U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
eConnect
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(Name of Small Business Issuer in its charter)
File No. 333-71212
Nevada 541990 43-1239043
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(State or jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
2500 Via Cabrillo Marina, Suite 112, San Pedro, California 90731; (310) 514-9482
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(Address and telephone number of Registrant's principal executive offices and
principal place of business)
Law Office of William B. Haseltine
604 North Greenbrier Street
Arlington, Virginia 22203; (703) 276 1919
(Name, address, and telephone number of agent for service)
Approximate date of proposed sale to the public: As soon as practicable after
this Registration Statement becomes effective.
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If this Form is filed to If this Form is a If this Form is a
register additional post-effective amendment post-effective
securities for an filed pursuant to Rule amendment filed
offering pursuant to Rule 462(c) under the pursuant to Rule 462(d)
462(b) under the Securities Act, check under the Securities
Securities Act, please the following box and Act, check the
check the following box list the Securities Act following box and list
and list the Securities registration statement the Securities Act
Act registration number number of the earlier registration statement
of the earlier effective effective registration number of the earlier
registration statement statement for the same effective registration
for the same offering. offering. statement for the same
[_] [ ] offering.
333-71212 [ ]
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If any of the securities being registered on this If the delivery of the
Form are to be offered on a delayed or continuous prospectus is expected
basis pursuant to Rule 415 under the Securities Act to be made pursuant to
of 1933 check the following box. Rule 434, check the
[X] following box.
[ ]
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CALCULATION OF REGISTRATION FEE
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Title of each class of Proposed maximum Proposed maximum
securities to be Amount to be offering price per aggregate offering Amount of
registered registered share/(1)/ price registration fee
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Common Stock 142,974,776 $0.015 $2,144,622 $197.31
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(1) Calculated in accordance with Rule 457(c): The average of the bid and ask
prices as of May 6, 2002.
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PROSPECTUS
eConnect
142,974,776 Shares
Common Stock
eConnect, a Nevada corporation, is hereby registering an offering for
resale of 142,974,776 shares of common stock pursuant to the terms of this
prospectus. As a result of an agreement with Alpha Venture Capital Inc.,
76,500,000 shares that have been received pursuant to an equity line agreement
will be sold by Alpha on a delayed and continuous basis, and 66,474,776 will be
sold by others on a delayed basis at their discretion. The exact selling plans
of each shareholder cannot be determined at this time. Alpha is an underwriter
of this offering. The company's common stock trades on the Over the Counter
Bulletin Board under the trading symbol "ECNC".
The shares offered hereby are highly speculative and involve a high
degree of risk to public investors and should be purchased only by persons who
can afford to lose their entire investment. See "Risk Factors" on page 6.
Transactions in the shares are subject to Penny Stock regulations adopted
pursuant to the Securities Exchange Act of 1934, as amended, which may result in
reduced trading or make it difficult to sell the shares.
These securities have not been approved or disapproved by the
securities and exchange commission or any state securities commission nor has
the securities and exchange commission or any state securities commission passed
upon the accuracy or adequacy of this prospectus. Any representation to the
contrary is a criminal offense. The company will not receive any proceeds from
this offering.
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Proposed offering Underwriting
Title of each class of Price to Discounts and Proceeds to
securities offered Amount offered Public Commissions /(1)/ Issuer
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Common stock 142,974,776
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Per Share $$0.015/(2)/ $ $ 0.00
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Total Maximum $2,144,622 $ $ 0.00
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Information contained herein is subject to completion or amendment.
The registration statement relating to the securities has been filed with the
U.S. Securities and Exchange Commission. The securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
/(1)/ Contemporaneous with entering the CSPA, the company agreed to pay First
Fidelity Capital, the agent for Alpha, a commission of 6% of the amount
of each drawdown under the common stock purchase agreement payable in
cash at the time of each drawdown.
/(2)/ The price of $0.015 is based on the current market price as of
May 6, 2002. The actual prices at which the Securities may be sold may be
negotiated and may differ from the price.
Dated: May 8, 2002
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[This Page Intentionally Left Blank]
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Table Of Contents
Prospectus Summary................................................................... 5
Risk Factors......................................................................... 6
Use of Proceeds...................................................................... 14
Selling Shareholders................................................................. 14
Plan of Distribution................................................................. 16
Legal Proceedings.................................................................... 19
Directors, Executive Officers, Promoters and Control Persons......................... 20
Security Ownership of Certain Beneficial Owners and Management....................... 21
Description of Securities............................................................ 22
Disclosure of Commission Position on Indemnification for Securities Act Liabilities.. 23
Organization Within Last Five Years.................................................. 28
Description of Business.............................................................. 29
Plan of Operation.................................................................... 30
Description of Property.............................................................. 31
Certain Relationships and Related Transactions....................................... 32
Market for Common Equity and Related Stockholder Matters............................. 33
Executive Compensation............................................................... 34
Financial Statements................................................................. F-1
Changes In and Disagreements With Accountants on
Accounting and Financial Disclosure............................................. F-34
Available Information................................................................ F-35
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by detailed
information appearing elsewhere in this prospectus. Each prospective investor
is urged to read this prospectus in its entirety.
The Company.
The business of eConnect is to develop and profit from the PERFECT industry.
Personal Encrypted Remote Financial Electronic Card Technologies is simply the
usage of hardware (terminals) from remote sites such as a home, to pay web
merchants by swiped credit cards, ATM cards with PIN and smart cards. The
PERFECT system is now complete as regards the service of eCashPad credit card
present payments to web merchants. The PERFECT system consists of a home
terminal, the eCashPad, which the consumer will use to swipe their credit card
at the web merchant's site, and the Merchants Integration Kit which the web
merchant needs to install. Both elements are now complete. The payment of
eCashPad ATM card with PIN payments is in development. The initial usage of the
eCashPad as a home terminal is to enable consumers to swipe their credit card,
which will result in a credit card present payment to the web merchant and lower
discount rate as provided by First Data, the acquirer of the Bank Eyes Only
transaction. First Data has an agreement with the company whereby First Data
will "acquire" the transactions initiated through Bank Eyes Only. This means
that First Data will clear the transactions after they are implemented through
the Bank Eyes Only system. The same terminal can be used to swipe an ATM card
and enter a PIN which will result in a "point of sale" same as cash payment to
the web merchant. The future emphasis of the company will be on facilitation of
ATM card with PIN payments, although credit card present transactions will
continue to be substantial.
The company has had no revenue from operations to date. Although it has been
involved with e-commerce since 1999, it has been primarily engaged in research
and development. The company has incurred significant losses from operations:
Net loss from operations of $19,068,529 for the fiscal year ended December 31,
1999, $107,809,363 for the fiscal year ended December 31, 2000, and $19,636,254
for the fiscal year ended December 31, 2001. At December 31, 2001, the company
had an accumulated deficit of $164,669,671 (the majority of which resulted from
stock issued for services totalling $10,748,159). The future growth and
profitability of the company will be principally dependent upon its ability to
successfully complete development and testing of, obtain regulatory approvals
for, and market or license its primary products. Accordingly, the company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered in connection with the establishment of a new business in
a highly competitive industry, characterized by new product introductions.
EConnect has developed the eCashPad as the terminal to make these transactions
and has developed the Merchant Integration Kit and published this kit at the
eConnect web site (www.econnectholdings.com) to enable web merchants to install
the MIK in order to receive PERFECT payments.
The capability of accomplishing PERFECT same as cash payments by ATM card with
PIN and debit card with PIN and smart card payments will effect Internet global
business to business and consumer to business transactions. The concept that
"cash is king" now applies for the first time to Internet commerce which until
now has been limited to credit card transactions. eConnect will rely on the
creation of agreements with ATM card networks in order to utilize this aspect of
the eCashPad. To date, no such agreements exist.
Many consumers who do not have credit cards will now be able to use their
eCashPad and effect PERFECT same as cash payments to web merchants who today are
basically limited to being paid by credit and not real time cash.
The on going discussions that the Company has had with many businesses who have
a web presence, leads us to believe that the usage of the eCashPad to send cash
donations, wagers, impulse purchases and bill payments will greatly simplify
back room accounting for industries ranging from mortgage to insurance to home
Off Track Betting.
EConnect will generate operating revenues by charging fees per PERFECT payment.
These transaction fees will be lower than those currently paid by the merchant.
The transaction flow of a Bank Eyes Only credit card swiped transaction begins
with the eCashPad, which allows an individual to make a payment at a web
merchant's site which has installed the Merchant Integration Kit. This enables
the eCashPad to communicate with the web merchants site. Then, eConnect the
front end processor, hands off the transaction to VeriSign, which as a Gateway,
then hands off the transaction to First Data, who is the back end processor of
the transaction, and who then settles the transaction with Banks that have
agreed to charge a low discount rate to the merchant when it is being paid by an
eCash Pad card present transaction.
These eCashPad originated transactions will be regarded as credit card present
and the bank acquirer will then charge the web merchant a lower discount fee
than what is presently charged to the merchant when they are being paid by a
standard non credit card present payment.
Web merchants will pay eConnect a flat fee of 50 cents to provide the Bank Eyes
Only service plus they will pay the lower discount rate to the acquirer bank.
Adding in the chances of reduced fraud and charge backs plus the lower discount
rate, the overall cost of a Bank Eyes Only payment is an efficient payment for
the merchant. The Company is also generating nominal revenues on the sale of the
eCashPad at $59.95.
Since August 21, 2001, eConnect has in effect been in business as we have a full
Bank Eyes Only service system to offer both merchants and consumers, and has
engaged a direct commission sales staff to begin contacting merchants to sell
them on adding the eConnect Bank Eyes Only solution at their web site. The
consumer first downloads and installs the eCashPad driver which is software and
which enables the eCashPad to work with the consumers PC. The web merchants
download and install the Merchant Integration Kit at their web sites, which is
software and enables the eCashPad to make a payment at the site which is either
a credit card swiped or ATM card with PIN transaction. The overall service to
both consumers and web merchants is defined as Bank Eyes Only and behind the
scenes consists of eConnect driving and handing off the transaction into the
appropriate credit card or ATM card system.
Two key incentives for the Internet merchants are:
1. A lower Discount Rate charged to them by VISA/MasterCard for receipt of card
present (swiped) credit cards rather than card not present credit card
transactions.
2. The ability to be paid by an ATM card with PIN or debit card with PIN same as
cash Internet payment.
Our service agreement is with First Data who will be acquiring the credit card
swiped Bank Eyes Only payments and will be charging the web merchants a lower
discount rate based on the credit card bring first swiped by the consumer and
the magnetic strip read by the eCashPad. This is a first for Internet
commerce.
The key incentives for the consumer are:
1. A far safer credit card transaction as the financial data is being sent
directly to the bank system and is not seen nor stored at the web merchants site
and can therefore not be stolen by hackers.
2. Merchant Incentives to pay by cash.
3. Speed, ease and convenience of eCashPad terminal originated electronic
payments.
Bank Eyes Only credit card payments can only be accomplished by a terminal that
reads the magnetic strip of the credit card and ATM card with PIN payments, or
cash to the web merchant can be accomplished with a terminal that reads the
magnetic strip of the ATM card or debit card.
The eCashPad is a full service terminal that has been developed and is being
sold by eConnect for home and office usage to effect PERFECT payments. The
PocketPay is a mobile wireless eCashPad that can also double as a phone and has
not yet been developed.
The eCashPad is now in operation and has been used to effect product purchases
over the Internet by card present credit card transactions. Efforts are underway
to expand its usage to complete bill payments as the service of ATM card with
PIN same as cash payments becomes available. The Company has received a proposal
from an ATM card network to begin a Pilot to test ATM card with PIN Internet
transactions. This Pilot will consist of 60-100 eCashPads making payment to 2 to
3 Bank Eyes Only web merchants. At the conclusion of a successful Pilot, the ATM
card Network will then authorize the usage of ATM card with PIN eCashPad
transactions within their network.
The eCashpad is a proprietary product of the company. The PocketPay
does not yet exist. Bank Eyes Only is a proprietary service of the company.
The principal offices of the company's are located at 2500 Via
Cabrillo Marina, Suite 112, San Pedro, California 90731. The telephone number
for the company is (310) 514-9482.
The Offering.
142,974,776 shares of common stock of the company will be sold pursuant to the
terms of this prospectus. Shares outstanding prior to this
offering: , as of . The shares will sold as follows:
. Shares have previously been purchased under a common stock purchase
agreement ("CSPA") with Alpha Venture Capital, Inc. ("Alpha") at 85%
of the market price on the put date: the maximum number of shares
issued under the CSPA will be 76,500,000. The commitment of this
investor under this agreement is $20,000,000. Under this agreement,
First Fidelity will be paid a commission of 6% of the amount of each
drawdown. The company may put shares to Alpha periodically under the
CSPA. In return, Alpha is required to provide funds to the
company.
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. Selling shareholders on a delayed basis under Rule 415:
. Use of Proceeds: The Company will receive no proceeds from this
offering.
RISK FACTORS
The securities offered hereby are highly speculative in nature and
involve a high degree of risk. They should be purchased only by persons who can
afford to lose their entire investment. Therefore, each prospective investor
should, prior to purchase, consider very carefully the following risk factors
among other things, as well as all other information set forth in this
prospectus.
Significant Revenues Generation
Generation of revenues by the company is essential to its continued
existence. There is currently no guarantee that revenues will be forthcoming in
substantial amounts. This would be the case if, for example, no web merchants
signed up with the company. In spite of this risk, the company is endeavoring to
lay the groundwork for generation of significant revenues in the very near
future. However, no revenues from operations have yet been realized. If the
company does not begin to generate substantial revenues, its continued existence
is in question.
Lack of Significant Experience
No one in the world has any significant experience in the PERFECT
industry. It has never been attempted before. The name PERFECT has been
created by eConnect. To date, we are the only company in the United States to be
implementing Bank Eyes Only payments. To our best knowledge, other than
ePayLatina, which is using the eCashPad in the Dominican Republic, there is no
experience for credit card present Internet payments. The PERFECT industry is in
the process of being developed by eConnect and the Bank Eyes Only system.
With what we have developed to date, the senior staff of eConnect are very
knowledgeable in the PERFECT industry but at the same time are just now
implementing the usage of eCashPad originated Bank Eyes Only payments and to
that end can be considered to not have significant experience within the
Internet business of PERFECT.
EConnect is the first company to enable consumers to swipe their
credit card and their ATM card with PIN and make Bank Eyes Only payments. We are
the first company to enable web merchants to receive credit card present
payments and PIN entered same as cash ATM card/debit card payments. The senior
staff of eConnect can be considered as experts in the PERFECT industry and are
learning as we go, as this is completely uncharted territory.
If this industry does not develop, or if unforeseen problems develop,
an adverse impact could be felt by the company in its attempts to begin revenue
generation.
Development Stage of Products May Affect Ability of Company to Succeed.
The company is currently selling the eCashPad. The company's
PocketPay will require significant additional investment in research and
development and will require substantial additional resources. The eCashPad has
met all necessary regulatory approvals (Federal Communicatons Commission and
Underwriters Laboratories) and is now ready for mass market consumer sales.
There can be no assurance that the company will generate significant
revenues in the future; and there can be no assurance that the company will
operate at a profitable level. If the company is unable to obtain customers and
generate sufficient revenues so that it can profitably operate, the company's
business will not succeed. In such event, investors in the shares may lose
their entire cash investment. Also the company and its management do not have
significant experience in the internet business, and in particular the on-line
gaming business. The primary anticipated function of the eCashpad is to enable
card with PIN and debit card with PIN payments, which will be the same as cash
payments. These transactions will be used to pay bills, make charity donations
and for impulse purchases due to incentives offered by web merchants. Such usage
also will naturally evolve into regulated home gaming services that can be paid
by an eCashPad originated transaction.
Although eConnect will not be offering games to be played, the Company
will provide the driving of home gaming originated wagers by ATM card and PIN
and will be paid a service fee for such transactions.
As a result of the fixed nature of many of the company's expenses, the
company may be unable to adjust spending in a timely manner to compensate for
any unexpected delays in the development and marketing of the company's products
or any capital raising or revenue shortfall. Any such delays or shortfalls will
have an immediate adverse impact on the company's business, operations and
financial condition.
Company Has Had Limited Revenue, History of Operating Losses, and Accumulated
Deficit, and Expects Such Losses to Continue for the Foreseeable Future.
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The company has had almost no revenue to date. Although the company has been
involved with e-commerce since 1999, it has been primarily engaged in research
and development. The company has incurred significant losses from operations:
Net loss from operations of $19,068,529 for the fiscal year ended December 31,
1999, $107,809,363 for the fiscal year ended December 31, 2000, and $19,636,254
for the fiscal year ended December 31, 2001. At December 31, 2001, the company
had an accumulated deficit of $164,669,671 (the majority of which resulted from
stock issued for services totalling $10,748,159). The future growth and
profitability of the company will be principally dependent upon its ability to
successfully complete development and testing of, obtain regulatory approvals
for, and market or license its primary products. Accordingly, the company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered in connection with the establishment of a new business in
a highly competitive industry, characterized by new product introductions.
The company anticipates that it will incur substantial operating
expenses in connection with the research, development, testing and approval of
its proposed products and expects these expenses to result in continuing and
significant losses until such time as the company is able to achieve adequate
revenue levels. There can be no assurance that the company will be able to
significantly increase revenues or achieve profitable operations. Failure to
obtain additional capital, if needed, would have a material adverse effect on
the company's operations.
Company Will Need Additional Financing to Implement its Business Plan and Such
Financing May Be Unavailable or Too Costly.
The company will be required to raise significant equity capital to
fund its plan of operation; it has in place equity financing of $20,000,000 over
the next 24 months. Recently, the company has been meeting its funding
requirements through financing provided by Alpha Venture Capital, Inc. through
loan advances made pending activation of a common stock purchase agreement
between the company and this firm, dated December 8, 2000, in the commitment
amount of $15,000,000. In addition, the company has been meeting its funding
requirements through financing provided by Alliance Equities under a revolving
$400,000 line of credit, provided in exchange for restricted common stock of the
Company pursuant to an agreement dated March 5, 2001. There currently is no
outstanding balance with Alliance. However, there is no guarantee that these
funding sources will continue to be available in the future.
The current funds available to the company, and any revenue generated
by operations, will not be adequate for it to be competitive in the areas in
which it intends to operate, and may not be adequate for the company to survive.
Therefore, the company will need to raise additional funds in order to fully
implement its business plan. The company's continued operations therefore will
depend upon its ability to raise additional funds through bank borrowings,
equity or debt financing. There is no assurance that the company will be able to
obtain additional funding when needed, or that such funding, if available, can
be obtained on terms acceptable to the company. If the company cannot obtain
needed funds, it may be forced to curtail or cease its activities. If additional
shares were issued to obtain financing, current shareholders may suffer a
dilution on their percentage of stock ownership in the company.
Pursuant to Section 5.11 of the CSPA with Alpha, dated October 6,
2001, the company cannot enter into any subsequent or further offer or sale of
common stock or convertible securities convertible into common stock until July
31, 2002, or the expiration of the Commitment Period.
There can be no assurance that the marketplace will accept and utilize products
that have been, or may be, developed by company.
There can be no assurance that the eCashPad, as well as any other
products successfully developed by the company, will ever achieve significant
market acceptance. The degree of market acceptance of any products developed by
the company will depend on a number of factors, including the establishment,
demonstration of the efficacy of the product candidates and their potential
advantage over alternative methods.
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There can be no assurance that the marketplace in general will accept and
utilize any products that may be developed by the company. If not accepted, an
investor's entire investment may be lost.
Risks Associated with eCashPad Production May Affect Distribution of eCashPads.
The agreement under which the eCashPad was originally manufactured for
the company only calls for an initial production run of 5,000 units, at a total
cost of $80,000. The company has contracted to purchase 100,000 eCashPads from
Asia Pacific Micro, Inc. Asia Pacific Micro has been contracted to manufacture
the first generation eCashPad, which is a PS2 connection to a desktop computer
and is proprietary to the company. The company has paid Asia Pacific Micro the
sum of $2.8 million. The eCashPad is simply connected to the keyboard port on
the desktop and the keyboard is connected to the eCashPad. In addition, the
company recently signed a purchase agreement with 3Pea Technologies, Inc.
("3Pea"), for the purchase of 60,000 PAYPAD units.
The 3Pea agreement offers the company substantial savings for the
purchase of 60,000 PAYPAD units.
Approval of Regional ATM Networks for Use of eCashPad is Important in Securing a
Market for this Product.
Within the United States market, the company is working to secure the
go ahead for regional ATM card networks for an eCashPad ATM card with PIN entry
"Bank Eyes Only" Internet payment. Such network currently permit the usage of
credit cards on their systems. Thus, a substantial part of the company's
strategy is based on ATM card with PIN entry Internet payments, and the company
may not receive bank approvals from the regional ATM card networks in the United
States for such transactions. In such case, this payment system could not be
used in the United States, which could substantially affect the prospects of the
Company in this country. Even though this type of payment system has already
been approved in the Dominican Republic and Ireland, and may be approved
elsewhere outside the United States, the Company would expect that a substantial
portion of its projected revenues would come from United States based
transactions. The company is currently providing eCashPads in the Dominican
Republic to facilitate both card-present credit card payments and ATM card with
PIN Internet payments to Dominican Republic web merchants. The company is not
currently active in Ireland.
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No Assurance of Protection of Proprietary Information.
Certain of the company's know-how and proprietary technology may not
be patentable. To protect its rights, the company requires management personnel,
employees, consultants, and advisors to enter into confidentiality agreements.
There is no assurance, however, that these agreements will provide meaningful
protection for the company's trade secrets, know-how or other proprietary
information in the event of any unauthorized use or disclosure. The eCashpad is
Patent Pending. The Patent Pending is held by ET&T, which has exclusively
licensed it to the company. The EzyDepot is developed and patented and is
exclusively licensed by ET&T to eConnect for global usage as is the PocketPay
which has not been developed.
Competition In Internet Commerce May Affect Company's Ability to Attract
Customers.
The company anticipates substantial competition in the development of
the PERFECT industry and the "Bank Eyes Only" internet application in
particular. The company believes that the marketplace is large enough to absorb
many competitor companies who may focus on ancillary aspects of the PERFECT
industry such as the development of hardware or of merchant sign ups, rather
than on the core business of the company which is the processing of
transactions.
Increased competition from e-commerce could result in reduced margins
or loss of market share, any of which could harm both our retail and e-commerce
businesses. Competition is likely to increase significantly as new companies
enter the market and current competitors expand their services. Many of the
company's present and potential competitors are likely to enjoy substantial
competitive advantages, including larger numbers of users, more fully-developed
e-commerce opportunities, larger technical, production and editorial staffs, and
substantially greater financial, marketing, technical and other resources. If
the company does not compete effectively or if it experiences any pricing
pressures, reduced margins or loss of market share resulting from increased
competition, the company's business could be adversely affected.
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Loss of Any Key Personnel May Affect the Ability of Company to Operate.
The company's success is dependent upon the hiring of key personnel.
None of the company's officers, directors, and key employees have an employment
agreement with the company (the accounting manager does have an employment
agreement with the company); therefore, there can be no assurance that these
personnel will remain employed by the company after the termination of such
agreements. Should any of these individuals cease to be affiliated with the
company for any reason before qualified replacements could be found, there could
be material adverse effects on the company's business and prospects. In
addition, management has no experience is managing companies in the same
business as the company.
Growth of Company Could Affect Management's Ability to Control Company.
The company's future growth, if any, may cause a significant strain on
its management, operational, financial and other resources. The company's
ability to manage its growth effectively will require it to implement and
improve its operational, financial, manufacturing and management information
systems and to expand, train, manage and motivate its employees. These demands
may require the addition of new management personnel and the development of
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additional expertise by management. Any increase in resources devoted to
research, product development and marketing and sales efforts without a
corresponding increase in the company's operational, financial, manufacturing
and management information systems could have a material adverse effect on the
company's business, financial condition, and results of operations.
Limitations on Liability, and Indemnification, of Directors and Officers May
Result in Financial Outlays by Company.
The articles of incorporation and bylaws of the company provide for
indemnification of officer or directors of the company. Such indemnification
shall be for liability resulting from acts undertaken in an official capacity.
In addition, the Nevada Revised Statutes provide for indemnification of officers
and directors and the company may provide indemnification under such provisions.
Any limitation on the liability of any director, or indemnification of
directors, officer, or employees, could result in substantial expenditures being
made by the company in covering any liability of such persons or in indemnifying
them.
Conflicts of Interest May Arise With Regard to Other Business Activities of the
Directors.
The directors of the company have other business interests to which
they devote time. As a result, certain conflicts of interest may arise between
the company and the directors which might not be susceptible to resolution. Any
potential conflicts of interest will be resolved through exercise by the
directors of such judgment as is consistent with their fiduciary duties to the
company. It is the intention of management, so as to minimize any potential
conflicts of interest, to present first to the board of directors of the
company, any proposed investments for its evaluation. Potential conflicts
existing include the fact that Mr. Hughes controls ET&T from which the
technology surrounding the eCashPad, EzyDepot and PocketPay are licensed; the
amount of $4,835,718 has been expensed as a bad debt owed by Mr. Hughes and ET&T
to the company; and substantial consulting agreements have been entered into
with Richard Epstein, who controls this company.
Lack of Cumulative Voting Will Affect a Shareholder's Ability to Elect a Board
Member.
Holders of the shares are not entitled to accumulate their votes for
the election of directors or otherwise. Accordingly, the holders of a majority
of the shares present at a meeting of shareholders will be able to elect all of
the directors of the company, and the minority shareholders will not be able to
elect a representative to the company's board of directors.
Absence of Cash Dividends May Affect a Shareholder's Return on His Investment.
The board of directors does not anticipate paying cash dividends on
the shares for the foreseeable future and intends to retain any future earnings
to finance the growth of the company's business. Payment of dividends, if any,
will depend, among other factors, on earnings, capital requirements, and the
general operating and financial condition of the company, and will be subject to
legal limitations on the payment of dividends out of paid-in capital.
Dilutive Effects
In order to implement the CSPA, this registration statement includes
shares that are being registered for the benefit of Alpha as a
Selling Shareholder. This amount represents approximately % of the authorized
and issued capital of the company. As such, this offering may have a substantial
dilutive effect on current shareholders.
Further Issuances of Shares
James Clinton, together with other individuals, were previously shareholders of
the predecessor of the company. This group now has the right to maintain 10%
control of the company, continued maintenance of this percentage control may
require issuance of more shares or otherwise cause substantial dilution for
shareholders.
Further Dilutive Effects
Further substantial dilution may be experienced by shareholders as a result of
the following: ET&T's option under its license agreement to purchase up to
13,822,000 additional shares at an exercise price of $0.30 per share; the
preemptive rights of James Clinton; the future issuance of 20,000,000 shares to
Mr. Epstein in payment of money owed by the company under its debentures; the
issuance of shares to Alpha pursuant to private equity lines entered into in
September 1999 and December 2000; and the future issuance of a warrant to
purchase 1 million shares to Mr. Egan in connection with his consultancy
agreement.
Fees To Be Paid to ET&T
The host processing agreement between the company and ET&T will involve payment
to ET&T of fees based on transactions initiated through gaming operators that
use the company's service. These fees are set forth in the agreement. ET&T will
receive either 10 cents per transaction or 10% of each transaction fee...
whichever is the larger and which is generated by an Bank Eyes Only payment as
originated by an eConnect driven device whereby eConnect is the front end
processor of the transaction. Difficulty of gaming operators to charge fees high
enough to cover ET&T's fees and to make a profit may cause decrease in interest
and utilization of the services of the company.
Sales by Selling Shareholders - No Proceeds to the Company
Sales may be made at any time and from time to time under this prospectus by
selling shareholders. These will be conducted at then-current market prices.
There can be no guarantee that after these sales are made at any given price,
that such price will be maintained or increased. The company will not receive
any proceeds from these sales.
11
Risk of Low Priced Securities May Affect the Liquidity of Company's Stock.
The company's common stock is subject to the low-priced security or so
called "penny stock" rules that impose additional sales practice requirements on
broker-dealers who sell such securities. The Securities Enforcement and Penny
Stock Reform Act of 1990 requires additional disclosure in connection with any
trades involving a stock defined as a penny stock (generally, according to
recent regulations adopted by the U.S. Securities and Exchange Commission, any
equity security that has a market price of less than $5.00 per share, subject to
certain exceptions), including the delivery, prior to any penny stock
transaction, of a disclosure schedule explaining the penny stock market and the
risks associated therewith. The regulations governing low-priced or penny
stocks sometimes limit the ability of broker-dealers to sell the company's
common stock and thus, ultimately, the ability of the investors to sell their
securities in the secondary market.
Because of a Limited Public Market for Company's Securities, an Investor May Not
Be Able to Liquidate the Shares Readily or at All.
Prior to this offering, there has been only a limited public market
for the shares of common stock being offered. The common stock of the company
is currently quoted on the Over the Counter Bulletin Board; it was relisted on
October 30, 2000 after trading on the National Quotation Bureau's Pink Sheets
since being delisted from the Over the Counter Bulletin Board after the SEC
trading suspension on March 13, 2000. Trading was suspended due to unusual
marker activity in the stock which included a sharp rise in the stock.
The market prices for the securities of technology companies have
historically been highly volatile. The market has from time to time experienced
significant price and volume fluctuations that are unrelated to the operating
performance of any particular company. The market price of the shares may be
affected significantly by factors such as announcements by the company or its
competitors, variations in the company's results of operations, and market
conditions in the retail, electron commerce, and internet industries in general.
The market price may also be affected by movements in prices of stock in
general. As a result of these factors, purchasers of the shares offered hereby
may not be able to liquidate an investment in the shares readily or at all.
12
Failure to Maintain Market Makers by Company Could Affect the Stock's Liquidity.
If the company is unable to maintain a National Association of
Securities Dealers, Inc. member broker/dealers as market makers after relisting
on the Bulletin Board, the liquidity of the common stock could be impaired, not
only in the number of shares of common stock which could be bought and sold, but
also through possible delays in the timing of transactions, and lower prices for
the common stock than might otherwise prevail. Furthermore, the lack of market
makers could result in persons being unable to buy or sell shares of the common
stock on any secondary market. There can be no assurance the company will be
able to maintain such market makers.
Shares Eligible For Future Sale
All of the approximately shares of common stock which are
currently held, directly or indirectly, by management have been issued in
reliance on the private placement exemption under the Securities Act of 1933.
Such shares will not be available for sale in the open market without separate
registration except in reliance upon Rule 144 under the Securities Act of 1933.
In general, under Rule 144 a person (or persons whose shares are aggregated) who
has beneficially owned shares acquired in a non-public transaction for at least
one year, including persons who may be deemed affiliates of the company (as that
term is defined under that rule) would be entitled to sell within any three-
month period a number of shares that does not exceed the greater of 1% of the
then outstanding shares of common stock, or the average weekly reported trading
volume during the four calendar weeks preceding such sale, provided that certain
current public information is then available. If a substantial number of the
shares owned by these shareholders were sold pursuant to Rule 144 or a
registered offering, the market price of the common stock could be adversely
affected.
Potential Status as a Pseudo California Corporation.
Section 2115 of the California General Corporation Law subjects
certain foreign corporations doing business in California to various substantive
provisions of the California General Corporation Law in the event that the
average of its property, payroll and sales is more than 50% in California and
more than one-half of its outstanding voting securities are held of record by
persons residing in the State of California. Some of the substantive provisions
include laws relating to annual election of directors (under Section 708,
cumulative voting is mandated), removal of directors without cause, removal of
directors by court proceedings, indemnification of officers and directors,
directors standard of care and liability of directors for unlawful
distributions. Section 2115 does not apply to any corporation which, among
other things, has outstanding securities designated as qualified for trading as
a national market security on NASDAQ if such corporation has at least eight
hundred holders of its equity securities as of the record date of its most
recent annual meeting of shareholders.
Currently, all of the sales by the company come from sources outside
the State of California and the company believes that more than 50% of its
common stock is held by record holders residing outside California. Therefore,
the company believes it is not subject to Section 2115.
Going Concern
The Company incurred a net loss of approximately $19,636,254 for the fiscal year
ended December 31, 2001. The Company's current liabilities exceed its current
assets by $10,223,679 as of December 31, 2001. These factors create an
uncertainty about the Company's ability to continue as a going concern. The
Company's management has developed a plan to complete the development of
technology products and create their respective markets to generate future
revenues. The Company will also seek additional sources of capital through the
issuance of debt and equity financing, but there can be no assurance that the
Company will be successful in accomplishing its objectives.
The ability of the Company to continue as a going concern is dependent on
additional sources of capital and the success of the Company's plan. The
company's auditors have issued a "going concern" opinion. The financial
statements do not include any adjustments that might be necessary if the Company
is unable to continue as a going concern.
Potential Depressive Effect to Market Price of Securities
When the puts under the CSPA are exercised by the company, the shares
will be purchased by Alpha at a discount to the market price. This may have a
depressive effect on the overall market for the shares of the company. This is
especially true when one considers that at the time of any puts, the company
will be at its greatest financial need and may already be vulnerable to
downturns in the share market price.
Potential Risks Associated with Multiple Lawsuits
The company is currently in the midst of multiple lawsuits and other
legal activity. These lawsuits are being actively defended and reasonable
settlements and culminations are being aggressively sought. If, however, these
efforts are not successful or achieve only limited success, substantial harm
could occur to the company as a result of these lawsuits.
13
USE OF PROCEEDS
The company will not receive any proceeds from this offering. The
,000,000 shares registered on behalf of Alpha Venture Capital, Inc. were
previously sold. Proceeds of this sale to Alpha under the equity line will be
used for working capital and for general corporate purposes. These purposes may
include such items as purchasing eCashPads, marketing and continued
technological development. No specific amounts can be allocated to any of these
potential expenditures at this time.
SELLING SHAREHOLDERS
Selling shareholders will be offering a total of shares of common
stock of the company, as follows (these restricted shares were issued in
connection with consulting services rendered to the company and various loans
made to the company):
- ------------------------------------------------------------------------------------------------------------------------------------
Amount Offered for
Amount Beneficially Selling Shareholder's Amount Beneficially Percentage Ownership
Name of Selling Shareholder Owned Prior to Offering Account Owned After Offering After Offering /(1)/
- ------------------------------------------------------------------------------------------------------------------------------------
Alpha Venture Capital, Inc. /(3)/ 76,500,000 76,500,000 0 0
Richard Epstein /(2)/ 31,092,424 31,092,424
Mark Ninci 800,000 800,000 0 *
Bryan R. Bagdady 600,000 600,000 0 *
Terry Roslington 5,882,352 5,882,352 0 *
Jerry Van De Brug 800,000 800,000 0 *
Heather Brady 100,000 100,000 0 *
Quinn Brady 625,000 625,000 0 *
Laurie Jayne Yapel Manzanares 200,000 200,000 0 *
Steve McRae 200,000 200,000 0 *
Elle Travis 400,000 400,000 0 *
David Weiler 3,000,000 3,000,000 0 *
Charles Yourshaw 2,200,000 2,200,000 0 *
Americlaim 562,500 562,500 0 *
Mallard Management 562,500 562,500 0 *
John Burke 50,000 50,000 0 *
Gordon Gisser 100,000 100,000 0 *
Perro Corp 6,000,000 6,000,000 0 *
Mike Sitrick 7,000,000 7,000,000 0 *
William Haseltine 850,000 850,000 0 *
Dave Ninci 150,000 150,000 0 *
Chris Jensen 500,000 500,000 0 *
Don Yarter 500,000 500,000 0 *
Jackie Robinson 3,500,000 3,500,000 0 *
Mark Ninci 800,000 800,000 0 *
TOTAL 142,974,776 142,974,776 0 0
* Less than 1%.
- ------------------------------------------------------------------------------------------------------------------------------------
14
/(1)/ Based on the total issued and outstanding common stock of
as of .
/(2)/ The amount owned by this selling shareholder represents the combined
holdings of Alliance Equities and Richard Epstein, who controls this firm.
/(3)/ The amount owned by this selling shareholder includes 76,500,000 shares
purchased under the CSPA. Alpha is deemed an underwriter for this offering in
connection with the resale of that stock.
15
PLAN OF DISTRIBUTION
Registration under this Offering.
142,974,776 shares of common stock of the company will be sold pursuant
to the terms of this prospectus. Shares outstanding prior to this offering:
, 2002. The shares will sold as follows:
. Shares to be offered under a common stock purchase agreement ("CSPA")
with Alpha, at 85% of the market price on the put date will total up
to 76,500,000. The commitment of this investor under this agreement
is $20,000,000. Under this agreement, First Fidelity, who is acting as
an agent for Alpha, will be paid a commission of 6% of the amount of
each drawdown. The company may put shares to Alpha periodically under
the CSPA. In return, Alpha is required under the CSPA to provide funds
to the company. Alpha is an underwriter of this offering.
. Selling shareholders on a delayed basis under Rule 415: .
. Use of Proceeds: The Company will receive no proceeds from this
offering.
There can be no assurance that any of these shares will be sold. Other
than as set forth above, no commissions or other fees will be paid, directly or
indirectly, by the company, or any of its principals, to any person or firm in
connection with solicitation of sales of the shares.
Selling Shareholders.
(a) Manner of Sales; Broker-Dealer Compensation.
The selling shareholders, or any successors in interest to the selling
shareholders, may sell their shares of common stock in one or more of the
following methods:
. Ordinary brokers' transactions;
. Transactions involving cross or block trades or otherwise on the
Bulletin Board;
. Purchases by brokers, dealers or underwriters as principal and resale
by these purchasers for their own accounts pursuant to this
prospectus;
. "At the market" to or through market makers or into an existing
market for the company's common stock;
. In other ways not involving market makers or established trading
markets, including direct sales to purchases or sales effected through
agents;
16
. Through transactions in options, swaps or other derivatives (whether
exchange-listed or otherwise);
. In privately negotiated transactions;
. To cover short sales; or
. Any combination of the foregoing.
The selling shareholders also may sell their shares in reliance upon
Rule 144 under the Securities Act at such times as they are eligible to do so.
The company has been advised by the selling shareholders that they have not
made any arrangements for the distribution of the shares of common stock.
Brokers, dealers or underwriters who effect sales for the selling shareholders
may arrange for other brokers, dealers or underwriters to participate. Brokers,
dealers or underwriters engaged by the selling shareholders will receive
commissions or discounts from them in amounts to be negotiated prior to the
sale. These brokers, dealers or underwriters may act as agent or as principals.
From time to time, one or more of the selling shareholders may pledge,
hypothecate or grant a security interest in some or all of the shares of common
stock being offered for sale, and the pledgees, secured parties or persons to
whom these securities have been pledged shall, upon foreclosure in the event of
default, be considered a selling shareholder hereunder. In addition, selling
shareholders may, from time to time, sell short their common stock. In these
instances, this prospectus may be delivered in connection with these short sales
and the shares of the common stock may be used to cover these short sales.
From time to time one or more of the selling shareholders may
transfer, pledge, donate or assign shares of their common stock to lenders or
others and each of these persons will be considered a selling shareholder for
purposes of this prospectus. The number of shares of the company's common stock
beneficially owned by those selling shareholders who so transfer, pledge,
donate or assign shares of their common stock will decrease as and when they
take these actions. The plan of distribution for the company's common stock by
the selling shareholders set forth herein will otherwise remain unchanged,
except that the transferees, pledgees, donees or other successors will be
considered selling shareholders hereunder. Such selling shareholders will not
be able to use this prospectus unless and until a post-effective amendment is
filed, naming those individuals, and is declared effective.
Subject to the limitations discussed above, a selling shareholder may
enter into hedging transactions with broker-dealers and the broker-dealers may
engage in short sales of the company's common stock in the course of hedging the
positions they assume with this selling shareholders, including in connection
with distributions of the common stock by these broker-dealers. A selling
shareholder may also enter into option or other transactions with broker-dealers
that involve the delivery of the company's common stock to the broker-dealers,
who may then resell or otherwise transfer these shares. A selling shareholder
also may loan or pledge the company's common stock to a broker-dealer and the
broker-dealer may sell the common stock so loaned or upon a default may sell or
otherwise transfer the pledged common stock.
17
(b) Filing of a Post-Effective Amendment In Certain Instances.
If any selling shareholders notifies the company that he, she, or it
has entered into a material arrangement (other than a customary brokerage
account agreement) with a broker or dealer for the sale of shares of common
stock under this prospectus through a block trade, purchase by a broker or
dealer or similar transaction, the company will file a post- effective amendment
to the registration statement for this offering. The post-effective amendment
will disclose:
. The name of each broker-dealer involved in the transaction.
. The number of shares of common stock involved.
. The price at which those shares of common stock were sold.
. The commissions paid or discounts or concessions allowed to the
broker-dealer(s).
. If applicable, that these broker-dealer(s) did not conduct any
investigation to verify the information contained or incorporated by
reference in this prospectus, as supplemented.
. Any other facts material to the transaction.
(c) Certain Persons May Be Deemed to Be Underwriters.
The selling shareholders and any broker-dealers who execute sales for
them may be deemed to be "underwriters" within the meaning of the Securities Act
of 1933 because of the number of shares of common stock to be sold or resold by
these persons or entities or the manner of sale of these shares, or both. If a
selling shareholder or any broker-dealer or other holders were determined to be
underwriters, any discounts, concessions or commissions received by them or by
brokers or dealers acting on their behalf and any profits received by them on
the resale of their shares of common stock might be deemed to be underwriting
discounts and commissions under the Securities Act.
(d) Regulation M.
The company has informed the selling shareholders that Regulation M
promulgated under the Securities Exchange Act of 1934 may be applicable to them
with respect to any purchase or sale of the company's common stock. In general,
Rule 102 under Regulation M prohibits any person connected with a distribution
of the company's common stock from directly or indirectly bidding for, or
purchasing for any account in which it has a beneficial interest, any of the
common stock or any right to purchase this stock, for a period of one business
day before and after completion of its participation in the distribution.
During any distribution period, Regulation M prohibits the selling
shareholders and any other persons engaged in the distribution from engaging in
any stabilizing bid or purchasing the company's common stock except for the
purpose of preventing or retarding a decline in the open
18
market price of the common stock. None of these persons may effect any
stabilizing transaction to facilitate any offering at the market. As the selling
shareholders will be reoffering and reselling the company's common stock at the
market, Regulation M will prohibit them from effecting any stabilizing
transaction in contravention of Regulation M with respect to this stock.
Opportunity to Make Inquiries.
The company will make available to each offeree, prior to any issue of
the shares, the opportunity to ask questions and receive answers from the
Company concerning any aspect of the investment and to obtain any additional
information contained in this prospectus, to the extent that the Company
possesses such information or can acquire it without unreasonable effort or
expense.
Execution of Documents.
Each person desiring to purchase Shares must complete, execute,
acknowledge, and delivered to the company certain documents. By executing these
documents, the subscriber is agreeing that such subscriber will be, a
shareholder in the Company and will be otherwise bound by the articles of
incorporation and the bylaws of the Company.
LEGAL PROCEEDINGS
Other than as stated below, the company is not a party to any material
pending legal proceedings and, to the best of its knowledge, no such action by
or against the company has been threatened:
1. Laurel Belkin and David Greenstein v. eConnect, et al. CV 01-06526 RSWL
(FMOx); filed on July 15, 2001, in the United States District Court for the
Central District of California. The plaintiffs allege violations of Section
10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder.
The relief sought is not specified.
2. Donald Clark v. eConnect, Inc., et al. CV 01-10249; filed October 25, 2001,
in the Superior Court of the State of California. The plaintiffs allege
violations of Section 10(b) of the Securities Exchange Act of 1934, and
Rule 10b-5 thereunder. The relief sought is $25,000, as well as punitive
damages and attorneys fees.
3. Howard L. and Joyce C. Fryett v. eConnect, Inc., et al. CS-01-0279-RHW;
filed August 29, 2001 in the United States District Court for the Eastern
District of Washington. The plaintiffs allege violations of Section 10(b)
of the Securities Exchange Act of 1934, and Rule 10b-5 thereunder. The
relief sought is not specified.
19
DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS,
AND CONTROL PERSONS
The names, ages, and respective positions of the directors, executive
officers, and key employee of the company are set forth below. The directors
named below will serve until the next annual meeting of the company's
stockholders or until their successors are duly elected and have qualified.
Directors are elected for a one-year term at the annual stockholders' meeting.
Officers will hold their positions at the will of the board of directors, absent
any employment agreement, of which none currently exist or are contemplated.
There are no arrangements, agreements or understandings between non-management
shareholders and management under which non-management shareholders may directly
or indirectly participate in or influence the management of the company's
affairs. There are no other promoters or control persons of the company. There
are legal proceedings involving two of the directors of the company.
Thomas S. Hughes, Chief Executive Officer/Director.
Mr. Hughes, Age 52, has been Chief Executive Officer and a Director of
the company since March 1997. From 1993 to the present, he has also served as
the President of Electronic Transactions & Technologies, a privately held Nevada
corporation which developed terminals for wireless home and internet
applications. Mr Hughes also serves as a director of Kanakaris Communications.
Mr. Hughes devotes his full time to e-Connect. ET&T is presently dormant while
waiting on the full implementation of the Bank Eyes Only system and will then
construct a business service agreement with eConnect as regards the application
of sending cash to email recipients by the usage of the eCashPad and the ATM
card with PIN.
The Company currently has no Chief Financial Officer. Failure of the
company to have a full time CFO could result in delays in financial decisions.
The duties normally performed by such a person are now undertaken as follows.
The financial reporting and accounting functions are initially performed by
Marylou Garcia. Subsequently, data is reviewed by George Brenner, an outsourced
accountant for the Company.
Jack M. Hall, Secretary/Director.
Mr. Hall, age 72, is currently President of Hall Developments, a real
estate development company he founded in 1991, which employs a staff of 10
people. Mr. Hall spends approximately 20 hours per week searching out strategic
alliances for the company. Mr. Hall joined the company as Secretary and a
Director in March 1997.
Laurence B. Donoghue, Director.
Mr. Donoghue, age 55, is an attorney as well as a computer
professional. He was awarded a Juris Doctor degree at George Washington
University in Washington, D.C. in 1971. In December 1997, Mr. Donoghue founded
and incorporated an Internet marketing consulting business call Adweb
Communications. In July 1998, Mr. Donoghue also opened his own practice of law,
founding the Law Offices Of Laurence B. Donoghue. Mr. Donoghue continues to
operate both enterprises. From 1975 to 1998, Mr. Donoghue built a successful
prosecuting career in the Los Angeles County District Attorney's Office as a
Deputy District Attorney. From 1980 to 1998, Mr. Donoghue worked as an Adjunct
Professor at Law at Trinity University School of Law. Mr. Donoghue became a
director in 2000.
20
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information regarding the beneficial
ownership of shares of the company's common stock as of Feburary 8, 2002
(581,718,521 issued and outstanding) by (i) all stockholders known to the
company to be beneficial owners of more than 5% of the outstanding common stock;
and (ii) all directors, executive officers, and key employees of the company,
individually and as a group:
- -------------------------------------------------------------------------------------------
Name and Address of Amount and Nature of
Title of Class Beneficial Owner Beneficial Owner Percent of Class
- -------------------------------------------------------------------------------------------
Common Stock Richard Epstein, 12147 40,000,000/(1)/ 4.35%
Northwest 9th Drive, Coral
Springs, FL 33071
- -------------------------------------------------------------------------------------------
Common Stock Thomas S. Hughes, 2500 600,000 *
Via Cabrillo Marina, Suite
112, San Pedro, CA 90731
- -------------------------------------------------------------------------------------------
Common Stock Jack M. Hall, 2500 Via 600,000 *
Cabrillo Marina, Suite 112,
San Pedro, CA 90731
- -------------------------------------------------------------------------------------------
Common Stock Laurence B. Donoghue, 510,000 *
2500 Via Cabrillo Marina,
Suite 300, San Pedro, CA
90731
- -------------------------------------------------------------------------------------------
Common Stock Shares of all directors, 1,710,000 *
executive officers, and
key employees as a group
(3 persons)
- -------------------------------------------------------------------------------------------
(3) The amount owned by this selling shareholder represents the combined
holdings of Alliance Equities and Richard Epstein, who controls this firm.
* less than 1 per cent
21
DESCRIPTION OF SECURITIES
General Description.
The securities being offered are shares of common stock. The
authorized capital of the company consists of 850,000,000 shares of common
stock, $0.001 par value per share. The holders of common stock shall:
. have equal ratable rights to dividends from funds legally available
therefore, when, as, and if declared by the board of directors of the
company
. are entitled to share ratably in all of the assets of the company
available for distribution upon winding up of the affairs of the
company
. are entitled to one non-cumulative vote per share on all matters on
which shareholders may vote at all meetings of shareholders.
The shares of common stock do not have any of the following rights:
. special voting rights
. preference as to dividends or interest
22
. preemptive rights to purchase in new issues of shares
. preference upon liquidation, or
. any other special rights or preferences.
In addition, the shares are not convertible into any other security.
There are no restrictions on dividends under any loan other financing
arrangements or otherwise. The company does not have any preferred stock
authorized in its articles of incorporation.
Non-Cumulative Voting.
The holders of shares of common stock of the company do not have
cumulative voting rights, which means that the holders of more than 50% of such
outstanding shares, voting for the election of directors, can elect all of the
directors to be elected, if they so choose. In such event, the holders of the
remaining shares will not be able to elect any of the company's directors.
Dividends.
The company does not currently intend to pay cash dividends. Because
the company does not intend to make cash distributions, potential shareholders
would need to sell their shares to realize a return on their investment. There
can be no assurances of the projected values of the shares, nor can there be any
guarantees of the success of the company.
A distribution of revenues will be made only when, in the judgment of
the company's board of directors, it is in the best interest of the company's
stockholders to do so. The board of directors will review, among other things,
the financial status of the company and any future cash needs of the company in
making its decision.
Transfer Agent.
The company has engaged the services of Corporate Stock Transfer, 3200
Cherry Creek Drive South, Suite 430, Denver, Colorado 80209, to act as transfer
agent and registrar.
DISCLOSURE OF COMMISSION POSITION ON
INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Limitation of Liability.
The articles of incorporation of the company provide that no Director
or Officer of this company shall be liable to the company or its stockholders
for any breach of fiduciary duty as Officer or Director of this company. This
provision shall not affect liability for acts or omissions which involve
intentional misconduct, fraud, a knowing violation or law, or the payment of
dividends in violation of NRS 78.300.
23
Indemnification.
* Articles of Incorporation.
The articles of incorporation of the company provide that all expenses
incurred by officers or directors in defending a civil or criminal action, suit,
or proceeding, must be paid by this company as they are incurred in advance of a
final disposition of the action, suit or proceeding, upon receipt of an
undertaking by or on behalf of a director or officer to repay the amount if it
is ultimately determined by a court of competent jurisdiction, that he or she
did not act in good faith, and in the manner he or she reasonably believed to be
or not opposed to the best interests of the company.
* Bylaws.
The bylaws of the company provide the following with respect to
indemnification:
Each indemnitee of the company shall be indemnified and held harmless
by the company for all actions taken by him or her, and for all omissions
(regardless of the date of any such action or omission), to the fullest extent
permitted by Nevada law, against all expense, liability and loss (including,
without limitation, attorney fees, judgments, fines, taxes, penalties, and
amounts paid or to be paid in settlement) reasonably incurred or suffered by the
Indemnitee in connection with any proceeding. Indemnification pursuant to this
section shall continue as to an indemnitee who has ceased to be a director or
officer and shall inure to the benefit of his or her heirs, executors and
administrators. The company may, by action of its board of directors, and to
the extent provided in such action, indemnify employees and other persons as
though they were indemnitees. The rights to indemnification as provided shall
be non-exclusive of any other rights that any person may have or hereafter
acquire under an statute, provision of the company's articles of incorporation
or bylaws, agreement, vote of stockholders or directors, or otherwise.
The company may purchase and maintain insurance or make other
financial arrangements on behalf of any person who is or was a director,
officer, employee or agent of the company, or is or was serving at the request
of the company in such capacity for another corporation, partnership, joint
venture, trust or other enterprise for any liability asserted against him or her
and liability and expenses incurred by him or her in such capacity, whether or
not the company has the authority to indemnify him or her against such liability
and expenses.
The other financial arrangements which may be made by the company may
include, but are not limited to, (a) creating a trust fund; (b) establishing a
program of self-insurance; (c) securing its obligation of indemnification by
granting a security interest or other lien on any of the company's assets, and
(d) establishing a letter of credit, guarantee or surety. No financial
arrangement made pursuant to this section may provide protection for a person
adjudged by a court of competent jurisdiction, after exhaustion of all appeals
therefrom, to be liable for intentional misconduct, fraud, or a knowing
violation of law, except with respect to advancing expenses or indemnification
ordered by a court. Any insurance or other financial arrangement made on behalf
of a person pursuant to this section may be provided by the company or any other
person approved by the board of directors, even if all or part of the other
person's stock or other securities is owned by the company. In the absence of
fraud:
24
. the decision of the board of directors as to the propriety of the
terms and conditions of any insurance or other financial arrangement
made pursuant to this section, and the choice of the person to provide
the insurance or other financial arrangement is conclusive; and
. the insurance or other financial arrangement is not void or voidable;
does not subject any director approving it to personal liability for
his action; and even if a director approving the insurance or other
financial arrangement is a beneficiary of the insurance or other
financial arrangement.
* Nevada Revised Statutes.
. NRS 78.7502 Discretionary and mandatory indemnification of officers,
directors, employees and agents: General provisions.
(1) A corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or investigative,
except an action by or in the right of the corporation, by reason of the fact
that he is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise, against expenses, including attorneys' fees, judgments, fines
and amounts paid in settlement actually and reasonably incurred by him in
connection with the action, suit or proceeding if he acted in good faith and in
a manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful. The
termination of any action, suit or proceeding by judgment, order, settlement,
conviction or upon a plea of nolo contendere or its equivalent, does not, of
itself, create a presumption that the person did not act in good faith and in a
manner which he reasonably believed to be in or not opposed to the best
interests of the corporation, and that, with respect to any criminal action or
proceeding, he had reasonable cause to believe that his conduct was unlawful.
(2) A corporation may indemnify any person who was or is a party or
is threatened to be made a party to any threatened, pending or completed action
or suit by or in the right of the corporation to procure a judgment in its favor
by reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise against expenses, including amounts paid in
settlement and attorneys' fees actually and reasonably incurred by him in
connection with the defense or settlement of the action or suit if he acted in
good faith and in a manner which he reasonably believed to be in or not opposed
to the best interests of the corporation. Indemnification may not be made for
any claim, issue or matter as to which such a person has been adjudged by a
court of competent jurisdiction, after exhaustion of all appeals therefrom, to
be liable to the corporation or for amounts paid in settlement to the
corporation, unless and only to the extent that the court in which the action or
suit was brought or other court of competent jurisdiction determines upon
25
application that in view of all the circumstances of the case, the person is
fairly and reasonably entitled to indemnity for such expenses as the court deems
proper.
(3) To the extent that a director, officer, employee or agent of a
corporation has been successful on the merits or otherwise in defense of any
action, suit or proceeding referred to in subsections 1 and 2, or in defense of
any claim, issue or matter therein, the corporation shall indemnify him against
expenses, including attorneys' fees, actually and reasonably incurred by him in
connection with the defense.
. NRS 78.751 Authorization required for discretionary indemnification;
advancement of expenses; limitation on indemnification and advancement
of expenses.
(1) Any discretionary indemnification under NRS 78.7502 unless
-----------
ordered by a court or advanced pursuant to subsection 2, may be made by the
corporation only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in the
circumstances. The determination must be made:
(i) By the stockholders;
(ii) By the board of directors by majority vote of a quorum
consisting of directors who were not parties to the action, suit or
proceeding;
(iii) If a majority vote of a quorum consisting of directors who were
not parties to the action, suit or proceeding so orders, by
independent legal counsel in a written opinion; or
(iv) If a quorum consisting of directors who were not parties to the
action, suit or proceeding cannot be obtained, by independent legal
counsel in a written opinion.
(2) The articles of incorporation, the bylaws or an agreement made
by the corporation may provide that the expenses of officers and directors
incurred in defending a civil or criminal action, suit or proceeding must be
paid by the corporation as they are incurred and in advance of the final
disposition of the action, suit or proceeding, upon receipt of an undertaking by
or on behalf of the director or officer to repay the amount if it is ultimately
determined by a court of competent jurisdiction that he is not entitled to be
indemnified by the corporation. The provisions of this subsection do not affect
any rights to advancement of expenses to which corporate personnel other than
directors or officers may be entitled under any contract or otherwise by law.
(3) The indemnification and advancement of expenses authorized in
NRS 78.7502 or ordered by a court pursuant to this section:
- -----------
(i) Does not exclude any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under the
articles of incorporation or any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, for either an
action in his official capacity or an action in another capacity while
holding his office, except that indemnification, unless ordered by a
court pursuant to or for the advancement of expenses made pursuant to
subsection 2, may not be made to or on behalf of any director or
officer if a final adjudication establishes that his acts or omissions
involved
26
intentional misconduct, fraud or a knowing violation of the law and
was material to the cause of action.
(ii) Continues for a person who has ceased to be a director, officer,
employee or agent and inures to the benefit of the heirs, executors
and administrators of such a person.
. NRS 78.752 Insurance and other financial arrangements against
liability of directors, officers, employees and agents.
(1) A corporation may purchase and maintain insurance or make other
financial arrangements on behalf of any person who is or was a director,
officer, employee or agent of the corporation, or is or was serving at the
request of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise for any
liability asserted against him and liability and expenses incurred by him in his
capacity as a director, officer, employee or agent, or arising out of his status
as such, whether or not the corporation has the authority to indemnify him
against such liability and expenses.
(2) The other financial arrangements made by the corporation
pursuant to subsection 1 may include the following:
(i) The creation of a trust fund.
(ii) The establishment of a program of self-insurance.
(iii) The securing of its obligation of indemnification by granting a
security interest or other lien on any assets of the corporation.
(iv) The establishment of a letter of credit, guaranty or surety.
No financial arrangement made pursuant to this subsection may provide protection
for a person adjudged by a court of competent jurisdiction, after exhaustion of
all appeals therefrom, to be liable for intentional misconduct, fraud or a
knowing violation of law, except with respect to the advancement of expenses or
indemnification ordered by a court.
(3) Any insurance or other financial arrangement made on behalf of a
person pursuant to this section may be provided by the corporation or any other
person approved by the board of directors, even if all or part of the other
person's stock or other securities is owned by the corporation.
(4) In the absence of fraud:
(i) The decision of the board of directors as to the propriety of
the terms and conditions of any insurance or other financial
arrangement made pursuant to this section and the choice of the person
to provide the insurance or other financial arrangement is conclusive;
and
(ii) The insurance or other financial arrangement:
27
(A) Is not void or voidable; and
(B) Does not subject any director approving it to personal
liability for his action, even if a director approving the
insurance or other financial arrangement is a beneficiary of the
insurance or other financial arrangement.
(5) A corporation or its subsidiary which provides self-insurance
for itself or for another affiliated corporation pursuant to this section is not
subject to the provisions of Title 57 of NRS."
Undertaking.
The company undertakes the following:
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors,
officers and controlling persons of the small business issuer pursuant
to the foregoing provisions, or otherwise, the small business issuer
has been advised that in the opinion of the U.S. Securities and
Exchange Commission such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable.
ORGANIZATION WITHIN LAST FIVE YEARS
The names of the promoters of the company are the officers and
directors as disclosed elsewhere in this Form SB-2. None of the promoters have
received anything of value from the company in such capacity.
28
DESCRIPTION OF BUSINESS
Business Development
On May 17, 1999, an Agreement and Plan of Merger between Betting,
Inc., a Missouri corporation, into Betting, Inc., a Nevada corporation was
executed by an authorized signatory of each company. On May 21, 1999, the merger
of the two companies was approved by a majority of the shareholders. Effective
on June 1, 1999, Articles of Merger were filed with the Nevada Secretary of
State, which formally resulted in the redomicile of the company from the State
of Missouri to the State of Nevada. This also resulted in the change of the
fiscal year end from August 31 to December 31. On June 4, 1999, a Certificate of
Amendment to Articles of Incorporation was filed with the Nevada Secretary of
State changing the name of the company to "eConnect" and increasing the number
of authorized common shares to 100,000,000.
On August 23, 1999, a Certificate of Amendment to Articles of
Incorporation was filed with the Nevada Secretary of State increasing the number
of authorized common shares to 200,000,000. On November 22, 2000, a Certificate
of Amendment of Articles of Incorporation was filed with the Nevada Secretary of
State increasing the number of authorized common shares to 300,000,000. On July
16, 2001, a Certificate of Amendment of Articles of Incorporation was filed with
the Nevada Secretary of State increasing the number of authorized common shares
to 500,000,000. On January 20, 2002, a Certificate of Amendment of Article of
Incorporation was filed with the Nevada Secretary of State increasing the number
of authorized common shares to 700,000,000. On March 5, 2002, a Certificate of
Amendment of Articles of Incorporation was filed with the Nevada Secretary of
State increasing the number of authorized common shares to 750,000,000.
Business of Company
The business of eConnect is to develop and profit from the PERFECT
industry. Personal Encrypted Remote Financial Electronic Card Technologies is
simply the usage of hardware (terminals) from remote sites such as a home, to
pay web merchants by swiped credit cards, ATM cards with PIN (personal
identification numbers) and smart cards. The PERFECT system is now complete as
regards to the service of eCashPad credit card present payments to web
merchants. Sixty web merchants had begun their participation as of April 15,
2002. The PERFECT system consists of a home terminal, the eCashPad, which the
consumer will use to swipe their credit card, and the Merchants Integration Kit
which the web merchant needs to install. The payment of eCashPad ATM card with
PIN payments is in development. The initial usage of the eCashPad as a home
terminal is to enable consumers to swipe their credit card, which will result in
a credit card present payment to the web merchant and is anticipated to lower
the discount rate. The same terminal can be used to swipe an ATM card and enter
a PIN which will result in a "point of sale" same as cash payment to the web
merchant. The future emphasis of the company will be on facilitation of ATM card
with PIN payments, although credit card present transactions will continue to be
substantial.
The company has had no revenue from operations to date. Although it
has been involved with e-commerce since 1999, it has been primarily engaged in
research and development. The company has incurred significant losses from
operations: Net loss from operations of $19,068,529 for the fiscal year ended
December 31, 1999, $107,147,089 for the fiscal year ended December 31, 2000, and
$15,761,049 for the year December 31, 2001. At December 31, 2001, the company
had an accumulated deficit of $164,662,671 (the majority of which resulted from
stock issued for services totalling $10,748,159). The future growth and
profitability of the company will be principally dependent upon its ability to
successfully complete development and testing of, obtain regulatory approvals
for, and market or license its primary products. Accordingly, the company's
prospects must be considered in light of the risks, expenses and difficulties
frequently encountered in connection with the establishment of a new business in
a highly competitive industry, characterized by new product introductions.
The capability of accomplishing PERFECT same as cash payments by ATM
card with PIN and debit card with PIN and smart card payments will effect
Internet global business to business and consumer to business transactions. The
concept that "cash is king" now applies for the first time to Internet commerce
which until now has been limited to credit card transactions. eConnect will rely
on the creation of agreements with ATM card networks in order to utilize this
aspect of the eCashPad. To date, no such agreements exist.
Many consumers who do not have credit cards will now be able to use
their eCashPad and effect PERFECT same as cash payments to web merchants who
today are basically limited to being paid by credit and not real time cash.
The on going discussions that the Company has had with many businesses
who have a web presence, leads us to believe that the usage of the eCashPad to
send cash donations, wagers, impulse purchases and bill payments will greatly
simplify back room accounting for industries ranging from mortgage to insurance
to home Off Track Betting.
eConnect will generate operating revenues by charging fees per PERFECT
payment. These transaction fees will be lower than those currently paid by the
merchant.
The transaction flow of a Bank Eyes Only credit card swiped
transaction begins with the eCashPad, which allows an individual to make a
payment to a web merchant's site. Then, eConnect the front end processor, routes
the transaction to certified credit card gateway processors such as Verisign and
ePayments. It is further routed to the back end processor of the transaction who
then settles the transaction with Banks that have agreed to charge a low
discount rate to the merchant when it is being paid by an eCash Pad card present
transaction.
These eCashPad originated transactions will be regarded as credit card
present and the bank acquirer will then charge the web merchant a lower discount
fee than what is presently charged to the merchant when they are being paid by a
standard non credit card present payment.
Web merchants will pay eConnect a flat fee of 50 cents to provide the
Bank Eyes Only service plus they will pay the lower discount rate to the
acquirer bank. Adding in the chances of reduced fraud and charge backs plus the
lower discount rate, the overall cost of a Bank Eyes Only payment is an
efficient system; for the merchant. The Company is also generating nominal
revenues on the sale of the eCashPad at $59.95.
Since August 21, 2001, eConnect has in effect been in business as it
has a full Bank Eyes Only service system to offer both merchants and consumers,
and has engaged a direct commission sales staff to begin contacting merchants to
sell them on adding the eConnect Bank Eyes Only solution at their web site.
Two key incentives for the Internet merchants are:
1. A lower Discount Rate charged to them by VISA/MasterCard for
receipt of card present (swiped) credit cards rather than card typed
transactions.
2. The ability to be paid by an ATM card with PIN or debit card with
PIN same as cash Internet payment.
Our service agreement is with First American Payment Systems who will
be acquiring the credit card swiped Bank Eyes Only payments and will be charging
the web merchants a lower discount rate based on the credit card being first
swiped by the consumer and the magnetic strip read by the eCashPad. This is a
first for Internet commerce.
The key incentives for the consumer are:
1. A far safer credit card transaction as the financial data is being
sent directly to the bank system and is not seen nor stored at the web merchants
site and can therefore not be stolen by hackers.
2. Merchant Incentives to pay by cash.
3. Speed, ease and convenience of eCashPad terminal originated
electronic payments.
Bank Eyes Only credit card payments can only be accomplished by a
terminal that reads the magnetic strip of the credit card and ATM card with PIN
payments, or cash to the web merchant can be accomplished with a terminal that
reads the magnetic strip of the ATM card or debit card.
The eCashPad is a full service terminal that has been developed and is
now available for sale by eConnect for home and office usage to effect PERFECT
payments. The PocketPay is a mobile wireless eCashPad that can also double as a
phone and has not yet been developed.
The eCashPad is now in operation and has been used to effect product
purchases over the Internet by card present credit card transactions. Efforts
are underway to expand its usage to complete bill payments as the service of ATM
card with PIN same as cash payments becomes available. The Company has received
a proposal from an ATM card network to begin a Pilot to test ATM card with PIN
Internet transactions. This Pilot will consist of 60-100 eCashPads making
payment to 2 to 3 Bank Eyes Only web merchants. At the conclusion of a
successful Pilot, the ATM card Network will then authorize the usage of ATM card
with PIN eCashPad transactions within their network.
The eCashpad is a proprietary product of the company. The PocketPay
does not yet exist. Bank Eyes Only is a proprietary service of the company.
The principal offices of the company's are located at 2500 Via
Cabrillo Marina, Suite 112, San Pedro, California 90731. The telephone number
for the company is (310) 514-9482.
Acquisitions by Company.
(a) PowerClick, Inc.
On February 9, 2000, the company acquired 50% of the outstanding
capital stock of PowerClick, Inc., a Nevada corporation, in consideration of
$1,200,000 cash and 8,000,000 shares of the company's common stock valued at
$1,300,000 for an aggregate 50% investment of $2,500,000, which is principally
comprised of goodwill. PowerClick, Inc. owns and operates a website that
provides a wide range of products and services to the public, and is intended to
be used as a vehicle to promote the use of the "Bank Eyes Only" system.
On October 21, 2000, the company and PowerClick agreed to a settlement
of the actions between the parties and a mutual release, as follows: The company
agreed to purchase an additional 30% of PowerClick (giving a total ownership to
the company of 80%) in exchange for:
. conversion of the 6,000,000 restricted shares of company's common
stock currently held by PowerClick into freely trading shares of the
company;
. the issuance to PowerClick of warrants for the purchase of 4,000,000
shares of freely trading common stock of the company (exercisable at
$1.00 per share until October 21, 2003;
. capping the cash portion of the original acquisition as $750,000; and
. decreasing the value of the transaction to $2,050,000.
The company has made the determination not to acquire the additional
30% of PowerClick. Therefore, the company cancelled the warrants for the
4,000,000 shares of common stock; the remaining portions of the settlement have
already been completed. Subsequently, in the second quarter of 2001, the Company
has written off its entire investment in Powerclick.
(b) National Data Funding Corporation.
On May 22, 2000, the company entered into a non-binding letter of
intent with National Data Funding Corporation to acquire 100% of this company's
common stock and later spin it off in a publicly trading company and retaining a
25% ownership. National Data Funding Corporation is a company that will provide
eCashPad distribution, encryption, and maintenance. National Data Funding
Corporation will also provide full merchant processing for all credit and debit
cards in support of eFunds-United States.
In connection with the letter of intent, the company has deposited
(non-refundable) $250,000. The letter of intent requires the company to pay the
stockholders of National Data Funding Corporation $10,000,000 and 10,000,000
restricted shares of the company's common stock in exchange for 100% ownership,
and contribute to National Data Funding Corporation $1,000,000 and 1,000,000
shares of the company's common stock for working capital. The Letter of Intent,
dated June 2, 2000, originally expired on September 1, 2000 but was extended by
oral agreement of the parties to a closing date of October 31, 2000.
On October 29, 2000, the company entered into an Agreement for Sale
and Plan of Reorganization ("NDFC Agreement") requiring the company to pay the
stockholders of NDFC 10,000,000 shares of the company's common stock in
exchange for 50% ownership, and contribute to NDFC $1,000,000 and 1,000,000
shares of the company's common stock for working capital. Pursuant to the NDFC
Agreement, the company is required to make a bona fide and good faith effort to
spin off NDFC as a publicly traded company in which the company will retain
approximately a 28% ownership. The company was required to complete the terms of
the NDFC Agreement on October 31, 2000 ("Closing Date"). The company did not
complete the NDFC Agreement on the Closing Date. Certain provisions within the
NDFC Agreement provided for an extension through January 2, 2001, however the
company did not complete the terms of the NDFC Agreement within the extension
date, and the $250,000 deposit was forfeited.
29
PLAN OF OPERATION
Twelve Month Plan of Operation.
The Company has now completed the full end to end Bank Eyes Only System
which refers to the deployment of working eCashPads effecting card "present"
transactions over the Internet. These transactions are initially received by the
"Bank Eyes Only" System and then routed to certified credit card gateway
processors including VeriSign and ePayments processing.
Initially, the Company licensed software from Connex but soon realized
that it did not need such an extensive software support system. A complete
in-house solution has since been developed called the Bank Eyes Only ("BEO")
system. Currently, the Company has completed version 1.0 of the BEO System,
which allows merchants to receive transactions from consumers using the
eCashPad. To date, the Company has 34 BEO processing agreements with merchants
and 10 merchants have installed or are using the service of BEO.
The Company's web site is: www.econnectholdings.com. On November 1st,
2001, the Company began distribution of the eCashPad. The eCashPad is presently
being sold for $59.95. In connection with Company promotions, many eCashPad have
been given away or discontinued.
Twelve Month Plan of Execution
The company's eCashPad product and BEO processing service is
positioned effectively to take advantage of market needs for secure internet
payments. The company believes that "Bank Eyes Only" transaction processing
system will effectively address Internet consumers' concerns regarding personal
and financial information security. The company has published the "Bank Eyes
Only" Web merchant install download documentation. Many web merchants are
joining the growing numbers of those with the capability of accomplishing "Bank
Eyes Only" transactions. This is constantly adding more "Bank Eyes Only"
accessible web merchants and is increasing the monthly usage of the eCashPad.
The marketing strategies for the organization are to acquire merchants
through internal profession sales force, external distributors, and managed
resellers; and acquire consumers through direct distribution, retail, and
managed resellers.
In addition, the company has structured a networking approach for mass
market consumer participation in finding "Bank Eyes Only" merchants along with
sales teams to sign on local web merchants. Using a revenue sharing plan from
the flat fee, the company will incentivize private labels of eCashPads with
expected advertising and marketing of private label eCashPads by the vendors to
their consumer base. Further registration of "Bank Eyes Only" web merchants will
likewise be pursued by a team of specialists to be assembled who understand a
specific industry such as phone, cable or collections. These team of specialists
will develop the pertinent "Bank Eyes Only" application for that industry and
will cultivate strategic alliances within their specific industry. The company
is projecting an average transaction revenue of 50 cents per usage which is
charged to the web merchant.
The company envisions the usage of the eCashPad to affect Internet cash
wagers by either ATM card with PIN or by on March 13, 2002, chip card payments.
The Company formed a subsidiary called eGS, Inc. on March 13, 2002 to exploit
this market. eGS will provide support services for Internet companies offering
games of skill and games of chance whereby players may use their eCashPad with
ATM card and PIN entry to effect on line cash transactions. eGS is being spun
off by the Company to shareholders as of the record date in order to maximize
shareholders value. The stock dividend will occur on May 15, 2002.
The Company expects to obtain the additional service of ATM card from
capital investments and revenues with PIN entry (debit over the internet)
transactions during the second quarter of 2002. The Company has no agreements
with ATM card networks to date; however, representatives from STAR ATM card
network have sent eConnect a proposal to begin a pilot program. Currently, the
Company is seeking a Star member acquiring financial institution to sponsor a
web merchant that will receive an ecnrypted PIN-entered on line Internet
transaction. The Company is diligently working on this and is in discussions
with various financial institutions. Until the Company obtains a STAR member
sponsor bank formally sponsoring the web merchants, the proposed pilot will not
start. Investors are cautioned against attributing undue certainty to
management's assessments.
Capital Resources
The company expects to obtain enough cash from capital investments and
revenues for its operations and business plan over the next twelve months.
Commitments from Alpha over that period include approximately $13,500,000. The
company will from time to time elect to access equity funding from Alpha. The
company expects to continue and increase production of revenues over the next 12
months from sales of eCashPads and BEO Processing services. The Company will
raise additional equity funding if necessary.
All recent acquisitions have been wound down, and no further expenses
are expected to occur in connection with any of these. The company has written
off investments in Power Click and Top Sports that totaled $2,500,000. Nothing
that results from these transactions is expected to have any adverse effect on
the business plan of the company or its core operations.
Definitions
"Bank Eyes Only" refers to a direct Internet connection between the
consumer's terminal and the company's bank card authorization system by which
the consumer will order an item from an Internet merchant, but the credit card
data or ATM data will go directly through the Company's server to the bank,
bypassing the merchant. Thus, this service will enable customers to pay for
Internet purchases, bill payments and other types of transactions from home by
physically swiping either credit cards or ATM cards with PIN entry. "Bank Eyes
Only" transactions are processed over the Internet without the cardholder
account information being stored at the merchant's web site, nor does the
merchant have access to the consumer's bank card information.
"eCashPad" refers to the smart card and magnetic stripe card read/write
terminal with encrypted PIN entry utilized for remote capture of transaction
authentication. The reader utilizes USB to connect to a Personal Computer
running the windows operating system. The reader is compliant with International
Standards Organization requirements for magnetic stripe and smart card payment
capture.
Forward Looking Statements.
This report contains "forward looking statements" within the meaning of
Rule 175 under the Securities Act of 1933, as amended, and Rule 3b-6 under the
Securities Act of 1934, as amended, including statements regarding, among other
items, the company's business strategies, continued growth in the company's
markets, projections, and anticipated trends in the company's business and the
industry in which it operates. The words "believe," "expect," "anticipate,"
"intends," "forecast," "project," and similar expressions identify
forward-looking statements. These forward-looking statements are based largely
on the company's expectations and are subject to a number of risks and
uncertainties, certain of which are beyond the company's control. The company
cautions that these statements are further qualified by important factors that
could cause actual results to differ materially from those in the forward
looking statements, including, among others, the following: reduced or lack of
increase in demand for the company's products, competitive pricing pressures,
changes in the market price of ingredients used in the company's products and
the level of expenses incurred in the company's operations. In light of these
risks and uncertainties, there can be no assurance that the forward-looking
information contained herein will in fact transpire or prove to be accurate. The
company disclaims any intent or obligation to update "forward looking
statements."
30
DESCRIPTION OF PROPERTY
The company owns approximately $228,000 of miscellaneous office
furniture and equipment, including computers. In San Pedro, the company leases a
total of 8,777 square feet of office space, with leases expiring on various
dates up to April 30, 2003. The lease agreements call for an annual base rent of
31
approximately $146,000 with a variable escalation rate. As of December 31, 2001,
total rent expense for the leased facility approximated $168,000.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
During the past two fiscal years, certain transactions which occurred
between the company and its officers, directors and five percent or greater
shareholders are set forth below. With respect to each such transaction, the
company believes that the terms of each transaction were approximately as
favorable to the company as could have been obtained from an unrelated third
party:
(a) On June 30, 2000, the Company granted to Alliance Equity a warrant
covering the purchase of 1,400,000 shares of common stock, exercisable at $1.00
per share from June 30, 2000 through June 30, 2002. The Company was charged
$716,139 for this grant, and is reflected in the Finance Fees section of the
financial statement. b) On August 22, 2000, the Company granted to Richard
Epstein in repayment of previous sums loaned to the Company in 2000 (totaling
$1,336,366), as follows: (1) a warrant covering the purchase of 3,000,000 shares
of common stock, exercisable at $0.25 per share from September 30, 2000 through
September 30, 2003; a net charge to the Company's Finance Fees of $1,611,424 was
recorded; (2) a warrant covering the purchase of 2,400,000 shares of common
stock, exercisable at $0.40 per share from September 30, 2000 through September
30, 2003; a net charge to the Company's Finance Fees of $1,272,021 was recorded;
and (3) a warrant covering the purchase of 2,000,000 shares of common stock,
exercisable at 50% below the closing bid price on the date of exercise from
August 22, 2000 through December 31, 2001; a net charge to the Company's Finance
Fees of $1,071,974 was reflected in its financial statement. All the above
warrants have been issued, and to date, the warrant to purchase 2,000,000 shares
at 50% below the closing bid price has been exercised for $85,000.
In payment of the amount of $1,336,366, and a further amount of
$316,634 loaned to the company in the first quarter of 2001, the company (in
addition to the issuance of the warrants) issued a debenture in the principal
amount of $1,653,000 (convertible at any time from issuance until April 5, 2002
into shares of common stock at $0.17 per share). Due to a decline in the market
price of the shares of the Company, this agreement has been renegotiated to
reflect the prevailing market price at the time of issuance. Consequently, an
additional 20 million shares were issued to Epstein, as full payment of the
monies owed by the Company pursuant to the debentures. This resulted in a net
charge to the Company's Interest expense of approximately $173,000. c) On
December 15, 2001, the options as described in (a) and (b) above have been
repriced at an exercise price of 50% below market value. The cost of this to the
Company is $88,400.
(b) As of December 31, 2001, advances on equity funding line totaling
$50,000 relates to advances from Alpha Venture Capital, Inc. related to the
Regulation D Common Stock Private Equity Line Subscription Agreement. The
advances are due on demand and bear no interest. The Company plans on converting
these advances as a draw on the Regulation D Common Stock Private Equity Line
Subscription Agreement in fiscal year 2002.
In September 1999, the Company entered into a Regulation D Common Stock
Private Equity Line Subscription Agreement ("Subscription Agreement") with Alpha
Venture Capital, Inc. ("Alpha"). The Subscription Agreement entitles the Company
to draw funds up to $5,000,000 from issuance of its common stock for an amount
equal to 80% of the market value at the time of each draw request, expiring
September 2000, subject to certain terms and conditions. The Subscription
Agreement required the Company to deliver an aggregate of 1,000,000 five year
warrants to purchase its common stock at an exercise price equal to 80% of the
closing bid price on the execution of this agreement as a commitment fee.
Furthermore, the Company is required to deliver to Alpha up to a maximum of
500,000 warrants on a pro rata basis in conjunction with the draw request,
exercisable at the closing bid price at the date of each draw request. In
October 2000, the Company was granted a one-year extension on its Subscription
Agreement with one automatic six-month extension and an overall increase in
funds it may draw by an additional $5,000,000. Pursuant to the October 2000
extension, the Company is required to deliver an aggregate of 2,000,000 five
year warrants to purchase its common stock at an exercise price equal to 80% of
the closing bid price on the execution of this extension. Furthermore, the
Company is required to deliver to Alpha up to a maximum of 1,571,428 warrants on
a pro rata basis in conjunction with the draw request, exercisable at the
closing bid price at the date of each draw request. The Company is assessed a
placement fee, as provided within the Subscription Agreement, for funds drawn,
which is equal to 8% of each draw.
As of December 31, 2000, the Company has drawn $7,773,000 of the
available $10,000,000, and issued approximately 22,900,000 and 6,600,000 of
shares of its common stock in conjunction with this Subscription Agreement
during fiscal years 2000 and 2001, respectively, of which approximately
6,600,000 of these shares were held by Alpha for future advances on the
Subscription Agreement. Accordingly, the 6,600,000 shares of the Company's
common stock held by Alpha is deemed unissued since no consideration has been
given for such shares and are not reflected as part of the outstanding shares of
the Company's common stock at December 31, 2000. As of December 31, 2000, the
Company recorded the commitment and placement fees as direct charges to the
gross proceeds from this Subscription Agreement for approximately $2,331,000.
During fiscal year 2000, Alpha exercised approximately 3,050,000 warrants of the
total 5,071,000 granted related to the Subscription Agreement.
In December 2000, the company entered into an additional Regulation D
Common Stock Private Equity Line Subscription Agreement ("Subscription Agreement
No. 2") with Alpha. The Subscription Agreement No. 2 entitles the company to
draw funds up to $15,000,000 from issuance of its common stock for an amount
equal to 82% of the market value for the five business days immediately
following the draw request date, expiring December 2001 with one automatic
twelve month extension if at least 20% of the subscription amount is drawn
during the first six months as of the agreement date, subject to certain terms
and conditions. The Subscription Agreement No. 2 requires the company to file a
registration statement on Form SB-2 with the Securities and Exchange Commission
for the registration of common stock for future issuance related to the
Subscription Agreement No. 2. The Subscription Agreement No. 2 also requires the
company to deliver an aggregate of 2,000,000 five year warrants to purchase its
common stock at an exercise price equal to the lesser of 40% of the closing bid
price of the company's common stock at the agreement date or 40% of the average
five day closing bid price as of the date of the effectiveness the Registration
Statement. Furthermore, the company is required to deliver to Alpha up to a
maximum of 1,000,000 warrants on a pro rata basis in conjunction with the draw
request, exercisable at the closing bid price at the date of each draw request.
The company is assessed a placement fee, as provided within the Subscription
Agreement, for funds drawn, which is equal to 8% of each draw. As of December
31, 2000, the company has not drawn upon the Subscription Agreement No. 2.
Furthermore, no warrants were exercised of the total 3,000,000 warrants granted
related to the Subscription Agreement No. 2. As of December 31, 2001, the
Company has drawn $1,316,617 of the available $15,000,000, and issued
approximately 20,389,000 of shares of its common stock in conjunction with
Subscription Agreement No. 2 during fiscal year 2001. During fiscal year 2001,
Alpha exercised approximately 4,000,000 warrants of the total granted related to
both Subscription Agreements, yielding an additional $160,000 to the Company.
In October 2001, the Company entered into an additional Regulation D Common
Stock Purchase Agreement ("Subscription Agreement No. 3") with Alpha.
Subscription Agreement No. 3 entitles the Company to draw funds up to
$20,000,000 from issuance of its common stock for an amount equal to 85% of the
market value for the five business days immediately following the draw request
date, expiring in October 2002. Simultaneous with the execution of the
Agreement, the Company is required to deliver one hundred five million
(105,000,000) shares of Common Stock to the Escrow Agent to be held in Escrow,
pursuant to the terms of the Escrow Agreement. Subscription Agreement No. 3
requires the Company to file a registration statement on Form SB-2 with the
Securities and Exchange Commission ("Registration Statement") for the
registration of common stock for future issuance related to the Agreement.
Subscription Agreement No. 3 also requires the Company to issue warrants
amounting to 10,500,000 fully paid and non-assessable shares of the Company's
Common Stock, no par value per share (the "Common Stock"), at an initial
exercise price per share of an amount equal to the lesser of (a) $0.07 or (b)
eighty-five percent (85%) of the average of the five (5) closing bid prices
following the effective date of the Registration Statement (the "Exercise
Price"). The Company is assessed a placement fee, as provided within
Subscription Agreement No. 3, for funds drawn, which is equal to 6% of each
draw." There were approximately 63,271,000 shares issued in 2001 for $1,109,000.
(c) On June 16, 2001, the company entered into a purchase agreement
with 3Pea Technologies, Inc., a company controlled by Mark Newcomer, the son-in-
law of Thomas Hughes, president of the company. Under this agreement, the
company agrees to purchase from 3Pea 60,000 PAYPADs. The PAYPAD is a USB hybrid
card reading pad which will include, after full packaging by 3Pea, the following
items: (1) a four-color printed box; (2) a user instruction manual running
approximately seven pages; (3) a printed compact disk containing the necessary
proprietary software drivers enabling the PAYPAD to communicate with the host
computer; and (4) appropriate designations demonstrating classification approval
by relevant licensing bodies, including the U.S. Federal Communications
Commission and the Underwriters' Laboratory. This Agreement will expire by its
own terms six months from its date of execution.
(d) In February 2002, the board of directors of eConnect passed a
resolution granting ET&T super-voting rights in keeping with the original
formation of eConnect in February 1997. This allows ET&T, which is controlled by
Thomas S. Hughes, president, director, and shareholder of the Company, to have a
controlling vote on issues before the Board of Directors.
(e) In March 2002, eGS, Inc. ("eGS"), a wholly owned subsidiary of
eConnect, Inc., was formed with 35,000,000 shares of common stock authorized
with a par value of $0.001. eGS plans to raising $7,500,000 in capital through a
private placement. However, there is no certainty as to the ability to raise
such capital in the future. On March 3, 2002, the Company made an announcement
that its shareholder will receive 1 share of stock in eGS based upon each 100
shares of common stock held in eConnect be issued to shareholders of record as
of April 3rd, 2002. The focus of eGS is to provide services for future usages of
State-regulated home Internet games. The games will be provided by state
licensed gaming providers. eGS will provide the support services for the state
regulated internet gaming companies. eConnect will support eCashPad originated
PIN debit and smart card transactions facilitated through eGS.
(f) In February 2002, the Company issued, 76,500,000 shares of its
common stock to Alpha Venture Capital Inc. related to Subscription Agreement
No. 3 which was placed in escrow for future advances on the equity funding line,
as discussed in Note 7.
(g) In February 2002, the Company issued 23,200,000 shares of common
stock to Alliance Equities, (an entity controlled by Mr. Epstein who is also a
significant stockholder of the Company) in exchange for $173,600, net of
offering costs of $327,500.
(h) In February 2002, the Company issued 6,800,000 shares of its common
stock related to Alliance Equities related to the exercise of warrants with an
exercise price of $0.01
(i) In February 2002, the Company issued 40,519,528 shares of its
common stock to Richard Epstein, a significant stockholder of the Company, in
satisfaction of advances from Alliance Equities of $300,000 and $183,000, net of
offering costs of $173,754.
(j) In February 2002, the Company issued 10,000,000 shares of common
stock in satisfaction of promissory notes payable to an individual totaling
$238,050, including accrued interest of $37,250 from fiscal year 2001 and
interest expense of $125,800 related to fiscal year 2002.
(k) In January of 2000, the Company entered into a Consulting Services
Agreement with Richard Epstein, a significant shareholder of the Company. Mr.
Epstein has agreed to assist the Company in developing a market for the usage of
the eCash Pad for a period of three years in exchange for 15,000,000 shares of
the Company's common stock. The amount recorded as consulting expense totaled
$983,475 for the year ended December 31, 2000. In February 2001, the Company
issued Mr. Epstein 15,000,000 shares of its common stock, 5,000,000 of which
satisfied the liability of $983,475, with the remaining portion recorded as
prepaid consulting services of $1,966,950 which has been fully expensed as of
December 31, 2001.
(l) In February 2000, the Company entered into another Consulting
Services Agreement with Mr. Epstein. Mr. Epstein agreed to provide consulting
services related to future mergers and acquisitions in behalf of the Company for
a period of 2 years in exchange for 300,000 shares of the Company's common stock
monthly for a total of 7,200,000 shares. The Company recorded consulting
expenses of $3,996,630 for the year ended December 31, 2000. During the year
ended 2000, the Company issued a total of 1,050,000 shares of the its common
stock in advance of such services having been rendered. Accordingly, the Company
has recorded a prepaid consulting services of $1,271,655 related to such advance
issuances as of December 31, 2000. During 2001, the Company issued an additional
1,800,000 shares of common stock to Mr.. Epstein for consulting services
rendered during this period and recorded consulting expenses of $2,179,980 for
the year ended December 31, 2001. As of December 31, 2001, the Company has
expensed all prepaid consulting services reflected as of December 31, 2000
totaling $1,271,655.
(m) In July 2001, the Company entered into another Consulting Services
Agreement with Mr. Epstein. Mr. Epstein agreed to target, locate and bring to
the Company 10 strategic allies per year in respective industries related to
PERFECT transactions in exchange for 15,000,000 shares of the Company's common
stock and recorded consulting expenses totaling of $849,150 for the year ended
December 31, 2001.
(n) During the fiscal year 2001, the Company issued 51,168,462 shares
of common stock to satisfy balances due Mr. Epstein, a significant shareholder
of the Company, and Alliance Equities ("Alliance"), a Company controlled by Mr.
Epstein, totaling $3,043,317, including interest of $681,951.
(o) In December 2001, the Company issued 7,504,724 shares of common
stock to Alliance for interest totaling $111,220.
During the year-ended 2000, the Company issued 3,300,000 shres of its common
stock totaling $3,966,630.
(p) In May 2001, the Company issued 3,550,000 shares of common stock to
Alliance for other consulting services and recorded consulting expenses totaling
$345,131 for the year ended December 31, 2001.
32
MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDER MATTERS.
Market Information.
The company's common stock is currently traded in the Over-the-Counter
Bulletin Board, under the symbol "ECNC".
Holders of Common Equity.
As of December 31, 2001, the company had approximately 5,000
shareholders.
Dividend Information.
The company has not declared or paid a cash dividend to stockholders
since it was originally organized. The company paid a 5% stock dividend on
September 20, 1999 to shareholders of record as of close of business on
September 14, 1999. The Board of Directors presently intends to retain any
earnings to finance company operations and does not expect to authorize cash
dividends in the foreseeable future. Any payment of cash dividends in the
future will depend upon the company's earnings, capital requirements and other
factors.
Under NASD Rule 6530, an NASD member (i.e. the market maker) is permitted to
quote a domestic equity security that is not listed on NASDAQ or a registered
national securities exchange in the United States, by an issuer that is required
to file reports (e.g. quarterly and annual reports on Forms 10Q-SB and 10K-SB,
and periodic reports on Form 8-K) pursuant to Section 13 or 15(d) of the Act,
and if the issuer is current in those reporting obligations (subject to a thirty
calendar day grace period). The company met these requirements, and, upon
completion of the application with the NASD, the company's common stock was
accepted for quotation on the Over the Counter Bulletin Board; it commenced
trading on that exchange on November 1, 2000. The company's common stock is
classified as a penny stock pursuant to Rule 3a51-1 of the 1934 Act. As such,
transactions involving the shares are subject to the Penny Stock rules
promulgated under this Act this may result in certain limitations on the ability
to trade the shares. Further, the additional restrictions placed on broker -
dealers by these rules may inhibit trading activity.
The range of closing prices shown below is as reported by these
markets. The quotations shown reflect inter-dealer prices, without retail mark-
up, mark-down or commission and may not necessarily represent actual
transactions.
Per Share Common Stock Bid Prices by Quarter
For the Fiscal Year Ending December 31, 2001
High Low
Quarter Ended December 31, 2001 0.05 0.02
Quarter Ended September 30, 2001 0.07 0.04
Quarter Ended June 30, 2001 0.15 0.06
Quarter Ended March 31, 2001 0.40 0.06
Per Share Common Stock Bid Prices by
Quarter
For the Fiscal Year Ended December 31,
2000
High Low
Quarter Ended December 31, 2000 1.35 0.20
Quarter Ended September 30, 2000 0.69 0.30
Quarter Ended June 30, 2000 1.75 0.37
Quarter Ended March 31, 2000 * 16.50 0.49
* The common stock did not trade from March 13, 2000 through March 24, 2000 due
to the trading suspension ordered by the Securities and Exchange Commission
Per Share Common Stock Bid Prices by Quarter
For the Fiscal Year Ended December 31, 1999
High Low
Quarter Ended December 31, 1999 0.40 0.06
Quarter Ended September 30, 1999 0.41 0.15
Quarter Ended June 30, 1999 0.83 0.38
Quarter Ended March 31, 1999 0.81 0.37
33
EXECUTIVE COMPENSATION
Summary Compensation Table.
- ---------------------------------------------------------------------------------------------------------
Annual compensation Long-term compensation
------------------------ ------------------------------
Awards Payouts
--------------------- -------
Securities
Other under-
annual Restricted lying All other
Name and compen- stock options/ LTIP compen-
principal Salary Bonus sation award(s) SARs payouts sation
position Year ($) ($) ($) ($) (#) ($) ($)
- ---------------------------------------------------------------------------------------------------------
2001 255,968 0 0 4,800,000 600,000 0 0
Thomas S. Hughes, Chief 2000 255,968 0 0 4,800,000 600,000 0 0
Executive Off. 1999 79,215 0 0 0 0 0 0
1998 0 0 0 0 0 0 0
- ---------------------------------------------------------------------------------------------------------
2001 0 0 57,500 56,000 400,000 0 0
Jack M. Hall, Secretary 2000 0 0 57,500 56,000 400,000 0 0
1999 0 0 21,000 0 0 0 0
1998 0 0 0 0 0 0 0
- ---------------------------------------------------------------------------------------------------------
2001 0 0 0 101,900 400,000 0 0
Lawrence B. Donoghue, 2000 0 0 0 101,900 400,000 0 0
Director /(1)/
- ---------------------------------------------------------------------------------------------------------
(1) Mr. Donoghue became a director of the company on May 23, 2000.
Individual Option/SAR Grants In Fiscal Year Ended December 31, 2000.
- ---------------------------------------------------------------------------------------------------------
Percent of total
Number of options/SARs
securities granted to
underlying employees in
options/SARs fiscal year Exercise of base
Name granted (#) /(1)/ price ($/Sh) Expiration date
- ---------------------------------------------------------------------------------------------------------
Thomas S. Hughes, 600,000 5.04% 25% of market December 8, 2010
Chief Executive Off. price on date of
exercise
Jack M. Hall, 400,000 3.36% 25% of market December 8, 2010
Secretary price on date of
exercise
Lawrence B. Donoghue, 400,000 3.36% 25% of market December 8, 2010
Director price on date of
exercise
- ---------------------------------------------------------------------------------------------------------
(1) On November 7, 2000, the company's board of directors approved an Amended
and Restated Stock Incentive Plan (Amendment No. 3); this will allow for stock
options and restricted awards to be made to employees and non-employees of the
company. There have been a total of 11,900,000 options granted in December 2000
under this plan, including for the officers and directors (as set forth above).
Aggregated Option/SAR Exercises in Last Fiscal Year and FY-End Option/SAR
Values.
- -------------------------------------------------------------------------------------------------------------------------------
Number of securities Value of
underlying unexercised in-
unexercised the-money
options/SARs at FY- options/SARs at
end (#) FY-end ($)
Shares acquired on Value realized Exercisable/ Exercisable/
Name exercise (#) ($) Unexercisable Unexercisable /(1)/
(a) (b) (c) (d) (e)
- -------------------------------------------------------------------------------------------------------------------------------
Thomas S. Hughes, - - 150,000 Exercisable -
Chief Executive Off. 450,000 Unexercisable
Jack M. Hall, - - 100,000 Exercisable -
Secretary 300,000 Unexercisable
Lawrence B. Donoghue, - - 100,000 Exercisable -
Director 300,000 Unexercisable
- -------------------------------------------------------------------------------------------------------------------------------
(1) As of fiscal year end (December 31, 2001), none of the unexercised options
were in-the-money.
Other Compensation.
There are no annuity, pension or retirement benefits proposed to be
paid to directors and officers of the company in the event of retirement at
normal retirement date as there is no existing plan provided for or contributed
to by the company. Other than under the Amended and Restated Stock Incentive
Plan (Amendment No. 3) as discussed above, there is no remuneration proposed to
be paid in the future directly or indirectly by the company to any officer or
director.
34
eConnect
Financial Statements
TABLE OF CONTENTS
PAGE NO.
-----------------
Report of Independent Certified Public Accountants F - 1
Financial statements
Balance sheet F - 2
Statements of operations F - 3
Statement of stockholders' deficit F - 4
Statements of cash flows F - 6
Notes to financial statements F - 8
L.L. Bradford & Company, LLC
Certified Public Accountants & Consultants
3441 S. Eastern Avenue
Las Vegas, Nevada 89102
(702) 735-5030 facsimile (702) 735-4854
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and Stockholders
eConnect
San Pedro, California
We have audited the accompanying balance sheet of eConnect as of December 31,
2001, and the related statements of operations, stockholders' deficit, and cash
flows for the years ended December 31, 2001 and 2000. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with auditing standards generally accepted
in the United States. Those standards require that we 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 statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of eConnect as of December 31,
2001, and the results of its operations and cash flows for the years ended
December 31, 2001 and 2000 in conformity with accounting principles generally
accepted in the United States.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 19 to the
financial statements, the Company has suffered losses from operations, current
liabilities exceed current assets and has a net stockholders' deficiency, all of
which raise substantial doubt about its ability to continue as a going concern.
Management's plans in regards to these matters are also described in Note 19.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
/s/ L.L. Bradford & Company, LLC
L.L. Bradford & Company, LLC
Las Vegas, Nevada
April 19, 2002
F-1
eCONNECT
BALANCE SHEET
December 31,
2001
-------------
ASSETS
Current assets
Inventory $ 180,019
-------------
Total current assets 180,019
Fixed assets, net 227,638
Other assets
Deposit 24,819
Other assets 370,509
-------------
Total other assets 395,328
-------------
Total assets $ 802,985
=============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities
Bank overdraft $ 30,223
Accounts payable 2,127,512
Accrued liabilities 3,072,217
Due to related parties 2,643,549
Deferred revenue 674
Legal settlement liability 1,404,700
Advance on equity funding line 50,000
Notes payable 1,697,789
-------------
Total current liabilities 11,026,664
-------------
Total liabilities 11,026,664
Commitments and contingencies --
Stockholders' deficit
Common stock; $.001 par value; 500,000,000
shares authorized, 471,931,621 shares
issued and outstanding 471,931
Additional paid-in capital 153,967,061
Accumulated deficit (164,662,671)
-------------
Total stockholders' deficit (10,223,679)
-------------
Total liabilities and stockholders' deficit $ 802,985
=============
See Accompanying Notes to Financial Statements
F-2
eCONNECT
STATEMENTS OF OPERATIONS
Year Ended December 31,
------------------------------------------------
2001 2000
--------------------- --------------------
Revenue
Other sales $ 1,579 $ --
--------------------- --------------------
Gross income 1,579 --
--------------------- --------------------
Operating expenses
Stock based compensation 10,748,159 83,441,832
Bad debts 44,101 4,952,537
Consulting 914,462 4,033,344
Public relations 192,775 1,198,411
Professional fees 430,304 743,207
Research and development 90,441 4,620,491
Wages 1,595,310 1,963,574
Amortization and depreciation 956,248 1,967,338
General and administrative 790,828 4,226,365
--------------------- --------------------
Total operating expenses 15,762,628 107,147,099
--------------------- --------------------
Net loss from operations (15,761,049) (107,147,099)
Other income (expense)
Interest income -- 9,056
Interest expense (394,274) (1,263,012)
Impairment of intangible asset (216,239) --
Loss on investment (48,040) (4,527,546)
Loss on purchased software (61,694) --
Loss on other assets (124,930) --
Cancellation fee (526,212) --
Legal settlement (1,813,231) (1,451,959)
Cancellation of common stock -- 984,375
Loss on equity method investees -- (603,438)
--------------------- --------------------
Total other income (expense) (3,184,620) (6,852,524)
--------------------- --------------------
Net loss before provision for income taxes (18,945,669) (113,999,623)
Provision for income taxes (800) (800)
--------------------- --------------------
Net loss from continuing operations (18,946,469) (114,000,423)
Discontinued operations
Loss from discontinued gaming operations
from January 1, 2001 to June 30, 2001
(net of income tax benefit which is fully
allowed for) (589,785) (661,464)
--------------------- --------------------
Net loss (19,536,254) (114,661,887)
===================== ====================
Earning per share
Loss from continuing operations $ (0.06) $ (0.65)
Loss from discontinued operations -- --
--------------------- --------------------
Net loss $ (0.06) $ (0.65)
===================== ====================
Basic and diluted weighted average
common shares outstanding 316,550,820 174,371,038
===================== ====================
See Accompanying Notes to Financial Statements
F-3
eCONNECT
STATEMENT OF STOCKHOLDERS' DEFICIT
Due From Common Stock
Common Stock Related Party - Issued for
-------------------------- Additional Secured By Prepaid
Number of Paid-in Company's Consulting
Shares Amount Capital Common Stock Services
------------ ------------- ------------- ------------- -------------
Balance, December 31, 1999 110,601,173 $ 110,601 $ 28,087,363 $ (2,980,882) $ --
Capital contribution from minority
interest in consolidated subsidiary -- -- -- -- --
Stockholder loan -- -- -- (1,854,835) --
Stock subscription payable 495,000 495 81,051 -- --
Common shares issued in satisfaction
of officer bonus payable 6,000,000 6,000 4,794,000 -- --
Stockholder loan reserve as allowance
for doubtful accounts -- -- -- 4,835,717 --
Common shares issued for cash, weighted
average price of $0.40 3,335,762 3,336 1,330,969 -- --
Common shares issued for cash, weighted
average price of $0.16 3,000,000 3,000 497,000 -- --
Common shares issued for services, weighted
average price of $0.63 65,158,348 65,158 40,789,546 -- --
Common shares issued for employee based
compensation 570,000 570 1,046,302 -- --
Common stock issued to satisfy Company
accounts payable 666,667 667 549,333 -- --
Stock based compensation related to options
and warrants granted -- -- 40,366,861 -- --
Stock based lawsuit settlement with warrants -- -- 1,451,959 -- --
Common shares issued for services related
to exercise of warrants with an exercise
price of $0.40 2,933,488 2,933 1,170,462 -- --
Prepaid consulting services paid with common shares 1,050,000 1,050 1,270,605 -- (1,271,655)
Cancellation of common shares related to the fiscal
year 1999 acquisition of Isla Escondida, S.A. (10,500,000) (10,500) (973,875) -- --
Cancellation of common shares related to the
fiscal year 1999 acquisition of Top Sports, S.A. (1,000,000) (1,000) (72,100) -- --
Common shares issued for cash related to Alpha Venture
Capital, Inc., net of offering costs of $2,331,486 13,161,800 13,162 6,486,738 -- --
Common shares issued for cash related to Alpha Venture
Capital, Inc. exercise of warrants, weighted average
exercise price of $0.20 3,050,000 3,050 610,350 -- --
Common shares issued for cash related to exercise of
warrants with an exercise price of $0.40 7,351,959 7,352 2,933,432 -- --
Common shares issued for the acquisition of
Powerclick, Inc. 8,000,000 8,000 1,292,000 -- --
Common shares issued as additional consideration for
50.00% ownership in Top Sports, S.A. 200,000 200 46,832 -- --
Net loss -- -- -- -- --
------------- ------------- ------------- ------------- ------------
Balance, December 31, 2000 214,074,197 214,074 131,758,828 -- (1,271,655)
Minority
Stock Interest In Total
Subscription Consolidated Accumulated Stockholders'
Payable Subsidiary Deficit Deficit
------------- -------------- ------------- -------------
Balance, December 31, 1999 $ 81,546 $ -- $ (30,573,349) $ (5,274,721)
Capital contribution from minority
interest in consolidated subsidiary -- 16,511 -- 16,511
Stockholder loan -- -- -- (1,854,835)
Stock subscription payable (81,546) -- -- --
Common shares issued in satisfaction
of officer bonus payable -- -- -- 4,800,000
Stockholder loan reserve as allowance
for doubtful accounts -- -- -- 4,835,717
Common shares issued for cash, weighted
average price of $0.40 -- -- -- 1,334,305
Common shares issued for cash, weighted
average price of $0.16 -- -- -- 500,000
Common shares issued for services, weighted
average price of $0.63 -- -- -- 40,854,704
Common shares issued for employee based
compensation -- -- -- 1,046,872
Common stock issued to satisfy Company
accounts payable -- -- -- 550,000
Stock based compensation related to options
and warrants granted -- -- -- 40,366,861
Stock based lawsuit settlement with warrants -- -- -- 1,451,959
Common shares issued for services related
to exercise of warrants with an exercise
price of $0.40 -- -- -- 1,173,395
Prepaid consulting services paid with common shares -- -- -- --
Cancellation of common shares related to the fiscal
year 1999 acquisition of Isla Escondida, S.A. -- -- -- (984,375)
Cancellation of common shares related to the
fiscal year 1999 acquisition of Top Sports, S.A. -- -- -- (73,100)
Common shares issued for cash related to Alpha Venture
Capital, Inc., net of offering costs of $2,331,486 -- -- -- 6,499,900
Common shares issued for cash related to Alpha Venture
Capital, Inc. exercise of warrants, weighted average
exercise price of $0.20 -- -- -- 613,400
Common shares issued for cash related to exercise of
warrants with an exercise price of $0.40 -- -- -- 2,940,784
Common shares issued for the acquisition of
Powerclick, Inc. -- -- -- 1,300,000
Common shares issued as additional consideration for
50.00% ownership in Top Sports, S.A. -- -- -- 47,032
Net loss -- (108,819) (114,553,068) (114,661,887)
------------- ------------- ------------- -------------
Balance, December 31, 2000 -- (92,308) (145,126,417) (14,517,478)
See Accompanying Notes to Financial Statements
F-4
eCONNECT
STATEMENT OF STOCKHOLDERS' DEFICIT (CONTINUED)
Due From Common Stock
Common Stock Related Party - Issued for
---------------------- Additional Secured By Prepaid
Number of Paid-in Company's Consulting
Shares Amount Capital Common Stock Services
----------- --------- ------------- ------------ -----------
Balance, December 31, 2000 214,074,197 214,074 131,758,828 -- (1,271,655)
Common shares issued for prepaid consulting services 31,100,000 31,100 5,235,450 -- (5,266,550)
Amortization of prepaid consulting services -- -- -- -- 6,538,205
Common shares issued in satisfaction of due to related parties 8,000,000 8,000 3,688,243 -- --
Common shares issued in satisfaction of due to consultants 2,400,000 2,400 2,018,047 -- --
Common shares issued for cash related to exercise of
options and warrants 3,423,899 3,424 641,277 -- --
Common shares issued for cash, $0.01 19,000,100 19,000 141,000 -- --
Common shares issued for cancellation fee 3,600,000 3,600 522,612 -- --
Common shares issued in satisfaction of due to related party
related to exercise of warrants with an exercise price of $0.04 2,000,000 2,000 83,000 -- --
Common shares issued for services related to exercise of
warrants with an exercise price of $0.26 74,113 74 19,102 -- --
Common shares issued in satisfaction of advance
on equity funding line 2,118,975 2,119 204,481 -- --
Common shares issued for cash related to Alpha Venture
Capital, Inc., net of offering costs of $1,480,578 83,660,382 83,661 2,342,010 -- --
Common shares issued for cash related to Alpha Venture
Capital, Inc. exercise of warrants, exercise price of $0.04 4,000,000 4,000 156,000 -- --
Common shares issued for services, weighted average price of $0.08 25,996,806 25,997 2,125,215 -- --
Common shares issued for interest 11,710,348 11,710 454,043 -- --
Common stock issued in satisfaction of due to related party,
including interest of $681,951 51,168,462 51,168 2,992,149 -- --
Warrants granted for interest -- -- 9,275 -- --
Warrants granted in satisfaction of promissory note payable,
including interest of $265,447 -- -- 325,447 -- --
Common shares issued in satisfaction of promissory note payable,
including interest of $51,950 6,001,505 6,001 321,065 -- --
Common shares issued in satisfaction of accrued interest 1,602,834 1,603 109,555 -- --
Stock based compensation related to options and warrants granted -- -- 565,190 -- --
Common shares issued in satisfaction of settlement liability 2,000,000 2,000 255,072 -- --
Elimination of minority interest in consolidated subsidiary related
to discontinued operations -- -- -- -- --
Net loss -- -- -- -- --
----------- --------- ------------- ------------ -----------
Balance, December 31, 2001 471,931,621 $ 471,931 $ 153,967,061 $ -- $ --
=========== ========= ============= ============ ===========
Minority
Stock Interest In Total
Subscription Consolidated Accumulated Stockholders'
Payable Subsidiary Deficit Deficit
----------- ----------- ------------- -------------
Balance, December 31, 2000 -- (92,308) (145,126,417) (14,517,478)
Common shares issued for prepaid consulting services -- -- -- --
Amortization of prepaid consulting services -- -- -- 6,538,205
Common shares issued in satisfaction of due to related parties -- -- -- 3,696,243
Common shares issued in satisfaction of due to consultants -- -- -- 2,020,447
Common shares issued for cash related to exercise of
options and warrants -- -- -- 644,701
Common shares issued for cash, $0.01 -- -- -- 160,000
Common shares issued for cancellation fee -- -- -- 526,212
Common shares issued in satisfaction of due to related party
related to exercise of warrants with an exercise price of $0.04 -- -- -- 85,000
Common shares issued for services related to exercise of
warrants with an exercise price of $0.26 -- -- -- 19,176
Common shares issued in satisfaction of advance
on equity funding line -- -- -- 206,600
Common shares issued for cash related to Alpha Venture
Capital, Inc., net of offering costs of $1,480,578 -- -- -- 2,425,671
Common shares issued for cash related to Alpha Venture
Capital, Inc. exercise of warrants, exercise price of $0.04 -- -- -- 160,000
Common shares issued for services, weighted average price of $0.08 -- -- -- 2,151,212
Common shares issued for interest -- -- -- 465,753
Common stock issued in satisfaction of due to related party,
including interest of $681,951 -- -- -- 3,043,317
Warrants granted for interest -- -- -- 9,275
Warrants granted in satisfaction of promissory note payable,
including interest of $265,447 -- -- -- 325,447
Common shares issued in satisfaction of promissory note payable,
including interest of $51,950 -- -- -- 327,066
Common shares issued in satisfaction of accrued interest -- -- -- 111,158
Stock based compensation related to options and warrants granted -- -- -- 565,190
Common shares issued in satisfaction of settlement liability -- -- -- 257,072
Elimination of minority interest in consolidated subsidiary related
to discontinued operations -- 92,308 -- 92,308
Net loss -- -- (19,536,254) (19,536,254)
----------- ----------- -------------- -------------
Balance, December 31, 2001 $ -- $ -- $(164,662,671) $(10,223,679)
=========== =========== ============== =============
See Accompanying Notes to Financial Statements
F-5
eCONNECT
STATEMENTS OF CASH FLOW
Year Ended December 31,
----------------------------------------------
2001 2000
------------------- ----------------
Cash flows from operating activities:
Net loss $ (19,536,254) $ (114,661,887)
Adjustments to reconcile net loss to net
cash used by operating activities:
Amortization and depreciation 956,248 1,967,338
Stock based compensation 10,748,159 83,441,832
Impairment of intangible asset 216,239 --
Loss on investments 48,040 4,527,546
Loss on purchased software 61,694 --
Loss on other assets 124,930 --
Cancellation fee 526,212 --
Bad debts -- 4,952,537
Loan fee -- 253,501
Cancellation of common stock -- (984,375)
Legal settlement -- 1,451,959
Changes in operating assets and liabilities:
Change in due from related party -- 133,180
Change in accounts receivable 16,758 (16,758)
Change in inventory (180,019) --
Change in stock subscription payable -- 220,176
Change in deposits 14,001 (38,820)
Change in other assets (389,827) (105,612)
Change in due from related party -
secured by Company's common stock -- (1,854,835)
Change in bank overdraft 30,223 --
Change in accounts payable 15,239 1,740,453
Change in accrued liabilities 1,132,853 2,942,694
Change in due to consultants -- 2,020,447
Change in due to related parties 1,742,749 3,106,403
Change in deferred revenue 674 --
Change in legal settlement liability 1,404,700 --
------------------- ----------------
Net cash used by operating activities (3,067,381) (10,904,221)
Cash flows from investing activities:
Purchase of fixed assets (49,498) (497,857)
Purchase of purchased software -- (2,168,892)
Cost of investments -- (1,000,000)
------------------- ----------------
Net cash used by investing activities (49,498) (3,666,749)
Cash flows from financing activities:
Proceeds from issuance of notes payable 337,500 2,606,305
Proceeds from advance on equity funding line 50,000 206,600
Principal payments on notes payable (674,000) (260,000)
Proceeds from issuance of common stock 3,390,372 11,888,389
Proceeds from minority interest in consolidated subsidiary -- 16,511
------------------- ----------------
Net cash provided by financing activities 3,103,872 14,457,805
------------------- ----------------
Net decrease in cash (13,007) (113,165)
Cash, beginning of period 13,007 126,172
------------------- ----------------
Cash, end of period $ -- $ 13,007
=================== ================
Supplemental disclosure of cash flow:
Cash paid for interest $ 87,000 $ 121,493
=================== ================
Cash paid for taxes $ 800 $ 800
=================== ================
See Accompanying Notes to Financial Statements
F-6
eCONNECT
STATEMENTS OF CASH FLOW (CONTINUED)
Year Ended December 31,
---------------------------------
2001 2000
--------------- ---------------
Schedule of non-cash investing and financing activities:
1,050,000 common shares issued for prepaid
consulting services $ -- $ 1,271,655
============== ===============
1,000,000 common shares cancelled during renegotiation
of 99.94% of Top Sports, S.A. recorded as portion of
due to related parties $ -- $ (73,100)
============== ===============
Remaining consideration for 99.94% acquisition of
Top Sports, S.A. recorded as portion of due
to related parties $ -- $ 2,973,996
============== ===============
6,000,000 common shares issued for
officer bonus payable $ -- $ 4,800,000
============== ===============
8,000,000 common shares issued related
to acquisition of Powerclick, Inc. $ -- $ 1,300,000
============== ===============
666,667 common shares issued for accounts payable $ -- $ 550,000
============== ===============
203,865 common shares issued for
stock subscription payable $ -- $ 81,546
============== ===============
31,100,000 common shares issued for prepaid
consulting services $ 5,266,550 $ --
============== ===============
8,000,000 common shares issued in satisfaction of
due to related parties $ 3,696,243 $ --
============== ===============
2,400,000 common shares issued in satisfaction of
due to consultants $ 2,020,447 $ --
============== ===============
2,000,000 common shares issued in satisfaction of
due to related party related to exercise of warrants
with an exercise price of $0.04 $ 85,000 $ --
============== ===============
2,118,975 common shares issued in satisfaction of
advance on equity funding line $ 206,600 $ --
============== ===============
51,168,462 common shares issued in satisfaction of
due to related party, excluding interest of $681,951 $ 2,361,366 $ --
============== ===============
Warrants granted in satisfaction of promissory note
payable, excluding interest of $265,447 $ 60,000 $ --
============== ===============
6,001,505 common shares issued in satisfaction of
promissory note payable, excluding interest of
$51,950 $ 275,116 $ --
============== ===============
1,602,834 common shares issued in satisfaction of
accrued interest $ 111,158 $ --
============== ===============
2,000,000 common shares issued in satisfaction of
settlement liability $ 257,072 $ --
============== ===============
Elimination of minority interest in consolidated subsidiary
related to discontinued operations $ 92,308 $ --
============== ===============
See Accompanying Notes to Financial Statements
F-7
eCONNECT
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, HISTORY AND SUMMARY OF SIGNIFICANT POLICIES
--------------------------------------------------------------------
Description of business - eConnect (the "Company") currently has one
-----------------------
division which is focused on the development of the Personal Encrypted
Remote Financial Electronic Card Transactions ("PERFECT") industry, which
consists of the fully operational terminal, the eCash Pad, affecting
Internet ATM card with PIN, credit card, smart card transactions, and
generating a fee per transaction for the Company.
History - eConnect (formerly Betting, Inc.) was originally incorporated in
-------
the State of Missouri on September 1, 1981 under the name of Handy-Top,
Inc. The Company underwent several name changes until May 1993, when it
changed its name to Leggoons, Inc. and continued as a shell corporation
with no business operations.
In February 1997, the Company entered into an agreement to license assets
from Electronic Transaction Technology ("ET&T"), formerly known as Home
Point of Sales, Inc., for the purpose of licensing certain technology for
the development of PERFECT. ET&T is a privately held corporation with a
majority interest owned by Thomas S. Hughes, President of the Company. This
technology developed by ET&T would provide consumers with the option to
instantly pay bills or make purchases from home with real-time cash
transactions. In March 1997, Thomas S. Hughes, Chairman of ET&T, was
elected the Chairman and President of the Company and concurrently changed
the Company's name to Betting, Inc.
In May 1999, an Agreement and Plan of Merger was consummated between the
Company and Betting, Inc., a non-operating privately held Nevada
corporation ("Betting-Nevada") to effectuate re-domicile of the Company to
the State of Nevada, whereby no shares were issued between companies. Under
generally accepted accounting principles, the merger with Betting-Nevada is
considered to be a reorganization in substance, rather than a business
combination since Betting-Nevada had no assets, liabilities or operations,
and the Company has since re-domiciled in the State of Nevada through
Betting-Nevada. Accordingly, the accounting for the merger has been
recorded at historical cost in a manner similar to a pooling of interests
("as-if pooling of interest accounting"), and no goodwill was recorded.
In June 1999, a Certificate of Amendment to the Articles of Incorporation
changed the name of the Company to eConnect. In November 2000, a
Certificate of Amendment to the Articles of Incorporation was filed with
the Nevada Secretary of State further increasing the number of authorized
common stocks to 300,000,000. In July 2001, a Certificate of Amendment to
the Articles of Incorporation was filed with the Nevada Secretary of State
further increasing the number of authorized common stocks to 500,000,000.
In January 2002, a Certificate of Amendment to the Articles of
Incorporation was filed with the Nevada Secretary of State further
increasing the number of authorized common stocks to 700,000,000. In March
2002, a Certificate of Amendment to the Articles of Incorporation was filed
with the Nevada secretary of State further increasing the number of
authorized common stocks to 750,000,000.
Definition of fiscal year - The Company's fiscal year end is December 31.
-------------------------
Reclassification - Certain prior year balances have been reclassified to
----------------
conform to the current year presentation.
Use of estimates - The preparation of financial statements in conformity
----------------
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from
those estimates.
Inventory - Inventory is stated at the lower of cost or market. Cost is
---------
determined by using the average cost method. Substantially all of the
inventory consists of finished goods held for sale. The Company's
management monitors the inventory for excess and obsolete items and makes
necessary valuation adjustments when required.
F - 8
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT POLICIES (continued)
-----------------------------------------------------------
Fixed assets - Fixed assets are stated at cost less accumulated
------------
depreciation. Depreciation is provided principally on the straight-line
method over the estimated useful lives of the assets, which are generally 3
to 5 years. The cost of repairs and maintenance is charged to expense as
incurred. Expenditures for property betterments and renewals are
capitalized. Upon sale or other disposition of a depreciable asset, cost
and accumulated depreciation are removed from the accounts and any gain or
loss is reflected in other income (expense).
The Company periodically evaluates whether events and circumstances have
occurred that may warrant revision of the estimated useful lives of fixed
assets or whether the remaining balance of fixed assets should be evaluated
for possible impairment. The Company uses an estimate of the related
undiscounted cash flows over the remaining life of the fixed assets in
measuring their recoverability.
Goodwill and intangible assets - Goodwill represents the excess of an
------------------------------
acquired business' purchase price over the fair value of its assets,
resulting from business acquisitions accounted for under the purchase
method. Intangible assets consist of purchased technology. Goodwill and
intangible assets are presented net of related accumulated amortization and
are being amortized on a straight-line basis over the estimated useful life
of three years.
The Company records impairment losses or write-downs on goodwill and
intangible assets when events and circumstances indicate that an impairment
assessment should be performed and that assessment indicates that there is
an impairment. Events and circumstances that would trigger an impairment
assessment include a significant decrease in the market value of an asset,
a significant change in the manner or extent that an asset is used
including a decision to abandon acquired products, services or
technologies, a significant adverse change in operations or business
climate affecting the asset, and historical operating or cash flow losses
expected to continue for the foreseeable future associated with the asset.
An asset is considered impaired when the undiscounted cash flows projected
to be generated from the asset over its remaining useful life is less than
the recorded amount of that asset. Impairment losses are measured based on
the difference between the asset's fair value and carrying amount and are
recorded as impairment write-downs in the statements of operations in the
period that an indicator of impairment arises. Measurement of fair value is
based on estimated expected future cash flows, including terminal value
cash flows expected to result from the disposition of the asset at the end
of its useful life, discounted at our weighted average cost of capital.
Weighted average cost of capital is based on historical risk premiums
required by investors for companies of our size, industry and capital
structure and includes risk factors specific to us. In some instances, the
measurement of fair value includes a factor, if appropriate, for market
comparables, representing our estimate of the value that a buyer is willing
to pay for similar assets in terms of products and services, customer base,
risks and earnings capabilities.
Fair value of financial instruments - The carrying amounts for the
-----------------------------------
Company's inventory, bank overdraft, accounts payable, accrued liabilities,
due to related parties, legal settlement liability, deferred revenue,
advance on equity funding line, and notes payable approximate fair value
due to the short-term maturity of these instruments.
Earnings (loss) per share - Basic earnings (loss) per share excludes any
-------------------------
dilutive effects of options, warrants and convertible securities. Basic
earnings (loss) per share is computed using the weighted-average number of
outstanding common stocks during the applicable period. Diluted earnings
per share is computed using the weighted average number of common and
common stock equivalent shares outstanding during the period. Common stock
equivalent shares are excluded from the computation if their effect is
antidilutive.
Revenue recognition - Revenues from its PERFECT division will consist of
-------------------
(i) the sale of eCash Pads and (ii) transaction fees charged to merchants
for electronic cash payments using the eCash Pads. Revenues from the sale
of eCash Pads recorded after a 30-day trial period of the product by the
customer. Revenues from transaction fees charged to merchants for
electronic cash payments using the eCash Pads are recognized upon the
completion of each electronic cash payment transaction, at which time a
transaction fee is assessed to the merchant.
F - 9
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT POLICIES (continued)
-----------------------------------------------------------
Income taxes - The Company accounts for its income taxes in accordance with
------------
Statement of Financial Accounting Standards No. 109, which requires
recognition of deferred tax assets and liabilities for future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective
tax bases and tax credit carryforwards. Deferred tax assets and liabilities
are measured using enacted tax rates expected to apply to taxable income in
the years in which those temporary differences are expected to be recovered
or settled. The effect on deferred tax assets and liabilities of a change
in tax rates is recognized in income in the period that includes the
enactment date.
As of December 31, 2001, the Company has available net operating loss
carryovers of approximately $42,000,000 that will expire in various periods
through 2021. Such losses may not be fully deductible due to the
significant amounts of non-cash service costs and the change in ownership
rules under Section 382 of the Internal Revenue Code. The Company has
established a valuation allowance for the full tax benefit of the operating
loss carryovers due to the uncertainty regarding realization.
Comprehensive income (loss) - The Company has no components of other
---------------------------
comprehensive income. Accordingly, net loss equals comprehensive loss for
all periods.
Segment information - The Company discloses segment information in
-------------------
accordance with Statements of Financial Accounting Standards (SFAS) No.
131, "Disclosures about Segments of an Enterprise and Related Information,"
which uses the Management approach to determine reportable segments. As of
December 31, 2001, the Company has only one operating segment.
Advertising costs - The Company recognizes advertising expenses in
-----------------
accordance with Statement of Position 93-7 "Reporting on Advertising
Costs." Accordingly, the Company expenses the costs of producing
advertisements at the time production occurs, and expenses the costs of
communicating advertisements in the period in which the advertising space
or airtime is used. Internet advertising expenses are recognized based on
the terms of the individual agreements, generally over the greater of the
number of impressions delivered over the total number of contracted
impressions, or a straight-line basis over the term of the contract.
Advertising costs of approximately $75,000 and $226,000 were incurred for
the years ended December 31, 2001 and 2000, respectively.
Stock-based compensation - The Company accounts for stock-based employee
------------------------
compensation arrangements in accordance with provisions of Accounting
Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to
Employees," and complies with the disclosure provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Under APB No. 25, compensation
expense is based on the difference, if any, on the date of the grant,
between the fair value of the Company's stock and the exercise price. The
Company accounts for stock issued to non-employees in accordance with the
provisions of SFAS No. 123 and the Emerging Issues Task Force ("EITF")
Issue No. 96-18.
F - 10
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT POLICIES (continued)
-----------------------------------------------------------
Research and development costs - Research and development costs are charged
------------------------------
to expense when incurred. Costs of software developed internally by us for
use in our operations are accounted for under the American Institute of
Certified Public Accountants' Statement of Position (SOP) No. 98-1,
"Internal Use Software." In May 2000, the Emerging Issues Task Force (EITF)
reached a consensus on Issue 00-2, "Accounting for Web Site Development
Costs" and we adopted this consensus on July 1, 2000. This consensus
requires that entities treat most web site development as internal use
software under SOP No. 98-1. Under these accounting pronouncements, we
expense costs of research, including pre-development efforts related to
determining technological or product alternatives, and costs incurred for
training and maintenance. Software and web site development costs, which
include direct costs such as labor and contractors, are capitalized when it
is probable that the project will be completed and the software or web
sites will be used as intended. Costs incurred for upgrades and
enhancements to our software or web sites are capitalized when we believe
such efforts result in additional functionality. Capitalized software and
web site costs are amortized to expense over the estimated useful life of
the software or web sites, which range from one to three years. As of
December 31, 2001, there are no costs capitalized under SOP No. 98-1.
Expenses of offering - The Company accounts for specific incremental costs
--------------------
directly to a proposed or actual offering of securities as a direct charge
against the gross proceeds of the offering.
New accounting pronouncements - In July 2001, the Financial Accounting
-----------------------------
Standards Board issued Statement of Financial Accounting Standards No. 141,
Business Combinations (SFAS 141), and Statement of Financial Accounting
Standards No. 142, Goodwill and Other Intangible Assets (SFAS 142). They
also issued Statement of Financial Accounting Standards No. 143, Accounting
for Obligations Associated with the Retirement of Long-Lived Assets (SFAS
143), and Statement of Financial Accounting Standards No. 144, Accounting
for the Impairment or Disposal of Long-Lived Assets (SFAS 144), in August
and October 2001, respectively.
SFAS 141 requires all business combinations initiated after June 30, 2001
be accounted for under the purchase method. SFAS 141 supersedes APB Opinion
No. 16, Business Combinations, and Statement of Financial Accounting
Standards No. 38, Accounting for Preacquisition Contingencies of Purchased
Enterprises, and is effective for all business combinations initiated after
June 30, 2001.
SFAS 142 addresses the financial accounting and reporting for acquired
goodwill and other intangible assets. Under the new rules, the Company is
no longer required to amortize goodwill and other intangible assets with
indefinite lives, but will be subject to periodic testing for impairment.
SFAS 142 supersedes APB Opinion No. 17, Intangible Assets. Effective
January 1, 2002, the Company will adopt SFAS 142 and is evaluating the
effect that such adoption may have on its results of operations and
financial position. The Company expects that the provisions of SFAS 142
will not have a material impact on its results of operations and financial
position upon adoption.
SFAS 143 establishes accounting standards for the recognition and
measurement of an asset retirement obligation and its associated asset
retirement cost. It also provides accounting guidance for legal obligations
associated with the retirement of tangible long-lived assets. SFAS 143 is
effective in fiscal years beginning after June 15, 2002, with early
adoption permitted. The Company expects that the provisions of SFAS 143
will not have a material impact on its results of operations and financial
position upon adoption. The Company plans to adopt SFAS 143 effective
January 1, 2003.
F - 11
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT POLICIES (continued)
-----------------------------------------------------------
New accounting pronouncements (continued)
-----------------------------
SFAS 144 establishes a single accounting model for the impairment or
disposal of long-lived assets, including discontinued operations. SFAS 144
superseded Statement of Financial Accounting Standards No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be
Disposed Of (SFAS 121), and APB Opinion No. 30, Reporting the Results of
Operations-- Reporting the Effects of Disposal of a Segment of a Business,
and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions. The provisions of SFAS 144 are effective in fiscal years
beginning after December 15, 2001, with early adoption permitted, and in
general are to be applied prospectively. The Company plans to adopt SFAS
144 effective January 1, 2002 and does not expect that the adoption will
have a material impact on its results of operations and financial position.
2. FIXED ASSETS
------------
Fixed assets consist of the following as of December 31, 2001:
Furniture and fixtures $ 40,362
Computers, equipment and software 252,586
Leasehold equipment 60,801
---------------
353,749
Less: accumulated depreciation 126,111
---------------
Fixed assets, net $ 227,638
===============
3. INVESTMENTS
-----------
Isla Escondida, S.A. - The Company initiated an acquisition of Isla
---------------------
Escondida, S.A. during 1999. This acquisition was recorded using the
purchase method of accounting under APB No. 16. The results of operations
for the acquired company have been included in the financial results of the
Company from the date of such transaction forward.
In accordance with APB No. 16, all identifiable assets were assigned a
portion of the cost of the acquired company on the basis of their
respective fair values. Intangible assets were identified and valued by
considering the Company's intended use of the acquired assets and analysis
of data concerning products, technologies, markets, historical performance,
and underlying assumptions of future performance. The economic environment
in which the Company and the acquired company operate were also considered
in the valuation analysis.
In August 1999, the Company completed its acquisition of Isla Escondida,
S.A. (hereafter "777WINS"), a Costa Rica Corporation with the ability to
provide on-line gaming through its website portal www.777WINS.com. In
connection with the acquisition, the Company issued 18,710,000 shares of
the Company's common stock. Substantially the entire purchase price,
approximately $3,552,000, was allocated to goodwill, which was being
amortized on a straight-line basis over the estimated useful life of three
years.
F - 12
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (continued)
-----------
Isla Escondida, S.A. continued
--------------------
As of December 31, 1999, the Company evaluated the balance and useful life
of goodwill related to 777WINS and determined that approximately $3,302,000
had no future benefit and, accordingly, recorded a loss on investment for
the same amount. As of December 31, 2000, the Company reevaluated the
balance and useful life of the remaining goodwill related to 777WINS and
determined an impairment on such goodwill since the operations have not
commenced nor does the Company anticipate it will ever commence.
Accordingly, the Company recorded a loss for the remaining unamortized
goodwill balance related to 777WINS approximating $139,000.
During 2000, the Company cancelled 10,500,000 shares of the Company's
common stock related to the fiscal year 1999 acquisition of 777WINS. The
Company renegotiated the terms of the acquisition of 777WINS primarily due
to lack of performance of 777WINS. The cancellation of common stock has
been reflected as other income of $984,375, see Note 11 for additional
discussion.
Top Sports, S.A. - In December 1999, the Company acquired 50% of the
----------------
outstanding capital stock of Top Sports, S.A. ("Top Sports") in
consideration of $35,000, 1,000,000 shares of the Company's common stock
and 2,000,000 warrants to purchase common stock for $0.40 per share for a
total value of $108,100, of which $85,319 was comprised of goodwill. During
2000, the Company renegotiated the terms of the acquisition agreement,
whereby the Company agreed to issue an additional 1,000,000 shares valued
at $235,160. In April 2000, the Company acquired an additional 49.94% of
Top Sports in consideration of 3,000,000 shares of the Company's common
stock and 1,000,000 warrants to purchase common stock for $1.00 per share
for a total value of $2,785,867. This acquisition was recorded using the
purchase method of accounting under APB No. 16. The Company's equity
interest in Top Sports' loss for the period from January 1, 2000 through
March 31, 2000 has been recorded as a loss on equity-method investees
totaling $200,668. The results of operations from April 1, 2000 through
December 31, 2000 for the acquired company has been included in the
financial results of the Company.
During fiscal year 2000, the Company cancelled 1,000,000 shares of its
common stock related to the fiscal year 1999 acquisition of Top Sports. The
cancellation was a result of the renegotiated terms of the acquisition
agreement which called for the cancellation of the original shares issued
in 1999 and for the issuance of new shares as discussed above.
In accordance with APB No. 16, all identifiable assets were assigned a
portion of the cost of the acquired company (purchase price) on the basis
of their respective fair values. Intangible assets were identified and
valued by considering the Company's intended use of the acquired assets and
analysis of data concerning products, technologies, markets, historical
performance, and underlying assumptions of future performance. The economic
environments in which the Company and the acquired company operate were
also considered in the valuation analysis. As of December 31, 2000, the
Company evaluated the unamortized balance and useful life of goodwill
related to Top Sports and determined the balance had no future benefit and,
accordingly, recorded a loss on investment for approximately $2,788,000.
As discussed in Note 18, the Company has discontinued all operations
related to Top Sports during the fiscal year 2001.
F - 13
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (continued)
-----------
Powerclick, Inc. - In February 2000, the Company acquired 50% of the
----------------
outstanding capital stock of Powerclick, Inc. ("Powerclick") in
consideration of $750,000 and 8,000,000 shares of the Company's common
stock valued at $1,300,000 for an aggregate investment of $2,050,000 which
is principally comprised of goodwill. The Company's equity interest in
Powerclick's loss has been recorded as a loss on equity-method investees
totaling $402,770 as of December 31, 2000.
As of December 31, 2000, the Company evaluated the unamortized balance and
useful life of goodwill related to Powerclick and determined the balance
had no future benefit and, accordingly, recorded a loss on investment for
approximately $1,235,000.
During June 2000, 200,000 shares of common stock valued at $1,950,000 were
issued to Powerclick, Inc. stockholders for consulting services and
expensed as of December 31, 2000.
During March 2001, the Company evaluated and determined the remaining
$48,040 of this investment had no future benefit, accordingly, the Company
recorded a loss on investment for the remaining amount.
www.theArtAuction.com - In September 1999, the Company acquired
---------------------
www.theArtAuction.com ("ArtAuction") from Powerclick, Inc., a domain name
and website portal, to provide on-line art auctions. In connection with the
acquisition, the Company issued 2,165,000 shares of the Company's common
stock to Powerclick, Inc. Substantially the entire purchase price,
approximately $964,000, was allocated to other intangibles.
As of December 31, 1999, the Company's management has evaluated and
determined that approximately $764,000 of this investment has no future
benefit, accordingly, the Company recorded a loss on investment for the
same amount. As of December 31, 2000, the Company reevaluated the balance
and useful life of remaining goodwill related to ArtAuction and determined
the entire balance had no future benefit and, accordingly, recorded a loss
on investment for approximately $116,000.
eConnect Caribbean, S.A. - eConnect Caribbean, S.A. ("eConnect Caribbean")
------------------------
was organized under the laws of the Dominican Republic and served as the
Company's Latin American headquarters for all e-commerce transactions. The
Company owned 75% of the outstanding capital shares with the remaining 25%
owned by eConnect Caribbean's company's managing director. eConnect
Caribbean was in the start-up phase, therefore no revenue has been recorded
and start-up costs of $253,213 have been expensed. The formation of this
subsidiary was recorded using the full consolidation method.
During June 2001, the Company discontinued the use of eConnect Caribbean.
All operations related to e-commerce transactions will continue at the
Company's Headquarters in San Pedro, California. The operating results of
eConnect Caribbean have been included in the financial results of the
Company for the years ended December 31, 2001 and 2000.
Intangible asset, net - In February 1997, the Company entered into an
---------------------
agreement for the exclusive 20-year license of certain assets of ET&T. In
satisfaction of the agreement terms, the Company reduced the balance due
from related party - secured by the Company's common stock by approximately
$707,000 based upon the historical value of this license based upon the
amount of research and development costs incurred by ET&T. This other
intangible is being amortized on a straight-line basis over three years
based upon management's estimated useful life of such asset. As of December
31, 2001, the Company reevaluated the balance and useful life of the
remaining license and determined the entire balance had no future benefit
and, accordingly, recorded the remaining net balance of $216,239 as
impairment of intangible asset.
F - 14
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (continued)
-----------
National Data Funding Corporation - In connection with a "Letter of
---------------------------------
Intent", a non-binding agreement with National Data Funding Corporation
(NDFC), the Company deposited (non-refundable) $250,000. The Letter of
Intent requires the Company to pay the stockholders of NDFC $10,000,000,
10,000,000 shares of the Company's common stock in exchange for 100%
ownership, and contribute to NDFC $1,000,000 and 1,000,000 shares of the
Company's common stock for working capital. Pursuant to the "Letter of
Intent", the Company is required to "spin off" NDFC as a publicly traded
company in which the Company will retain a 25% ownership. The Letter of
Intent expired on September 1, 2000. During September 2000, the Company
evaluated and determined the deposit of $250,000 of this investment has no
future benefit, accordingly, the Company recorded a loss on investment for
the same amount.
In October 2000, the Company entered into an Agreement for Sale and Plan of
Reorganization ("NDFC Agreement") requiring the Company to pay the
stockholders of NDFC $10,000,000, 10,000,000 shares of the Company's common
stock in exchange for 50% ownership, and contribute to NDFC $1,000,000 and
1,000,000 shares of the Company's common stock for working capital.
Pursuant to the NDFC Agreement, the Company is required to make a bona fide
and good faith effort to spin off NDFC as a publicly traded company in
which the Company will retain approximately a 28% ownership. The Company
was required to complete the terms of the NDFC Agreement on October 31,
2000 ("Closing Date"). The Company did not complete the NDFC Agreement on
the Closing Date. Certain provisions within the NDFC Agreement provided for
an extension through January 2, 2001, however the Company did not complete
the terms of the NDFC Agreement within the extension date. The Company does
not plan to pursue an extended agreement with NDFC.
4. OTHER ASSETS
------------
Other assets consist of the following as of December 31, 2001:
Deposits for the purchase of inventory $ 355,000
Miscellaneous 15,509
---------------
Total other assets $ 370,509
===============
5. ACCRUED LIABILITIES
-------------------
As of December 31, 2001, accrued liabilities totaling $3,072,217 are
comprised of the following balances:
Accrued interest $ 872,629
Accrued wages 122,093
Commissions payable 642,934
Purchased software liability (see Note 15) 1,321,530
Miscellaneous 113,031
---------------
Total accrued liabilities $ 3,072,217
===============
F - 15
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
6. SETTLEMENT LIABILITIES
----------------------
Former President and Chief Operating Officer for the Company - On March 21,
------------------------------------------------------------
2000, the Company consummated an amended employment agreement with an
individual for the position of President and Chief Operating Officer for
the Company. On April 17, 2000, the Company terminated this individual as
President and Chief Operating Officer of the Company. Based upon the
amended employment agreement, the remaining salary for the term of this
agreement, would be due within 30 days upon the termination of this
individual if terminated for reasons other than good cause. In addition,
through the date of termination, all of the granted stock options and
warrants would vest and be exercisable for their entire term. Accordingly,
the termination of this individual, for reasons other than good cause,
exposed the Company to a potential liability of approximately $1,260,000
for the remaining portion of unpaid salary for the first, second, third,
and fourth years of this agreement. Furthermore, the termination
potentially accelerated the vesting of the granted stock options and
warrants consisting of 1,000,000 warrants exercisable at $1.00 per share,
6,000,000 stock options exercisable at $0.40 per share, and 1,500,000 stock
options exercisable at the lowest average daily trading price of the
Company's common stock within the first 90 days of the executive's
employment. On March 21, 2001, the former President and Chief Operating
Officer for the Company filed a complaint for breach of contract and
specific performance.
During July 2001, the Company reached a settlement with the former
President and Chief Operating Officer, whereby the Company agreed to pay
$1,006,000 consisting of an initial payment of $186,000, a second payment
of $120,000 on November 16, 2001 and 14 monthly installments of $50,000
commencing on February 16, 2002. As of December 31, 2001, the Company had a
remaining unpaid balance of $790,000 which has been included as part of
legal settlement liability totaling $1,404,700 at December 31, 2001.
Goldstake Enterprises, Inc. - On October 13, 2000, the Company borrowed
---------------------------
$200,000 from Goldstake Enterprises, Inc. (hereafter referred to as
"Goldstake") which became due and payable on January 13, 2001. The Company
also had various consulting contracts with Goldstake whereby the Company
agreed to issue shares and pay a percentage of capital raised through
Goldstake's efforts. During May 2001, the Company settled on all amounts
due to Goldstake for a total of $882,7020 of which $257,072 was paid
through issuance of 2,000,000 shares of the Company's commons stock and the
remaining $625,000 will be payable in monthly installments ranging from
$25,000 to $50,000 through October 2002. The Company reclassified this
$882,072 settlement from obligations to Goldstake of approximately $337,000
and settlement expense of $545,072 which has been reflected as part of
legal settlement totaling $1,813,231 at December 31, 2001.
As of December 31, 2001, the Company had a remaining unpaid balance of
$549,700 which has been included as part of legal settlement liability
totaling $1,404,700 at December 31, 2001.
Other settlements - For the year ended December 31, 2001, the Company
-----------------
settled various legal actions approximating $262,000 primarily resulting
form defaults on Company loans. The Company reflected these legal
settlements of approximately $262,000 as part of legal settlement totaling
$1,813,231 at December 31, 2001.
As of December 31, 2001, the Company had a remaining unpaid balance of
$65,000 which has been included as part of legal settlement liability
totaling $1,404,700 at December 31, 2001.
F - 16
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. EQUITY FUNDING LINES
--------------------
As of December 31, 2001, advances on equity funding line totaling $50,000
relates to advances from Alpha Venture Capital, Inc. related to the
Regulation D Common Stock Private Equity Line Subscription Agreement. The
advances are due on demand and bear no interest. The Company plans on
converting these advances as a draw on the Regulation D Common Stock
Private Equity Line Subscription Agreement in fiscal year 2002.
In September 1999, the Company entered into a Regulation D Common Stock
Private Equity Line Subscription Agreement ("Subscription Agreement") with
Alpha Venture Capital, Inc. ("Alpha"). The Subscription Agreement entitles
the Company to draw funds up to $5,000,000 from issuance of its common
stock for an amount equal to 80% of the market value at the time of each
draw request, expiring September 2000, subject to certain terms and
conditions. The Subscription Agreement required the Company to deliver an
aggregate of 1,000,000 five year warrants to purchase its common stock at
an exercise price equal to 80% of the closing bid price on the execution of
this agreement as a commitment fee. Furthermore, the Company is required to
deliver to Alpha up to a maximum of 500,000 warrants on a pro rata basis in
conjunction with the draw request, exercisable at the closing bid price at
the date of each draw request. In October 2000, the Company was granted a
one-year extension on its Subscription Agreement with one automatic
six-month extension and an overall increase in funds it may draw by an
additional $5,000,000. Pursuant to the October 2000 extension, the Company
is required to deliver an aggregate of 2,000,000 five year warrants to
purchase its common stock at an exercise price equal to 80% of the closing
bid price on the execution of this extension. Furthermore, the Company is
required to deliver to Alpha up to a maximum of 1,571,428 warrants on a pro
rata basis in conjunction with the draw request, exercisable at the closing
bid price at the date of each draw request. The Company is assessed a
placement fee, as provided within the Subscription Agreement, for funds
drawn, which is equal to 8% of each draw.
As of December 31, 2000, the Company has drawn $7,773,000 of the available
$10,000,000, and issued approximately 22,900,000 and 6,600,000 of shares of
its common stock in conjunction with this Subscription Agreement during
fiscal years 2000 and 2001, respectively, of which approximately 6,600,000
of these shares were held by Alpha for future advances on the Subscription
Agreement. Accordingly, the 6,600,000 shares of the Company's common stock
held by Alpha is deemed unissued since no consideration has been given for
such shares and are not reflected as part of the outstanding shares of the
Company's common stock at December 31, 2000. As of December 31, 2000, the
Company recorded the commitment and placement fees as direct charges to the
gross proceeds from this Subscription Agreement for approximately
$2,331,000. During fiscal year 2000, Alpha exercised approximately
3,050,000 warrants of the total 5,071,000 granted related to the
Subscription Agreement.
In December 2000, the Company entered into an additional Regulation D
Common Stock Private Equity Line Subscription Agreement ("Subscription
Agreement No. 2") with Alpha as noted above. The Subscription Agreement No.
2 entitles the Company to draw funds up to $15,000,000 from issuance of its
common stock for an amount equal to 82% of the market value for the five
business days immediately following the draw request date, expiring
December 2001 with one automatic twelve month extension if at least 20% of
the subscription amount is drawn during the first six months as of the
agreement date, subject to certain terms and conditions. The Subscription
Agreement No. 2 requires the Company to file a registration statement on
Form SB-2 with the Securities and Exchange Commission ("Registration
Statement") for the registration of common stock for future issuance
related to the Subscription Agreement No. 2. The Subscription Agreement No.
2 also requires the Company to deliver an aggregate of 2,000,000 five year
warrants to purchase its common stock at an exercise price equal to the
lesser of 40% of the closing bid price of the Company's common stock at the
agreement date or 40% of the average five day closing bid price as of the
date of the effectiveness the Registration Statement. Furthermore, the
Company is required to deliver to Alpha up to a maximum of 1,000,000
warrants on a pro rata basis in conjunction with the draw request,
exercisable at the closing bid price at the date of each draw request. The
Company is assessed a placement fee, as provided within the Subscription
Agreement No. 2, for funds drawn, which is equal to 8% of each draw.
F - 17
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
7. EQUITY FUNDING LINES (continued)
--------------------
As of December 31, 2000, the Company has not drawn upon the Subscription
Agreement No. 2. Furthermore, no warrants were exercised of the total
3,000,000 warrants granted related to the Subscription Agreement No. 2.
As of December 31, 2001, the Company has drawn $1,316,671 of the available
$15,000,000, and issued approximately 20,389,000 of shares of its common
stock in conjunction with Subscription Agreement No. 2 during fiscal year
2001. As of December 31, 2001, the Company recorded the commitment and
placement fees as direct charges to the gross proceeds from this
Subscription Agreement for approximately $495,911. During fiscal year 2001,
Alpha exercised approximately 4,000,000 warrants of the total granted
related to both Subscription Agreements, yielding an additional $160,000 to
the Company.
In October 2001, the Company entered into an additional Regulation D Common
Stock Purchase Agreement ("Subscription Agreement No. 3") with Alpha.
Subscription Agreement No. 3 entitles the Company to draw funds up to
$20,000,000 from issuance of its common stock for an amount equal to 85% of
the market value for the five business days immediately following the draw
request date, expiring in October 2002. Simultaneous with the execution of
the Agreement, the Company is required to deliver 105,000,000 shares of
common stock to be held in escrow, pursuant to the terms of the escrow
agreement. Subscription Agreement No. 3 requires the Company to file a
registration statement on Form SB-2 with the Securities and Exchange
Commission ("Registration Statement") for the registration of common stock
for future issuance related to the Agreement. Subscription Agreement No. 3
also requires the Company to issue warrants amounting to 10,500,000 five
year warrants to purchase its common stock at an exercise price equal to
the lesser of (a) $0.07 or (b) 85% of the average of the five closing bid
prices following the effective date of the Registration Statement. The
Company is assessed a placement fee, as provided within Subscription
Agreement No. 3, for funds drawn, which is equal to 6% of each draw.
As of December 31, 2001, the Company has drawn $1,109,000 of the available
$20,000,000, and issued approximately 63,271,000 of the shares held in
escrow. As of December 31, 2001, the Company recorded the commitment and
placement fees as direct charges to the gross proceeds from Subscription
Agreement No. 3 for approximately $278,985. Of the escrow shares,
approximately 46,738,587 were held by the Escrow Agent for future advances
and drawdowns. Accordingly, the 46,738,587 shares of the Company's common
stock held by the Escrow Agent for the Alpha is deemed unissued since no
consideration has been given for such shares and are not reflected as part
of the outstanding shares of the Company's common stock at December 31,
2001.
8. NOTES PAYABLE
-------------
As of December 31, 2001, notes payable totaling $1,697,789 are comprised of
promissory notes from various individuals, secured by Company assets, and
bearing annual interest rates ranging from 10% to 11%. As of December 31,
2001, the Company is currently in default on these notes as a result of
past due maturities and delinquent interest payments.
F - 18
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
9. EMPLOYMENT AGREEMENT
--------------------
During fiscal year 2000, the Company entered into an employment agreement
with its principal accountant. The agreement has a term through June 5,
2002. The agreement provides for a base compensation of approximately
$260,000 and performance based increases. Furthermore, the agreement
provided a signing bonus comprised of a stock option for 750,000 shares of
the Company's common stock at an exercise price of 25% of the prevailing
market price; and a warrant for 250,000 shares of the Company's common
stock at a strike price of $1.00; and cash of $100,000. The Company
recorded a stock based compensation approximating $211,000 related to the
stock options for 750,000 shares since the strike price was below fair
value at the grant date in accordance with APB No. 25, see Note 12
"Employee stock options and warrants" for additional disclosures. The
warrants for 250,000 shares of the Company's common stock weighted-average
grant date fair value approximated $0.33 per share. The Company has paid
$25,000 of the cash portion of the signing bonus and the remaining $75,000
was recorded as an accrued liability as of December 31, 2000.
10. STOCK OPTIONS AND WARRANTS
--------------------------
Employee stock options and warrants - During fiscal year 2000, the Company
-----------------------------------
granted options and warrants for 6,800,000 shares of its common stock to
employees. The strike price of 6,550,000 shares is at 25% of the bid price
upon the date of exercise, and the remaining 250,000 shares has a strike
price of $1.00. The Company recorded stock based compensation of
approximately $2,560,000 related to these stock options and warrants for
6,550,000 shares since the strike price was below the fair value at the
grant date in accordance with APB No. 25. Certain stock options and
warrants were granted in connection with an employment agreement entered
into during fiscal year 2000, see Note 9. Certain stock options and
warrants were exercisable upon grant and have a life ranging from 4 years
to indefinitely. The following table summarizes the Company's employee
stock options and warrants activity:
Number Weighted
Of Average
Warrants Exercise Price
------------ --------------
Balance, December 31, 1999 -- $ --
Warrants granted 6,800,000 0.16
Warrants canceled -- --
Warrants expired -- --
Warrants exercised -- --
------------ -------------
Balance, December 31, 2000 6,800,000 0.16
Warrants granted -- --
Warrants canceled -- --
Warrants expired -- --
Warrants exercised 567,142 0.03
------------ -------------
Balance, December 31, 2001 6,232,858 $ 0.16
============ =============
The options and warrants for 6,550,000 shares weighted average exercise
price used in the preceding table is based upon 25% of the fair value at
the grant date, and 250,000 shares based upon an exercise price of $1.00
Pro forma disclosure - SFAS No. 123 requires companies that follow APB
--------------------
No. 25 to provide a pro forma disclosure of the impact of applying the fair
value method of SFAS No. 123. Accordingly, had compensation cost of
approximately $3,055,000 been recognized based on the fair value at the
date of grant for employee options granted in fiscal year 2000, the pro
forma amounts of the Company's net loss and net loss per share for the year
ended December 31, 2000 would have been as follows:
F - 19
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS AND WARRANTS (continued)
--------------------------
Employee stock options and warrants (continued)
-----------------------------------
December 31,
2000
--------------
Net loss - as reported $(114,661,887)
Net loss - pro forma $(117,717,053)
Basic and diluted loss per share - as reported $ (0.66)
Basic and diluted loss per share - pro forma $ (0.68)
The Company estimates the fair value of stock option and warrant granted to
employees using the Black-Scholes option pricing-model with the following
assumptions used for grants in 2000 using specific grant dates; no dividend
yield; expected volatility of 318%; risk free interest rates of 5.59%; and
expected lives of 1.5 years for all non-employee stock warrants.
The following tables summarizes information about options and warrants
granted, outstanding and exercisable at December 31, 2001:
Shares Underlying
Shares Underlying Options Outstanding Options Exercisable
------------------------------------------------ --------------------------
Weighted
Shares Average Shares
Underlying Remaining Weighted Underlying Weighted
Options Contractual Average Options Average
Exercise Price Outstanding Life Exercise Price Exercisable Exercise
--------------- --------------- ------------- --------------- ------------ ------------
$ 0.16 6,232,858 3 years $ 0.16 6,232,858 $ 0.16
=============== ============== ============= =============== ============ =============
$0.40 Stock warrants - During fiscal year 1999, the Company granted
--------------------
approximately 13,770,000 stock warrants with an exercise price of $0.40
($0.40 warrants) per share for its common stock. These stock warrants were
granted in connection with common stock sold during fiscal year 1998 and
1999. These stock warrants were exercisable upon issuance and expired on
December 31, 2000. The following table summarizes the Company's $0.40
warrants activity:
Number of
Warrants Exercise Price
------------ --------------
Balance, December 31, 1999 13,770,000 $ 0.40
Warrants granted -- --
Warrants canceled -- --
Warrants expired 3,485,000 0.40
Warrants exercised 10,285,000 0.40
------------ --------------
Balance, December 31, 2000 -- --
Warrants granted -- --
Warrants canceled -- --
Warrants expired -- --
Warrants exercised -- --
------------ --------------
Balance, December 31, 2001 -- $ --
============ ==============
F - 20
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS AND WARRANTS (continued)
--------------------------
$0.50 Stock warrants - During the year ended December 31, 2000, the Company
--------------------
granted approximately 500,000 stock warrants with an exercise price of
$0.50 ($0.50 warrants) per share of its common stock. These stock warrants
were granted in connections with consulting services rendered to the
Company during fiscal year ended 2000. These stock warrants were
exercisable upon issuance expiring in May 2005. The following table
summarizes the Company's $0.50 stock warrants activity:
Number of
Warrants Exercise Price
------------ --------------
Balance, January 1, 2000 -- $ --
Warrants granted 500,000 0.50
Warrants canceled -- --
Warrants expired -- --
Warrants exercised -- --
------------ --------------
Balance, December 31, 2000 500,000 0.50
Warrants granted -- --
Warrants canceled -- --
Warrants expired -- --
Warrants exercised -- --
------------ --------------
Balance, December 31, 2001 500,000 $ 0.50
============ ==============
The Company estimates the fair value of $0.50 warrants granted to
consultants by using the Black-Scholes option pricing-model with the
following assumptions used for grants in 2000 using specific grant dates;
no dividend yield; expected volatility of 286%; risk free interest rates of
6.41%; and expected lives of 1.5 years for all non-employee stock warrants.
Accordingly, the Company recorded consulting expenses under SFAS No. 123
relating to non-statutory stock options that became exercisable upon grant
in 2000 for approximately $276,000 as of December 31, 2000.
The following table summarizes information about warrants granted during
the year ended December 31, 2000:
Exercise Price
Equals, Exceeds or
Number of is Less Than Mkt. Weighted Weighted
Options Granted Price of Stock Average Range of Average
During 2000 on Grant Date Exercise Price Exercise Price Fair Value
---------------- ------------------ ---------------- --------------- ---------------
-- Equals $ -- $ -- $ --
-- Exceeds $ -- $ -- $ --
500,000 Less Than $ 0.50 $ 0.50 $ 0.55
---------------- ---------------- --------------- ---------------
500,000 $ 0.50 $ 0.50 $ 0.55
================ ================ =============== ===============
F - 21
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS AND WARRANTS (continued)
--------------------------
$1.00 Stock warrants - During the year ended December 31, 2001 and 2000,
--------------------
the Company granted approximately 1,050,000 and 27,140,000, respectively,
stock warrants with an exercise price of $1.00 ($1.00 warrants) per share
of its common stock. These stock warrants were granted in connections with
common stocks sold, consulting services rendered, satisfaction of debts,
and legal settlements during fiscal year ended 2001 and 2000. Stock
warrants related to 27,140,000 shares were exercisable upon issuance
expiring at various dates ranging from June 2002 through October 2003.
Stock warrants related to 1,050,000 shares were exercisable upon issuance
with no expiration dates. The following table summarizes the Company's
$1.00 stock warrants activity:
Number of
Warrants Exercise Price
------------ --------------
Balance, December 31, 1999 -- $ --
Warrants granted 27,140,000 1.00
Warrants canceled -- --
Warrants expired -- --
Warrants exercised -- --
------------- --------------
Balance, December 31, 2000 27,140,000 1.00
Warrants granted 1,050,000 1.00
Warrants canceled -- --
Warrants expired -- --
Warrants exercised -- --
------------- --------------
Balance, December 31, 2001 28,190,000 $ 1.00
============= ==============
The Company estimates the fair value of $1.00 warrants granted to
consultants by using the Black-Scholes option pricing-model with the
following weighted average assumptions used for grants in 2001 and 2000; no
dividend yield; expected volatility of 316% and 280%, respectively; risk
free interest rates of 5.6% and 6.2%, respectively; and expected lives of
1.5 years for all non-employee stock warrants. Accordingly, the Company
recorded consultant expenses under SFAS No. 123 relating to non-statutory
stock options that became exercisable upon grant in 2001 and 2000 for
approximately $275,000 and $30,756,000, respectively, as of December 31,
2001 and 2000.
The following table summarizes information about warrants granted during
the years ended December 31, 2001 and 2000:
Exercise Price
Equals, Exceeds or
Number of is Less Than Mkt. Weighted Weighted
Options Granted Price of Stock Average Range of Average
During 2001 on Grant Date Exercise Price Exercise Price Fair Value
---------------- ----------------- ---------------- --------------- ----------------
-- Equals $ -- $ -- $ --
1,050,000 Exceeds $ 1.00 $ 1.00 $ 0.26
-- Less Than $ -- $ -- $ --
---------------- ---------------- --------------- ---------------
1,050,000 $ 1.00 $ 1.00 $ 0.26
================ ================ =============== ===============
Exercise Price
Equals, Exceeds or
Number of is Less Than Mkt. Weighted Weighted
Options Granted Price of Stock Average Range of Average
During 2000 on Grant Date Exercise Price Exercise Price Fair Value
---------------- ----------------- ---------------- --------------- ---------------
-- Equals $ -- $ -- $ --
-- Exceeds $ -- $ -- $ --
27,140,000 Less Than $ 1.00 $ 1.00 $ 1.13
---------------- ---------------- --------------- ---------------
27,140,000 $ 1.00 $ 1.00 $ 1.13
================ ================ =============== ===============
F - 22
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS AND WARRANTS (continued)
--------------------------
Consultant options - During the year ended December 31, 2000, the Company
------------------
granted approximately 6,100,000 stock options for its common stock to
consultants in connection with consulting services performed during fiscal
year 2000. The exercise price of these stock option is $0.40 per share if
exercised on or before December 31, 2000; thereafter the exercise price
will be 25% of the fair market value on the date of the exercise.
Approximately 5,169,000 of these stock warrants are exercisable at
December 31, 2001. The following table summarizes the Company's consultant
stock warrants activity:
Number Weighted
Of Average
Warrants Exercise Price
------------- ---------------
Balance, December 31, 1999 -- $ --
Warrants granted 6,100,000 0.14
Warrants canceled -- --
Warrants expired -- --
Warrants exercised -- --
------------- ---------------
Balance, December 31, 2000 6,100,000 0.14
Warrants granted -- --
Warrants canceled -- --
Warrants expired -- --
Warrants exercised 930,870 0.41
------------- ---------------
Balance, December 31, 2001 5,169,130 $ 0.14
============= ===============
The weighted average exercise price of these warrants were based on the 30
day average fair value at December 31, 2000. The following tables
summarizes information about options granted, outstanding and exercisable
at December 31, 2001:
Shares Underlying
Shares Underlying Options Outstanding Options Exercisable
------------------------------------------------- ------------------------------
Weighted
Shares Average Shares
Underlying Remaining Weighted Underlying Weighted
Options Contractual Average Options Average
Exercise Price Outstanding Life Exercise Price Exercisable Exercise
----------------- ------------- ----------- -------------- ----------- ------------
$ 0.01 5,169,130 3 years $ 0.01 5,169,130 $ 0.01
=============== ============= =========== ============== ============ ===============
The Company has recorded consulting expense for past services during 2000
based upon the grant date since it provides more reliable measurement. The
Company estimates the fair value of consultant options granted by using the
Black-Scholes option pricing-model with the following weighted average
assumptions used for grants in 2000; no dividend yield; expected volatility
of 318%; risk free interest rates of 6.0%; and expected lives of 1.5 years
for all non-employee stock warrants. Accordingly, the Company recorded
consultant expenses under SFAS No. 123 relating to non-statutory stock
options that became exercisable upon grant in 2000 for approximately
$3,216,000 for the year ended December 31, 2000.
F - 23
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS AND WARRANTS (continued)
--------------------------
Richard Epstein stock warrants - During the year ended December 31, 2000,
------------------------------
the Company granted approximately 8,800,000 stock warrants for its common
stock to Richard Epstein, a significant stockholder, in connection with
financing provided by Mr. Epstein to the Company during fiscal year 2000.
The exercise price of these stock warrants primarily range from $0.25 to
$0.40. Approximately 2,000,000 of these stock warrants are exercisable at
50% below the closing bid price upon the date of exercise. These stock
warrants were exercisable upon grant and will expire on June 2002 through
September 2003. During 2001, the Company cancelled stock warrants related
to 6,800,000 shares issued in 2000 and subsequently reissued stock warrants
for 6,800,000 shares in during 2001. The reissued stock warrants for
6,800,000 shares were exercisable upon grant with an exercise price of 50%
below the closing bid price upon the date of exercise. The following table
summarizes the Company's consultant stock warrants activity:
Number Weighted
Of Average
Warrants Exercise Price
------------- --------------
Balance, January 1, 2000 -- $ --
Warrants granted 8,800,000 0.48
Warrants canceled -- --
Warrants expired -- --
Warrants exercised -- --
------------- --------------
Balance, December 31, 2000 8,800,000 0.48
Warrants granted 6,800,000 0.01
Warrants canceled 6,800,000 0.48
Warrants expired -- --
Warrants exercised 2,000,000 0.04
------------- --------------
Balance, December 31, 2001 6,800,000 $ 0.02
============= ==============
The warrants for 6,800,000 shares outstanding at December 31, 2001,
weighted average exercise price used in the preceding table is based upon
50% of the closing bid price at December 31, 2001.
The Company estimates the fair value of Mr. Epstein's stock warrants by
using the Black-Scholes option pricing-model with the following assumptions
used for grants in 2001 and 2000 using specific grant dates; no dividend
yield; expected volatility of 316% and 295%; respectively, risk free
interest rates of 5.59% and 6.22%; respectively, and expected lives of 2
months and 1.5 years, respectively, for all non-employee stock warrants.
Accordingly, the Company recorded costs under SFAS No. 123 relating to
non-statutory stock options that became exercisable upon grant in 2001 and
2000 for approximately $88,400 and $4,672,000 as of December 31, 2001 and
2000, respectively.
The following table summarizes information about warrants granted during
the year ended December 31, 2001 and 2000:
Exercise Price
Equals, Exceeds or
Number of is Less Than Mkt. Weighted Weighted
Options Granted Price of Stock Average Range of Average
During 2001 on Grant Date Exercise Price Exercise Price Fair Value
---------------- ----------------- ---------------- --------------- ---------------
-- Equals $ -- $ -- $ --
-- Exceeds $ -- $ -- $ --
6,800,000 Less Than $ 0.02 $ 0.02 $ 0.04
---------------- ---------------- --------------- ---------------
6,800,000 $ 0.02 $ 0.02 $ 0.04
================ ================ =============== ===============
F - 24
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS AND WARRANTS (continued)
--------------------------
Richard Epstein stock warrants (continued)
------------------------------
Exercise Price
Equals, Exceeds or
Number of is Less Than Mkt. Weighted Weighted
Options Granted Price of Stock Average Range of Average
During 2000 on Grant Date Exercise Price Exercise Price Fair Value
---------------- ----------------- ---------------- --------------- ---------------
-- Equals $ -- $ -- $ --
-- Exceeds $ -- $ -- $ --
8,800,000 Less Than $ 0.48 $ 0.48 $ 0.53
---------------- ---------------- --------------- ---------------
8,800,000 $ 0.48 $ 0.48 $ 0.53
================ ================ =============== ===============
Paul Egan stock warrants - During fiscal year 1999 and 2000, the Company
------------------------
granted 2,000,000 and 1,000,000, respectively, stock warrants for its
common stock to Paul Egan, a stockholder, in connection with the
acquisition of Top Sports, S.A. with an exercise price ranging from $0.40
to $1.00 expiring in April 2001, as discussed in Note 3. The following
table summarizes the Company's stock warrants activity related to Mr. Egan:
Number Weighted
Of Average
Warrants Exercise Price
------------- --------------
Balance, December 31, 1999 2,000,000 $ 0.40
Warrants granted 1,000,000 1.00
Warrants canceled -- --
Warrants expired 500,000 0.40
Warrants exercised -- --
------------- --------------
Balance, December 31, 2000 2,500,000 0.64
Warrants granted -- --
Warrants canceled -- --
Warrants expired 2,500,000 0.64
Warrants exercised -- --
------------- --------------
Balance, December 31, 2001 -- $ --
============= ==============
The following table summarizes information about warrants granted during
the year ended December 31, 2000:
Exercise Price
Equals, Exceeds or
Number of is Less Than Mkt. Weighted Weighted
Options Granted Price of Stock Average Range of Average
During 2000 on Grant Date Exercise Price Exercise Price Fair Value
---------------- ------------------ ---------------- --------------- ---------------
-- Equals $ -- $ -- $ --
1,000,000 Exceeds $ 1.00 $ 1.00 $ 0.15
-- Less Than $ -- $ -- $ --
---------------- ---------------- --------------- ---------------
1,000,000 $ 1.00 $ 1.00 $ 0.15
================ ================ =============== ===============
F - 25
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS AND WARRANTS (continued)
--------------------------
Alpha Venture Capital, Inc. stock warrants - As discussed in Note 7, a
------------------------------------------
total of 8,071,00 stock warrants were granted during 2000, and 2001. The
following table summarizes the Company's stock warrants activity related to
Alpha Venture Capital, Inc.:
Number Weighted
Of Average
Warrants Exercise Price
------------- --------------
Balance, January 1, 2000 1,500,000 0.22
Warrants granted 6,571,000 0.44
Warrants canceled -- --
Warrants expired -- --
Warrants exercised 3,050,000 0.20
------------- --------------
Balance, January 1, 2000 5,021,000 0.44
Warrants granted 10,500,000 0.02
Warrants canceled -- --
Warrants expired -- --
Warrants exercised 4,000,000 0.04
------------- --------------
Balance, December 31, 2001 11,521,000 $ 0.03
============= ==============
The warrants for 1,021,000 and 10,500,000 shares outstanding at December
31, 2001, weighted average exercise price used in the preceding table is
based upon 40% and 15%, respectively; of the closing bid price at December
31, 2001.
The following tables summarizes information about options outstanding and
exercisable at December 31, 2001:
Shares Underlying
Shares Underlying Options Outstanding Options Exercisable
--------------------------------------------------- ------------------------------
Weighted
Shares Average Shares
Underlying Remaining Weighted Underlying Weighted
Options Contractual Average Options Average
Exercise Price Outstanding Life Exercise Price Exercisable Exercise
--------------- --------------- ------------ -------------- -------------- ------------
$ 0.03 11,521,000 1.5 years $ 0.03 11,521,000 $ 0.03
=============== =============== ============ ============== ============== ============
F - 26
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
10. STOCK OPTIONS AND WARRANTS (continued)
--------------------------
James Clinton's stock warrant - During the year ended December 31, 2001,
-----------------------------
the Company granted to James Clinton, a stockholder, stock warrants for
5,000,000 shares of its common stock with an exercise price equal to the
closing bid price of its common stock upon the date of exercise. These
stock warrants were granted in connection with a license agreement, as
discussed further in Note 14, Ownership interest related to agreement to
license assets rendered, during fiscal year ended 2001. These stock
warrants were exercisable upon issuance, expiring during December 2005. The
following table summarizes Mr. Clinton's stock warrant activity:
Number of
Warrants Exercise Price
---------- ---------------
Balance, December 31, 1999 -- $ --
Warrants granted -- ---
Warrants canceled -- --
Warrants expired -- --
Warrants exercised -- --
------------- ---------------
Balance, December 31, 2000 -- --
Warrants granted 5,000,000 0.03
Warrants canceled -- --
Warrants expired -- --
Warrants exercised -- --
------------- ---------------
Balance, December 31, 2001 5,000,000 $ 0.03
============= ===============
The Company estimates the fair value of Mr. Clinton's stock warrants
granted by using the Black-Scholes option pricing-model with the following
weighted average assumptions used for grants in 2001; no dividend yield;
expected volatility of 267%; risk free interest rates of 2.1%; and expected
lives of 6 months. Accordingly, the Company recorded consultant expenses
under SFAS No. 123 relating to non-statutory stock options that became
exercisable upon grant in 2001 for approximately $120,000 as of December
31, 2001.
The following table summarizes information about warrants granted during
the years ended December 31, 2001:
Exercise Price
Equals, Exceeds or
Number of is Less Than Mkt. Weighted Weighted
Options Granted Price of Stock Average Range of Average
During 2001 on Grant Date Exercise Price Exercise Price Fair Value
---------------- ----------------- ---------------- --------------- ---------------
-- Equals $ -- $ -- $ --
-- Exceeds $ -- $ -- $ --
5,000,000 Less Than $ 0.02 $ 0.02 $ 0.03
---------------- ---------------- --------------- ---------------
5,000,000 $ 0.02 $ 0.02 $ 0.03
================ ================ =============== ===============
11. CANCELLATION OF COMMON STOCK
----------------------------
During fiscal year 2000, the Company cancelled a total of 10,500,000 shares
of its common stock. As discussed in Note 3, 10,500,000 shares were
cancelled related to the fiscal year 1999 acquisition of 777WINS. The
Company recorded a total of $984,375 as other income based on the original
issuance price during fiscal year 1999.
F - 27
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. RELATED PARTY TRANSACTIONS
--------------------------
Due to related parties - As of December 31, 2001, due to related parties
----------------------
totaling $2,643,549 are comprised of the following:
Common stock due to ET&T related 8,522,000 shares provided by
ET&T for use by the Company $ 194,626
Advances from Alliance Equities (company controlled by Richard Epstein,
a significant stockholder of the Company), unsecured, bearing no
interest, to be converted to stock (see Note 20 for subsequent
payment) 300,000
Deposit related to the purchase of eCashPad terminals 250,000
Value of remaining 1,800,000 common stocks and warrants for 2,500,000
shares of the Company's common stock to be issued to Paul Egan (a
stockholder of the Company) related to the fiscal year
1999 acquisition of Top Sports, S.A., see Note 3 261,228
Advances from an affiliate, unsecured, due on demand and bearing
no interest 709,785
Advances from Paul Egan, unsecured, due on demand, and bearing
no interest 927,910
-------------
Total due to related parties $ 2,643,549
=============
Employee bonus - In January 2000, the Company issued 6,000,000 shares of
--------------
the Company's common stock to satisfy a $4,800,000 bonus payable to Thomas
S. Hughes, Chief Executive Officer and Director, incurred during fiscal
year 1999.
Satisfaction of due to related parties - In January 2001, the Company
--------------------------------------
issued 3,000,000 shares of common stock to satisfy balances due Paul Egan,
stockholder of the Company, totaling $2,712,768, related to the fiscal year
1999 acquisition of Top Sports.
Satisfaction of due to related parties and interest - During the fiscal
---------------------------------------------------
year 2001, the Company issued 51,168,462 shares of common stock to satisfy
balances due Mr. Epstein, a significant stockholder of the Company, and
Alliance Equities ("Alliance"), a Company controlled by Mr. Epstein,
totaling $3,043,317, including interest of $681,951.
In December 2001, the Company issued 7,504,724 shares of common stock to
Alliance for interest totaling $111,220.
In May 2001, the Company issued 2,000,000 shares related to warrants with a
strike price of $0.04 to Mr. Epstein, a significant stockholder of the
Company, in satisfaction of debt totaling $85,000
F - 28
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
12. RELATED PARTY TRANSACTIONS (continued)
--------------------------
Consulting agreement - In January of 2000, the Company entered into a
-------------------
Consulting Services Agreement with Richard Epstein, a significant
stockholder of the Company. Mr. Epstein has agreed to assist the Company in
developing a market for the usage of the eCash Pad for a period of three
years in exchange for 15,000,000 shares of the Company's common stock. The
amount recorded as consulting expense totaled $983,475 for the year ended
December 31, 2000. In February 2001, the Company issued Mr. Epstein
15,000,000 shares of its common stock, 5,000,000 of which satisfied the
liability of $983,475, with the remaining portion recorded as prepaid
consulting services of $1,966,950 which has been fully expensed as of
December 31, 2001.
In February 2000, the Company entered into another Consulting Services
Agreement with Mr. Epstein. Mr. Epstein agreed to provide consulting
services related to future mergers and acquisitions in behalf of the
Company for a period of 2 years in exchange for 300,000 shares of the
Company's common stock monthly for a total of 7,200,000 shares. During the
year ended 2000, the Company issued 3,300,000 shares of its common stock
totaling $3,996,630. During the year ended 2000, the Company issued a total
of 1,050,000 shares of the its common stock in advance of such services
having been rendered. Accordingly, the Company has recorded a prepaid
consulting services of $1,271,655 related to such advance issuances as of
December 31, 2000. During 2001, the Company issued an additional 1,800,000
shares of common stock to Mr Epstein for consulting services rendered
during this period and recorded consulting expenses of $2,179,980 for the
year ended December 31, 2001. As of December 31, 2001, the Company has
expensed all prepaid consulting services reflected as of December 31, 2000
totaling $1,271,655.
In July 2001, the Company entered into another Consulting Services
Agreement with Mr. Epstein. Mr. Epstein agreed to target, locate and bring
to the Company 10 strategic allies per year in respective industries
related to PERFECT transactions in exchange for 15,000,000 shares of the
Company's common stock and recorded consulting expenses totaling $849,150
for the year ended December 31, 2001.
Stock issuances to Richard Epstein for cash - In December 2001, the Company
-------------------------------------------
issued 19,000,100 shares of common stock to Mr. Epstein in exchange for
$160,000.
Other stock issuances to Alliance - In February 2001, Alliance exercised
---------------------------------
1,000,000 warrants with an exercise price of $0.20 and 911,586 warrants
with an exercise price of $0.40 to purchase 1,911,586 shares of the
Company's common stock in exchange for $564,000.
In May 2001, the Company issued 3,550,000 shares of common stock to
Alliance for other consulting services and recorded consulting expenses
totaling $345,131 for the year ended December 31, 2001.
F - 29
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
13. STOCK BASED COMPENSATION
------------------------
As of December 31, 2000 and 2001, the Company incurred expenses resulting
from stock warrants and common stock issued totaling $83,441,323 and
$10,628,159, respectively. The following table summarizes the Company's
stock based compensation activities based on the accounts shown on the
statements of operations:
December 31, December 31,
2000 2001
--------------- ----------------
Consulting $ 9,273,783 $ 66,496,629
Public relations -- 2,677,381
Research and development -- 3,001,042
Wages -- 2,562,494
Investor relations -- 1,173,395
Financing fees -- 4,671,559
Professional fees -- 639,903
Interest expense 1,474,376 2,219,429
--------------- ----------------
Total stock based compensation $ 10,748,159 $ 83,441,832
=============== ================
14. COMMITMENTS AND CONTINGENCIES
-----------------------------
Legal proceedings - During fiscal year 2000, a class action litigation was
----------------
filed asserting the Company and Thomas S. Hughes (an officer and director
of the Company), as well as the directors of the Company (in certain
actions), have violated Section 10(b) of the Exchange Act (false or
misleading statements and omissions which deceived stock purchasers) and
also Section 20(a) of the Exchange Act (liability as a "controlling person"
with respect to a primary violation of securities laws). The principal
allegations concern various material misrepresentations and omissions which
allegedly made the Company's public statements, on and after November 18,
1999, false and misleading; and artificially inflated the market for the
Company's common stock. The Company reached a settlement in principle with
the plaintiffs, pursuant to which $350,000 was paid to plaintiffs' counsel
to be held in escrow during fiscal year 2000. A warrants component of the
settlement is still being finalized with the plaintiffs' counsel which will
calls for the issuance of 5,000,000 stock warrants of the Company's common
stock exercisable over ten years from the date of issuance with a strike
price of $1.00 per share. The Company anticipates that the settlement will
be negotiated in full by the second quarter in fiscal year 2001. The
Company has recorded the 5,000,000 stock warrants as a legal settlement
expense totaling $1,451,959 as of December 31, 2000.
On July 15, 2001, two stockholders filed a claim asserting the Company and
Thomas S. Hughes (an officer and director of the Company), as well as the
directors of the Company (in certain actions), have violated Section 10(b)
of the Exchange Act (false or misleading statements and omissions which
deceived stock purchasers) and also Section 20(a) of the Exchange Act
(liability as a "controlling person" with respect to a primary violation of
securities laws). The action was voluntarily dismissed by the plaintiffs on
October 24, 2001. The same stockholders filed a compliant on February 28,
2002 asserting common law fraud claims against the Company, Mr. Hughes, as
well as other directors of the Company. The Company's management intends to
contest this case vigorously.
On October 25, 2001, a stockholder filed an action asserting common law
fraud claims against the Company, Mr. Hughes, and directors of the Company.
This stockholder seeks to recover compensatory damages in the amount of
$25,000, as well as punitive damages and attorneys' fees. The Company's
management intends to contest the case vigorously.
F - 30
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
14. COMMITMENTS AND CONTINGENCIES (continued)
-----------------------------
On August 29, 2001, two stockholders filed a claim asserting the Company
and Thomas S. Hughes (an officer and director of the Company), as well as
the directors of the Company (in certain actions), have violated Section
10(b) of the Exchange Act (false or misleading statements and omissions
which deceived stock purchasers) and also Section 20(a) of the Exchange Act
(liability as a "controlling person" with respect to a primary violation of
securities laws). The plaintiffs in this action are seeking compensatory
damages in an unspecified amount. The Company's management intends to
contest the case vigorously.
While the results of these matters cannot be predicted with certainty, the
Company's management believes that losses, if any, resulting from the
ultimate resolution of these matters will not have a material adverse
effect on the Company's results of operations, cash flows or financial
position. However, unfavorable resolution could affect the results of
operations or cash flows for the years in which they are resolved.
Ownership interest related to agreement to license assets - As a provision
---------------------------------------------------------
of the license agreement with ET&T dated February 18, 1997, as discussed in
Note 1, it is the intention of the parties thereto that if and when any
additional shares of the common stock of the Company are issued to the
public or any employees, ET&T's ownership interest in the Company shall be
and remain no less than 60% and that ownership interest of the stockholder
of the Company, which consisted solely of James Clinton on the date of the
agreement, shall be and remain no less than 10%.
Between June 9, 1999 and February 2, 2000, the Company issued a total of
2,950,000 shares of the Company's common stock to James Clinton or his
nominees pursuant to the 10% provision of the license agreement. The common
shares issued under this provision of the license agreement were issued
without any consideration and therefore may not have been issued in
compliance with Missouri and Nevada Revised Statutes.
On December 1, 2001, the Company entered into an agreement with James
Clinton in connection with the provision of the license agreement, whereby
the Company granted warrants to purchase 5,000,000 shares the Company's
common stock with an exercise price equal to the closing bid price on the
date of the exercise. Additionally, Mr. Clinton will be granted warrants
for 5,000,000 shares of the Company's common stock each quarter with an
exercise price of 50% of the closing bid price on the date such warrants
are exercised beginning after the first quarter of 2002 until at such time
Mr. Clinton has acquired warrants which together with current holdings
equal 10% of the issued and outstanding common stock of the Company. The
initial warrants for 5,000,000 shares of common stock granted in December
2001 will be exercisable at any time until December 31, 2005, and the
warrants to be issued quarterly in the future will be exercisable upon
grant for an exercise period of four years.
During 2002, ET&T also enforced this provision of the license agreement to
the extent of voting rights as discussed further in Note 20.
Leased facilities - The Company operates from a leased facilities under a
-----------------
noncancellable operating leases. The Agreements calls for an annual base
rent of approximately $146,000 with a variable escalation rate. As of
December 31, 2001 and 2000, total rent expense for the leased facility
approximated $168,000 and $95,000, respectively.
Future minimum rental payments required under the operating lease for the
office facility as of December 31, 2001, are as follows:
2002 $ 125,000
2003 44,000
--------------
$ 169,000
==============
F - 31
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
15. LOSS ON PURCHASED SOFTWARE
--------------------------
During July 2001, the Company returned the purchased software acquired
during fiscal year 2000, related to licenses to use the Connex software
system for processing eCommerce transactions. The purchased software was
recorded at its historical cost of $2,169,000 and purchased software
liability in the same amount. As of December 31, 2001, the Company had
recorded an accumulated amortization expense of approximately $1,195,000.
As a result of the returned purchased software, the Company removed the
capitalized purchased software along with the accumulated amortization
expense, a net $974,000, and reduced purchase software liability by
approximately $912,000. The remaining balance of $61,694 related to the
removal the purchased software along with the accumulated amortization was
recorded as loss on purchased software within the statements of operations
as of December 31, 2001.
16. LOSS ON OTHER ASSET
-------------------
In June 2001, the Company entered into an agreement to resell internet
merchant sites in exchange for $150,000, of which the Company paid
$124,930. As of December 31, 2001, the Company determined that the sites
were not compatible with the PERFECT technology and wrote off the entire
$124,930 as a loss on other asset on the statements of operations.
17. CANCELLATION FEE
----------------
During October 2000, the Company entered into an agreement to acquire all
the assets of Broadband Video, Inc. in exchange for 10,000,000 shares of
its common stock, 3,000,000 warrants to purchase common stock for $1.00
per share expiring on December 31, 2001. The Company did not complete nor
intends to complete this transaction and has agreed to issue 3,600,000
shares of its common stock as a cancellation fee resulting in an expense
totaling $526,212 which is reflected in the statements of operations as of
December 31, 2001.
18. DISCONTINUED OPERATIONS
-----------------------
During June 2001, the Company adopted a formal plan to discontinue its
gaming operations. As of June 30, 2001, the Company completed the closing
of all walk-in sports books located in the Dominican Republic. The assets
abandoned consisted primarily of fixed assets with a net book value of
approximately $26,000 and other assets of approximately $68,000. The
Company incurred liabilities related to the discontinued gaming operations
of approximately $792,000 as of December 31, 2001. Operating results of the
discontinued gaming operations for the years ended December 31, 2001 and
2000 are shown separately in the accompanying statement of operations
totaling $589,785 and $661,464 .
19. GOING CONCERN
-------------
The Company incurred a net loss of approximately $19,536,000 for the year
ended December 31, 2001. The Company's liabilities exceed its assets by
approximately $10,224,000, and current liabilities exceed its current
assets by approximately $10,847,000 as of December 31, 2001. These factors
raise substantial doubt about the Company's ability to continue as a going
concern. The Company's management plans to market the PERFECT technology to
in order to generate revenues in the future. The Company will also seek
additional sources of capital through a combination debt equity financing
and issuance of equity for approximately $20,000,000, but there can be no
assurance that the Company will be successful in accomplishing its
objectives.
The ability of the Company to continue as a going concern is dependent on
additional sources of capital and the success of the Company's plan. The
financial statements do not include any adjustments that might be necessary
if the Company is unable to continue as a going concern.
F - 32
eCONNECT
NOTES TO FINANCIAL STATEMENTS (CONTINUED)
20. SUBSEQUENT EVENTS
-----------------
In February 2002, the board of directors of eConnect passed a resolution
granting ET&T super-voting rights in keeping with the original formation of
eConnect in February 1997. This allows ET&T, which is controlled by Thomas
S. Hughes, president, director, and stockholder of the Company, to have a
controlling vote on issues before the Board of Directors.
In March 2002, eGS, Inc. ("eGS"), a wholly owned subsidiary of eConnect,
Inc., was formed with 35,000,000 shares of common stock authorized with a
par value of $0.001. eGS plans to raising $7,500,000 in capital through a
private placement. However, there is no certainty as to the ability to
raise such capital in the future. On March 3, 2002, the Company made an
announcement that its stockholder will receive 1 share of stock in eGS
based upon each 100 shares of common stock held in eConnect be issued to
stockholders of record as of April 3rd, 2002. The focus of eGS is to
provide services for future usages of State-regulated home Internet games.
The games will be provided by state licensed gaming providers. eGS will
provide the support services for the state regulated internet gaming
companies. eConnect will support eCashPad originated PIN debit and smart
card transactions facilitated through eGS.
In February 2002, the Company issued, 76,500,000 shares of its common stock
to Alpha Venture Capital Inc. related to Subscription Agreement No. 3 which
was placed in escrow for future advances on the equity funding line, as
discussed in Note 7.
In February 2002, the Company issued 23,200,000 shares of common stock to
Alliance Equities, (an entity controlled by Mr. Epstein who is also a
significant stockholder of the Company) in exchange for $173,600, net of
offering costs of $327,500.
In February 2002, the Company issued 6,800,000 shares of its common stock
related to Alliance Equities related to the exercise of warrants with an
exercise price of $0.01.
In February 2002, the Company issued 40,519,528 shares of its common stock
to Richard Epstein, a significant stockholder of the Company, in
satisfaction of advances from Alliance Equities of $300,000 and $183,000,
net of offering costs of $173,754.
In February 2002, the Company issued 10,000,000 shares of common stock in
satisfaction of promissory notes payable to an individual totaling
$238,050, including accrued interest of $37,250 from fiscal year 2001 and
interest expense of $125,800 related to fiscal year 2002.
F - 33
CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE
(a) On August 1, 1998, the company engaged the services of George
Brenner, C.P.A. of Beverly Hills, California, to provide an audit of the
company's financial statements for the fiscal years ended August 31, 1997 and
1998. The former accountants for the company, BDO Seidman L.L.P. of St. Louis
Missouri declined to stand for re-election for the 1997 engagement. The
independent auditor's reports for August 31, 1996 and 1995, were modified as to
the uncertainties about the company's ability to continue as a going concern.
The decision to change accountants was approved by the company's Board of
Directors with the selection of the successor accountant.
(b) Effective on July 19, 1999, the independent accountant who was
previously engaged as the principal accountant to audit the registrant's
financial statements, resigned. This accountant's report on the financial
statements for the past two years was modified as to uncertainty that the
company will continue as a going concern. The decision to change accountants was
approved by the Board of Directors.
(c) Effective on July 22, 1999, the firm of Farber & Hass was engaged
to serve as the new principal accountant to audit the company's financial
statements. During the company's two most recent fiscal years, and the
subsequent interim period prior to engaging that accountant, neither the company
(nor someone on its behalf) consulted the newly engaged accountant regarding any
matter.
(d) Effective on March 8, 2000, the independent accountants who were
previously engaged as the principal accountants to audit the company's financial
statements were dismissed. These accountants did not issue any financial
statements for the company. The decision to change accountants was approved by
the Board of Directors.
(e) Effective on March 8, 2000, the firm of L.L. Bradford & Company
was engaged to serve as the new principal accountants to audit the company's
financial statements. During the company's two most recent fiscal years, and the
subsequent interim period prior to engaging those accountants, neither the
company (nor someone on its behalf) consulted the newly engaged accountants
regarding any matter.
During the company's two most recent fiscal years and any subsequent
interim period preceding such changes, there have been no disagreements with
former accountants on any matter of accounting principles or practices,
financial statement disclosure, or auditing scope or procedure. In addition,
there were no "reportable events" as described in Item 304(a)(1)(iv)(B)1 through
3 of Regulation S-B that occurred within the company's two most recent fiscal
years and the subsequent interim period preceding such changes.
F-34
AVAILABLE INFORMATION
The company has filed with the U.S. Securities and Exchange
Commission, Washington, D.C. 20549, a Registration Statement on Form SB-2 under
the Securities Act of 1933 with respect to the shares of common stock offered by
this prospectus. This prospectus does not contain all of the information set
forth in the registration statement and the exhibits and schedules filed with
the registration statement. Certain items are omitted in accordance with the
rules and regulations of the Commission. For further information with respect
to the company and the common stock offered by this prospectus, reference is
made to the registration statement and the exhibits and schedules filed with the
registration statement. Statements contained in this prospectus as to the
contents of any contract or any other document referred to are not necessarily
complete, and in each instance, reference is made to the copy of such contract
or other document filed as an exhibit to the registration statement, each such
statement being qualified in all respects by such reference.
A copy of the registration statement, and the exhibits and schedules filed
with it, may be inspected without charge at the public reference facilities
maintained by the Commission in Room 1024, 450 Fifth Street, N.W., Washington,
D.C. 20549, and copies of all or any part of the registration statement may be
obtained from such office upon the payment of the fees prescribed by the
Commission. The public may obtain information on the operation of the public
reference room by calling the Commission at 1 (800) SEC-0330. The Commission
maintains a World Wide Web site that contains reports, proxy and information
statements and other information regarding registrants that file electronically
with the Commission, including the company. The address of the site is
http://www.sec.gov. The registration statement, including all its exhibits and
any amendments, has been filed electronically with the Commission.
F-35
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF OFFICERS AND DIRECTORS
Information on this item is set forth in the propsectus under the
heading "Disclosure of Commission Position on Indemnification for Securities Act
Liabilities."
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the fees and expenses in connection
with the issuance and distribution of the securities being registered hereunder,
all of which are being paid by the company*:
Securities and Exchange Commission registration fee $ 197.31
Transfer agent's fees 1,000
Printing and engraving expenses 2,500
Legal fees and expenses 25,000
Accounting fees and expenses 5,000
-------
Total $34,697*
=======
* All fees, except the Securities and Exchange Commission registration fee, are
estimated.
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES; USE OF PROCEEDS FROM SALE OF
REGISTERED SECURITIES
Sales of Unregistered Securities.
Other than as set forth below, during the last three years there have
not been any sales of unregistered securities of the company:
II-1
(a) Period beginning October 1, 1999, through December 31, 1999:
(1) During the period of April 7, 1999 through November 24, 1999, the
company issued a total of 4,484,500 shares of common stock valued at $1,348,550
(or $0.30 per share) to 14 individuals and firms in exchange for consulting and
other services to the company.
(2) In October 1999, the company issued warrants in connection with a
consulting agreement with International Investor Relations Group valued at
$225,000, as follows: (i) a warrant covering 100,000 shares of common stock,
exercisable at $0.50 per share; (ii) a warrant covering 100,000 shares of common
stock, exerciable at $0.75 per share; and (iii) a warrant covering 100,000
shares of common stock, exercisable at $1.00 per share.
(3) In December 1999, the company issued 1,000,000 shares of common
stock in connection with the acquisition of a 50% interest in TopSports, S.A.
valued at $250,000.
(4) During fiscal year 1999, the company granted approximately
13,770,000 stock warrants with an exercise price of $0.40 per share for its
common stock. These stock warrants were granted in connection with common stock
sold during fiscal year 1998 and 1999, and consulting services rendered to the
company during fiscal year 1999. These stock warrants were exercisable upon
issuance and expired on December 31, 2000. The value of these warrants was
$50,000.
II-2
(b) Fiscal Year Ended December 31, 2000:
The company made the following sales of unregistered securities during
the fiscal year ended December 31, 2000:
(1) On January 10, 2000, the company issued a total 666,667 shares of
common stock to satisfy certain accounts payable by the company in the amount of
$550,000.
(2) On January 11, 2000, the company issued 6,000,000 shares of
common stock to Mr. Hughes in satisfaction of a bonus payable of $400,000.
(3) On February 2, 2000, the company issued a total of 1,100,000
shares of common stock for James Clinton or his nominees based on the stated
reason that compliance with a 10% ownership provision contained in a 1997
license agreement was required. Shares issued under this provision of this
license agreement were not issued for new consideration. See "Certain
Relationships and Related Transactions."
(4) During the period of February 2, 2000 through December 28, 2000,
the company issued a total of 19,509,719 shares of common stock to 43
individuals and firms in exchange for consulting and other services performed
for the company in the amount of $7,803,887.
(5) During February 2000, the company issued a total 570,000 shares
of common stock in connection with employee compensation and bonuses in the
amount of $182,400.
(6) Between February 2, 2000 and October 3, 2000, the company sold a
total of 3,335,762 shares of common stock to 129 individuals at a price of $0.40
per share, for an aggregate consideration of $1,330,969; 472,500 of these shares
had warrants attached to them, exercisable at $1.00 per share for the period of
January 1, 2001 through June 30, 2002. In connection with these sales,
2,500,000 shares of common stock were issued on April 4, 2000 to two individuals
for finder's fees (included within the total issuances under paragraph (d)).
(7) On March 22, 2000, the company issued 6,000,000 of its common
stock for the acquisition of PowerClick, Inc., valued at $975,000 (2,000,000
additional free trading shares
II-3
were issued in connection with this acquisition, for a total value of this
acquisition of $1,300,000).
(8) During the first quarter of 2000, the company issued warrants at
$1.00 per share covering a total of 14,430,060 shares of common stock to 13
individuals under various warrant agreements for consulting services to the
company, exercisable at $1.00 per share from June 30, 2000 through June 30,
2002. The consulting services were valued at $5,000.
(9) On April 4, 2000, the company issued a warrant covering 300,000
shares of common stock in connection with a consulting agreement valued at
$10,000 entered into on that date by the company, exercisable at $1.00 per share
from January 1, 2001 through June 30, 2002.
(10) On May 24, 2000, the company issued two warrants covering a
total of 500,000 shares of common stock, exercisable at $0.50 through May 24,
2005 under a warrant agreement with GunnAllen Financial, Inc. in connection with
this firm's services in assisting the company to become relisted on the Over the
Counter Bulletin Board valued at $20,000.
(11) On June 15, 2000, the company sold 3,000,000 shares of common
stock to an individual for $500,000 cash ($0.16 per share).
(12) On July 11, 2000, the company issued two warrants to two
individuals covering a total of 600,000 shares of common stock, exercisable at
$1.00 per share for the period of January 1, 2001 through June 30, 2002, for
consulting services rendered to the company valued at $15,000.
(13) On July 12, 2000, the company granted to an individual an option
to purchase 4,400,000 shares of common stock of the company, exercisable upon
issuance at $1.00 per share through July 12, 2002 (3,080,000 of the total was
granted as payment of all accured interest under a $500,000 loan made by this
individual to the company; the remaining 1,320,000 were granted as compensation
for consulting services rendered to the company).
(14) On October 21, 2000, the company issued a warrant covering the
purchase of 4,000,000 shares of common stock to PowerClick, Inc., exercisable
upon issuance at $1.00 per share through October 21, 2003 (issued in connection
with the settlement of litigation between that firm and the company, as
disclosed in the Form 10-QSB filed on November 14, 2000). The consideration for
the warrants was valued at $25,000.
(15) At various times in the fourth quarter of 2000, the company
issued warrants to Alpha Venture Capital, Inc. for the purchase common stock
totaling 6,571,428 shares, as follows: (i) a warrant to purchase 2,000,000
shares of common stock, exercisable upon issuance in connection with the
purchase agreement between the company and this company, dated Decemnber 8,
2000, at a price equal to the lesser of (a) 40% of the closing bid price of the
stock on that date ($0.44), or (b) 40% of the average five day closing bid price
as of the effective date of this registration statement; (ii) a warrant to
purchase 1,000,000 shares of common stock on a pro rata basis in conjunction
with draw downs under that agreement, exercisable at the close bid price at the
date of each draw down; and (iii) a warrant to purchase 3,571,428 shares of
common stock, exercisable at $0.08 per share as calculated under that addendum
(dated October 23, 2000) to a previous stock purchase agreement between the
parties, dated September 28, 1999.
II-4
(16) On November 7, 2000, the company's board of directors approved
an Amended and Restated Stock Incentive Plan (Amendment No. 3) for the purpose
of granting stock options and restricted stock awards to employees and non-
employees of the company. A total of 11,200,000 options issued in December 2000
under this plan.
(17) From August 2, 2000 through December 19, 2000, the company
issued a total of 3,259,454 shares to 40 individuals and companies as payment of
interest under various short-term loans made to the company. The value, if these
late payments was $488,918.
(18) During fiscal 2000, the company issued a total of 2,093,565
shares of common stock upon the exercise of warrants at $0.40 per share for a
total consideration of approximately $835,000 (approximately $771,000
[1,993,488] of which consisted of services rendered to the company).
(c) Fiscal Year Ending December 31, 2001:
The company made the following sales of unregistered securities during
the fiscal year ending December 31, 2001:
(1) On January 5, 2001, the company issued a warrant covering the
purchase of 1,000,000 shares of common stock, exercisable upon issuance at $1.00
per share through June 30, 2002, to an individual in connection with the
repayment of a $60,000 loan (plus accrued interest) made to the company.
(2) On January 15, 2001, the company issued 3,000,000 shares of
common stock to Paul Egan in connection with completing the acquisition of Top
Sports, S.A. by the company. The value of these shares was $600,000.
(3) On January 12, 2001 and February 28, 2001, the company issued a
total of 16,800,000 shares of common stock to Richard Epstein related to
consulting agreements. A total of 5,000,000 shares relate to satisfaction of a
company obligation to Mr. Epstein totaling $983,475 at December 31, 2000. The
remaining 11,800,000 shares were issued in advance and has been recorded by the
company as prepaid consulting services during this period approximating
$4,147,000.
(4) On February 2, 2001, the company issued 50,000 shares of common
stock and a warrant for the purchase of 50,000 shares of common stock,
exercisable upon issuance through June 30, 2002. These shares and warrant were
issued in connection with a penalty in connection with the non-payment of a loan
to the company in the amount of $25,000.
(5) On March 1, 2001, the company issued 12,307,625 shares of common
stock purchased for cash under a common stock purchase agreement with Alpha
Venture Capital, Inc. at a price equal to 82% of the average closing bid price
for the five business days immediately following a put notice to the company.
The Value received for these shares was $1,311,993.
II-5
(6) On March 15, 2001, the company issued 200,000 shares of common
stock to one individual in connection with consulting compensation valued at
$30,000.
(7) On March 21, 2001, the company issued 25,000 shares of common
stock to one individual in connection with consulting services to be rendered to
the company valued at $3,731.
(8) On March 23, 2001, the company issued a total of 1,000,000 shares
of common stock to two individuals for consulting services rendered to the
company valued at $137,448.
(9) On May 24, 2001, the company issued 1,000,000 shares of common
stock to one individual in connection with consulting compensation valued at
$120,000.
(10) Between July 12, 2001 and July 16, 2001, the company issued a
total of 32,789,657 shares of common stock to a total of 26 individuals and
companies as partial repayment of principal and interest on loans to the company
totaling $32,789,657, accruing interest at the rate of 10% per annum.
(11) On October 6, 2001, the company issued 21,000,000 shares of
common stock to one individual for operating capital in the amount of $630,000.
(d) General Comments.
No commissions or fees were paid in connection with these sales. All
of the above sales were undertaken pursuant to the limited offering exemption
from registration under the Securities Act of 1933 as provided under Regulation
D by the fact that:
. the sales were made to sophisticated investors as defined in Rule 502;
. the information specified in paragraph (b)2(ii)(B) and paragraph
(b)(2)(ii)(C) of this section was provided to each investor;
. the company gave each purchaser the opportunity to ask questions and
receive answers concerning the terms and conditions of the offering
and to obtain any additional information which the Company possessed
or could acquire without unreasonable effort or expense that is
necessary to verify the accuracy of information furnished;
. at a reasonable time prior to the sale of securities, the company
advised the purchasers of the limitations on resale in the manner
contained in paragraph Rule 502(d)2 of this section;
. neither the company nor any person acting on its behalf sold the
securities by any form of general solicitation or general advertising;
and
. the company exercised reasonable care to assure that the purchasers of
the securities are not underwriters within the meaning of section
-------
2(11) of the Securities Act of 1933 in compliance with Rule 502(d).
-----
II-6
ITEM 27. EXHIBITS
The exhibits required by Item 601 of Regulation S-B, and an index
thereto, are attached.
ITEM 28. UNDERTAKINGS
The undersigned company hereby undertakes to:
(a) (1) File, during any period in which it offers or sells
securities, a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act of 1933;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the
information in the registration statement; and Notwithstanding the
forgoing, 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
prospects filed with the U.S. Securities and Exchange Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in the
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) Include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act of 1933, treat
each post-effective amendment as a new registration statement of the
securities offered, and the offering of the securities at that time to be
the initial bona fide offering.
(3) File a post-effective amendment to remove from registration any
of the securities that remain unsold at the end of the offering.
(d) Provide to the underwriter at the closing specified in the
underwriting agreement certificates in such denominations and registered in such
names as required by the underwriter to permit prompt delivery to each
purchaser.
(e) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers and controlling
persons of the small business issuer pursuant to the foregoing provisions, or
otherwise, the small business issuer has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the small business issuer
II-7
of expenses incurred or paid by a director, officer or controlling person of the
small business issuer in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the small business issuer will,
unless in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act of 1933 and will be governed by the final adjudication of such
issue.
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
company certifies that it has reasonable grounds to believe that it meets all of
the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorize, in the City of San Pedro, State of California, on March 1, 2002.
eConnect
By: /s/ Thomas S. Hughes
----------------------
Thomas S. Hughes, President
II-8
Special Power of Attorney
The undersigned constitute and appoint Thomas S. Hughes their true and lawful
attorney-in-fact and agent with full power of substitution, 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 Form SB-2 registration
statement, and to file the same with all exhibits thereto, and all documents in
connection therewith, with the U.S. Securities and Exchange Commission, granting
such attorney-in-fact the full power and authority to do and perform each and
every act and thing requisite and necessary to be done in and about the
premises, as fully and to all intents and purposes as he might or could do in
person, hereby ratifying and confirming all that such attorney-in-fact may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this registration
statement has been signed by the following persons in the capacities and on the
date indicated:
Signature Title Date
- ----------------------------------------------------------------------------------
/s/ Thomas S. Hughes President/Chief Executive Officer/ , 2002
- --------------------------- Director
Thomas S. Hughes
/s/ Jack M. Hall Secretary/Director , 2002
- ---------------------------
Jack M. Hall
/s/ Laurence Donoghue Director , 2002
- ---------------------------
Laurence Donoghue
/s/ Mary Lou Garcia Accounting Manager (principal , 2002
- --------------------------- financial and accounting officer)
Mary Lou Garcia
II-9
ITEM 13. EXHIBITS, REPORTS ON FORM 8-K, AND INDEX TO
FINANCIAL STATEMENTS
There were no reports filed on Form 8-K during the last quarter of fiscal 2001.
EXHIBIT INDEX
Exhibit No. Description
- ----------- -----------
2 Agreement and Plan of Merger, dated June 1, 1999 (incorporated by
reference to Exhibit 2 of the Form 10-KSB filed on May 9, 2000).
3.1 Articles of Incorporation, March 8, 1999 (incorporated by reference to
Exhibit 3.1 of the Form SB-2/A filed on July 22, 1999).
3.2 Certificate of Amendment of Articles of Incorporation, dated May 25,
1999 (incorporated by reference to Exhibit 3.2 of the Form SB-2/A
filed on July 22, 1999).
3.3 Certificate of Amendment of Articles of Incorporation, dated August
20, 1999 (incorporated by reference to Exhibit 3.3 of the Form SB-2/A
filed on September 3, 1999).
3.4 Certificate of Amendment of Articles of Incorporation, dated November
20, 2000 (incorporated be reference to Exhibit 3.4 of the Form SB-2/A
filed on May 3, 2001).
3.5 Certificate of Amendment of Articles of Incorporation, dated July 13,
2001 (incorporated by reference to Exhibit 3.5 of the Form SB-2 filed
July 30, 2001).
3.6 Bylaws, dated May 14, 1999 (incorporated by reference to Exhibit 3.3
of the Form SB-2/A filed on July 22, 1999).
3.7 Amended and Restated Bylaws, dated September 15, 2000 (incorporated by
reference to Exhibit 3.5 of the Form 10-QSB filed on November 14,
2000).
4.1 Class A Warrant Agreement (incorporated by reference to Exhibit 4.2 of
the Form S-1 filed on October 28, 1993).
4.2 Retainer Stock Plan for Non-Employee Directors and Consultants, dated
April 26, 1999 (incorporated by reference to Exhibit 4.1 of the Form
S-8 filed on May 14, 1999).
4.3 Common Stock Purchase Agreement between the company and Alpha Venture
Capital, Inc., dated October 6, 2001 (incorporated by reference to the
SB-2 filed on October 9, 2001).
5 Opinion re: Legality (see below)
10.1 Promissory Note between Electronic Transactions & Technologies and
Unipay, Inc., dated April 26, 1999 (incorporated by reference to
Exhibit 10.5 of the Form 10-KSB filed on May 9, 2000).
10.2 Amendment to Agreement to License Assets dated February 18, 1997
between the company, Electronic Transactions & Technologies, and James
Clinton, dated September 1, 1999 (incorporated by reference to Exhibit
10.7 of the Form SB-2/A filed on May 3, 2001).
10.3 Agreement between the company and Alliance Equities, dated November
29, 1999 (incorporated by reference to Exhibit 10.18 of the Form 10-
KSB filed on May 9, 2000).
10.4 Secured Promissory Note issued to the company by Electronic
Transactions & Technologies and Thomas S. Hughes, dated December 1,
1999 (incorporated by reference to Exhibit 10.19 of the Form 10-KSB
filed on May 9, 2000).
10.5 Security Agreement between the company, Electronic Transactions &
Technologies, and Thomas S. Hughes, dated December 1, 1999
(incorporated by reference to Exhibit 10.20 of the Form 10-KSB filed
on May 9, 2000).
10.6 Software License, Development, and Maintenance Agreement (Dominican
Republic) between the company and eFunds Corporation, dated February
3, 2000 (incorporated by reference to Exhibit 10.34 of the Form 10-QSB
filed on May 30, 2000).
10.7 Software License, Development, and Maintenance Agreement (Ireland)
between the company and eFunds Corporation, dated February 4, 2000
(incorporated by reference to Exhibit 10.36 of the Form 10-QSB filed
on May 30, 2000).
10.8 Agreement between the company and Richard Epstein, dated February 12,
2000 (incorporated by reference to Exhibit 10.16 of the Form 10-KSB
filed on April 25, 2001).
10.9 Loan Agreement between the company and Richard Epstein, dated February
15, 2000 (incorporated by reference to Exhibit 10.38 of the Form 10-
QSB filed on May 30, 2000).
10.10 Amended and Restated Secured Promissory Note issued to the company by
Electronic Transactions & Technologies and Thomas S. Hughes, dated
March 31, 2000 (incorporated by reference to Exhibit 10.45 of the Form
10-QSB filed on May 30, 2000).
10.11 Amended and Restated Security Agreement between the company,
Electronic Transactions & Technologies, and Thomas S. Hughes, dated
March 31, 2000 (incorporated by reference to Exhibit 10.46 of the Form
10-QSB filed on May 30, 2000).
10.12 Agreement for Sale and Plan of Reorganization between the company and
National Data Funding Corporation, dated October 29, 2000
(incorporated by reference to Exhibit 10.53 of the Form SB-2/A filed
on May 3, 2001).
10.13 Purchasing Agreement between the company and 3Pea Technologies, Inc.,
dated June 19, 2001 (incorporated by reference to Exhibit 10.56 of the
Form SB-2 filed on July 30, 2001).
16.1 Letter on change in certifying accountant (incorporated by reference
to Exhibit 16 of the Form 8-K filed on July 23, 1999).
16.2 Letter on change in certifying accountant (incorporated by reference
to Exhibit 16 of the Form 8-K filed on March 15, 2000).
23.1 Consent of LL Bradford (see below).
23.2 Consent of Counsel (see below)
23.3 Consent of Artega & Asociados (see below)
24 Special Power of Attorney (see signature page).
99.1 Patents: dated August 9, 1994, May 19, 1998, and September 15, 1998
(incorporated by reference to Exhibit 99.1 of the Form 10-KSB filed on
May 9, 2000).
99.2 Trademarks: filed March 31, 1997, February 16, 1999, May 6, 1999, May
24, 1999, June 3, 1999, June 4, 1999, August 12, 1999, and September
28, 1999 (incorporated by reference to Exhibit 99.2 of the Form 10-KSB
filed on May 9, 2000).
99.3 Trademark filed on March 15, 2000 (incorporated by reference to
Exhibit 99.3 of the Form 10-QSB filed on May 30, 2000).