U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-QSB
(Mark one)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2001
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15 (d) OF
THE EXCHANGE ACT
For the transition period from to
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Commission file number 0-2401
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E-SYNC NETWORKS, INC
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(Exact name of small business issuer as specified in its charter)
Delaware 06-0625999
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State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
35 Nutmeg Drive, Trumbull, CT 06611
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(Address of principal executive offices)
(203) 601-3000
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(Issuer's telephone number, including area code)
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Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes (X) No ( )
State the number of shares outstanding of each of the issuer's classes of
common equity as of the latest practicable date:
Class Outstanding at November 1, 2001
- ------------------------------ -------------------------------
Common Stock Par Value $.01 7,436,805 shares
Transitional Small Business Disclosure Format (Check one): Yes___ No _X_
E-SYNC NETWORKS, INC.
INDEX
Page No.
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PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements (unaudited):
Consolidated Balance Sheet at September 30, 2001 3
Condensed Consolidated Statements of Operations
For the Three and Nine Months Ended September 30, 2001 and 2000 4
Condensed Consolidated Statements of Cash Flows
For the Nine Months Ended September 30, 2001 and 2000 5
Notes to Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 12
PART II OTHER INFORMATION
Item 1 Legal Proceedings 16
Item 2. Changes in Securities and Use of Proceeds 16
Item 4. Submission of Matters to a Vote of Security Holders 17
Item 6 Exhibits and Reports on Form 8-K 18
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
E-SYNC NETWORKS, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share and per share data)
<Table>
<Caption>
SEPTEMBER 30,
2001
-------------
(unaudited)
ASSETS
Current Assets:
Cash and cash equivalents .................................................. $ 403
Accounts receivable, less allowance for doubtful accounts of $112 .......... 1,313
Other current assets ....................................................... 53
--------
Total current assets .................................................. 1,769
Equipment, net .................................................................. 2,970
Other assets .................................................................... 223
--------
Total assets .......................................................... $ 4,962
========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Notes payable .............................................................. $ 2,566
Obligations under capital leases, current portion .......................... 42
Accounts payable ........................................................... 2,354
Accrued expenses ........................................................... 1,203
Medical benefits obligation, current portion ............................... 37
Deferred revenue ........................................................... 64
--------
Total current liabilities ............................................. 6,266
Obligations under capital leases, less current portion .......................... 6
Medical benefits obligation, less current portion ............................... 204
--------
Total liabilities ............................................................... 6,476
Stockholders' Equity:
Convertible preferred stock, par value $.01 per share, 10,000,000 shares
authorized
Series A - 1,000,000 shares issued and outstanding ......................... 10
Series B - 2,352,727 shares issued and outstanding ......................... 23
Common stock, stated value $.01 per share, 50,000,000 shares authorized,
8,414,320 shares issued and outstanding ..................................... 84
Additional paid in capital ...................................................... 28,988
Accumulated deficit ............................................................. (29,403)
Less treasury stock at cost, 992,565 shares ..................................... (1,216)
--------
Total stockholders' deficit ........................................... (1,514)
--------
Commitments and Contingencies
Total liabilities and stockholders' equity ............................ $ 4,962
========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
E-SYNC NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------- -------------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
(unaudited) (unaudited)
REVENUES:
Managed services $ 983 $ 887 $ 3,328 $ 2,915
Professional services 1,019 1,054 3,191 4,469
---------- ---------- ---------- ----------
Total revenues 2,002 1,941 6,519 7,384
COST OF SALES:
Managed services 1,170 1,149 3,381 3,065
Professional services 774 1,554 2,870 4,302
---------- ---------- ---------- ----------
Total cost of sales 1,944 2,703 6,251 7,367
GROSS MARGIN:
Managed services (187) (262) (53) (150)
Professional services 245 (500) 321 167
---------- ---------- ---------- ----------
Total gross margin 58 (762) 268 17
OPERATING EXPENSES:
Sales and marketing 239 562 957 1,844
General and administrative 907 1,194 2,612 3,697
Product development 83 296 262 969
Non-cash compensation -- 70 323 631
---------- ---------- ---------- ----------
Total operating expenses 1,229 2,122 4,154 7,141
Loss from operations (1,171) (2,884) (3,886) (7,124)
OTHER INCOME (EXPENSE):
Other expense, net 2 -- 4 (7)
Interest expense (96) (51) (380) (103)
Interest income 2 21 14 190
---------- ---------- ---------- ----------
Total other income (expense) (92) (30) (362) 80
---------- ---------- ---------- ----------
Net loss $ (1,263) $ (2,914) $ (4,248) $ (7,044)
========== ========== ========== ==========
Basic and diluted net loss per share $ (0.17) $ (0.43) $ (0.57) $ (1.04)
========== ========== ========== ==========
Weighted average number of shares 7,434,192 6,804,430 7,408,007 6,750,962
========== ========== ========== ==========
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
E-SYNC NETWORKS, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands, except share and per share data)
NINE MONTHS ENDED
SEPTEMBER 30, 2001 SEPTEMBER 30, 2000
----------------------------------------------
(unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................ $(4,248) $(7,044)
Adjustments to reconcile net loss to net cash used by operating
activities
Depreciation ....................................................... 793 633
Amortization of goodwill and other intangible assets ............... -- 683
Amortization of loan discount ...................................... 196 17
Non-cash compensation .............................................. 323 631
Changes in operating assets and liabilities:
Accounts receivable ............................................ 69 (811)
Other current assets ........................................... 58 (90)
Accounts payable and accrued expenses .......................... 909 (421)
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Net cash used in operating activities .............................. (1,900) (6,402)
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................... (123) (981)
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Net cash used in investing activities ....................................... (123) (981)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from notes payable ........................................ 665 1,000
Proceeds from on bank loan ........................................ -- 271
Payments on bank loan .............................................. (11) (40)
Proceeds from exercise of stock options and warrants ............... 15 177
Payments under capital lease obligations, net ...................... (10) (63)
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Net cash provided by financing activities ................................... 659 1,345
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Net decrease in cash and cash equivalents ................................... (1,364) (6,038)
Cash and cash equivalents at beginning of period ............................ 1,767 7,182
------- -------
Cash and cash equivalents at end of period .................................. $ 403 $ 1,144
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest ......................................................... $ 2 $ 4
======= =======
SEE ACCOMPANYING NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
E-SYNC NETWORKS, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 AND 2000
1. ORGANIZATION AND BASIS OF ACCOUNTING
The condensed consolidated balance sheet of E-Sync Networks, Inc. (the
"Company") as of September 30, 2001, and the related condensed consolidated
statements of operations for the three and nine months ended September 30, 2001
and 2000 and the condensed consolidated statements of cash flows for the nine
months ended September 30, 2001 and 2000 are unaudited. In the opinion of
management, all adjustments necessary for a fair presentation of such financial
statements have been included. Such adjustments consisted only of normal
recurring items. Interim results are not necessarily indicative of results for a
full year.
The financial statements as of September 30, 2001, and for the three and nine
months then ended, should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form 10-KSB/A for
the year ended December 31, 2000. The accounting policies followed by the
Company with respect to the unaudited interim financial statements are
consistent with those stated in the Company's Annual Report on Form 10-KSB/A for
the year ended December 31, 2000.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded asset
amounts or the amounts and classification of liabilities that might be necessary
should the Company be unable to continue as a going concern. The Company
continues to incur substantial net losses and negative operating cash flow and
revenues have been insufficient to cover costs of operations for the three and
nine months ended September 30, 2001. The Company has a working capital deficit
of $4.5 million and an accumulated deficit of $29.4 million. Management believes
the Company's ability to continue as a going concern is dependent upon its
ability, among other things, consummate the Proposed Transaction (as defined
below), to obtain additional financing and to achieve increased revenue to
generate sufficient cash flow to meet its obligations on a timely basis. Our
Annual Report on Form 10-KSB/A for the year ended December 31, 2000 included a
report from our independent auditors containing an explanatory paragraph stating
that we have recurring losses from operations, have a working capital deficiency
and an accumulated deficit that raise substantial doubt about our ability to
continue as a going concern.
On August 6, 2001, the Company entered into a definitive agreement (the
"Agreement") with CRC, Inc. ("CRC"). Pursuant to the Agreement, upon the
satisfaction or waiver of all of the conditions to closing set forth therein,
the Company will contribute substantially all of its assets and business (the
"ESNI Contributed Assets") to a newly formed joint venture entity (the "JV") and
CRC will contribute assets and business (the "CRC Contributed Assets")
substantially equal in revenues to the ESNI Contributed Assets to the JV (the
"Proposed Transaction"). In connection with the consummation of the Proposed
Transaction, the Company will initially be given a 51% equity interest in the
JV. CRC will receive a 49% equity interest in the JV in exchange for the
contribution of the CRC Contributed Assets. The Company will account for the
investment in the JV by the equity method of accounting for an unconsolidated
subsidiary.
In addition to the consideration set forth above, CRC will make available to the
Company a $2 million revolving loan commitment. Through November 12, 2001 the
Company has received $550,000 of this loan commitment. In addition, through
November 12, 2001 , CRC has advanced the Company operating funds aggregating
$127,000. The Company and CRC entered into a Pledge and Security Agreement (the
"Security Agreement") pursuant to which such loans, along with all other
liabilities of the Company to CRC, are secured by all of the assets of the
Company.
In addition, the Company will grant CRC a warrant to acquire up to 10% of
Company's capital stock on a fully diluted basis determined as of the close of
business on the closing date of the Proposed Transaction. The exercise price for
such warrants will be at a discount to market. The Company will grant
registration rights to CRC at the closing in connection with the issuance of the
warrant.
CRC will have an option to purchase up to an additional 17% interest in the JV.
CRC may not exercise this option for 18 months, unless the Company has defaulted
under the terms of the loan, or has undergone a change of control or bankruptcy.
This option will be exercisable for five years from the closing of the Proposed
Transaction, or if later, until two years after the loan is repaid in full.
6
On October 15, 2001, the Company's stockholders approved a resolution
authorizing the Company to complete the Proposed Transaction. Certain conditions
required to complete the Proposed Transaction, including but not limited to,
satisfactory agreements with the Company's creditors and the establishment of a
credit facility for the JV, have not yet been satisfied. The Company and CRC are
in discussions to either modify or satisfy these conditions. Additionally, CRC
has notified the Company that advances which have been made to the Company in
anticipation of CRC's $2 million loan commitment to the Company are currently in
default, as a result of the delay in closing the Proposed Transaction. The
Company and CRC are in discussions to modify the terms that have caused this
event of default. There can be no assurance that these efforts will be
successful.
Subject to certain exceptions, in the event that the Proposed Transaction does
not close by December 31, 2001, the Company would owe a break-up fee to CRC of
$500,000.
2. STOCKHOLDERS EQUITY
In the fourth quarter of 1999, in conjunction with the issuance of Series B
Preferred Stock, the Company's U.K. subsidiary issued 3,000,000 preference
shares. These preference shares were exchangeable at the option of the holder
into 681,818 shares of the Company's Series B Preferred Stock. On July 17, 2001,
these preference shares were exchanged by the holder thereof for 681,818 shares
of the Company's Series B Preferred Stock.
3. CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company considers all highly
liquid instruments, including money market funds and certificates of deposit
with original maturities of three months or less, to be cash equivalents.
4. EARNINGS PER SHARE
For the periods presented in the condensed consolidated statement of operations,
the calculations of basic EPS and EPS assuming dilution vary in that the
weighted average shares outstanding assuming dilution include the incremental
effect of stock options.
Options to purchase 2,588,581 shares and 2,021,443 shares of common stock at
prices ranging from $0.01 to $15.00 were outstanding at September 30, 2001 and
2000, respectively. At September 30, 2001 and 2000, 3,352,727 convertible
preferred shares were outstanding. All the stock options and convertible
preferred shares were excluded from the calculation of diluted EPS for the three
and nine month periods ended June 30, 2001 and 2000, because the Company
experienced a loss for those periods and inclusion of such securities would have
had an anti-dilutive effect.
5. STOCK OPTIONS
During 2000, the Company issued to various consultants fully vested options to
purchase 20,000 shares of common stock, at exercise prices from $1.19 to $1.81
per share, in exchange for their professional services. These options are
exercisable for a period of ten years. The Company valued these options using
the Black-Scholes pricing model and this cost is amortized over the applicable
service periods. The Company amortized approximately $6,000 during the nine
months ended September 30, 2001. In addition, during 2001 the Company issued to
various consultants fully vested options to purchase 7,500 shares of common
stock, at an exercise price of $1.06 per share, in exchange for providing
services. The Company amortized approximately $7,000 during the nine months
ended September 30, 2001 related to these options. Such amounts are included in
non-cash compensation in the statements of operations.
During 2001, the Company granted employees options to purchase 304,264 shares of
common stock at an exercise price of $0.27 per share. These options vest
immediately and are exercisable for ten years. Compensation expense was recorded
for the difference between the exercise price and fair value at the grant date,
totaling approximately $239,000. Such amounts are included in non-cash
compensation in the statements of operations.
During 2001, the Company granted options at the then fair value to purchase
approximately 720,000 shares of common stock to employees at prices ranging from
$0.80 to $1.09. These options are exercisable for a ten-year period and vest
over three years.
Options to purchase 5,000 and 63,000 shares of common stock were exercised
during the three and nine months ended September 30, 2001, respectively. The
Company received proceeds of approximately $1,000 and $15,000, respectively,
upon the exercise of such options.
7
6. COMMITMENTS AND CONTINGENCIES
During August 2000, the Company received $1,000,000 from affiliates in
connection with the issuance of subordinated term notes which were payable on
August 15, 2001. The notes bear an interest rate of 12% per annum. The principal
balance was due at maturity. However, in the event the Company receives proceeds
in excess of $3,000,000 from the sale of securities, the holders may demand
prepayment of all or any part of the then outstanding balance. At September 30,
2001 the outstanding principal balance was $1,000,000. The Company has entered
into agreements with the holders of these notes, who are affiliates, to convert
the outstanding principal and accrued interest into Senior Convertible Series C
Preferred Stock, at $0.36 per share, effective upon consummation of the Proposed
Transaction.
In connection with the issuance of these notes, the Company issued warrants to
purchase 30,000 shares of the Company's common stock at exercise prices ranging
from $3.85 to $5.50 per share. The warrants are transferable and expire on
August 15, 2005. A value of approximately $167,000 was ascribed to these
warrants using the Black-Scholes pricing model. The value of the warrants was
recorded as a reduction to the notes payable with a corresponding increase to
additional paid-in capital. This value was amortized as interest expense over
the one-year term of the notes. For the three and nine months ended September
30, 2001, the Company amortized approximately $27,000 and $109,000,
respectively, which is included in interest expense in the consolidated
statement of operations.
During December 2000, the Company received $ 850,000 and an additional $150,000
during the six months ended June 30, 2001 from an affiliate in connection with
the issuance of subordinated term notes payable. The notes bear an interest rate
of 10% per annum. The principal balance and interest was payable at the maturity
date of May 31, 2001. The note and accrued interest will automatically convert
in the event the Company receives proceeds in excess of $3,500,000 from the sale
of securities under the same terms as such sale. In the event the note is not
automatically converted and the note is not repaid prior to May 31, 2001, the
holder may convert a portion of the note into common stock at $0.25 per share,
not to exceed approximately 600,000 shares. At September 30, 2001, the
outstanding principal balance was $1,000,000. The Company has entered into
agreements with the holders of these notes, who are affiliates, to convert the
outstanding principal balance and accrued interest into equity of the Company.
The notes will be partially converted into 661,683 shares of common stock at a
conversion price of $0.25 per share effective upon consummation of the Proposed
Transaction. The remaining balance will be converted into Senior Convertible
Series C Preferred Stock at $0.36 per share, effective upon consummation of the
Proposed Transaction.
In connection with the issuance of these notes, the Company issued warrants to
purchase 108,000 shares of the Company's common stock at an exercise price of
$1.25 per share. The warrants are transferable and expire on December 22, 2005.
A value of approximately $88,000 was ascribed to these warrants using the
Black-Scholes pricing model. The value of the warrants was recorded as a
reduction to the notes payable with a corresponding increase to additional
paid-in capital. This value is being amortized as interest expense over the term
of the notes. For the nine months ended September 30, 2001, the Company
amortized approximately $88,000, which is included in interest expense in the
consolidated statement of operations
The Company's inactive subsidiary, Braincraft Learning Technologies Inc.
("Braincraft"), also has an outstanding line of credit with a commercial bank of
$100,000 bearing interest at 2% above the bank's prime rate, of which the
Company is a guarantor. The amount outstanding under the line of credit at
September 30, 2001 was approximately $52,000.
7. RESTRUCTURING RESERVE
During the fourth quarter of 2000, the Company committed to a plan to
discontinue the operations of its web design consulting business, which was the
principal activity of Braincraft. As a result, the Company recorded a charge
totaling $225,000 for minimum lease payments and other costs to shut down these
operations. During the three and nine months ended September 30, 2001,
approximately $38,000 and 198,000, respectively, for employee severance, fixed
asset disposals and lease termination costs were charged to this reserve. The
shut down was substantially completed during the second quarter of 2001.
8. OTHER
The Company had previously entered into a non-binding letter of intent with
Howard Systems Inc ("HSI") to sell its professional services business to HSI.
The Company terminated this letter of intent when it entered in a letter of
intent with CRC. HSI filed a lawsuit which alleged claims for breach of
contract, fraud and violation of the Connecticut Unfair Trade Practices Act
arising out of the Company's entry into a letter of intent with CRC and
termination of its letter of intent with HSI. The complaint sought a temporary
injunction and compensatory and punitive damages. The Company, CRC and HSI have
entered into settlement agreements and HSI has withdrawn the complaint against
the Company. The Company did not incur any liability as a result of this action.
8
On September 26, 2001, QWEST Communications Corporation, a trade creditor filed
a lawsuit against the Company seeking payment of $207,000 for services. In
addition the creditor is also seeking costs and interest. The Company intends to
defend the action.
Prior to November 12, 2001 the Company's Common Stock was traded over the
counter and quoted on the NASDAQ Small Cap Market System under the symbol
"ESNI". Effective as of the opening of business on November 12, 2001, the
Company's Common Stock was delisted from the Nasdaq Small Cap Market System,
and, simultaneously, the Company's common stock became eligible to be traded on
the OTC Bulletin Board. The Company's symbol of "ESNI" was not changed by such
delisting.
9. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 1998, the FASB issued SFAS No. 133 "Accounting for Derivative
Instruments and Hedging Activities," (SFAS 133), which establishes accounting
and reporting standards for derivative instruments, including derivative
instruments embedded in other contracts, and for hedging activities. SFAS No.
133, as amended by SFAS 137 (Accounting for Derivative Instruments and Hedging
Activities -- Deferral of the effective date of SFAS No. 133 - an Amendment of
SFAS No. 133), is effective for all fiscal quarters of fiscal years beginning
after June 15, 2000. In June 2000, SFAS No.138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", was issued to provide
additional implementation guidance related to SFAS 133. The Company adopted this
statement January 1, 2001. Adoption of these statements did not have a material
effect on the Company's financial position or results of operations for the
three and nine months ended September 30, 2001.
In July 2001, the FASB issued Statement of Financial Accounting Standards No.
141, "Business Combinations" ("SFAS No. 141"). SFAS No. 141 requires the
purchase method of accounting for business combinations initiated after June 30,
2001 and eliminates the pooling-of-interests method. The adoption of SFAS is not
expected to have a significant impact on our results of operations.
In July 2001, the FASB issued Statement of Financial Accounting Standard No.
142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") which is effective
January 1, 2002. SFAS No. 142 eliminates the current requirement to amortize
goodwill and indefinite-lived intangible assets and replaces the amortization
with an impairment test which must be performed at least annually. For
intangible assets with definite useful lives, SFAS No 142 requires amortization
over their respective useful lives to their estimated residual values and review
for impairment in accordance with Statement of Finical Accounting Standards No.
121 "Accounting for Impairment of Long Lived Assets and for Long Lived Assets to
be disposed of." Additionally, SFAS No.142 requires that a transitional goodwill
impairment test be completed six months from the date of adoption. SFAS No. 142
is not expected to have a significant impact on our results of operations.
In August 2001, the FASB issued FASB Statement No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets", which addresses financial
accounting and reporting for the impairment or disposal of long-lived assets.
Statement 144 requires an entity to test an asset for recoverability whenever
events or changes in circumstances indicate that the entity may not be able to
recover the asset's carrying amount. Companies are required to adopt Statement
142 for fiscal years beginning after December 15, 2001. The Company plans to
adopt this statement on January 1, 2002. The adoption of SFAS No. 142 is not
expected to have a significant impact on the Company's financial position or
results of operations as the Company does not have significant amounts of
long-lived assets.
10. BUSINESS SEGMENT INFORMATION
The FASB issued Statement of Financial Accounting Standards No. 131, Disclosures
about Segments of an Enterprise and Related Information (SFAS No. 131) in June
1997. SFAS 131 supersedes FASB Statement No. 14, Financial Reporting for
Segments of a Business Enterprise, but retains the requirement to report
information about major customers. SFAS 131 replaces the "industry segment'
concept of Statement 14 with a "management approach" concept as the basis for
identifying reportable segments. The management approach is based on the way
that management organizes the segments within the enterprise for making
operating decisions and assessing performance. Consequently, the segments are
evident from the structure of the enterprise's internal organization. It focuses
on financial information that an enterprise's decision makers use to make
decisions about the enterprise's operating matters.
The Company is an e-commerce enabler, providing global messaging solutions for
Fortune 1000 companies. The Company offers a suite of enterprise communication
infrastructure capabilities that facilitate secure and reliable information
exchange. These services include secure online messaging, outsourced e-mail
services, directory and fax services, hosted communications, network design and
integration, messaging integration and message platform migration. The
operations of the Company are conducted through two business segments primarily
within the continental United States and the United Kingdom. Descriptions of the
business segments' services and operations are as follows:
9
MANAGED SERVICES
The Managed Services business delivers its services through four products,
MailFAX, TotalMail, Directory and Messaging Services, and Hosting Services.
MailFAX facilitates conversion, encryption and delivery of faxes to e-mail or
e-mail to faxes without any additional hardware or software. This service
includes (i) Application to Fax which simultaneously delivers computer-generated
files from mainframe or PC-based applications to one or many facsimile devices
worldwide, (ii) Outbound Fax, which sends faxes and attachments via e-mail, and
(iii) Inbound Fax, which allows receipt of inbound faxes at the desktop via
e-mail. TotalMail is a full featured email solution supporting a range of
available options. The service is outsourced and web-based, and includes the
integration of e-mail with directory services, content filtering, and virus
scanning. Directory and Messaging Services enable customers' multiple-messaging
systems to have all user address information presented in a complete, native
format to all participating systems. This service feature also allows external
trading partner systems to participate in the directory synchronization process.
As an enhancement, messaging integration, which connects users of disparate
messaging applications (Exchange, Lotus Notes, cc:Mail, Profs, etc.) within an
organization can be implemented over intranets, extranets, and virtual private
networks (VPNs). Hosting Services, whereby the Company will maintain customers'
applications remotely at one of its sites using the latest technologies,
provides security, redundancy, and data backup for the client's applications.
PROFESSIONAL SERVICES
Professional Services provides consulting services in the areas of messaging
design, architecture and implementation, as well as a broad range of additional
services including network design and integration, systems management, security
planning and training. Network Design and Integration provides expert resources
for all network design and integration needs. E-Sync assesses information,
messaging, and connectivity needs, evaluates existing infrastructure
architecture for adaptability to change, defines and tests migration processes,
executes and documents phased migration procedures for disparate messaging
platforms, and prepares enterprise-wide implementation plans. E-Sync also offers
numerous services in application development and support and in workflow
automation. E-Sync can install a Virtual Private Network (VPN) to ensure that
only authorized users can access a client's network and that data cannot be
intercepted. The Security Solutions area provides the ability to exchange
sensitive documents and private information securely with confidence and
reliability. E-Sync uses public key infrastructure (PKI) technology to deliver
digital certificates, encryption keys, and SmartCards for optimum secure
messaging. With large-scale anti-virus protection capabilities and e-mail
anti-virus filtering, E-Sync can provide full protection for applications, data,
messaging, and user systems across entire networks. E-Sync's Security Solutions
evaluates the costs and benefits of ID/password pairs, challenge/response
tokens, smart cards, biometrics, or other devices that provide unique profiles.
BackOffice(R) Consulting provides architecture, design, and implementation
services. The Company's Microsoft Certified Professionals, Systems Engineers,
and Trainers offer a complete BackOffice(R) solution, including assessing system
requirements, installing, configuring, and training.
10
Identifiable assets by segment are those assets that are used in the operations
of each segment as well as the accounts receivable generated by each segment.
Corporate assets consist primarily of cash and cash equivalents, short term
investments, prepaid expenses and corporate furniture, fixtures, and equipment.
Capital expenditures are comprised primarily of additions to data processing
equipment, furniture and fixtures, and leasehold improvements.
The following table presents the Company's business segment financial
information, in thousands:
<Table>
<Caption>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------- ---------------------------
2001 2000 2001 2000
---- ---- ---- ----
REVENUE:
Managed services ..................... $ 983 $ 887 $ 3,328 $ 2,915
Professional services ................ 1,019 1,054 3,191 4,469
------- ------- ------- -------
Total revenues .................... $ 2,002 $ 1,941 $ 6,519 $ 7,384
======= ======= ======= =======
OPERATING LOSS:
Managed services ..................... $ (790) $ (942) $(2,173) $(2,699)
Professional services ................ (381) (1,942) (1,713) (4,425)
------- ------- ------- -------
Operating loss from segments ......... (1,171) (2,884) (3,886) (7,124)
Other income (expenses), net ......... 2 -- 4 (7)
Interest (expense) income, net ....... (94) (30) (366) 87
------- ------- ------- -------
Net loss .......................... $(1,263) $(2,914) $(4,248) $(7,044)
======= ======= ======= =======
DEPRECIATION AND AMORTIZATION:
Managed services ..................... $ 195 $ 87 $ 420 $ 249
Professional services ................ 15 23 55 65
Corporate ............................ 106 352 318 1,002
------- ------- ------- -------
Total depreciation and amortization $ 316 $ 462 $ 793 $ 1,316
======= ======= ======= =======
CAPITAL EXPENDITURES:
Managed services ..................... $ 12 $ 44 $ 78 $ 291
Professional services ................ 2 30 44 34
Corporate ............................ -- -- 1 656
------- ------- ------- -------
Total capital expenditures ........ $ 14 $ 74 $ 123 $ 981
======= ======= ======= =======
IDENTIFIABLE ASSETS AT: SEPTEMBER 30, 2001
------------------
Managed services ................................. $1,388
Professional services ............................ 905
------
Total assets for reportable segments........... 2,293
Corporate ........................................ 2,669
------
Total assets .................................. $4,962
======
</Table>
11
Item 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is an e-commerce enabler, providing global messaging solutions for
Fortune 1000 companies. The Company offers a suite of enterprise communication
infrastructure capabilities that facilitate secure and reliable information
exchange. The Company's managed services include secure online messaging,
outsourced e-mail services, directory and fax services and hosted
communications. In addition, the Company has a highly qualified professional
services organization, which directs its efforts toward providing network design
and integration, messaging integration and message platform migration services.
The Company's strategy, which was adopted during the fourth quarter of 2000, is
to leverage its relationships with key channel partners to extend its core
messaging solutions into vertical solution frameworks initially for the
insurance and healthcare markets. Previously, the Company had focused much of
its efforts towards the development of supply chain management software, which
efforts were discontinued during 2000 through a reprioritization of capital
resources toward core messaging activities that comprise the majority of the
Company's business and revenue.
The Company continues to incur substantial net losses and negative operating
cash flow and revenues have been insufficient to cover costs of operations for
the three and nine months ended September 30, 2001. Management believes the
Company's ability to continue as a going concern is dependent upon its ability,
among other things, to consummate the Proposed Transaction, to obtain additional
financing and to achieve increased revenue to generate sufficient cash flow to
meet its obligations on a timely basis.
On August 6, 2001 the Company entered into definitive agreements to create a new
joint venture entity (the "JV") with CRC Inc. ("CRC"). The definitive agreements
call for the Company to contribute its business and substantially all of its
assets to the JV at the closing, and for CRC to simultaneously contribute
business and assets substantially equal in revenues to the JV. The JV would
initially be 51% owned by Company. The Company will account for the investment
in the JV by the equity method of accounting for an unconsolidated subsidiary.
On October 15, 2001, the Company's stockholders approved a resolution
authorizing the Company to complete the Proposed Transaction. Certain conditions
required to complete the Proposed Transaction, including but not limited to,
satisfactory agreements with the Company's creditors and the establishment of a
credit facility for the JV have not yet been satisfied. The Company and CRC are
in discussions to either modify or satisfy these conditions. Additionally, CRC
has notified the Company that advances which have been made to the Company in
anticipation of CRC's $2 million loan commitment to the Company are currently in
default, as a result of the delay in closing the Proposed Transaction. The
Company and CRC are in discussions to modify the terms that have caused this
event of default. There can be no assurance that these efforts will be
successful.
Subject to certain exceptions, in the event that the Proposed Transaction does
not close by December 31, 2001, the Company would owe a break-up fee to CRC of
$500,000.
It is expected that the JV will be able to provide new and expanded products and
services to the Company's and CRC's customers while reducing the Company's
dependence on a small number of current customers. It is also expected that the
JV will operate at an overall combined lower cost. The Proposed Transaction is
not expected to occur until the fourth quarter of 2001 and the benefits are not
anticipated to be realized until the year 2002. It is expected that the Company
will incur additional costs through the end of the year 2001 to complete the
Proposed Transaction which will impact the Company's current operations.
In connection with the Proposed Transaction, CRC will make available to the
Company a $2 million revolving loan commitment. To date the Company has received
$550,000 of this loan commitment. In addition, to date, CRC has advanced the
Company operating funds aggregating $127,000.00. The Company and CRC entered
into a Pledge and Security Agreement pursuant to which these loans, along with
all other liabilities of the Company to CRC, are secured by all of the assets of
the Company.
12
THREE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE THREE MONTHS ENDED
SEPTEMBER 30, 2000
The Company's revenues consist of fees for Professional Services provided to its
customers in the form of messaging infrastructure and other consulting services,
and Managed Services in the form of hosting and messaging services. Professional
Services are normally billed on a time and material basis with contracts
typically ranging from 1 to 12 months. Managed Services consist of both fixed
charges, billed in advance, and usage based charges billed at the end of the
month. Contracts for Managed Services are typically for a one-year period. The
Company recognizes revenue in the period the services are performed.
Managed Services revenues increased by 10.8 % and Professional Services revenues
decreased by 3.3% in the three months ended September 30, 2001 compared to the
same period in 2000. Managed Services revenue increased primarily due to new
customers and an increase in customer volume. The decrease in Professional
Services revenue is primarily due to the web design services which were
discontinued in the first quarter of 2001. Net of the effect of the web design
services, Professional Services revenue increased 13.8% from the prior period,
principally due to increase in consulting services provided.
Gross margin was 2.9% for the three months ended September 30, 2001, compared to
negative gross margin of (39.0%) or ($769,000) for the three months ended
September 30, 2000. Managed Services recognized a negative gross margin of
(19.0%) or ($187, 000) for three months ended September 30, 2001 compared to a
negative gross margin of (29.5%) or ($262,000) for the three months ended
September 30, 2000. The gross margin for Professional Services was 24.0% or
$245,000 for three months ended September 30, 2001 compared to a negative gross
margin of (47.4%) or ($500,000) for the three months ended September 30, 2000.
The increase in Managed Services gross margin is mainly due to increased volume.
The increase in Professional Services is mainly due to lower costs resulting
principally from the web design operations which were shut down during the
second quarter of 2001. Excluding the web design operations, the gross margin
was 28.6 % during the three months ended September 30, 2001 compared to 20.6 %
for the same period in 2000. The increase in margin was mainly due to higher
consulting revenue.
Sales and marketing expenses decreased $323,000, or 57%, in the current quarter,
and as a percent of total revenues decreased from 28.9% in the three months
ended September 30, 2000, to 11.9% for the three months ended September 30,
2001. The decrease is a result of the Company's efforts to reduce operating
expenses. The lower expenses are principally attributable to reduced sales
promotion activity and reduced use of outside consultants. Management expects
the level of such expenses to remain consistent in 2001 through the closing of
the Proposed Transaction.
The Company's general and administrative expenses decreased $287,000 or 24.0%
for the three months ended September 30, 2001 compared to the three months ended
September 30, 2000. The decrease is primarily due to reduced goodwill
amortization. During the fourth quarter of 2000, the Company recorded an
impairment charge related to the remaining goodwill balance at December 31,
2000. In addition, compensation and consultant expenses were lower as result of
the Company's efforts to reduce costs. Due to the Proposed Transaction,
management expects general and administrative expenses to increase through the
remainder of 2001.
Research and development expenditures were $83,000 and $296,000 for the three
months ended September 30, 2001 and 2000, respectively. The decreased expense
for the current quarter was mainly due to a reduction in research and
development personnel and use of outside consultants. To date, all development
costs have been expensed in the period incurred.
Interest expense was $96,000 for the three months ended September 30, 2001 as
compared to $51,000 in the same period in 2000. The increase is due to the
increase in borrowings during 2001.
Interest income was $2,000 for the three months ended September 30, 2001, as
compared to $21,000 in the same period in 2000. The decrease was mainly due to
higher available funds invested during 2000.
13
NINE MONTHS ENDED SEPTEMBER 30, 2001 COMPARED TO THE NINE MONTHS ENDED
SEPTEMBER 30, 2000
Managed Services revenues increased by 14.2% and Professional Services revenues
decreased by 28.6% for the nine months ended September 30, 2001. Managed
Services revenues increased primarily due to new customers and increased volume.
The decrease in Professional Services revenue is primarily due to the shut down
of web design services which were discontinued in the first quarter 2001.
Gross margin increased to 4.1% for the nine months ended September 30, 2001,
compared to 0.2% for the nine months ended September 30, 2000. Gross margin for
Managed Services was a negative (1.6) % or ($53, 000) for the nine months ended
September 30, 2001, compared to a negative (5.1 %) or ($150, 000) for the nine
months ended September 30, 2000. Gross margin for Professional Services was
10.1% or $321,000 for the nine months ended September 30, 2001 compared to 3.7%
or $167,000 for the nine months ended September 30, 2000. The increase in
Professional Services' margin is due to reduced costs incurred from the web
design operations which were shut down during the first quarter of 2001 and
lower personnel related costs. Excluding the web design operations, the gross
margin was 31.6 % during the nine months ended September 30, 2001 compared to
20.0 % for the same period in 2000.
Sales and marketing expenses decreased $887,000, or 48%, for the nine months
ended September 30, 2001, and as a percent of total revenues decreased from
25.0% in the nine months ended September 30, 2000, to 14.7% for the nine months
ended September 30, 2001. The lower expenses are principally in the areas of
reduced sales promotion activity and reduced use of outside consultants.
Management expects the level of such expenses to remain consistent in 2001
through the closing of the Proposed Transaction.
The Company's general and administrative expenses were $1,085,000 or 29.3%
lower for the nine months ended September 30, 2001, than for the nine months
ended September 30, 2000. As a percentage of total revenues, general and
administrative expenses decreased from 50.1% to 40.1% over the periods. The
decrease is due in part to reduced goodwill amortization. During the fourth
quarter of 2000, the Company record an impairment charge related to the
remaining goodwill balance at December 31, 2000. In addition, compensation and
consultant expenses were lower as result of the Company's efforts to reduce
costs. Due to the Proposed Transaction, management expects general and
administrative expenses to increase through the remainder of 2001.
Research and development expenditures were $ 262,000 and $969,000 for the nine
months ended September 30, 2001, and 2000, respectively. The decreased expense
was mainly due to a reduction in research and development personnel and the use
of outside consultants. To date, all development costs have been expensed in the
period incurred.
Interest expense was $380,000 for the nine months ended September 30, 2001 as
compared to $103,000 for the same period in 2000. The increase is due to the
increase in borrowings during 2001.
Interest income was $14,000 for the nine months ended September 30, 2001, as
compared to $190,000 for the same period in 2000. The decrease was mainly due to
higher available funds invested during 2000.
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents decreased by $1.4 million during the nine months ended
September 30, 2001 from $1.8 million at December 31, 2000. At September 30,
2001, the Company had a working capital deficit (current assets minus current
liabilities) of approximately $4.5 million. Net cash used in operating
activities was $1.9 million for the nine months ended September 30, 2001. Net
cash flows used in operating activities in the period reflect net losses of
$4.2 million, offset by non-cash expenses of approximately $1.3 million and
changes in working capital of approximately $1.0 million.
As of September 30, 2001, the Company had $403,000 of cash and cash equivalents.
The Company has an accumulated deficit of $29.4 million as of September 30,
2001. The Company continues to incur substantial net losses and negative
operating cash flow. The Company will need additional financing to meet current
operating cash requirements. If the Company is unable to raise additional
financing or generate sufficient cash flow, it may be unable to continue as a
going concern. Even if the Company is successful in obtaining funding to meet
current operating expenses, the Company will need to substantially increase its
revenues or its losses will continue indefinitely. Even if the Company's efforts
to increase revenue are successful, there will be a delay in making this revenue
available to fund operating expenses. The Company will need to raise additional
funds to maintain current operating expenses and those expenses needed to
support efforts to increase revenue. If the Company is not successful in
securing additional funding, the Company's business will be seriously harmed.
Our principal commitments consist of subordinated convertible notes, notes
payable, obligations under capital and operating leases and accounts payable.
Our annual report on Form 10-KSB/A for the year ended December 31, 2000 included
a report from our independent auditors containing an explanatory paragraph
stating that we have recurring losses from operations, have a working capital
deficiency and an accumulated deficit that raise substantial doubt about our
ability to continue as a going concern.
14
Our consolidated financial statements do not include any adjustments relating
to the recoverability and classification of recorded asset amounts or the
amounts and classification of liabilities that might be necessary should the
Company be unable to continue as a going concern. Management believes that the
Company's ability to continue as a going concern is dependent upon its ability
to obtain additional financing to generate sufficient cash flow to meet its
obligations on a timely basis as may be required and ultimately to achieve
profitable operations. Management is implementing internal actions to improve
operations and liquidity, including a reduction of the Company's workforce and
closure of some of our businesses operating with negative cash flows. The
internal actions to date to reduce operating expenses will not be sufficient to
reach positive cash flow. In addition to these internal actions, management is
considering external financing options, such as strategic alliances, debt, or
equity offerings. There can be no guarantee that these efforts will be
successful. Such offerings can have a dilutive effect on the Company's
shareholders.
On August 6, 2001, the Company entered into a definitive agreement (the
"Agreement") with CRC, Inc., ("CRC"). Pursuant to the Agreement, upon the
satisfaction or waiver of all of the conditions to closing set forth therein,
the Company will contribute substantially all of its assets and business (the
"ESNI Contributed Assets") to a newly formed joint venture entity (the "JV") and
CRC will contribute assets and business (the "CRC Contributed Assets")
substantially equal in revenues to the ESNI Contributed Assets to the JV (the
"Proposed Transaction"). In connection with the consummation of the Proposed
Transaction, the Company will initially be given a 51% equity interest in the
JV. CRC will receive a 49% equity interest in the JV in exchange for the
contribution of the CRC Contributed Assets. The Company will account for the
investment in the JV by the equity method of accounting for an unconsolidated
subsidiary.
In addition to the consideration set forth above, CRC will make available to the
Company a $2 million revolving loan commitment. Through November 12, 2001 the
Company has received $550,000 of this loan commitment. In addition, through
November 12, 2001, CRC has advanced the Company operating funds aggregating
$127,000. The Company and CRC entered into a Pledge and Security Agreement,
pursuant to which these loans, along with all other liabilities of the Company
to CRC, are secured by all of the assets of the Company.
In addition, the Company will grant CRC a warrant to acquire up to 10% of
Company's capital stock on a fully diluted basis determined as of the close of
business on the closing date of the Proposed Transaction. The exercise price for
such warrants will be at a discount to market. E-Sync will grant registration
rights to CRC at the closing in connection with the issuance of the warrant.
CRC will have an option to purchase up to an additional 17% interest in the JV.
CRC may not exercise this option for 18 months, unless the Company has defaulted
under the terms of the loan, or has undergone a change of control or bankruptcy.
This option will be exercisable for five years from the closing of the Proposed
Transaction, or if later, until two years after the loan is repaid in full.
On October 15, 20001, the Company's stockholders approved a resolution
authorizing the Company to complete the Proposed Transaction. Certain conditions
required to complete the Proposed Transaction, including but not limited to,
satisfactory agreements with the Company's creditors and the establishment of a
credit facility for the JV have not yet been satisfied. The Company and CRC are
in discussions to either modify or satisfy these conditions. Additionally, CRC
has notified the Company that advances which have been made to the Company in
anticipation of CRC's $2 million loan commitment to the Company are currently in
default, as a result of the delay in closing the Proposed Transaction. The
Company and CRC are in discussions to modify the terms that have caused this
event of default. There can be no assurance that these efforts will be
successful.
Subject to certain exceptions, in the event that the Proposed Transaction does
not close by December 31, 2001, the Company would owe a break-up fee to CRC of
$500,000.
Prior to November 12, 2001 the Company's Common Stock was traded over the
counter and quoted on the NASDAQ Small Cap Market System under the symbol
"ESNI". Effective as of the opening of business on November 12, 2001, the
Company's Common Stock was delisted from the Nasdaq Small Cap Market System,
and, simultaneously, the Company's common stock became eligible to be traded on
the OTC Bulletin Board. The Company's symbol of "ESNI" was not changed by such
delisting.
The Company had previously entered into a non-binding letter of intent with
Howard Systems Inc ("HSI") to sell its professional services business to HSI.
The Company terminated this letter of intent when it entered in a letter of
intent with CRC. HSI filed a lawsuit which alleged claims for breach of
contract, fraud and violation of the Connecticut Unfair Trade Practices Act
arising out of the Company's entry into a letter of intent with CRC and
termination of its letter of intent with HSI. The complaint sought a temporary
injunction and compensatory and punitive damages. The Company, CRC and HSI have
entered into settlement agreements and HSI has withdrawn the complaint against
the Company. The Company did not incur any liability as a result of this action.
On September 26, 2001, QWEST Communications Corporation, a trade creditor filed
a lawsuit against the Company seeking payment of $207,000 for services. In
addition the creditor is also seeking costs and interest. The Company intends to
defend the action.
PART II. OTHER INFORMATION
FORWARD-LOOKING STATEMENTS
The statements in this quarterly report on Form 10-QSB that are not historical
fact constitute "forward-looking statements." Said forward-looking statements
involve risks and uncertainties that may cause the actual results, performance
or achievements of the Company and its subsidiaries to be materially different
from any future results, performance or achievements, express or implied by such
forward-looking statements. These forward-looking statements are identified by
their use of forms of such terms and phrases as "expects", "intends", "goals",
"estimates", "projects", "plans", "anticipates", "should", "future", "believes",
and, "scheduled".
The variables which may cause differences include, but are not limited to, the
following general economic and business conditions: competition; success of
operating initiatives; operating costs; advertising and promotional efforts; the
existence or absence of adverse publicity; changes in business strategy or
development plans; the ability to retain management; availability, terms and
deployment of capital; business abilities and judgment of personnel;
availability of qualified personnel; labor and employee benefit costs;
availability and cost of raw materials and supplies; and changes in, or failure
to comply with, government regulations. Although the Company believes that the
assumptions underlying the forward-looking statements contained herein are
reasonable, any of the assumptions could be inaccurate, and therefore, there can
be no assurance that the forward-looking statements included in this filing will
prove to be accurate. In light of the significant uncertainties inherent in the
forward-looking statements included herein, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and exceptions of the Company will be achieved.
In addition, there can be no assurance that the Company will be successful in
developing any new products, that the Company will not experience difficulties
that could delay or prevent successful development, introduction and sales of
these products, or that its new products and enhancements will adequately meet
the requirements of the marketplace and achieve market acceptance. Management
cannot be sure that existing and future development efforts will be completed
within the anticipated schedules or that, if completed, they will have the
features or quality necessary to make them successful in the marketplace.
Further, despite testing by the Company and by current and potential customers,
errors could be found in the Company's products. E-Sync may not be able to
successfully correct these errors in a timely and cost effective manner. If the
Company is not able to develop new products or enhancements to existing products
or corrections on a timely and cost-effective basis, or if these new products or
enhancements do not have the features or quality necessary to make them
successful in the marketplace, the Company's business will be seriously harmed.
Management expects that most of the Company's enhancements to existing and
future products will be developed internally. However, the Company currently
licenses certain externally developed technologies and will continue to evaluate
externally developed technologies to integrate with its solutions. These
externally developed technologies, if suffering from defects, quality issues or
the lack of product functionality required to make the Company's solutions
successful in the marketplace, may seriously impact and harm the Company's
business. In addition, the Company must attract and retain highly qualified
employees to further its research and development efforts. The Company's
business could be seriously harmed if it is not able to hire and retain a
sufficient number of these individuals.
Item 1. Legal Proceedings
The Company had previously entered into a non-binding letter of intent with
Howard Systems Inc. ("HSI") to sell its professional services business to HSI.
The Company terminated this letter of intent when it entered in a letter of
intent with CRC. HSI filed a lawsuit in Connecticut Superior Court on June 27,
2001, which alleged claims for breach of contract, fraud and violation of the
Connecticut Unfair Trade Practices Act arising out of the Company's entry into a
letter of intent with CRC and termination of its letter of intent with HSI. The
complaint sought a temporary injunction and compensatory and punitive damages.
The Company, CRC and HSI have entered into settlement agreements and HSI has
withdrawn the complaint against the Company. The Company did not incur any
liability as a result of this action.
On September 26, 2001, QWEST Communications Corporation, a trade creditor filed
a lawsuit against the Company, in Connecticut Superior Court seeking payment of
$207,000 for services. In addition the creditor is also seeking costs and
interest. The Company intends to defend the action.
Item 2. Changes in Securities and Use of Proceeds
In the fourth quarter of 1999, in conjunction with the issuance of Series B
Preferred Stock, the Company's U.K. subsidiary issued 3,000,000 preference
shares. These preference shares were exchangeable at the option of the holder
into 681,818 shares of the Company's Series B Preferred Stock. On July 17, 2001,
these preference shares were exchanged by the holder thereof for 681,818 shares
of the Company's Series B Preferred Stock. The offer and sale of the Company's
Series B Preferred Stock in the aforesaid
16
transaction was exempt from the registration requirements of the Securities Act
of 1933, as amended, by virtue of the provisions of Section 4(2) thereof.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual meeting of stockholders on October 15, 2001. Of the
7,436,805 Common Shares, 1,000,000 Series A Preferred Shares, and 2,272,727
Series B Preferred Shares outstanding, as of the record date 6,803,039 Common
Shares, 1,000,000 Series A Preferred Shares and 1,672,725 Series B Preferred
Shares, respectively, were present or represented by proxy. The following
actions were voted upon at this meeting:
(a) To elect the following directors to serve until the next Annual
Meeting of Shareholders and until their successors are elected and have
qualified.
Number of Votes Number of votes
Nominee For Against/Withheld Abstentions Broker Non Votes
Michael A. Clark 10,943,709 32,055 -- --
Nathan Gantcher 10,966,909 8,855 -- --
Stephen D. Grubbs 10,966,909 8,855 -- --
Grame Macletchie 10,966,909 8,855 -- --
John C. Maxwell III 10,966,909 8,855 -- --
(b) To consider and vote upon a proposal recommended by our Board of
Directors to approve and authorize the Board of Directors to file an amendment
to our Certificate of Incorporation that would effect a reverse stock split of
our outstanding common stock at an exchange ratio of one-for-eight, as the Board
of Directors has determined is necessary to attempt to maintain the listing of
our Common Stock on The Nasdaq SmallCap Market. The vote on such action was
10,865,953 votes in favor, 23,385 votes against and 86,426 votes abstaining.
(c) To consider and vote upon an amendment to our 1999 Long-Term
Incentive Plan to increase the number of shares of Common Stock available for
awards under the plan from 4,500,000 shares to 7,500,000 shares. The vote on
such action was 8,490,542 votes in favor, 167,274 votes against, 7,266 votes
abstaining and 2,310,682 broker non-votes.
(d) To consider and vote upon a proposal to approve the following: (a)
the Contribution Agreement, dated as of August 6, 2001 (the "Company
Contribution Agreement"), by and among the Company, E-Sync Networks, LLC, a
Delaware limited liability company (the "JV"), and CRC, Inc., a New York
corporation ("CRC"), pursuant to which the Company will contribute substantially
all of its assets and business to the JV in exchange for what initially will be
a 51% membership interest in the JV, and (b) certain related agreements and
transactions to be entered into or effected at the same time as the closing of
the transactions under the Company Contribution Agreement (the "Closing"),
including, among other things, a Contribution Agreement pursuant to which CRC
would contribute certain of its assets to the JV in exchange for a 49%
membership interest in the JV, an Operating Agreement pursuant to which the
Company may be forced in the future to sell some or all of its interest in the
JV, without the stockholders having a right to object to the sale, up to
$2,000,000 of aggregate borrowings by the Company from CRC, and the issuance of
a warrant by the Company to CRC which will entitle CRC to purchase 10% of the
Company's outstanding Common Stock on a fully-diluted basis at a discount to
current market price, determined as of the Closing. The vote on such action was
8,643,661 votes in favor, 10,610 votes against, 10,811 votes abstaining and
2,310,682 broker non-votes.
(e) To consider and vote upon a proposal to approve the conversion of
the $500,000 promissory note issued to Michael P. Schulhof, a stockholder of the
Company, the $500,000 note issued to John C. Maxwell, III, the Chairman of the
Board, the $905,000 note issued to CE Capital Partnership, L.P., a stockholder
of the Company ("CECAP"), and the $95,000 note issued to CECAP into shares of
our Senior Convertible Series C Preferred Stock, effective upon the closing of
the Proposed Transaction. The vote on such action was 8,549,413 votes in favor,
32,140 votes against, 83,529 votes abstaining and 2,310,682 broker non-votes.
(f) To consider and vote upon a proposal recommended by the Board of
Directors to approve and authorize the Board of Directors to file an amendment
to our Certificate of Incorporation to change the corporate name of the Company
from "E-Sync Networks, Inc." to "ESNI, Inc." upon the Closing. The vote on such
action was 8,655,179 votes in favor, 7,560 votes against, 2,343 votes abstaining
and 2,310,682 broker non-votes.
17
Item 6. Exhibits and reports on Form 8-K
(a) Exhibits - none
(b) Reports on Form 8-K
August 13, 2001 On August 6, 2001, E-Sync Networks, Inc.("ESNI"),
entered into a definitive agreement (the "Agreement")
relating to the transactions proposed by that certain
non-binding Letter of Intent dated June 14, 2001 with
CRC, Inc.("CRC"). Pursuant to the Agreement ESNI will
contribute substantially all of its assets and
business to a newly formed joint venture entity and
CRC will contribute assets and business substantially
equal in projected revenues to the ESNI Contributed
Assets to the JV. In connection with the consummation
of the Proposed Transaction, ESNI will initially
receive a 51% equity interest in the JV and CRC will
receive a 49% equity interest in the JV.
In addition to the consideration set forth above, CRC
will make available to ESNI a $2 million revolving
loan commitment. As additional consideration for
entering into the Proposed Transaction, E-Sync will
grant CRC a warrant to acquire up to 10% of ESNI
capital stock on a fully diluted basis determined as
of the close of business on the closing date of the
Proposed Transaction. The exercise price for such
warrants will be at a discount to market. E-Sync will
grant registration rights to CRC at the closing in
connection with the issuance of the warrant.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 14, 2001 E-SYNC NETWORKS, INC.
/s/ Michael A. Clark
-------------------------------------
Michael A. Clark
President and COO
/s/ Thomas Wikander
-------------------------------------
Thomas Wikander
Controller (Chief Accounting Officer)