UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
QUARTERLY REPORT FOR SMALL BUSINESS ISSUERS SUBJECT TO THE 1934
ACT REPORTING REQUIREMENTS
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2000 Commission File No.
33-68570
3
eConnect
(Exact name of registrant as specified in its charter)
Nevada 43-1239043
(State of organization) (I.R.S. Employer Identification No.)
2500 Via Cabrillo Marina, Suite 112, San Pedro, California 90731
(Address of principal executive offices)
Registrant's telephone number, including area code (310) 514-9482
Check whether the issuer (1) filed all reports required to be
file by Section 13 or 15(d) of the Exchange Act during the past
12 months and (2) has been subject to such filing requirements
for the past 90 days. Yes X
There are 180,583,813 shares of common stock outstanding as of
August 1, 2000.
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The Unaudited Financial Statements as of June 30, 2000
eCONNECT
CONSOLIDATED BALANCE SHEET
JUNE 30, 2000
(UNAUDITED)
ASSETS
Current assets
Cash $ 164,143
Due from related parties 310,525
-----------
Total current assets 474,668
Fixed assets, net 484,690
Investment, net 2,101,011
Intangible assets, net 3,436,164
Purchased software 2,168,892
Deposit 250,000
Other assets 141,721
-----------
8,097,788
-----------
Total assets $ 9,057,146
===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable $2,261,000
Accrued liabilities 225,947
Due to related parties 3,845,630
Due to affiliate 578,989
Notes payable-stockholders 711,818
Note payable-current portion 544,971
------------
Total current liabilities 8,168,355
Long-term liabilities
Note payable-long-term portion 734,727
------------
Total liabilities 8,903,082
Stockholders' equity
Commonstock;$.001parvalue;200,000,000
shares authorized,177,103,813shares
Issued and outstanding 177,104
Additional paid-in capital 63,278,319
Minority interest in consolidated 15,625
subsidiary
Due from related party-secured by
Company's common stock (4,392,918)
Accumulated deficit (58,924,066)
------------
Total stockholders' equity 154,064
------------
Total liabilities and stockholders' $ 9,057,146
equity
============
See Accompanying Notes to Financial Statements
1
eCONNECT
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
For the three months ended June For the six months ended June
30, 30,
--------------------------- --------------------------
2000 1999 2000 1999
------ -------- ------- -------
Revenue
Sports Books (excess payouts over wagers) $(462,573) $ - $(462,573) $ -
----------- ----------- ----------- ------------
Operating expenses
Sports Books 118,350 - 118,350 -
Consulting 5,648,127 841,365 15,517,044 867,615
Public relations 436,223 - 5,669,003 -
Research and development 243,057 498,254 2,153,366 502,354
General and administrative 2,392,073 488,167 4,343,900 547,097
----------- ----------- ----------- ------------
Total operating expenses 8,837,830 1,827,786 27,801,663 1,917,066
----------- ----------- ----------- ------------
Net loss from operations (9,300,403) (1,827,786) (28,264,236) (1,917,066)
Other income (expense)
Interest income 106,535 - 193,885 -
Loss on investment - - - (2,062,500)
Equity losses of investees - - (280,366) -
----------- ----------- ----------- ------------
Total other income(expense) 106,535 - (86,481) (2,062,500)
Net loss before provision for income (9,193,868) (1,827,786) (28,350,717) (3,979,566)
taxes
Provision for income taxes - - - -
----------- ----------- ----------- ------------
Net loss $(9,193,868) $(1,827,786) $(28,350,717) $(3,979,566)
============ ============ ============= ============
Basic and diluted loss per common share $(0.06) $(0.16) $(0.19) $(0.22)
============ ============ ============= ============
Basic and diluted weighted average
common shares outstanding 166,744,917 11,181,234 151,417,577 18,233,711
============ ============ ============= ============
See Accompanying Notes to Financial Statements
2
eCONNECT
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
For the six months ended June
30,
------------------------
2000 1999
Cash flows from operating activities:
Net $(28,350,717) $(3,979,566)
loss
Adjustments to reconcile net loss to net
cash used by operating activities:
Depreciation and amortization 785,127 -
Common shares issued for expenses 21,702,625 2,910,138
Equity losses of investees 280,366 -
Changes in operating assets and liabilities:
Decrease in stock subscription receivable 220,176 -
Increase in due from related party (60,525) -
Increase in due from related party -
secured by Company's common stock (1,412,036) -
Increase in deposits (250,000) -
Increase in other assets (141,721) -
Increase in accounts payable 1,735,730 135,210
Increase in accrued liabilities 135,267 -
Increase in due to related parties 609,762 (282,535)
Decrease in due to affiliate (34,021) -
Increase in minority interest in 15,625 -
consolidated subsidiary
Increase in notes payable - stockholders 361,818 -
----------- -----------
Net cash used by operating (4,402,524) (1,216,753)
activities
Cash flows from investing activities:
Purchase of fixed assets (512,802) (5,478)
Payments for investments (980,797) -
Payments for purchased software (2,168,892) -
----------- -----------
Net cash used by investing (3,662,491) (5,478)
activities
Cash flows from financing activities:
Proceeds from issuance of long-term debt 2,124,000 636,000
Principal payments on long-term debt (844,302) (100,000)
Proceeds from issuance of common stock 6,823,288 861,587
----------- -----------
Net cash provided by financing 8,102,986 1,397,587
activities
----------- -----------
Net increase in cash 37,971 175,356
Cash, beginning of period 126,172 8,862
----------- -----------
Cash, end of period $164,143 $184,218
=========== ===========
Supplemental disclosure of cash flow:
Cash paid for interest $- $97,500
=========== ===========
Cash paid for income taxes $- $-
=========== ===========
Schedule of non-cash investing and financing
activities:
Remaining consideration of the second half
acquisition of
Top Sports, S.A. recorded as Due to $2,785,868 $-
related parties
=========== ===========
Remaining consideration of the acquisition
of
Powerclick, Inc. recorded as Due to $450,000 $-
related parties
=========== ===========
8,000,000 common shares issued
related to the acquisition of Powerclick, $1,300,000 $-
Inc.
=========== ===========
666,667 common shares issued for
accounts payable $550,000 $-
=========== ===========
6,000,000 common shares issued for
officer bonus payable $4,800,000 $-
=========== ===========
203,865 common shares issued for
stock subscription payable $81,546 $-
=========== ===========
9,400,000 common shares issued in exchange
for
due from related party - secured by
Company's
common stock $- $2,598,750
=========== ===========
See Accompanying Notes to Financial Statements
3
eCONNECT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying consolidated financial statements have been
prepared in accordance with Securities and Exchange Commission
requirements for interim financial statements. Therefore, they
do not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements. The financial statements should be read in
conjunction with the Form 10-KSB for the year ended December 31,
1999 of eConnect ("the Company").
The results of operations for the interim periods shown in this
report are not necessarily indicative of results to be expected
for the full year. In the opinion of management, the information
contained herein reflects all adjustments necessary to make the
results of operations for the interim periods a fair statement of
such operation. All such adjustments are of a normal recurring
nature.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation - The accompanying financial
statements include the accounts of the Company's subsidiaries Top
Sports, S.A. (99.99% owned) and eConnect Caribbean, S.A. (75%
owned). All inter-company accounts have been eliminated and the
minority interest recorded. The Company's investment in
Powerclick, Inc. (50%) is not consolidated but reported on the
equity basis of accounting. See Note 3, "Acquisitions".
Revenue - Revenue (second quarter-April 1 - June 30, 2000) was
reported from the Company's wholly-owned subsidiary, Top-Sports,
S.A. which revenue is derived from non-internet gaming operations
located in Santo Domingo, Dominican Republic. Revenue consists
of the excess of the payouts in the amount of $3,376,137 over
wagers made in the amount of $2,913,564 resulting in a net gaming
loss of $462,573.
The Company acquired control of Top-Sports, S.A. as of April
1,2000, consequently the above revenue is included in the
Company's consolidated operations. The Company did not have a
controlling interest during the first quarter (January 1 - March
31, 2000), consequently, Top-Sports, S.A. operating results for
this period was reported on the equity basis of accounting, which
was a loss of $200,669.
Amortization - Goodwill representing the excess of the purchase
price over the equity of the ownership percentage in the
Company's subsidiaries and the costs of the intangible assets are
amortized over a three-year period. Because the Company has not
begun its e-commerce operations and installation is in process,
no amortization has been recorded on the purchased software. See
Note 4 "Purchased Software".
3. ACQUISITIONS
Powerclick, Inc. - In February 2000, the Company acquired 50% of
the outstanding capital stock of Powerclick, Inc. ("the
investee") in consideration of $1,200,000 cash (of which $450,000
is still due and payable) 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. To
date, a loss of $79,697 (first quarter March 31,2000) and six
months goodwill amortization of $319,292 have been recorded for a
net carrying value at June 30,2000 of $2,101,011. During the
second quarter, 5,200,000 shares of common stock valued at
$1,950,000 were given to Powerclick, Inc. stockholders for
consulting services and expensed in the accompanying
"Consolidated Statement of Operations".
Due to a dispute between the parties and unavailability of
necessary accounting records, Powerclick, Inc. did not report its
second quarter earnings/losses (April 1 - June 30, 2000) to the
Company's management. However, the Company's management does not
believe that such amounts, if reported, would have a material
impact to these consolidated financial statements. Consequently,
the above carrying value of $2,101,011 has not been adjusted for
the 50% share of Powerclick, Inc.'s second quarter's
earnings/losses.
Currently, the parties and their respective counsels are
attempting to resolve the dispute.
4
eCONNECT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. ACQUISITIONS (CONTINUED)
Top Sports, S.A. - The Company completed the second half of its
Top Sports, S.A. acquisition effective April 1, 2000 by acquiring
4,997 shares of the remaining 5,000 capital shares outstanding.
Of the 10,000 shares outstanding, the Company owns 9,994 shares.
Dominican Republic Law, where Top Sports, S.A. is located,
requires that there be seven stockholders.
The above 4,997 shares of Top-Sports, S.A. was acquired for
2,800,000 shares of the Company's common stock valued at
$3,450,000. The goodwill resulting from the acquisition of Top-
Sports, S.A. $2,860,527 is included in intangible assets.
eConnect Caribbean, S.A. - eConnect Caribbean, S.A. was organized
under the laws of the Dominican Republic and serves as the
Company's Latin American headquarters for all e-commerce
transactions. The Company owns 75% of the outstanding capital
shares with the remaining 25% owned by the company's managing
director. eConnect Caribbean is in the start-up phase, no
revenue has been recorded and start-up costs of $71,114 have been
expensed.
4. PURCHASED SOFTWARE
Purchased software represents the Connex Software System used in
processing e-commerce transactions. The system will be installed
in the Dominican Republic (currently in process), Ireland, Hong
Kong and Australia. The licensor, E-Funds, (located in Milwaukee,
Wisconsin) and the Company have worked out a payment plan to pay
$680,000 down and $1,752,000 over three years for an aggregate
$2,432,000.
The accompanying consolidated balance sheet liability has imputed
interest at 15.031% for a present value of $2,124,000 (including
the $680,000 down payment) assigning a value of $531,000 to each
of the above four geographic areas plus $44,892 in professional
service fees (installation costs billed and in process). The
balance is due in monthly installments of $58,400 through
February 2002 and monthly installments of $29,200 from March 2002
through February 2003. Under the terms of the license agreement
the Company has a no term limitation to use the Connex Software
System, however, title to the software remains with the licensor.
As of June 30, 2000, principal payments on the note payable are
as follows:
Six months ending December 31, 2000 $ 262,314
12 months ending December 31, 2001 587,23
4
12 months ending December 31, 2002 372,829
Period ending February 4, 2003 57,321
----------
$1,279,698
Less: amounts due within one year 544,971
----------
Note payable - long-term portion $ 734,727
==========
5
eCONNECT
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEPOSIT
In connection with a "Letter of Intent", a non-binding agreement
with National Data Funding Corporation (NDFC), the Company has
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" dated June
2, 2000 expires September 1, 2000.
6. DUE TO RELATED PARTIES
As of June 30, 2000, due to related parties totaled $3,845,630
consisting of $3,395,630 due to the former sole stockholder of
Top Sports, S.A. and $450,000 due to the stockholders of
Powerclick, Inc. as discussed in Note 3, bearing no interest and
due on demand. The due to related party balance of $3,395,630 is
comprised of $609,762 payable in cash and the remaining
$2,785,868 payable in 2,800,000 shares of the Company's common
stock.
7. NOTES PAYABLE - STOCKHOLDERS
Notes payable - stockholders are comprised of five notes
aggregating $711,818 ($600,000 in cash; $111,818 in 242,500
shares of the Company's common stock). The notes dated in May and
June 2000 are due no later than six months from the notes' dates,
bearing a simple interest rate of 10% per month on the cash
balance.
8. GOING CONCERN
The Company incurred a net loss of approximately $28,000,000 for
the six months ended June 30, 2000. The Company's current
liabilities exceed its current assets by approximately $7,700,000
as of June 30, 2000. These factors create an uncertainty about
the Company's ability to continue as a going concern. The
Company's management has developed a plan, which includes
completing the development of technology products to generate
future revenues. The Company will also seek additional sources
of capital through the issuance of debt 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 financial statements do not include any
adjustments that might be necessary if the Company is unable to
continue as a going concern.
6
ITEM 2. MANAGEMENT'S PLAN OF OPERATION
NOTE REGARDING PROJECTIONS AND FORWARD LOOKING STATEMENTS
This statement includes projections of future results and
"forward-looking statements" as that term is defined in Section
27A of the Securities Act of 1933 as amended (the "Securities
Act"), and Section 21E of the Securities Exchange Act of 1934 as
amended (the "Exchange Act"). All statements that are included in
this Registration Statement, other than statements of historical
fact, are forward-looking statements. Although Management
believes that the expectations reflected in these forward-looking
statements are reasonable, it can give no assurance that such
expectations will prove to have been correct. Important factors
that could cause actual results to differ materially from the
expectations are disclosed in this Statement, including, without
limitation, those expectations reflected in forward-looking
statements contained in this Statement.
Plan of Operation
(a) Twelve Month Plan of Operation.
In the year 2000, the Registrant will focus its attention on the
marketing and development of the PERFECT industry (Personal
Encrypted Remote Financial Electronic Card Transactions), with
specific focus on the "Bank Eyes Only" Internet aspect of the
PERFECT transaction.
"Bank Eyes Only" refers to a direct Internet connection between
the consumer's terminal and the Registrants 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 to the Registrant's server and then 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. These "Bank Eyes Only," transactions
can be processed over the Internet without the cardholder account
information being stored at the merchant's web site, nor does the
merchant have ready access to the consumer's bank card
information.
The Registrant believes that "Bank Eyes Only" transaction
processing system will effectively address Internet consumers'
concerns regarding personal and financial information security.
The Registrant will receive a projected flat fee of $1.00 for
each "Bank Eyes Only" transaction which will be paid by the
merchant, not the consumer.
The Registrant has begun initial sign ups of web Merchants for
this service and based on responses, will now expend substantial
dollars for an aggressive sign up campaign to begin
simultaneously on several fronts. To launch the service of
Internet "Bank Eyes Only" transactions, the Registrant has
implemented the following initiatives:
Completion of testing of the eCashPads, the consumer "Bank
Eyes Only" device. The Registrant expects a national roll-
out of eCashPads in the third quarter of 2000.
Development of "bankeyesonly.com" web sites in the United
States, Dominican Republic, Ireland, Australia and Hong
Kong. These web sites will be used to register web merchants
within the above listed countries to be able to receive a
"Bank Eyes Only" transaction by an eCashPad. A consumer will
be able to go the Registrant's website and with the use of
his/her eCashPad will be able to safely order merchandise on
line.
Aggressive recruiting of web merchants to the Registrant
"Bank Eyes Only" network. Registration of "Bank Eyes Only"
web merchants will be pursued by a team specialists to be
hired who understand their specific industry such as phone
or cable or collections and who will fully develop the
pertinent "Bank Eyes Only" applications for that industry
and who will develop strategic alliances within their
specific industry. In addition, the Registrant 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
Registrant will incentivize private labels of eCashPads with
expected advertising and marketing of these private label
eCashPads by the web merchants to their consumer base. For
example, a merchant might distribute eCashPads with its logo
to its own consumers.
Establishment of strategic alliances with a substantial
partner in each country. The partner will then proceed to
develop the business of "Bank Eyes Only" transactions by
usage of the simple and proprietary eCashPad which has been
developed by the Registrant.
Establishment of the "International," which will be a four
country real time "Bank Eyes Only" with ATM card and PIN
entry game among the countries of the Dominican Republic,
Ireland, Australia, and Hong Kong, whereby consumers within
those countries will be able to use the eCashPad to effect
same day gaming with ATM card and PIN entry.
The Registrant intends to spin off eGaming and its PowerClick
subsidiary as separate publicly traded companies.
Current Developments
On May 31, 2000, the Company entered into a Letter of Intent with
National Data Funding Corporation (NDFC)to acquire 100% of NDFC's
capital stock and spin it off in a publicly trading company and
retaining a 25% ownership. NDFC is a company that will provide
eCashPad distribution, encryption, and maintenance (see Exhibit
10.47 to the Form 10-QSB). The eCashpad is a device which will
attach to a personal computer to enable a credit card or ATM
transaction via Internet. NDFC will also provide full merchant
processing for all credit and debit cards in support of eFunds-
United States. The Registrant is in the process of negotiating a
final acquisition agreement.
Acquisitions of Subsidiaries
On June 20, 2000, the Registrant verbally agreed to modify two
previous agreements entered into with Paul Egan. This verbal
agreement was committed to writing and made effective as of April
1, 2000 (see Exhibit 10.49). In accordance with this agreement,
Mr. Egan is to receive 25% of the common stock of eConnect
Caribbean, S.A., as a Dominican Republic subsidiary of the
Registrant. The Registrant will own 100% of Top Sports. Mr. Egan
would resign as a director of Top Sports and would keep all
consideration received to date under the December 9, 1999 and
January 1, 2000 agreements and will not receive any other
consideration under either of these agreements. He will be
employed as President of eConnect Caribbean, S.A. for a term of
three years.
Promissory Notes
The Company has issued five promissory notes totaling $711,818
($600,000 in cash and $111,818 for the value of 242,500 shares of
the Company's common stock). The notes are dated in May and June
2000 and are due no later than six months from the notes' dates,
bearing a simple interest rate of 10% per month on the cash
balance.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Other than as stated below, the Registrant is not a party to any
material pending legal proceedings and, to the best of its
knowledge, no such action by or against the Registrant has been
threatened:
(a) Securities and Exchange Commission Action (March 12, 1999).
On March 12, 1999, the Securities and Exchange Commission ("SEC")
filed a complaint alleging the Company had failed to make
available to the investing public current and accurate
information about its financial condition and results of
operations through the filing of periodic reports as required by
the Securities Exchange Act of 1934 (specifically, the Form 10-
KSB for the 1997 and 1998 fiscal years, the Form 10QSB for each
of the first three quarters of fiscal 1998, and the corresponding
Notifications of Late Filings (Form 12b-25)). The SEC sought in
this action to compel the Company to file delinquent reports and
enjoin the Company from further violations of the reporting
requirements. The Company consented to the entry of a final
judgment granting the relief sought by the SEC.
Although this action has been concluded, since the permanent
injunction was entered the Company has been late with the
following reports: (a) Form 10QSB for the quarter ended February
28, 1999 (due by April 29, 1999 because of the filing of a Form
12b-25) - filed with the SEC on May 28, 1999; (b) Form 10QSB for
the quarter ended June 30, 1999 (due by August 14, 1999) - filed
with the SEC on August 23, 1999 (due to an error in the CIK code
for the Company entered on the EDGAR electronic filing system);
(c) a Form 10-QSB for the transition period ended December 31,
1998 (due by July 5, 1999) - filed with the SEC on September 3,
1999; (d) Form 8-K to reflect a certain acquisition by the
Company (due by May 21, 1999) - filed with the SEC on November
15, 1999; (e) Form 8-K to reflect two acquisitions by the Company
(due by September 15, 1999) - filed with the SEC on November 16,
1999; (f) Form 10-KSB for the period ended on December 31, 1999
(due by April 14, 2000) - filed with the SEC on May 9, 2000; and
(g) Form 10-QSB for the quarter ended March 31, 2000 (due by May
22, 2000).
(b) Securities and Exchange Commission Action (March 23, 2000).
In a complaint filed on March 23, 2000 (Securities and Exchange
Commission v. eConnect and Thomas S. Hughes, Civil Action No. CV
00 02959 AHM (C.D. Cal.)), the SEC alleged that since February
28, 2000, the Registrant issued false and misleading press
releases claiming: (1) the Registrant and its joint venture
partner had a unique licensing arrangement with PalmPilot; and
(2) a subsidiary of the Registrant had a strategic alliance with
a brokerage firm concerning a system that would permit cash
transactions over the Internet. The complaint further alleges
that the press releases, which were disseminated through a wire
service as well as by postings on internet bulletin boards,
caused a dramatic rise in the price of the Registrant's stock
from $1.39 on February 28 to a high of $21.88 on March 9, 2000,
on heavy trading volume. The SEC suspended trading in the
Registrant's common stock on the Over the Counter Bulletin Board
on March 13 for a period of 10 trading days (trading resumed on
the National Quotation Bureau's Pink Sheets on March 27, 2000).
The complaint alleges that despite the trading suspension and the
SEC's related investigation, the Registrant and Mr. Hughes
continued to issue false and misleading statements concerning the
Registrant's business opportunities. In addition to the interim
relief granted, the Commission seeks a final judgment against the
Registrant and Mr. Hughes enjoining them from future violations
of Section 10(b) of the Exchange Act and Rule 10b-5 thereunder
(the anti-fraud provisions of that act) and assessing civil
penalties against them.
On March 24, 2000, a temporary restraining order was issued in
the above-entitled action prohibiting the Registrant and Mr.
Hughes, from committing violations of the antifraud provisions of
the federal securities laws. The Registrant and Mr. Hughes
consented to the temporary restraining order.
On April 6, 2000, without admitting or denying the allegations
contained in said complaint, the Registrant and Mr. Hughes
entered into a settlement by consent that has resulted in the
entry of permanent injunctive relief. The settlement agreement
with the SEC was accepted and a judgment of permanent injunction
was entered by the Court on April 7, 2000. The judgment that the
Registrant and Mr. Hughes consented to prohibits the Registrant
and Mr. Hughes from taking any action or making any statement, or
failing to make any statement that would violate Section 10(b) of
the Securities Exchange Act of 1934 and Rule 10b-5 thereunder.
The court has yet to determine whether disgorgement, civil
penalties or other relief should be assessed against the
Registrant and/or Mr. Hughes.
(c) Employment Agreement Disputes
On March 22, 2000, the Company consummated an amended and
restated employment agreement with an individual and his firm to
act as outside counsel for the Company. On April 14, 2000, the
Company terminated this individual and his firm as outside
counsel. Based upon the amended and restated employment
agreement, the remaining compensation for the term of this
agreement will be due immediately upon the termination of this
individual and his firm as outside counsel if terminated for
reasons other than good cause. In addition, any common stock and
stock warrants granted through the term of this agreement will be
considered due in the event of termination for reasons other than
good cause. Accordingly, the termination of this individual and
his firm, for reasons other than good cause, may potentially
expose the Company to incur a liability of approximately $600,000
for the remaining portion of unpaid compensation for the first,
second and third years of this agreement. Furthermore, the
termination may have accelerated the vesting of the granted
common stock and stock warrants consisting of 400,000 common
shares and 400,000 warrants exercisable at $1.00 per share. The
Company's management believes that the termination of this
individual and his firm was in good cause and intends to defend
itself in this matter vigorously.
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, will 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 will vest and be exercisable for their
entire term. Accordingly, the termination of this individual,
for reasons other than good cause, may potentially expose the
Company to incur a 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
may have 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. The Company's
management believes that the termination of this individual was
in good cause and intends to defend itself in this matter
vigorously.
(d) Shareholder Class Action Lawsuits.
Barbara Einhorn, et al. v. eConnect, Thomas S. Hughes, Jack M.
Hall, Dianne Hewitt, Anthony L. Hall, and Kevin J. Lewis, Case
No. 00-02674 MMM (JWJx);
Joel Eckstein, et al. v. eConnect, Inc. , Thomas S. Hughes, Jack
M. Hall, Dianne Hewitt, Anthony L. Hall, and Kevin J. Lewis, Case
No. 00-02700 DDP (CWx);
Felicia Bernstein, et al. v. eConnect, Inc., et al., Case No. 00-
02703 FMC (BQRx);
Robert Colangelo, et al. v. eConnect, Inc., et al., Case No. 00-
02743 SVW (SHx);
Irving Baron, et al. v. eConnect, Inc. , Thomas S. Hughes, Jack
M. Hall, Dianne Hewitt, Anthony L. Hall, and Kevin J. Lewis, Case
No. 00-02757 WJR (CTx);
James J. Warstler, et al. v. eConnect, Inc. , Thomas S. Hughes,
Jack M. Hall, Dianne Hewitt, Anthony L. Hall, and Kevin J. Lewis,
Case No. 00-02758 R (SHx);
Yakov Prager, et al. v. eConnect, Inc. , Thomas S. Hughes, Jack
M. Hall, Dianne Hewitt, Anthony L. Hall, and Kevin J. Lewis, Case
No. 00-02759 GHK (RCx);
Gil Weisblum, et al. v. eConnect and Thomas S. Hughes, Case No.
00-02770 MRP (CTx);
Kenneth Mazda, et al. v. eConnect, et al., Case No. 00-02776 LGB
(Mcx);
Domenico Pirraglia, et al. v. eConnect, et al., Case No. 00-02875
SVW (CWx);
Israel C. Hershkop and Shlomo Hershkop, et al. v. eConnect and
Thomas S. Hughes, Case No. 00-03095 MRP (RNRx);
Judith Bacun, et al. v. eConnect, Inc. , Thomas S. Hughes, Jack
M. Hall, Dianne Hewitt, Anthony L. Hall, and Kevin J. Lewis, Case
No. 00-03161 FMC (JWJx);
Howard Fine, et al. v. eConnect, Inc. and Thomas Hughes, Case No.
00-03290 SVW (BQRx);
Arthur Smith, et al. v. eConnect, Thomas Hughes, Case No. 00-
03301 DT (Mcx);
Thomas Reimer, et al. v. eConnect, Thomas Hughes, Case No. 00-
03405 JSL;
Morris Tepper, et al. v. eConnect and Thomas S. Hughes, Case No.
00-03444 WJR (CTx);
Vin Bury, et al. v. eConnect, Thomas Hughes, Case No. 00-03446
ABC;
Frances Villari, et al. v. eConnect, Thomas Hughes, Case No. 00-
03447 LGB (SHx);
Benjamin Ringel, et al. v. eConnect, Inc. , Thomas S. Hughes,
Jack M. Hall, Dianne Hewitt, Anthony L. Hall, and Kevin J. Lewis,
Case No. 00-03591 RSWL (RNBx);
Anthony Massaro, et al. v. eConnect, Inc., Thomas S. Hughes, Jack
M. Hall, Dianne Hewitt, Anthony L. Hall, and Kevin J. Lewis, Case
No. 00-03671 DDP (MANx);
Ardelle Gardner, et al. v. eConnect, Inc., Thomas S. Hughes, Jack
M. Hall, Dianne Hewitt, Anthony L. Hall, and Kevin J. Lewis, Case
No. 00-03897 MMM (RZx);
The foregoing twenty-one actions were filed on various dates
between March 14, 2000 and April 12, 2000, inclusive, and are all
pending in the United States District Court for the Central
District of California. These actions are brought by various
putative classes of the purchasers of the Registrant's common
stock. The putative classes alleged, none of which have been
certified, range from no earlier than November 18, 1999 through
March 13, 2000. Plaintiffs in the various actions assert that the
Registrant and Thomas S. Hughes, as well as (in certain of the
actions) Jack M. Hall, Diane Hewitt, Anthony L. Hall, and Kevin
J. Lewis, 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
alleged material misrepresentations and omissions which
supposedly made the Registrant's public statements on and after
November 18, 1999 (and/or on and after November 23, 1999) false
and misleading, thereby artificially inflating the market in and
for the Company's common stock. The answers or other responses of
the defendants to the various initial complaints are not yet due.
The Registrant cannot as yet express any opinion as to the
probable outcome of these litigation matters. The Registrant
intends to defend these litigation matters vigorously.
ITEM 2. CHANGES IN SECURITIES
During April 2000, the Company issued 6,000,000 of its common
stock to for the acquisition of Powerclick valued at $975,000.
The Company also issued 250,000 shares of its common stock to an
individual for research and development valued at $156,250. An
An additional 2,500,000 shares of its common stock were issued
to two individuals for finder's fees valued at a total of
$781,250 These shares were issued in reliance upon Section 4(2)
of theSecurities Act of 1933, as amended.
On June 27, 2000, the Company issued 200,000 shares of its common
stock to two individuals for consulting services valued at
$59,400. These issuances were made in reliance upon Section 4(2)
of the Securities Act of 1933, as amended.
On June 15, 2000, the Company issued 3,000,000 shares of common
stock to an individual valued at $600,000, of which, a portion
was for consulting services valued at $100,000 and the Company
received $500,000 cash for the remainder. This issuance was made
in reliance upon Section 4(2) of the Securities Act of 1933, as
amended.
ITEM 5. OTHER INFORMATION
On May 23, 2000, the Company's Board of Directors appointed
Laurence B. Donoghue and David Weiler to the Board of Directors,
effective June 1, 2000. Mr. Donoghue accepted his appointment as
a member of the Board, however, Mr. Weiler has yet to accept his
appointment. The current members of the board decided that the
position shall remain vacant until such a time as the board shall
fill the vacancy.
The biography of Mr. Donoghue is included in the Company's Post-
Effective Form SB-2, and is incorporated by reference to Item 10
of that document.
Registration of Stock
On May 31, 2000, the Company filed a Form S-8 to register
5,200,000 shares of its common stock to be issued to four
individuals as consultants to the Company.
During June 2000, the Company filed Forms S-8 to register
4,100,000 shares of its common stock to be issued to 8
individuals as consultants to the Company.
On July 10. 2000, the Company filed Forms S-8 to register
2,480,000 shares of its common stock to be issued to 7
individuals as consultants to the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
EXHIBITS
3.1 The exhibit consisting of the Company's Articles of
Incorporation is attached to the Company's Form SB-2/A, filed on
July 22, 1999. This exhibit is incorporated by reference to that
Form.
3.2 The exhibit consisting of the Company's Bylaws is attached
to the Company's Form SB-2/A, filed on July 22, 1999. This
exhibit is incorporated by reference to that Form.
10.47 Letter of Intent with National Data Funding Corporation
10.49 Modified Agreement with Top Sports, S.A.
27 Financial Data Schedule
Reports on Form 8-K: None.
SIGNATURES
Pursuant to the requirements of Section 12 of the Securities
Exchange Act of 1934, the Registrant has duly caused this
registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
eConnect
By:/s/ Diane Hewitt
Diane Hewitt, Treasurer
Date: August 21, 2000