Rescission of FASB Statements No. 4,
44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.
Among other provisions, this statement modifies the criteria for classification
of gains or losses on debt extinguishment such that they are not required to be
classified as extraordinary items if they do not meet the criteria for
classification as extraordinary items in APB Opinion No. 30, Reporting the
Results of Operations - Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. The Company has applied the provisions of this standard to
transactions occurring after December 31, 2002.
In May 2003, the FASB issued Statement of Financial Accounting Standards No.
150, Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equities. Statement No. 150 will require financial instruments
that are mandatorily redeemable or that contain an obligation to repurchase the
financial instrument be classified as liabilities. Statement No. 150 was
effective July 1, 2003.
F-7
MERGENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2-GOODWILL AND LONG-LIVED ASSETS
Kiss Software - Effective April 1, 1999, the Company completed the acquisition
of Kiss Software Corporation, a California corporation engaged in the wholesale
and retail distribution of computer and Internet utility software products.
Amortization of goodwill recognized during the year ended December 31, 2001 was
$1,635,009. Beginning in the fourth quarter of 2002, the Company wound down
this sales activity of Kiss Software to reduce losses from operations. Sales
for the year ended December 31, 2002 were $145,707. On February 1, 2003, the
product rights of Kiss Software Corporation were disposed of to James Budd for
balance of all moneys due Mr. Budd. These rights were of minimal value.
NOTE 3 - EQUIPMENT
The Company abandoned its remaining equipment in the year ended December 31,
2002 and recognized an impairment loss of $135,784.
Equipment consisted of the following at December 31, 2003 and 2002:
Depreciation expense for the years ended December 31, 2003 and 2002 was $0 and
$227,969, respectively.
NOTE 4 - TECHNOLOGY
During the year ended December 31, 2001, the Company acquired proprietary data
encryption technology for use in its streaming media products and services
business sector. In connection with the purchase of the technology, the Company
issued 801,187 shares valued at $275,448 and made payments of $26,000 for the
modification of the software. The technology combined a variety of advanced
methods and gave the Company the ability to deliver simultaneous streaming
media and downloading services in a fully secure, industry-standard
environment. The acquired technology was used in combination with the Company's
existing technologies in products and services. The Company amortized the cost
of the
technology over the estimated future cash inflows or three years, whichever
resulted in the greater amount of amortization. The net value of the
technology of $226,086 was included in other assets on the accompanying
December 31, 2001 balance sheet. During the year ended December 31, 2002, the
Company discontinued the use of the technology and amortized the balance of the
cost of the technology.
NOTE 5 - ACCRUED LIABILITIES
Included in accrued liabilities at December 31, 2003 and 2002 are $ 1,837,000
and $1,585,000, respectively, in obligations to state and federal governments
for payroll taxes from previous years and for estimated interest and penalties
owing on such tax obligations. At December 31, 2003 and 2002 the Company has
accrued salaries of $276,545 and $276,545, respectively. Some of these
employees to whom the accrued salaries are due have obtained judgments against
the Company for payment of these salaries and these amounts have been
reclassified to accounts payable. Additionally, during 2003 and 2002, the
Company withheld 401K contributions from employees' wages; however, these
employee contributions were not contributed to the plan. At December 31, 2003
and 2002, amounts due to the plan were $43,467 and $43,467, respectively.
F-8
MERGENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - NOTES PAYABLE
During the year ended December 31, 2003 and 2002, the Company borrowed $150,000
and $125,000 from individuals. The 2003 have a 10% interest rate and were due
on demand. The 2002 note is non-interest bearing, unsecured and due on demand.
During 2002, an individual forgave a $40,000 note plus interest. During 2001,
the Company issued 1,250 shares of common stock valued at $16,000 for interest
and consideration to shareholder for making the loan. The value of the shares
has been included in interest expense.
At December 31, 2003 and 2002, the Company has $450,000 due under a promissory
note to Garfinkle Limited Partnership II ("GLP"), a company of a shareholder
and a former member of the Board of Directors. The note bears an interest rate
of 10%. The note was entered into on June 14, 2000 and was originally due on
September 12, 2000. At December 31, 2000, the note was in default. During
January 2001, the Company issued warrants to purchase 6,250 shares of common
stock to GLP. The warrants were valued at $160,850 using the Black-Scholes
option-pricing model. In return, GLP agreed to extend the terms of the note.
There was a collection action filed on May 9, 2002 by GLP wherein GLP alleged
breach of the $450,000 promissory note. Additionally, GLP filed a motion for
summary judgment against the Company, which is set for trial during June 2004.
Notes payable consisted of the following at December 31, 2003 and 2002:
2003 2002
--------- ---------
10% Convertible note payable to a shareholder, unsecured,
due on demand $ 450,000 $ 450,000
7% Note payable to shareholder, interest due quarterly,
principal payable $14,754 quarterly, unsecured 77,150 77,150
Non-interest bearing, unsecured note, due on demand 125,000 125,000
10% Note payable to shareholder, payable on demand,
unsecured 31,250 31,250
10% Note payable to shareholder, payable on demand,
unsecured 17,500
10% Note payable to shareholder, payable on demand.
unsecured 17,500
10% Note payable to shareholder, payable on demand,
unsecured 115,000
--------- ---------
Total Notes Payable $ 833,400 $ 683,400
========= =========
NOTE 7 - SUPPLEMENTAL CASH FLOW INFORMATION AND NONCASH INVESTING AND FINANCING
ACTIVITIES
Supplemental Cash Flow Information - The Company paid $60,647 and $72,387 for
interest during the years ended December 31, 2003 and 2002, respectively.
Noncash Investing And Financing Activities - During the year ended December 31,
2003, the Company had the following non-cash transactions: accrued preferred
dividends of $300,904; settled outstanding dividends valued at $ 127,500 by
issuance 106,250 shares of common stock.
During the year ended December 31, 2002, the Company had the following non-cash
transactions: accrued preferred dividends of $219,640; converted a capital
lease with remaining liability of $197,107 into an account payable upon default
of the lease agreement; issued common stock to settle preferred dividends of
$581,133; converted Series J and Series K preferred stock valued at $385,000
into shares of common stock; a shareholder forgave debt of $40,000 that was
contributed to capital without the issuance of shares (see Note 7).
F-9
MERGENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - INCOME TAXES
There was no provision for, or benefit from, income taxes for any period
presented. The components of the net deferred tax asset as of December 31, 2003
and 2002 were as follows:
2003 2002
------------ -----------
Operating loss carry forwards $ 10,247,500 $10,155,967
Valuation allowance (10,247,500) (10,155,967)
------------ -----------
Net Deferred Tax Asset $ - $ -
============ ===========
For income tax reporting purposes, the Company has net operating loss carry
forwards in the amount of approximately $27,460,000 at December 31, 2003 that
will expire beginning in the year 2011 through 2023. The valuation allowance
increased by $91,533 and $1,338,015 during the years ended December 31, 2003
and 2002, respectively.
The following is a reconciliation of the tax benefit that would result from
applying the federal statutory tax rate to pretax loss with the provision for
income taxes for the years ended December 31, 2003 and 2002:
2003 2002
------------ ------------
Benefit at federal statutory
rate (34%) $ (750,050) $ (1,219,639)
Stock-based compensation 731,549 387,118
Change in valuation allowance 91,533 1,338,015
State tax benefit, net of federal
tax effect (73,032) (118,376)
Other - (87,118)
------------ ------------
Provision for Income Taxes $ - $ -
============ ============
NOTE 9 - STOCKHOLDERS' EQUITY
Series J Convertible Preferred Stock - From August through October 1999, the
Company issued 262.5 shares of Series J convertible preferred stock at a price
of $10,000 per share in a private placement offering. The Series J convertible
preferred stock is convertible into the number of shares of common stock
determined by dividing its $10,000 stated value per share by the conversion
price, computed as the lower of $140 per common share or 80% of the average of
the six lowest closing bid prices per share in the twenty-trading-day period
ending on the day before conversion. Any Series J convertible preferred shares
not converted on the third anniversary of the issuance dates was automatically
convertible into common stock, subject to extensions by the Company for certain
events which the Company has granted.
Dividends on the Series J convertible preferred stock are cumulative and accrue
at the rate of 7% per annum. The dividends are not required to be paid until
conversion, redemption or until an acquisition of the Company occurs. The
Company has the option of paying accrued dividends either in cash or in common
shares, based on the conversion price then in effect. To date, the Company has
elected to pay accrued preferred dividends on the various conversion dates with
common stock. Although the number of common shares issued in payment of accrued
preferred dividends was determined by the conversion price in effect on the
dates issued, they were recorded at fair value, which effectively increased the
dividend rate.
F-10
MERGENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accrued dividends payable were estimated based on the fair value of the number
of shares of common stock issuable using current conversion prices, and totaled
$127,872 and $95,970 at December 31, 2003 and 2002, respectively. Series J
convertible preferred stock dividends accrued during the years ended December
31, 2003 and 2002 were $ 33,250 and $33,250, respectively.
The Series J convertible preferred stock has a liquidation preference of
$10,000 per share plus accumulated and unpaid dividends and may be redeemed at
the Company's option for $12,000 per share plus accumulated dividends.
During the years ended December 31, 2003 and 2002, holders of Series J
convertible preferred stock converted a total of 14.3 preferred shares valued
at $143,000 and received 129,879 common shares in 2002. Additional accrued
dividends remain unpaid on converted Series J convertible preferred stock.
Series K Convertible Preferred Stock - In December 1999 and January 2000, the
Company issued 200 shares of Series K convertible preferred stock at a price of
$10,000 per share in a private placement offering. The Series K convertible
preferred stock is convertible into the number of shares of common stock
determined by dividing its $10,000 stated value per share by the conversion
price, computed as the lower of $140 per common share or 80% of the average of
the six lowest closing bid prices per share in the twenty-trading-day period
ending on the day before conversion. Any Series K convertible preferred shares
not converted on the third anniversary of the issuance dates was automatically
convertible into common stock, subject to extensions by the Company for certain
events, which the Company has granted.
Dividends on the Series K convertible preferred stock are cumulative and accrue
at the rate of 7% per annum. The dividends are not required to be paid until
conversion, redemption or until an acquisition of the Company occurs. The
Company has the option of paying accrued dividends either in cash or in common
shares, based on the conversion price then in effect. To date, the Company has
elected to pay accrued preferred dividends on the various conversion dates with
common stock. Although the number of common shares issued in payment of accrued
preferred dividends was determined by the conversion price in effect on the
dates issued, they were recorded at fair value, which effectively increased the
dividend rate. Accrued dividends payable were estimated based on the fair value
of the number of shares of common stock issuable using the current conversion
prices, and totaled $12,165 and $8,120 at December 31, 2003 and 2002,
respectively. Series K convertible preferred stock dividends accrued during the
years ended December 31, 2003 and 2002 were $4,088 and $4,060, respectively.
The Series K convertible preferred stock has a liquidation preference of
$10,000 per share plus accumulated and unpaid dividends and may be redeemed at
the Company's option for $12,000 per share plus accumulated dividends upon 30
days notice.
Series M Convertible Preferred Stock - On December 7, 2000 and January 23,
2001, the Company issued 196.9 shares of Series M convertible preferred stock.
The Series M convertible preferred stock is convertible into the number of
shares of common stock determined by dividing its $10,000 stated value per
share by the conversion price, computed as the lower of $55 per common share or
78% of the average of the three lowest closing bid prices per share in the
twenty-trading-day period ending on the day before conversion. Any Series M
convertible preferred shares not converted on the third anniversary of the
issuance dates will be automatically converted into common stock, subject to
extensions by the Company for certain events, which the Company has granted..
F-11
MERGENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Dividends on the Series M convertible preferred stock are cumulative from
January 22, 2001 and accrue at the rate of 8% per annum. The dividends are not
required to be paid until conversion, redemption or until an acquisition of the
Company occurs. The Company has the option of paying accrued dividends either
in cash or in common shares, based on the conversion price then in effect. To
date, the Company has elected to pay accrued preferred dividends on the various
conversion dates with common stock. Although the number of common shares issued
in payment of accrued preferred dividends was determined by the conversion
price in effect on the dates issued, they were recorded at fair value, which
effectively increased the dividend rate. Accrued dividends payable were
estimated based on the fair value of the number of shares of common stock
issuable using current conversion prices, and totaled $213,025 and $75,753 at
December 31, 2003 and 2002, respectively. Series M convertible preferred stock
dividends accrued during the years ended December 31, 2003 and 2002 were
$137,452 and $209,349.
The holders of Series M convertible preferred stock are entitled to a
preference in the event the Company is liquidated. That preference is $10,000
per share, plus accrued and unpaid dividends.
During 2003, 106,250 shares of common stock were issued for payment of
liquidated damages in connection with series J and M preferred stock in the
amount of $127,500.
The Series J convertible preferred stock, the Series K convertible preferred
stock and the Series M convertible preferred stock are on 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. A merger or acquisition of the
Company can only be effected if the holders of the convertible preferred stock
maintain their relative rights, preferences and privileges. A transaction that
is inconsistent with this provision is prohibited. Holders of convertible
preferred stock are not entitled to vote in the election of directors. The vote
of holders of three-fourths of the convertible preferred stock outstanding is
required, however, to reclassify any of the outstanding securities (e.g., a
stock split), to make a distribution with respect to any stock that is junior
to the convertible preferred stock (e.g., any dividend to holders of common
stock), or to authorize any securities senior to the Series M convertible
preferred.
In July 2003, the holders of all of the Company's outstanding Series J, K and M
preferred stock agreed to exchange the Preferred Stock for 575,000 shares
(post-split) of the Company's common stock. The closing took place
simultaneously with the reverse spilt of the Company's common stock at a rate
of 40 for 1, which occurred on February 13, 2004.
Common Stock - On February 13, 2004, the shareholders of the Company approved a
1-for-40 reverse stock split of the Company's outstanding common stock. The
accompanying financial statements have been restated on a retroactive basis for
the effects of the reverse stock split for all periods presented. During the
year December 31, 2003, the Company issued common stock as follows: the
issuance of 875,000 for services in the amount of $852,200; issued 1,081,250
shares for compensation in the amount of $1,097,500; issued 106,250 shares in
payment of preferred shares dividends in the amount of $127,500; issued 13,750
shares in connection with the exercise of stock options with a value of
$11,000 and issued 1,000,151 shares in the acquisition of Nacio which were also
voided during the year.
During the year ended December 31, 2002, the Company issued common stock as
follows: the issuance of 992,750 shares for services and compensation in the
amount of $1,207,700, which was charged to stock issued for services expense,
the issuance of 130,362 shares for the settlement of dividends valued at
$489,045 and the issuance of 318,942 shares for the conversion of Series J and
Series K convertible preferred stock as described above.
During 2003 and 2002, option holders exercised 13,750 and 164,750 options to
purchase shares of the Company's common stock. The total proceeds from the
exercises were $11,000 and $112,900 during 2003 and 2002, respectively.
NOTE 10 - STOCK OPTIONS AND WARRANTS
The Company has issued stock options to employees and consultants under a
stock-based compensation plan and under individual contracts. Under the 1999
Stock Incentive Plan, which was approved by the shareholders in November 1999,
the Company may grant options to its employees and consultants for up to 75,000
shares of common stock. On September 6, 2002, the 1999 Stock Incentive
F-12
MERGENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Plan was amended to allow the granting of options for up to 318,750 and on
January 6, 2004 was amended to allow the granting of options up to 10,000,000
shares of common stock. Under the 1998 Stock Option Plan, options may be
granted to employees and consultants for up to 15,000 common shares
The exercise prices of options under the plans and under individual option
contract have generally been below the market price of the Company's stock on
the date of grant. Options generally vest from immediately to over three years
and are exercisable for up to five to ten years. Employees and directors
generally expire six months after termination of service.
During the year ended December 31, 2003, options were exercised to purchase
13,750 shares at an exercise price $1.20 per share. During the year no options
were granted and 59,415 expired and no options were outstanding at December 31,
2003.
In March 2002, the Company issued options to purchase 6,250 share of common
stock at an exercise price of $1.60 per share. In August 2002, the Company
issued options to purchase 43,750 shares of common stock at an exercise price
of $1.20 per share. These options were issued under the 1999 Stock Incentive
Plan to officers, directors, and employees of the Company.
A summary of the status of the Company's stock options as of December 31, 2003
and 2002 and changes during the years then ended are presented below:
OPTIONS OUTSTANDING
---------------------
2003 2002
---------- ----------
WEIGHTED- WEIGHTED-
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
---------------------------------- --------------------- ------- ----------- ---------
Outstanding at beginning of year 73,165 $ 53.60 48,672 $96.40
Granted 50,000 1.20
Forfeited (19,413) 38.40
Expired (59,415) 63.73 ( 1,094) 1.20
Exercised ( 13,750) 1.20 ( 5,000) 1.20
--------------------- ----------- -------
Outstanding at end of year _ 73,165 53.60
===================== ===========
Options exercisable at end of year - 72,508 $52.80
===================== ===========
Weighted-average fair value of
options granted during year $ - $ 0.40
======= =======
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 2002; dividend yield 0%; expected volatility of
214%; risk-free interest rate of 2.50%, expected life of the options of 2.48
years and underlying stock price $0.03
OPTIONS AND WARRANTS GRANTED TO NON-EMPLOYEES
During the year December 31, 2003 the Company issued no options. During the
year ended December 31, 2002, the Company issued options under a consulting
agreement for 84,750 shares of common stock for $0.40 per share. The shares
vested immediately. The options were valued at $45,900 using the Black-Scholes
option pricing model with the following weighted-average assumptions: 1.73%
risk-free interest rate, 0% expected dividend yield, 143.4% volatility and 1.0
years, of which the entire amount was expensed during the year ended December
31, 2002.
F-13
MERGENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
During the year ended December 31, 2002, the Company issued options under a
consulting agreement for 75,000 shares of common stock for $1.20 per share. The
shares vested immediately. The options were valued at $103,950 using the Black-
Scholes option pricing model with the following weighted-average assumptions:
1.73% risk-free interest rate, 0% expected dividend yield, 143.4% volatility
and 1.0 years, of which the entire amount was expensed during the year ended
December 31, 2002.
The options and warrants are exercisable for periods from two to ten years. The
options and warrants are summarized as follows:
OPTIONS OUTSTANDING
-------------------------------------------
2003 2002
--------------------- --------------------
WEIGHTED- WEIGHTED
AVERAGE AVERAGE
EXERCISE EXERCISE
SHARES PRICE SHARES PRICE
--------- ------- -------- -------
Outstanding at beginning of year 40,375 $ 96.40 40,375 $96.40
Granted 159,750 0.80
Cancelled (12,500) 121.70
Exercised ( 159,750) 0.80
----------- ----------
Outstanding at end of year 27,875 96.40 40,375 96.40
=========== ==========
Options exercisable at end of year 27,875 $85.29 40,375 $96.40
=========== ==========
Weighted-average fair value of
options granted during year $ - $ 0.80
=========== =======
The following table summarizes information about non-employee stock options
outstanding at December 31, 2003:
OUTSTANDING EXERCISABLE
---------------- -----------
WEIGHTED-AVERAGE WEIGHTED-AVERAGE
RANGE OF NUMBER REMAINING WEIGHTED-AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
---------------- ----------- ----------------- ---------------- ----------- ---------------
$ 20.00 -50.00 20,000 3.69 $ 26.88 20,000 $ 26.88
$ 80.00 2,875 1.89 80.00 2,875 80.00
260.00-340.00 5,000 5.75 322.00 5,000 322.00
---------------- -------------
$20.000-340.00 27,875 3.87 85.29 27,875 $85.29
================ =============
F-14
MERGENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Compensation from non-employee options and warrants was determined based on the
fair value at the grant dates consistent with the method set forth under
Statement of Financial Accounting Standards No. 123, Accounting for Stock-Based
Compensation. Compensation relating to the options and warrants is being
recognized over their vesting periods. Stock-based compensation charged to
operations for non-employees was $149,850 for the year ended December 31, 2002
and $0 for the year ended December 31, 2003.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Capital Lease - The Company entered into a lease for computer equipment during
the year ended December 31, 2000. The lease is for thirty-six months and
requires a monthly payment of $7,413. During the year ended December 31, 2001
the Company entered into an additional lease for computer equipment. The lease
is for thirty-six months and requires a minimum monthly payment of
approximately $1,171. The leases have been treated as capital leases. The
following is a schedule of future minimum rental payments under the capital
lease at December 31, 2003:
FOR THE YEARS ENDING DECEMBER 31:
2004 $ 4,685
---------
Total minimum payments 4,685
Less amount representing interest 4,685
---------
Present value of net minimum lease payments $ -
=========
At December 31, 2003, the Company was in default on its capitalized lease
obligations as a result of delinquent payments. The financial institutions have
obtained judgments against the Company and the amount due is now recorded in
accounts payable. The Company no longer has the equipment.
Operating Lease - Until November of 2001, the Company leased office and
warehouse facilities in Tustin California under a five-year agreement
classified as an operating lease. Monthly minimum rental payments on the lease
were $20,010 to be adjusted upwards by 4% for each succeeding year during the
term of the lease. The Company terminated this lease and recognized an accrued
liability for its remaining obligations herewith of $136,351 during the year
ended December 31, 2001. The Company moved to a temporary multi-tenant office
facility in Irvine, California, paying a rental rate of $6,000 per month under
a month-to- month contract from November 1, 2001 to February 2002. In February
2002, the Company moved to Santa Ana, California where it leases office
facilities under a fifteen-month agreement classified as an operating lease.
Monthly minimum rental payments on the lease are $3,750. Additionally, the
Company previously leased space for its computer servers and bandwidth. The
lease had a term of two years and a minimum monthly payment of $4,110. In
September of 2001, the Company moved its co-location operation from this
facility to a new location in Irvine, California and canceled the lease. In
November 2002, the Company entered into a month-to month lease in Irvine with a
monthly rent payment of $1,000 per month.
Lease expense for the years ended December 31, 2003 and 2002 was $12,000 and $
48,608 respectively.
Litigation - The Company was involved in several lawsuits that have resulted in
judgments against the Company. All amounts claimed under these actions have
been recorded in the accompanying financial statements.
F-15
MERGENCE CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - 401K PLAN
The Company had an optional 401K plan available for its employees. In order to
qualify employees must have worked for the Company for at least one-hundred and
eighty days and be at least twenty-one years of age. The employee may elect to
invest up to ten percent of their pre-tax earnings. The Company agrees to match
75% of the employee's contributions up to four percent of their earnings and
one percent of their earnings between four and ten percent of their earnings
contributed. The Company made no contributions to the 401K plan in the years
ending December 31, 2003 and 2002.
NOTE 14 - SUBSEQUENT EVENTS
An action was taken by written consent dated July 15, 2003 by over 50% of the
stockholders of the Company to amend the Articles of Incorporation of the
Company to provide for a stock combination (reverse split) of the common stock
in an exchange ratio to be approved by the Board, ranging from one newly issued
share for each two to forty outstanding shares of common stock and the approval
of a name change for the Company from eSynch Corporation to Mergence
Corporation. The amendment to the Articles of Incorporation occurred on
February 13, 2004.
In July 2003, the holders of all of the Company's outstanding Series J, K and M
Preferred Stock agreed to exchange the Preferred Stock for 575,000 shares
(post-split) of the Company's common stock. The closing took place
simultaneously with the reverse spilt of the Company's common stock at a rate
of 40 for 1 on February 13, 2004.
The name change of the Company and the 40 to 1 reverse spilt was effective on
February 13, 2004. All references to transactions with the Company stock have
been changed to give effect to the post-spilt adjustments.
On January 5, 2004 the Company has amended the 2003 Employee Stock Compensation
Plan under which 10,000,000 shares of common stock are reserved for grants
under the plan. The grants may be in the form of options, stock purchase rights
or stock grants. The Board of Directors, or a committee designated by the Board
of Directors, has discretion to determine the terms of the grants and the
recipients of grants.
During the period January 1, 2004 through April 12, 2004 the Company issued
2,006,500 shares of common stock for services and compensation valued at
$1,024,700.