<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended June 30, 2000
-------------
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________ to __________
Commission File Number 0-27249
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EZCONNECT, INC.
--------------------------
(Exact name of registrant as specified in charter)
Nevada 87-0284731
------------------------------ -------------------------
State or other jurisdiction of (I.R.S. Employer I.D. No.)
incorporation or organization
2900 Townsgate Road, Suite 200, Westlake Village, CA 91361
---------------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code (818) 889-9925
---------------
Securities registered pursuant to section 12(b) of the Act:
Title of each class Name of each exchange on which registered
None N/A
------------------ -----------------------------------------
Securities registered pursuant to section 12(g) of the Act:
None
---------------
(Title of class)
Check whether the Issuer (1) filed all reports required to be filed by
section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. (1) Yes [X]
No [ ] (2) Yes [X] No [ ]
Check if disclosure of delinquent filers in response to Item 405 of
Regulation S-B is not contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
<PAGE> 2
State issuer's revenues for its most recent fiscal year: $501
----
State the aggregate market value of the voting stock held by nonaffiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of a specified date within the past 60
days:
Based on the average of the bid and asked prices of the common stock at
November 10, 2000, of $1.625 per share, the market value of shares held by
nonaffiliates (2,470,836 shares) would be approximately $4,015,108.
As of November 10, 2000, the Registrant had 4,324,342 shares of common stock
issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
List hereunder the following documents if incorporated by reference and
the part of the Form 10-KSB (e.g., part I, part II, etc.) into which the
document is incorporated: (1) Any annual report to security holders; (2) Any
proxy or other information statement; and (3) Any prospectus filed pursuant to
rule 424(b) or (c) under the Securities Act of 1933: NONE
<PAGE>
<PAGE> 3
PART I
ITEM 1. DESCRIPTION OF BUSINESS
Business in General
-------------------
EZConnect, Inc. (the "Company" or "EZConnect") was organized under the laws of
the state of Nevada on September 21, 1999, in connection with an Agreement and
Plan of Reorganization (the "Acquisition Agreement") relating to the
acquisition of EZ Connect USA, Inc., a Utah corporation ("EZ") through a share
exchange. The Acquisition Agreement was approved by the board of directors
and shareholders of EZ and the board of directors of the Company, and was
approved by the Company's shareholders at a special meeting on October 15,
1999. The Company was formed to engage in the remote establishment and
disconnection of utility services and should be considered a start-up or
development stage business.
Following the acquisition of EZConnect USA, Inc. the board of directors
actively recruited qualified individuals to serve in senior executive
management positions and assist it in the further development of the Company's
business plan. After evaluating the Company's business plan and its viability,
management proposed to the board of directors that the Company pursue an
alternative, but related business strategy. That strategy involved entering
into the private label wireless service industry.
EZConnect is developing the capability to become a private label wireless
provider. On July 8, 2000, EZConnect entered into an Agreement and Plan of
Merger ("Merger Agreement") with Encore Wireless, Inc., a California
corporation ("Encore"), wherein EZConnect had the right to acquire Encore in a
stock and cash transaction, subject to certain closing conditions. Encore,
headquartered in Westlake Village, California, is a provider of private label
wireless Internet solutions to the marketplace. EZConnect completed the
acquisition of Encore on October 17, 2000.
Now that EZConnect's capability to become a private label wireless provider is
completed, EZConnect expects to grow rapidly within several metropolitan areas
within the United States as part of the forecasted expansion in new wireless.
This growth is possible without the typical infrastructure and subscriber
acquisition costs of traditional service providers by providing services to
end users as a reseller on the national networks of industry leading
facilities-based carriers and by leveraging marketing activities of the well
recognized, name brands of EZConnect's marketing partners and their
distribution channels. EZConnect now offers its end users wireless
communications services (voice and data), voice over internet protocol
communications services, and other enhanced services and software solutions,
all fully branded with the trade names of EZConnect's marketing partners.
EZConnect expects to provide the customers of its marketing partners with a
full suite of wireless and Internet access services in a way that promotes the
marketing partners' own brand and affinity with their customers while
increasing the profitability of their business through on-going residual
commission participation for the life of the customer. EZConnect expects to
be able to provide its end users with bundled service offerings and convergent
billing of its various services. Through the offering and bundling of its
services on a private label basis, EZConnect is providing a unique and much
needed marketing solution to its distribution partners.
<PAGE> 4
Through Encore, EZConnect has entered into a relationship with one of the
strongest carriers in wireless service. EZConnect is able to offer its
customers 100% digital wireless voice and data services on the Sprint PCS
Nationwide Network. The Sprint PCS Nationwide Network provides digital
service in over 300 metropolitan areas across the United States. Encore has
entered into a six year reselling agreement with Sprint PCS with favorable
forward pricing and activation credits. Under this agreement, EZConnect is
able to deliver wireless voice and data services to its end users on a
national coverage area basis, all fully branded with its marketing partner's
trade name, including, billing, customer care and in certain cases, the
handset itself.
Why has EZConnect become a private label wireless provider?
It is widely known that the Internet and wireless communications have been on
a collision course for some time. What is not widely understood is how
businesses can exploit this convergence in practical, profitable ways in spite
of the breadth of information available on the Internet and the technological
limitations of wireless handsets.
Additionally, retailers, marketing organizations, service providers and other
organizations seeking to offer telecommunications services were initially
limited to offering branded products of other providers, in effect reducing
customer affinity by creating a new relationship between their customers and
the communications provider. Generally, the only benefit of selling another
companies services was collecting a fee for the referral. There was little or
no ongoing revenue stream for the sale, no reason for ongoing contact related
to that service, no way to capture valuable marketing data related to that
customers use of the service, and no way to cross market related products and
services. In response, the concept of private labeling these services
attracted some attention and a measure of success based on the level of
affinity and the discount to the comparable branded price. However, the
'commoditization' of many telecom services (such as long distance) compressed
the pricing differential, and often left the private label supplier unable to
compete effectively against the branded offering.
Combining the ongoing benefits of customized services with the customers'
affinity to the organization creates a powerful relationship that promotes
brand recognition and commitment, improves organizational efficiency and
profitability, and diminishes price sensitivity and turn over. All these
factors are expected to substantially increase usage and revenues to EZConnect
on a per end user basis.
From the perspective of the consumers, EZConnect's services are extremely
attractive due to the combination of top quality service on the networks of
industry leading facilities-based carriers, competitive pricing, bundled
services and the anticipation of being able to offer convergent billing in the
not too distant future.
For our channel partners, EZConnect believes these services are superior to
anything else available in the marketplace today. EZConnect's services are:
COMPREHENSIVE - providing national, all digital wireless service access and
wireless Internet capability, (available independently or on a bundled basis)
<PAGE> 5
UNIQUE - supplying our marketing partners with customized branding, packaging,
pricing, optional convergent billing, and customer service
COMPETITIVE - enabling competitive and reactive pricing because of our ability
to aggregate thousands of users among a variety of channels and markets
COMPELLING - offering our channel partners significant, reoccurring residual
revenues based on the usage and magnitude of their customer base
Employees
---------
At June 30, 2000, EZConnect had 5 full-time salaried employees including
administrators and sales staff. Following the acquisition of Encore, EZConnect
has 6 full-time salaried employees, including administrators and sales staff.
None of EZConnect's employees are represented by a labor union. Management
believes that it will be able to hire a sufficient quantity of qualified
personnel in the local area to meet the Company's employment needs. The
Company's sales employees do not require special training, other than
orientation to the Company's sales and marketing techniques and specific
wireless equipment.
ITEM 2. DESCRIPTION OF PROPERTIES
Offices
-------
Until the fiscal year ended June 30, 2000, EZConnect's administrative offices
were located at 6009 South Redwood Road, Salt Lake City, Utah, were in leased
office space from an unrelated third party on a month-to-month basis. In
August 2000, EZConnect relocated its offices to 2749 East Parleys Way in Salt
Lake City, where it leases approximately 2,500 square feet from an unrelated
party. The term of the lease expires in January, 2003. Since the acquisition
of Encore, whose executive offices are in Westlake Village, California,
EZConnect will vacate its offices in Salt Lake City, and conduct its business
operations from Encore's facilities. In connection with vacating the Salt Lake
City facility, EZConnect is working with its landlord to negotiate a release
from its lease.
ITEM 3. LEGAL PROCEEDINGS
EZConnect is not the subject of any known legal proceedings.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
No matters were submitted to a vote of shareholders during the fourth quarter
of the fiscal year ended June 30, 2000.
<PAGE>
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PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The table below sets forth, for the respective periods indicated, the prices
for the Company's common stock in the over-the-counter market as reported by
the NASD's OTC Bulletin Board. The bid prices represent inter-dealer
quotations, without adjustments for retail mark-ups, mark-downs or commissions
and may not necessarily represent actual transactions.
Period Ended June 30, 2000 High Bid Low Bid
-------------------------- -------- -------
First Quarter N/A N/A
Second Quarter $3.125 $0.47
Third Quarter $7.125 $2.50
Fourth Quarter $5.75 $2.00
At November 10, 2000, the Company's Common Stock was quoted on the OTC
Bulletin Board at a bid and asked price of $1.375 and $1.875, respectively.
Since its inception, the Company has not paid any dividends on its Common
Stock, and the Company does not anticipate that it will pay dividends in the
foreseeable future. At November 10, 2000, the Company had approximately 1,890
shareholders of record based on information provided by the Company's transfer
agent.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Cautionary Statement Regarding Forward-looking Statements
---------------------------------------------------------
This report may contain "forward-looking" statements. Examples of forward-
looking statements include, but are not limited to: (a) projections of
revenues, capital expenditures, growth, prospects, dividends, capital
structure and other financial matters; (b) statements of plans and objectives
of the Company or its management or Board of Directors; (c) statements of
future economic performance; (d) statements of assumptions underlying other
statements and statements about the Company and its business relating to the
future; and (e) any statements using the words "anticipate," "expect," "may,"
"project," "intend" or similar expressions.
Results of Operations for September 23, 1999 (Inception) through June 30, 2000
------------------------------------------------------------------------------
During its operating history EZConnect has had no revenues from the sale of
its services. EZConnect is developing the capability to become a private label
wireless provider, and subsequent to its fiscal year end entered into a Merger
Agreement with Encore, a provider of private label wireless Internet solutions
to the marketplace. EZConnect completed the acquisition of Encore on October
17, 2000.
Corporate Expense. Total operating expenses were $3,903,954, consisting
mainly of consulting expenses for stock options, $1,924,599, and interest
expense for the beneficial conversion feature on notes and line of credit of
$640,108. All other operating expenses aggregated $1,339,247.
<PAGE> 7
In February 2000, EZConnect obtained a line of credit for up to $1,500,000
from a shareholder and director, Philip R. Lacerte. The line of credit had a
conversion feature that allowed Mr. Lacerte to convert the principal and
interest under the line of credit into common stock at his option at $1.00 per
share. Because of the conversion feature of the line of credit, at any time
the market price of the common stock is higher than the conversion rate on the
day of draw on the line of credit, the difference between the price to convert
and the market price of the stock is considered a beneficial conversion
feature. The beneficial conversion feature is recorded as additional interest
expense and recognized at the time the debt becomes convertible into stock.
Therefore, for the period ended June 30, 2000, the beneficial conversion
resulted in an increase of interest expense of $535,530 and an effective
interest rate on the line of credit of approximately 307 percent. At June 30,
2000, the Company had an outstanding balance of $535,530 in borrowings
against the line of credit, with $964,470 remaining credit available. In
October 2000, Mr. Lacerte exercised his right of conversion under the line of
credit, converting $832,967 of principal and accrued interest into 832,967
shares of common stock.
At June 30, 2000, EZConnect had notes payable to other stockholders in the
aggregate of $100,000. These notes were convertible into stock at the option
of the debt holder at $1.00 per share. The difference between the price to
convert and the market price of the common stock on the date the notes were
issued and considered convertible is a beneficial conversion feature recorded
as additional interest expense recognized when the debt becomes convertible
into common stock. This caused the effective interest rate on the notes to be
approximately 218 percent. Subsequent to June 30, 2000 all outstanding notes
were converted to common stock.
During the period ended June 30, 2000, EZConnect issued (i) 20,233 shares of
stock in lieu of cash for employee compensation and services received for a
total value of $32,600; and (ii) 823,000 stock options to outside consultants
for services received. Expense recognized for the period ended June 30, 2000
related to these options totaled $1,924,599. In addition, EZConnect issued
stock options to board members and an employee in connection with employment
agreements and for services rendered. Compensation expense related to these
options for the period ended June 30, 2000 totaled $291,750. EZConnect also
issued 35,000 options to purchase shares of common stock in connection with
stockholder notes. Expense for the period ended June 30, 2000 related to these
options totaled $46,200, and was recorded as a non-cash charge to interest
expense.
Interest Income. EZConnect had interest income of $501 during the period.
EZConnect experienced a net loss of $3,903,453 for the period. The basic and
diluted loss per share was $0.46 on the weighted average number of shares
outstanding of 8,572,918.
Liquidity and Capital Resources
-------------------------------
During the period ended June 30, 2000, EZConnect financed operations through
the issuance of common stock for cash and services, the issuance of options
for services, draws against its line of credit and additional loans from
shareholders. EZConnect will require substantial additional working capital to
continue its business operations.
<PAGE> 8
At June 30, 2000, EZConnect had current assets of $67,326 and current
liabilities of $859,393, for a working capital deficit of $792,067. EZConnect
had cash of $53,134 and prepaid expenses of $14,192. Net cash used in
operating activities was $753,005, which was funded primarily by the issuance
of stock options for compensation, services, and interest. At June 30, 2000,
EZConnect had net property and equipment of $21,749, after deduction of $5,600
in accumulated depreciation. EZConnect's property and equipment consists
mainly of office and computer equipment. Because at June 30, 2000, EZConnect
has an accumulated deficit during the development stage of $3,903,453, has a
working capital deficit and limited external financial resources, the report
of EZConnect's auditor contains a modification as to the ability of EZConnect
to continue as a going concern.
Mangement of EZConnect is aware of its ongoing cash requirements and has
implemented a recapitalization plan that will (i) reduce administrative
expenses by consolidating management with Encore; (ii) provide for up to
$1,500,000 in equity funding through the private placement of its common
stock; and (iii) provide for the conversion of approximately $1,250,000 in
loans and accrued interest to equity through the exercise of conversion
features. Further, management may continue to seek additional equity financing
from existing shareholders and other investment capital resources. Because of
EZConnect's limited financial resources, it does not anticipate expending any
substantial sums for new research and development during the fiscal year
ending June 30, 2001.
Impact of Inflation
-------------------
Inflation did not have a material impact on EZConnect's operations during the
period ended June 30, 2000, and it is not expected to have a material impact
on EZConnect's or Encore's future operations.
Principal Customers
-------------------
During the most recent fiscal year ended June 30, 2000, EZConnect had no
individual customer that accounted for more than 10% of its revenues.
Seasonality
-----------
Management knows of no seasonal aspects relating to the nature EZConnect's
business operations that had a material effect on the financial condition or
results of operation of the Company.
ITEM 7. FINANCIAL STATEMENTS
The financial statements of the Company are set forth immediately following
the signature page to this form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company has had no disagreements with its certified public accountants
with respect to accounting practices or procedures or financial disclosure.
See ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
<PAGE>
<PAGE> 9
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS, PROMOTERS, AND CONTROL
PERSONS; COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The following table sets forth the name, age, and position of each executive
officer and director that has served during the fiscal year ended June 30,
2000, and the term of office of each director of the Company.
Name Age Position Director or Officer Since
---- --- -------- ------------------------
Philip R. Lacerte 54 CEO and Director November 1999
Frank J. Gillen 31 President/Secretary and Director December 1999 (1)
J. Greg Spencer 44 President and Director April 2000 (2)
Adam Leffler 29 President and Director October 1999 (3)
Vaughn Nelson 50 Vice President and Director October 1999 (4)
William H. Flury III 46 Vice President and Director April 2000 (5)
Sharlene Moore 61 COO and Director February 2000 (6)
Ed Krafchow 57 Director November 1999 (7)
Robert M. Proznik 41 Director February 2000
---------------------
(1) Mr. Gillen resigned as an Officer and Director in February 2000.
(2) Mr. Spencer became President in April 2000 and a Director in June 2000. He
resigned as an Officer and Director in September 2000.
(3) Mr. Leffler resigned as an Officer in December 1999 and as a director in
January 2000.
(4) Mr. Nelson resigned as a Director in June 2000 and his employment as Vice
President terminated in July 2000.
(5) Mr. Flury became Vice President in April 2000 and a Director in June 2000.
He resigned as an Officer and Director in September 2000.
(6) Ms. Moore became an officer and director in January 2000. She resigned as
an officer in April 2000 and as a director in October 2000.
(7) Mr. Krafchow became a Director in November 1999. He resigned as a Director
in October 2000.
The term of office of each director is one year and until his successor is
elected and qualified at the Company's annual meeting, subject to removal by
the Shareholders. The term of office for each Officer is one year and until a
successor is elected at the annual meeting of the Board of Directors and is
qualified, subject to removal by the Board of Directors. The Company will
reimburse Directors for their expenses associated with attending Directors'
meetings. However, Directors have not, nor is it anticipated they will,
receive any additional compensation for attending Directors' meetings.
Biographical Information
------------------------
Set forth below is certain biographical information for each of the Company's
Officers and Directors and other key personnel at June 30, 2000.
Philip R. Lacerte has over 20 years of experience in executive management,
software development, and sales and marketing. Mr. Lacerte was co-founder of
Lacerte Software Corporation, Dallas, Texas, where he served as Executive Vice
President from 1982 through 1998.
<PAGE> 10
J. Greg Spencer spent the last 16 years at American Stores Company (NYSE:
ABS), the country's second largest food and drug retailer, where he most
recently served as senior vice president and treasurer.
William H. Flury III has over 20 years experience in sales, marketing and
business development in the data and telecommunications business. He has
recently served as President of MyAssociation.com and was previously senior
vice president of sale and marketing for I-Link (NASDAQSC: ILNK), director of
market development for Adobe Systems, Inc. (NASDAQNMS: ADBE) and senior
director of national accounts and industry markets at Novell (NASDAQNMS:
NOVL).
Sharlene Moore has over 20 years experience in marketing, sales execution and
program implementation for various companies, including Convergys (Matrixx
Marketing), Salt Lake City, Utah, where from August 1995 to December 1999, she
served as Senior Director, Client Development.
Ed Krafchow has been for the past five years the president of Prudential
California Reality, Walnut Creek, California, an independently owned and
operated member of the Prudential Real Estate Affiliates, Inc., a full-service
residential and commercial real estate franchise network with companies
throughout the United States and Canada.
Robert M. Proznik has been for the past 15 years the president and sole owner
of Inter-Pro Property Corporation (USA), Edmonton, Alberta, Canada, a real
estate development, investment, and fee management company involved in
commercial, multi-family and single family projects throughout western Canada
and the western United States.
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
-------------------------------------------------
EZConnect's common stock is registered pursuant to Section 12(g) of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), and in
connection therewith, directors, officers, and beneficial owners of more than
10% of its common stock are required to file on a timely basis certain reports
under Section 16 of the Exchange Act as to their beneficial ownership. The
following table sets forth, to the best of EZConnect's knowledge, the name and
position of each person that failed to file on a timely basis any reports
required pursuant to Section 16 of the Exchange Act, as of June 30, 2000.
Report to
Name of Person Position be Filed
-------------- -------- ------------
None N/A N/A
<PAGE>
<PAGE> 11
ITEM 10. EXECUTIVE COMPENSATION
The following tables set forth certain summary information concerning the
compensation paid or accrued for the Company's chief executive officer and
each of its other executive officers that received compensation in excess of
$100,000 from inception (September 23, 1999) through June 30, 2000, the end of
the Company's last completed fiscal year):
<TABLE>
<CAPTION> Summary Compensation Table
Long Term Compensation
----------------------
Annual Compensation Awards Payouts
------------------------------- ------------------ -------
(a) (b) (c) (d) (e) (f) (g) (h) (i)
Securities
Other Restricted Underlying
Name and Annual Stock Options/ LTIP All other
Principal Position Year Salary Bonus($) Compensation Awards SARs# Payout Compensation
------------------ ---- ------ -------- ------------ ------ ------- ------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Philip R. Lacerte 2000 $ -0- -0- -0- -0- -0- -0- $ 150,000
CEO
</TABLE>
Compensation Pursuant to Plans
------------------------------
Effective November 1, 1999, and January 31, 2000, the Board of Directors of
the Company approved the terms of the 1999 Non-Qualified Stock Option Plan
(the "1999 Plan") and the 2000 Non-Qualified Stock Option Plan (the "2000
Plan"), respectively. At June 30, 2000, 250,000 options to purchase shares
had been awarded under the 1999 Plan, 4,118,000 options to purchase shares had
been awarded under the 2000 Plan, and individual options to purchase an
aggregate of 1,288,000 shares had been issued by EZConnect. Subsequent to June
30, 2000, EZConnect entered into various agreements that provided for the
cancellation of options to purchase 150,000 shares under the 1999 Plan,
4,093,000 shares under the 2000 Plan, and 1,173,000 shares under individual
plans. Thereafter, EZConnect issued new options to purchase up to an aggregate
of 1,690,000 shares, so that on October 13, 2000, EZConnect had outstanding
options to purchase 100,000 shares under the 1999 Plan, 930,000 shares under
the 2000 Plan, and 900,000 shares under various individual plans. See Item 12.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS: Plan of Recapitalization.
The terms and conditions of the 1999 Plan and the 2000 Plan are substantially
the same. The following summary of the 1999 and 2000 Plans is qualified in its
entirety by the specific provisions of each Plan.
1999 and 2000 Plans Summary
---------------------------
The Board of Directors of the Company believes that it is important that
employees and other individuals who contribute to the success of the Company
have a stake in the enterprise as shareholders. Consistent with this belief,
the award of stock options has been and will continue to be an important
element of the Company's compensation program.
Both the 1999 and 2000 Plans are intended to aid the Company in maintaining
and developing a management team, attracting qualified officers and employees
capable of assisting in the future success of the Company, and rewarding those
individuals who have contributed to the success of the Company.
<PAGE> 12
Both Plans are designed to aid the Company in retaining the services of
executives and employees and in attracting new personnel when needed for
future operations and growth and to provide such personnel with an incentive
to remain employees of the Company, to use their best efforts to promote the
success of the Company's business, and to provide them with an opportunity to
obtain or increase a proprietary interest in the Company. Each Plan is also
designed to permit the Company to reward those individuals who are not
employees of the Company but who are perceived by management as having
contributed to the success of the Company or who are important to the
continued business and operations of the Company.
The Plans are administered by the Board. Subject to compliance with applicable
provisions of the governing law, the Board may delegate administration of the
Plans or specific administrative duties with respect to the Plans, on such
terms and to such committees of the Board as it deems proper; provided
however, that if less than the entire Board is administering the Plans or
grants under the Plans, action may be taken only by a committee of two or more
"disinterested directors" as that term is defined in Rule 16b-3, and the
regulations and releases thereunder all as promulgated by the SEC. Any options
approved by the Board shall be approved by a majority vote of those members of
the Board in attendance at a meeting at which a quorum is present. Any options
approved by a committee designated by the Board shall be approved as specified
by the Board at the time of delegation.
The exercise price of options granted under the Plans is to be determined by
the Board (or committee) on the date of grant. Options granted under the Plan
shall expire no later than 5 years from the date of grant. The option price
may be paid by cash or, at the discretion of the Board of Directors or
Committee, by delivery of a promissory note or shares of Common Stock of the
Company already owned by the optionee (valued at their fair market value at
the date of exercise), or a combination thereof.
A maximum of 500,000 shares are available for grant under the 1999 Plan and
5,000,000 shares are available for grant under the 2000 Plan. The aggregate
number of shares with respect to which options may be granted under the Plans,
the number of shares covered by each outstanding option, and the purchase
price per share, shall be adjusted for any increase or decrease in the number
of issued shares resulting from a recapitalization, reorganization, merger,
consolidation, exchange of shares, stock dividend, stock split, reverse stock
split, or other subdivision or consolidation of shares.
The Board of Directors (or committee) may from time to time alter, amend,
suspend, or discontinue the Plans with respect to any shares as to which
options or stock awards have not been granted. However, no such alteration or
amendment (unless approved by the stockholders) shall (a) increase (except
adjustment for an event of dilution) the maximum number of shares for which
options or stock awards may be granted under the Plans either in the aggregate
or to any eligible employee; (b) reduce (except adjustment for an event of
dilution) the minimum option prices which may be established under the Plans;
(c) extend the period or periods during which options may be granted or
exercised; (d) materially modify the requirements as to eligibility for
participation in the Plans; (e) change the provisions relating to events of
dilution; or (f) materially increase the benefits accruing to the eligible
participants under the Plans.
<PAGE> 13
Options/SAR Grants in Last Fiscal Year
--------------------------------------
The following tables contain information regarding the Plan Options granted to
the Company's named executive officers as of the date of this Prospectus:
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
Individual Grants
-----------------------------------------------------
Number of % of Total
Securities Options/SARs
Underlying Granted to Exercise or
Options/SARs Employees Base Price Expiration Grant Date
Name Granted in Fiscal Year ($/Share) Date Present Value $
------------------- ------------ -------------- ----------- ---------- ---------------
<S> <C> <C> <C> <C> <C>
(a) (b) (c) (d) (e) (f)
Philip R. Lacerte 100,000 sh 2.08 1.50 11/11/04 284,210
</TABLE>
Aggregate Option/SAR Exercises in Last Fiscal Year
and FY-End Option/SAR Values
Number of
Securities Value of
Underlying Unexercised
Unexercised In-the-Money
Options/SARs Options/SARs
Shares at FY-End(#) at FY-End($)
Acquired Value Exercisable/ Exercisable/
Name on Exercise(#) Realized($) Unexercisable Unexerciable
------------------- ------------- ------------- ------------ ------------
None.
PENSION TABLE
-------------
Not Applicable.
Other Compensation
------------------
None.
Compensation of Directors
-------------------------
None.
<PAGE>
<PAGE> 14
Employment Contracts and Termination of Employment and Change of Control
Arrangement
------------------------------------------------------------------------
Subsequent to June 30, 2000, in connection with the acquisition of Encore, the
Company has entered into employment agreements with Kevin S. Hamilton and Tod
M. Turley, to serve as the Company's President and Senior Vice President,
respectively. The term of the employment agreements were for two (2) years,
expiring September 30, 2002. Each executive received a base salary of $200,000
per year throughout the term of this Agreement.
Each executive is entitled to a cash bonus of $12,500 per calendar quarter
(the "Quarterly Bonus") payable within ten (10) days after the end of each
calendar quarter occurring during the term of their agreement, subject to the
achievement during each of such quarters of the management business objectives
("MBOs") pertaining to the Company's business. If either agreement is
terminated prior to the expiration of its term, the Quarterly Bonus shall be
prorated through the date of termination and paid within ten (10) days after
such date of termination, subject to achievement of the MBOs applicable to the
quarter in which such termination takes place.
Each executive is entitled to a super bonus (the "Super Bonus") if during the
one-year period from October 1, 2000 to September 30, 2001, the Company's
wireless reselling business acquires 100,000 or more new active mobile
identification numbers ("MINS") on terms and conditions in effect prior to
October 1, 2000, subject to adjustment as required to respond effectively to
competitive changes in the industry. The Super Bonus shall be $250,000
payable in cash within forty-five (45) days following the expiration of the
one-year measurement period described above.
Each executive has been granted non-qualified stock options to purchase up to
750,000 shares of the Company's common stock (the "Executive Options") at an
exercise price equal to $1.50 per share (the market value on the date of
grant). The Executive Options are exercisable for a term of five (5) years and
are subject to the vesting requirements set forth below. At the executive's
request, during the term of employment, the exercise price of the Executive
Options may be reduced to the then current market price twice during the
exercise period, provided the market price of the Company's common stock
closes at a price at or below the exercise price of the Executive Options for
three consecutive trading days prior to the repricing. The Company must file
such registration statements and take such additional actions as may be
required to provide the executive with registered shares upon his exercise of
the Executive Options. The registration rights with respect to the Executive
Options may relate to a registration statement on Form S-8 or may be
"piggybacked" onto any other registration statement filed by the Company.
Vesting of the Executive Options shall be as follows:
(i) 234,383 Executive Options shall vest on December 31, 2001;
(ii) 15,625 Executive Options shall vest upon the completion of each of the
nine consecutive months commencing January 31, 2002 and continuing through and
including September 30, 2002, for a total vesting of 140,625 Executive Options
at the end of such period; and
<PAGE> 15
(iii) 46,874 Executive Options shall vest at the end of each of eight
calendar quarters commencing with the quarter ended December 31, 2000,
subject to the achievement of the MBOs; provided, that none of such options
shall be deemed to be fully vested until October 1, 2001, regardless of the
achievement of quarterly MBOs prior to that date.
Notwithstanding the foregoing, in the event of a Change in Control (as defined
in the agreement), all unvested Executive Options shall vest immediately. In
the event the agreement is terminated prior to its expiration date by the
Company or executive, all unvested Executive Options shall terminate and be of
no further force or effect upon the date of termination and all vested
Executive options shall continue to be exercisable for a period of five (5)
years following the date of termination.
Each executive is provided health and medical insurance in the form and
program chosen by the Company for its full-time employees. The executives are
entitled to participate in any other health, medical, retirement, pension,
profit-sharing, disability, death and dismemberment, life insurance, stock
option, vacation and other benefit plans and programs as in effect from time
to time on the same basis as other members of senior management.
The executives are entitled to paid vacation in accordance with the most
favorable plans, policies, programs and practices of the Company and its
affiliated companies with respect to members of senior management. Each
executive is initially entitled to three weeks paid vacation per calendar
year.
<PAGE>
<PAGE> 16
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth as of November 10, 2000, the name, address and
the number of shares of the Company's voting securities held of record or
beneficially by each person who was known by the Company to own beneficially,
more than 5% of the issued and outstanding 6,824,342 voting securities
[consisting of 4,324,342 shares of Common Stock and 2,500,000 shares of
Preferred Stock]. In addition, the table sets forth the name and
shareholdings of each director and of all officers and directors as a group.
<TABLE>
<CAPTION>
Security Ownership of Certain Beneficial Owners
-----------------------------------------------
Title
of Name and Address Amount and Nature of Percentage
Class Beneficial Owner Beneficial Ownership(1) of Class(2)
----- ---------------- -------------------- ----------
<S> <C> <C> <C> <C>
Common Philip R. Lacerte 1,445,467 (3) D 19.74
3535 Gillespie #7-D
Dallas, TX 75219
Common Kelly Trimble 353,289 D 5.18
175 South Main Street, #1230
Salt Lake City, UT 84111
Common Robert M. Proznik 300,000 D
#600, 10240-124 Street 236,472 I
Edmonton, Alberta -------
Canada T5N 3W6 536,472 (4) 7.53
Common Kevin S. Hamilton 750,000 D
Preferred 2900 Townsgate, Suite 200 1,106,611 I
Westlake Village, CA 91361 ---------
1,856,611 (5) 24.51
Common Tod M. Turley 750,000 D
Preferred 2900 Townsgate, Suite 200 1,102,459 I
Westlake Village, CA 91361 ---------
1,852,459 (6) 24.51
Security Ownership of Management of the Company
-----------------------------------------------
Title
of Name and Position of Amount and Nature of Percentage
Class Officer and/or Director Beneficial Ownership(1) of Class(2)
----- ----------------------- -------------------- ----------
Common Philip R. Lacerte, CEO and
Director -----See Table Above-----
Common Robert M. Proznik, Director -----See Table Above-----
Common Kevin S. Hamilton, President -----See Table Above-----
Preferred and Director
Common Tod M. Turley, Senior Vice -----See Table Above-----
Preferred President and Director
Preferred M.G. Meador, Jr., CFO and
Secretary 74,751 (7) D
All Officers and Directors
as a Group (5 persons) 3,320,218 D
2,445,542 I
--------- -----
Total Beneficial Ownership 5,765,760 63.19
========= =====
</TABLE>
[Footnotes contained on next page]
<PAGE> 17
(1) Indirect and Direct ownership are referenced by an "I" or "D",
respectively. All shares owned directly are owned beneficially and of record
and such shareholder has sole voting, investment, and dispositive power,
unless otherwise noted. Total beneficial ownership assumes the exercise of any
right to acquire beneficial ownership (i.e. option exercise or conversion).
(2) The percentage calculation takes into account the concomitant increase in
the number of issued and outstanding voting securities represented by the
exercise or conversion of the shareholder's right to acquire beneficial
ownership.
(3) Represent 945,467 shares of common stock and options to acquire 500,000
shares of common stock.
(4) Represents 236,472 shares of common stock held of record by Inter-Pro
Property Corporation (USA), of which Mr. Proznik is the principal owner and
options to acquire 300,000 shares of common stock.
(5) Represents (i) 1,106,611 shares of preferred stock, each share convertible
to one share of Common Stock, at the option of the record holder, subject to
automatic conversion on the occurrence of certain events, prior to and
including October 17, 2002. 937,500 shares have been placed in escrow to be
released subject to certain earn-out provisions; and (ii) options to acquire
750,000 shares of common stock, subject to certain vesting requirements
associated with the shareholder's term of employment and management business
objectives (MBOs); provided, that none of the options shall be deemed fully
vested until October 1, 2001, regardless of the achievement of quarterly MBOs
prior to that date.
(6) Represents (i) 1,102,459 shares of preferred stock, each share convertible
to one share of Common Stock, at the option of the record holder, subject to
automatic conversion on the occurrence of certain events, prior to and
including October 17, 2002. 937,500 shares have been placed in escrow to be
released subject to certain earn-out provisions; and (ii) options to acquire
750,000 shares of common stock, subject to certain vesting requirements
associated with the shareholder's term of employment and management business
objectives (MBOs); provided, that none of the options shall be deemed fully
vested until October 1, 2001, regardless of the achievement of quarterly MBOs
prior to that date.
(7) Each share of preferred stock is convertible to one share of Common Stock
at the option of the record holder, subject to automatic conversion on the
occurrence of certain events, prior to and including October 17, 2002.
<PAGE>
<PAGE> 18
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Plan of Recapitalization
------------------------
Subsequent to June 30, 2000, the Company entered into various agreements that
allowed for implementing a plan of recapitalization that provides for (i) the
cancellation of shares and options held by former affiliates and other
shareholders; (ii) the issuance of new shares and options in settlement and
release of claims against the Company; and (iii) the issuance of shares to
certain creditors of the Company for the conversion of outstanding debt as
outlined below.
Cancellation of Shares:
Name of Shareholder # of Shares (net)
------------------- -----------
Vaughn Nelson 2,724,000
Adam Leffler 2,740,000
Clint Combs 345,000
Michael Shehan 71,500
Maven Strategic Partners, Inc. 830,000
-----------
Total Shares cancelled 6,710,500
===========
Cancellation of Options:
Grant Expire Exercise
Name of Option Holder # of Options Date Date $/Share
--------------------- ------------ -------- --------- -----------
Vaughn Nelson 250,000 10/18/99 10/18/01 $1.50
Adam Leffler 270,000 10/18/99 10/18/01 $1.50
Ed Krafchow 50,000 11/01/99 11/01/04 $1.50
Tavit.com, LLC 603,000 11/01/99 11/01/01 $1.47-$2.33
Frank J. Gillen 50,000 10/18/99 10/18/01 $1.50
Sharlene Moore 50,000 1/17/00 1/17/05 $2.25
J.Greg Spencer 1,850,000 4/17/00 4/17/05 $3.25
William H. Flury III 1,960,000 4/17/00 4/17/05 $3.25
Others (5 persons) 333,000 Various Various $2.50-$3.25
------------
Total Options cancelled 5,416,000
============
Issuance of New Options:
Grant Expire Exercise
Name of Option Holder # of Options Date Date $/Share
--------------------- ------------ -------- --------- -----------
Philip R. Lacerte 400,000 10/13/00 10/13/05 $1.50
Robert M. Proznik 300,000 10/13/00 10/13/05 $1.50
Sharlene Moore 15,000 10/13/00 10/13/05 $1.50
Ed Krafchow 20,000 10/13/00 10/13/05 $1.50
J. Greg Spencer 200,000 10/13/00 10/13/05 $1.50
William H. Flury III 350,000 10/13/00 10/13/05 $1.50
Others (6 persons) 405,000 10/13/00 10/13/05 $1.50
------------
Total Options issued 1,690,000
============
<PAGE> 19
Issuance of New Shares:
Effective October 13, 2000, the Company issued an aggregate of 100,000 shares
to certain shareholders and affiliates of the Company in exchange for the
settlement and release of any and all claims relating to rights they may have
to acquire shares of the Company's common stock from former affiliates of the
Company as follows:
Name of Shareholder # of Shares
------------------- -----------
Philip R. Lacerte 42,500
Ed Krafchow 12,500
Maven Strategic Partners, Inc. 21,250
Others (3 persons) 23,750
-----------
Total Shares issued 100,000
===========
Effective October 13, 2000, the Company issued an aggregate of 1,248,795
shares to certain affiliated creditors and note holders in conversion of a
line-of-credit and promissory notes and accrued interest aggregating
approximately $1,248,795 as follows:
Name of Shareholder # of Shares
------------------- -----------
Philip R. Lacerte 832,967
Maven Strategic Partners, Inc. 26,793
Calamitous, LC 51,442
Inter-Pro Property Corporation (USA) 156,472
Kelly Trimble 78,236
Rodaric Group, LLC 102,885
-----------
Total Shares issued 1,248,795
===========
<PAGE>
<PAGE> 20
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a)(1)FINANCIAL STATEMENTS. The following financial statements are included
in this report:
Title of Document Page
----------------- ----
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 21
Consolidated Balance Sheet as of June 30, 2000 22
Consolidated Statement of Operations for the period
September 23, 1999 (Inception) through June 30, 2000 23
Consolidated Statement of Stockholders' Equity for the period
September 23, 1999 (Inception) through June 30, 2000 24
Consolidated Statement of Cash Flows for the period
September 23, 1999 (Inception) through June 30, 2000 25
Notes to Consolidated Financial Statements 28
(a)(2)FINANCIAL STATEMENT SCHEDULES. The following financial statement
schedules are included as part of this report:
None.
(a)(3)EXHIBITS. The following exhibits are included as part of this report:
SEC
Exhibit Reference
Number Number Title of Document Location
------- --------- ----------------- --------
27 27 Financial Data Schedule This Filing
(b) Reports on Form 8-K.
There were no reports on Form 8-K filed with the Commission during the quarter
ended June 30, 2000.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated:
EZCONNECT, INC.
Date: November 16, 2000 By /S/Philip R. Lacerte, Chairman of
the Board, CEO
[Principal Executive Officer and
Principal Accounting Officer]
Date: November 16, 2000 By /S/Robert M. Proznik, Director
<PAGE>
<PAGE> 21
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
The Directors and Stockholders of
EZ Connect, Inc.
We have audited the accompanying consolidated balance sheet of EZ Connect,
Inc. and Subsidiary as of June 30, 2000, and the related consolidated
statements of operations, stockholders' deficit and cash flows for the period
from September 23, 1999 (inception) through June 30, 2000. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on the 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 consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position
of EZ Connect, Inc. and Subsidiary as of June 30, 2000, and the consolidated
results of their operations and their consolidated cash flows for the period
from September 23, 1999 (inception) through June 30, 2000, in conformity with
accounting principles generally accepted in the United States.
As discussed in Note A, the Company has been in the development stage since
its inception on September 23, 1999. The Company has generated net losses of
$3,903,453 since inception (September 23, 1999) and has an accumulated deficit
of $770,318 at June 30, 2000. In addition, the Company has limited operating
capital with current liabilities exceeding current assets by $792,067 and no
revenue stream at June 30, 2000. Realization of a major portion of the assets
is dependent upon the Company's ability to meet its future financing
requirements, and the success of future operations (Note B). These factors
raise substantial doubt about the Company's ability to continue as a going
concern.
Salt Lake City, Utah
September 8, 2000 except for Note K for
which the date is October 17, 2000
<PAGE>
<PAGE> 22
CONSOLIDATED FINANCIAL STATEMENTS
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
CONSOLIDATED BALANCE SHEET
June 30, 2000
ASSETS
Current assets (Note E)
Cash $ 53,134
Prepaid expenses 14,192
------------
Total current assets 67,326
Equipment, at cost (Note E) $ 27,349
Less accumulated depreciation (5,600) 21,749
------------- ------------
$ 89,075
============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current Liabilities
Trade accounts payable $ 89,046
Accrued liabilities (Note D) 134,817
Notes payable to stockholders (Note F) 100,000
Line of credit to stockholders (Note E) 535,530
------------
859,393
COMMITMENTS AND CONTINGENCIES (Notes E and I)
STOCKHOLDERS' DEFICIT (Notes B, C and H)
Preferred stock, $0.001 par value; 5,000,000
shares authorized, 0 shares issued and
outstanding $ -
Common stock, $0.001 par value; 45,000,000
shares authorized, 8,680,657 shares issued
and outstanding 8,680
Additional paid-in capital 3,124,455
Deficit accumulated during
the development stage (3,903,453)
------------- ------------
Total stockholders' deficit (770,318)
------------
$ 89,075
============
The accompanying notes are an integral part of this statement.
<PAGE>
<PAGE> 23
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
CONSOLIDATED STATEMENT OF OPERATIONS
For the period September 23, 1999 (Inception) through June 30, 2000
Interest income $ 501
Operating expenses
Consulting expense for stock options (Note H) $ 1,924,599
Interest recognized on beneficial feature
(Notes E and F) 640,108
Salaries 365,359
Compensation expense for stock options (Note H) 291,750
Other 199,370
Professional fees 174,305
Consulting 142,340
Website and logo development 97,499
Interest for stock options (Note H) 46,200
Interest 16,824
Depreciation 5,600 3,903,954
------------- ------------
Loss before income taxes (3,903,453)
Income taxes (Note G) -
------------
NET LOSS $ (3,903,453)
============
Loss per common share (Note J)
Basic $ (0.46)
Diluted (0.46)
Weighted-average common and dilutive
common equivalent shares outstanding (Note J)
Basic 8,572,918
Diluted 8,572,918
The accompanying notes are an integral part of this statement.
<PAGE>
<PAGE> 24
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
For the period September 23, 1999 (Inception) through June 30, 2000
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During the
---------------------- paid-in Development
Number Amount capital Stage Total
---------- ---------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C>
Balance at
September 23, 1999 1,000 $ 1 $ 1,759 $ - $ 1,760
Recapitalization
of Company (Note C) 8,659,424 8,659 187,459 - 196,118
Issuance of common stock for
services and compensation 20,233 20 32,580 - 32,600
Issuance of stock options
for services (Note H) - - 1,924,599 - 1,924,599
Issuance of stock options
in lieu of interest (Note H) - - 46,200 - 46,200
Interest recognized on
beneficial conversion
feature on line-of-credit
and notes payable to
stockholders (Notes E, F and H) - - 640,108 - 640,108
Issuance of stock options
for compensation (Note H) - - 291,750 - 291,750
Net loss - - - (3,903,453) (5,110,985)
---------- ---------- ----------- ----------- -----------
Balance at June 30, 2000 8,680,657 $ 8,680 $ 3,124,455 $ (3,903,453) $ (770,318)
========== ========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of this statement.
<PAGE>
<PAGE> 25
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS
For the period September 23, 1999 (Inception) through June 30, 2000
Increase (decrease) in cash
Cash flows from operating activities
Net loss $ (3,903,453)
Adjustments to reconcile net loss to net cash
used in operating activities
Depreciation 5,600
Issuance of stock options for compensation 1,924,599
Interest expense recognized on beneficial conversion
features of line of credit and stockholder notes payable 640,108
Issuance of stock options for services 291,750
Issuance of stock for services and compensation 32,600
Issuance of stock options in lieu of interest 46,200
Changes in assets and liabilities
Prepaid expenses (14,192)
Accounts payable 88,966
Accrued liabilities 134,817
-----------
Total adjustments 3,150,448
-----------
Net cash used in operating activities (753,005)
-----------
Cash flows from investing activities-
Purchase of property and equipment (27,349)
Cash flows from financing activities
Proceeds from draws on line of credit 535,530
Proceeds from the issuance of notes payable to stockholders 135,000
Proceeds from the issuance of note to affiliate 30,000
Stock subscriptions received 169,000
Principal payment on notes payable to stockholders (38,417)
Cash obtained in reverse merger 615
Stock issued for cash 1,760
-----------
Net cash provided by financing activities 833,488
-----------
Net increase in cash 53,134
Cash at beginning of period -
-----------
Cash at end of period $ 53,134
===========
(Continued)
<PAGE>
<PAGE> 26
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
For the period September 23, 1999 (Inception) through June 30, 2000
Supplemental disclosures of cash flow information
-------------------------------------------------
The Company paid no cash for interest or income taxes the period.
Noncash investing and financing activities
------------------------------------------
Recapitalization
--------------------------------
On September 30, 1999, the Company merged with EZConnect USA, Inc. in a
transaction accounted for as a reverse acquisition (recapitalization) (Note
C). Net assets received through the non-cash recapitalization were as follows:
Cash $ 615
Notes receivable 30,000
Notes payable to stockholder (3,417)
Accounts payable and accrued liabilities (80)
Stock Subscriptions receivable 169,000
---------------
Net assets received 195,118
Par value of stock issued in connection with
recapitalization (8,659)
Amount recorded as additional paid-in capital in
connection with recapitalization (187,459)
---------------
$ -
===============
Beneficial conversion feature of convertible debt
------------------------------------------------
As discussed in Notes E and F - the Company recognized charges related to the
beneficial conversion feature of the line of credit and notes payable to
stockholders issued during the year ended June 30, 2000. The beneficial
conversion feature is determined by the difference between the market value of
the common stock and the conversion rate of the debt. The beneficial
conversion feature is recognized as interest expense over the period
corresponding to the time restrictions on conversion of the debt into stock.
At June 30, 2000, the beneficial conversion resulted in a non-cash charge
recorded as additional interest expense of $640,108.
Stock and stock options issued for compensation, services and interest
----------------------------------------------------------------------
During the period ended June 30, 2000, the Company issued 20,233 shares of
stock to employees as compensation and consultants for services received at a
total value of $32,600. The value of the expense recognized was based on the
market value of the stock issued.
(Continued)
<PAGE> 27
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
CONSOLIDATED STATEMENT OF CASH FLOWS - CONTINUED
For the period September 23, 1999 (Inception) through June 30, 2000
During the period ended June 30, 2000, the Company issued 823,000 stock
options for services received. Expense recognized for the period ended June
30, 2000 related to these options totaled $1,924,599 (Note H).
During the period ended June 30, 2000, the Company issued stock options to
board members and an employee in connection with employment agreements and for
services rendered. Compensation expense recognized for the period ended June
30, 2000 totaled $291,750 (Notes H and I).
The Company also issued 35,000 options to purchase shares of common stock of
the Company to a stockholder. Expense recorded for the period ended June 30,
2000 related to these options totaled $46,200. (Note H)
The accompanying notes are an integral part of this statement.
<PAGE>
<PAGE> 28
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period September 23, 1999 (Inception) through June 30, 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies consistently applied in the
preparation of the accompanying financial statements follows.
1. Organization and business activity
-------------------------------------
EZConnect, Inc., (the Company) is a Nevada corporation organized on September
21, 1999 to merge with Diversified Industries, Inc., (Diversified) a Utah
corporation. Diversified was a public shell with no operations from November
1, 1996 through September 30, 1999. Its business purpose was to locate and
consummate a merger or acquisition with a private entity. Upon completion of
the merger on September 30, 1999, all shares of Diversified were converted
into shares of stock of the Company with the Company as the surviving
corporation.
On September 30, 1999, the Company merged with EZ Connect USA, Inc., a Utah
corporation headquartered in Salt Lake City. EZConnect USA Inc. was
originally organized on September 23, 1999 to engage in the remote
establishment and disconnection of utility services. This merger was
accounted for as a reverse acquisition (recapitalization) with a public shell
(Note C). Subsequent to the reverse acquisition, the Company determined that
the remote utility service connection service industry was not a viable market
for the Company. As a result, the Company re-evaluated its proposed business
activity, and entered into an agreement of intent to merge in June of 2000
with Encore Wireless, Inc. a California corporation to become a provider of
private label wireless internet solutions (Note K).
As of June 30, 2000, the Company's activities have principally been related to
market analysis, capital raising, development and other business planning
activities. As such, the Company has had no significant revenue from its
planned principal operations and is considered a development stage company.
2. Principles of consolidation
------------------------------
The consolidated financial statements include the accounts of the Company and
its wholly owned subsidiary, EZ Connect USA, Inc. All significant
intercompany accounts and transactions have been eliminated in consolidation.
3. 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 revenues and expenditures during the reporting period.
Actual results could differ from those estimates.
<PAGE> 29
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period September 23, 1999 (Inception) through June 30, 2000
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
4. Depreciation
---------------
Depreciation of equipment is provided on the straight-line method over the
estimated useful lives of the assets of three to five years and on accelerated
methods for tax purposes.
5. Fair value of financial instruments
--------------------------------------
The carrying value of the Company's trade accounts payable and accrued
liabilities approximate their fair values.
6. Income taxes
---------------
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred tax assets and liabilities are determined
based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates and laws that will be
in effect, when the differences are expected to reverse. An allowance against
deferred tax assets is recorded, when it is more likely than not that such tax
benefits will not be realized.
7. Net earnings (loss) per share
--------------------------------
Basic earnings (loss) per common share (EPS) is based on the weighted average
number of common shares outstanding during each period. Diluted earnings
(loss) per common share are based on shares outstanding (computed as under
EPS) and dilutive potential common shares. Potential common shares included in
the dilutive earnings per share calculation include stock options awarded and
shares to be issued in connection with convertible debt. Potential common
shares are not included in the diluted loss per share calculation because to
do so would be antidilutive.
8. Stock Options
----------------
The Company has elected to following Accounting Principles Board Opinion No.
25 "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options rather than
adopting the alternative fair value accounting provided for under FASB No. 123
"Accounting for Stock-Based Compensation" (SFAS 123).
<PAGE>
<PAGE> 30
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period September 23, 1999 (Inception) through June 30, 2000
NOTE B - GOING CONCERN
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. The Company has generated net
losses of $3,903,453 since inception (September 23, 1999), and has an
accumulated stockholders deficit of $770,318. In addition the Company's
current liabilities exceed its current assets by $792,067 as of June 30, 2000.
The Company's continuation as a going concern is dependent on its ability to
meet its obligations, to obtain additional financing as may be required and
ultimately to attain profitability.
The Company is a development stage enterprise and has not yet generated any
revenue through June 30, 2000. During June of 2000, the Company entered a
letter of intent to merge with Encore Wireless Inc., (Encore) to continue
developing the capability to become a private label wireless provider (Note
K). Once the merger is complete, the Company's ability to develop profitable
operations is dependent on building a subscriber base and obtaining sufficient
funds or financing for the acquisition of subscriber equipment and the
required infrastructure. The Company plans to convert outstanding debt into
stock in order to reduce the liabilities of the Company. In addition, the
Company intends to reduce overhead costs by consolidating management with
Encore once the merger is completed.
NOTE C - RECAPITALIZATION
On September 30, 1999 the Company merged with EZConnect USA, Inc. (USA). USA
was originally formed on September 23, 1999. The transaction was initiated
through the issuance of 6,075,000 shares of EZConnect, Inc.'s common stock to
the shareholders of USA in exchange for all of the outstanding common stock of
USA.
The combination of EZConnect, Inc. and EZConnect USA, Inc. was recorded as a
reverse acquisition of EZ Connect, Inc. As such, the historical financial
statements of EZ Connect, USA, Inc., the accounting acquirer, are presented.
After the reverse acquisition there were 8,660,464 shares of common stock
outstanding with approximately 30 percent of those shares being held by former
stockholders of Diversified.
NOTE D - ACCRUED LIABILITIES
Accrued liabilities at June 30, 2000 consisted of the following:
Legal fees $ 64,553
Accrued consulting fees 28,789
Accrued compensation 23,682
Accrued software expense 7,165
Accrued bonus 5,000
Accrued interest 4,578
Customer deposit 1,050
-----------
$ 134,817
===========
<PAGE> 31
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period September 23, 1999 (Inception) through June 30, 2000
NOTE E - LINE OF CREDIT
During 2000, the Company obtained a line of credit from a stockholder for up
to $1,500,000 bearing interest at 10 percent. The line of credit is
convertible into stock at the option of the debt holder at $1.00 per share.
At any time the market price of the stock is higher than the conversion rate
on the day of draw on the line of credit, the difference between the price to
convert and the market price of the stock is considered a beneficial
conversion feature. The beneficial conversion feature is recorded as an
additional non-cash charge to interest expense and is recognized in the period
when the debt becomes convertible into stock. For the period ended June 30,
2000, the beneficial conversion resulted in an increase of interest expense of
$535,530 and an effective interest rate on the line of credit of approximately
307 percent. The Company had an outstanding balance of $535,530 in borrowings
against the line at June 30, 2000, with $964,470 remaining credit available.
The line of credit is collateralized by all of the Company's assets.
NOTE F - NOTES PAYABLE TO STOCKHOLDERS
The Company has three uncollateralized notes payable to stockholders in the
aggregate amount of $100,000 with an interest rate of 10 percent. All notes
are considered past due as of June 30, 2000. These notes are convertible into
stock at the option of the debt holder at $1.00 per share. The market price of
the stock was higher than the conversion rate on the day of issuance. The
difference between the price to convert and the market price of the stock is
considered a beneficial conversion feature. The beneficial conversion feature
is recorded as an additional non-cash charge to interest expense and is
recognized in the period when the debt becomes convertible into stock. For
the period ended June 30, 2000, the beneficial conversion resulted in an
increase in interest expense of $104,578 and an effective interest rate on the
notes of approximately 218 percent. Subsequent to June 30, 2000 all
outstanding notes were converted to stock (Note K).
NOTE G - INCOME TAXES
The Company has sustained a net operating loss in the period presented. There
were no deferred tax assets or income tax benefits recorded in the financial
statements for net deductible temporary differences or net operating loss
carryforwards because the likelihood of realization of the related tax
benefits cannot be established. Accordingly, a valuation allowance has been
recorded to reduce the net deferred tax asset to zero and consequently, there
is no income tax provision or benefit for the period presented. The increase
in the valuation allowance was $1,119,662 for the period ended June 30, 2000.
As of June 30, 2000, the Company had net operating loss carryforwards for tax
reporting purposes of approximately $480,226 that expire in 2020. Utilization
of the net operating loss is dependent on the profitable operation of the
Company in the future. In addition, utilization of approximately $913,000
federal and $271,000 state net operating losses are subject to limitations on
the carryforward of net operating losses after a change in ownership according
to the US Internal Revenue Code.
<PAGE> 32
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period September 23, 1999 (Inception) through June 30, 2000
NOTE G - INCOME TAXES - CONTINUED
Income tax benefit differs from the amount computed by applying the U.S.
Federal income tax rate of 34 percent to pretax loss from continuing
operations as a result of the following:
Computed tax benefit $ (1,327,174)
State income taxes (106,136)
Non-deductible items 233,648
Change in valuation allowance 1,199,662
------------
Income taxes $ -
============
Deferred income tax assets and liabilities are as follows:
Deferred tax assets
Benefit of net operating loss carryforwards $ 480,226
Asset reserve and accrued liabilities 719,255
Depreciation 181
Less valuation allowance (1,199,662)
------------
Net deferred tax assets (liabilities) $ -
============
NOTE H - OPTIONS
During 2000, the board of directors approved two stock option plans. The 1999
non-qualified stock option plan and the 2000 non-qualified stock option plan,
as well as various consulting and executive options. Under the 1999 Plan, the
Company granted 250,000 options to various consultants. Options granted under
this plan vested immediately and expire five years after the date of grant.
The 1999 Plan had a maximum of 500,000 options.
Under the 2000 Plan, the Company granted 2,095,000 options to employees and
consultants of the Company. Options under the 2000 Plan vest at different
rates from immediately to three years. The options expire five years after
the grant date. The 2000 Plan had a maximum of 5,000,000 options.
During 2000, the Company also granted options to three executives and various
consultants under newly executed employment (Note I) and consulting
agreements. The agreements granted options to acquire an aggregate of
3,311,000 shares of common stock at exercise prices from $1.00 to $5.75 per
share. The options under these agreements vest and expire through January
2002.
<PAGE>
<PAGE> 33
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period September 23, 1999 (inception) through June 30, 2000
NOTE H - OPTIONS - CONTINUED
Options have been granted to the following:
Number of
Shares
------------
Board members 250,000
Executive officers, including officers who are directors 4,478,000
Other employees 70,000
Consultants 823,000
Options issued in lieu of interest 35,000
------------
5,656,000
============
The Company accounts for stock option grants to employees and directors under
its Plans in accordance with APB 25 and related interpretations. Accordingly,
no compensation costs are recognized for options granted under the Plan at or
in excess of the fair market value of the stock on the date of grant. During
the period ended June 30, 2000, the Company granted 4,798,000 options to
employees and/or board members of which 263,000 were below market value at the
date of grant resulting in compensation expense of $291,750. The remaining
4,535,000 options were issued at a price at or in excess of fair market value
and therefore, no compensation was recorded. Had compensation expense for the
options granted been determined based upon the fair value of the awards at the
grant date consistent with the methodology prescribed by FAS 123, the
Company's net loss and loss per share would have been increased to the
following pro forma amounts:
Net loss As reported $ 3,903,453
Pro forma 12,854,223
Loss per share - basic
and diluted As reported (0.46)
Pro forma (1.50)
The fair value of these options was estimated at the date of grant using the
modified Black-Scholes American option-pricing model with the following
weighted-average assumptions for 2000: expected volatility of 152 percent;
risk-free interest rate ranging from 5.625 percent to 6.750 percent; and
expected life ranging from two to five years, respectively. The weighted-
average fair value of options granted to employees was $3.26.
Option pricing models require the input of highly subjective assumptions
including the expected stock price volatility. Also, the Company's employee
stock options have characteristics significantly different from those of
traded options, and changes in the subjective input assumptions can materially
affect the fair value estimate. Management believes the best input
assumptions available were used to value the options and that the resulting
option values are reasonable.
<PAGE> 34
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period September 23, 1999 (inception) through June 30, 2000
NOTE H - OPTIONS - CONTINUED
During the period ended June 30, 2000, the Company also issued options to
purchase 823,000 shares of common stock of the Company to outside consultants
for services received. The options are exercisable at prices ranging from
$1.47 to $3.25 per share. The value of the services is based on the fair
value at the date of grant calculated using the Black-Scholes option-pricing
model or the value of the services rendered whichever is more readily
determinable. Expense for services is recognized at the time the services were
rendered and the options become exercisable. Expense recognized for the
period ended June 30, 2000 related to these options totaled $1,924,599.
The Company also issued 35,000 options to purchase shares of the Company's
common stock. These options were exercisable the date of grant at $2.25 per
share in connection with the issuance of notes payable to stockholders.
Expense related to these options is recognized at the fair value of the option
based on modified Black-Scholes option-pricing model. The Company recorded a
non-cash charge to interest expense of $46,200 for these options.
Changes in the Company's stock options during the period are as follows:
Weighted-
Average
Stock Exercise Exercise
Options Price Price
------------ ---------- -----------
Outstanding at September 23, 1999 - - -
Granted 5,656,000 $ 1-5.75 $ 2.78
Exercised - - -
Canceled or expired - - -
------------
Outstanding at June 30, 2000 5,656,000 1-5.75 2.78
============
Exercisable at June 30, 2000 2,711,000 1-5.75 2.83
============
<PAGE>
<PAGE> 35
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period September 23, 1999 (Inception) through June 30, 2000
NOTE H - OPTIONS - CONTINUED
A summary of the status of the options outstanding under the Company's stock
option plan at June 30, 2000 is presented below:
<TABLE>
<CAPTION>
STOCK OPTIONS ISSUED BELOW MARKET PRICE.
Weighted-
average Weighted- Weighted-
remaining average average
Number contractual exercise Number exercise
Range of exercise prices Outstanding life (years) price exercisable price
------------------------ ----------- ------------ ---------- ----------- ---------
<S> <C> <C> <C> <C> <C>
$1.00-1.50 583,000 2.13 $1.48 583,000 $1.48
1.51-2.00 - - - - -
2.01-2.50 648,000 1.84 2.30 648,000 2.30
--------- ---------
1,231,000 1,231,000
STOCK OPTIONS ISSUED AT MARKET PRICE.
Weighted-
average Weighted- Weighted-
remaining average average
Number contractual exercise Number exercise
Range of exercise prices Outstanding life (years) price exercisable price
------------------------ ----------- ------------ ---------- ----------- ---------
$1.00-1.50 320,000 1.32 $1.50 320,000 $1.50
1.51-2.00 - - - - -
2.01-2.50 95,000 4.66 2.50 95,000 2.50
2.51-3.00 55,000 4.96 3.00 - -
3.01-3.50 1,985,000 3.61 3.25 610,000 3.25
5.75 1,960,000 2.69 5.75 455,000 5.75
--------- ---------
4,415,000 1,480,000
STOCK OPTIONS ISSUED ABOVE MARKET PRICE.
Weighted-
average Weighted- Weighted-
remaining average average
Number contractual exercise Number exercise
Range of exercise prices Outstanding life (years) price exercisable price
------------------------ ----------- ------------ ---------- ----------- ---------
$3.01-3.50 10,000 4.86 $3.25 - $ -
--------- ---------
5,656,100 2,711,000
========= =========
</TABLE>
<PAGE>
<PAGE> 36
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period September 23, 1999 (Inception) through June 30, 2000
NOTE I - COMMITMENTS AND CONTINGENCIES
The Company has employment agreements with certain officers of the Company.
Total salaries covered by these agreements is $808,000 annually over the next
three years. The agreements also include bonuses of $860,000 and stock option
clauses upon meeting specified business objectives and time requirements.
Subsequent to June 30, 2000, the Company entered into settlement agreements
for several of these agreements that were terminated. (Note H and K).
NOTE J - LOSS PER COMMON SHARE
The following data show the shares used in computing loss per common share
including dilutive potential common stock.
Common shares outstanding during the entire period 1,000
Weighted-average common shares issued during the period 8,571,918
------------
Weighted-average number of common shares used in basic EPS 8,572,918
Dilutive effect options -
------------
Weighted-average number of common shares and dilutive
potential common stock used in dilutive EPS 8,572,918
============
Shares from the exercise of all outstanding options (Note H) were not included
in the computation of diluted loss per share because their inclusion would
have been antidilutive for the period ended June 30, 2000.
NOTE K - SUBSEQUENT EVENTS
Subsequent to June 30, 2000, the Company entered into various agreements that
allowed for implementing a plan of recapitalization that provides for (1) the
cancellation of shares and options held by former affiliates and other
shareholders; (2) the issuance of new shares and options in settlement and
release of claims against the Company; and (3) the issuance of shares to
certain creditors of the Company for the conversion of outstanding debt.
In connection with this plan of recapitalization, stockholders returned
6,710,500 shares of common stock to the Company as authorized and unissued.
Holders of certain stock options also surrendered 5,416,000 options to
purchase common stock of the Company for cancellation.
Of these options, 4,013,000 were surrendered by certain terminated employees
in connection with the settlement of their employment agreements subsequent to
June 30, 2000. The Company settled these agreements for $34,000 in cash and
the issuance of 595,000 options to purchase common stock for any and all
claims.
<PAGE> 37
EZConnect, Inc. and Subsidiary
(A Development Stage Company)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the period September 23, 1999 (Inception) through June 30, 2000
NOTE K - SUBSEQUENT EVENTS - CONTINUED
Various consultants, stockholders and board members surrendered the remaining
1,403,000 options canceled. Subsequent to the cancellation of these options,
the Company issued new options to purchase 1,095,000 shares of the Company's
common stock to certain of these individuals.
Simultaneous with the plan of recapitalization, stockholders converted all
principal and accrued interest on notes due from the Company totaling
$1,248,795 for 1,248,795 shares of common stock of the Company.
Effective October 13, 2000, the Company issued an aggregate of 100,000 shares
to certain shareholders and affiliates of the Company in exchange for the
settlement and release of any and all claims relating to rights they may have
to acquire shares of the Company's common stock from former affiliates of the
Company.
Subsequent to June 30, 2000, the Company merged with Encore Wireless, Inc.
(Encore), a California company, wherein the Company acquired Encore for
$350,000 cash and 2,500,000 shares of its Series A Convertible Preferred
Stock. The acquisition was recorded as a purchase with Encore continuing as a
wholly-owned subsidiary of the Company. Of the 2,500,000 shares of the
Company's Series A Preferred Stock issued to the Encore shareholders,
1,875,000 shares have been placed in escrow and will be released based on
certain performance criteria. One-half of the shares placed in escrow will be
"earned-out" based on Encore achieving a minimum number of subscribers and the
other one-half of the shares placed in escrow shall be "earned-out" based on
the continued active involvement of certain shareholders.
Subsequent to June 30, 2000, the Company initiated a private placement
arrangement to raise $1,500,000 through the sales common stock with a minimum
placement of $1,000,000 as required by the Encore merger agreement. As of the
closing date of the merger with Encore, the Company had successfully raised
the $1,000,000 minimum through the sale of 1,000,000 shares of common stock to
accredited investors.
