As filed with the Securities and Exchange Commission on December 14, 2000
Registration No. 333-_____
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
________________
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
________________
INSYNQ, INC.
(Exact name of registrant as specified in its charter)
Delaware 6510 74-2964608
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification No.) Identification No.)
1101 Broadway Plaza
Tacoma, Washington 98402
(253) 284-2000
(Address and telephone number of principal executive offices)
John P. Gorst
Chief Executive Officer
1101 Broadway Plaza
Tacoma, Washington 98402
(253) 284-2000
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
________________
Copies to:
Stephen L. Sapp, Esq.
Locke Liddell & Sapp LLP
2200 Ross Avenue, Suite 2200
Dallas, Texas 75201
(214) 740-8000
APPROXIMATE DATE OF PROPOSED SALE TO THE PUBLIC: As soon as practicable
after the effective date of this registration statement.
If this form is filed to register additional securities for an offering pursuant
to rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [_]
If this form is a post-effective amendment filed pursuant to rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If this form is a post-effective amendment filed pursuant to rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If delivery of the prospectus is expected to be made pursuant to rule 434,
please check the following box. [_]
CALCULATION OF REGISTRATION FEE
Proposed Proposed
Maximum Maximum
Title of Securities Amount to be Offering Price Aggregate Amount of
to be Registered Registered/(1)/ Per Share/(2)/ Offering Price Registration Fee
- ---------------------------------------------------------------------------------------------
Common Stock, 17,184,796 $0.80 $13,747,836 $3,629.43
$0.001 par value
- ---------------------------------------------------------------------------------------------
(1) Includes 7,927,456 shares of common stock, $0.001 par value, of the
Registrant (the "Common Stock") issuable upon the exercise of outstanding
warrants by certain selling stockholders, 600,000 shares of Common Stock
issuable upon the exercise of options held by one selling stockholder,
2,143,730 shares subject to conversion rights and 6,513,610 shares of
Common Stock issued and outstanding to the remaining selling stockholders.
(2) Estimated solely for purposes of calculating the registration fee. The
registration fee is calculated in accordance with Rule 457(c), based upon
the average of the bid and asked prices of the Registrant's Common Stock
reported on the OTC Bulletin Board on December 12, 2000.
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THIS REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(a), MAY DETERMINE.
The information in this prospectus is not complete and may be changed. The
selling stockholders may not sell these securities until the registration
statement filed with the Securities and Exchange Commission becomes effective.
This prospectus is not an offer to sell these securities and it is not
soliciting offers to buy these securities in any state where the offer or sale
is not permitted.
SUBJECT TO COMPLETION, DATED DECEMBER 14, 2000
PROSPECTUS
INSYNQ, INC.
17,184,796 SHARES OF COMMON STOCK
This prospectus relates to the offer and sale from time to time by some selling
stockholders of up to 17,184,796 shares of common stock of Insynq, Inc., of
which 7,927,456 shares are issuable upon the exercise of outstanding warrants,
600,000 are issuable upon the exercise of options, 2,143,730 are issuable upon
conversion rights and 6,513,610 are outstanding shares of our common stock. The
offer and sale of the shares of common stock covered by this prospectus is not
being underwritten. The prices at which the shareholders may sell the shares
will be determined by the prevailing market price for the shares or in
negotiated transactions.
We will not receive any of the proceeds from the sale of the shares of
common stock offered by this prospectus. All the expenses related to the
registration of the shares will be paid by us, except that the selling
stockholders will pay any underwriting, brokerage or related fees, discounts,
commissions or the fees or expenses of counsel or advisors to the selling
stockholders. We are paying the fees or expenses of counsel or advisors to
certain of the selling stockholders pursuant to their respective agreements. If
all of the warrants and options to purchase shares of our common stock covered
by this Prospectus are exercised by their holders then we would receive
estimated gross proceeds of approximately $11,455,699 assuming those
shareholders with cashless rights exercise using the cashless feature. See "Use
of Proceeds."
The selling stockholders may sell the shares of common stock directly or
through one or more broker-dealers over the OTC Bulletin Board, in negotiated
transactions or otherwise, at prices related to the prevailing market prices or
at negotiated prices. See "Plan of Distribution."
Our common stock is now quoted on the OTC Bulletin Board under the symbol
"ISNQ." On December 5, 2000, the last reported average closing of the bid and
asked price for the common stock on the OTC Bulletin Board was $0.87 per share.
INVESTING IN THE COMMON STOCK INVOLVES A HIGH DEGREE OF RISK. SEE "RISK
FACTORS."
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
THE DATE OF THIS PROSPECTUS IS DECEMBER 14, 2000.
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TABLE OF CONTENTS
Prospectus Summary......................................... 4
The Offering............................................... 5
Risk Factors............................................... 6
Use of Proceeds............................................ 18
Selling Stockholders....................................... 19
Plan of Distribution....................................... 24
Market Prices of Common Stock and Dividend Policy.......... 26
Management's Discussion and Analysis of Financial
Condition and Results of Operations................... 27
Our Business............................................... 31
Properties................................................. 44
Legal Proceedings.......................................... 44
Management................................................. 45
Certain Relationships and Related Transactions............. 54
Security Ownership of Certain Beneficial Owners and
Management............................................ 56
Description of Capital Stock............................... 58
Limitation of Liability and Indemnification Matters........ 58
Security and Exchange Commission's Position on
Indemnification....................................... 59
Stock Transfer Agent and Register.......................... 59
Changes In and Disagreements with Accountants on Accounting
and Financial Disclosure.............................. 60
Legal Matters.............................................. 60
Experts.................................................... 60
Index to Financial Statements.............................. F-1
ABOUT THIS PROSPECTUS AND WHERE YOU CAN FIND MORE INFORMATION
Unless the context otherwise requires, "Insynq," "we," "our," "us" and
similar expressions refer to Insynq, Inc., a Delaware corporation, and its
predecessors, but not to the selling stockholders identified under the caption
"Selling Stockholders."
We file annual, quarterly and special reports, proxy statements and other
information with the Securities Exchange Commission, or the SEC. You may inspect
and copy these materials at the public reference facilities maintained by the
SEC at:
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, New York 10048
Washington, D.C. 20549 Chicago, Illinois 60661
You also may obtain copies of these materials from the SEC at prescribed
rates by writing to the Public Reference Section of the SEC, 450 Fifth Street,
N.W., Washington, D.C. 20549. Please call the SEC at 1-800-SEC-0330 for more
information on the operation of the public reference rooms. You also can find
our SEC filings at the SEC's website at http://www.sec.gov.
We have filed with the SEC a registration statement on Form SB-2 under the
Securities Act of 1933, as amended, or the Securities Act, with respect to the
shares of common stock offered in this prospectus. This prospectus is part of
that registration statement and, as permitted by the SEC's rules, does not
contain all of the information set forth in the registration statement. For
further information about us and our common stock, we refer you to those copies
of contracts or other documents that have been filed as exhibits to the
registration statement, and statements relating to such documents are qualified
in all respects by such reference. You can review and copy the registration
statement and its exhibits and schedules from the SEC at the address listed
above or from its Internet site.
Our World Wide Web site is located at http://www.insynq.com. Information
contained on our Web site does not constitute, and shall not be deemed to
constitute, part of this prospectus.
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NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference contain forward
looking statements within the meaning of Section 27A of the Securities Act and
Section 21E of the Exchange Act which are intended to be covered by the safe
harbors created thereby. Generally, these forward-looking statements include but
are not limited to statements about our plans, objectives, expectations,
intentions and other statements contained in this prospectus that are not
historical facts. You can identify these statements by forward-looking words,
such as "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate,"
"may," "will" and "continue" or similar words. You should read statements that
contain these words carefully because they may discuss our future expectations,
contain projections of our future results of operations or of our financial
condition or state other forward-looking information. We caution readers that
these forward-looking statements are not guarantees of future performance or
events and are subject to a number of uncertainties, risks and other influences,
many of which are beyond our control and may influence the accuracy of the
statements and projections upon which the statements are based. The factors
listed in the sections captioned "Risk Factors" as well as any cautionary
language in this prospectus, provide examples of risks, uncertainties and events
that may cause our actual results to differ materially from the expectations we
describe in our forward-looking statements. Before you invest in our common
stock, you should be aware that the occurrence of the events described in the
"Risk Factors" section and elsewhere in this prospectus could have a material
adverse effect on our business, operating results and financial condition.
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PROSPECTUS SUMMARY
This summary sets forth the material highlights of the information
contained elsewhere in this prospectus. It does not contain all of the
information that you should consider before investing in us, and you should read
the entire prospectus carefully, especially the discussion of Risk Factors.
Unless specified otherwise, as used herein, the terms "we," "us," or "our" refer
to Insynq, Inc., a Delaware corporation and its predecessor entity, Xcel
Management, Inc., a Utah corporation. References to "Insynq-WA" refer to Insynq,
Inc., a Washington corporation , the assets of which were purchased by us in
February 2000. The term "you" refers to a prospective investor.
INSYNQ, INC.
We are a provider of Internet appliances, managed software services
(through customer premises equipment, CPE, and application hosting), Web hosting
services, and access to Internet marketing assistance and related equipment and
services. We offer these products and services as an integrated whole, either
sold directly or on a fee or subscription basis.
We target small and medium enterprises and the high-end segment of the
small office and home office market for the sale of hardware and hosted software
and access to Internet-related services. We provide these products and services
by developing a customer subscriber base that adopts a cost-effective, on-line
solution to building and maintaining an information technology system through
the adoption of "Web-based" computing as an alternative to both local area
networks and traditional client-server implementations. Generally, we market
ourselves as an Internet utility company that can cost-effectively provide all
of the computer software, hardware, connectivity and Internet-access needs for
our customers.
We currently have several independent software vendors on line using our
server-based computing services and anticipate signing various agreements with
additional organizations in the next few months. In addition, we have recently
completed initial training for existing software vendors, and we expect to
further increase our subscriber base through their respective sales channels.
Key software vendor relationships currently in place include Microsoft
Corporation, Network Associates, Inc., Remedy Corporation, Macola Software, and
Novell, Inc.
We believe our core competency is providing products and services related
to server-based and hosted computing. We believe we have gained credibility in
the industry with strategic relationships with companies such as Hewlett-Packard
Company, Citrix Systems, Inc., and Global Crossing Ltd. We believe these
companies have chosen to strategically align with us in various capacities that
combine the hardware, software, and access required to build a successful
delivery mechanism for our hosted services.
Our principal executive offices are located at 1101 Broadway, Tacoma,
Washington, 98402, and our telephone number is (253) 284-2000.
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THE OFFERING
Securities Offered 17,184,796 shares of common stock issued or
issuable upon exercise by selling
stockholders of the Warrants, Options and/or
conversion.
Common Stock to be Outstanding
After this Offering (1) 35,713,270 shares of common stock.
Common Stock Outstanding as of
December 5, 2000 25,042,084 shares of common stock.
Use of Proceeds We will not receive any of the proceeds from
the sale of the shares of common stock
offered by this prospectus. We will receive
estimated gross proceeds of up to $11,455,699
if the selling stockholders exercise all of
the currently outstanding warrants and
options to purchase the shares of our common
stock covered by this prospectus, assuming
those shareholders with cashless rights
exercise using the cashless feature. We
currently intend to use such net proceeds, if
any, for working capital and general
corporate purposes. See "Use of Proceeds."
Risk Factors An investment in the shares of common stock
offered hereby involves a high degree of risk
and should be made only by investors who can
afford the loss of their entire investment.
See "Risk Factors."
OTC Bulletin Board Market
trading symbol ISNQ
(1) Assumes exercise or conversion in full into shares of common stock of the
warrants, options and conversion rights held by the selling stockholders
as described in "Selling Stockholders."
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RISK FACTORS
Before you invest in our common stock, you should be aware of various
risks, including those described below. Investing in our common stock involves a
high degree of risk. You should carefully consider these risk factors, together
with all of the other information included in this prospectus, before you decide
whether to purchase shares of our common stock. Our business, financial
condition, and results of operations could be seriously harmed by any of the
following risks. The trading price of our common stock could decline due to any
of these risks, and you may lose part or all of your investment.
Risks Particular to Insynq, Inc.
We have historically operated at a loss, have experienced negative
operating cash flows, and anticipate that losses will continue.
We have experienced net losses and negative cash flows since we began
implementing our current business plan. We expect that the ongoing
implementation of our current business plan will increase our net losses and our
negative cash flows for the foreseeable future as we continue to incur
significant operating expenses and make capital investments in our business. We
may never generate sufficient revenues to achieve profitability, and if we are
unable to make a profit, we may not be able to continue to operate our business.
Even if we do become profitable, we may not be able to sustain or increase
profitability on a quarterly or annual basis.
Our limited operating history makes evaluating our business difficult.
Insynq, Inc., a development stage company, began doing business in
September 1998. Accordingly, we have only a very limited operating history upon
which you can evaluate our business and prospects. We face the risks, expenses
and difficulties frequently encountered by early-stage companies in new and
rapidly evolving markets, including on-line companies which host hardware and
software applications for other companies. Our past financial results may not be
representative of our future financial results.
There is substantial doubt about our ability to continue as a going
concern.
Due to our limited operations, we currently do not have sufficient revenue
to cover our operating costs to allow us to continue as a going concern
indefinitely. We are currently late in the payment of a number of our trade
payables, and our inability to raise additional capital to pay these payables,
along with our day to day operating expenses, could have a material adverse
effect on our operations and ability to continue as a business. We plan to
continue to raise funds through public and private debt and equity financings
and, consistent with this approach, have entered into several non-exclusive
financial advisory agreements.
Our quarterly results of operations fluctuate, which could result in a
lower price for our common stock.
Our quarterly results may be affected by factors that may be beyond our
control, including, but not limited to, the following:
. Introduction of new products or pricing programs by our competitors;
. Changes in pricing for, and changes in the gross margins of, certain
products, services, or lines of business as our business model
continues to develop;
. Difficulty managing growth;
. Technical difficulties or systems downtime affecting our services and
products;
. Variations in spending patterns by companies;
. Other business interruptions;
. Increases in necessary operating expenses;
. The amount and timing of costs associated with the development and
maintenance of new hardware and software products;
. Economic conditions specific to the Internet or to the hardware and
software hosting business, as well as general economic conditions;
. Customer acceptance of our products and business model;
. Costs and risks associated with potential acquisitions;
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. Inability to acquire or lack of availability of necessary hardware or
software components, or difficulties in manufacturing; and
. Inability to provision additional bandwidth to adequately service
customer growth.
In addition, a substantial portion of our expenses, including most product
development and selling and marketing expenses, must be incurred in advance of
revenue generation. If our actual revenue does not meet our expectations, then
our operating profit, if any, may fall short of our expectations. Further, we
may change our pricing strategy for our products due to the rapidly evolving
market for hosting hardware and software applications, and this may affect our
quarterly results. Any one or more of these factors could affect our business,
financial condition, and results of operations, and this makes the prediction of
results of operations on a quarterly basis unreliable. As a result, period-to-
period comparisons of our historical results of operations may not be meaningful
and should not be relied on as an indication of our future performance. Also,
due to these and other factors, it is possible that our quarterly results of
operations may fall below the expectations of public market analysts and
investors. This could adversely affect the trading price of our common stock.
We will require additional capital and/or vendor credit in the future,
which may not be available to us.
In order to execute our short-term and long-term strategic plans, we need
to continue to raise funds through public or private debt or equity financing
and obtain and improve credit from key vendors. If we raise additional funds by
issuing equity securities, our stockholders may suffer material dilution in
their holdings of our common stock. Also, as a result of cash flow shortages
that have caused or may cause us to be delinquent on operating payments,
adequate funds and credit may not be available to us when we need them, or may
not be available to us on favorable terms. In this case, we may be not be able
to obtain or maintain key vendor products and services, develop or enhance our
products or services, take advantage of business opportunities, or respond to
competitive pressures, any of which could harm our business. If we are unable to
raise additional capital or maintain vendor credit, we will not be able to
achieve the goals set forth in our strategic plan and may be unable to continue
to operate our business.
Our future capital requirements and vendor relationships will depend upon
many factors, including the following:
. Costs to develop and maintain our on-line hosting of hardware and
software;
. The rate at which we expand our operations;
. Our ability to pay timely outstanding amounts to key vendors and
improve our credit rating;
. The extent to which we develop and upgrade our technology;
. The occurrence, timing, size and success of acquisitions; and
. The response of competitors to our service offerings.
Future demand for ASP services is highly uncertain.
The market for ASP services has only recently begun to develop and is
evolving rapidly. Future demand for these services is highly uncertain. We
believe that many of our potential customers are not fully aware of the benefits
of ASP services. We must educate potential customers regarding these benefits
and convince them of our ability to provide complete and reliable services. The
market for ASP services may never become viable or grow further. If the market
for our ASP services does not grow or grows more slowly than we currently
anticipate, our business, financial condition and operating results will be
materially adversely affected.
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Our internal accounting and financial controls have weaknesses due
primarily to the lack of qualified accounting and financial staff prior to June
2000, and we are unable to determine to what extent these weaknesses have had on
our management systems and financial reporting.
From our inception through June 5, 2000, M. Carroll Benton was our
controller and principal accounting officer. During this time period Ms. Benton
was also the owner and principal accounting officer of Interactive Information
Systems Corporation, or Interactive, a Washington corporation, during which time
an undetermined number of related party transactions occurred between Insynq and
Interactive.
When preparing for the audit of our financial statements for the year ended
May 31, 2000, our then chief financial officer and our in-house financial team
reported to us conditions they believed to be material weaknesses in our system
of internal accounting and financial controls related to the financial statement
process and reconciliation and analysis of general ledger account balances. In
response to this, we hired additional subsidiary accounting personnel. We have
begun to identify measures to improve our system of internal controls, implement
more rigorous internal accounting policies, procedures and controls, and conduct
accounting systems training. Further, we have selected a more robust and capable
accounting system and are planning its implementation. However, these measures
may not be successful in correcting the noted deficiencies and we may experience
similar or other deficiencies in the future as we continue to expand our
operations. If we are unable to establish and maintain effective internal
accounting and financial controls, we will not be able to timely and accurately
account for and monitor the operations of our business and we therefore may not
be able to properly execute our strategic plan, which could have a material
adverse affect on our business, results of operations and financial condition.
We rely on technology and channel alliances and ISVs to refer many of our
clients to us.
We rely on referrals from channel alliances for a portion of our business.
Companies with whom we have strategic alliances, including Remedy and Macola,
refer their customers to us because we can provide an array of services that
complement the products and services they offer. However, these companies may
stop or substantially reduce referring business to us or they may decide to
cooperate with our competitors and thereby adversely impact or eliminate the
amount of referrals made to us. If these third party referrals cease or
materially decrease, our sales will materially decline and our business, results
of operations, and financial condition will be materially adversely affected.
If we are unable to obtain key software applications and hardware
components from certain vendors, we will be unable to deliver our services.
We rely on third-party suppliers, including Microsoft, Citrix, and Cisco to
provide us with key software applications and hardware components for our
infrastructure. Certain components or applications are only available from
limited sources. Our inability to obtain these products or other services,
including connectivity services, in a timely manner at an acceptable cost or at
all, may substantially inhibit our ability to deliver our services, and
consequently, our business, results from operations and financial condition will
be materially adversely affected.
Some of our ASP service contracts guarantee certain service levels.
Some of our ASP contracts contain service guarantees that obligate us to
provide our hosted applications at a guaranteed level of performance. To the
extent we fail to meet those service levels we may be obligated to provide our
customers certain services free of charge. If we continue to fail to meet these
service levels, our ASP customers have the right to cancel their contracts with
us. These credits or cancellations will cost us money, damage our reputation
with our customers and prospective customers, and could materially adversely
affect our business, results of operations and financial condition.
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Rapid growth in our business due to an increase in the number of customers
purchasing our products and services could strain our operational and financial
resources and cause us to lose customers and increase our operating expenses.
Any increase in the volume of users of our computer systems could strain
the capacity of our software or hardware, which could lead to slower response
times or system failures. Any future growth may require us, among other things,
to:
. Expand and upgrade our hardware and software systems;
. Expand and improve our operational and financial procedures, systems
and controls;
. Improve our financial and management information systems;
. Expand, train and manage a larger workforce; and
. Improve the coordination among our product development, sales and
marketing, financial, accounting and management personnel.
We cannot assure you that our current level of personnel, systems, and
controls will be adequate to support future growth. Our inability to manage
growth effectively or to maintain the quality of our products and services could
cause us to lose customers and could materially increase our operating expenses.
If we do not increase awareness of our products and services, our ability
to reach new customers will be limited.
Our future success will depend, in part, on our ability to increase
awareness of our products and services. To do so, we must succeed in our
marketing efforts, provide high-quality products and services, and increase
traffic to our Website. If our marketing efforts are unsuccessful, or if we
cannot increase our brand awareness, we may not be able to attract new customers
and increase our revenues.
We depend heavily on our management team that has little experience working
together or managing a public company. We have also experienced turnover in our
management team, and this turnover could be disruptive to our abilities to work
together.
Our success depends, to a significant extent, upon the efforts and
abilities of John P. Gorst, chairman of the board and chief executive officer,
as well as on the efforts of other officers and senior management. Loss of the
services of any or all of the members of our executive management team, or
continued turnover in these positions, could have a material adverse affect our
business, results of operations, and financial condition and could cause us to
fail to successfully implement our business plan. Also, our executive management
team has worked together for less than one year, in part due to turnover in the
president and chief financial officer positions. The short period of time that
they have worked together, or their inability to work successfully together,
and/or continued turnover may adversely affect our ability to manage growth.
Moreover, our executive management team has a limited amount of experience
managing a public company. Our executive management team may not be able to
manage future growth, if any, or the demands of successfully operating a public
company.
There is intense competition for qualified technical professionals and
sales and marketing personnel, and our failure to attract and retain these
people could affect our ability to respond to rapid technological change and to
increase our revenues.
Our future success also depends upon our ability to attract and retain
qualified technical professionals and sales and marketing personnel. Competition
for talented personnel, particularly technical professionals, is intense. This
competition could increase the costs of hiring and retaining
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personnel. We may not be able to attract, retain, and adequately motivate our
personnel or to integrate new personnel into our operations successfully.
We may not be able to protect our patents, copyrights, trademarks and
proprietary and/or non-proprietary technology, and we may infringe upon the
patents, copyrights, trademarks and proprietary rights of others.
Our services are highly dependent upon proprietary technology, including,
for example, our IQ Delivery System, which allows us to upgrade and manage the
customer's computing environment, both at the data center and customer level. In
addition, we rely on contracts, confidentiality agreements, and copyright,
patent, trademark, and trade-secrecy laws to protect our proprietary rights in
our technology. We have also obtained, or are pursuing, several trademark,
copyright, and patent registrations for our various product names. The
protective steps we have taken may not be adequate to deter misappropriation of
our proprietary information. In addition, some end-user license provisions
protecting against unauthorized use, copying, transfer and disclosure of a
licensed program may be unenforceable under the laws of certain jurisdictions
and foreign countries. In addition, the laws of some foreign countries do not
protect proprietary rights to the same extent as the laws of the United States.
Failure to adequately protect our intellectual property could harm our brand
name, devalue our proprietary content, and affect our ability to compete
effectively. Furthermore, defending our intellectual property rights could
result in the expenditure of significant financial and managerial resources,
which could materially adversely affect our business, results of operations and
financial condition. Also, it is possible that our competitors or others will
adopt product or service brands similar to ours, possibly leading to customer
confusion.
We utilize open source services and code for some products. While we can
modify open source and charge for it, we must release certain changes back to
the open source community, which may include competitors. This could negatively
affect our ability to compete effectively, and have a material adverse affect on
our financial condition and results of operations.
Some of our technology, including our proprietary code, performs functions
similar to technology available from third parties. Therefore, we could be
subject to claims that our technology infringes the proprietary rights of third
parties. Claims against us, even if without merit, could subject us to costly
litigation and could divert the time and attention of our technical and
management teams. A claim of infringement may require us, and our customers, to
obtain one or more licenses from third parties. We cannot assure you that we or
our customers will be able to obtain necessary licenses from third parties at a
reasonable cost or at all. Any failure to obtain a required license could have a
material adverse effect on our business, results of operations and financial
condition.
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Disruptions to our data center, or to the offsite backup storage facilities
of third parties with whom we do business, could materially affect our business.
The continued and uninterrupted performance of our computer systems, and of
the backup storage facilities of third parties with whom we do business, is
critical to our success. Any system failure that causes interruptions in our
ability to deliver our products and services to our customers, including
failures that affect our customers' abilities to access our hosted hardware,
software, and stored data, could reduce customer satisfaction and, if sustained
or repeated, would reduce the attractiveness of our services or result in
material liabilities or costs.
Our hardware and software hosting business strategy, including data backup
and storage, depends on the consistent performance of our data center and those
of third parties. We offer offsite back-up storage of data for all customers.
Our current data center, and those of third parties, is vulnerable to
interruption from fire, earthquake, flood, power loss, connectivity failures,
vandalism and other malicious acts, and other events beyond our control,
including natural disasters. If the data center is damaged in any way, a
customer whose data is stored there may lose some or all data, despite routine
backup procedures. Our operations are dependent on our ability to protect our
computer system, and customer systems, applications and data against damages,
including, but not limited to those from computer viruses, fire, earthquake,
flood, power loss, connectivity failures, vandalism and other malicious acts,
and other events beyond our control, including natural disasters. Damage to our
computer system, or to the systems, applications, or data of our customers,
could delay or prevent delivery of our products and result in the loss of our
customers or in material liabilities. In addition, a failure of our
telecommunication providers to provide the data communications capacity in the
time frame required by us for any reason could cause interruptions in the
delivery of our products. Substantially all of our computer and communications
hardware is located at a single facility, and the loss of this hardware or the
data it contains would cause severe business interruptions. In the event that we
experience significant disruptions that affect our data center, we could lose
customers or fail to attract new customers, and our business, results of
operations and financial condition would be materially adversely affected.
We could experience breaches of security when transmitting data to or from
our customers, including the use of third-party vendor security technologies and
methodologies.
Our business depends upon our ability to securely transmit confidential
information between our data center, third-party backup locations, and the
servers of our customers, including the use of third-party vendor security
technologies and methodologies. Despite our physical design and setup, and the
implementation of a variety of security measures, there exists the risk that
certain unauthorized access, computer viruses, accidental or intentional
disturbances could occur. We may need to devote substantial capital and
personnel resources to protect against the threat of unauthorized penetration of
our delivery system or to remedy any problems that such penetration might cause.
The occurrence of any of these events could cause us to lose customers, cause
harm to our reputation, and expose us to material liability, all of which could
have a material adverse effect on our financial condition and results of
operations.
We depend on licensed software applications.
We depend on contracts with third-party software manufacturers to allow
their software applications to be hosted or run at our data center and provided
to our customers. We have entered into non-exclusive agreements with third-party
companies, including, but not limited to, Microsoft and Citrix
11
that allow us to host some of their software applications at our data center or
re-license their software applications to our customers. Under most of these
agreements, the software manufacturer can terminate its relationship with us for
any reason by giving us as little as 30 days notice. In these instances, the
software manufacturer is not liable to us, or to our customers, for any damages
resulting from termination. If our relationships with these software
manufacturers are terminated, or if these or other software manufacturers do not
allow our customers to obtain a license to operate the software application on
our data centers, our business, operating results and financial condition could
be materially adversely affected.
The hardware and software we use is complex and may contain defects.
Our service offerings depend on complex hardware and software that may
contain defects, particularly when initially introduced or when new versions are
released. Although we test internal and third party software applications prior
to deployment, we may not discover software defects that could affect our new or
current services or enhancements until deployed. These defects could cause
service interruptions or the loss of data, which could damage our reputation,
increase our operating costs, impair our ability to generate or collect revenue,
delay market acceptance or divert our management and technical resources. Any
software modifications we perform as part of our integration services could
cause problems in application delivery. Also, because we offer an open-source
software solution to our customers, they are likely to hold us accountable for
any problems associated with their software, even if the manufacturer caused the
problem or defect. Typically, software manufacturers disclaim liability for any
damages suffered as a result of software defects and provide only limited
warranties. As a result, we may have no recourse against the providers of
defective software applications.
Operating margins on certain products or lines of business may decline over
time.
Operating margins may be adversely affected by increases in material or
labor costs, heightened price competition, changes in channels of distribution,
or in the mix of products sold. We have recently introduced several new
products and services, and we plan to release additional new products or
services in the future. If warranty costs associated with new products or
services are greater than we have experienced historically, operating margins
may be adversely affected. Geographic mix, as well as the mix of configurations
within each product or service group may also impact our operating margins. We
continue to expand third party and indirect distribution channels, which
generally result in reduced operating margins. In addition, increasing third
party and indirect distribution channels generally results in greater difficulty
in forecasting the mix of our products, and to a certain degree, the timing of
our orders.
We also expect that our operating margins may decrease as we continue to
hire additional personnel and increase other operating expenses to support our
business. Because these expenses are relatively fixed in the short term, a
shortfall in revenue could lead to operating results that fall below
expectations.
We are involved in, or may become involved in, legal proceedings with a
former employee, consultants, or other third parties that, if determined
against us, could require us or one or more of our executives, to issue or
transfer a significant amount of our shares of common stock and
12
perhaps pay damages. The issuance of a significant number of shares of our
common stock, especially if at a large discount to the then-current market
price, will dilute our stockholder position, and the payment of damages could
materially adversely affect our financial condition, results of operations, and
therefore, our ability to achieve our business plan.
We were party to a lawsuit in which the plaintiff, who is the widow of a
former principal and shareholder of Insynq-WA, sought the rescission of an
agreement pursuant to which our chief executive officer purchased 2,500,000
shares from her, a decision from the court that the agreement is unenforceable,
and damages in an unspecified amount. We have settled this lawsuit. See "Legal
Proceedings."
We are a party to a lawsuit in which our former president and chief
operating officer seeks damages in excess of $3,000,000 for various claims,
including breach of contract of employment, regarding the termination of his
employment agreement. See "Legal Proceedings."
We have received correspondence from a shareholder which appears to
threaten litigation against us. The allegations against us are vague, but appear
to relate to the shareholder's belief that we have not timely registered
warrants held by the shareholder.
Certain of our Series A and Series B warrant holders have also indicated
that they might file suit against us if they do not receive registration rights
satisfactory to them.
In the past, we have negotiated with third parties and entered into
contracts, in the normal course of our business, with advisors, consultants and
others based on business plans and strategies that we may no longer be pursuing.
We believe that such negotiations were terminated and that those contracts are
no longer effective. However, it is possible that the other parties to those
negotiations and contracts could claim that we did not fulfill our obligations.
If a court found that we are obligated under any of those contracts,
arrangements or otherwise, we could be liable for an undeterminable amount of
compensation or stock or both.
Our stockholders may suffer material dilution if a material number of
options are awarded. If any such litigation occurs, it is likely to be expensive
for us. If such suits are determined against us, and a court awards a material
amount of cash damages, our business, results of operations and financial
condition will be materially adversely affected. In addition, any such
litigation could divert management's attention and resources.
We plan to grow, in part, through mergers with and acquisitions of other
companies. However, we may not be able to identify, acquire, and successfully
integrate future acquisitions into our own operations, which could materially
adversely affect our growth and our operating results.
Our business strategy contemplates that we will seek a number of
significant acquisitions within the next few years. While we have initiated
discussions with several acquisition targets, there is no assurance that we will
complete any such acquisitions or, if we do complete acquisitions, whether we
will successfully integrate these acquisitions into our business. In addition,
there is no assurance that if we acquire any businesses, we will achieve
anticipated revenue and earnings. Our failure to acquire suitable companies or
to successfully integrate any acquired companies into our operations could have
a material adverse effect upon our business, operating results, and financial
condition.
Many of our installations, testing agreements, and consulting contracts
have fixed prices, which expose us to cost overruns. If we are not able to
control cost overruns, our operating results could be materially adversely
affected.
13
We undertake certain projects on a fixed-price basis rather than billing on
a time-and-materials basis, or on a per employee or user basis. Projects with
cost overruns would cause our expenses to increase, and would materially
adversely affect our business, operating results, and financial condition.
Many companies use names similar in sound or spelling to "Insynq."
Intellectual property infringement claims against us for the use of the name
"Insynq," or one similar in sound or spelling, even if without merit, could be
expensive to defend and divert management's attention from our business. If a
claim to stop us from using our name is successful, we will have to either buy
the right to use our name, which may be expensive, or change our name, which may
also be expensive.
We are aware that other companies have claimed use of names similar to
"Insynq" for products or services similar to our own. We are in the process of
investigating the rights, if any, others may have to the name. In addition, we
are attempting to register "Insynq" as a trademark in the United States, Europe,
and Canada. However, we may not be able to obtain proprietary rights to the use
of this name. We will incur expenses if called to defend our use of the "Insynq"
name. Any such litigation, even if without merit, may be time consuming and
expensive to defend. It also could divert management's attention and resources
and require us to enter into costly royalty or licensing agreements. In
addition, if any company in our industry is able to establish a use of the
"Insynq" name that is prior to our use, we could be liable for damages and could
be forced to stop using the name unless we are able to buy the right to use the
name. If we are unable to buy the right to use our name after we lose an
infringement claim, we would have to change our name, which may require us to
spend money to build new brand recognition and incur other costs. Third parties
may assert other infringement claims against us. Any of these events could have
a material adverse effect on our business, financial condition, and results of
operations.
Others may seize the market opportunity we have identified because we may
not efficiently execute our strategy.
If we fail to execute our strategy in a timely or effective manner, our
competitors may be able to seize the marketing opportunities we have identified.
Our business strategy is complex and requires that we successfully and
simultaneously complete many tasks. In order to be successful, we will need to:
. Negotiate effective strategic alliances and develop economically
attractive service offerings;
. Attract and retain customers;
. Attract and retain highly skilled employees;
. Integrate acquired companies into our operations; and
. Evolve our business to gain advantages in an increasingly competitive
environment.
In addition, although some of our management team has worked together for
approximately one year, there can be no assurance that we will be able to
successfully execute all elements of our strategy.
Our industry is characterized by rapidly changing technology with
continuous improvements in both computer hardware and software, and rapid
obsolescence of current systems. If we do not respond effectively and on a
timely basis to rapid technological change in our industry, we will not be able
to effectively sell our services and our sales will materially adversely
decline.
We must continually buy new computer hardware and license new computer
software systems to effectively compete in our industry. Our software delivery
methodologies must be able to support changes in the underlying software
applications that are delivered to our customers. The rapid development of new
technologies increases the risk that current or new competitors could develop
14
products or services that would reduce the competitiveness of our products or
services. We rely on software providers to produce software applications that
keep pace with our customers' demands.
There is no assurance that we will successfully develop or adopt new
technologies, introduce new services or enhance our existing services on a
timely basis, or that new technologies, new services or enhancements we use or
develop will achieve market acceptance. If we fail to address these
developments, we will lose sales to our competitors, and our business, operating
results and financial condition will be materially adversely affected.
Although our current operations include operating as a technology-focused
company, our previous business activities included gaming, natural resource
mining, and exploration. As a result, we may be exposed to unknown
environmental and other liabilities that could require us to expand our
financial resources and materially adversely affect our financial condition.
The assets of a predecessor company were acquired by a publicly-traded
company that was engaged, prior to August 1999, in gaming, and prior to 1993, in
natural resource exploration and development, including mining, and oil and gas.
We no longer own any mining, oil and gas, or gaming-related assets. The mining,
mineral processing, and oil and gas industries are subject to extensive
governmental regulations for the protection of the environment, including
regulations relating to air and water quality, site reclamation, solid and
hazardous waste handling and disposal and the promotion of occupational safety.
We could be held responsible for any liabilities relating to our previous
involvement in gaming, mining or oil and gas exploration and development, which
liabilities would result in our spending our cash resources and could have a
material adverse effect on our business, financial condition and results of
operations.
Reliability Of Market Data
Market data used within this report was obtained from internal sources and
from industry publications. Such industry publications typically contain a
statement to the effect that the information contained therein was obtained from
sources considered to be reliable, but that the completeness and accuracy of
such information is not guaranteed. While we believe that the market data
presented herein is reliable, we have not independently verified such data.
Similarly, market data supplied by internal sources, which we believe to be
reliable, has not been verified by independent sources.
Third Party Reports and Press Releases
We do not make financial forecasts or projections, nor do we endorse the
financial forecasts or projections of third parties or comment on the accuracy
of third party reports. We do not participate in the preparation of the reports
or the estimates given by analysts. Analysts who issue financial reports are not
privy to non-public financial information. Any purchase of our securities based
on financial estimates provided by analysts or third parties is done entirely at
the risk of the purchaser.
We periodically issue press releases to update stockholders on new
developments relating to Insynq and our business. These releases may contain
certain statements of a forward-looking nature relating to future events or our
future financial performance within the meaning of Section 27A of the Securities
Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934,
as amended, and which are intended to be covered by the safe harbors created
thereby.
Readers are cautioned that such statements are only predictions, and that
actual events or results may materially differ with those statements. In
evaluating such statements, readers should specifically review the various risk
factors described herein, among others we identify in documents we file with the
SEC, which could cause actual results to differ materially from those indicated
by such forward-looking statements.
15
Risks Related to Our Industry
The failure of the Internet to grow or to remain a viable commercial medium
could harm our growth.
Our success depends in large part on the maintenance of the Internet
infrastructure as a reliable network backbone that provides adequate speed, data
capacity, and security. Our success also depends on the timely development of
products, such as high-speed modems, that enable reliable Internet access and
services. The Internet may continue to experience significant growth in the
number of users, frequency of use and amount of data transmitted. The Internet
infrastructure may not be able to support the demands placed on it and the
performance or reliability of the Internet may be adversely affected by this
continued growth. In addition, the Internet could lose its commercial viability
if the number of people who use the Internet does not continue to grow. A number
of factors, including unreliable service, unavailability of cost-effective,
high-speed access to the Internet or concerns about security, could impede this
growth. The infrastructure or complementary products and services necessary to
maintain the Internet as a viable commercial medium may not be developed, and,
as a result, the Internet may not continue to be a viable commercial medium for
us.
If the government adopts regulations that charge Internet access fees or
impose taxes on subscriptions to our Web-based products, our operating expenses
will increase.
Currently there are few laws or regulations that specifically regulate
communications or commerce on the Internet. However, laws and regulations may be
adopted that address issues such as pricing and the characteristics of products
and services. In addition, several connectivity companies have petitioned the
Federal Communications Commission to regulate Internet and on-line service
providers in a manner similar to long-distance telephone carriers and to impose
access fees on them. This regulation, if imposed, could increase the cost of
transmitting data over the Internet. Moreover, it may take years to determine
the extent to which existing laws relating to issues such as intellectual
property ownership and infringement, libel, obscenity and personal privacy are
applicable to the Internet. Finally, state tax laws and regulations relating to
the provision of products and services over the Internet are still developing. A
few states have tried to impose taxes on products and services provided over the
Internet. If additional states try to do so, our operating costs may increase
and we may not be able to increase the price that we charge for our products to
cover these costs. Any new laws or regulations or new interpretations of
existing laws and regulations relating to the Internet could decrease the growth
in the use of the Internet, decrease the demand for traffic on our Website,
increase our operating expenses, or otherwise adversely affect our business.
Our industry is rapidly changing.
Our industry is characterized by rapidly changing technology with
continuous improvements in both computer hardware and software. If we do not
respond effectively and on a timely basis to rapid technological change in our
industry, we will not be able to effectively sell our services and our sales
will materially decline. We must continually purchase new computer hardware and
license new computer software systems to effectively compete in our industry. In
addition, our software delivery methodologies must be able to support changes in
the software applications that are delivered to our customers. The rapid
development of new technologies increases the risk that current or new
competitors could develop products or services that would reduce the
competitiveness of our products or services. And moreover, we rely on software
providers to produce software that keeps pace with our customers' demands.
We may not successfully develop or adopt new technologies, introduce new
services or enhance our existing services on a timely basis; in addition, new
technologies, services, or enhancements we use may never achieve market
acceptance. If we fail to address these developments, we will lose sales to our
16
competitors and our business, operating results, and financial condition will be
materially adversely affected.
Risks Related to Our Common Stock
Anti-takeover actions and/or provisions could prevent or delay a change in
control.
Provisions of our certificate of incorporation and bylaws and Delaware law
may make it more difficult for a third party to acquire us, even if so doing
would be beneficial to our stockholders. These include the following:
. Our board of directors is authorized to issue of up to 10,000,000
shares of preferred stock and to fix the rights, preferences,
privileges and restrictions of those shares without any further vote
or action by the stockholders, which may be used by the Board to
create voting impediments or otherwise delay or prevent a change in
control or to modify the rights of holders of our common stock;
. Our board of directors is authorized to issue of up to 10,000,000
shares of class A common stock pursuant to which the holders of such
stock are entitled to three (3) votes for each share held, on all
matters submitted to stockholders, which voting power may be used by
the holders of such stock to create voting impediments or otherwise
delay or prevent a change in control or to modify the rights of
holders of our common stock;
. A prohibition on cumulative voting in the election of directors, which
would otherwise allow less than a majority of stockholders to elect
directors;
. Our articles of incorporation provide that Section 203 of the Delaware
General Corporation Law, an anti-takeover law, will not apply to us.
In general, this statute prohibits a publicly held Delaware
corporation from engaging in a business combination with an interested
stockholder for a period of three years after the date of the
transaction by which that person became an interested stockholder,
unless the business combination is approved in a prescribed manner.
For purposes of Section 203, a business combination includes a merger,
asset sale of other transaction resulting in a financial benefit to
the interested stockholder, and an interested stockholder is a person
who, together with affiliates and associated, owns, or within three
years prior, did own, 15% or more of our voting stock; and
. Limitations on who may call annual and special meetings of
stockholders.
Control by officers and directors could have an adverse effect on our
stockholders.
As of December 5, 2000, our directors, executive officers, and their
affiliates beneficially owned approximately 59.1% of our outstanding common
stock. John P. Gorst, our chairman of the board and chief executive officer,
beneficially owns approximately 36.0% of our outstanding common stock and M.
Carroll Benton, our chief administrative officer, secretary, treasurer and
director beneficially owns approximately 23.1% of our outstanding common stock.
As a result, these stockholders, acting together, have the ability to control
substantially all matters submitted to our stockholders for approval, including
the election and removal of directors and any merger, consolidation, takeover or
other business combination involving us, and to control our management and
affairs. This may discourage a potential acquirer from making a tender offer or
otherwise attempting to obtain control of us, which could materially adversely
affect the market price of our common stock.
17
The volatility of our stock price could adversely affect our stockholders.
There currently is a public market for our common stock, but there is no
assurance that there will always be such a market. The trading price of our
common stock is highly volatile and could be subject to wide fluctuations in
response to factors such as:
. Actual or anticipated variations in quarterly operating results;
. Announcements of technological innovations;
. New sales methodologies, contracts, products or services by us or our
competitors;
. Changes in financial estimates by securities analysts;
. Announcements of significant acquisitions, strategic partnerships, joint
ventures or capital commitments;
. Additions or departures of key personnel;
. Sales of common stock; or
. Other general economic or stock market conditions, many of which are
beyond our control.
In addition, the stock market in general, and the market for Internet-
related and technology companies in particular, have experienced extreme price
and volume fluctuations that have often been unrelated or disproportionate to
the operating performance of such companies. The trading prices of many
technology companies' stock have, during the last year, been at or near
unprecedented levels. There can be no assurance that these trading prices and
price-to-earnings predictions will be repeated. These broad market and industry
factors may materially adversely affect the market price of our common stock,
regardless of our operating performance. Historically, following periods of
volatility in the market price of a company's securities, securities class
action litigation has often been instituted against that company. The
institution of similar litigation against us could result in substantial costs
and a diversion of management's attention and resources, which could have a
material adverse effect on our business, financial condition, and results of
operations.
You should not expect to receive dividends from us.
We currently do not anticipate paying any cash dividends on our common
stock in the foreseeable future and we intend to retain our earnings, if any, to
finance the expansion of our business and for general corporate purposes. Any
payment of future dividends will be at the discretion of our board of directors
and will depend upon, among other things, our earnings, financial condition,
capital requirements, level of indebtedness, contractual restrictions, and other
factors that our board of directors deems relevant.
USE OF PROCEEDS
We will not receive any of the proceeds from the sale of the shares of
common stock offered by the selling stockholders under this prospectus. If all
currently outstanding warrants and options to purchase the shares of common
stock offered for resale in this offering were exercised, Insynq would receive
aggregate gross proceeds of approximately $11,455,699 assuming those
shareholders with cashless exercise rights use the cashless feature.
The net proceeds, if any, that we receive from the exercise of warrants and
options will be used for working capital and general corporate purposes. We may
also use all or a portion of the net proceeds for the acquisition of businesses,
products and technologies or otherwise to enter into strategic alliances. While
we from time to time have engaged, and expect to continue to engage, in
preliminary discussions with other business entities with regard to the
possibility of acquisitions or strategic alliances, as of the date of this
prospectus no discussions have resulted in any pending definitive acquisition or
strategic alliance agreements. We can give no assurances that we will be able
to reach a definitive agreement on or
18
consummate any such related transaction. Pending any uses, we intend to invest
the net proceeds from the warrant and option exercises in short-term, interest-
bearing, investment-grade securities.
The foregoing represents our current best estimate of our use of the net
proceeds derived from the exercise of the warrants and options to purchase the
shares of common stock offered in this prospectus, if any, based upon our
present plans, the state of our business operations and current conditions in
the industries in which we operate. We reserve the right to change the use of
the net proceeds if unanticipated developments in our business, business
opportunities, or changes in economic, regulatory or competitive conditions,
make shifts in the allocations of proceeds necessary or desirable.
SELLING STOCKHOLDERS
This prospectus relates to the offer and sale by the following selling
stockholders of the indicated number of shares, some of which are issuable
pursuant to warrants and/or options held by these selling stockholders. We are
not aware that any of these selling stockholders has any plan, arrangement,
understanding, agreement, commitment or intention to sell their securities. See
"Plan of Distribution." None of the following shareholders, other than Charles
Benton, the husband of our secretary, treasurer and chief administrative officer
M. Carroll Benton, has held any position or office within Insynq, nor has had
any other material relationship with us in the past three years, other than in
connection with the transactions pursuant to which the selling stockholders
acquired the warrants, options, rights to conversion and common shares.
The following table sets forth some information about the selling
stockholders for whom we are registering shares of common stock for resale to
the public. The information in the table assumes no sales are effected by the
selling stockholders other than pursuant to this registration statement, and
that all shares of common stock being registered pursuant to this registration
statement are sold. Certain of these shares have been, or will be, acquired by
the selling stockholders pursuant to:
. the exercise by Consulting & Strategy International, LLC of warrants
to purchase 2,000,000 shares of common stock, in 500,000 share
increments, at exercise prices of $1.25, $1.50, $2.00 and $2.25, in
accordance with the terms of that certain Warrant Purchase Agreement
dated February 24, 2000, and an option to purchase 600,000 shares at
an exercise price of $1.00 per share in accordance with that certain
Business Services Agreement dated November 18, 1999;
. the exercise of warrants to purchase 218,637 shares at $2.13 per share
by Robert J. Torres and 134,003 shares at $2.13 per share by Lowell
Cooper in accordance with that certain Consulting Agreement dated
October 28, 1999;
. the exercise of warrants to purchase 282,112 shares at $0.35 per share
by Hewlett-Packard under that certain Warrant Agreement dated June 1,
1999;
. the exercise of warrants to purchase an aggregate of 125,000 shares at
$3.00 per share by Timothy Horan (50,000), Raymond Betz (25,000) and
International Fluid Dynamics, Inc. (50,000) in accordance with those
certain Warrant Agreements dated May 17, 2000;
. the exercise of warrants to purchase 325,000 shares at $2.00 per share
by each of International Fluid Dynamics, Inc., subsequently
transferred to Sage Capital Management, Inc., and Garnier Holdings,
Ltd. in accordance with those certain Warrant Agreements dated July
17, 2000;
. the exercise of warrants to purchase 457,746 shares at $1.00 per share
by each of TCA Investments, Inc. and Travin Partners, L.L.L.P. in
accordance with those certain Subscription Agreements dated June 16,
2000;
19
. the exercise of warrants to purchase 57,144 shares at $3.25 per share
by The Perry Family Trust in accordance with that certain Warrant
Agreement dated April 6, 2000;
. the exercise of warrants to purchase 285,714 shares at $2.75 per share
and 285,714 shares at $3.75 per share by Plazacorp Investors Limited
in accordance with those certain Warrant Agreements dated April 26,
2000;
. the exercise of warrants to purchase 125,000 shares at $1.00 per share
by each of TCA Investments, Inc., subsequently transferred to Sage
Capital Management, Inc., and Travin Partners, L.L.L.P. in accordance
with those certain Subscription Agreements dated September 11, 2000;
. the exercise of warrants to purchase an aggregate of 1,311,820 shares
at $1.77 per share and 1,311,820 shares at $2.84 per share by our
Series A and Series B warrant holders pursuant to certain Warrant
Agreements dated February 18, 2000;
. that certain agreement between Charles Benton, the husband of our
secretary, treasurer and chief administrative officer M. Carroll
Benton, and John P. Gorst, us, and certain other parties, pursuant to
which Mr. Benton received 248,466 shares in exchange for the release
of certain potential claims; in addition, Mr. Benton previously owned
248,000 shares which are also being registered hereunder.
. that certain Settlement Agreement for 1,500,000 shares between
Kathleen McHenry, Hagens, Berman, LLP, John P. Gorst, us and
other parties.
. the exercise of warrants to purchase 100,000 shares at $0.50 per share
by Locke Liddell & Sapp LLP in accordance with that certain Warrant
Agreement dated December 7, 2000.
. an Agreement with International Fluid Dynamics, Inc. whereby the
amount due under a promissory note dated October 20, 2000 was
converted into 250,000 shares of common stock.
. an Agreement with Travin Partners, L.L.L.P., subsequently transferred
to Gerald M. Sherman, whereby the amount due under a promissory note
dated October 20, 2000 was converted into 250,000 shares of common
stock.
. an Agreement with Plazacorp Investments Limited whereby the amount due
under a promissory note dated October 20, 2000 was converted into
500,000 shares of common stock.
. an Agreement with TCA Investments, Inc. whereby the amount which could
be converted under a convertible debenture dated June 16, 2000 was
converted into 650,000 shares of common stock.
. an Agreement with Travin Partners, L.L.L.P. whereby the amount which
could be converted under a convertible debenture dated June 16, 2000
was converted into 650,000 shares of common stock.
. an Agreement with International Fluid Dynamics, Inc., subsequently
transferred to Sage Capital Management, Inc., whereby the amount due
under a promissory note dated July 17, 2000 was converted into 255,000
shares of common stock.
20
. an Agreement with Garnier Holdings, Ltd. whereby the amount due under
a promissory note dated July 17, 2000 was converted into 255,000
shares of common stock.
. an Agreement with TCA Investments, Inc., subsequently transferred to
Sage Capital Management, Inc., whereby the amount which could be
converted under a convertible debenture dated September 11, 2000 was
converted into 250,000 shares of common stock.
. an Agreement with Travin Partners, L.L.L.P., subsequently transferred
to Gerald M. Sherman, whereby the amount which could be converted
under a convertibl debenture dated September 11, 2000 was converted
into 250,000 shares of common stock.
. an Agreement with International Fluid Dynamics, Inc. under which
shares that may be "put" to us at $2.86 per share under a Registration
and Repurchase Agreement may be converted into 286,000 shares.
. an Agreement with Raymond Betz under which shares that may be "put" to
us at $2.86 per share under a Registration and Repurchase Agreement
may be converted into 143,000 shares.
. an Agreement with Timothy Horan, Jr. under which shares that may be
"put" to us at $2.86 per share under a Registration and Repurchase
Agreement may be converted into 286,000 shares.
. an Agreement with Plazacorp Investments Limited under which shares
that may be "put" to us at $2.50 per share under a Registration and
Repurchase Agreement may be converted into 1,428,730 shares.
- -----------------------------------------------------------------------------------------------------------------------
NAME NUMBER OF SHARES NUMBER OF SHARES NUMBER OF SHARES PERCENT
BENEFICIALLY OWNED BEING REGISTERED BENEFICIALLY BENEFICIALLY
PRIOR TO OFFERING UNDER OFFERING OWNED AFTER OWNED AFTER
FOR RESALE OFFERING* OFFERING
- -----------------------------------------------------------------------------------------------------------------------
Consulting & Strategy
International, L.L.C. (1) 2,600,000 2,600,000 0 0
- -----------------------------------------------------------------------------------------------------------------------
Robert Torres (2) 857,619 644,625 212,994 +
- -----------------------------------------------------------------------------------------------------------------------
Lowell Cooper 134,003 134,003 0 0
- -----------------------------------------------------------------------------------------------------------------------
Hewlett Packard 282,112 282,112 0 0
- -----------------------------------------------------------------------------------------------------------------------
Timothy Horan, Jr.(3) 786,000 786,000 0 0
- -----------------------------------------------------------------------------------------------------------------------
Raymond Betz (4) 218,000 218,000 0 0
- -----------------------------------------------------------------------------------------------------------------------
International Fluid Dynamics,
Inc. (5) 586,000 586,000 0 0
- -----------------------------------------------------------------------------------------------------------------------
Sage Capital Management, Inc. (6) 955,000 955,000 0 0
- -----------------------------------------------------------------------------------------------------------------------
Garnier Holdings, Ltd. (7) 580,000 580,000 0 0
- -----------------------------------------------------------------------------------------------------------------------
Travin Partners, L.L.L.P. (8) 1,532,746 1,532,746 0 0
- -----------------------------------------------------------------------------------------------------------------------
TCA Investments, Inc.(9) 1,107,746 1,107,746 0 0
- -----------------------------------------------------------------------------------------------------------------------
Charles Benton(10) 6,242,112 496,466 5,745,646 16.1%
- -----------------------------------------------------------------------------------------------------------------------
Kathleen McHenry(11) 1,150,000 1,150,000 0 0
- -----------------------------------------------------------------------------------------------------------------------
Hagens, Berman, LLP(11) 350,000 350,000 0 0
- -----------------------------------------------------------------------------------------------------------------------
Gerald Sherman 600,000 600,000 0 0
- -----------------------------------------------------------------------------------------------------------------------
Martin Weiner 100,000 100,000 0 0
- -----------------------------------------------------------------------------------------------------------------------
Rhea H. Laws 90,000 90,000 0 0
- -----------------------------------------------------------------------------------------------------------------------
21
- ----------------------------------------------------------------------------------------------------------------------------
NAME NUMBER OF SHARES NUMBER OF SHARES BEING NUMBER OF SHARES
BENEFICIALLY OWNED REGISTERED UNDER BENEFICIALLY OWNED PERCENT
PRIOR TO OFFERING FOR OFFERING AFTER OFFERING* BENEFICIALLY OWNED
RESALE AFTER OFFERING
- ----------------------------------------------------------------------------------------------------------------------------
Jeffrey L. Henkin 40,000 40,000 0 0
- ----------------------------------------------------------------------------------------------------------------------------
Lan Bentsen 20,000 20,000 0 0
- ----------------------------------------------------------------------------------------------------------------------------
The Perry Family Trust 114,288 114,288 0 0
- ----------------------------------------------------------------------------------------------------------------------------
Plazacorp Investors Limited (12) 2,500,158 2,500,158 0 0
- ----------------------------------------------------------------------------------------------------------------------------
Locke Liddell & Sapp LLP 100,000 100,000 0 0
- ----------------------------------------------------------------------------------------------------------------------------
Series A and B Warrant Holders
- ----------------------------------------------------------------------------------------------------------------------------
Astro Enterprises 105,792 70,528 35,264 +
- ----------------------------------------------------------------------------------------------------------------------------
Stephen Hull 126,948 84,632 42,316 +
- ----------------------------------------------------------------------------------------------------------------------------
Laron W. Kent 126,948 84,632 42,316 +
- ----------------------------------------------------------------------------------------------------------------------------
Larry McDermid 8,466 5,644 2,822 +
- ----------------------------------------------------------------------------------------------------------------------------
Larry McLanahan 211,584 141,056 70,528 +
- ----------------------------------------------------------------------------------------------------------------------------
Theodore Yvon Roy 169,266 112,844 56,422 +
- ----------------------------------------------------------------------------------------------------------------------------
Joseph Wiberg 63,474 42,316 21,158 +
- ----------------------------------------------------------------------------------------------------------------------------
Melea Johnson 10,578 7,052 3,526 +
- ----------------------------------------------------------------------------------------------------------------------------
Spencer Jones 10,578 7,052 3,526 +
- ----------------------------------------------------------------------------------------------------------------------------
David Kent 10,578 7,052 3,526 +
- ----------------------------------------------------------------------------------------------------------------------------
Jerald Kent 10,578 7,052 3,526 +
- ----------------------------------------------------------------------------------------------------------------------------
Ray Jarvis 8,466 5,644 2,822 +
- ----------------------------------------------------------------------------------------------------------------------------
Glen Hult 84,636 56,424 28,212 +
- ----------------------------------------------------------------------------------------------------------------------------
Tren Jones 42,318 28,212 14,106 +
- ----------------------------------------------------------------------------------------------------------------------------
Elaine Kent 21,162 14,108 7,054 +
- ----------------------------------------------------------------------------------------------------------------------------
Loretta Legault 42,318 28,212 14,106 +
- ----------------------------------------------------------------------------------------------------------------------------
Verna B. Campbell Trust 21,156 14,104 7,052 +
- ----------------------------------------------------------------------------------------------------------------------------
Kevin Lyle 42,318 28,212 14,106 +
- ----------------------------------------------------------------------------------------------------------------------------
Charles Destree 21,156 14,104 7,052 +
- ----------------------------------------------------------------------------------------------------------------------------
Sharon C. Smith 21,156 14,104 7,052 +
- ----------------------------------------------------------------------------------------------------------------------------
W.L. Hyndman 21,156 14,104 7,052 +
- ----------------------------------------------------------------------------------------------------------------------------
Charles L. Hyndman 21,156 14,104 7,052 +
- ----------------------------------------------------------------------------------------------------------------------------
Gann Family Trust 21,156 14,104 7,052 +
- ----------------------------------------------------------------------------------------------------------------------------
Erle R. Robertson 21,156 14,104 7,052 +
- ----------------------------------------------------------------------------------------------------------------------------
Eagle One Enterprises, Inc. 10,578 7,052 3,526 +
- ----------------------------------------------------------------------------------------------------------------------------
Bonnie Wilks 42,318 28,212 14,106 +
- ----------------------------------------------------------------------------------------------------------------------------
Barbara Eisenhour 10,578 7,052 3,526 +
- ----------------------------------------------------------------------------------------------------------------------------
James R. Stutz 12,696 8,464 4,232 +
- ----------------------------------------------------------------------------------------------------------------------------
Bill Gantry 63,474 42,316 21,158 +
- ----------------------------------------------------------------------------------------------------------------------------
Vicki Jarvis 21,162 14,108 7,054 +
- ----------------------------------------------------------------------------------------------------------------------------
Mike Noland 16,926 11,284 5,642 +
- ----------------------------------------------------------------------------------------------------------------------------
James M. Vranizan 21,162 14,108 7,054 +
- ----------------------------------------------------------------------------------------------------------------------------
Mary Crocker 4,230 2,820 1,410 +
- ----------------------------------------------------------------------------------------------------------------------------
David Cooper 4,230 2,820 1,410 +
- ----------------------------------------------------------------------------------------------------------------------------
Gary Forcum 84,636 56,424 28,212 +
- ----------------------------------------------------------------------------------------------------------------------------
Donald L. Manzano 10,578 7,052 3,526 +
- ----------------------------------------------------------------------------------------------------------------------------
Don Manzano 12,696 8,464 4,232 +
- ----------------------------------------------------------------------------------------------------------------------------
Leitze Family Trust 21,156 14,104 7,052 +
- ----------------------------------------------------------------------------------------------------------------------------
Paul Panico 25,392 16,928 8,464 +
- ----------------------------------------------------------------------------------------------------------------------------
Rebecca D. Vidrine 10,578 7,052 3,526 +
- ----------------------------------------------------------------------------------------------------------------------------
Mark Bowin 84,636 56,424 28,212 +
- ----------------------------------------------------------------------------------------------------------------------------
Aspen Ridge 74,052 49,368 24,684 +
- ----------------------------------------------------------------------------------------------------------------------------
22
- --------------------------------------------------------------------------------------------------------------------
NUMBER OF NUMBER OF
SHARES NUMBER OF SHARES PERCENT
BENEFICIALLY SHARES BEING BENEFICIALLY BENEFICIALLY
OWNED PRIOR REGISTERED OWNED AFTER OWNED AFTER
NAME FOR RESALE UNDER OFFERING OFFERING* OFFERING
- --------------------------------------------------------------------------------------------------------------------
Foster Family Trust 12,696 8,464 4,232 +
- --------------------------------------------------------------------------------------------------------------------
Aubrey & Lois Foster 21,162 14,108 7,054 +
- --------------------------------------------------------------------------------------------------------------------
Clayton Foster 10,578 7,052 3,526 +
- --------------------------------------------------------------------------------------------------------------------
Deborah Foster 10,578 7,052 3,526 +
- --------------------------------------------------------------------------------------------------------------------
Lee Foster 12,696 8,464 4,232 +
- --------------------------------------------------------------------------------------------------------------------
Shawna Foster 10,578 7,052 3,526 +
- --------------------------------------------------------------------------------------------------------------------
Carol Jones 42,318 28,212 14,106 +
- --------------------------------------------------------------------------------------------------------------------
Tawnya Jones 10,578 7,052 3,526 +
- --------------------------------------------------------------------------------------------------------------------
Peter Franklin 10,578 7,052 3,526 +
- --------------------------------------------------------------------------------------------------------------------
Gene Gladysz 42,318 28,212 14,106 +
- --------------------------------------------------------------------------------------------------------------------
Colin McKean 21,162 14,108 7,054 +
- --------------------------------------------------------------------------------------------------------------------
Northern Foods Ltd. 42,318 28,212 14,106 +
- --------------------------------------------------------------------------------------------------------------------
Michelle Visic 10,578 7,052 3,526 +
- --------------------------------------------------------------------------------------------------------------------
Christopher Yen 42,318 28,212 14,106 +
- --------------------------------------------------------------------------------------------------------------------
Linda M. Jones 48,666 32,444 16,222 +
- --------------------------------------------------------------------------------------------------------------------
Eldon Worobieff 21,162 14,108 7,054 +
- --------------------------------------------------------------------------------------------------------------------
Julian J. Villegas 42,318 28,212 14,106 +
- --------------------------------------------------------------------------------------------------------------------
Mary L. Bailey 21,156 14,104 7,052 +
- --------------------------------------------------------------------------------------------------------------------
William E. Ballard 21,156 14,104 7,052 +
- --------------------------------------------------------------------------------------------------------------------
Lavern D. Turner 21,162 14,108 7,054 +
- --------------------------------------------------------------------------------------------------------------------
Arthur Delisle Jr. 25,398 16,932 8,466 +
- --------------------------------------------------------------------------------------------------------------------
Arthur Kuntz 42,318 28,212 14,106 +
- --------------------------------------------------------------------------------------------------------------------
Steven Neumann 42,318 28,212 14,106 +
- --------------------------------------------------------------------------------------------------------------------
Steven G. Rodacker, Sr. 50,784 33,856 16,928 +
- --------------------------------------------------------------------------------------------------------------------
Orville M. Rolf 42,318 28,212 14,106 +
- --------------------------------------------------------------------------------------------------------------------
Kenneth R. Taylor 21,156 14,104 7,052 +
- --------------------------------------------------------------------------------------------------------------------
William Thompson 21,156 14,104 7,052 +
- --------------------------------------------------------------------------------------------------------------------
Glenn Whitestone 21,156 14,104 7,052 +
- --------------------------------------------------------------------------------------------------------------------
Brent A. Johnston 10,578 7,052 3,526 +
- --------------------------------------------------------------------------------------------------------------------
John H. Gorst 10,578 7,052 3,526 +
- --------------------------------------------------------------------------------------------------------------------
Robert Bailey 10,578 7,052 3,526 +
- --------------------------------------------------------------------------------------------------------------------
Brad Hageman 10,578 7,052 3,526 +
- --------------------------------------------------------------------------------------------------------------------
Peter Hummel 10,578 7,052 3,526 +
- --------------------------------------------------------------------------------------------------------------------
Rob Neiffer 10,578 7,052 3,526 +
- --------------------------------------------------------------------------------------------------------------------
David P. Allen 211,584 141,056 70,528 +
- --------------------------------------------------------------------------------------------------------------------
Donald Siedelman 31,740 21,160 10,580 +
- --------------------------------------------------------------------------------------------------------------------
Paul Allen 126,948 84,632 42,316 +
- --------------------------------------------------------------------------------------------------------------------
Bradley Casper 135,414 90,276 45,138 +
- --------------------------------------------------------------------------------------------------------------------
Loraine Callahan 10,578 7,052 3,526 +
- --------------------------------------------------------------------------------------------------------------------
Michael Farwell 10,578 7,052 3,526 +
- --------------------------------------------------------------------------------------------------------------------
Linda Levasseur 116,370 77,580 38,790 +
- --------------------------------------------------------------------------------------------------------------------
Tarina Lyth 10,578 7,052 3,526 +
- --------------------------------------------------------------------------------------------------------------------
Todd Williams 48,666 32,444 16,222 +
- --------------------------------------------------------------------------------------------------------------------
Colin Pool d/b/a ProClear 12,696 8,464 4,232 +
Services
- --------------------------------------------------------------------------------------------------------------------
TOTAL 24,242,262 17,184,796 7,057,466
- --------------------------------------------------------------------------------------------------------------------
* Assumes all shares are sold under this offering.
+ Less than 1%.
23
(1) Includes warrants to purchase 2,000,000 shares of common stock and options
to purchase 600,000 shares of common stock that are not exercisable until
May 1, 2001. These warrants have a cashless exercise feature, and the
options additionally cannot be exercised until we have received four
million in financing.
(2) Includes 425,988 Series A & B warrants to purchase shares of common stock.
(3) Includes 150,000 shares held as trustee for certain individuals as follows:
75,000 for Timothy Horan, Jr., 37,500 for Travin Partners, L.L.L.C., and
37,500 for International Fluid Dynamics, Inc. Also includes 286,000 shares
pursuant to a present right to conversion.
(4) Includes 143,000 shares pursuant to a present right to conversion.
(5) Includes warrants to purchase 50,000 shares of common stock that are not
exercisable until May 1, 2001. Also includes 286,000 shares pursuant to a
present right to conversion.
(6) Includes warrants to purchase 325,000 and 125,000 shares of common stock
that are not exercisable until May 1, 2001. The warrants to purchase
125,000 shares of common stock have a cashless exercise feature.
(7) Includes warrants to purchase 325,000 shares of common stock that are not
exercisable until May 1, 2001.
(8) Includes warrants to purchase 457,746 and 125,000 shares of common stock
that are not exercisable until May 1, 2001. The warrants to purchase
125,000 shares of common stock have a cashless exercise feature.
(9) Includes warrants to purchase 457,746 shares of common stock that are not
exercisable until May 1, 2001.
(10) Includes 5,745,646 shares owned by Mr. Benton's wife, M. Carroll Benton, as
to which Mr. Benton disclaims any beneficial ownership. The 496,466 shares
are subject to a lock up agreement for a period of 180 business days after
the effective date of the registration of the shares referenced herein,
except that Mr. Benton may sell 50,000 shares during each calendar quarter
during the term of the lock up.
(11) These shares are subject to a lock up agreement and may not be sold until
180 trading days after the effective date of the registration of the shares
referenced herein.
(12) Includes 1,428,730 shares pursuant to a present right to conversion.
Of the shares of common stock covered by this prospectus, (i)
10,671,186 have not yet been issued and the related warrants, options and rights
to conversion remain outstanding, and (ii) 1,996,466 are subject to lock up
agreements as described herein.
In connection with the issuance of shares, warrants and options to
certain selling stockholders, we agreed to file and use our best efforts to
cause to be declared effective the registration statement of which this
prospectus is a part.
We have agreed to indemnify certain of the selling stockholders
against some expenses, claims, losses, damages and liabilities (or action in
respect thereof). We have agreed to pay the expenses of registering the shares
under the Securities Act, including registration and filing fees, blue sky
expenses, printing expenses, accounting fees, administrative expenses and our
own counsel fees and those of certain of the selling stockholders not to exceed
various capped rates.
PLAN OF DISTRIBUTION
The shares covered by this prospectus may be offered and sold from
time to time by the selling stockholders. The selling stockholders may include
donees and pledgees selling shares received from one of the selling stockholders
after the date of this prospectus. The selling stockholders will act
independently of us in making decisions with respect to the timing, manner, and
size of each sale. The
24
selling stockholders may sell the shares being offered by this prospectus in the
over-the-counter market or otherwise, at prices and under terms then prevailing
or at prices related to the then current market price or at negotiated prices.
Shares may be sold by one or more of the following means of distribution:
. block trades in which the broker-dealer so engaged will attempt to
sell such shares as agent, but may position and resell a portion of
the block as principal to facilitate the transaction;
. purchases by a broker-dealer as principal and resale by such broker-
dealer for its own account pursuant to this prospectus;
. ordinary brokerage transactions and transactions in which the broker
solicits purchasers;
. privately negotiated transactions;
. broker-dealers may agree with the selling stockholders to sell a
specified number of such shares at a stipulated price per share;
. a combination of any such methods of sale; and
. any other method permitted pursuant to applicable laws.
Amendment and Supplementation Necessitated by Future Sales
To the extent required, this prospectus may be amended and supplemented
from time to time to describe a specific plan of distribution. In connection
with distributions of such shares or otherwise, the selling stockholders may
enter into hedging transactions with broker-dealer or other financial
institutions. In connection with these transactions, broker-dealer or other
financial institutions may engage in short sales of our common stock in the
course of hedging the positions they assume with the selling stockholders. The
selling stockholders may also sell our common stock short and redeliver the
shares to close out such short positions. The selling stockholders may also
enter into option or other transactions with broker-dealers or other financial
institutions which require the delivery to the broker-dealer or other financial
institution of the shares offered in this prospectus, which shares the broker-
dealer or other financial institution may resell pursuant to this prospectus (as
supplemented or amended to reflect such transaction). The selling stockholders
may also pledge their shares to a broker-dealer or other financial institution,
and, upon a default, the broker-dealer or other financial institution may effect
sales of the pledged shares pursuant to this prospectus (as supplemented or
amended to reflect such transaction). In addition, any shares that qualify for
sale pursuant to Rule 144 may be sold under Rule 144 rather than pursuant to
this prospectus.
In effecting sales, brokers, dealers or agents engaged by the selling
stockholders may arrange for other brokers or dealers to participate. Brokers,
dealers or agents may receive commissions, discounts or concessions from the
selling stockholders in amounts to be negotiated prior to the sale. These
brokers or dealers, the selling stockholders, and any other participating
brokers or dealers may be deemed to be "underwriters" within the meaning of the
Securities Act in connection with such sales, and any such commissions,
discounts or concessions may be deemed to be underwriting discounts or
commissions under the Securities Act. The selling stockholders have advised us
that they have not entered into any agreements, understandings or arrangements
with any underwriters or broker-dealers regarding the sale of their securities,
nor is there an underwriter or coordinating broker acting in connection with the
proposed sale of shares by the selling stockholders.
Other Information Regarding Future Sales
In order to comply with the securities laws of some states, if applicable,
the shares being offered in this prospectus must be sold in such jurisdictions
only through registered or licensed brokers or dealers.
25
In addition, in some states shares may not be sold unless they have been
registered or qualified for sale in the applicable state or a seller complies
with an available exemption from the registration or qualification requirement.
We will make copies of this prospectus available to the selling
stockholders and will inform them of the need for delivery of copies of this
prospectus to purchasers at or prior to the time of any sale of the shares
offered hereby. The selling shareholders may indemnify any broker-dealer that
participates in transactions involving the sale of the shares against some
liabilities, including liabilities arising under the Securities Act.
At the time a particular offer of shares is made, if required, a prospectus
supplement will be filed and distributed that will set forth the number of
shares being offered and the terms of the offering, including the name of any
underwriter, dealer or agent, the purchase price paid by any underwriter, any
discount, commission and other item constituting compensation, any discount
commission or concession allowed or reallowed or paid to any dealer, and the
proposed selling price to the public. In addition, upon being notified by a
selling stockholder that a donee or pledgee intends to sell more than 500
shares, a prospectus supplement will be filed and distributed.
Payment of Expenses
We will pay all the expenses related to the registration of the shares
offered by this prospectus, except for any underwriting, brokerage or related
fees, discounts, commissions or the fees or expenses of counsel or advisors to
the selling stockholders, except that the we will reimburse the following costs
to the following entities/individuals: Plazacorp Investors Limited - $5,000,
International Fluid Dynamics, Inc. - $2,000, Timothy Horan, Jr. - $2,000, and
Raymond Betz - $1,000.
MARKET PRICES OF COMMON STOCK AND DIVIDEND POLICY
Our common stock currently trades on the OTC Bulletin Board under the
symbol "ISNQ." Until August 3, 2000, our common stock was traded on the OTC
Bulletin Board under the symbol "XCLL." The following table sets forth, for the
periods indicated, the high and low bid and ask prices for the common stock as
reported on the OTC Bulletin Board. The table gives effect to our two-for-one
stock split that occurred on August 3, 2000. The quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not represent
actual transactions:
26
- -------------------------------------------------------------------------------
FISCAL YEAR QUARTER BID ASK
- -------------------------------------------------------------------------------
HIGH LOW HIGH LOW
- -------------------------------------------------------------------------------
1999 1st Quarter* $ 0.01 $0.01 $ 0.08 $0.08
- -------------------------------------------------------------------------------
2nd Quarter* 0.01 0.01 0.08 0.08
- -------------------------------------------------------------------------------
3rd Quarter* + + 0.05 0.05
- -------------------------------------------------------------------------------
4th Quarter* + + 0.05 0.05
- -------------------------------------------------------------------------------
2000 1st Quarter 0.01 + 0.05 0.05
- -------------------------------------------------------------------------------
2nd Quarter 0.04 0.01 0.12 0.05
- -------------------------------------------------------------------------------
3rd Quarter N/A N/A N/A N/A
- -------------------------------------------------------------------------------
*4th Quarter 10.00 2.00 12.75 2.06
- -------------------------------------------------------------------------------
2001 1st Quarter 6.25 1.75 6.38 0.06
- -------------------------------------------------------------------------------
2nd Quarter 2.50 0.69 2.75 0.72
- -------------------------------------------------------------------------------
3rd Quarter (through 0.94 0.88 1.00 0.75
December 5, 2000)
- -------------------------------------------------------------------------------
* These bid prices give effect to the following: in connection with our plan
of reorganization in its Chapter 11 bankruptcy proceeding, in July 1999,
each holder of our common stock received, pro rata, a total of .0102 shares
of common stock for each share then held.
+ Less than $0.01.
On December 5, 2000, the last reported sale price for our common stock on
the OTC Bulletin Board was $0.87 per share. On December 5, 2000, there were 923
stockholders of record of our common stock.
Holders of our common stock are entitled to dividends when, as and if
declared by the board of directors out of funds legally available therefor. We
have never paid cash dividends on our common stock, and management intends, for
the immediate future, to retain any earnings, if any, for the operation and
expansion of our business. Any future determination regarding the payment of
dividends will depend upon results of operations, capital requirements, our
financial condition and such other factors that our board of directors may
consider.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the financial statements and notes thereto included elsewhere in this
prospectus. The statements contained in this report that are not historical
facts, including, without limitation, statements containing the words
"believes," "anticipates," "estimates," "expects," and words of similar import,
constitute "forward-looking statements." Forward-looking statements are made
based upon management's current expectations and beliefs concerning future
developments and their potential effects upon the Company. Our actual results
could differ materially from those anticipated for many reasons, including risks
faced by us described in this prospectus under "Risk Factors."
27
Overview
Insynq-WA was incorporated August 31, 1998, and is a development stage
company that provides Internet Appliances, managed and hosted software services,
Web hosting services, Web-based local and wide area networks, and access to
Internet marketing assistance and related equipment and services.
In late 1999, we (then Insynq-WA) decided to target a combination with a
public company and on February 18, 2000, Xcel and Insynq-WA closed an asset
purchase transaction in which Xcel acquired substantially all of the assets of
Insynq-WA. Xcel continued the business of Insynq-WA and on August 3, 2000, at a
special meeting of its shareholders, Xcel completed a re-incorporation merger
with its wholly owned subsidiary, Insynq Inc., a Delaware corporation. Today, as
a combined entity, we continue to deliver the application hosting and managed
software services we founded incorporating Internet Appliances developed as part
of our IQ Delivery System.
Results of Operations
For the Three Months Ended August 31, 2000. During the fiscal quarter ended
August 31, 1999 (First Quarter 2000), we had limited active operations and
therefore, we believe that a comparison of the results of operations of First
Quarter 2000 to the fiscal quarter ended August 31, 2000 (First Quarter 2001),
has limited value for evaluating trends and as a basis for predicting future
results.
We incurred a net loss of $2,808,499 for the First Quarter 2001, as
compared to a net loss of $62,970 for the First Quarter 2000. The First Quarter
2001 and First Quarter 2000 losses resulted primarily from: (1) providing
discounted or free services as we test-marketed our products and services, (2)
initial network, infrastructure, and research and development costs associated
with start-up operations, and (3) increases in salaries and related benefits,
reflecting headcount increases in our technical, development, sales, marketing,
finance, accounting, and administrative staff.
Total revenue for First Quarter 2001 was $67,761, an increase of $44,299 as
compared to the First Quarter 2000. The primary sources of First Quarter 2001
revenue, which essentially did not occur in First Quarter 2000, includes: seat
subscription revenue of $42,012, managed software service revenue of $21,008,
and hardware and software sales revenue of $4,741. We expect future revenue from
all sources to trend away from our practice of providing discounts and free
offerings experienced in First Quarter 2000 as we continue to develop our sales
and implement our sales and marketing strategies, and prove our business model.
Our continued growth is significantly dependent upon our ability to
generate sales relating to our subscription and managed software services. Our
main priorities relating to revenue are: (1) increase market awareness of our
products and services through our strategic marketing plan, (2) growth in the
number of customers and seats per customer, (3) continue to accomplish
technological economies of scale, and (4) continue to streamline and maximize
efficiencies in our system implementation model.
For the Years Ended May 31, 2000 and 1999. During the year ended May 31,
1999 (Fiscal 1999), we had limited active operations, and therefore, we believe
that a comparison of the results of operations of Fiscal 1999 to the year ended
May 31, 2000 (Fiscal 2000) has limited value for evaluating trends and as a
basis for predicting future results.
28
We incurred a net loss of $3,778,867 for Fiscal 2000 and a net loss of
$143,475 for Fiscal 1999. The Fiscal 2000 and Fiscal 1999 losses resulted
primarily from: (1) providing discounted or free services as we test- marketed
our products and services, (2) initial network, infrastructure, and research and
development costs associated with start-up operations, (3) increases in salaries
and related benefits, reflecting headcount increases in our technical,
development, sales, marketing, finance, accounting, and administrative staff,
and (4) expenses related to stocks and warrants issued for services in Fiscal
2000.
Total revenue for Fiscal 2000 was $235,808, an increase of $222,192 as
compared to Fiscal 1999. The primary sources of Fiscal 2000 revenue, which
essentially did not occur in Fiscal 1999, includes: seat subscription revenue of
$162,148, managed software service revenue of $39,287, and hardware and software
sales revenue of $34,373. We expect future revenue from all sources to trend
away from our practice of providing discounts and free offerings experienced in
Fiscal 2000 as we continue to develop our sales, implement our sales and
marketing strategies and prove our business model.
Costs and Expenses
Three Months Ended August 31, 2000. During First Quarter 2001, we recorded
direct costs of services of $274,381, an increase of $235,453 over the limited
operations experienced in First Quarter 2000. Network and infrastructure costs
were $37,414 for First Quarter 2001, which is an increase of $31,464 from First
Quarter 2000.
Selling, general, and administrative costs increased to $2,132,658 in the
First Quarter 2001, an increase of $2,078,854 over the First Quarter 2000, as we
built out our infrastructure, including hiring management and support staff, and
started to develop our sales and delivery systems.
Depreciation and amortization expense increased to $72,357 in First Quarter
2001, an increase of $61,993 over First Quarter 2000, as we purchased fixed
assets, including computer equipment needed for infrastructure to support active
business operations.
Interest expense was $236,291 during First Quarter 2001 versus $18,625 in
First Quarter 2000 as a result of an increase in capital lease obligations
incurred on purchases of computer equipment needed for infrastructure to support
active business operations and as a result of interest recognized on discounts
on short-term notes and convertible debentures. Other income, decreased to $566
in the First Quarter 2001, versus $41,239, primarily due to trademark revenue
recorded in First Quarter 2000.
We recorded a $469,050 non-recurring extraordinary gain on extinguishment
of debt for First Quarter 2000 in connection with the Xcel Asset Purchase
Agreement.
For the Years Ended May 31, 2000 and 1999. During Fiscal 2000, we recorded
direct costs of services of $594,297, an increase of $550,681 over the limited
operations experienced in Fiscal 1999. Network and infrastructure costs were
$94,303 for Fiscal 2000, which is an increase of $87,265 from Fiscal 1999.
Selling, general, and administrative costs increased to $2,875,143 in
Fiscal 2000, an increase of $2,784,821 over Fiscal 1999, as we built out our
infrastructure, including hiring management and support staff, and started to
develop our sales and delivery systems. In Fiscal 2000 the company incurred
29
$105,752 in research and development costs and $97,745 in advertising expense.
Depreciation and amortization expense increased to $195,610 in Fiscal 2000,
an increase of $185,963 over Fiscal 1999, as we purchased fixed assets,
including computer equipment needed for the infrastructure to support active
business operations .
Interest expense increased to $98,611 during Fiscal 2000 versus $6,468 in
Fiscal 1999 as a result of an increase in capital lease interest expense of
$87,774 incurred on acquisition of computer equipment needed for infrastructure
to support active business operations. Other income of $46,786 was recorded in
Fiscal 2000.
Liquidity and Capital Resources
For the Three Months Ended August 31, 2000. We had cash and cash
equivalents of $0.00 at August 31, 2000, and $106,806 at May 31, 2000, and
working capital deficits of $1,319,582 and $441,029 at the same dates,
respectively.
We recently have signed several sales and marketing agreements and
management anticipates that revenues will take an upward movement as a result of
these agreements, particularly with Bridge 21, which consists of approximately
140 accounting member firms. The purchase of our ASP solution for Bridge 21 has
given us access to their member's clients and their ASP needs. Management
conservatively projects this agreement to add $300,000 per month in necessary
revenues. We are currently deploying seats in this market with great acceptance
and now have a "beta" site at a broker dealer in the securities industry. We are
configuring desktops for a February rollout at the National Investment Banking
meeting.
For the Years Ended May 31, 2000 and 1999. We had cash of $106,806 at May
31, 2000, and $501 at May 31, 1999, and working capital deficits of $441,029 and
$215,746 at the same dates, respectively.
Our continuation as a going concern is dependent on our ability to obtain
additional financing and generate sufficient cash flow from operations to meet,
and in certain cases restructure, our obligations on a timely basis. If we are
successful in obtaining sufficient additional funding to execute our business
plan, based on Pro Forma projections we would expect to achieve profitability in
late 2001.
From June 5, 2000, through December 5, 2000, we raised additional funds in
the amount of $194,280 through the exercise of options and warrants, $805,000 in
short-term loans, $1,180,000 in equity investments and a short-term promissory
note of $1,120,000 from a shareholder of the Company. This credit facility gives
us the necessary working capital through January 2001 to meet our ongoing needs
but little funds, if any, to pay our past payables. We are currently working
with our trade payable creditors to accept stock or long term payment plans.
Management believes we have been well received by our creditors and further
believes we can settle and/or restructure a significant number of these
accounts.
As of December 5, 2000, we are late in payment of certain trade payables
in the amount of approximately $619,038. If we are not able to pay such
amounts on a timely basis, it could adversely impact our financial condition and
ability to raise funding or obtain trade credit in the future. We have initiated
discussions to restructure these payables and are negotiating on other trade
payables regarding payment terms.
We currently have no arrangements or commitments for accounts or accounts
receivable financing. We believe our need for additional capital going forward
will be met from public and private debt and equity offerings, and,
increasingly, from revenues from operations as we continue to implement our
strategic plan; however, future operations will be dependent upon our ability to
secure sufficient sources of financing and adequate vendor credit.
We are currently developing and refining our acquisition and expansion
strategy. If we expand more rapidly than currently anticipated, if our working
capital needs exceed our current expectations, or if we consummate acquisitions,
we will need to raise additional capital from public and private equity and debt
sources. We cannot be sure that we will be able to obtain the additional
financings to satisfy our cash requirements or to implement our growth strategy
on acceptable terms or at all. If we cannot obtain such financings on terms
acceptable to us, our ability to fund our planned business expansion and to fund
our on-going operations will be materially adversely affected. We are presently
pursuing a variety of sources of debt and equity financings. If we incur debt,
the risks associated with our business and with owning our common stock could
increase. If we raise capital through the sale of equity securities, the
percentage ownership of our stockholders will be diluted. In addition, any new
equity securities may have rights, preferences, or privileges senior to those of
our common stock.
30
OUR BUSINESS
Except for historical information, the following description of our
business contains forward-looking statements based on current expectations that
involve risks and uncertainties. Our actual results could differ materially from
those set forth in these forward-looking statements as a result of a number of
factors, including those set forth in this prospectus under the heading "Risk
Factors."
History
One of our predecessor companies, Xcel Management, Inc., formerly known as
"Palace Casinos, Inc.," was inactive from the end of 1995 until the consummation
of an asset purchase transaction with another of our predecessor companies,
Insynq-WA. During the two-year period prior to the transaction with Insynq-WA,
Xcel and its then management worked to complete a plan of reorganization
confirmed in the United States Bankruptcy Court under Chapter 11 of the federal
bankruptcy laws, and undertook necessary steps to position Xcel to seek a new
business enterprise in which it could become involved, either through a merger
or reorganization, or an acquisition transaction. These efforts resulted in the
transaction with Insynq-WA, completed in February 2000.
Xcel was originally incorporated in the state of Utah on May 22, 1980,
under the name Ward's Gas & Oil, to engage in the oil and gas business. This
business was terminated after a few years of
31
operations. From December 1992 until approximately the end of 1995, Xcel (then
called "Palace Casinos, Inc."), was engaged, through its then wholly-owned
subsidiary, Maritime Group, Ltd., in the development of a dockside gaming
facility in Biloxi, Mississippi. In April 1994, Maritime completed the
development of the Biloxi gaming facility, "Palace Casino," and commenced
operations. On December 1, 1994, Xcel and Maritime separately filed voluntary
petitions for relief under Chapter 11 of the federal bankruptcy laws. Although
the original bankruptcy petition was filed in the United States Bankruptcy Court
for the District of Utah, Central Division, the supervision of Xcel's Chapter 11
proceedings was transferred to the United States Bankruptcy Court for the
Southern District of Mississippi. On September 22, 1995, Xcel, having been
operating as a debtor-in-possession in connection with the bankruptcy
proceeding, entered into an asset purchase agreement under the terms of which it
agreed, subject to the approval of the Mississippi bankruptcy court, to sell
substantially all of Maritime's operating assets. This transaction was approved
by the Mississippi bankruptcy court and completed in the end of 1995, with all
of the net proceeds of the transaction being distributed to creditors. Following
the completion of the sale of Maritime's Assets, Xcel had essentially no assets
and liabilities and its business operations essentially ceased, except for
efforts to complete a plan of reorganization, described below.
In February 1999, Steve Rippon and Edward D. Bagley, Xcel's management at
the time, submitted to the Mississippi bankruptcy court, as plan proponents, a
plan of reorganization, which was confirmed by the Mississippi bankruptcy court
on June 16, 1999. Under the terms of the Plan: (a) all of Xcel's priority
creditors were paid a total of $5,000; (b) unsecured creditors, holding between
$300,000 and $500,000 in claims, were issued pro rata a total of 90,000 shares
of post- bankruptcy common stock in full satisfaction of such obligations; and
(c) all of the equity holders of Xcel common stock were issued, pro rata, a
total of approximately 90,000 shares of common stock in lieu of a total of
8,794,329 shares of preferred and common stock issued and outstanding, with the
result that .0102 shares of common stock were issued for each previously
outstanding share of common stock. Under the terms of the Plan, all of Xcel's
outstanding warrants and options expired. In connection with the Plan, Messrs.
Rippon and Bagley, creditors of the estate and the plan proponents, were elected
as Xcel's officers and directors, and were issued a total of 1,620,000 shares of
common stock (810,000 shares each) in consideration of their contributions of
services and approximately $20,000 in cash provided to pay for legal services
and costs incurred in the plan confirmation process and related activities.
Following the confirmation of the plan in June 1999, Xcel completed the
plan in accordance with its terms. Immediately following the confirmation of the
plan, Xcel had a total of approximately 1,800,000 shares of common stock, par
value $0.001 per share, issued and outstanding. On December 3, 1999, the
Mississippi bankruptcy court, after reviewing the efforts by the plan
proponents, issued an order closing the bankruptcy estate.
Since the completion of the plan, Xcel undertook efforts to complete
updated financial statements, to prepare and file updated periodic reports with
the Securities and Exchange Commission, and to undertake actions to enable Xcel
to seek a business opportunity for acquisition or involvement by Xcel. These
efforts resulted in the asset purchase transaction with Insynq-WA.
On January 26, 2000, Xcel entered into an asset purchase agreement with
Insynq-WA. Insynq-WA was, since September 1998, engaged in providing hardware,
software, computer Internet and related connectivity services and products to
the small to medium size enterprise market and the small office and home office
market. On or about that same time, Insynq-WA engaged in a 1.41056 to 1 stock
split. The terms of the Insynq-WA asset purchase agreement were substantially
completed on February 18, 2000. Under the terms of the Insynq-WA asset purchase
agreement, Xcel acquired substantially all of the assets of Insynq-WA and
assumed substantially all of the obligations of Insynq-WA, in exchange for the
issuance by Xcel of a total of 7,604,050 shares of restricted common stock of
Xcel to the Insynq-WA shareholders pro rata in a liquidating distribution. As a
result of the transaction, Xcel had a total of approximately 9,404,050 shares
issued and outstanding, of which the former Insynq-WA shareholders held
7,604,050 shares, or approximately 80.9%. In connection with the Insynq-WA asset
purchase
32
agreement, Insynq-WA obtained approval of the sale of its assets by its
shareholders at a duly called and convened shareholders' meeting.
As a result of the Insynq-WA asset purchase agreement, Xcel acquired
essentially all of the assets, tangible and intangible, of Insynq-WA and became
engaged in Insynq-WA's business. These assets included computer hardware and
software, related equipment, furniture and fixtures, proprietary technology
developed by Insynq-WA, all contractual rights including capitalized lease
equipment and other leasehold rights, trade names and trademarks and all client
lists and marketing data and materials, cash and cash equivalents, accounts
receivable, inventory, work-in-progress and related assets. Xcel also assumed
essentially all of the obligations and liabilities of Insynq-WA, including
capital lease obligations on equipment, accounts payable, accrued payroll and
other business taxes, notes payable, and other liabilities. In addition to such
liabilities, Xcel agreed to assume all other contractual obligations of Insynq-
WA. In that regard, Xcel has entered into employment contracts with certain
individuals who were executives or key employees of Insynq-WA on substantially
the same terms as the terms of employment between Insynq-WA and such
individuals.
Prior to September 1998, the business which ultimately became Insynq-WA's
business was under development as a potential product/services line of
Interactive, a company wholly owned by M. Carroll Benton, our Secretary,
Treasurer and Chief Administrative Officer. In September 1998, Interactive
transferred to Charles Benton, husband of Ms. Benton and then a creditor of
Interactive, in satisfaction of a debt obligation owed by Interactive to Charles
Benton, all of Interactive's right, title and interest in and to (1) certain
equipment and other tangible personal property, and (2) the intellectual
properties, computer software, trademarks, copyrights, ideas, work-in-progress,
and other tangible and intangible property comprising the system known as the
"Insynq Project" which later developed into Insynq's IQ Delivery System. Mr.
Benton contributed all of the Insynq Project intellectual property assets to
Insynq-WA in exchange for the initial shares of common stock issued by Insynq-WA
at the time of its formation. Mr. Benton also sold the equipment and other
tangible property to the newly-formed Insynq-WA, in exchange for a note. Mr.
Benton then sold all of his shares of Insynq-WA common stock to M. Carroll
Benton and John P. Gorst, our Chief Executive Officer and Chairman of the Board.
Insynq-WA continued the development of the Insynq Project business until
February 18, 2000, when all of that business was acquired by Xcel under the
terms of the Insynq-WA asset purchase agreement.
Under the Insynq-WA asset purchase agreement, Xcel also agreed to assume
all equipment leases, leaseholder obligations covering office space utilized by
Insynq-WA, all consulting contracts, and all other contract obligations.
Finally, at the time of completion of the Insynq-WA asset acquisition, Insynq-WA
had outstanding to various shareholders a number of warrants and options which
entitled the holders to purchase shares of restricted common stock of Insynq-WA,
which warrants and options were converted into like warrants and options to
purchase shares of Xcel's common stock.
On August 3, 2000, at a special meeting of shareholders, Xcel completed a
re-incorporation merger with its wholly owned subsidiary, Insynq, Inc., a
Delaware corporation, pursuant to a Plan of Merger dated June 30, 2000. Pursuant
to the plan of merger, each shareholder of Xcel received two (2) shares of
Insynq common stock for each one (1) share of Xcel stock held on the date of the
merger.
Since February 2000, we have operated several satellite sales offices in
central and southern California and in Washington State, selling our hosted and
managed network services to small to medium enterprises. We believe our test
marketing initiative provided us with critical information regarding the
deployment of our products and services into regionally dispersed markets. In
addition to our test marketing efforts, we initiated a strategic alliance
program, which we believe has proved to be a more beneficial method of
increasing awareness and generating market share of our products and services.
We recently implemented a reorganization of our operations, both in sales
and marketing and in our executive management team and implemented certain cost-
cutting measures. We believe this
33
reorganization and the cost-cutting measures, which resulted in a workforce
reduction of approximately 20 people - mostly in sales-related positions - in
addition to changes to our executive management team, will allow us to (1)
reduce operating costs, (2) provide operational efficiencies, and (3) focus on
the development of strategic alliances in preparation for future growth
initiatives.
As part of our corporate reorganization, we consolidated our sales
activities into our corporate headquarters office in Tacoma while retaining one
California sales office. We plan a redeployment of a national direct sales
force in the future to augment our strategic alliance program.
In addition to the reorganization, retroactive to September 1,2000, we
reduced salaries and benefits for most members of executive management and
certain other employees until the earlier of three months or the receipt of
equity financing of at least $1,000,000.
The combination of the reorganization and the salary reductions will reduce
corporate overhead by approximately $100,000 per month.
The second part of our reorganization effort was a restructure of our
executive management team. We promoted James R. Leigh, III, chief technology
officer, to the position of president. We believe Mr. Leigh brings significant
technological expertise and operational knowledge to his new role; he will
continue as chief technology officer, overseeing product design and deployment.
In addition, James A. Zachman was promoted to senior vice president. He will
work closely with Mr. John P. Gorst, our chief executive officer, in developing
growth strategies and continue our strategic alliance program. Last, we
announced the departure of DJ Johnson, who we appointed as our chief financial
officer in June. Stephen C. Smith, currently the chief financial officer of ALT
Global of Carlsbad, CA, an integration company, will be our interim chief
financial officer as we conduct a nationwide search for a full-time chief
financial officer.
We believe these changes, along with our current management team, position
us well for future growth opportunities, as we now have the right mix of
technology and sales know-how to help our strategic relationships be more
effective promoting our products and services.
Our Proprietary IQ Delivery System
Our Internet Utility service and our IQ Delivery System were originally
developed by Interactive, a computer integration company located in Tacoma,
Washington. The early state of the IQ delivery system was purchased by Insynq-
WA in September 1998, and was subsequently assumed by Xcel as part of the
Insynq-WA asset purchase agreement in February 2000. The complete IQ Delivery
System includes managed network and application services, and can span from a
customer's keyboard to the Insynq Data Center. Insynq provides certain
equipment, which is kept on its customer's premises, including a simplified,
diskless workstation or thin client, and multi-function router that we manage
and maintain. The system can also include Internet-access services provided by
Global Crossing or another provider. The final piece of the system is the Insynq
Data Center, which is located at the Tacoma Technology Center, and is managed by
us. This facility, with redundant power, bandwidth, and cooling, houses our
Hewlett-Packard server equipment and Cisco routers. While we recommend that
customers use the full IQ Delivery System, they are free to choose which
components they use.
In the process of developing the IQ Delivery System, we believe we acquired
valuable technological expertise. We have created new methodologies and produced
proprietary hardware and software that we believe is essential to the
configuration and effective management of Internet-based networks and outside
deployment of shared software applications. Some of our key employees are
certified as Microsoft Systems Engineers, Microsoft Certified Professionals,
Certified Netware
34
Administrators, Certified Citrix Administrators, Certified Netware Engineers and
Certified Cisco Architects.
To support Microsoft Corporation's Windows-based applications, the IQ
Delivery System uses proprietary Citrix Systems, Inc., independent computer
architecture protocol to increase end-user performance and reduce a customer's
total cost of owning and maintaining computer hardware and software. Our
technology utilizes a simple appliance at the client site that allows us to
manage all hosted application processing functions. The centrally managed
servers also house customers' data, provide storage and backup, file and
directory security, and anti-virus protection.
The IQ Delivery System receives and transmits information in the form of
images rather than data, requiring less bandwidth than traditional client-server
configurations. Customers may connect to the IQ Delivery System via a variety of
carriers and connectivity technologies, including public access over the
Internet with encryption, through private connections, or other available access
methods. Properly scaled and provisioned connections, whether public or private,
generally provide a quality end-user experience.
A thin client is a type of simplified, diskless workstation. Internet
browser-based Thin Client devices, also called Internet appliances, allow a user
to interact with Internet content using only a monitor, keyboard, and a mouse.
The Internet appliance actually does very little since its functions are limited
to sending user instructions to an outsourced provider. Using the IQ Delivery
System, an Internet appliance communicates the user's data-entry and retrieval
commands to servers located at the Insynq Data Center, where all computing
functions are performed. Internet appliances do not have disk or tape drives,
which generally increases customer productivity by restricting users' ability to
install extraneous software applications, such as computer games, or tamper with
a computer's operating system. This access device imposes a singleness of
purpose upon the operation, and improves manageability, simplicity, and
reliability. This is the user option recommended by us.
The traditional workstation, utilizing a central processing unit, or CPU
and disk resources, constitutes the second type of customer configuration.
These customers may need to use fully equipped workstations for certain
individual seats that utilize non-Windows software applications or very
specialized, complex applications such as computer aided design, or CAD
programs. This is not our recommended option because it does not free the
customer from the technical problems and service costs associated with
maintaining this type of configuration. Customers may choose to use existing
workstations to connect to the IQ Delivery System, and can be accomplished by
using a Citrix independent computer architecture software client and a standard
network interface card, or NIC. However, because this machine uses an operating
system that Insynq does not manage, the workstation may be more susceptible to
various failures.
Once connected to the IQ Delivery System, users can acquire any of the
following computer services.
Virtual Office - We can establish a virtual office for a customer, allowing
professionals, employers, employees, clients, and customers to utilize a wide
variety of software applications and/or interact directly in a network
environment. This office is always open, irrespective of the time of day or the
user's location.
Office Suite - Customers may select from one of three (3) Office Suites as
part of the virtual desktop subscription. Customers may also select from a wide
variety of fully supported Windows-based software. We serve some vertical
markets and in many cases incorporate specialized software for these customers.
We regularly test new applications and make them available to our customers. If
a customer wishes to use Windows-based software that is not already offered for
use with our service, we may test, and subsequently configure, load, and
maintain compatible applications for an additional monthly fee.
35
Internet Connection - We may provide customers with connectivity to the
Internet at a discounted rate as part of our service.
Web Site Hosting - For an additional fee, we may put the customer's
Internet Web site on one of our servers and host the site for them. Further, we
can assist our customer in performing Web site changes and updates.
Data Back-up and Storage - The IQ Delivery System provides daily automatic
backup of customer data on high-speed tape and logs the backups. Upon request, a
customer can receive their backup data and related backup logs. On average we
provide one (1) gigabyte of data storage with each business subscription. For
larger customers, we tailor storage requirements to the customers' needs and
price it accordingly.
Security - Our IQ Delivery System generally raises the level of a
customer's computer security in several ways. First, our servers are located in
biometrically secured rooms, with keycard access. Second, customers utilizing
thin client technology additionally prevent unauthorized disk installation and
installation of extraneous software, both of which can introduce computer
corruptions and viruses. Third, access to customer data is restricted through
the use of secured application servers located at the Insynq Data Center, which
is protected by firewall filters and Internet protocol based networking rules.
Last, customer data is rarely transmitted; transmissions between the customer's
site and the servers located in the Insynq Data Center generally occur in the
form of indecipherable, encrypted images.
Redundancy - Our IQ Delivery System secures customer data on redundant disk
arrays with ready spare disk drives. We make a best effort to assure
application redundancy so that if one server fails, we can reroute customers to
similar servers, thereby minimizing customer downtime.
Overview of Internet Industry
The Internet has emerged as a global medium, enabling millions of people
worldwide to share information, communicate, and conduct business
electronically. Internet growth is expected to be driven by the increasing
number of personal computers and Internet connectivity options that can be
installed in homes and offices, the decreasing cost of personal computers, the
introduction of Internet appliances, improvements in network infrastructure, the
proliferation of Internet content and the increasing familiarity with and
acceptance of the Internet by businesses and consumers. As the number of users
has increased, the Internet has emerged as an effective means to market products
and services, helping to fuel its growth as a commercial medium.
The Internet possesses a number of unique characteristics that
differentiate it from traditional reference points: a lack of geographic or
temporal limitations; a sense of spatial freedom realized through high powered
navigation tools; fast connectivity and the shedding of one's true identity and
the adoption of an online identity; real-time access to dynamic and interactive
content; and instantaneous communication with a single individual or with groups
of individuals, effecting a flattening and broadening of interpersonal
relationships in general. In a true sense, the term cyberspace reflects another
dimension, the new frontier of our time. As a result of these characteristics,
Internet usage is expected to continue to grow rapidly. The proliferation of
users, combined with the Internet's reach and its lower cost for transmitting
data, graphics, and voice communications has created a powerful new dimension to
the conduct of business.
The commercial potential of the Internet has resulted in a proliferation of
Web sites through which a vast number of persons, businesses, and communities,
including media companies, news services, affinity groups and individuals seek
to inform, entertain, communicate and conduct business with Internet users
worldwide. New Internet businesses, such as E-Loan Inc., InsWeb Corporation, and
36
Microsoft's Expedia, have been established to offer goods and services in novel
ways using the Internet. Other popular Internet destination sites such as
FindLaw, ivillage and Xoom offer users the ability to engage and participate in
a virtual community with users of similar interests. At the same time, many
traditional media and publishing companies have transitioned their brand and
content onto the Internet, such as ABC.com, Disney.com, MSNBC.com, and Dow Jones
(The Wall Street Journal Interactive Edition). Hundreds of thousands of
corporations have established Web sites and corporate intranets and extranets to
communicate with employees, customers, and business partners over the Internet.
This rapid growth in the number of Web sites and the wide array of content
associated with them has caused the emergence of the "portal," an integrated
online service through which users can access a wide range of information and
services without having to navigate through multiple sites. Leading Internet
service providers, such as America Online, Internet software and services
companies, such as Microsoft and Netscape Communications Corporation, and
Internet search engines and directories, such as those offered by Yahoo!, Inc.,
Lycos, Inc., Excite, Inc. and Infoseek Corp., have sought to capitalize on their
positions as the most frequently visited sites on the Internet by establishing
themselves as primary portals. These companies have regularly added to their
service offerings, aggregating third party content, such as stock quotes, news
and yellow pages, and incorporating links to and from other related sites, in
order to prolong their users' visits and promote repeat usage. In this
environment, popular destination and corporate sites have found it increasingly
difficult to compete for the attention of users and to preserve user loyalty.
Many of these sites have found it necessary to add to the amount of information
and services accessible through their sites, supplementing their more targeted
or thematic content with useful third-party content and services and effectively
becoming portals themselves.
The popularity of the Internet has also resulted in the emergence of new
Internet access devices and the adaptation of traditional communications devices
for Internet access, including cellular phones, pagers, screen phones,
television set-top boxes, online kiosks, personal digital assistants and, most
recently, Internet appliances. In order to drive market acceptance of their
devices, these suppliers seek an integrated package of content and services that
is specifically designed to complement the display format and navigational
features of their devices.
In order to differentiate their services and attract the attention of users
on the increasingly crowded Internet, existing and emerging Internet portals,
destination sites and suppliers of personal computers and other Internet access
devices all need to continually expand and enrich their offerings with value-
added content and services. The objective of these companies is to effectively
increase the audience for their services in terms of both reach and frequency.
The greater the size of their audience, the greater the advertising and
electronic commerce opportunities afforded to them.
The growth of the Internet represents a significant opportunity for
businesses to conduct commerce over the Internet. One factor in this projected
growth is the increasing variety of transactions that take place on the
Internet. Initially, companies focused on facilitating Internet transactions
between businesses. More recently, however, a number of companies have targeted
business-to-consumer transactions. These companies typically use the Internet to
offer standard products and services that can be easily described with graphics
and text and that do not necessarily require a physical presence for purchase,
such as software, books, music, videocassettes, home loans, airline tickets and
online banking and stock trading. The Internet allows these companies to develop
one-to-one relationships with customers worldwide without making significant
investments in traditional infrastructure such as retail outlets, distribution
networks, and sales personnel.
As the Internet evolves into a mass medium, we believe there will be an
increasing need for outsourced business and syndication services to enable
existing and emerging Internet portals, destination sites and suppliers of
personal computers and other Internet access devices (collectively, "Internet
points-of-entry") to broaden their content offering and exploit the revenue
potential of their audience. In more traditional media such as television, radio
and print, syndicated content provided by the major television
37
networks, programming syndicators and wire services, such as Reuters and
Associated Press, has been widely used by local television stations, radio
stations and newspapers in order to augment their core programming with
additional programming and, in so doing, extend their audience reach and
retention. The diverse Internet points-of-entry similarly need a source of
syndicated content that will increase the convenience, relevancy and enjoyment
of their users' experience, thereby generating increasing dependence and/or
repeat usage and making it less likely that users will switch to another
service. Such syndicated content must be delivered to these Internet points-of-
entry through a reliable, scalable infrastructure that can ensure high-quality
service. As a result, we believe there is an opportunity for a highly focused
company to provide business software, outsourced content services and Web
hosting to small and medium sized businesses.
Strategic Plan
We have targeted the following businesses as our primary markets: (1)
businesses with multiple office locations, (2) businesses with a highly mobile
workforce, and (3) high-growth and startup organizations.
We believe we are different from our competitors because we fill the real
need of enterprises, who require reliable information technology including
propriety and off-the-shelf software, hardware, and all related services at a
cost-effective price. Our challenge is to educate our target markets on the
cost savings associated with hosted Web-based computing as an alternative to
traditional local area networks and client-server implementations. We will
position our product and service offerings as the high-quality, value-added
alternative to traditional computing models.
We will promote, market and sell our services in order to achieve our goals
primarily through indirect channels involving strategic relationships with
Internet service providers, connectivity companies, independent software vendors
(ISV), managed service providers, other application service providers, or ASPs,
and telephone and computer hardware and software resellers. By focusing heavily
on the education of our reseller channels, we hope to penetrate a large part of
our target markets with a concise and planned approach; there is no assurance,
of course, that we will be successful in accomplishing our goal.
While we believe that it is paramount that we remain focused on our plan,
we must have the ability inherent in small companies to adapt to changing market
conditions.
In addition to internally generated growth, we intend to expand our
business through strategic acquisitions in the United States and possibly
abroad. We believe our acquisitions should allow us to accelerate our
penetration of key geographical markets, broaden our offerings of products and
services, and expand our technical staff and sales force.
Recent Reorganization
Until recently, we operated several satellite sales offices in central and
southern California and in Washington State, selling our hosted and managed
network services to small to medium enterprises. We completed our test marketing
recently allowing us to focus on our strategic alliance program, which we
believe has proved to be a more beneficial method of increasing awareness and
generating market share of our products and services.
We recently implemented a reorganization of our operations, both in sales
and marketing and in our executive management team and implemented certain cost-
cutting measures. We believe this reorganization and the cost-cutting measures,
which resulted in a workforce reduction of approximately 20 people - mostly in
sales-related positions - in addition to changes to our executive management
team,
38
will allow us to (1) reduce operating costs, (2) provide operational
efficiencies, and (3) focus on the development of strategic alliances in
preparation for future growth initiatives.
As part of our corporate reorganization, we consolidated our sales
activities into our corporate headquarters office in Tacoma while retaining one
California sales office. We plan a redeployment of a national direct sales force
in the future to augment our strategic alliance program.
In addition to the reorganization, retroactive to September 1, we reduced
salaries and benefits for certain members of executive management and certain
other employees until the earlier of three months or the receipt of equity
financing of at least $1 million.
The combination of the reorganization and the salary reductions will reduce
corporate overhead by approximately $100,000 per month.
Sales and Marketing
Our market research and test marketing efforts have resulted in our
targeting the small to medium size enterprise market and the small office and
home office market. Although specific definitions for these market segments
vary somewhat, we view the high end small office and home office market to
represent small offices with up to 10 employees, and the small to medium size
enterprise market to represent companies that employ approximately 11 to 100
people. We will occasionally pursue larger opportunities.
The report dated August 1999 produced by Cahners In-Stat-Group entitled
"Small Company Problems, Future Web-based Computing Solutions: Demand for
Application Services in the Small and SOHO Business Market" found that the
market has never been better for the ASP industry, particularly for service
providers targeting small companies. Customers' increased understanding of
technology, pressures to implement business strategies over the Internet, and
growing confidence in the Internet has set the stage for what we expect to be a
booming market.
In relation to the small to medium size enterprise market, Cahners In-Stat
Group states the following:
. small companies will spend more than $7 billion on application services by
2004, and the majority of the spending will likely be part of broadband
connectivity;
. by 2004, Cahners In-Stat estimates more than 3 million small companies will
use application services, likely subscribing to them through a carrier or
broadband connectivity provider; and
. In-Stat believes carriers will emerge as the most influential channel for
ASPs targeting small companies, as these vendors will focus on re-
positioning themselves as "business service providers," endeavoring to
surround their customers with business solutions in addition to high-speed
connectivity.
We believe the small to medium size enterprise market is very dependant on
reliable information technology. Computers are used for a range of functions
including accounting, shipping, inventory, internal and external communications,
and personal productivity. Small enterprises are typically not large enough,
however, to have dedicated information technology departments like those found
in larger businesses. This, coupled with deficiencies in software automation and
the associated networks to run them, has impeded their efficiency and ability to
compete with more technically enabled competitors.
As a result, many small to medium size enterprise customers have become
willing to outsource their information technology and software application
hosting to ASPs. We believe this outsourcing
39
decision allows these companies to focus on their core competencies rather than
the nuisance and overhead associated with managing an information technology
infrastructure. The outsourced information technology services and pay-as-you-go
application subscription that we provide enables our customers to enjoy the most
advanced computing capabilities available, with higher reliability, and at a
lower cost than these companies are currently experiencing.
Our target small office and home office customer is as dependent on
reliable information technology as any other business. We believe our standard
small office and home office customer will be a multi- user installation using
desktop publishing, accounting, Internet, and administration software as well as
job specific software needs. We believe we will be able to offer an attractive
proposition to the service-oriented and security-oriented buyers for a cost-
effective price.
We target professional firms including: graphic artists, writers,
consultants, accountants, lawyers, doctors and dentists. We also target
individuals who maintain home offices for part-time or personal use.
We leverage existing relationships to dramatically accelerate market
penetration and reduce the cost of producing new sales. We are currently
pursuing a three-pronged distribution approach, with plans to pursue a fourth
channel as the market matures. The first three channels of distribution
include: telecommunication providers, independent software vendors, and direct
sales. The fourth channel is retail.
We target telecommunication providers to tap new revenue streams through
their sales organizations. Second, we will develop sales through alternate
channels involving a variety of companies whose core competencies complement
ours. Several key information technology and carrier market drivers are
reshaping the direction of this segment. The channel sales department will
leverage these changes to develop a significant value proposition that can be
used by the carrier sales channels as an enhancement and differentiator for
their core product offerings.
The independent software vendor market is comprised of thousands of U.S.
software companies. In late 1999, our research revealed that a large percentage
of traditional client-server independent software vendors were in the early
stages of determining how the Web-based model of application delivery would fit
in with their respective businesses. Many prominent independent software
vendors are seeing declines in revenue from Fortune 1000 companies as this
market saturates. A number of these independent software vendors conducted
market research, which subsequently identified a significant recurring revenue
stream that promised not to negatively impact their traditional revenue sources
including client-server software sales and installations.
As a result, a growing number of independent software vendors are turning
toward the small to medium size enterprise market for growth. We differentiate
ourselves by offering a complete delivery system and offer a unique strategic
alliance approach that includes both joint marketing and joint sales efforts.
Competition
We compete in a highly competitive market for computer services. The
principal competitive factors include technical innovation to meet dynamic
market needs, product performance and reliability, ease of installation and use,
customer service and support, marketing, and financial strength.
There are several segments within the application-hosting industry.
Companies that are not currently focused on our target markets will not be
discussed in this prospectus. We have identified the following ASP competitors
in our target markets.
40
Identified as a primary ASP competitor, FutureLink is backed by $35 million
in funding and is a public company. A viable contender for the independent
software vendor market, FutureLink places higher emphasis on larger
organizations with larger seat counts.
Breakaway Solutions is a pure ASP, providing sales and support for vertical
applications that include Vignette's e-marketing software, Silknet's eCRM,
OnDisplay's Centerstage product suite and Brio's Internet portal and analytic
tools.
Originating in Norway, Telecomputing recently established a U.S.
headquarters in Fort Lauderdale, Florida. While being a viable contender for
the mid-market, Telecomputing does not appear to pose a present threat to us in
our target markets, having a higher emphasis on larger companies with larger
seat counts.
Corio, Inc. and U.S. Internetworking also compete in the ASP market,
although their primary focus is on the middle market, a segment that we are not
specifically targeting with our marketing efforts.
Government Regulation
There are currently few laws or regulations directly governing access to,
or commerce upon, the Internet. Due to the increasing popularity and use of the
Internet, it is possible that a number of laws and regulations may be adopted
with respect to the Internet, covering issues such as user privacy, pricing and
characteristics and quality of products and services.
Such legislation could dampen the growth in the use of the Internet
generally and decrease the acceptance of the Internet as a communications and
commercial medium, and could, thereby, have a material adverse effect on our
business, results of operations and financial condition. Other nations,
including Germany, have taken actions to restrict the free flow of material
deemed to be objectionable on the Internet. In addition, several connectivity
carriers are seeking to have connectivity over the Internet regulated by the
Federal Communications Commission, or FCC, in the same manner as other
connectivity services. For example, America's Carriers Connectivity Association
has filed a petition with the FCC for this purpose. In addition, because the
growing popularity and use of the Internet has burdened the existing
connectivity infrastructure and many areas with high Internet use have begun to
experience interruptions in phone service, local telephone carriers, such as
Pacific Bell, have petitioned the FCC to regulate ISPs and online service
providers, or OSPs, in a manner similar to long distance telephone carriers and
to impose access fees on the ISPs and OSPs. If either of these petitions is
granted, or the relief sought therein is otherwise granted, the costs of
communicating on the Internet could increase substantially, potentially slowing
the growth in use of the Internet, which could in turn decrease the demand for
our products.
Also it is possible that laws will be adopted or current laws interpreted
in a manner to impose liability on online service providers, such as us, for
linking to third party content providers and other Internet sites that include
materials that infringe copyrights or other rights of others. Such laws and
regulations if enacted could have an adverse effect on our business, operating
results and financial condition. Moreover, the applicability to the Internet
upon the existing laws governing issues such as property ownership, copyright
defamation, obscenity and personal privacy is uncertain, and we may be subject
to claims that our services violate such laws. Any such new legislation or
regulation or the application of existing laws and regulations to the Internet
could have a material adverse effect on our business, operating results and
financial condition.
In addition, as our products and services are available over the Internet
in multiple states and foreign countries, such jurisdictions may claim that we
are required to qualify to do business as a foreign corporation in each such
state or foreign country. We are qualified to do business only in the states of
Washington and California, and our failure to qualify as a foreign corporation
in a jurisdiction where we
41
are required to do so could subject us to taxes and penalties and could result
in the our inability to enforce contracts in such jurisdictions. Any such new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to the Internet and other online
services could have a material adverse effect on our business, results of
operations and financial condition.
At present, we do not collect sales or other similar taxes in respect of
sales and shipments of our products through Internet purchases. However,
various states have sought to impose state sales tax collection obligations on
out-of- state direct marketing companies similar to us. A successful assertion
by one or more of these states that it should have collected or be collecting
sales tax on the sale of our products could result in additional costs and
corresponding price increases to its customers. The U.S. Congress has passed
legislation limiting for three years the ability of states to impose taxes on
Internet-based transactions. Failure to renew this legislation could result in
the broad imposition of state taxes on e-commerce.
Customer Services
Our Customer Support Service is comprised of Customer Service
Representatives, Customer Support Representatives (the Help Desk) and is further
supplemented by Senior Technical Support Representatives consisting of
Microsoft, Citrix, Novell and Cisco Certified Engineers and Insynq Server
Technicians. The Help Desk is available via toll-free telephone lines to offer
support for any aspect of the IQ Delivery System.
Intellectual Property and Proprietary Rights
We regard our service marks, trademarks, domain names, and similar
intellectual property as critical to our success. We have applied for federal
trademark or service mark registration of a number of names and terms, including
"Insynq," "Your Internet Utility Company," "Interlynq," and "Idesq." Our domain
names include, INSYNQ.com, ON-Q.net, SIMPLENETWORKS.net, APPLICATIONVAULT.com,
MESSAGEIQ.com, OURACCOUNTING.com, OURBOOKEEPER.com, and RAPIDNETWORKS.com, all
of which are now owned by the Company. We have also applied for a patent
covering our multi-platform network application management and connectivity
system: our InterLynQ and IdesQ CPE solution.
We rely on trademark, unfair competition and copyright law, trade secret
protection and contracts such as confidentiality and license agreements with our
employees, customers, partners, and others to protect our proprietary rights.
Despite precautions, it may be possible for competitors to obtain and/or use the
proprietary information without authorization, or to develop technologies
similar to our and independently create a similarly functioning infrastructure.
Furthermore, the protection of proprietary rights in Internet-related industries
is uncertain and still evolving. The laws of some foreign countries do not
protect proprietary rights to the same extent as do the laws of the United
States. Protection for proprietary rights in the United States or abroad may not
be adequate.
We intend to continue to license certain technology from third parties such
as Citrix, Microsoft, and others, for our technologies that support business
systems. The market is evolving and we may need to license additional
technologies to remain competitive. We may not be able to license these
technologies on commercially reasonable terms or at all. In addition, we may
fail to successfully integrate licensed technology into our operations.
Although we have not yet experienced infringement or misappropriation of
our intellectual property or similar proprietary rights, it may be anticipated
that infringements and misappropriations will occur as our business grows and
there is more brand loyalty attaching to our trade names and domain names. We
intend to police against infringement or misappropriation. However, we cannot
guarantee that
42
we will be able to enforce our rights and enjoin the alleged infringers from
their use of confusingly similar trademarks, service marks, telephone numbers,
and domain names.
In addition, third parties may assert infringement claims against us. We
cannot be certain that our technologies or trademarks do not infringe valid
patents, trademarks, copyrights, or other proprietary rights held by third
parties. We may be subject to legal proceedings and claims from time to time
relating to the intellectual property of others in the ordinary course of our
business. Intellectual property litigation is expensive and time-consuming and
could divert management resources away from running the business.
Employees
We currently have approximately 31 employees, including management and
clerical, approximately 15 technical people, and an additional 5 marketing and
sales personnel.
Management
Our board of directors consists of John P. Gorst, M. Carroll Benton and
David D. Selmon, each of whom took this position upon or shortly after the
consummation of the asset purchase on February 18, 2000, and continued in these
positions after the reincorporation merger effected on August 3, 2000. Our
executive officers include: John P. Gorst, chief executive officer and chairman
of the board, M. Carroll Benton, chief administrative officer, secretary and
treasurer, James R. Leigh, III, president and chief technology officer, William
G. Hargin, executive vice president of marketing, James A. Zachman as senior
vice president, and Joanie C. Mann, vice president of operations. In September
2000, DJ Johnson resigned his position as our chief financial officer, and we
appointed Stephen C. Smith as our interim chief financial officer while we
conduct a nationwide search for a full-time chief financial officer.
We recently implemented a reorganization of our operations, both in sales
and marketing and in our executive management team. As part of our corporate
reorganization, we restructured our executive management team. We promoted
James R. Leigh, III, chief technology officer, to the position of president. We
believe Mr. Leigh brings significant technological expertise and operational
knowledge to his new role; he will continue as chief technology officer,
overseeing product design and deployment.
In addition, we promoted James A. Zachman to senior vice president. He
will work closely with Mr. John P. Gorst, our chief executive officer, in
developing growth strategies and continue our strategic alliance program. Last,
we announced the departure of DJ Johnson, who we brought on in June as our chief
financial officer. Stephen C. Smith, currently the chief financial officer of
ALT Global of Carlsbad, CA, an integration company, is our interim chief
financial officer as we conduct a nationwide search for a full-time chief
financial officer.
Need For Additional Capital
In order to execute our long-term and short-term strategic plans and to
continue our operations, we need to continue to raise funds through public or
private debt or equity financings. Consistent with this approach, we have
entered into various non-exclusive financial advisory agreements, including, but
not limited to, a non-exclusive financial consulting agreement with Union
Atlantic LC and Union Atlantic Capital LC to provide financial consulting
services to us. Pursuant to the terms of the Union Atlantic agreement, we have
agreed to pay to Union Atlantic a cash fee equal to ten percent (10%) of the
aggregate purchase price of the securities purchased by or through any investor
or intermediary identified to us by Union Atlantic. In addition, upon the
closing of each transaction contemplated in the Union Atlantic agreement, we
have agreed to issue to Union Atlantic through escrow a warrant entitling Union
Atlantic or its designees to purchase 50,000 shares per one million dollars
($1,000,000) raised, subject to
43
adjustment of our common stock. The warrant will be immediately exercisable for
a four (4) year period and shall have unlimited piggyback registration rights.
In addition, we entered into a Contract of Engagement with Cardinal
Securities, L.L.C. to provide non-exclusive, general financial advisory
services. Pursuant to the terms of the Cardinal agreement, we have agreed to
pay to Cardinal a cash fee equal to seven percent (7%) of the face amount of any
Cardinal private placement which occurs. In addition, Cardinal will receive
fifty thousand (50,000) warrants to purchase shares of our common stock for each
one million dollars ($1,000,000) raised, which warrants shall be registered on
the investor's registration statement and be exercisable for a period of five
(5) years at one hundred twenty percent (120%) of the closing price on the date
the private placement closes.
We also entered into an agreement with Gerard Klauer Mattison & Co., Inc.
(GKM) on May 15, 2000, to be our exclusive financial advisor. On October 20,
2000, we gave the required thirty (30) days' notice to terminate this agreement.
There can be no assurance that we will be able to raise additional capital
through any such financial advisory arrangements, including, but not limited to,
Union Atlantic or its affiliates or Cardinal.
PROPERTIES
Our headquarters are located in Tacoma, WA, and consist of approximately
6,629 square feet of office space under a lease expiring October 31, 2002. The
lease provides that upon notice, we can add an additional 840 square feet. In
addition, we lease space in the Tacoma Technology Center under an 18-month lease
expiring December 2000 with automatic renewal provisions. As a result of our
recent reorganization, we are in the process of sub-leasing additional office
space in Tacoma, WA, and are continuing to lease office space in Newport Beach,
CA. We believe that these facilities are adequate for our current operations.
LEGAL PROCEEDINGS
As described under "Description of Business," in December 1994, our
predecessor, Xcel, and its then wholly owned subsidiary, filed voluntary
petitions under Chapter 11 of the Federal Bankruptcy Code. As a result of these
filings, all litigation against Xcel was stayed. In June 1999, Xcel's new
management submitted a Plan of reorganization that was confirmed by the
Mississippi bankruptcy court. On December 3, 1999, the Mississippi bankruptcy
court issued an order closing the bankruptcy estate. As a result of these
proceedings, Xcel was not a party to any material pending legal proceedings.
On August 14, 2000, Kathleen McHenry (McHenry), the widow of a former
shareholder of Insynq-WA, filed a lawsuit in the Superior Court of Washington
against us, Insynq-WA, Ms. Benton, and Mr. Gorst. In May 1999, Mr. Gorst and Ms.
McHenry entered into an agreement (the McHenry Agreement) whereby Ms. McHenry
sold to Mr. Gorst 2,500,000 shares of Insynq-WA left to her after her husband's
death. The lawsuit alleged that both Mr. Gorst and Insynq-WA did not perform
under the McHenry Agreement, and sought a rescission of that agreement, a
decision from the court that the agreement was unenforceable, and damages in an
unspecified amount. The parties have now reached a resolution of the lawsuit.
Mr. Gorst has agreed to provide 1,500,000 of our shares held by him to Ms.
McHenry in exchange for a complete release by Ms. McHenry of us, Gorst, Benton
and Insynq-WA, as well as a dismissal of the lawsuit with prejudice. Mr. Gorst
is retaining the right to vote, by proxy, the 1,500,000 shares being returned to
Ms. McHenry for so long as Ms. McHenry continues to own such shares. Ms.
McHenry's counsel is receiving 350,000 of the shares being returned to Ms.
McHenry in payment of their legal fees, and Mr. Gorst is retaining the right to
vote, by proxy, all such shares for so long as Ms. McHenry's counsel continues
to own such shares.
44
On October 23, 2000, Donald L. Manzano, our former president and chief
operating officer, filed a lawsuit against us in the Superior Court of
California, Placer County. The lawsuit alleges that the Company breached a
written employment contract and an alleged oral employment contract, breached an
alleged duty of good faith and fair dealing, committed fraud and deceit, and
intentionally inflicted emotional distress upon him. Each of Mr. Manzano's
allegations relate to the cessation of his employment with the Company in
approximately June 2000. He alleges that he has been damaged in an amount in
excess of $3,000,000, the majority of such alleged damages stemming from his
allegation that he may be unable to obtain employment with other employers in a
position with compensation comparable to that which he alleges the Company would
have paid him had his employment continued with the Company. He also seeks
punitive damages. The Company strenuously denies Mr. Manzano's allegations and
intends to vigorously defend against the lawsuit.
We have received correspondence from a shareholder which appears to
threaten litigation against us. The allegations against us are vague, but appear
to relate to the shareholder's belief that we have not timely registered
warrants held by the shareholder. We strenuously deny that we have improperly
delayed the registration of any shareholders' stock or warrants and will
vigorously defend any litigation if brought by the shareholder. Further, the
stock subject to the warrants of which the shareholder complains are being
registered on this Form SB-2.
Certain of our series A and Series B warrantholders have indicated that
they may file suit against us if they do not receive registration rights
satisfactory to them for their shares.
MANAGEMENT
Directors
The names of our directors, their principal occupations, and the year in
which each of our current directors initially joined the board of directors are
set forth below.
Name Age Position
- --------------------------------------------------------------------------------
John P. Gorst 32 Chairman of the Board, Chief Executive Officer and
Director
M. Carroll Benton 56 Chief Administrative Officer, Secretary, Treasurer
and Director
David D. Selmon 43 Director
John P. Gorst has served as our chairman of the board, chief executive
officer and director since February 2000, and served as our president from June
2000 to September 2000. Mr. Gorst was a co-founder of Insynq-WA. Mr. Gorst has
over twelve (12) years experience in founding entrepreneurial technology
ventures, specifically in the development of software and data services for
businesses. The prior experience of Mr. Gorst includes serving as vice president
and general manager of Interactive, and a training/IS consulting business in
conjunction with Nynex Business Centers of New York.
M. Carroll Benton has served as our chief administrative officer,
secretary, treasurer and director since February 2000. Ms. Benton was a co-
founder of Insynq-WA. Ms. Benton directed and managed our fiscal
responsibilities prior to the hiring of a chief financial officer in June 2000.
Ms. Benton's early career spanned both the public and private sectors working
45
largely with banking systems and higher education institutions, assisting in the
development and deployment of computer systems. Ms. Benton is the sole owner of
Interactive.
David D. Selmon has served as our director since February 2000. Mr. Selmon
is a certified tax professional and has practiced with David Selmon, Inc. since
1982. In August 1999, Mr. Selmon, without admitting or denying the allegations
raised in a complaint by the National Futures Association, or NFA, agreed to
withdraw from the NFA in all capacities and to refrain from applying in the
future for any status with the NFA.
There are no family relationships among any of our directors or executive
officers. See "Certain Relationships and Related Transactions" for a description
of transactions between us and our directors, executive officers or their
affiliates.
In a consulting agreement we assumed with One Click Investments, LLC,
originally entered into on September 20, 1999, with Insynq-WA, One Click was
granted the right to appoint one (1) person to serve on our board of directors.
One Click has not yet exercised the right to appoint a member to our board.
In a business services agreement we assumed with Consulting & Strategy
International, LLC, originally entered into on November 18, 1999, with Insynq-
WA, CSI was granted the right to appoint two (2) persons to serve on our board
of directors, such members not to exceed forty percent (40%) of our board,
subject to our stock becoming publicly traded. Pursuant to the purchase of
Insynq-WA by Xcel, our stock began trading publicly on February 18, 2000. CSI
has not yet exercised its right to appoint two members to our board.
Executive Officers
Our executive officers as of December 5, 2000 are as follows:
NAME AGE POSITION WITH INSYNQ, INC.
- ---- --- --------------------------
John P. Gorst 32 Chairman of the Board, Chief Executive
Officer and Director
James R. Leigh, III 31 President and Chief Technical Officer
Stephen C. Smith 51 Interim Chief Financial Officer
M. Carroll Benton 56 Secretary, Treasurer, Chief Administrative
Officer and Director
William G. Hargin 39 Executive Vice President of Sales and
Marketing
James A. Zachman 38 Senior Vice President
Joanie C. Mann 39 Vice President of Operations
Information concerning the business experience of Mr. Gorst and Ms. Benton
is provided under the caption "Directors" above. Set forth below is information
concerning the business experience of our other executive officers.
James R. Leigh, III has served as our president since September 2000 and as
our chief technical officer since February 2000. Prior to being named chief
technology officer, he served as our director of technical services. Mr. Leigh
is a Microsoft certified systems engineer and Citrix certified administrator
with an extensive background in IBM AS/400 midrange systems administration and
database
46
management. Before joining us, Mr. Leigh worked as a technical consultant for
Analysts International Corporation.
Stephen C. Smith has served as our interim chief financial officer since
September 2000. Mr. Smith is currently the chief financial officer of ALT Global
of Carlsbad, CA, an integration company. Mr. Smith brings over 30 years of
experience to our management team, and has agreed to join us on an interim basis
as we conduct a nationwide search for a replacement chief financial officer.
William G. Hargin has served as our executive vice president of sales and
marketing since July 2000. Prior to July 2000, Mr. Hargin served as director of
international business development for PADS Software, Inc., and previously as
the director of sales at HyperLynx, Inc. Prior to that Mr. Hargin worked as a
consultant for Apple Computer and for Microsoft Corporation, and as an engineer
at Boeing Aerospace and Electronics.
James A. Zachman has served as our senior vice president since September
2000. Mr. Zachman was our vice president of sales from January 2000 to June 2000
and vice president of our business development from June 2000 to September 2000.
Mr. Zachman brings over 13 years of senior sales management experience to our
team. Prior to joining us, Mr. Zachman held sales and marketing positions within
the computer services and EDI industries, and brings with him over 14 years of
on-line transaction oriented service industry experience. Mr. Zachman's
experience working with several of the industry's leading providers of
transaction and outsourcing data processing firms includes National Data
Corporation, EDS, American Express, and Shared Medical Systems.
Joanie C. Mann has served as our vice president of operations since July
2000. She brings to us over 18 years of experience in multi-user system design
and implementation, voice and data networking, and advanced network
integrations. Ms. Mann also has extensive experience in business process
automation and a strong background in business accounting principles. Previous
positions held include founder of Com-Pacific Resources, Inc., a network
integration firm whose business operations were sold to Communications World
International; manager of the Seattle-based computer telephony and data
integration division of Commworld; and IS Management Consultant for Interactive.
Directors' Compensation
Pursuant to a consulting agreement we entered into with David D. Selmon,
Mr. Selmon will receive 3,500 shares of our common stock for each full fiscal
quarter he serves on our board beginning June 1, 2000. Mr. Selmon also receives
$250 for each Board meeting attended. To date, Mr. Selmon has received 7,000
shares.
Compensation of Executive Officers
The total compensation for the two fiscal years ended May 31, 2000 of John
P. Gorst, our chief executive officer (and the chief executive officer of Xcel
prior to its merger with Insynq), Donald L. Manzano, our former president and
chief operating officer, and James R. Leigh, III, our president and chief
technology officer (the named executive officers), is set forth below in the
following Summary Compensation Table. No other person received cash compensation
in excess of $100,000 during the fiscal year ended May 31, 2000.
47
Summary Compensation Table (1)
Annual Compensation Long-Term Awards
------------------- ----------------
Securities
----------
Name and Principal Other Annual Underlying Options All Other
- ------------------ ------------ ------------------ ---------
Position Year Salary ($)(3) Bonus ($) Compensation ($)(5) (#) Compensation ($)
- -------- ---- ------------- --------- ------------------ --- ----------------
John P. Gorst
President, Chief
Executive Officer and 2000 $107,919 $1,624 $20,129 3,000,000 (6) -
Director 1999 53,731 - - -
Donald L. Manzano (2)
Former President and 2000 123,250 575 - 196,632 -
Chief Operating Officer 1999 - - - - -
James R. Leigh, III
Chief Technical 2000 74,957 1,624 25,000(4) 780,000 -
Officer 1999 48,125 250 - - -
(1) The compensation described in this table does not include medical, group
life insurance or other benefits received by the named executive officers
that are available generally to all of our salaried employees, and may not
include certain perquisites and other personal benefits received by the
named executive officers that do not exceed the lesser of $50,000 or ten
percent (10%) of any such officer's salary and bonus disclosed in the
table.
(2) Mr. Manzano served as president and chief operating officer from July 20,
1999, through June 15, 2000. We no longer employ him in any capacity.
Under the terms of his employment agreement, 196,632 shares have vested and
are exercisable at any time before February 21, 2005, at an exercise price
of $0.71. We are currently in litigation with Mr. Manzano about any
additional terms regarding the termination of his employment and the
receipt of any additional compensation.
(3) Includes compensation from Insynq-WA during such period.
(4) These shares were returned to the Company on November 30, 2000.
(5) Includes non-cash compensation for services performed for us.
(6) Represents options for class A common stock granted under the Executive
LTIP.
Option Grants During Last Fiscal Year
Long Term Incentive Awards
The following table provides information related to long-term incentive
awards granted to our named executive officers during the fiscal year ended May
31, 2000. The information in this table reflects options granted by the board
of directors under our 2000 Executive Long Term Incentive Plan and our 2000 Long
Term Incentive Plan, which plans were approved by our stockholders on August 3,
2000. Options granted to Mr. Gorst vest according to specific company-related
goals.
48
Long Term Incentive Plan - Awards in Last Fiscal Year
- --------------------------------------------------------------------------------------------------------
Awards
------------------------------------------------------
Number of Shares
Units or Other Rights Performsnce Or Other Period
Name and Principal Location Fiscal Year (#) Until Maturation Or Payout
- --------------------------------------------------------------------------------------------------------
John P. Gorst, Chairman of the
Board, Chief Executive Officer 2000 3,000,000 (1)(2)
and Director
Don Manzano, former President
and Chief Operating Officer 2000 196,632 (3)
James R. Leigh, III
Chief Technical Officer 2000 780,000 (4)
- --------------------------------------------------------------------------------------------------------
(1) This includes 2,000,000 options exercisable as of May 31, 2000.
(2) Our board of directors previously granted nonqualified stock options to
acquire shares of class A common stock to John P. Gorst and M. Carroll
Benton with a strike price equal to $0.20, which reflected the board's
determination of the fair market value of such shares on February 21,
2000. Based on its recent determination that the actual fair market value
of a share of our Class A Common Stock on February 21, 2000 was $1.00 per
share, our Board of Directors has increased the exercise price of the
options issued to Mr. Gorst and Ms. Benton to $1.00 per share which, post-
split, equals $0.50 per share.
(3) Mr. Manzano served as president and chief operating officer from July 20,
1999 through June 15, 2000. We no longer employ him in any capacity. Under
the terms of his option agreement, 196,632 shares have vested and are
exercisable at any time before February 21, 2005, at an exercise price of
$0.71. We are currently in litigation with Mr. Manzano regarding the
termination of his employment and his receipt of any additional stock
options.
(4) Includes 50,000 options that are currently exercisable at an exercise
price of $0.50 and 730,000 options which will vest and are exercisable at
an exercise price of $1.00 as follows: 243,332 shares on February 20,
2001, and thereafter in increments of 1/24 (20,278) each month beginning
March 20, 2001, and continuing until 2003.
Options Grants In Last Fiscal Year
The following table provides information related to options granted to our
named executive officers during the fiscal year ended May 31, 2000. The
information in this table reflects options granted by the board of directors
under our 2000 Executive Long Term Incentive Plan and our 2000 Long Term
Incentive Plan, which plans were approved by our stockholders on August 3, 2000.
The following table sets forth each grant of stock options made during the
fiscal year ended May 31, 2000, to the named executive officers:
49
Number of Securities % of Total
Underlying Options Granted Exercise Price Expiration
Name Options Granted in Fiscal 2000 (5) Per Share Date (6)
---- --------------- ------------------ --------- --------
John P. Gorst (1)(2) 3,000,000 35.9% $0.50 2/21/10
Donald L. Manzano (3) 196,632 2.4% $0.71 2/21/05
James R. Leigh (4) 780,000 9.3% $0.50 and $1.00 2/21/10
(1) This includes 2,000,000 options exercisable as of May 31, 2000.
(2) Our board of directors previously granted nonqualified stock options to
acquire shares of our class A common stock to John P. Gorst and M. Carroll
Benton with a strike price equal to $0.20, which reflected the Board's
determination of the fair market value of such shares on February 21, 2000.
Based on its recent determination that the actual fair market value of a
share of our class A common stock on February 21, 2000 was $1.00 per share,
our board of directors has increased the exercise price of the options
issued to Mr. Gorst and Ms. Benton to $1.00 per share which, post-split,
equals $0.50 per share.
(3) Mr. Manzano served as president and chief operating officer from July 20,
1999, through June 15, 2000. We no longer employ him in any capacity. Under
the terms of his option agreement, 196,632 shares have vested and are
exercisable at any time before February 21, 2005, at an exercise price of
$0.71. We are currently in litigation with Mr. Manzano regarding the
termination of his employment and his receipt of any additional stock
options.
(4) Includes 50,000 options that are currently exercisable at an exercise price
of $0.50 and 730,000 options which will vest and are exercisable at an
exercise price of $1.00 as follows: 243,332 shares on February 20, 2001,
and thereafter in increments of 1/24 (20,278) each month beginning March
20, 2001, and continuing until 2003.
(5) Based on a total of 8,367,082 options granted during the fiscal year ended
May 31, 2000.
(6) Options may terminate before their expiration date upon death, disability,
or termination of employment of the optionee.
Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Options
Values
The following table sets forth, for each of the named executive officers,
information concerning the number of shares received during fiscal 2000 upon
exercise of options and the aggregate dollar amount received from such exercise,
as well as the number and value of securities underlying unexercised options
held on May 31, 2000.
Number of Securities Value of In-The-Money
Shares Acquired Value Underlying Options ---------------------
on Exercise(#) Realized ($)(1) at Year End (#) Options at Year-End($)(2)
-------------- --------------- --------------- -------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
---- ---------- ------------ ---------- --------------
John P. Gorst(3) - - 2,000,000 1,000,000 $4,120,000 $2,060,000
Donald L. Manzano - - 196,632 - 363,769 -
James R. Leigh, III - - 50,000 730,000 103,000 1,138,800
50
(1) Based on the difference between the option exercise price and the fair
market value of our common stock on the exercise date as determined
pursuant to the terms of the 2000 Long Term Incentive Plan and the 2000
Executive Long Term Incentive Plan.
(2) Based on the difference between the option exercise price and the closing
sale price of $2.56 of our common stock as reported on the OTC Bulletin
Board on May 31, 2000, the last trading day of our 2000 fiscal year,
adjusted for the two-for-one stock split effected on August 3, 2000,
multiplied by the number of shares underlying the options.
(3) Our board of directors previously granted nonqualified stock options to
acquire shares of our class A common stock to John P. Gorst and M. Carroll
Benton with an exercise price equal to $0.20, which reflected the Board's
determination of the fair market value of such shares as of February 21,
2000. Based on its recent determination that the actual fair market value
of a share of the our class A common stock on February 21, 2000 was $1.00
per share, our board of directors has increased the exercise price of the
options issued to Mr. Gorst and Ms. Benton to $1.00 per share which, post-
split, equals $0.50 per share.
Employment Contracts and Termination of Employment Agreements
In March 2000, we entered into employment agreements with each of John P.
Gorst and M. Carroll Benton (each, an employee) (hereinafter referred to as the
executive agreements). Our board of directors approved the principal terms of
the executive agreements on February 21, 2000.
The executive agreements are each for an initial term of three years, and
are automatically renewable for additional terms of one year each, unless
terminated by the employee or us on at least thirty (30) days written notice
prior to the expiration of the current term. The executive agreements contain
standard confidentiality and non-compete provisions that prohibit the employee
from disclosing our confidential information, and from competing with us for a
period of six (6) months following the employee's termination of employment,
whether voluntary or involuntary. If we terminate either of the executive
agreements "for cause," our obligations under such executive agreement are
terminated as of the termination date. If we terminate either of the executive
agreements without cause, the employee shall be entitled to receive a severance
payment equal to twice the employee's annual salary, payable within sixty (60)
days of the termination date, and shall be entitled to receive fully paid
medical benefits of the type the employee had prior to termination, for a period
of eighteen months after such termination. Each of the executive agreements
provides for payment of certain benefits to the employee upon the occurrence of
a "change of control," as defined in the executive agreements. If the employee's
employment is terminated upon a the event of a "change of control," for any
reason other than for cause or for "good reason" by the employee, as defined in
the executive agreements, the employee is entitled to receive a severance
benefit equal to two times the sum of the employee's highest annual cash base
salary in effect within two years preceding the change of control, plus the
average of the employee's annual bonuses paid for the two calendar years
immediately preceding the change of control. In addition, if the employee is
terminated under circumstances requiring a severance payment, as described
above, we are required to provide the health and welfare benefits that are no
less favorable than the benefits that the employee was entitled to prior to the
change of control.
In connection with our reorganization, in September 2000 certain of our
executives executed amendments to their employment agreements under which each
agreed to a reduction in salary for a period of three (3) months or until we
received one million dollars ($1,000,000) in financing.
The executive agreement with Gorst, pursuant to which Mr. Gorst is employed
as our chief executive officer, provides for an annual salary of $225,000 during
the first year; $250,000 during the second year; and $275,000 during the third
year of employment. In addition, the Gorst agreement provides for use of an
Insynq-owned or leased automobile; executive health, life, disability and dental
51
insurance; and reimbursement of all ordinary and necessary business expenses.
The Gorst agreement entitles Gorst to participate in our 2000 Long Term
Incentive Plan and 2000 Executive Officer Long Term Incentive Plan. On September
27, 2000, Mr. Gorst executed Amendment No. 1 to his agreement in which he agreed
to a forty percent (40%) reduction in salary until the earlier of (a) an elapse
of three months or (b) we receive $1 million in financing.
The employment agreement with Benton, pursuant to which Ms. Benton is
employed as our chief administrative officer, provides for an annual salary of
$135,000 during the first year; $150,000 during the second year; and $165,000
during the third year of employment. In addition, the Benton agreement provides
for the use of an Insynq-owned or leased automobile; executive health, life,
disability and dental insurance; and reimbursement of all ordinary and necessary
business expenses. The Benton agreement entitles Benton to participate in our
2000 Long Term Incentive Plan and 2000 Executive Officer Long Term Incentive
Plan." On September 27, 2000, Ms. Benton executed Amendment No. 1 to her
agreement in which she agreed to a forty percent (40%) reduction in salary until
the earlier of (a) an elapse of three months or (b) we receive $1 million in
financing.
We entered into an employment agreement with David Wolfe, effective as of
August 17, 2000, providing for Mr. Wolfe's full-time employment as director of
mergers and acquisitions. The employment agreement provides for an initial
employment term of three years, and automatic one-year renewals thereafter,
unless terminated by either party in writing on or before ninety days prior to
the end of a current term of the agreement. Under the terms of the employment
agreement, Mr. Wolfe will be paid an annual salary of $180,000 and a signing
bonus of 25,000 options to purchase shares of common stock at an exercise price
of $2.00. Mr. Wolfe has been granted options to purchase a total of 225,000
shares of our common stock at an exercise price of $2.00. The 225,000 options
vest and are exercisable, subject to Mr. Wolfe's continued employment, as
follows: (a) 75,000 shares vest and are exercisable after August 17, 2001 and
before August 17, 2010; and (b) 6,250 shares vest each month, beginning
September 17, 2001 and ending August 17, 2003 (for 24 months), and are
exercisable prior to August 17, 2010. In addition, we have granted to Mr. Wolfe
an additional bonus of 3% of the "Value" of any reorganization, purchase of
assets, merger or other form of acquisition or similar transaction completed by
us during the term of this agreement, whether or not initiated by Mr. Wolfe or
us or a third party. This bonus will be awarded in the form of 50% cash and 50%
in shares of common stock. The term "value" means the total consideration paid
directly or indirectly by us or received by the seller in the transaction. On
September 27, 2000, Mr. Wolfe executed Amendment No. 1 to his agreement in which
he agreed to a thirty percent (30%) reduction in salary until the earlier of (a)
an elapse of three months or (b) we receive $1 million in financing. On October
19, 2000, Mr. Wolfe executed Amendment No. 2 in which he was granted an
additional 300,000 options at an exercise price of $0.81 per share, 150,000 of
which will vest when we receive $500,000 in financing, and the remaining 150,000
will vest upon the securing of an additional $500,000 or more in financing. On
November 29, 2000, Mr. Wolfe executed Amendment No. 3 in which he was granted an
additional 500,000 immediately vested options, as a bonus, at an exercise price
of $0.01 per share. On December 1, 2000, Mr. Wolfe exercised his option for the
500,000 shares of common stock and tendered to us the purchase price of $5,000.
We entered into an employment agreement with James R. Leigh, III, effective
as of February 20, 2000, providing for his employment as our chief technical
officer. Mr. Leigh was appointed as our president on September 22, 2000. The
employment agreement provides for an initial employment term of three years, and
automatic one-year renewals thereafter, unless terminated by either party in
writing on or before ninety days prior to the end of a current term of the
agreement. Under the terms of the employment agreement, Mr. Leigh will be paid
an annual salary of no less than $105,000 plus $8,000 bonus for the first year
of employment. This salary will be increased to no less than $130,000 in the
second year and no less than $150,000 in the third year. Mr. Leigh has been
granted options to purchase a total of 780,000 shares of our common stock as
follows: 50,000 options that are currently exercisable at an exercise price of
$0.50 and 730,000 options which will vest and are exercisable at an exercise
price of $1.00 as follows: 243,332 shares on February 20, 2001, and thereafter
in increments of 1/24 (20,278) each month beginning
52
March 20, 2001, and continuing until 2003. The agreement contains both non-
disclosure and non-competition clauses.
We entered into an employment agreement with Stephen C. Smith, effective as
of September 18, 2000, providing for Mr. Smith's interim employment as chief
financial officer. The employment agreement provides for an initial employment
term of fifteen weeks, and on each succeeding Friday thereafter, for terms of
one (1) year, on such terms and conditions set forth in the employment
agreement. Under the terms of the employment agreement, Mr. Smith will be paid a
weekly salary of no less than $100 per week plus a signing bonus of $2,500 and
an Incentive Stock Option to purchase 60,000 shares of our common stock at an
exercise price of $0.30 per share. The agreement contains both non-disclosure
and non-competition clauses. On December 1, 2000, Mr. Smith executed Amendment
No. 1 to his employment agreement in which his base salary has been increased to
$2,500 per week to be received for any week he is located at our headquarters.
All of the options granted under the original employment agreement have been
terminated.
We entered into an employment agreement with William G. Hargin on June 28,
2000 providing for his employment as our Executive Vice President of Sales
Marketing, with a transition to President on or before October 1, 2000. The
employment agreement provides for an initial employment term of three years, and
automatic one-year renewals thereafter, unless terminated by either party in
writing on or before ninety days prior to the end of a current term of the
agreement. Under the terms of the employment agreement, Mr. Hargin will be paid
an annual salary of $140,000 with annual increases of 15%. Mr. Hargin received a
signing bonus equal to one month's base salary, and has the ability, based on an
equation, to receive quarterly bonuses ranging from $15,000 to $26,250. Mr.
Hargin has been granted options to purchase a total of 300,000 shares of our
common stock at $3.00 per share, which vest as follows: 50,000 options are
currently exercisable and 250,000 options which will vest and are exercisable as
follows: 50,000 shares on June 28, 2001, and thereafter in increments of 1/24
(8,333) each month beginning July 28, 2001, and continuing until 2003. Mr.
Hargin was granted an additional 50,000 options to purchase our common stock at
$3.00 per share as his transition to president did not occur on or before
October 1, 2000. The agreement contains both non-disclosure and non-competition
clauses. On October 1, 2000 Mr. Hargin was granted the additional 50,000 options
at an exercise price of $3.00 per share as required under his employment
agreement.
The employment agreement of James A. Zachman, originally entered into on
February 21, 2000, was amended on September 16, 2000, to appoint him as our
senior vice president. The employment agreement provides for an initial
employment term of three years with no renewal option. Under the terms of the
amended employment agreement, Mr. Zachman will be paid an annual salary of
$96,000 with annual increased to be based on overall performance as determined
by our board of directors. Mr. Zachman has been granted options to purchase a
total of 300,000 shares of our common stock at $1.00 per share, which vest in
three equal increments of one-third (100,000) per year commencing on January 1,
2000. Mr. Zachman has the opportunity to receive additional stock options
dependant upon certain performance-related goals. The agreement contains both
non-disclosure and non-competition clauses. On September 27, 2000, Mr. Zachman
executed Amendment No. 2 to his agreement in which he agreed to a thirty percent
(30%) reduction in salary until the earlier of (a) an elapse of three months or
(b) we receive $1 million in financing.
We entered into an employment agreement with Joanie C. Mann on February 20,
2000, providing for her employment as our vice president of operations. The
employment agreement provides for an initial employment term of three years, and
automatic one-year renewals thereafter, unless terminated by either party in
writing on or before ninety days prior to the end of a current term of the
agreement. Under the terms of the employment agreement, Ms. Mann will be paid an
annual salary of no less than $85,000 for the first year of employment. This
salary will be increased to no less than $110,000 in the second year and no less
than $125,000 in the third year. Ms. Mann has been granted options to purchase a
total of 450,000 shares of our common stock as follows: 50,000 options that are
currently exercisable at an exercise price of $0.50 and 400,000 options which
will vest and are exercisable at an exercise price of
53
$1.00 as follows: 133,332 shares on February 20, 2001, and thereafter in
increments of 1/24 (11,111) each month beginning March 20, 2001, and continuing
until 2003. The agreement contains both non-disclosure and non-competition
clauses. On September 25, 2000, Ms. Mann executed Amendment No. 1 to her
agreement in which she agreed to a thirty percent (30%) reduction in salary
until the earlier of (a) an elapse of three months or (b) we receive $1 million
in financing. Also on September 25, 2000, Ms. Mann executed Amendment No. 2 to
her agreement in which she received an increase in her base salary to $95,000
per year.
We have also assumed the obligations under employment agreements between
Insynq-WA and a number of key employees or former employees, or entered into
employment agreements with our key employees or former employees. These include
(a) Insynq-WA employment agreements with Carey M. Holladay, currently a company
employee, and Donald L. Manzano, our former president and chief operating
officer; and (b) recent employment agreements with Christopher Todd as director
of development and Barbara D. Brown as controller. On November 29, 2000, Ms.
Brown executed Amendment No. 1 to her agreement in which she received additional
Performance Bonus options for the period from June 6, 2000 through June 5, 2001.
Ms. Brown received forty thousand (40,000) options which are immediately vested
and are exercisable for a period of ten (10) years at an exercise price of
$0.96875 per share. Ms. Brown is no longer with us. Mr. Todd's employment
agreement provides for a royalty of two percent (2%) of our monthly gross
revenue from a hardware device that Mr. Todd assisted us in developing for the
deployment of our IQ Delivery System. Stock options were granted to these
individuals under the terms of their employment agreements. We may enter into
other employment agreements from time to time with other executives and key
employees.
Donald L. Manzano, our former president and chief operating officer,
resigned and his employment agreement was terminated effective as of June 14,
2000. In connection with his resignation and the termination of his employment
agreement Mr. Manzano has 196,632 options that are currently vested and
exercisable. Mr. Manzano has sued us regarding the termination of his
employment.
On September 18, 2000, DJ Johnson, our former chief financial officer,
resigned. Mr. Johnson performed services for us commencing February 20, 2000,
but was formally appointed as chief financial officer at the end of June 2000.
Under the termination provisions of the employment agreement, Mr. Johnson will
receive his salary for three months, plus reimbursement for certain medical
insurance. Mr. Johnson has been granted options to purchase a total of 190,000
shares of our common stock, all of which have vested. The exercise price for
options covering 50,000 shares is $0.50, the exercise price for 125,000 is
$1.00, and the exercise price on the remaining 15,000 shares is $1.63. These
options are exercisable any time before February 20, 2001. We have included the
options and the resale of shares underlying the options in a Form S-8
registration statement filed with the Securities and Exchange Commission on
October 10, 2000.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Interactive is a company wholly owned by M. Carroll Benton, our chief
administrative officer, secretary and treasurer. John P. Gorst, our chief
executive officer, was also vice president and general manager of Interactive.
During their time at Interactive, Ms. Benton and Mr. Gorst began developing the
"Insynq Project," which later developed into our current business. On September
16, 1998, Interactive transferred to Charles Benton, husband of Ms. Benton and
then a creditor of Interactive, all of Interactive's title and interest in and
to (1) certain equipment and other tangible personal property, and (2) the
intellectual properties, computer software, trademarks, copyrights, ideas, work-
in-progress, and other tangible and intangible property comprising the system
known as the "Insynq Project" to retire a $200,000 debt obligation owed by
Interactive to Charles Benton. These assets later developed into Insynq's IQ
Delivery System. Mr. Benton contributed all of the "Insynq Project" intellectual
property assets to Insynq-WA in exchange for the initial 5,500,000 shares of
common stock issued by Insynq-WA at the time of its formation. On the same date,
Mr. Benton sold the equipment and other tangible property to the newly-formed
Insynq-WA, in exchange for a $70,000 promissory note. Mr. Benton then sold
2,750,000 shares to each of Ms. Benton and Mr. Gorst in exchange for a $65,000
note from each of them secured by the shares. During the start-up operations of
Insynq-WA, the business contacts of Interactive were utilized in the purchase of
supplies and other items for Insynq-WA. As of September 30, 1999, Insynq-WA owed
54
Interactive $117,024 related to these purchases, and on November 12, 1999, the
board of Insynq-WA approved the issuance of 118,000 shares of its common stock
in full payment of this debt, after a board determination that the shares of
Insynq-WA should be valued at $1.00 per share. From October 1, 1999 through
December 5, 2000, approximately $8,000 of services/expenses on behalf of
Interactive have been paid by us. During the same time period, we received
approximately $6,400 from Interactive for services.
On September 22, 2000, we executed a Release Agreement (the Release
Agreement) with M. Carroll Benton, our chief administrative officer, secretary
and treasurer, John Gorst, our chief executive officer, Charles Benton, the
husband of Ms. Benton, Interactive Information Systems, an entity owned by Ms.
Benton, and entities controlled by Mr. Benton, which, with certain exceptions,
releases the parties from any and all claims, if any, arising from the parties'
prior relationships and dealings prior to the Release date. Among the
consideration given for the Release Agreement, we granted Mr. Benton
registration rights to register his shares of common stock of the Company. In
addition, Mr. Gorst, Mr. Benton and Ms. Benton executed a Release Agreement (the
Gorst Release) to fully and finally release Mr. Gorst personally of any
obligations arising under the $65,000 promissory note he owed to Mr. Benton
secured by shares of our stock he originally purchased from Mr. Benton, as well
as a general release of Mr. Gorst, with certain exceptions, by Mr. and Mrs.
Benton and certain entities affiliated with them. In consideration of the Gorst
Release, Mr. Gorst agreed to transfer 150,000 shares of our common stock held by
him to Mr. Benton, and Ms. Benton transferred approximately 98,000 shares of
common stock held by her to Mr. Benton.
On October 17, 2000, we executed a Lock-Up and Waiver Agreement with Mr.
Benton with respect to the 496,466 shares of our common stock owned by him.
Under the agreement, he waived any rights he may have to exercise any
registration right for a period of 180 trading days after a contemplated
registration statement is filed with the SEC. This agreement was amended on
November 30, 2000, to allow Mr. Benton to sell 50,000 shares per calendar
quarter during the term of the lock up agreement.
On October 31, 2000, we executed a Consulting Agreement with CFB
Associates, Inc., and specifically Charles F. Benton, CPA, for him to provide
consulting services on general operational issues for a period of three (3)
months. We have agreed to compensate CFB in the amount of $350 per hour. For
previous consulting services performed by Mr. Benton, we have agreed to
guarantee Mr. Benton a minimum of eighty-six (86) hours at this rate.
Additionally, we agree to pay to CFB $5,000 per month for eight (8) consecutive
months beginning November 30, 2000.
On June 1, 2000, we entered into a Master Licensing Agreement with My
Partner Online, Inc. (MPO), a company two-thirds owned by M. Carroll Benton and
Charles Benton. The agreement is for a term of five (5) years with an automatic
one year extension unless either party notifies the other of termination within
ninety (90) days. The agreement may be terminated at any time by either party
for breach or insolvency. Under the agreement, MPO has a non-exclusive,
worldwide license to promote, market, distribute and sublicense application
hosting services, bundled or unbundled with MPO products. MPO must use
reasonable commercial efforts to market, promote, and distribute our services by
marketing them through their sales activity. We have agreed to charge MPO a
below-market rate for subscription pricing and to forgive the $5,000 monthly
maintenance fee in exchange for the right to exercise an option to purchase a
five percent (5%) equity position in MPO. On November 29, 2000, this agreement
was amended to specifically detail the services MPO is to provide, and also
requires that MPO purchase 100 of our seats at $50.00 per seat for a period of
twelve (12) months, beginning on December 1, 2000.
On November 28, 2000, we executed an Independent Consultant Agreement with
MPO and Summer J. Mathews, MPO's president. The Consultant Agreement is for a
term of three (3) months beginning December 1, 2000, and is automatically
renewable for additional three (3) month terms unless
55
terminated by either party upon thirty (30) days notice. For consulting
services, we have agreed to pay a consulting fee of $15,000 in the form of
shares of our common stock at $0.9675 per share. We have agreed to register
these shares within 45 days of their issuance.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
As of December 5, 2000, there were issued and outstanding 25,042,084 shares
of our common stock. There is no other class of voting security of ours issued
or outstanding.
The following table sets forth the number of shares of our common stock
beneficially owned, as of December 5, 2000 by:
. each person known to us to own more than 5% of our outstanding common
stock;
. each director;
. each named executive officer; and
. all directors, named executive officers and other executive officers
as a group.
Unless otherwise indicated, the number of shares and percentage of
ownership of common stock for each of the stockholders set forth below assumes
that shares of common stock that the stockholder may acquire within sixty days
of December 5, 2000 are outstanding. Except as otherwise indicated, all shares
are owned directly and the owner has the sole voting and investment power with
respect thereto.
56
Name Number Percent
- ---- ------ -------
Shares Beneficially
-------------------
Owned(10)
---------
5% Owners
Plazacorp Investors Limited (1) 2,500,158 7.4%
Directors and Officers:
John P. Gorst (2) 10,103,336 36.0%
Donald L. Manzano (3) 207,210 *
M. Carroll Benton (4) 6,242,112 23.1%
David D. Selmon 7,000 *
James R. Leigh, III (5) 60,000 *
Joanie C. Mann (6) 100,284 *
William G. Hargin (7) 115,000 *
Stephen C. Smith - *
James A. Zachman (8) 17,500 *
All executive officers and directors as a group (9 persons) (9) 16,852,442 59.1%
* Less than 1%
(1) This includes 1,428,720 shares with a present right to conversion, and
571,428 warrants to purchase shares of common stock.
(2) This includes 100,000 shares of common stock held by One Click Investments,
LLC, and 1,150,000 shares of common stock held by Kathleen Henry and
350,000 shares of common stock held by Hagens Berman LLP as to which Mr.
Gorst holds a voting proxy and as to which Mr. Gorst disclaims beneficial
ownership. Also includes 3,015,000 shares of common stock issuable upon the
exercise of outstanding stock options that are presently exercisable or
will become exercisable within 60 days of December 5, 2000.
(3) Includes 196,632 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of December 5, 2000. Also includes 7,052
warrants to purchase shares of common stock that are presently exercisable.
(4) Includes 496,466 shares of common stock held by Charles Benton, the husband
of Ms. Benton, as to which Ms. Benton disclaims beneficial ownership. Also
includes 2,015,000 shares of common stock issuable upon exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of December 5, 2000.
(5) Includes 60,000 shares of common stock issuable upon the exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of December 5, 2000.
(6) Includes 65,000 shares of common stock issuable upon the exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of December 5, 2000.
(7) Includes 115,000 shares of common stock issuable upon the exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of December 5, 2000.
(8) Includes 15,000 shares of common stock issuable upon the exercise of
outstanding stock options that are presently exercisable or will become
exercisable within 60 days of December 5, 2000.
(9) Includes 5,481,632 shares of common stock issuable upon exercise of
outstanding stock options held by our executive officers, including Mr.
Manzano, who is no longer an officer of the
57
company, that are presently exercisable or will become exercisable within
60 days of December 5, 2000.
(10) Adjusted for the two-for-one stock split effected on August 3, 2000.
DESCRIPTION OF CAPITAL STOCK
Our authorized capital stock consists of 100,000,000 shares of common
stock, $0.001 par value per share, 10,000,000 shares of class A common stock,
$0.001 par value per share, and 10,000,000 shares of preferred stock, $0.001 par
value per share.
Common Stock
There were 25,042,084 shares of our common stock outstanding and held of
record by approximately 923 stockholders as of December 5, 2000.
Holders of our common stock are entitled to one vote per share on all
matters to be voted upon by the stockholders. Because the shares of common stock
do not have cumulative voting rights, the holders of more than 50 percent of the
shares voting for the election of directors can elect all the directors if they
choose to do so and, in such event, the holders of the remaining shares will not
be able to elect any person to the board of directors. Subject to preferences
that may be applicable to the holders of outstanding shares of preferred stock,
if any, the holders of our common stock are entitled to receive ratably such
dividends, if any, as may be declared from time to time by the board of
directors out of funds legally available therefor. In the event of liquidation,
dissolution or winding-up, and subject to the prior distribution rights of the
holders of outstanding shares of preferred stock, if any, the holders of shares
of our common stock shall be entitled to receive pro rata all the remaining
assets available for distribution to our stockholders. Our common stock has no
preemptive or conversion rights or other subscription rights. There are no
redemption or sinking fund provisions applicable to our common stock. All
outstanding shares of our common stock are fully paid and nonassessable, and the
shares to be issued pursuant to this Offering shall be fully paid and
nonassessable, assuming compliance with the exercise provisions of the related
warrants.
Our board of directors is authorized to issue additional shares of common
stock, not to exceed the amount authorized by our Certificate of Incorporation,
and to issue options and warrants for the purchase of such shares, on such terms
and conditions and for such consideration as the Board may deem appropriate
without further stockholder action. The above description concerning our common
stock does not purport to be complete. Reference is made to our Certificate of
Incorporation and By-laws which are available for inspection upon proper notice
at our offices, as well as to the applicable statutes of the State of Delaware
for a more complete description concerning the rights and liabilities of
stockholders.
Class A Common Stock
We currently have no outstanding shares of class A common stock. Holders
of our class A common stock are entitled to three votes per share on all matters
to be voted upon by the stockholders. Because the shares of common stock do not
have cumulative voting rights, the holders of more than 50 percent of the shares
voting for the election of directors can elect all the directors if they choose
to do so and, in such event, the holders of the remaining shares will not be
able to elect any person to the board of directors. Holders of our class A
common stock are not entitled to receive cash dividends, if any, as may be
declared from time to time by the board of directors. In the event of
liquidation, dissolution or winding-up, and subject to the prior distribution
rights of the holders of outstanding shares of preferred stock, if any, the
holders of shares of our class A common stock shall be entitled to receive pro
rata all the remaining assets available for distribution to our stockholders.
Our class A common stock has no preemptive rights. Holders of class A common
stock may at any time or from time to time, at their discretion, convert any
whole number or all of the Class A common stock held into fully paid and
58
nonassessable common stock at the rate (subject to adjustment) of one share of
common stock for each share of class A common stock. There are no redemption or
sinking fund provisions applicable to our class A common stock. All outstanding
shares of our class A common stock are fully paid and nonassessable, and the
shares to be issued pursuant to this Offering shall be fully paid and
nonassessable, assuming compliance with the exercise provisions of the related
warrants.
Our board of directors is authorized to issue additional shares of class A
common stock, not to exceed the amount authorized by our Certificate of
Incorporation, and to issue options and warrants for the purchase of such
shares, on such terms and conditions and for such consideration as the board may
deem appropriate without further stockholder action. The above description
concerning our class A common stock does not purport to be complete. Reference
is made to our Certificate of Incorporation and By-laws which are available for
inspection upon proper notice at our offices, as well as to the applicable
statutes of the State of Delaware for a more complete description concerning the
rights and liabilities of stockholders.
Preferred Stock
We currently have no outstanding shares of preferred stock. The board of
directors has the authority, without further action by our stockholders, to
issue up to one million shares of preferred stock in one or more series and to
fix the rights, preferences and privileges thereof, including dividend rates and
preferences, conversion rights, voting rights, terms of redemption, redemption
prices, liquidation preferences and the number of shares constituting any series
or the designation of such series, without further vote or action by the
stockholders. Although they presently have no intention to do so, the board of
directors, without stockholder approval, could issue preferred stock with voting
and conversion rights which could adversely affect the voting power of the
holders of common stock. The issuance of preferred stock may also have the
effect of delaying or preventing a change of control of us.
Delaware Law and Certain Charter Provisions
Our Certificate of Incorporation states that we will not be subject to the
provisions of Section 203 of the Delaware General Corporation law and anti-
takeover law. In general, the statute prohibits a publicly held Delaware
corporation from engaging in a "business combination" with an "interested
stockholder" for a period of three years after the date of the transaction in
which the person became an interested stockholder, unless either (i) prior to
the date at which the person becomes an interested stockholder, the board of
directors approves such transaction or business combination, (ii) the
stockholder acquires more than 85% of the outstanding voting stock of the
corporation (excluding shares held by directors who are officers or held in some
employee stock plans) upon consummation of such transaction, or (iii) the
business combination is approved by the board of directors and by two-thirds of
the outstanding voting stock of the corporation (excluding shares held by the
interested stockholder) at a meeting of stockholders (and not by written
consent). A "business combination" includes a merger, asset sale or other
transaction resulting in a financial benefit to such interested stockholder. For
purposes of Section 203, "interested stockholder" is a person who, together with
affiliates and associates, owns (or within three years prior, did own) 15% or
more of the corporation's voting stock.
Our Certificate of Incorporation includes a provision that allows the board
of directors to issue preferred stock in one or more series with such voting
rights and other provisions as the board of directors may determine. This
provision may be deemed to have a potential anti-takeover effect and the
issuance of preferred stock in accordance with such provisions may delay or
prevent a change of control of us.
LIMITATION OF LIABILITY AND INDEMNIFICATION MATTERS
As permitted by the Delaware General Corporation Law, our certificate of
incorporation contains a provision eliminating the monetary liability of a
director for breach of fiduciary duty, subject to certain exceptions. The
provision does not eliminate a director's liability for (i) breaches of the
director's duty of loyalty to us or our shareholders, (ii) acts or omissions not
in good faith or involving intentional misconduct or a knowing violation of law,
(iii) the payment of unlawful dividends or unlawful stock repurchases or
redemptions, or (iv) any transaction from which the director derived an improper
personal benefit. Furthermore, the provision does not limit equitable remedies,
such as an injunction or rescission for breach of a director's fiduciary duty of
care.
The Delaware General Corporation Law permits, and in some cases requires, a
corporation to indemnify directors and officers who are or have been a party or
are threatened to be made a party to litigation against certain expenses,
judgments, fines, settlements, and other amounts under certain circumstances.
Article IX of our Bylaws provides for indemnification of and advancement of
expenses to directors, officers, employees, and agents to the fullest extent
authorized or permitted by the Delaware General Corporation Law.
We have in force an officers' and directors' liability insurance policy
insuring, up to specified amounts and with specified exceptions, our directors
and officers and former directors and officers of us and our subsidiaries
against damages, judgments, settlements and costs for which they are not
indemnified by us that any such persons may become legally obligated to pay on
account of claims made against them for any error, misstatement or misleading
statement, act or omission, or neglect or breach of duty committed, attempted or
allegedly committed or attempted by such persons in the discharge of their
duties to us in their capacities as directors or officers, or any matter claimed
against them solely by reason of their serving in such capacities.
SECURITIES AND EXCHANGE COMMISSION'S POSITION ON INDEMNIFICATION
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons pursuant to
the Delaware General Corporation Law, our Certificate of Incorporation and our
Bylaws, or otherwise, we have been advised that in the opinion of the Securities
and Exchange Commission such indemnification is against public policy as
expressed in the Securities Act, and is, therefore, unenforceable. In the event
that a claim for indemnification against such liabilities (other than the
payment by us of expenses incurred or paid by a director, officer or controlling
person in the successful defense of any action, suit or proceeding) is asserted
by such director, officer or controlling person in connection with the
securities being registered hereunder, we will, unless in the opinion of our
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question of whether such indemnification by us
is against public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
STOCK TRANSFER AGENT AND REGISTRAR
The stock transfer agent and registrar for our common stock is Colonial
Stock Transfer Co., 455 E. 400 South #100, Salt Lake City, Utah, 84111, (801)
355-5740.
59
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
On April 3, 2000, our board of directors decided to terminate our
accountants, Jones, Jensen & Company, and engage G. Brad Beckstead, CPA, as our
auditor for the year ending May 31, 2000. The firm of Jones, Jensen & Co.
served as our auditors for the fiscal year ended May 31, 1999. In February 2000
Beckstead was engaged as the independent auditor of Insynq-WA to audit its
financial statements for the years ended December 31, 1998 and 1999. Because of
Beckstead's familiarity with the accountings and business operations of Insynq-
WA, the assets of which we acquired on February 18, 2000, our board of directors
believes Beckstead is in the best position to undertake the audit of our
financial statements for the fiscal year ending May 31, 2000. Beckstead's
office is located at 330 East Warm Springs, Las Vegas, Nevada 89119.
During the year ended May 31, 1999, and up to and including the present,
there have been no disagreements between ourselves and Jones, Jensen & Co. on
any matter of accounting principles or practices, financial statement disclosure
or auditing scope or procedures. Jones, Jensen & Co.'s report on our financial
statements for the fiscal year ended May 31, 1999, indicated there was
substantial doubt regarding our ability to continue as a going concern. The
appointment of Beckstead was ratified at the special meeting of shareholders
held on August 3, 2000.
On October 11, 2000, our board of directors decided to terminate our
auditor for the quarter ending August 31, 2000. Beckstead served
as the Company's auditor for the fiscal year ended May 31, 2000. Grant Thornton
LLP has been appointed to be our auditor. Grant Thornton's office is located in
Key Tower at 700 Fifth Avenue, Suite 4150, Seattle, Washington 98104.
During the year ended May 31, 2000, and up to and including the present,
there have been no disagreements between ourselves and Beckstead on any matter
of accounting principles or practices, financial statement disclosure, or
auditing scope or procedures. Beckstead's report on our financial statements
for the fiscal year ended May 31, 2000, indicated that substantial doubt existed
regarding our ability to continue as a going concern.
LEGAL MATTERS
The validity of the shares offered hereby has been passed upon for us by
Locke Liddell & Sapp LLP. On December 7, 2000, we issued a warrant to Locke
Liddell & Sapp LLP to purchase 100,000 shares of our common stock at an exercise
price of $0.50 per share.
EXPERTS
Our audited financial statements as of May 31, 2000 and 1999, have been
included in the registration statement in reliance upon the report of G. Brad
Beckstead CPA, as independent auditor, given upon his authority as an expert in
accounting and auditing.
60
INDEX TO FINANCIAL STATEMENTS
Interim Financial Statements For Three Months Ended August 31, 2000 (Unaudited):
Balance Sheets -
August 31, 2000 and May 31, 2000.......................... F-2
Statements of Operations -
Three Months Ended August 31, 2000 and 1999............... F-4
Statement of Stockholders' Equity (Deficit)-
Three Months Ended August 31, 2000........................ F-5
Statements of Cash Flows -
Three Months Ended August 31, 2000 and 1999............... F-6
Notes to Financial Statements................................ F-7
Financial Statements For Year Ended May 31, 2000 and 1999 -
Restated (Audited):
Independent Auditor's Report................................. F-10
Balance Sheets - Restated
May 31, 2000 and 1999..................................... F-11
Statements of Operations - Restated
Years Ended May 31, 2000 and 1999......................... F-13
Statement of Stockholders' Deficit - Restated
Years Ended May 31, 2000 and 1999......................... F-14
Statements of Cash Flows - Restated
Years Ended May 31, 2000 and 1999......................... F-15
Notes to Financial Statements................................ F-16
F-1
Insynq, Inc.
(formerly Xcel Management, Inc.)
(A Development Stage Company)
Balance Sheets
August 31, 2000 May 31, 2000
--------------------- -------------------
(unaudited) (restated)
ASSETS
CURRENT ASSETS:
Cash $ -- $ 106,806
Restricted Cash 15,000
Accounts receivable, net of
allowance for doubtful accounts of
$9,920 and $1,469 at August 31,
2000, and May 31, 2000, respectively 65,113 63,405
Other receivables 48,712 16,912
Inventory 13,064 29,512
Prepaid expenses 32,481 29,186
--------------------- -------------------
174,370 245,821
PROPERTY AND EQUIPMENT, NET 1,127,265 1,031,675
OTHER ASSETS:
Intellectual and other intangible 72,088 87,824
property, net
Deposits 167,414 165,584
--------------------- -------------------
$1,541,137 $1,530,904
===================== ===================
- continued -
F-2
Insynq, Inc.
(formerly Xcel Management, Inc.)
(A Development Stage Company)
Balance Sheets
August 31, 2000 May 31, 2000
------------------- -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) (unaudited) (restated)
CURRENT LIABILITIES:
Accounts payable $ 859,343 $ 296,946
Accrued and other liabilities 171,832 183,565
Notes payable 252,245 39,470
Current portion of capital leae obligations 210,532 166,869
----------- -----------
Total current liabilities 1,493,952 686,850
ADVANCE FROM STOCKHOLDER -- 100,000
CONVERTIBLE DEBENTURES, NET OF DISCOUNT OF $325,000 325,000 --
CAPITAL LEASES OBLIGATIONS, NET OF CURRENT PORTION 421,917 442,087
COMMITMENTS AND CONTINGENCIES -- --
PUT OPTION OBLIGATION 1,071,785 1,071,785
STOCKHOLDERS' EQUITY (DEFICIT):
Preferred stock, $0.001 par value, 10,000,000 shares
authorized, no shares issued or outstanding -- --
Common stock - Class A, $0.001 par value, 10,000,000 shares
authorized, no shares issued or outstanding -- --
Common stock, $0.001 par value, 100,000,000 shares
authorized, 20,354,346 and 19,620,946 shares
and outstanding as of August 31 and May 31, 2000,
respectively 20,354 19,621
Additional paid-in capital 6,792,129 3,132,903
Unearned compensation and services (1,853,159) --
Accumulated development stage deficit (6,730,841) (3,922,342)
----------- -----------
Total stockholders' equity (deficit) (1,771,517) (769,818)
----------- -----------
$1,541,137 $1,530,904
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-3
Insynq, Inc.
(formerly Xcel Management, Inc.)
(A Development Stage Company)
Statements of Operations
Cumulative results of
Three months ended August 31, operations since
-------------------------------------------- inception
2000 1999 (August 31, 1998)
----------------- ------------------------ --------------------------
(unaudited) (unaudited and restated) (unaudited)
REVENUE $ 67,761 $ 23,462 $ 317,185
COSTS AND EXPENSES:
Direct cost of services 274,381 38,928 912,294
Network and infrastructure costs 37,414 5,950 138,755
Selling, general and administrative 2,132,658 53,804 5,098,123
Research and development 70,684 -- 176,436
Advertising 53,041 -- 150,786
Depreciation and amortization 72,357 10,364 277,614
----------------- ------------------- --------------------------
2,640,535 109,046 6,754,008
----------------- ------------------- --------------------------
Loss from operations (2,572,774) (85,584) (6,436,823)
OTHER INCOME (EXPENSES):
Interest expense (236,291) (18,625) (341,370)
Other income 566 41,239 47,352
----------------- ------------------- --------------------------
(235,725) 22,614 (294,018)
----------------- ------------------- --------------------------
NET LOSS $(2,808,499) $ (62,970) $(6,730,841)
================= =================== ==========================
NET LOSS PER SHARE $(0.14) $(0.01) $(0.49)
================= =================== ==========================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 19,972,841 11,321,046 13,763,070
================= =================== ==========================
The accompanying notes are an integral part of these financial statements.
F-4
Insynq, Inc.
(formerly Xcel Management, Inc.)
(A Development Stage Company)
Statement of Stockholders' Equity (Deficit)
(Unaudited)
Accumulated
Common Stock Additional Unearned Development Total
------------------------------ Paid-in Compensation Stage Stockholders'
Shares Amount Capital and Services Deficit Equity (Deficit)
-------------- ------------ ------------- -------------- ------------ -----------------
Balances at May 31, 2000
as restated 19,620,846 $19,621 $3,132,903 $ -- $(3,922,342) $ (769,818)
Issuance of common stock
for services valued at
$3.25 per share in June
2000, including
unearned services 250,000 250 812,250 (643,230) -- 169,270
Issuance of common stock
at $0.60 per share in
July 2000 200,000 200 119,800 -- -- 120,000
Issuance of common stock
at $0.60 per share in
August 2000 200,000 200 119,800 -- -- 120,000
Issuance of common stock
at $0.50 per share in
August 2000 80,000 80 39,920 -- -- 40,000
Issuance of common stock
for services valued at
$1.32 per share in
August 2000 and stock
granted to Director for
services 3,500 3 22,932 (13,755) -- 9,180
Unearned compensation
for stock options
granted to employees
with exercise prices
below fair market value
on date of grant -- -- 1,307,500 (1,307,500) -- --
Amortization of unearned
compensation -- -- -- 111,326 -- 111,326
Allocation of warrants
and conversion feature
on convertible debenture -- -- 650,000 -- -- 650,000
Issuance of common stock
warrants for services
rendered -- -- 358,024 -- -- 358,024
Allocation of common
stock warrants issued
with debt -- -- 229,000 -- -- 229,000
Net loss for the period
ended August 31, 2000 -- -- -- -- (2,808,499) (2,808,499)
-------------- ------------ ------------- -------------- ------------ ---------------
Balances at August 31,
2000 20,354,346 $20,354 $6,792,129 $(1,853,159) $(6,730,841) $(1,771,517)
============== ============ ============= ============== ============ ===============
The accompanying notes are an integral part of this financial statement.
F-5
Insynq, Inc.
(formerly Xcel Management, Inc.)
(A Development Stage Company)
Statements of Cash Flows
Three months ended
August 31, Cumulative cash flows
-------------------------------------- since inception
2000 1999 (September 16, 1998)
----------------- ---------------- --------------------------
Unaudited Unaudited Unaudited
and Restated
INCREASE (DECREASE) IN CASH:
Net loss $(2,808,499) $(62,970) $(6,730,841)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITES:
Depreciation and amortization expense 72,357 10,364 277,174
Issuance of common stock for services 169,270 -- 508,349
Issuance of warrants for services 358,024 -- 1,140,868
Issuance of options to employees under fair 120,506 -- 120,506
market value
Warrants issued with debt and capital leases 145,267 -- 168,867
Warrants and beneficial conversion feature of
debentures 325,000 -- 325,000
CHANGE IN ASSETS AND LIABILITIES:
Accounts receivable (1,708) (3,083) (65,113)
Other receivables 3,200 (634) (13,712)
Prepaid expenses (3,295) (2,613) (32,481)
Inventories 16,448 (26,843) (13,064)
Deposits and other assets (671) -- (164,882)
Accounts payable 562,397 9,999 859,343
Accrued liabilities (11,733) 39,625 171,575
----------------- ---------------- --------------------------
Net cash provided by (used by) operating
activities (1,053,437) 36,154 (3,448,411)
----------------- ---------------- --------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (135,608) (37,662) (548,082)
Acquisition of intellectual property -- -- (1,548)
Deposit on future acquisition (50,000) -- (50,000)
Cash received from Xcel acquisition -- -- 257
----------------- ---------------- --------------------------
Net cash used by investing activities (185,608) (37,662) (599,373)
----------------- ---------------- --------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital leases (2,136) (9,463)
Borrowings on convertible debentures 550,000 550,000
Proceeds from short-term notes payable 310,000 310,000
Payments on short-term notes payable (5,625) (36,155)
Proceeds from issuance of common stock -- 265,001 3,133,402
Advance from stockholder 280,000 -- 100,000
----------------- ---------------- --------------------------
Net cash provided by financing activities 1,132,239 265,001 4,047,784
----------------- ---------------- --------------------------
NET INCREASE (DECREASE) IN CASH (106,806) 191,184 --
CASH AT BEGINNING OF PERIOD 106,806 501 --
----------------- ---------------- --------------------------
CASH AT END OF PERIOD $ -- $191,685 $ --
================= ================ ==========================
The accompanying notes are an integral part of these financial statements.
F-6
Insynq, Inc.
(formerly Xcel Management, Inc.
Notes To Financial Statements
Note 1 - Financial Statements
- ------
The unaudited financial statements of the Company have been prepared by the
Company pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles (GAAP) have been condensed or omitted pursuant to such rules and
regulations. The results of operations for interim periods are not necessarily
indicative of the results to be expected for the entire fiscal year ending May
31, 2001. The accompanying unaudited financial statements and related notes
should be read in conjunction with the Company's financial statements and notes
thereto, and Form 10-KSB/A for its fiscal year ended May 31, 2000.
The Company, in preparing the Quarterly Financial Report Form 10QSB, discovered
material errors in the Company's Annual Report on Form 10-KSB for the year ended
May 31, 2000 (the "Original Filing"). There is a change in the reporting entity.
The restated financial statements present the financial position and results of
operations of Insnyq, Inc. for the period from inception (August 31, 1998) to
May 31, 2000. The financial statements included in the Original Filing were
those of Xcel Management, Inc. for the two years ended May 31, 2000, with the
results of operations of Insynq included from February 18, 2000 (date of merger)
to May 31, 2000. In addition material errors were discovered in reporting of
expenses related to stock and warrants issued for services in the amount of
$862,843 and the Company did not record an adjustment to equity of $1,071,785 to
account for Put Option Obligation on certain stock. In addition, there were
other adjustments decreasing Stockholders' Equity as of May 31, 2000, and
increasing the loss from operations and net loss totaling approximately $85,000
for the year ended.
The following is a schedule of changes to the Original Filing as of May 31,
2000:
Original Filing As Restated
--------------- -----------
Total assets $ 1,607,577 $ 1,530,904
Liabilities $ 1,320,408 $ 1,228,937
Put Option Obligation -- $ 1,071,785
Stockholders equity $ 287,169 $ (769,818)
Loss from operations $ (2,830,427) $ (3,727,042)
Net Loss $ (2,830,427) $ (3,778,867)
Net Loss Per Common Share $(0.29) $(0.27)
The Company has taken steps to correct these errors and to implement procedures
to insure they do not recur.
The Company has filed an Amended Annual Report on Form 10-K for the Period ended
May 31, 2000 (Form 10-KSB/A) on December 6, 2000.
Note 2 - Basis of Presentation
- ------
Basis of Presentation: The Company does not have operations significant to
sustain it without raising additional funds either through added debt or
offerings of equity. Therefore, in accordance with Statement of Financial
Accounting Standards Board ("SFAS") No. 7, the Company is considered a
Development Stage Company.
F-7
Insynq, Inc.
(formerly Xcel Management, Inc.)
Notes To Financial Statements
Note 3 - Loss Per Common Share
- ------
Basic loss per share is computed by dividing the net loss by the weighted
average number of common shares outstanding during the period. The weighted
average number of shares outstanding was 19,972,841 and 11,321,046 for the three
months ended August 31, 2000 and 1999, respectively, and 13,763,070 since
inception August 31, 1998 through August 31, 2000. Diluted loss per share for
all periods presented equaled basic loss per share due to antidilutive effect of
the potentially dilutive securities.
Note 4 - Management Plans
- ------
The Company is devoting its present efforts into establishing a new business in
the Application Service Provider ("ASP") industry and is currently in the
process of establishing alliances with Independent Software Vendors ("ISV") to
provide applications for its customers and building channels for marketing
products to its customers. We are further developing new products to enable the
deployment and on going management of Insynq services. These products will
enable us to provide additional services to customers and will generate
additional revenues.
Accordingly, our operating revenue has been minimal. The Company's operations to
date have consumed substantial and increasing amounts of cash. The Company's
negative cash flow from operations is expected to continue and may accelerate in
the future. The Company has been exploring various marketing strategies and has
completed its national marketing plan. Through its efforts, the Company has
recently signed several national sales and marketing agreements. These
relationships are projected to bring over $300,000 per month in recurring
revenues. The Company will continue to need to raise substantial additional
capital through public and private equity or debt financing to fund its
operations and planned expansion of its sales efforts. In doing so, the Company
has recently negotiated a short-term promissory note for $1,120,000 and has
converted certain debentures in the amount of $900,000 and certain promissory
notes in the amount of $755,000 into common stock. The Company has recently
implemented a reorganization of its operations, both in sales and marketing and
in its executive management team, and implemented certain cost saving measures.
The Company has approximately $619,038 in trade payables that are over 90 days
past due. Management is currently working with creditors to define the payment
terms including offering stock or installment payment plans. In addition, the
Company is continuing to develop and refine its acquisition and expansion
strategy. There can be no assurance, however, that such additional funding will
be available on acceptable terms, if at all. The Company's continued existence
as a going concern is ultimately dependent upon its ability to secure additional
funding for completing and successfully market its technology and services.
Note 5 - Stock Split
- ------
On August 3, 2000, the Company held a special meeting of the shareholders and
unanimously voted to adopt the following:
In connection with the re-incorporation of the Company in the State of Delaware,
the shareholders adopted a plan of re-capitalization (the "Re-capitalization")
pursuant to which the issued and outstanding shares of the Company's common
stock were forward split, two-for-one, so that holders of common stock received
two shares of the Company's $0.001 par value common stock (the "Split Common
Stock") for each share previously held.
In addition, the 9,915,424 shares of common stock outstanding immediately prior
to the reorganization were converted to approximately 19,830,848 shares of
common stock, and outstanding options and warrants to purchase shares were
converted into options and warrants entitling the holders to purchase twice as
many shares upon exercise of such options and warrants. The financial statements
have been restated to reflect the forward split.
Note 6 - Stockholder Loans
- ------
On July 17, 2000, the Company entered into a private financing transaction with
two shareholders, International Fluid Dynamics ("IFD") and Garnier Holdings,
Inc. ("Garnier"), under the terms of which IFD and Garnier each loaned the
Company the sum of $127,500, or a total of $255,000, (the "loans"), and were
granted warrants to purchase a total of 325,000 shares of common stock at a
price of $2.00 per share at any time before July 17, 2005. The Loans are payable
on or before March 1, 2001, with interest compounded annually at the Chase
Manhattan Bank, NA rate quoted as its prime. The Company recorded a discount on
the loans totaling $229,000 for the fair value of warrants granted.
Note 7 - Convertible Debentures
- ------
Prior to June 1, 2000 the Company received a $100,000 shareholder advance on a
loan pursuant to an agreement with Travin Partners, LLLP ("TPL"), and TCA
Investments, Inc. ("TII"). On June 16, 2000, the Company entered into a private
financing transaction with TPL and TII, under the terms of which TPL and TII
each loaned us the sum of $325,000 (the "loans"), in the form of convertible
debentures, convertible at $0.71, with attached warrants entitling each of them
to purchase a total of 457,746 shares of the Company's common stock at a price
of $1.00 per share. Accrued interest under each debenture is payable only in
shares of the Company's common stock, at a price of $0.71 per share at the
current Bank of America prime rate, plus 1/2%.
The Company recorded a discount on the convertible debentures totaling $650,000
for the fair value of the warrants and conversion feature. The Company has
recognized $325,000 of interest expense on the discount for the period ended
August 31, 2000.
Note 8 - Stockholders' Equity
- ------
Issuance of Common Stock and Warrants for Cash:
On August 2, 2000 the Company completed a private placement of common equity
with five foreign investors for $100,000 at $0.50 per share, a total of 200,000
shares of restricted shares of common stock. The Company issued these securities
under an exception provided by Rule 903 of Regulation S under the Act.
On August 4, 2000 the Company completed a private placement of common equity
with a private equity investor for $120,000 at $0.60 per share, a total of
200,000 shares of restricted shares of common stock and warrants to purchase
200,000 shares of common stock at an exercise price of $2.00 per share were
issued.
F-8
Insynq, Inc.
(formerly Xcel Management, Inc.)
Notes To Financial Statements
Note 9 - Contingencies
- ------
On August 14, 2000, Kathleen McHenry ("McHenry"), the widow of a former
principal and shareholder of Insynq, filed a lawsuit in the Superior Court of
Washington against the Company, Insynq, M. Carroll Benton, the Company's Chief
Administrative Officer, Secretary, and Treasurer, and Mr. John Gorst, the
Company's President, Chief Executive Officer, and Chairman of the Board,
alleging that the defendants attempted to defraud her out of the shares issued
to her deceased husband during his tenure with Insynq. In May 1999, Mr. Gorst
and Ms. McHenry entered into an agreement whereby Ms. McHenry sold to Mr. Gorst
3,526,400 shares of Insynq left to her after her husband's death. The lawsuit
alleges that neither Mr. Gorst nor Insynq performed under the terms of the
agreement and seeks a rescission of that agreement, a declaration from the court
that the agreement is unenforceable, and damages in an unspecified amount.
Management does not consider the contingency to be probable or quantifiable, and
therefore has not accrued an amount on the Company's financial statements.
Note 10 - Stock Options
- -------
In connection with the restructuring, the Company granted 535,000 options to
existing employees and 85,000 options to employees who were terminated. All
options were issued at an exercise price of $1.63 per share.
The Company also issued options to employees with an exercise price under fair
market value. The Company recorded unearned compensation of $1,307,500 and
recognized expense of $111,326 for the period ended August 31, 2000.
Note 11 - Subsequent Events
- -------
Between September 11, 2000 and November 1, 2000, the Company entered into
several private financing transactions which totaled $1,625,000. In conjunction
with these short-term obligations, the Company issued convertible debentures
and granted warrants.
Effective September 1, 2000, the Company amended its Long Term Incentive Plan to
include a provision to issue stock options to consultants at less than fair
market value as of the grant date.
In October 2000, the Company entered into a consulting service agreement with
the spouse of a corporate officer. The services will be provided through June
2001 and will cost the Company approximately $70,100.
On October 23, 2000, a former president and officer of the Company filed a
lawsuit against the Company claiming breach of his employment contract and
certain other allegations. Damages claimed are $3,000,000, plus punitive
damages. The Company denies the validity of this claim and intends to vigorously
defend against the lawsuit.
On November 1, 2000, pursuant to the underlying terms of various debt
instruments and certain other agreements, the Company agreed to convert $900,000
in convertible debentures into 1,800,000 shares of common stock, and converted
$755,000 of short term notes payable into 1,510,000 shares of common stock.
The lawsuit filed by Kathleen McHenry (See also Note 9) on August 14, 2000 was
settled on November 30, 2000. Terms of the settlement stipulated that the
Company's CEO transfer 1,500,000 shares of Insynq, Inc. common stock held by
her personally in satisfaction of the claim.
F-9
G. BRAD BECKSTEAD
- -----------------
Certified Public Accountant
330 E. Warm Springs
Las Vegas, NV 89119
702.528.1984
425.928.2877efax
INDEPENDENT AUDITOR'S REPORT
Board of Directors
Insynq, Inc.
(A Development Stage Company)
Tacoma, WA 98405
I have audited the Balance Sheets of Insynq, Inc. (the "Company") (A Development
Stage Company) as of May 31, 2000 and 1999, and the related Statements of
Operations, Stockholders' Deficit, and Cash Flows for the years then ended.
These financial statements are the responsibility of the Company's management.
My responsibility is to express an opinion on these financial statements based
on my audit.
I conducted my audit in accordance with generally accepted auditing standards.
Those standards require that I plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statement presentation. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. I believe that my audit provides a reasonable basis for my
opinion.
In my opinion, the financial statements referred to above present fairly, in all
material respects, the financial position of Insynq, Inc. (A Development Stage
Company) as of May 31, 2000 and 1999, and the results of its operations, changes
in stockholders' deficit, and cash flows for the years then ended, in conformity
with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 12 to the financial
statements, the Company has had limited operations. This raises substantial
doubt about its ability to continue as a going concern. Management's plans in
regard to these matters are also described in Note 12. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.
/s/ G. Brad Beckstead
October 22, 2000
F-10
Insynq, Inc.
(formerly Xcel Management, Inc.)
(A Development Stage Company)
Balance Sheets - Restated
May 31, 2000 May 31, 1999
---------------- -------------------
ASSETS
CURRENT ASSETS:
Cash $ 106,806 $ 501
Accounts receivable, net of
allowance for doubtful accounts of 63,405 3,424
$1,469 at May 31, 2000
Other receivables 16,912 --
Inventory 29,512 2,246
Prepaid expenses 29,186 --
---------------- -------------------
245,821 6,171
PROPERTY AND EQUIPMENT, NET 1,031,675 79,001
OTHER ASSETS:
Intellectual and other intangible
property, net 87,824 128,270
Deposits 165,584 --
---------------- -------------------
$1,530,904 $213,442
================ ===================
- Continued -
F-11
Insynq, Inc.
(formerly Xcel Management, Inc.)
(A Development Stage Company)
Balance Sheets - Restated
May 31, 2000 May 31, 1999
------------------ -------------------
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
Accounts payable $ 296,946 $ 28,699
Accrued and other liabilities 183,565 123,218
Notes payable 39,470 70,000
Current portion of capital lease obligation 166,869 --
------------------ -------------------
Total current liabilities 686,850 221,917
ADVANCE FROM STOCKHOLDER 100,000 --
CAPITAL LEASE OBLIGATION, NET OF CURRENT
PORTION 442,087 --
COMMITMENTS AND CONTINGENCIES -- --
PUT OPTION OBLIGATIONS 1,071,785 --
STOCKHOLDERS' DEFICIT:
Preferred stock, $0.001 par value, -- --
10,000,000 shares authorized, no shares
issued or outstanding as of May 31, 2000
and 1999, respectively
Common stock, $0.001 par value,
100,000,000 shares authorized, 19,620,946
and 11,284,479 shares issued and
outstanding as of May 31, 2000 and 1999,
respectively 19,621 11,284
Additional paid-in capital 3,132,903 123,716
Accumulated development stage deficit (3,922,342) (143,475)
------------------ -------------------
Total stockholders' deficit (769,818) (8,475)
------------------ -------------------
$ 1,530,904 $ 213,442
================== ===================
The accompanying notes are an integral part of these financial statements.
F-12
Insynq, Inc.
(formerly Xcel Management, Inc.)
(A Development Stage Company)
Statements of Operations - Restated
Cumulative results of
operations since
Year ended May 31, inception
--------------------------------------
2000 1999 (August 31, 1998)
----------------- ---------------- --------------------------
REVENUE $ 235,808 $ 13,616 $ 249,424
COSTS AND EXPENSES:
Direct cost of services 594,297 43,616 637,913
Network and infrastructure costs 94,303 7,038 101,341
Selling, general and administrative 2,875,143 90,322 2,965,465
Research and development 105,752 -- 105,752
Advertising 97,745 -- 97,745
Depreciation and amortization 195,610 9,647 205,257
----------------- ---------------- -------------------
3,962,850 150,623 4,113,473
----------------- ---------------- -------------------
Loss from operations (3,727,042) (137,007) (3,864,049)
OTHER INCOME (EXPENSE):
Other income (expense) 46,786 -- 46,786
Interest expense (98,611) (6,468) (105,079)
----------------- ---------------- -------------------
(51,825) (6,468) (58,293)
----------------- ---------------- -------------------
NET LOSS $(3,778,867) $ (143,475) $(3,922,342)
================= ================ ===================
NET LOSS PER COMMON SHARE $(0.27) $(0.01) $(0.31)
================= ================ ===================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING 14,050,928 11,284,479 12,869,018
================= ================ ===================
The accompanying notes are an integral part of these financial statements.
F-13
Insynq, Inc.
(formerly Xcel Management, Inc.)
(A Development Stage Company)
Statement of Stockholders' Deficit - Restated
Accumulated
Common Stock Additional Development Total
Paid-in Stage Stockholders'
Shares Amount Capital Deficit Deficit
------------ ------------ -------------- -------------- ---------------
Balances at August 31, 1998 -- $-- $-- $-- $--
Issuance of founders' shares at $0.012
per share in August 1999 11,284,479 11,284 123,716 -- 135,000
Net loss for the year ended
May 31, 1999 -- -- -- (143,475) (143,475)
------------ ------------ -------------- -------------- ---------------
Balances at May 31, 1999 11,284,479 11,284 123,716 (143,475) (8,475)
Common stock warrants issued
for services rendered -- -- 782,844 -- 782,844
Issuance of common stock for
services performed in 1999
valued at $0.07 per share 700,000 700 50,050 -- 50,750
Allocation of warrants on
lease obligation in September 1999 -- -- 118,000 -- 118,000
Issuance of common stock at
$0.71 per share in August 1999 373,798 374 264,626 -- 265,000
Issuance of common stock for
services valued at $1.00 in
September 1999 59,000 59 58,941 -- 59,000
Issuance of common stock for
services valued at $1.00 per
share in November 1999 59,000 59 58,941 -- 59,000
Issuance of common stock for
services valued at $0.71 per
share in December 1999 76,735 77 54,323 -- 54,400
Issuance of common stock
attaching one Class A warrant
and one Class B warrant for
each share issued at $0.71 in
January 2000 1,311,821 1,312 928,688 -- 930,000
Issuance of common stock in
conjunction with merger
transaction with Xcel
Management, Inc. 3,600,090 3,600 (2,359) -- 1,241
Issuance of common stock at
$0.50 per share in February
2000 1,600,000 1,600 798,400 -- 800,000
Issuance of common stock for
services valued at $0.71 per
share in February 2000 43,265 43 30,629 -- 30,672
Issuance of common stock at
$1.75 per share in April 2000 61,944 62 108,340 -- 108,402
Issuance of common stock at
$1.75 per share in April 2000
in connection with repurchase
agreement 285,714 286 499,714 -- 500,000
Reclassification to put option
obligation -- -- (1,071,785) -- (1,071,785)
Issuance of common stock at
$2.00 per share in May 2000 125,000 125 249,875 -- 250,000
Issuance of common stock for
services valued at $2.00 per
share in May 2000 40,000 40 79,960 -- 80,000
Net loss for the year ended
May 31, 2000 -- -- -- (3,778,867) (3,778,867)
------------ ------------ -------------- -------------- ---------------
Balances at May 31, 2000 19,620,846 $19,621 $ 3,132,903 $(3,922,342) $ (769,818)
============ ============ ============== ============== ===============
The accompanying notes are an integral part of these financial statements.
F-14
Insynq, Inc.
(formerly Xcel Management, Inc.)
(A Development Stage Company)
Statements of Cash Flows - Restated
Cumulative cash flows
Year ended May 31, since inception
-----------------------------------------
2000 1999 (August 31, 1998)
------------------ ---------------- ---------------------
INCREASE (DECREASE) IN CASH
Net loss $(3,778,867) $(143,475) $(3,922,342)
ADJUSTMENTS TO RECONCILE NET LOSS TO NET
CASH USED IN OPERATING ACTIVITIES:
Depreciation and amortization expense 195,610 9,647 205,257
Issuance of common stock for services 333,822 5,257 339,079
Issuance of warrants for services 782,844 -- 782,844
Warrants issued with debt and capital 23,600 -- 23,600
leases
CHANGE IN ASSETS AND LIABILITIES:
Accounts receivable, net (59,981) (3,424) (63,405)
Other receivables 18,088 -- 18,088
Other assets (164,468) -- (164,468)
Inventories (27,266) (2,246) (29,512)
Prepaid expense (29,186) -- (29,186)
Deposits (165,583) -- (165,583)
Accounts payable 268,247 28,699 296,946
Accrued liabilities 60,604 122,961 183,565
------------------ ---------------- ---------------------
Net cash provided by (used by) operating activities (2,376,953) 17,419 (2,359,534)
------------------ ---------------- ---------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets (397,544) (15,370) (412,914)
Acquisition of intellectual property -- (1,548) (1,548)
Deposit on future acquisition (35,000) -- (35,000)
Cash received from Xcel acquisition 257 -- 257
------------------ ---------------- ---------------------
Net cash investing activities (432,287) (16,918) (449,205)
------------------ ---------------- ---------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on capital leases (7,327) -- (7,327)
Payments on short term notes payable (30,530) -- (30,530)
Proceeds from issuance of common stock 2,853,402 -- 2,853,402
Advances from stockholder 100,000 -- 100,000
------------------ ---------------- ---------------------
Net cash provided by financing
activities 2,915,545 -- 2,915,545
------------------ ---------------- ---------------------
NET INCREASE (DECREASE) IN CASH 106,305 501 106,806
CASH AT BEGINNING OF PERIOD 501 --
------------------ ---------------- ---------------------
CASH AT END OF PERIOD $ 106,806 $ 501 $ 106,806
================== ================ =====================
The accompanying notes are an integral part of these financial statements.
F-15
INSYNQ, INC.
(FORMERLY XCEL MANGEMENT, INC.)
NOTES TO FINANCIAL STATEMENTS
Note 1 - Basis of Presentation
- ------
The Company:
On February 18, 2000, the Company closed an asset purchase transaction in which
Xcel, a shell public company, acquired substantially all of the assets of
Insynq. Xcel continued the business of Insynq and on August 3, 2000, at a
special meeting of its shareholders, Xcel completed a re-incorporation as a
Delaware corporation and changed its' name to Insynq, Inc. In connection with
the re-incorporation of the Company in the State of Delaware, the shareholders
unanimously voted for the adoption of a plan of recapitalization (the
"Recapitalization") pursuant to which the issued and outstanding shares of the
Company's common stock, would forward split, two-for-one, so that holders of
common stock would receive two shares of the Company's $0.001 par value common
stock ("Split Common Stock") for each share held. The 9,915,424 shares of common
stock outstanding immediately prior to the reorganization were converted to
approximately 19,830,848 shares of common stock, and outstanding options and
warrants to purchase shares were converted into options and warrants entitling
the holders to purchase twice as many shares upon exercise of such options and
warrants.
Insynq, Inc. ("Insynq"), provides server-based computing services, and is an
application services provider ("ASP"). Insynq's services enable software
applications to be deployed, managed, supported and upgraded from centrally
located servers, rather than on individual desktop computers. For server-based
computing customers, Insynq installs and integrates software applications on
customers' servers. For ASP customers, Insynq hosts software applications on
servers at data centers, and rents computing services to customers for a monthly
fee. ASP customers connect to facilities over the Internet, through a dedicated
telecommunications line or by wireless connection.
Basis of Presentation: The financial statements presented herein represent those
of Insynq, the surviving entity in the reverse merger transaction described
above. The Company's operating revenue has been minimal and is insufficient to
maintain the Company as a going concern. The Company is continuing to develop
its products and business plan. In accordance with Statement of Financial
Accounting Standards ("SFAS") No. 7, the Company is considered a Development
Stage Company.
Note 2 - Summary of Significant Accounting Policies
- ------
Cash and Cash Equivalents: Cash and cash equivalents consist of money market
accounts and other short-term investments with maturity of three months or less
when purchased. The Company maintains a cash balance in a non-interest-bearing
account that currently does not exceed federally insured limits. For the
purpose of the statements of cash flows, all highly liquid investments with an
original maturity of three months or less are considered to be cash equivalents.
Fair Value of Financial Instruments: Financial instruments, consisting
principally of cash, accounts receivable, payables, accrued liabilities, short-
and long-term obligations, and their carrying values in the accompanying balance
sheets, approximate their fair value. It is management's opinion that the
Company is not exposed to significant currency or credit risks arising from
these financial instruments.
F-16
Accounts Receivable: The Company had established an allowance for doubtful
accounts based upon the history of account collection and prior bad debts.
Inventory: Inventories are stated at the lower of cost (first in, first out) or
market and consists of computer hardware, parts and supplies on hand for resale.
Property and Equipment: Equipment and hardware is stated at cost. Depreciation,
including amortization of capitalized cost of leased assets, for financial
statement purposes is calculated using straight-line and declining balance
methods over useful lives of the assets, which range from five to seven years.
The cost of maintenance and repairs is charged to income as incurred;
significant improvements are capitalized and amortized over the remaining life
of the lease.
Leasehold improvements are amortized over the shorter of the lives of the
respective leases or service lives of the improvements.
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect certain reported amounts and disclosures. Actual
results could differ from those estimates.
Revenue Recognition: The Company generates revenue from ASP services,
information technology services, outsourcing contract services, and from the
resale of computer hardware and software. Service revenue is recognized when the
service is provided, or over the term of the applicable contracts. Payments
received in advance, even if non-refundable, are recorded as customer deposits.
Revenue from the resale of computer hardware and software is recorded upon
shipment, or upon installation when required under contract terms.
Concentration of Credit Risk and Key Supplier: The Company sells the majority
of its services and products throughout North America. Sales to the Company's
recurring customers are generally made on an open account while sales to
occasional customers may be made on a prepaid basis. The Company generally does
not require collateral. Reserves are maintained for potential credit losses.
Citrix Systems, Inc. ("Citrix") is one of the Company's key suppliers. The
Company uses Citrix software almost exclusively to connect its customers to
software applications.
Intangible Assets: The Company capitalizes the costs associated with licenses
of major business process application software used in providing ASP services.
The licenses are amortized over three years.
Long-Lived Assets: The Company follows SFAS No. 121, "Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,"
which requires impairment losses to be recorded on long-lived assets used in
operations when indicators of impairment are present. Long-lived assets and
certain identifiable intangibles held and used by the Company are reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of an asset may not be recoverable. Based upon this review, the
Company believes that no impairment of the carrying value of its long-lived
assets existed at May 31, 2000 and 1999.
Income Taxes: The Company utilizes the liability method of accounting for income
taxes as set forth in SFAS No. 109, "Accounting for Income Taxes." Under this
method, deferred tax assets and liabilities are recognized based on the
anticipated future tax effects arising from the differences between the
financial statement carrying amounts of assets and liabilities and their
respective tax bases of assets and liabilities using enacted tax rates.
F-17
Stock-Based Compensation: The Company accounts for stock-based awards to
employees in accordance with Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" and related interpretations and has
adopted the disclosure-only alternative of SFAS No. 123, "Accounting for Stock-
Based Compensation." Options granted to consultants, independent representatives
and other non-employees are accounted for using the fair value method as
prescribed by SFAS No. 123.
Loss Per Common Share: Basic loss per share is computed by dividing the net
loss by the weighted average number of common shares outstanding during the
year. The weighted average number of shares outstanding was 14,050,928 and
11,284,479 for the fiscal years ended May 31, 2000 and May 31, 1999,
respectively, and 12,869,018 since inception August 31, 1998 through May 31,
2000. Diluted loss per share for all period presented equaled basic loss per
share due to antidilutive effect of the potentially dilutive securities.
Reclassifications: Certain amounts in the 1999 consolidated financial
statements have been reclassified to conform to the current year presentation.
Recent Accounting Pronouncements:
In June 1998, SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued, which establishes new standards for recording
derivatives in interim and annual financial statements. This statement requires
recording all derivative instruments as assets or liabilities, measured at fair
value. Statement No. 133, as amended, is effective for all fiscal quarters of
all fiscal years beginning after June 15, 2000. Management does not anticipate
the adoption of the new statement will have a significant impact on the
consolidated results of operations or financial position of the Company.
Note 3 - Property and Equipment
- ------
Property and equipment consist of the following as of May 31:
2000 1999
----------- -----------
Computer hardware $ 144,621 $50,636
Computer software 105,536 8,876
Equipment 217,468 24,948
Furniture and fixtures 86,650
Capitalized lease equipment 587,517
Leasehold improvements 51,365
----------- -----------
1,193,157 84,460
Less accumulated depreciation and amortization 161,482 5,459
----------- -----------
$1,031,675 $79,001
=========== ===========
Note 4 - Intellectual and Other Intangible property
- ------
Insynq, Inc. acquired the rights to the "Insynq Project" on August 31, 1998, in
exchange for 7,758,080 common shares of stock valued at $130,000. The Insynq
Project, consisting of tangible and intangible properties, is the development of
a proprietary data utility services system. The cost is amortized over sixty
months.
F-18
Note 5 - Deposits
- ------
Security deposits for realty leases consisted of the following at May 31, 2000:
Name of Lessor Refundable Date Amount
------------------- -----------------
Walarie, Inc. June 2005 $ 8,209
Vantas Sacramento, LLC April 2003 4,033
Howe/Horizon Holdings, LLC January 2009 153,342
-----------------
$165,584
=================
Note 6 - Lease Obligations
- ------
The Company conducts a substantial portion of its operations utilizing leased
office facilities, which expire in 2009. The Company also leases equipment
under capital leases expiring in 2003.
The following is a schedule by years of future minimum lease payments together
with the present value of the minimum payments under capital and operating
leases as of May 31, 2000:
Capital Leases Operating Leases
----------------- ------------------
Fiscal Year ending May 31,
2001 $281,556 $ 447,514
2002 274,692 429,169
2003 241,951 424,290
2004 -- 412,354
2005 -- 305,836
2006-2009 -- 1,131,874
----------------- ------------------
Future minimum lease payments 798,199 $3,151,037
==================
Less amount representing interest 189,243
-----------------
Present value of minimum lease payments $608,956
=================
Current maturities $166,869
Long-term maturities 442,087
-----------------
$608,956
=================
All of the above scheduled lease agreements were entered into during the fiscal
year ended May 31, 2000. The rent expense for facilities and equipment was
$178,578 and $0.00 for the fiscal years ended May 31, 2000 and 1999.
Note 7 - Convertible Debentures
- ------
In June 2000, the Company received a $100,000 advance on a loan pursuant to an
agreement with Travin Partners, LLP ("TPL"), and TCA Investments, Inc. ("TII").
On June 16, 2000, the Company entered into an additional private financing
transaction with TPL and TII, under the terms of which TPL and TII each loaned
us the sum of $325,000 (the "loans") in exchange for convertible debentures and
warrants.
Note 8 - Income Taxes
- ------
The Company accounts for income taxes using the liability method as prescribed
by Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes".
The income tax provision reconciled to the tax computed at the statutory federal
rate was as follows at May 31:
2000 1999
---------------- ----------------
Tax benefit at statutory rate $ (1,385,590) $ (48,782)
Permanent differences 4,046 48
Change in valuation allowance 1,381,544 48,734
---------------- ----------------
$ - $ -
================ ================
The components of deferred tax assets and liabilities consist of the following
at May 31:
2000 1999
---------------- ----------------
Deferred tax asset:
Liabilities not timely paid $ 20,040 $ -
Net operating loss carry forwards 1,147,482 52,299
Other 4,024 -
Warrants issued for services 266,167 -
---------------- ----------------
1,437,713 52,299
Deferred tax liability:
Depreciation (7,435) (3,565)
Valuation allowance (1,430,278) (48,734)
---------------- ----------------
$ - $ -
================ ================
The Company has established a valuation allowance of $1,430,278 and $48,734 as
of May 31, 2000 and 1999, respectively, due to the uncertainty of future
utilization of net operating loss carryforwards and realization of other
deferred tax assets. The valuation allowance was increased by approximately
$1,381,500 during the year ended May 31, 2000 based upon management's estimate
of the realizability of the net deferred tax asset. At May 31, 2000, an
operating loss carryforward of approximately $3,375,000 expiring through 2018 is
available to offset future taxable income. Utilization of these carryforwards
are dependent on future taxable income and could further be limited due to a
change of control in the Company's ownership as defined by the Internal Revenue
Code 382.
F-19
Note 9 - Stockholders' Equity
- -------
The Company is authorized to issue 100,000,000 shares of $0.001 par value common
stock and 10,000,000 shares of $0.001 par value preferred stock. The Company
has issued and outstanding 19,620,846 and 11,284,479 shares of $0.001 par value
common stock as of May 31,2000 and 1999, respectively. There were no shares of
preferred stock issued or outstanding as of May 31, 2000 or May 31, 1999.
Note 10 - Stock Options
- -------
During fiscal year 2000, the Company's Board adopted the Long Term Incentive
Plan ("LTIP") and the Executive Long Term Incentive Plan (the "Executive LTIP").
The "Executive LTIP" provides for the issuance of incentive and non-qualified
stock options, stock appreciation rights and restricted stock. The maximum
number of options under the Executive LTIP is 5,400.000. As of
F-20
May 31,2000, a total of 5,000,000 options were granted to M. Carroll Benton, the
Chief Administrative Officer, Secretary and Treasurer, and John P. Gorst, the
Chief Executive Officer, under the Executive LTIP.
The LTIP provides for the issuance of incentive and non-qualified stock options,
stock appreciation rights and restricted stock to directors, officers, employees
and consultants. The maximum numbers of shares, which may be issued upon the
exercise of options under the LTIP, is 16,750,300.
The Company has adopted the disclosure only provisions of Financial Accounting
Standard No. 123, "Accounting for Stock-Based Compensation" (SFAS 123). The
Company generally does not recognize compensation expense for its stock based
compensation plans. If the Company had elected to recognize compensation expense
based upon the fair value at the grant date for awards under these plans
consistent with the methodology prescribed by SFAS 123, the Company's net loss
would change to the pro forma amounts indicated below:
2000
------------
Net loss
As reported $(3,778,867)
Pro forma $ 5,700,015)
Net earnings (loss) per share
As reported $ (0.34)
Pro forma $ (0.51)
The fair value of option grants is estimated using the Black-Scholes option-
pricing model with the following weighted-average assumptions for the years
ended May 31:
2000
------------
Expected volatility 90%
Expected dividend yield --
Risk-free interest rate 6.5%
Expected life 10 years
A summary of the Company's stock option plan's activity is as follows:
-----------------------------------------
Weighted-Average
Shares Exercise Price
---------------- ---------------------
Outstanding at beginning of year -- --
Granted 7,011,802 $0.51
Exercised -- --
Forfeited -- --
---------------- ---------------------
Outstanding at end of year 7,011,802 $0.51
================ =====================
Options exercisable at end of year 4,555,482 $0.58
================ =====================
Weighted-average fair value of
options granted during the year $0.39
=====================
The following is a summary of stock options outstanding from the 2000 Stock
Option Plan at May 31,2000
Options Outstanding
-----------------------------------------------------------------
Weighted-
Average Number of
Exercise Number Remaining Options
Price Outstanding Contractual Life Exercisable
------------------- ----------------------- ---------------
$0.25 - $0.71 5,731,802 8.59 years 4,555,482
F-21
$1.00 1,280,000 8.72 years --
The Company has issued 1,100,000 stock options to consultants outside of the
2000 Stock Option Plan. Shares totaling 500,000 were outstanding and
exercisable at May 31, 2000. The weighted average exercise price of the shares
was $0.89 and the average remaining contractual life was 4.0 years. None of
these options were exercised or forfeited as of May 31,2000.
Note 11 - Warrants
- -------
The Company granted 4,016,766 common stock warrants as of May 31, 2000. In
conjunction with leased computer equipment the Company granted 282,112 warrants
with an exercise price of $0.35.
In January of 2000, the Company completed a private offering, in reliance upon
applicable exemptions from the registration requirements under the Securities
Act of 1933, as amended, of a total of 1,311,821 shares of common stock at an
offering price of approximately $0.71. Each purchaser in the private offering
was issued one Class A Warrant and one Class B Warrant entitled the purchasers
to purchase a share of common stock at any time on or before December 31, 2001,
at a price of $1.77 and $2.84 repectively.
The Company issued warrants and options with exercise prices less than fair
market value on the date of grant. The Company valued the option and warrants
using the Black-Scholes valuation model.
Note 12 - Going Concern
- --------
The Company's financial statements are prepared using the generally accepted
accounting principles applicable to a going concern, which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. Without realization of additional capital, it would be unlikely for
the Company to continue as a going concern. Additionally the Company does not
have significant cash or other material assets, nor does it have an established
source of revenue sufficient to cover its operating costs to allow it to
continue as a going concern indefinitely.
The Company plans to continue to raise funds through public and private debt and
equity financings. Consistent with this approach, the Company has entered into
various non-exclusive financial agreements.
Note 13 - Related Party Transactions
- --------
Interactive Information Systems ("Interactive") is a wholly owned company of M.
Carroll Benton, the Company's Chief Administrative Officer, Secretary and
Treasurer. John P. Gorst, Chief Executive Officer and President, was also an
employee of Interactive. During their time at Interactive, Ms. Benton and Mr.
Gorst began developing the "Insynq Project," which later developed into our
current business. On September 16, 1998, Interactive exchanged substantially all
of its assets with Charles Benton, the husband of Ms. Benton, to retire a
$200,000 debt owed by Interactive to Mr. Benton. On that same date, Mr. Benton
sold the tangible assets he had acquired to Insynq-WA of which Ms. Benton and
Mr. Gorst were principals, for a $70,000 promissory note and he contributed the
intangible assets, consisting of the "Insynq Project," to Insynq-WA for
5,500,000 shares of common stock of Insynq-WA. Mr. Benton then sold 2,500,000
shares to each of Ms. Benton and Mr. Gorst in exchange for a $65,000 note from
each of them. The shares purchased secured each such note. During the start-up
operations of Insynq-WA, the business contacts of Interactive were utilized in
the purchase of supplies and other items for Insynq-WA. As of September 30,
1999, Insynq-WA owed Interactive $117,024 related to these purchases, and on
November 12, 1999, the board of Insynq-WA approved the issuance of 118,000
shares of its common stock in full payment of this debt, after a board
determination that the shares of Insynq-WA should be valued at $1.00 per share.
From October 1, 1999 through August 18, 2000,
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approximately $8,000 of services consisting primarily of rental allocation was
charged to the Company by Interactive. During the same time period, the Company
sold approximately $6,400 of services to Interactive.
Note 14 - Commitments
- --------
On May 15, 2000, the Company entered into a financial advisory agreement with
Gerard Klauer Mattison & Co., Inc. ("GKM"), under the terms of which the Company
and its affiliates have engaged GKM, and GKM has agreed to serve, as the
Company's exclusive financial advisor concerning certain "strategic"
transactions. Under the terms of the agreement (the "GKM Agreement"), GKM has
agreed to provide assistance to the Company in identifying and contacting
parties, which may be interested in considering a "strategic transaction," and,
as exclusive financial advisor to the Company, to assist the Company, on a best-
efforts basis, in analyzing, structuring, negotiating and effecting potential
"strategic transactions" on terms and conditions satisfactory to the Company.
The Company has recently entered into an amendment to a business services
contract between Insynq-WA and Consulting & Strategy International, LLC ("CSI"),
an unrelated third party. Under the terms of the amended agreement, amended on
July 31, 2000, CSI has provided, and agreed to continue to provide, for the
duration of the agreement, business consulting services to the Company. In
consideration of such services, the Company has granted to CSI, options to
purchase a total of 600,000 shares, at a price of $1.00 per share, and warrants
to purchase up to a total of 2,000,000 shares, exercisable at any time after
November 1, 2000 and before February 20, 2003, in increments of 500,000 shares,
at exercise prices of $1.25, $1.50, $2.00 and $2.25. In addition, the Company
has agreed to pay to CSI a monthly retainer of $2,500, increasing to $5,000 per
month after the Company's common stock bid price in the over-the-counter market
exceeds $3.00 per share for five (5) consecutive business days; $7,500 per month
at such time as the Company's common stock bid price exceeds $4.00 per share for
five consecutive business days; and $10,000 at such time as the Company's stock
bid price exceeds $5 per share for five consecutive business days, or until such
time as the Company and any of its subsidiaries have obtained a funding
commitment from any source for $4 million or more.
The Company has entered into a consulting agreement with Vijay Alimchandani
("VJ"), dated February 20, 2000, under the terms of which the Company has
engaged VJ to provide to the Company general consulting services, including
strategic planning, the identification of possible strategic alliances with
software vendors, the evaluation and development of cooperative alliances, and
related activities. The agreement is for an initial term of twelve months, and
is automatically renewable for successive one-year terms unless terminated by
either party prior to the end of a term. The Company has agreed to reimburse VJ
for all travel and entertainment and reasonable expenses related to his
consulting services, and to pay VJ a consulting fee of $5,000 per month,
increasing to $7,000 per month as such time as the Company has secured $2
million in equity financing, and to $10,000 per months at such time as the
Company has secured an additional $10 million in equity financing. In addition,
the Company has granted options to VJ, as follows: (a) 500,000 shares,
exercisable at any time prior to February 21, 2005, at a price of $0.25 per
share; and (b) 400,000 shares, exercisable one year from the beginning date of
the contract, for a period of five years, at an exercise price of $.50 per
share. The Company has also agreed to grant to VJ (a) an additional option,
entitling him to purchase a total of 180,000 shares for a five year period
beginning at the end of 24 months from the date of the agreement, if such
agreement is extended by the Company, at price of $.75 per share; and (b) bonus
options of between 50,000 to 100,000 shares, to be granted at the discretion of
the board of directors based on the performance of VJ, at an exercise price of
not more than $1.50 per share. The Company has granted to VJ "piggyback"
registration rights in connection with the shares under options, pursuant to
which the Company has agreed to include such shares in a Form S-8 registration
statement to register the initial 900,000 shares under option described above.
The Company has assumed the obligation of Insynq-WA under a financial public
relations consulting agreement with One Click Investments, LLC ("One Click"), a
Washington state limited liability company of
F-23
which Eric Estoos, a shareholder of the Company, is a principal. Under the terms
of the agreement with One Click, the Company has agreed to engage One Click to
provide various financial public relations services. The Company has agreed to
compensate One Click for its services at the rate of $8,000 per month during the
term of the agreement (through August 19, 2000, which is automatically renewable
for six additional months unless terminated by either party in writing), to
reimburse One Click for all reasonable expenses in connection with the
agreement, and to pay One Click a fee of 10% of all funding obtained by One
Click for the Company, to the extent permitted by law. The Company also issued
One Click 700,000 restricted shares of common stock and granted One Click
warrants to purchase a total of 1,500,000 shares of common stock, exercisable at
any time after December 31, 2000, and prior to December 31, 2003, in one-third
increments of 500,000 shares, at exercise prices of $2.00, $4.00 and $7.50 per
share. One Click has executed a voting proxy in favor of John Gorst, Chief
Executive Officer, with respect to the restricted shares.
Note 15 - Contingencies
- -------
On August 14, 2000, the widow of a former principal and shareholder of Insynq,
Inc., filed a lawsuit in the Superior Court of Washington against the Company,
Insynq, Inc., M. Carroll Benton, the Company's Chief Administrative Officer,
Secretary, and Treasurer, and Mr. John Gorst, the Company's President, Chief
Executive Officer, and Chairman of the Board. The lawsuit alleges that the
defendants attempted to defraud her out of the shares issued to her deceased
husband during his tenure with Insynq, Inc., which she later sold to Mr. Gorst.
Management does not consider the contingency to be probable or quantifiable, and
therefore has not accrued an amount on the Company's financial statements for
the years ended May 31, 2000 and 1999.
The Company is currently in negotiations with the Company's former President and
Chief Operating Officer regarding the termination of his employment contract.
Management does not consider the contingency to be significant in order to be
accrued as a liability on the Company's financial statements for the years ended
May 31, 2000 and 1999.
Note 16 - Supplementary Cash Flow Information
- -------
The following non-cash transactions have been appropriately excluded from the
statement of cash flows:
The Company has entered into an agreement with Horizon Holdings I, LLC to
provide facilities management services at its location in Tacoma, Washington at
the Tacoma Technology Center. The agreement to provide collaborative management
services is effective July 1, 1999 for a monthly base fee of $3,000 and will
continue through December 31, 2000. The Company will have the use of this
location for its data utility equipment in exchange for management of the
facilities. The rental value of the office space is offset with an appropriate
charge to service income. Future minimum rental payments over the life of the
agreement total $21,000.
The Company entered into a three-year capital lease agreement with Hewlett
Packard to acquire $780,683 in equipment. A discount of $118,000 was recognized
in the capital lease representing the value of warrants granted Hewlett Packard
as part of the agreement. Future minimum lease payments over the life of the
agreement total $798,199.
The Company acquired $130,000 in intangible assets representing intellectual
property from one of its founders during the fiscal year ended May 31, 2000.
The Company acquired $727 in other assets with common stock during the fiscal
year ended May 31, 2000.
F-24
Note 17 - Asset Purchase Agreement
- -------
On January 26, 2000, the Company entered into an Asset Purchase Agreement with
Insynq, Inc.. The terms of the Asset Purchase Agreement were substantially
completed on February 18, 2000. Under the terms of the Asset Purchase Agreement,
the Company acquired substantially all of the assets of Insynq, Inc., and
assumed substantially all of the obligations of Insynq, Inc., in exchange for
the issuance by the Company of a total of 15,208,100 shares of restricted common
stock of the Company, to the Insynq, Inc. shareholders pro rata in a liquidating
distribution. As a result of the transaction, the Company had a total of
approximately 18,808,100 shares issued and outstanding, of which the former
Insynq, Inc. shareholders held 15,208,100 shares, or approximately 81%. In
connection with the Asset Purchase Agreement, Insynq, Inc. obtained approval of
the sale of its assets by its shareholders at a duly called and convened
shareholders' meeting.
As a result of the Asset Purchase Agreement, the Company has acquired
essentially all of the assets, tangible and intangible, of Insynq, Inc., and has
become engaged in Insynq, Inc.'s business, described below. These assets include
computer hardware and software, related equipment, furniture and fixtures,
proprietary technology developed by Insynq, Inc., all contractual rights
including capitalized lease equipment and other leasehold rights, trade names
and trademarks and all client lists and marketing data and materials, cash and
cash equivalents, accounts receivable, inventory, work in progress and related
assets. The asset considered most valuable by Insynq, Inc. and the Company in
completing the Asset Purchase Agreement, is Insynq, Inc.'s proprietary data
utility services system that was designed to offer enhanced technological
computer processing and communication capabilities.
In addition, the Company has agreed to assume all equipment leases, leasehold
obligations covering office space utilized by Insynq, Inc., all consulting
contracts, and all other contract obligations. Finally, at the time of
completion of the Insynq, Inc. asset acquisition, Insynq, Inc. had outstanding
to various shareholders, a number of warrants and options, entitling the holders
to purchase shares up to a total of 7,358,392 shares of restricted common stock
of Insynq, Inc., which warrants and options have been converted into options and
warrants to purchase a total of approximately 7,358,392 shares of the Company's
common stock, at prices of between $0.25 to $7.50 per share. The exercise of all
or any portion of these outstanding options and warrants would have the effect
of substantially diluting the ownership of the present shareholders in the
Company.
Note 18 - Subsequent Events
- -------
On or about June 15, 2000, the Company entered into a non-exclusive financial
advisory agreement with Sunstate Equity Trading, Inc. ("Sunstate"), a Florida
corporation, which is a member of the NASD, under the terms of which the Company
has engaged Sunstate, on a non-exclusive basis, to provide financial advisory
services and advice. The agreement is for an initial term of one year, and may
be extended for additional terms as agreed upon by the parties. In
consideration of the services undertaken by Sunstate, the Company has issued to
Sunstate a total of 250,000 shares of restricted common stock, and agreed to
reimburse Sunstate for all out-of-pocket expenses incurred in providing services
under the agreement.
On or about June 16, 2000, the Company entered into a private financing
transaction with two investors, Travin Partners, L.L.L.P. ("TPL") and TCA
Investments, Inc. ("TII"), under the terms of which TPL and TII each loaned to
the Company the sum of $325,000 (the "loans"), and were sold convertible
debentures and granted warrants, described below. The loans are payable
pursuant to the terms of a convertible debenture (the "debenture"), providing
for full payment on or before June 16, 2002 (the "due date"), with interest at
the current Bank of America prime rate, plus 1/2%. All accrued interest under
each debenture is payable only in shares of the Company's common stock, at a
price of $.71 per share. The debentures are convertible in increments of no
less than $10,000, at any time after November 1, 2000 and before the close of
business on the due date, into shares of common stock of the Company, at a price
of $.71 per share, or a total of 457,746 shares each for TPL
F-25
and TII. In addition to the debentures, TPL and TII were granted warrants
entitling each of them to purchase a total of 457,746 shares of the Company's
common stock at a price of $1.00 per share, at any time after November 1, 2000
and before June 15, 2005. The number of shares and exercise or conversion prices
of the shares exercisable under the debentures and warrants held by TPL and TII,
are subject to usual adjustments in the event of stock dividends, merger,
consolidations, stock splits or distributions or similar events. The Company has
agreed to file, on or before September 15, 2000, a registration statement which
includes the shares issuable under conversion of the debentures and upon
exercise of the warrants held by TPL and TII (the "underlying shares"), at TPL's
and TII's request, and to cause such registration statement to become effective
as soon as practicable. In addition, the Company has agreed to include the
underlying shares, on TPL's and TII's request, in any registration filed by the
Company (exclusive of a registration relating to sales in employee benefit
plans, a Rule 145 transaction, or the sale of debt or convertible debt
instruments, or a registration statement which does not contain substantially
similar information), subject to the holder's agreement to enter into
appropriate underwriting agreement(s), and other requirements. The subscription
agreements for the purchase of the debentures and warrants held by TPL and TII
provide that, on a one-time basis on the date the Company sells additional
securities to or through an institutional investor, and only if the total market
valuation of the Company is less than $30 million, TPL and TII will each be
entitled to receive shares issuable upon conversion of debentures and upon
exercise of warrants, equal to the number of shares issuable upon such exercise
of warrants and conversion of debentures, multiplied by a number, the numerator
of which is $30 million and the denominator of which is the actual total market
valuation of the Company.
On or about July 10, 2000, the Company entered into a non-exclusive financial
consulting agreement with Union Atlantic LC and Union Atlantic Capital LC to
provide financial consulting services to the Company in the form of: (i)
evaluating the Company's capital requirements for funding growth and expansion
of the Company's operations; (ii) advising the Company as to alternative modes
and sources of financing; (iii) analyzing the impact of business decisions,
policies, and practices on the value of the Company's business and securities;
and (iv) bringing to the attention of the Company possible business
opportunities and evaluating business opportunities generally, whether or not
such opportunities are oriented by United Atlantic or others. Pursuant to the
terms of the Union Atlantic agreement, the Company has agreed to pay to Union
Atlantic a cash fee equal to ten percent (10%) of the aggregate purchase price
of the securities purchased by or through any investor or intermediary
identified to the Company by Union Atlantic. In addition, upon the closing of
each transaction contemplated in the Union Atlantic agreement, the Company has
agreed to issue to Union Atlantic through escrow a warrant entitling Union
Atlantic or its designees to purchase 50,000 shares per one million dollars
($l,000,000) raised, subject to adjustment of the Company's common stock. The
warrant will be immediately exercisable for a four (4) year period and shall
have unlimited piggyback registration rights.
On July 17, 2000, the Company entered into a private financing transaction with
two investors, International Fluid Dynamics ("IFD") and Garnier Holdings, Inc.
("Garnier"), under the terms of which IFD and Garnier each loaned the Company
the sum of $127,500, or a total of $255,000, (the "loans"), and were granted
warrants described below. The Loans are payable pursuant to the terms of a
promissory note (the "Note"), providing for full payment on or before August 17,
2000 (the "Due Date"), with interest compounded annually at the Chase Manhattan
Bank, NA rate quoted as its prime. The warrants entitle each of IFD and Garnier
to purchase a total of 325,000 shares of common stock at a price of $2.00 per
share at any time before July 17, 2005. If the Notes are not paid by 5:00pm CST
on August 17, 2000, the exercise price will decrease by half, or $1.00, and on
and after each additional ten (10) day period that the Notes remain unpaid, the
exercise price will decrease by an additional ten percent (10%). The due date
of the Notes has been extended to 5:00pm CST on October 1, 2000, without
prejudice to the Company's rights to reduce the exercise price. Both IFD and
Garnier were granted "piggyback" registration rights with respect to the shares
underlying the warrants.
On August 2, 2000, the Company entered into a private financing transaction with
five foreign investors (the "Investors"), under the terms of which the Investors
purchased an aggregate of 200,000 shares of common
F-26
shares at a price of $0.60 per share pursuant to Subscription Agreement (the
"Agreements"). The Company issued these securities under an exemption provided
by Rule 903 of Regulation S under the Act.
On August 4, 2000, the Company sold a total of 200,000 shares of common stock to
One Click Investments, LLC, a Washington corporation ("One Click"), at a price
of $0.60 per share. In connection with this sale, One Click was granted
warrants to purchase an additional 200,000 shares of common stock, exercisable
at any time for a five (5) year period, at a price of $2.00 per share. In
connection with this transaction, One Click was granted registration rights
under a Registration Rights Agreement (the "Agreement") granting One Click (a)
one demand registration right, on or after November 1, 2000, requiring the
Company to file a registration statement upon request and (b) "piggyback"
registration rights. The Company issued these securities under an exemption
provided by Rule 506 of Regulation D under the Act.
On August 11, 2000, the Company entered into an agreement for the sale of
1,100,000 shares of common stock to Tricorp Financial, Inc., a Delaware
corporation ("Tricorp"), at a price of $1.50 per share. An additional 1,100,000
shares will be issued after the shares are registered for resale. The shares
have not yet been paid for, but the Company has been assured that payment will
be received no later than September 15, 2000. In connection with this sale,
Tricorp was granted registrations rights obligating the Company to file or have
declared effective a registration statement registering the shares within 120
days of the date of the transaction. The Company issued these securities under
an exemption provided by Rule 506 of Regulation D under the Act.
On August 24, 2000, the Company entered into a private financing transaction
with certain foreign investors (the "Investors"), under the terms of which the
Investors purchased an aggregate of 135,000 of common shares at a price of
$0.2963 per share pursuant to Subscription Agreements (the "Agreements"). The
Company issued these securities under an exemption provided by Rule 903 of
Regulation S under the Act.
On September 11, 2000, the Company entered into a private financing transaction
with two investors, Travin Partners, L.L.L.P. ("TPL") and TCA Investments, Inc.
("TII"), under the terms of which TPL and TII each loaned us the sum of
$125,000, or a total of $250,000, (the "loans"), and were sold convertible
debentures and granted warrants, described below. The loans are payable
pursuant to the terms of identical convertible debentures (each, a "Debenture"),
providing for full payment on or before October 11, 2000 (the "Due Date"), with
interest at the current Bank of America prime rate, plus 1/2%. All accrued
interest under each Debenture is payable only in shares of common stock at a
price of (a) $1.00 per share or (b) sixty percent (60%) of the average of the
bid price, whichever is less on the date of conversion. The Debentures are
convertible in increments of no less than $10,000, at any time after September
11, 2000 and before the close of business on the due date for a total of
125,000 shares each for TPL and TII. In addition to the Debentures, TPL and TII
were granted warrants entitling each of them to purchase a total of 250,000
shares of common stock at a price of $1.00 per share, at any time after
September 11, 2000 and before September 11, 2005. The Company agreed to file,
on or before September 25, 2000, a registration statement which includes the
shares issuable under conversion of the Debentures and upon exercise of the
warrants held by TPL and TII (the "Underlying Shares"), at TPL's and TII's
request, and to cause such registration statement to become effective as soon as
practicable. In addition, the Company agreed to include the Underlying Shares,
on TPL's and TII's request, in any registration it files (exclusive of a
registration relating to sales in employee benefit plans, a Rule 145
transaction, or the sale of debt or convertible debt instruments, or a
registration statement which does not contain substantially similar
information), subject to the holder's agreement to enter into appropriate
underwriting agreement(s), and other requirements. The Company issued these
securities under an exemption provided by Rule 506 of Regulation D under the
Act.
On August 3, 2000, the Company held a special meeting of the shareholders and
unanimously voted to adopt the following:
a) REINCORPORATION IN DELAWARE
F-27
Changing the state of incorporation of the Company from Utah to Delaware. In
order to accomplish the re-incorporation in accordance with the laws of the
states of Utah and Delaware, the Company has merged with and into a wholly owned
subsidiary, Insynq, Inc., formed under the laws of the state of Delaware
(hereinafter "Insynq"), pursuant to the terms of a Plan of Merger. Under the
terms of the merger, Insynq is the surviving corporation. The Certificate of
Incorporation and Bylaws of Insynq will be the governing instruments of the
surviving corporation.
Through the merger, and in connection with the recapitalization described under
"RECAPITALIZATION," the shareholders of the Company received two shares of
Insynq common stock, par value $0.001 per share, in exchange for each share of
the Company's common stock, par value $0.001 per share, held immediately prior
to the merger.
The Certificate of Incorporation of Insynq increased the authorized number of
shares of common stock (the "Common Stock") to 100,000,000 shares, par value
$0.001 per share, and 10,000,000 shares of preferred stock, par value $0.001 per
share. In addition, the Certificate of Incorporation of Insynq also authorizes
a total of 10,000,000 shares of Class A Common Stock (the "Class A Common
Stock"), par value $0.001 per share.
Change of Company's Name
In connection with the re-incorporation, the name of the Company is changed to
"Insynq, Inc.,". The Company believes that changing the Company's name to
"Insynq, Inc." will be more reflective of the Company's activities.
Forward Stock Split
In connection with the re-incorporation of the Company in the state of Delaware,
the company has affected a forward split in the Company's issued and outstanding
$0.001 par value common stock, increasing the number of outstanding shares to
approximately 19,830,848 shares of common stock. The issued and outstanding
shares of the Company's common stock immediately prior to the re-incorporation
in Delaware will be effectively forward split through the merger on a two-for-
one basis. Through the merger with Insynq, the shareholders of the Company will
receive two shares of common stock, par value $0.001, of Insynq for each one
share of the Company's common stock.
b) RECAPITALIZATION
The shareholders unanimously voted for the adoption of a plan of
recapitalization (the "Recapitalization") pursuant to which the issued and
outstanding shares of the Company's common stock, will be forward split, two-
for-one, so that holders of common stock will receive two shares of the
Company's $0.001 par value common stock ("Split Common Stock") for each share
now held.
The rights of existing shareholders will not be altered in connection with the
Recapitalization, and no shareholders will be eliminated as a result of the
Recapitalization. The authorized number of shares of common stock will not
change, and the par value of the Company will remain at $0.001. The
Recapitalization will have the effect of increasing the stated capital of the
Company by approximately $9,915 (which is the number of additional shares as a
result of the Recapitalization multiplied by the par value for such shares).
If the Recapitalization is approved by the shareholders, the 9,915,424 shares of
common stock outstanding immediately prior to the reorganization would be
converted to approximately 19,830,848 shares of common stock, and outstanding
options and warrants to purchase shares would be converted into options and
warrants entitling the holders to purchase twice as many shares upon exercise of
such options and warrants.
F-28
c) ADOPTION OF INCENTIVE PLANS
The shareholders unanimously voted to adopt the Company's 2000 Long Term
Incentive Plan (the "Employee Plan") and its 2000 Executive Officer Long Term
Incentive Plan Option Plan (the "Executive Plan"). The two plans are
hereinafter referred to together as the "Incentive Plans." The essential terms
of the Incentive Plans are substantially identical, except for two differences:
1) The Employee Plan is for executives, managers and key employees of the
Company. The Executive Plan is for executive officers of the Company.
2) The Company has reserved a total of 16,675,300 shares of common stock for
issuance under the Employee Plan, and the Company has reserved a total of
5,400,000 shares of Class A Common Stock for issuance under the Executive Plan.
As described below, the Class A Common Stock carries preferred voting rights,
entitling the holder to three (3) voting shares for each share of common stock
held by a holder of Class A Common Stock.
d) RATIFICATION OF ACCOUNTANT
The selection of G. Brad Beckstead as independent auditor of the Company in
2000 was unanimously ratified.
F-29
17,184,796 SHARES
INSYNQ, INC.
COMMON STOCK
PROSPECTUS
DECEMBER 14, 2000
You should rely only on information contained in this prospectus. We have not
authorized anyone to give any information or make any representations in
connection with this offering other than those contained in this prospectus. If
anyone gives you any such information or makes any such representations, you
should not rely on it or them as having been authorized by us. This prospectus
is not an offer to sell common stock and it is not soliciting an offer to buy
common stock in any state where the offer and sale is not permitted. The
information contained in this prospectus is accurate only as of the date of this
prospectus, regardless of the time of delivery of this prospectus or of any sale
of our common stock.
PART II
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Delaware General Corporation Law authorizes a court to award, or a
corporation's board of directors to grant, indemnity to directors and officers
in terms sufficiently broad to permit such indemnification under certain
circumstances (including reimbursement for expenses incurred) arising under the
Securities Act of 1933, as amended. Our Certificate of Incorporation and Bylaws
provide that we will indemnify our directors and officers to the fullest extent
permitted by Delaware law and include a provision limiting director liability to
us or our shareholders for monetary damages arising from certain acts or
omissions in the director's capacity as a director. In addition, we have the
ability to maintain insurance on behalf of our directors and executive officers
to insure them against any liability asserted against them in their capacities
as directors or officers or arising out of such status.
Certain of our registration rights agreements or arrangements contain
reciprocal agreements of indemnity between us and certain of the selling
stockholders as to certain liabilities, including liabilities under the
Securities Act and in certain circumstances could provide for indemnification of
our directors and officers.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the small
business issuer pursuant to the foregoing provisions, or otherwise, we have been
advised that in the opinion of the Securities and Exchange Commission, this type
of indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table indicates the estimated expenses that have been or will
be incurred in connection with this offering, all of which will be paid by us.
SEC registration fee .................................. $ 3,629.43
Accounting fees and expenses .......................... 10,000.00
Legal fees and expenses ............................... 30,000.00
Printing and shipping ................................. 20,000.00
Blue Sky fees and expenses............................. 2,500.00
Miscellaneous expenses ................................ 0.00
Total ............................................... $66,129.43
==========
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
The following sets forth information regarding all sales of our
unregistered securities during the past three years. All of these shares were
exempt from registration under the Securities Act by reason of Section 4(2) of
the Securities Act, or Regulation D promulgated thereunder, as transactions by
an issuer not involving a public offering, or were exempt by reason of the
application of Regulation S. The recipients of securities in each of these
transactions represented their intentions to acquire the securities for
investment only and not with a view to or for sale in connection with any
distribution of the securities, and appropriate legends were affixed to the
share certificates and warrants issued in such transactions. All
II-1
recipients had adequate access, through their relationships with us or
otherwise, to information about us. Unless otherwise indicated, the issuances of
the securities described below were affected without the involvement of
underwriters. Where applicable, each of the disclosures has been adjusted to
account for the 1.41056 to 1 stock split of Insynq-WA, the 1 for 2 stock split
of Xcel effective on January 24, 2000, and the 2 for 1 stock split of Insynq-
Delaware effective on August 3, 2000.
1. We assumed a business services contract dated November 18, 1999, with
Consulting & Strategy International, LLC, or CSI, under which we granted to
CSI options to purchase a total of 600,000 shares at a price of $1.00 per
share, and warrants to purchase up to a total of 2,000,000 shares,
exercisable at any time after May 1, 2001 and before February 20, 2003, in
increments of 500,000 shares, at exercise prices of $1.25, $1.50, $2.00 and
$2.25. These warrants have a "cashless" exercise provision allowing CSI to
exercise the warrants for a reduced number of shares pursuant to a formula
set forth in the warrants.
2. We assumed an equipment financing arrangement dated June 1, 1999, with
Hewlett-Packard under which we granted to Hewlett-Packard an option to
purchase a total of 282,112 shares of common stock at any time prior to
June 1, 2002, at a price of $0.35 per share.
3. We assumed a financial public relations consulting agreement dated
September 20, 1999, with One Click Investments, L.L.C., or One Click, under
which we issued One Click 700,000 restricted shares of common stock and
granted One Click warrants to purchase a total of 1,500,000 shares of
common stock, exercisable at any time after February 28, 2001, and prior to
December 31, 2003, in one-third increments of 500,000 shares, at exercise
prices of $2.00, $4.00 and $7.50 per share.
4. We assumed a Consulting Agreement dated October 28, 1999, with Robert J.
Torres and Lowell Cooper. In consideration of consulting services rendered
we granted options to each of Mssrs. Torres and Cooper entitling them to
purchase a total of 218,637 shares and 134,003 shares, respectively, at any
time prior to November 2, 2003, at an exercise price of $2.13 per share.
5. We assumed the obligations under a bridge financing with CSI, dated
December 14, 1999, pursuant to which 1,300,000 common shares were issued to
nine investors at a price of $0.50 per share.
6. In January of 2000, Insynq-WA completed a private offering of a total of
1,311,820 shares of common stock at an offering price of approximately
$0.71 per share. Each purchaser in the private offering was issued one
Series A Warrant and one Series B Warrant for each share of common stock
purchased by such purchaser. The Series A Warrants and Series B Warrants
entitle the purchasers to purchase a share of common stock at any time on
or before December 31, 2001, at a price of $1.77 and $2.84, respectively.
7. In January 2000, Timothy Horan, as trustee on behalf of certain parties
named below, advanced to Insynq-WA the sum of $150,000 to provide Insynq-WA
with capital to secure the leased facility at 1101 Broadway Plaza, Tacoma,
Washington. In consideration of this financing, and pursuant to an
agreement, Mr. Horan, as trustee, was issued a total of 150,000 shares of
restricted common stock, as follows: 150,000 shares to Timothy Horan;
75,000 shares to Travin Partners, L.L.L.P. and 75,000 shares to
International Fluid Dynamics, Inc.
8. On February 20, 2000, we entered into a consulting agreement with Vijay
Alimchandani (VJ), under the terms of which we engaged VJ to provide us
with general consulting services for which we granted options to VJ as
follows: (a) 500,000 shares, exercisable at any time prior to February
II-2
21, 2005, at a price of $0.25 per share; and (b) 400,000 shares,
exercisable one year from the commencement date of the contract, for a
period of five years, at an exercise price of $0.50 per share. We also
agreed to grant to VJ (a) an additional option, entitling him to purchase a
total of 180,000 shares for a five-year period beginning at the end of 24
months from the date of the agreement, if such agreement is extended by us,
at price of $0.75 per share; and (b) bonus options of between 50,000 to
100,000 shares, to be granted at the discretion of the Board of Directors
based on the performance of VJ, at an exercise price of not more than $1.50
per share.
9. On or about April 6, 2000, we sold a total of 61,944 shares of common stock
to two investors, The Perry Family Trust and John Anderson, under the terms
of which the Perry Trust and Mr. Anderson were granted a total of 61,944
warrants to purchase shares of common stock at an exercise price of $3.25
per share.
10. On or about April 26, 2000, we sold a total of 285,714 shares of common
stock to Plazacorp Investors Limited, an Ontario corporation, at a price of
$1.75 per share. In connection with this sale, Plazacorp was granted
warrants to purchase an additional 571,428 shares of common stock,
exercisable at any time for a five (5) year period, at a price of $2.75 per
share with respect to 285,714 shares, and $3.75 per share with respect to
the remaining 285,714 shares. In connection with this transaction,
Plazacorp was granted registration rights under a Registration and
Repurchase Agreement (the "Agreement") requiring us to file a registration
statement by October 31, 2000 and to cause the registration statement to be
effective on or before January 31, 2001. In the event we did not file a
registration statement by October 31, 2000, or the registration statement
was not declared effective by December 13, 2000, Plazacorp had the right,
but not the obligation, to require us to repurchase the shares (but not
shares issuable on exercise of the warrants), at a price of $2.50 per
share. On November 1, 2000, we entered into an Agreement with Plazacorp
under which Plazacorp agreed to relinquish its right to require us to
repurchase the 285,714 shares at $2.50 in exchange for the conversion of
those shares into the right to receive 1,428,730 shares with an agreed
value of $0.50 per share.
11. On or about May 17, 2000, we sold a total of 125,000 shares of common stock
at a price of $2.00 per share to the following investors: Raymond Betz -
25,000 shares; Timothy Horan - 50,000 shares; and International Fluid
Dynamics, Inc. (IFD) - 50,000 shares. In connection with this transaction,
the purchasers were granted warrants to purchase an equivalent number of
additional shares (or a total of 125,000 shares), at any time on or before
May 17, 2005, at an exercise price of $3.00 per share. In connection with
this transaction, the purchasers were granted registration rights under a
Registration and Repurchase Agreement (the "Agreement") requiring us to
file a registration statement by October 31, 2000, and to cause the
registration statement to be effective on or before January 31, 2001. In
the event we did not file a registration statement by October 31, 2000, or
the registration statement was not declared effective by January 31, 2001,
the purchasers had the right, but not the obligation, to require us to
repurchase the shares (but not shares issuable on exercise of warrants), at
a price of $2.86 per share. On November 1, 2000, we entered into an
Agreement with each of Betz, Horan and IFD under which each agreed to
relinquish the right to require us to repurchase their respective number of
shares at $2.86 in exchange for the conversion of those shares into the
right to receive an aggregate of 715,000 shares with an agreed value of at
$0.50 per share.
12. On May 26, 2000, we entered into a consulting agreement with MQ Holdings,
Inc. (MQ), under the terms of which we issued a total of 40,000 shares of
restricted common stock to two individuals - Mark DeStefano and T J Jesky -
for services to be rendered in assisting us in our corporate and securities
filings, and other consulting services. Under the terms of the consulting
agreement, we filed an S-8 registration statement for the registration of
the shares issued on October 4, 2000.
II-3
13. On or about June 15, 2000, we entered into a non-exclusive financial
advisory agreement with Sunstate Equity Trading, Inc., a Florida
corporation, which is a member of the NASD, under the terms of which we
have engaged Sunstate, on a non-exclusive basis, to provide financial
advisory services and advice. In consideration of the services undertaken
by Sunstate, we issued to Sunstate a total of 125,000 shares of restricted
common stock. This agreement was amended on September 22, 2000, to include
the provision of additional services by Sunstate, including, but not
limited to, sponsoring us in conferences with various investments groups.
In consideration of these additional services, we issued to Sunstate an
additional 250,000 shares of restricted common stock.
14. On June 16, 2000, we entered into a private financing transaction with two
investors, Travin Partners, L.L.L.P. (TPL) and TCA Investments, Inc. (TCA),
under the terms of which TPL and TCA each loaned us the sum of $325,000
(the loans), and were sold convertible debentures and granted warrants,
described below. The loans are payable pursuant to the terms of identical
convertible debentures, providing for full payment on or before June 16,
2002 (the due date), with interest at the current Bank of America prime
rate, plus 1/2%. All accrued interest under each Debenture is payable only
in shares of our common stock at a price of $0.71 per share. In addition to
the Debentures, TPL and TCA were granted warrants entitling each of them to
purchase a total of 457,746 shares of our common stock at a price of $1.00
per share, at any time after November 15, 2000 and before June 15, 2005. On
November 1, 2000, we entered into an Agreement with each of TPL and TCA
under which each agreed to relinquish its right to convert the debentures
into shares of common stock at $0.71 per share in exchange for the
conversion of those debentures into the right to receive an aggregate of
1,300,000 shares with an agreed value of $0.50 per share.
15. On July 17, 2000, we entered into a private financing transaction with two
investors, International Fluid Dynamics, Inc. (IFD) and Garnier Holdings,
Inc. (Garnier), under the terms of which IFD and Garnier each loaned us the
sum of $127,500 (the loans), and were granted warrants described below. The
loans are payable pursuant to the terms of a promissory note (the note),
providing for full payment on or before August 1, 2000 (the due date), with
interest compounded annually at the Chase Manhattan Bank, N.A. rate quoted
as its prime. The warrants entitle each of IFD and Garnier to purchase a
total of 325,000 shares of our common stock at a price of $2.00 per share
at any time after December 28, 2000 and before July 17, 2005. If the notes
were not paid by 5:00 p.m. CST on August 17, 2000, the exercise price would
have decreased by one-half, or $1.00, and on and after each additional ten
(10) day period that the notes remain unpaid, the exercise price would have
decreased by an additional ten percent (10%). On November 1, 2000, we
entered into an Agreement with each of Garnier and IFD under which each of
them agreed to relinquish its right to payment under the promissory notes
in exchange for the conversion of those notes into the right to receive an
aggregate of 510,000 shares with an agreed value of $0.50 per share. Under
that same agreement, each of Garnier and IFD agreed to lock in the exercise
price of the warrants under the Warrant Agreement at $0.50 per share.
16. On August 2, 2000, we entered into a private financing transaction with
five foreign investors under the terms of which the investors purchased an
aggregate of 200,000 shares of our common shares at a price of $0.60 per
share.
17. On August 4, 2000, we sold a total of 200,000 shares of common stock to One
Click at a price of $0.60 per share. In connection with this sale, One
Click was granted warrants to purchase an additional 200,000 shares of
common stock, exercisable at any time for a five (5) year period, at a
price of $2.00 per share.
II-4
18. On August 24, 2000, we entered into a private financing transaction with
certain foreign investors under the terms of which the investors purchased
an aggregate of 135,000 of our common shares at a price of $0.2963 per
share.
19. On September 11, 2000, we entered into a private financing transaction with
two investors, Travin Partners, L.L.L.P. (TPL) and TCA Investments, Inc.
(TCA), under the terms of which Travin and TCA each loaned us the sum of
$125,000 (the loans), and we issued the convertible debentures and granted
warrants, described below. The loans were payable pursuant to the terms of
identical convertible debentures providing for full payment on or before
October 11, 2000 (the due date), with interest at the current Bank of
America prime rate, plus 1/2%. All principal and accrued interest under
each debenture was convertible into shares of our common stock at a
conversion price of (a) $1.00 per share or (b) sixty percent (60%) of the
average of the bid price, whichever is lower on the date of conversion. In
addition to the debentures, TPL and TCA were granted warrants entitling
each of them to purchase a total of 125,000 shares of our common stock at a
price of $1.00 per share, at any time after September 11, 2000 and before
September 11, 2005. These warrants have a "cashless" exercise provision
allowing TPL and/or TCA to exercise the warrants for a reduced number of
shares pursuant to a formula set forth in the warrants. On November 1,
2000, we entered into an Agreement with each of TPL and TCA under which
each agreed to relinquish its right to convert the debentures into shares
of common stock in exchange for the conversion of those debentures into the
right to receive an aggregate of 500,000 shares with an agreed value of
$0.50 per share.
20. On October 20, 2000, we entered into a private financing transaction with
three investors, International Fluid Dynamics, Inc. (IFD), Plazacorp
Investments Limited (Plazacorp) and Travin Partners, L.L.L.P. (TPL), under
the terms of which IFD and TPL each loaned us the sum of $125,000 and
Plazacorp loaned us the sum of $250,000 (the loans). The loans are payable
pursuant to the terms of a promissory note (the note), providing for full
payment on or before November 3, 2000 (the maturity date), with interest
payable on the maturity date of ten percent (10%) per annum based on a 365-
day year. On November 1, 2000, we entered into an Agreement with each of
IFD, Plazacorp and TPL under which each of them agreed to relinquish its
right to payment under the promissory notes in exchange for the conversion
of those notes into the right to receive an aggregate of 1,000,000 shares
with an agreed value of $0.50 per share.
21. On November 1, 2000, we entered into a private financing transaction with
Plazacorp Investments Limited (Plazacorp) under the terms of which
Plazacorp agreed to loan us up to $1,120,000 (the loan). The loan is
payable pursuant to the terms of a promissory note (the note), providing
for full payment on or before November 2, 2001 (the maturity date), with
interest payable on the maturity date of ten percent (10%) per annum based
on a 365-day year. Under the terms of the note, upon our written request
Plazacorp shall advance to us up to $300,000.00 under this note in each
calendar month during which advances can be requested thereunder (a monthly
advance). An advance can be requested during each of November 2000,
December 2000 and January 2001 at any time after the 10/th/ day of each
month. During the term of the note and after the effective date of a
registration statement filed with the SEC registering the shares of our
common stock held by Plazacorp, we can request in writing, and Plazacorp
shall pay within 10 business days of the written request, an advance of up
to an additional $220,000.00 (an additional advance) for the payment of
certain obligations of ours that are currently due and owing.
Notwithstanding the foregoing, if we raise funds in a financing of either
our debt or equity securities during the term of the note (a new
financing), and (i) the new financing is up to, but does not exceed,
$220,000.00, Plazacorp's obligation to advance the additional advance
amount, if it has not already done so, shall be reduced dollar for dollar
by the amount of the new financing, or (ii) the new financing exceeds
$220,000.00, Plazacorp shall not be obligated to
II-5
advance the additional advance amount, if it has not already done so, and
in addition, the obligation of Plazacorp to advance the monthly advances
remaining to be advanced thereunder, if any, shall be reduced dollar for
dollar by the amount of the funds raised in the new financing.
22. On November 11, 2000, we entered into an Agreement with Bridge 21, Inc., a
Wyoming corporation, under the terms of which we have formed a relationship
to provide seats to Bridge 21's members. In consideration of the
relationship, we granted to Bridge 21 a total of 30,000 options to purchase
our common stock at a price to be determined on the date of exercise based
on certain performance goals.
23. On December 7, 2000, for services rendered, we granted to Locke Liddell &
Sapp LLP (LLS) warrants to purchase 100,000 shares of common stock,
exercisable at any time for a five (5) year period, at an exercise price of
$0.50 per share.
ITEM 27. EXHIBITS.
- --------------------------------------------------------------------------------
EXHIBIT
NUMBER DESCRIPTION
- --------------------------------------------------------------------------------
2.1 Asset Purchase Agreement, dated as of February 18, 2000, by and
between Xcel Management, Inc. and Insynq, Inc. (Incorporated by
reference to Exhibit 2 to the Company's Current Report on Form 8-
K, filed March 3, 2000).
- --------------------------------------------------------------------------------
3.1 Certificate of Incorporation of Insynq, Inc. (Incorporated by
reference to Exhibit 2 to the Company's Current Report on Form 8-
K filed August 17, 2000).
- --------------------------------------------------------------------------------
3.2 By-Laws of Insynq, Inc. (Incorporated by reference to Exhibit 3
to the Company's Current Report on Form 8-K filed August 17,
2000).
- --------------------------------------------------------------------------------
4.1 Form of Specimen Common Stock Certificate (Incorporated by
reference to Exhibit 4.1 to the Company's Annual Report on Form
10-KSB filed September 13, 2000).
- --------------------------------------------------------------------------------
4.2* Form of Warrant Agreement issued to Consulting & Strategy
International, LLC on February 24, 2000, as amended by Amendment
No. 1 dated June 9, 2000, Amendment No. 2 dated July 31, 2000,
Amendment No. 3 dated August 31, 2000, Amendment No. 4 dated
October 1, 2000, Amendment No. 5 dated October 28, 2000 and
Amendment No. 6 dated December 1, 2000.
- --------------------------------------------------------------------------------
4.3 Form of Warrant Agreement issued to International Fluid Dynamics,
Inc. on May 17, 2000. (Incorporated by reference to Exhibit 4.3
to the Company's Annual Report on Form 10-KSB filed September 13,
2000).
- --------------------------------------------------------------------------------
4.4 Form of Registration and Repurchase Agreement issued to
International Fluid Dynamics, Inc. on May 17, 2000, as amended.
(Incorporated by reference to Exhibit 4.4 to the Company's Annual
Report on Form 10-KSB filed September 13, 2000).
- --------------------------------------------------------------------------------
4.5 Form of Warrant Agreement issued to Plazacorp Investors Limited
on April 26, 2000. (Incorporated by reference to Exhibit 4.5 to
the Company's Annual Report on Form 10-KSB filed September 13,
2000).
- --------------------------------------------------------------------------------
4.6 Form of Registration and Repurchase Agreement issued to Plazacorp
Investors Limited on April 26, 2000, as amended. (Incorporated by
reference to Exhibit 4.6 to the Company's Annual Report on Form
10-KSB filed September 13, 2000).
- --------------------------------------------------------------------------------
4.7* Form of Warrant Agreement issued to TCA Investments, Inc. on June
16, 2000, as amended by Amendment No. 1 dated August 31, 2000,
Extension dated September 5, 2000, Amendment No. 2 dated
September 14, 2000, Amendment No. 3 dated October 1, 2000,
Amendment No. 4 dated October 28, 2000 and Amendment No. 5 dated
December 1, 2000.
- --------------------------------------------------------------------------------
4.8* Form of Convertible Debenture issued to TCA Investments, Inc. on
June 16, 2000, as amended by Amendment No. 1 dated August 31,
2000, Extension dated September 5, 2000, Amendment No. 2 dated
September 14, 2000, Amendment No. 3 dated October 1, 2000 and
Amendment No. 4 dated October 28, 2000.
- --------------------------------------------------------------------------------
4.9* Form of Warrant Agreement issued to Garnier Holdings, Ltd. on
July 17, 2000, as amended by Amendment No. 1 dated September 22,
2000, Amendment No. 2 dated October 1, 2000, Amendment No. 3
dated October 19, 2000, Amendment No. 4 dated October 28, 2000
and Amendment No. 5 dated December 1, 2000.
- --------------------------------------------------------------------------------
II-6
- --------------------------------------------------------------------------------
4.10 Form of Promissory Note issued to Garnier Holdings, Ltd. on July
17, 2000, as amended by Extension No. 1 dated September 11, 2000
and Extension NO. 2 dated October 1, 2000. (Incorporated by
reference to Exhibit 4.10 to the Company's Quarterly Report on
Form 10-QSB filed October 23, 2000).
- --------------------------------------------------------------------------------
4.11 Form of Warrant Agreement issued to One Click Investments, LLC on
August 4, 2000. (Incorporated by reference to Exhibit 4.11 to the
Company's Annual Report on Form 10-KSB filed September 13, 2000).
- --------------------------------------------------------------------------------
4.12 Form of Registration Rights Agreement issued to One Click
Investments, LLC on August 4, 2000. (Incorporated by reference to
Exhibit 4.12 to the Company's Annual Report on Form 10-KSB filed
September 13, 2000).
- --------------------------------------------------------------------------------
4.13 Form of Warrant Agreement issued to Series A & B warrant holders.
(Incorporated by reference to Exhibit 4.13 to the Company's
Annual Report on Form 10-KSB filed September 13, 2000).
- --------------------------------------------------------------------------------
4.14 Form of Warrant Agreement issued to One Click Investments, LLC on
September 20, 1999, as amended. (Incorporated by reference to
Exhibit 4.14 to the Company's Annual Report on Form 10-KSB filed
September 13, 2000).
- --------------------------------------------------------------------------------
4.15 Form of Warrant Agreement issued to Hewlett-Packard on June 1,
1999. (Incorporated by reference to Exhibit 4.15 to the Company's
Annual Report on Form 10-KSB filed September 13, 2000).
- --------------------------------------------------------------------------------
4.16 Form of Registration Agreement issued to Hewlett-Packard on
February 20, 2000. (Incorporated by reference to Exhibit 4.16 to
the Company's Amendment No. 1 to Annual Report on Form 10-KSB/A
filed December 6, 2000).
- --------------------------------------------------------------------------------
4.17 Form of Subscription Agreement between TCA Investments, Inc. and
Insynq, Inc. dated June 16, 2000. (Incorporated by referenced to
Exhibit 4.17 to the Company's Quarterly Report on Form 10-QSB
filed October 23, 2000).
- --------------------------------------------------------------------------------
4.18 Form of Subscription Agreement between TCA Investments, Inc. and
Insynq, Inc. dated September 11, 2000. (Incorporated by reference
to Exhibit 4.17 to the Company's Quarterly Report on Form 10-QSB
filed October 23, 2000).
- --------------------------------------------------------------------------------
4.19* Form of Warrant Agreement issued to TCA Investments, Inc. dated
September 11, 2000, as amended by Amendment No. 1 dated December
1, 2000.
- --------------------------------------------------------------------------------
4.20 Form of Convertible Debenture issued to TCA Investments, Inc.
dated September 11, 2000, as amended by Amendment No. 1 dated
October 6, 2000 and Amendment No. 2 dated October 19, 2000.
(Incorporated by reference to Exhibit 4.20 to the Company's
Quarterly Report on Form 10-QSB filed October 23, 2000).
- --------------------------------------------------------------------------------
4.21 Form of Consent of Plazacorp Investors Limited to the Extension
of the filing of the Registration Statement on Form SB-2 dated
September 22, 2000. (Incorporated by reference to Exhibit 4.21 to
the Company's Quarterly Report on Form 10-QSB filed October 23,
2000).
- --------------------------------------------------------------------------------
4.22 Form of Consent of Plazacorp Investors Limited to the Extension
of the filing of the Registration Statement on From SB-2 dated
October 2, 2000. (Incorporated by reference to Exhibit 4.22 to
the Company's Quarterly Report on Form 10-QSB filed October 23,
2000).
- --------------------------------------------------------------------------------
4.23 Form of Consent of TCA Investments, Inc. to Extension of the
filing of the Registration Statement on From SB-2 dated September
22, 2000. (Incorporated by reference to Exhibit 4.23 to the
Company's Quarterly Report on Form 10-QSB filed October 23,
2000).
- --------------------------------------------------------------------------------
4.24 Form of Consent of TCA Investments, Inc. to Extension of the
filing of the Registration Statement on Form SB-2 dated October
2, 2000. (Incorporated by reference to Exhibit 4.24 to the
Company's Quarterly Report on Form 10-QSB filed October 23,
2000).
- --------------------------------------------------------------------------------
II-7
- --------------------------------------------------------------------------------
4.25 Form of Consent of International Fluid Dynamics, Inc. to
Extension of the filing of the Registration Statement on Form SB-
2 dated September 22, 2000. (Incorporated by reference to Exhibit
4.25 to the Company's Quarterly Report on Form 10-QSB filed
October 23, 2000).
- --------------------------------------------------------------------------------
4.26 Form of Consent of International Fluid Dynamics, Inc. to
Extension of the filing of the Registration Statement on Form SB-
2 dated October 2, 2000. (Incorporated by reference to Exhibit
4.26 to the Company's Quarterly Report on Form 10-QSB filed
October 23, 2000).
- --------------------------------------------------------------------------------
4.27 Registration Rights Agreement dated September 22, 2000 between
Charles Benton and Insynq, Inc. (Incorporated by reference to
Exhibit 4.27 to the Company's Quarterly Report on Form 10-QSB
filed October 23, 2000).
- --------------------------------------------------------------------------------
4.28 Form of Promissory Note issued to International Fluid Dynamics,
Inc. on October 20, 2000. (Incorporated by reference to Exhibit
4.28 to the Company's Quarterly Report on Form 10-QSB filed
October 23, 2000).
- --------------------------------------------------------------------------------
4.29* Agreement dated November 1, 2000 between International Fluid
Dynamics, Inc. and Insynq.
- --------------------------------------------------------------------------------
4.30* Agreement dated November 1, 2000 between Travin Partners,
L.L.L.P. and Insynq.
- --------------------------------------------------------------------------------
4.31* Agreement dated November 1, 2000 between TCA Investments, Inc.
and Insynq.
- --------------------------------------------------------------------------------
4.32* Agreement dated November 1, 2000 between Plazacorp Investors
Limited and Insynq.
- --------------------------------------------------------------------------------
4.33* Agreement dated November 1, 2000 between Garnier Holdings, Ltd.
and Insynq.
- --------------------------------------------------------------------------------
4.34* Agreement dated November 1, 2000 between International Fluid
Dynamics, Inc. and Insynq.
- --------------------------------------------------------------------------------
4.35* Agreement dated November 1, 2000 between Timothy Horan and
Insynq.
- --------------------------------------------------------------------------------
4.36* Agreement dated November 1, 2000 between Raymond Betz and Insynq.
- --------------------------------------------------------------------------------
4.37* Agreement dated November 1, 2000 between Travin Partners,
L.L.L.P. and Insynq.
- --------------------------------------------------------------------------------
4.38* Form of Warrant Agreement dated December 7, 2000 between Locke
Liddell & Sapp LLP and Insynq.
- --------------------------------------------------------------------------------
4.39* Lock-Up and Waiver Agreement dated October 17, 2000, as amended
by Amendment No. 1 dated December 1, 2000, by Charles F. Benton.
- --------------------------------------------------------------------------------
4.40* Lock-Up and Waiver Agreement dated October 17, 2000 by John P.
Gorst.
- --------------------------------------------------------------------------------
4.41* Lock-Up and Waiver Agreement dated October 17, 2000 by M. Carroll
Benton.
- --------------------------------------------------------------------------------
4.42* Lock-Up and Waiver Agreement dated October 15, 2000 by Vijay
Alimchandani.
- --------------------------------------------------------------------------------
4.43* Lock-Up and Waiver Agreement dated October 16, 2000 by One Click
Investments LLC.
- --------------------------------------------------------------------------------
5.1* Opinion of Locke Liddell & Sapp LLP.
- --------------------------------------------------------------------------------
10.1 Insynq, Inc. 2000 Executive Long Term Incentive Plan.
(Incorporated by reference to Exhibit 10.1 to the Company's
Annual Report on Form 10-KSB filed September 13, 2000).
- --------------------------------------------------------------------------------
10.2 Insynq, Inc. 2000 Long Term Incentive Plan, as amended by
Amendment No. 1 dated September 1, 2000. (Incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on
Form 10-QSB filed October 23, 2000).
- --------------------------------------------------------------------------------
10.3* Business Services Contract with Consulting & Strategy
International, L.L.C. dated November 18, 1999, as amended by
Amendment No. 1 dated August 31, 2000, Amendment No. 2 dated
September 14, 2000, Amendment No. 3 dated October 1, 2000,
Amendment No. 4 dated October 28, 2000, Amendment dated October
31, 2000, and Amendment No. 5 dated December 1, 2000.
- --------------------------------------------------------------------------------
10.4 Independent Marketing Consultant Agreement with Vijay
Alimchandani dated February 20, 2000, as amended by Amendment No.
1 dated June 30, 2000. (Incorporated by reference to Exhibit 10.4
to the Company's Quarterly Report on Form 10-QSB filed October
23, 2000).
- --------------------------------------------------------------------------------
II-8
- --------------------------------------------------------------------------------
10.5* Financial Public Relations Consulting Agreement with One Click
Investments, LLC dated September 20, 1999, as amended by
Amendment No. 1 dated June 30, 2000 and Amendment No. 2 dated
October 31, 2000.
- --------------------------------------------------------------------------------
10.6 Form of Registration Rights Agreement upon the issuance of shares
to investors under the bridge financing dated December 14, 1999.
(Incorporated by reference to Exhibit 10.6 to the Company's
Annual Report on Form 10-KSB filed September 13, 2000).
- --------------------------------------------------------------------------------
10.7 Form of Registration Rights Agreement upon the issuance of shares
to investors under the bridge financing dated January 24, 2000.
(Incorporated by reference to Exhibit 10.7 to the Company's
Annual Report on Form 10-KSB filed September 13, 2000).
- --------------------------------------------------------------------------------
10.8 Engagement Letter with Rosenblum Partners, LLC dated July 7,
2000. (Incorporated by reference to Exhibit 10.8 to the Company's
Annual Report on Form 10-KSB filed September 13, 2000).
- --------------------------------------------------------------------------------
10.9* Employment Agreement, dated as of February 20, 2000, between John
P. Gorst and Xcel Management, Inc., as amended by Amendment No. 1
dated September 25, 2000.
- --------------------------------------------------------------------------------
10.10* Employment Agreement, dated as of February 20, 2000, between M.
Carroll Benton and Xcel Management, Inc., as amended by Amendment
No. 1 dated September 27, 2000.
- --------------------------------------------------------------------------------
10.11 Employment Agreement dated as of February 20, 2000, between James
R. Leigh, III, and Xcel Management, Inc. (Incorporated by
reference to Exhibit 10.11 to the Company's Annual Report on
Form 10-KSB filed September 13, 2000).
- --------------------------------------------------------------------------------
10.12 Employment Agreement, dated as of February 20, 2000, between DJ
Johnson and Xcel Management, Inc. (Incorporated by reference to
Exhibit 10.12 to the Company's Annual Report on Form 10-KSB filed
September 13, 2000).
- --------------------------------------------------------------------------------
10.13* Employment Agreement, dated as of February 20, 2000, between
Joanie C. Mann and Xcel Management, Inc., as amended by Amendment
No.1 dated September 25, 2000 and Amendment No. 2 dated
September 25, 2000.
- --------------------------------------------------------------------------------
10.14* Employment Agreement, dated as of February 20, 2000, between Jim
Zachman and Xcel Management, Inc., as amended by Amendment No. 1
dated September 16, 2000 and Amendment No. 2 dated September 27,
2000.
- --------------------------------------------------------------------------------
10.15 Employment Agreement, dated as of July 20, 1999, between Donald
L. Manzano and Insynq, Inc.- Washington. (Incorporated by
reference to Exhibit 10.15 to the Company's Annual Report on Form
10-KSB filed September 13, 2000).
- --------------------------------------------------------------------------------
10.16 Employment Agreement, dated as of July 20, 1999, between Carey M.
Holladay and Insynq, Inc.- Washington. (Incorporated by reference
to Exhibit 10.16 to the Company's Annual Report on Form 10-KSB
filed September 13, 2000).
- --------------------------------------------------------------------------------
10.17 Employment Agreement, dated as of June 28 2000, between William
G. Hargin and Xcel Management, Inc. (Incorporated by reference to
Exhibit 10.17 to the Company's Annual Report on Form 10-KSB filed
September 13, 2000).
- --------------------------------------------------------------------------------
10.18* Employment Agreement, dated as of June 5, 2000, between Barbara
D. Brown and Xcel Management, Inc., as amended by Addendum No. 1
dated November 29, 2000.
- --------------------------------------------------------------------------------
10.19 Employment Agreement, dated as of June 16, 2000, between
Christopher Todd and Xcel Management, Inc. (Incorporated by
reference to Exhibit 10.19 to the Company's Annual Report on
Form 10-KSB filed September 13, 2000).
- --------------------------------------------------------------------------------
II-9
- --------------------------------------------------------------------------------
10.20* Employment Agreement, dated as of September 1, 2000, between
David Wolfe and Insynq, Inc., as amended by Amendment No. 1 dated
September 27, 2000, Amendment No. 1 dated October 19, 2000,
Amendment No. 2 dated November 29, 2000 and Addendum dated
December 7, 2000.
- --------------------------------------------------------------------------------
10.21* Lease Agreement dated January 3, 2000 between Howe/Horizon
Holdings LLC and Insynq, Inc., for 1101 Broadway Plaza, Tacoma,
Washington, as amended by Amendment No. 1 dated October 26, 2000.
- --------------------------------------------------------------------------------
10.22 Sublease Agreement dated November 1, 1999 between Duane and Wendy
Ashby, d/b/a Cargocare and Insynq Data Utilities for the property
in the Seafirst Plaza Building in Tacoma, Washington, at the
Northwest corner of South 9th and A Streets. (Incorporated by
reference to Exhibit 10.22 to the Company's Annual Report on Form
10-KSB filed September 13, 2000).
- --------------------------------------------------------------------------------
10.23 Lease Agreement dated March 21, 2000 between Walaire, Inc. and
Insynq, Inc., for 3017 Douglas Boulevard, Suite 220 and 240,
Roseville, California. (Incorporated by reference to Exhibit
10.23 to the Company's Annual Report on Form 10-KSB filed
September 13, 2000).
- --------------------------------------------------------------------------------
10.24 Master Licensing Agreement dated May 19, 2000 between Macola,
Inc. and Insynq, Inc. (Incorporated by reference to Exhibit 10.24
to the Company's Annual Report on Form 10-KSB filed September 13,
2000).
- --------------------------------------------------------------------------------
10.25 Citrix iLicense Agreement dated March 2, 2000 between Citrix and
Insynq, Inc. (Incorporated by reference to Exhibit 10.25 to the
Company's Annual Report on Form 10-KSB filed September 13, 2000).
- --------------------------------------------------------------------------------
10.26 Citrix iBusiness Application Service Provider Agreement dated
March 2, 2000 between Citrix and Insynq, Inc. (Incorporated by
reference to Exhibit 10.26 to the Company's Annual Report on Form
10-KSB filed September 13, 2000).
- --------------------------------------------------------------------------------
10.27 Master Licensing Agreement dated March 1, 2000 between Legacy
Solutions and Insynq, Inc. (Incorporated by reference to Exhibit
10.27 to the Company's Annual Report on Form 10-KSB filed
September 13, 2000).
- --------------------------------------------------------------------------------
10.28 Master Licensing Agreement dated April 7, 2000 between Electronic
Registry Systems, Inc. and Insynq, Inc. (Incorporated by
reference to Exhibit 10.28 to the Company's Annual Report on Form
10-KSB filed September 13, 2000).
- --------------------------------------------------------------------------------
10.29 Master Licensing Agreement dated March 22, 2000 between Viking
Software Services, Inc. and Insynq, Inc. (Incorporated by
reference to Exhibit 10.29 to the Company's Annual Report on Form
10-KSB filed September 13, 2000).
- --------------------------------------------------------------------------------
10.30 Master Licensing Agreement dated June 1, 2000 between My Partner
Online and Insynq, Inc. (Incorporated by reference to Exhibit
10.30 to the Company's Annual Report on Form 10-KSB filed
September 13, 2000).
- --------------------------------------------------------------------------------
10.31 Master Licensing Agreement dated April 24, 2000 between Veracicom
and Insynq, Inc. (Incorporated by reference to Exhibit 10.31 to
the Company's Annual Report on Form 10-KSB filed September 13,
2000).
- --------------------------------------------------------------------------------
10.32 Master Licensing Agreement dated August 21, 2000 between
CastaLink.com, Inc. and Insynq, Inc. (Incorporated by reference
to Exhibit 10.32 to the Company's Annual Report on Form 10-KSB
filed September 13, 2000).
- --------------------------------------------------------------------------------
10.33 Application Hosting Agreement dated May 12, 2000 between Remedy
Corporation and Insynq, Inc. (Incorporated by reference to
Exhibit 10.33 to the Company's Annual Report on Form 10-KSB filed
September 13, 2000).
- --------------------------------------------------------------------------------
10.34 Novell Internet Commercial Service Provider Agreement dated July
24, 2000 between Novell, Inc. and Insynq, Inc. (Incorporated by
reference to Exhibit 10.34 to the Company's Annual Report on Form
10-KSB filed September 13, 2000).
- --------------------------------------------------------------------------------
II-10
- --------------------------------------------------------------------------------
10.35 Agreement to Provide Collaborative Management Services dated July
15, 1999 between Horizon Holdings I, LLC, and Insynq, Inc.
(Incorporated by reference to Exhibit 10.35 to the Company's
Annual Report on Form 10-KSB filed September 13, 2000).
- --------------------------------------------------------------------------------
10.36 Referral Partner Agreement dated July 29, 1999 between Global
Crossing Telecommunications, Inc. and Insynq, Inc. (Incorporated
by reference to Exhibit 10.36 to the Company's Annual Report on
Form 10-KSB filed September 13, 2000).
- --------------------------------------------------------------------------------
10.37 Application Hosting and Delivery Agreement dated August 18, 2000
between Donor Management, Inc. and Insynq, Inc. (Incorporated by
reference to Exhibit 10.37 to the Company's Quarterly Report on
Form 10-QSB dated October 23, 2000).
- --------------------------------------------------------------------------------
10.38 Application Service Provider Agreement dated August 21, 2000
between Corel Corporation and Insynq, Inc. (Incorporated by
reference to Exhibit 10.38 to the Company's Quarterly Report on
Form 10-QSB dated October 23, 2000).
- --------------------------------------------------------------------------------
10.39 Application Services Agreement dated September 6, 2000 between
Microsoft and Insynq, Inc. (Incorporated by reference to Exhibit
10.39 to the Company's Quarterly Report on Form 10-QSB dated
October 23, 2000).
- --------------------------------------------------------------------------------
10.40 Consulting Agreement dated September 20, 2000 between David D.
Selmon and Insynq, Inc. (Incorporated by reference to Exhibit
10.40 to the Company's Quarterly Report on Form 10-QSB dated
October 23, 2000).
- --------------------------------------------------------------------------------
10.41 Release Agreement dated September 22, 2000 with Charles Benton.
(Incorporated by reference to Exhibit 10.41 to the Company's
Quarterly Report on Form 10-QSB dated October 23, 2000).
- --------------------------------------------------------------------------------
10.42 Release Agreement dated September 22, 2000 with Charles Benton.
(Incorporated by reference to Exhibit 10.42 to the Company's
Quarterly Report on Form 10-QSB dated October 23, 2000).
- --------------------------------------------------------------------------------
10.43* Employment Agreement dated September 18, 2000 between Stephen C.
Smith and Insynq, Inc. as amended by Amendment No. 1 dated
December 1, 2000.
- --------------------------------------------------------------------------------
10.44* Non-Exclusive Financial Advisory Agreement dated June 15, 2000
between Sunstate Equity Trading, Inc. and Xcel Management, Inc.,
as amended by Amendment No. 1 dated September 22, 2000.
- --------------------------------------------------------------------------------
10.45 Independent Consulting Agreement dated September 16, 2000 between
Steven Tebo and Insynq, Inc. (Incorporated by reference to
Exhibit 10.45 to the Company's Quarterly Report on Form 10-QSB
dated October 23, 2000).
- --------------------------------------------------------------------------------
10.46 Independent Consulting Agreement dated September 16, 2000 between
Franklin C. Fisher and Insynq, Inc. (Incorporated by reference to
Exhibit 10.46 to the Company's Quarterly Report on Form 10-QSB
dated October 23, 2000).
- --------------------------------------------------------------------------------
10.47* Independent Consulting Agreement dated October 31, 2000 between
Charles F. Benton and Insynq, Inc.
- --------------------------------------------------------------------------------
10.48* Independent Consulting Agreement dated November 28, 2000 between
My Partner Online, Inc. and Insynq. Inc.
- --------------------------------------------------------------------------------
10.49* Letter of Understanding dated November 11, 2000 and Agreement
dated November 11, 2000 between Bridge 21, Inc. and Insynq, Inc.
- --------------------------------------------------------------------------------
10.50* Contract of Engagement dated September 27, 2000 between Cardinal
Securities, L.L.C. and Insynq, Inc.
- --------------------------------------------------------------------------------
10.51* Agreement dated November 30, 2000 between Kathleen McHenry, John
P. Gorst and Insynq, Inc.
- --------------------------------------------------------------------------------
10.52* Voting Agreement dated November 30, 2000 between Kathleen
McHenry, Hagens Berman LLP, John P. Gorst and Insynq, Inc.
- --------------------------------------------------------------------------------
10.53* Registration Rights Agreement dated November 30, 2000 between
Kathleen McHenry, Hagens Berman LLP and Insynq, Inc.
- --------------------------------------------------------------------------------
II-11
- --------------------------------------------------------------------------------
10.54* Application Service Provider Reseller Agreement dated October 27, 2000
between Wireless Knowledge, Inc. and Insynq, Inc.
- --------------------------------------------------------------------------------
16.1 Letter on Change in Certifying Accountant (Incorporated by reference
to Exhibit 16.1 to the Company's Current Report on Form 8-K filed
October 13, 2000).
- --------------------------------------------------------------------------------
23.1* Consent of G. Brad Beckstead, CPA for Financial Statements for the
years ended May 31, 2000 and May 31,1999.
- --------------------------------------------------------------------------------
23.2* Consent of Locke Liddell & Sapp LLP (included in Exhibit 5.1)
- --------------------------------------------------------------------------------
24.1* Power of Attorney (included on the signature page of this Registration
Statement.
- --------------------------------------------------------------------------------
* Filed Herewith
ITEM 28. UNDERTAKINGS.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to our directors, officers and controlling persons pursuant to
our Certificate of Incorporation, Bylaws, Delaware law or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission, such
indemnification is against public policy as expressed in the Securities Act and
is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by us of expenses incurred or
paid by any one of our directors, officers or controlling persons in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, we will, unless in the opinion of our counsel the matter has been
settled by controlling precedent, submit to a court of appropriate jurisdiction
the question whether such indemnification by it is against public policy as
expressed in the Securities Act and will be governed by the final adjudication
of such issue.
We hereby undertake that for purposes of determining any liability under
the Securities Act, the information omitted from the form of prospectus filed as
part of this registration statement in reliance upon Rule 430A and contained in
a form of prospectus filed by us pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act shall be deemed to be part of this registration
statement as of the time it was declared effective by the Securities and
Exchange Commission.
We also hereby undertake:
(1) to file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) to include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) to reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent post-
effective amendment thereof) which, individually or in the aggregate, represent
a fundamental change in the information set forth in the registration statement.
Notwithstanding the foregoing, any increase or decrease in volume of securities
offered (if the total dollar value of securities offered would not exceed that
which was registered) and any deviation from the low or high end of the
estimated maximum offering range may be reflected in the form of prospectus
filed with the Securities and Exchange Commission pursuant to Rule 424(b) if, in
the aggregate, the changes in volume and price represent no more than a 20%
change in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) to include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
II-12
(2) that, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a new
registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof; and
(3) to remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering.
II-13
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements for filing on Form SB-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Tacoma, State of Washington, on December 12, 2000.
INSYNQ, INC.
By: /s/ JOHN P. GORST
-----------------
John P. Gorst,
Chief Executive Officer
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below
constitutes and appoints John P. Gorst as his true and lawful attorney-in-fact
and agent, with full power of substitution and resubstitution, for him and in
his name, place and stead, in any and all capacities, to sign any and all
amendments (including post-effective amendments) to this registration statement,
and to file same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorney-in-fact and agent or his
substitutes, may lawfully do or cause to be done by virtue thereof.
Pursuant to the requirements of the Securities Act of 1933, as amended,
this registration statement on Form SB-2 has been signed below by the following
persons on behalf of the Registrant in the capacities indicated on the date
stated.
SIGNATURES TITLE DATE
---------- ----- ----
/s/ John P. Gorst Chief Executive Officer, December 12, 2000
- -----------------
John P. Gorst Chairman of the Board
and Director (Principal
Executive Officer)
/s/ Stephen C. Smith Chief Financial Officer December 12, 2000
- --------------------
Stephen C. Smith (Principal Financial and
Accounting Officer)
/s/ M. Carroll Benton Chief Administrative Officer, December 12, 2000
- ---------------------
M. Carroll Benton Secretary Treasurer and
Director
/s/ David D. Selmon Director December 12, 2000
- -------------------
David D. Selmon
II-14