<PAGE>
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2000
--------------
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to
Commission File No. 0-27649
-------
Upgrade International Corporation
(Exact name of small business issuer as specified in its charter)
Florida 58-2441311
- ------- ----------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1411 Fourth Avenue - Suite 629 Seattle, Washington 98101
(Address of principal executive offices)
(206) 903-3116
(Issuer's telephone number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
YES _____ NO x
------
State the number of shares outstanding of each of the issuer's classes of common
equity as of the latest practicable date: As of May 10, 2000, 19,236,717 shares
of common stock, $.001 par value were outstanding.
Transitional Small Business Disclosure Format (Check one): Yes [_] No [X]
<PAGE>
INDEX
<TABLE>
<CAPTION>
PART I -- Financial Information Page
<S> <C>
Item 1. Financial Statements
- ------- --------------------
Consolidated balance sheets at March 31, 2000 and September 30, 1999................. 3
Consolidated statements of operations for the three and six months ended March 31,
2000 and March 31, 1999 and cumulative from inception (February 5, 1997)............. 4
Consolidated statement of stockholders' equity for the six months ended March
31, 2000............................................................................. 5
Consolidated statement of cash flows for the six months ended March 31, 2000 and
cumulative from inception (February 5, 1997)......................................... 6
Notes to Consolidated Financial Statements........................................... 7
Item 2. Management's Discussion and Analysis or Plan of Operation................... 11
- ------- ---------------------------------------------------------
PART II -- Other Information......................................................... 13
Item 1. Legal Proceedings........................................................... 13
- ------- -----------------
Item 2. Changes In Securities and Use of Proceeds................................... 13
- ------- -----------------------------------------
Item 5. Other Information........................................................... 13
- ------- -----------------
Item 6. Exhibits and Reports on Form 8 - K.......................................... 14
- ------- ----------------------------------
Signatures........................................................................... 16
</TABLE>
-2-
<PAGE>
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30, March 31,
-------------------- -------------------
1999 2000
-------------------- -------------------
(unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents $ 4,781,330 $ 2,687,675
Subscription receivable 165,000 730
Prepaid expenses, deposits and other 209,054 192,470
-------------------- -------------------
Total current assets 5,155,384 2,880,875
PROPERTY AND EQUIPMENT - AT COST,
less accumulated depreciation and amortization 1,003,381 1,380,936
OTHER ASSETS
Intangible assets, net of accumulated amortization 253,763 290,945
Equipment deposits - 1,200,000
Other deposits 135,032 317,344
-------------------- -------------------
Total assets $ 6,547,560 $ 6,070,100
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 1,068,769 $ 857,790
Accrued liabilities 843,493 778,273
Payable to related parties 370,270 178,679
Loans payable to related parties 237,365 159,897
Other 31,322 26,444
--------------------- --------------------
Total current liabilities 2,551,219 2,001,083
CONVERTIBLE DEBENTURES, net of unamortized discount - 661,705
MINORITY INTEREST 1,792,869 71,038
COMMITMENTS AND CONTINGENCIES - -
STOCKHOLDERS' EQUITY
Common stock - $.001 par value, 50,000,000 shares authorized 12,958 19,192
Stock subscriptions 12,344,613 459,628
Additional paid in capital 2,082,479 21,454,244
Receivable from stockholders of subsidiary (400,000) (400,000)
Accumulated development stage deficit (11,836,578) (18,196,790)
--------------------- --------------------
2,203,472 3,336,274
--------------------- --------------------
Total liabilities and stockholders' equity $ 6,547,560 $ 6,070,100
===================== ====================
</TABLE>
-3-
<PAGE>
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended
Six months ended March 31, March 31,
-------------------------------- -----------------------------
1999 2000 1999 2000
------------ ------------ ------------ ------------
Costs and expenses (unaudited) (unaudited) (unaudited) (unaudited)
<S> <C> <C> <C> <C>
Research and development $ 726,263 $ 1,869,127 $ 704,771 $1,109,319
Purchased in-process research and development 1,361,110 425,800 1,189,472 269,600
Sales and marketing - 928,535 - 185,552
General and administrative 390,021 4,389,930 169,896 2,670,686
------------ ------------ ------------ -----------
2,477,394 7,613,392 2,064,139 4,235,157
Other expenses (income)
Equity in losses of UltraCard 268,688 - 201,426 -
Interest expense 7,710 520,644 7,710 63,893
Other, net 119,045 (86,491) 39,781 (45,632)
------------ ------------ ------------ -----------
395,443 434,153 248,917 18,261
Minority interest in losses of subsidiaries (125,000) (1,687,333) (125,000) (823,763)
------------ ------------ ------------ -----------
NET LOSS $2,747,837 $ 6,360,212 $2,188,056 $3,429,655
============ ============ ============ ============
LOSS PER COMMON
SHARE-BASIC AND DILUTED $ 0.23 $ 0.38 $ 0.16 $ 0.18
============ ============ ============ ============
<CAPTION>
Cumulative
results of
operations since
inception
(February 5, 1997)
-----------------
Costs and expenses (unaudited)
<S> <C>
Research and development $ 3,185,291
Purchased in-process research and development 5,971,603
Sales and marketing 2,570,660
General and administrative 6,767,075
--------------
18,494,629
Other expenses (income)
Equity in losses of UltraCard 1,264,316
Interest expense 531,352
Other, net (50,130)
--------------
1,745,538
Minority interest in losses of subsidiaries (2,043,377)
--------------
NET LOSS $(18,196,790)
==============
LOSS PER COMMON
SHARE-BASIC AND DILUTED $ 1.98
==============
</TABLE>
-4-
<PAGE>
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY
Six months ended March 31, 2000 (unaudited)
<TABLE>
<CAPTION>
Additional Receivable from
Voting common stock Common stock subscribed paid-in stockholders
---------------------- -------------------------
Shares Amount Shares Amount Capital of subsidiary
----------- -------- ---------- ---------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Balances at October 1, 1999 12,957,488 12,958 5,216,933 12,344,613 2,082,479 (400,000)
Issuance of subscribed
shares in November 1999 999,999 1,000 (999,999) (1,799,998) 1,798,998 -
Issuance of common shares,
including shares
subscribed, in November
1999 at $2.50 per share,
net of expenses 4,652,281 4,652 (4,045,583) (10,113,957) 11,521,038 -
Issuance of common stock
at $.25 per share in
December 1999 through
exercise of employee
stock options 90,000 90 - - 22,410 -
Common shares issued for
services in December 1999
at $3.47 per share 70,000 70 - - 242,830 -
Allocation of debenture
proceeds to beneficial
conversion feature - - - - 400,000 -
Allocation of debenture
proceeds to stock warrants
- - - - 416,040 -
Issuance of common stock
warrants for services in
January 2000 - - - - 339,500 -
Issuance of common stock
at $44.00 per share in
January 2000 through a
private placement, net of
expenses 100,000 100 - - 4,355,900 -
Issuance of common stock
at $2.50 per share in
February 2000 through
exercise of common stock
warrants 102,546 102 - - 256,263 -
Issuance of common stock
at $.25 per share in
February 2000 through
exercise of common stock
warrants 91,903 92 - - 22,884 -
Issuance of common stock
in February 2000
subscribed in August
1999 at $.25 per share 27,500 28 (27,500) (71,030) 71,002 -
Issuance of common stock
at $.25 per share in
March 2000 through
exercise of common stock
warrants 100,000 100 - - 24,900 -
Common stock subscribed
at $2.50 per share in
March 2000 related to
placement fees - - 40,000 100,000 (100,000) -
Net consolidated loss for
the six months ended
March 31, 2000 - - - - - -
----------- -------- ---------- ---------- ----------- --------------
Balances at March 31, 2000 19,191,717 $19,192 183,851 459,628 $21,454,244 $ (400,000)
=========== ======== ========== ========== =========== ==============
<CAPTION>
Accumulated
Development
stage deficit Total
-------------- -----------
<S> <C> <C>
Balances at October 1, 1999 (11,836,578) 2,203,472
Issuance of subscribed
shares in November 1999 - -
Issuance of common shares,
including shares
subscribed, in November
1999 at $2.50 per share,
net of expenses - 1,411,733
Issuance of common stock
at $.25 per share in
December 1999 through
exercise of employee
stock options - 22,500
Common shares issued for
services in December 1999
at $3.47 per share - 242,900
Allocation of debenture
proceeds to beneficial
conversion feature - 400,000
Allocation of debenture
proceeds to stock warrants
- 416,040
Issuance of common stock
warrants for services in
January 2000 - 339,500
Issuance of common stock
at $44.00 per share in
January 2000 through a
private placement, net of
expenses - 4,356,000
Issuance of common stock
at $2.50 per share in
February 2000 through
exercise of common stock
warrants - 256,365
Issuance of common stock
at $.25 per share in
February 2000 through
exercise of common stock
warrants - 22,976
Issuance of common stock
in February 2000
subscribed to in August
1999 at $.25 per share
through exercise of
common stock warrants - -
Issuance of common stock
at $.25 per share in
March 2000 through
exercise of common stock
warrants - 25,000
Common stock subscribed to
at $2.50 per share in
March 2000 granted in
connection with October
1999 debenture placement
and November 1999 private
placement - -
Net consolidated loss for
the six months ended
March 31, 2000 (6,360,212) (6,360,212)
-------------- -----------
Balances at March 31, 2000 $(18,196,790) $ 3,336,274
============== ===========
</TABLE>
-5-
<PAGE>
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Six months ended Cumulative
March 31, since inception
-------------------------------
1999 2000 (February 5, 1997)
-------------- --------------- ----------------------
(unaudited) (unaudited) (unaudited)
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $ (2,747,837) $ (6,360,212) $ (18,196,790)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 1,265 102,993 114,960
Amortization of beneficial conversion feature - 400,000 400,000
Amortization of debenture discount - 77,745 77,745
Write off of option cost 76,250 - 76,250
Equity in loss of UltraCard 268,688 - 1,264,316
Purchased in-process research and
development 1,361,110 425,800 5,971,603
Warrants and options issued for services - 339,500 2,301,705
Shares issued for services - 242,900 298,650
Expenses incurred through loan assumption 470,005 - 470,005
Stock of subsidiary issued in exchange for
contribution of intellectual property charged
to expense 125,000 - 125,000
Minority interest (125,000) (1,687,333) (2,043,377)
Changes in assets and liabilities:
Prepaid expenses, deposits and other (1,292) (148,167) 465,999
Accounts payable and accrued liabilities (37,523) (200,072) 215,106
-------------- --------------- ----------------------
(609,334) (6,806,846) (8,458,828)
Net cash used in operating activities
Cash flows from investing activities
Acquisition of property and equipment (3,534) (446,641) (514,136)
Equipment Deposits - (1,200,000) (1,200,000)
Acquisition of Centurion Technologies, Inc.,
net of cash acquired - - (650,000)
Acquisition of additional equity interest in EforNet
from a minority shareholder - (200,000) (200,000)
Loans to Centurion Technologies Inc., net (50,000) - -
Acquisition of UltraCard, Inc., net of cash acquired (1,680,900) (260,300) (5,571,105)
Additions to intangible assets - (1,084) (1,084)
-------------- --------------- ----------------------
Net cash used in investing activities (1,734,434) (2,108,025) (8,136,325)
Cash flows from financing activities
Borrowings 83,361 1,000,000 1,218,438
Loan costs - (70,000) (70,000)
Repayments of payables to related parties - (367,628) (927,827)
Proceeds from sale of common stock and stock
subscriptions 2,304,054 6,258,844 19,062,217
-------------- --------------- ----------------------
Net cash provided by
financing activities 2,387,415 6,821,216 19,282,828
-------------- --------------- ----------------------
Net increase (decrease) in cash and cash equivalents 43,647 (2,093,655) 2,687,675
Cash and cash equivalents at the beginning of the period 3,697 4,781,330 -
-------------- --------------- ----------------------
Cash and cash equivalents at the end of the period $ 47,344 $ 2,687,675 $ 2,687,675
============== =============== ======================
</TABLE>
Non-cash disclosures
During the three months ended March 31, 2000, the Company issued 53,282 common
stock warrants for services performed in connection with October 1999 issuance
of convertible debentures and November 1999 private placements. At the time of
the issuance, the warrants were valued at $125,000 using Black-Schooles
pricing model. In addition to warrants, the same underwriters were granted
40,000 shares of the Company's common stock included in total shares
subscribed at March 31, 2000.
-6-
<PAGE>
UPGRADE INTERNATIONAL CORP.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
Note A - Financial Statements
The unaudited consolidated financial statements of the Company and its
subsidiaries have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles (GAAP) have been
condensed or omitted pursuant to such rules and regulations. The results of
operations for interim periods are not necessarily indicative of the results to
be expected for the entire fiscal year ending September 30, 2000. This form 10-
QSB should be read in conjunction with the Form 8-K filed under the former name,
Second CMA, Inc., that includes audited consolidated financial statements for
the year ended September 30, 1999 and 1998 and unaudited financial statements
for the three month period ended December 31, 1999 and 1998.
NOTE B - SUMMARY OF ACCOUNTING POLICIES
On April 6, 2000 the Company completed a merger with Second CMA, Inc., a
Colorado corporation, pursuant to which Upgrade International Corp., became the
successor issuer to Second CMA for reporting purposes under the Securities
Exchange Act of 1934 and elected to report under the Act effective April 6,
2000. The merger agreement provided for the issuance by Upgrade of 45,000
shares, with the issuance of such securities exempt from registrant pursuant to
Rule 506 of the Securities Act of 1933, and the payment of $300,000. The entity
surviving the merger was Upgrade International Corporation.
NOTE C - Basis of Presentation
The Company consolidates all companies in which it has a controlling financial
interest. This generally occurs when the Company owns more than 50% of the
outstanding voting shares of the company. The Company also consolidates 50%-
owned companies in which it has voting control through agreements with other
shareholders. Investments in companies where the Company has significant
influence through ownership of 20% to 50% of the investors voting shares or
contractual arrangements are accounted for by the equity method.
The balance sheet as of March 31, 2000 and September 30, 1999, reflects the
consolidated financial position of the Company and its subsidiaries
(Subsidiaries) as follows: UltraCard, Inc. (UltraCard); Centurion Technologies,
Inc. (Centurion); CTI Acquisition Corporation (CTI); Global CyberSystems, Inc.
(Global); EforNet Corporation (EforNet); Global Cybersystems SA. (GCSA) and
Global Cybersystems PLC (GCPLC). The statements of operations and cash flows
for the six months ended March 31, 1999, reflect the consolidated results of
operations and cash flows of the Company and the results of the subsidiaries
beginning on the dates the Company acquired control. The statements of
operations and cash flows for the six months ended March 31, 2000 include the
consolidated results of the Company and its Subsidiaries. All significant
intercompany balances and transactions have been eliminated in consolidation.
Minority interest represents the minority stockholders' proportionate share in
-7-
<PAGE>
the equity of the Company's consolidated Subsidiaries. The losses incurred by a
subsidiary are allocated on a proportionate basis to minority interest until the
carrying amount of minority interest is eliminated. Further losses are then
included in the net loss of the Company.
NOTE D - Loss per Common Share
---------------------
-8-
<PAGE>
Basic loss per share is computed by dividing the net loss by the weighted
average number of common shares outstanding during the period. The weighted
average number of shares outstanding was 16,905,166 and 11,892,280 for the six
months ended March 31, 2000 and 1999, respectively, 19,147,677 and 13,313,460
for the three months ended March 31, 2000 and 1999, respectively and 9,173,856
since inception (February 5, 1997) through March 31, 2000. Diluted loss per
share for all periods presented equaled basic loss per share due to antidilutive
effect of the potentially dilutive securities.
NOTE E - MANAGEMENT PLANS
The Company is a development stage enterprise as defined under Statement of
Financial Accounting Standards No. 7. The Company is devoting its present
efforts into establishing a new business in the information technology industry
and, is currently in the process of identifying markets and establishing
applications for its technologies. Accordingly, no operating revenues have been
generated. The Company's operations to date have consumed substantial and
increasing amounts of cash. The Company's negative cash flow from operations is
expected to continue and to accelerate in the foreseeable future. The
development of the Company's technology and potential products will continue to
require a commitment of substantial funds. The Company expects that its existing
capital resources will be adequate to satisfy the requirements of its current
and planned operations until the end of the fiscal year 2000. However, the rate
at which the Company expends its resources is variable, may be accelerated, and
will depend on many factors. The Company will need to raise substantial
additional capital to fund its operations and may seek such additional funding
through public or private equity or debt financing or through licensing
arrangements. The Company has commenced private placements on a best efforts, no
minimum basis. In addition the Company is negotiating licensing arrangements and
the possible sale of a minority interest in subsidiary companies. There can be
no assurance that such additional funding will be available on acceptable terms,
if at all. The Company's continued existence as a going concern is ultimately
-9-
<PAGE>
dependent upon its ability to secure additional funding for completing and
marketing its technology and the success of its future operations.
NOTE F - COMMITMENTS
As of March 31, 2000, UltraCard has equipment purchase commitments of
approximately $3,000,000 of which $1,200,000 has been paid as a deposit.
On March 30, 2000, UltraCard entered into a five-year lease agreement for a new
facility that commences on August 1, 2000. The lease requires monthly payments
of approximately $163,000 in the first year accelerating annually to
approximately $190,000 in the final year. In addition, UltraCard is required to
make a lease deposit of $996,000, of which $190,000 has been paid, and prepay
rent of $163,000 which has also been paid. UltraCard plans to move into the
facility in August 2000.
NOTE G - CONTINGENCIES
During February and March 2000, the Company was notified that a series of class
action lawsuits were filed in United States District Court against the Company
and its President alleging securities violations. The Company's counsel
believes the Court will consolidate these complaints. The Company has engaged
defense counsel, whom are reviewing the facts alleged in the complaints and
developing an appropriate response. As a result, the Company has not yet
responded. Management is unable to assess the ultimate outcome of these matters.
Therefore, the accompanying financial statements do not include a liability, if
any, with regard to these matters.
-10-
<PAGE>
ITEM 2. MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
Certain statements contained in this Quarterly Report on Form 10-QSB, including,
without limitation, statements containing the words "believes, " anticipates,"
"estimates," "expects," and words of similar import, constitute "forward looking
statements." You should not place undue reliance on these forward-looking
statements. Our actual results could differ materially from those anticipated
in these forward- looking statements for many reasons, including the risks faced
by us described in the Company's Form 8-K for Period April 6, 2000, in this
Quarterly Report, and in other documents we file with the Securities and
Exchange Commission.
Net loss grew by $3.4 million in the second quarter of fiscal 2000 from $2.9
million in the first quarter of fiscal 2000. Net loss for the first six months
of fiscal 2000 was $6.3 million compared with a $2.8 million net loss for the
first six months of fiscal 1999. The increase in the net loss by more than 230%
compared to the prior year is a result of an increase in development
expenditures for the Company's subsidiary, UltraCard Inc. In the prior year,
losses of UltraCard were reported on an equity basis, as Upgrade owned less than
50% of UltraCard. In addition, fiscal year 1999 did not include the acquisition
of Centurion Technologies, Inc. Also, the level of expenditures in the Company's
subsidiary, EforNet Corporation, were limited as the company had just been
incorporated in February of 1999. The increase in consolidated expenses by 17%
in the second quarter of the fiscal year from the first quarter of the current
fiscal year primarily reflects the Company's efforts in continuing its research
and development initiatives, while at the same time, developing production
facilities to produce the UltraCard and developing application initiatives
through Upgrade and its operating subsidiaries.
Direct research and development expenditures of $1.8 million for the first six
months of the current fiscal year represents an increase of $1.1 million over
the corresponding period in the prior year. This increase represents the
increased cost of the research and development expenditures incurred in
adaptation of production equipment, facilities and processes within UltraCard,
but also in meeting the needs of an expanding list of attributes that may be
incorporated into the UltraCard and application software to meet increasingly
diverse user needs. The costs also reflect an effort at the establishment of a
standard operating system for the UltraCard. A significant portion of the
increase was due to the addition of new personnel, prototype development and
contracts with external research and development contractors. For the near
future research and development expenditures are expected to be maintained and
increase to meet the Company's numerous potential market opportunities.
Additionally, research and development expenses of UltraCard for the first six
months of the previous fiscal year are not reflected in the accompanying
financial statements because the Company accounted for its investment in
UltraCard under the equity method of accounting. All of the Company's research
and development costs are expensed as incurred.
In an effort to augment the Company's internal research initiatives, the Company
will license technology from other businesses or acquire other businesses as an
alternative to internal research and development. The proceeds paid for such
investments in excess of the Company's portion of the net investment in assets
is accounted for as "purchased in-process research and development" which
aggregated $1.3 million in the first six months of 1999 and decreased to $.4
million in the first six months of 2000. This higher level of expenditure in the
corresponding period of the prior year reflects the costs expended in the most
part for UltraCard Inc. which is the holder of the Company's base technology.
UltraCard was acquired on a step by step basis for gross
-11-
<PAGE>
proceeds of $7.9 million with the bulk of that acquisition made in September of
1999, outside of the reporting period. The amounts expensed to purchased in-
process research and development for the first six months of fiscal 2000 is
comprised of additional investments made by the Company for UltraCard Inc. and
EforNet Corporation. All purchased in-process research and development is
expensed as incurred.
General and administrative expenses have increased from $.4 million for the six
months ended March 31, 1999 to $4.4 million for the corresponding six month
period ending March 31, 2000. Included in this growth in general and
administrative expenses over the comparative periods, the Company has acquired a
growing number of subsidiary Companies for which it consolidates the
administrative costs in the current year, which was not the case in the
preceding period. These costs are expected to continue to grow as the
subsidiaries commercialize their products and develop more extensive
infrastructures. In addition, the Company incurred non-cash fees of $.6 million
comprised of costs associated with obtaining the financing to fund the
activities of UltraCard Inc. and related subsidiaries.
Sales and marketing expenditures of $.9 million for the six months ended March
31, 2000 represent costs associated with the Company's attendance at trade shows
and industry awareness programs as the Company builds market awareness to
establish and develop new markets and prepare for effective product launches for
products which are currently under development.
Depreciation and amortization of capital assets for the six months ended March
31, 2000 aggregates $103 thousand a growth of $102 thousand over the
corresponding prior period, related to tangible assets acquired and utilized for
commercial purposes.
LIQUIDITY AND CAPITAL RESOURCES
Cash and equivalents were $2.7 million at March 31, 2000, a decrease from $4.8
million at September 30, 1999. The decrease is primarily the result of
investing activities during the period into production equipment - $1.7 million,
and additional equity acquired in UltraCard and EforNet - $.46 million. Cash
flows from financing activities of $6.8 million essentially offset net cash used
in operating activities of $6.8 million during the six month period under
review.
Upgrade has entered into a funding agreement with UltraCard Inc. which provides
for additional funding of up to $20 million. That agreement is attached as
exhibit hereto. The funding agreement is convertible into common stock upon
completion of an initial public offering by the subsidiary. These conversion
privileges provide to Upgrade the ability to mitigate dilution in the subsidiary
in the event that the subsidiary completes an initial public offering.
In order for the Company to meet these funding requirements and to meet ongoing
operating requirements, it will have to raise additional financing. The Company
expects that its existing capital resources will be adequate to satisfy the
requirements of its current and planned operations until the end of the fiscal
year 2000. However, the rate at which the Company expends its resources is
variable, may be accelerated, and will depend on many factors. The Company will
need to raise substantial additional capital to fund its operations and may seek
such additional funding through public or private equity or debt financing or
through the licensing of its technology. There can be no assurance that such
additional funding will be available on acceptable terms, if at all. The
Company's continued existence as a going concern is ultimately dependent upon
its ability to secure additional funding for completing and marketing its
technology and the success of its future operations.
-12-
<PAGE>
PART II Other Information
Item 1. Legal Proceedings
- -------
On February 24, 2000, a class action suit (Timyan v. Upgrade International Corp.
-------------------------------------
and Bland, U.S. District Court, Western District of Washington at Seattle, c/a
- ---------
#C00-0298) was filed against Upgrade and its president, Daniel S. Bland. The
plaintiff, Phil Timyan, is a minority shareholder in Upgrade. Plaintiff is
represented by Hagens Berman LLP and Milberg Weiss Bershad Hynes & Lerach LLP.
The complaint alleges material misrepresentations and omissions were made by
Upgrade and Mr. Bland. The complaints seeks class certification and payment of
unspecified damages and attorneys fees.
On March 3, 2000, a suit (Bedford v. Upgrade International
--------------------------------
Corp. et al, U. S. District Court, Western District of Washington at Seattle,
- -----------
c/a #CVO-03420 was filed against the Company. The plaintiff is minority
shareholder in Upgrade. The complaint alleges violation of the Securities
Exchange Act. The complaint seeks payment of unspecified damages.
Upgrade is has recently engaged the firm of Cohen, Milstein, Hausfield & Toll,
P.L.L.C. as defense counsel. Counsel is currently reviewing the facts alleged
in the complaints and developing an appropriate response.
Item 2. Changes in Securities and Use of Proceeds
- -------
A. Recent Sales of Unregistered Securities
(1) Set forth below is information regarding the issuance and sales of our
securities without registration for the three months ended March 31, 2000.
No such sales involved the use of an underwriter and no commissions were
paid in connection with the sale of any securities.
(2) In January 2000, the Company concluded an offering of 100,000 shares
pursuant to an offering memorandum at $44.00 per share for total gross
proceeds of $4,400,000, to Newton Investment Management Ltd. The offer and
sale of shares were exempt from registration pursuant to Regulation S
promulgated under the U.S. Securities Act of 1933, as amended (the
"Securities Act"). In addition the shares were exempt from registration
under Rule 506 of Regulation D and under Section 4(2) of the Securities
Act.
(3) During the quarter ended March 31, 2000, the Company issued 321,949 shares
pursuant to warrants exercised at prices from $0.25 and $2.50 per share for
total proceeds of $304,341. The sale of shares was exempt from registration
under Rule 506 of the Securities Act. In addition all sales are exempt
under Regulation S of the Securities Act due to the foreign nationality of
the relevant purchasers.
(4) In March 1999 the Company paid a $100,000 in share subscriptions at $2.50
per share in connection with an October 1999 debenture placement and
November 1999 private placement. The transaction was exempt from
registration under Rule 506 of the Securities Act, and under Regulation S
of the Securities Act due to the foreign nationality of the relevant
purchasers.
Item 5. Other Information
- -------
A. Changes in Rights of Stockholders
Pursuant to the Agreement and Plan of Merger, all of the 12,000,000 outstanding
shares of common stock of Second CMA were exchanged for 45,000 shares of common
stock of Upgrade. Upgrade is authorized to issue 50,000,000 shares of common
stock, par value $.001 per share. Holders of common stock are entitled, on a
ratable basis, to such dividends as may be declared from time to time by the
Board of Directors out of funds legally available therefore, and to a pro rata
share of all assets available for distribution upon liquidation or dissolution
or winding up of the affairs of Upgrade. The Board of Directors has never
declared a dividend and does not anticipate declaring a dividend in the future.
Each share of common stock entitles the holder to one vote. A quorum for action
by shareholders is a majority of outstanding shares. Once a quorum is present,
shareholder action is taken by vote of a plurality of the shares present. Under
-13-
<PAGE>
Florida Business Corporation Act (S)728, no rights to cumulative voting exist
for the election of directors, which means that holders of more than 50% of the
shares voting for election of directors can elect 100% of the directors if they
choose to do so. The holders of the shares of common stock have no preemptive
or subscription rights. To the extent that additional shares of Upgrade's
common stock are issued, the relative interests of existing shareholders may be
diluted.
B. Changes in Accountant
Effective April 6, 2000, as a result of the merger of Second CMA, Inc. into
Upgrade International Corporation, pursuant to which Upgrade succeeded to Second
CMA as a registrant under the Securities Exchange Act of 1934, Grant Thornton
LLP will continue to serve as the independent auditor for the registrant. By
virtue of Second CMA's merger into Upgrade, Comiskey & Company no longer serves
as the registrant's auditor.
The audit reports of Comiskey & Company on the financial statements of Second
CMA, Inc. as of and for the year ended December 31, 1999 did not contain any
adverse opinion or disclaimer of opinion, nor were they qualified or modified as
to uncertainty, audit scope or accounting principles. During Second CMA's two
most recent fiscal years and any subsequent interim period preceding the change,
there were no disagreements with the former accountant on any matter of
accounting principles or practices, financial statement disclosure, or auditing
scope or procedure, which disagreements, if not resolved to the satisfaction of
the former accountant, would have caused it to make reference to the subject
matter of the disagreements in connection with its report.
The Company has provided a copy of this disclosure to the new accountant and an
opportunity to furnish the Company with a letter addressed to the Securities and
Exchange Commission containing any new information, clarification of the
Company's expression of its views, or the respects in which it does not agree
with the statements made by the Company.
C. Changes in Fiscal Year
Effective April 6, 2000, as a result of the merger of Second CMA, Inc. into
Upgrade International Corporation, the combined surviving entity will continue
to use Upgrade's fiscal year end of September 30, not the December 31 year end
previously used by Second CMA.
D. Changes in Officers and Directors
-14-
<PAGE>
On April 6, 2000, Second CMA, Inc. merged into Upgrade International
Corporation. Pursuant to the Agreement and Plan of Merger, the officers and
directors of Upgrade, the surviving corporation, remained the officers and
directors of the combined entity. They are as follows:
<TABLE>
<CAPTION>
Director
Name Age Since Position(s)
- ---- --- -------- -----------
<S> <C> <C> <C>
Daniel S. Bland 41 12/11/97 President, Secretary,
Director of Upgrade
Malcolm P. Burke 58 6/30/98 Director of Upgrade
Ronald P. Erickson 56 8/15/98 Director of Upgrade
David I. Zucker 55 6/30/98 Director of Upgrade
</TABLE>
Daniel S. Bland is the founder of Upgrade. He also was a founder, and from 1993
to 1996 served as a director and the chief executive officer of, Empyrean
Diagnostics Ltd., a reporting company in British Columbia under the British
Columbia Securities Commission.
Malcolm P. Burke is the founder, and since 1998 to present has been the
president and chief executive officer, of Primary Ventures Corp., a Vancouver,
British Columbia company providing financial and strategic consulting services
to start-up companies. He also is president of Sopio Investments Ltd., a family
holding company. From 1992 to 1998 Mr. Burke was president and chief executive
officer of Interactive Entertainment Limited, an NASD Small Cap Market company.
Ronald P. Erickson has served as a director and senior executive officer
(currently chairman of the board of directors) of eCharge Corporation, a Seattle
based provider of Internet billing solutions, from October 1997 to present.
From January 1996 through August 1998, Mr. Erickson was chairman of the board of
directors and chief executive officer of GlobalTel Resources, Inc., an
international provider of telecommunications services, messaging and intranet
solutions. From September 1994 to January 1996, Mr. Erickson was managing
director of GlobalVision LLC, a consulting firm. Mr. Erickson also was a co-
founder of Egghead Software, a leading software retailer, where he was variously
chairman, vice chairman, president and chief executive officer from 1992 to
1994.
David I. Zucker is the President of EforNet since the date of its inception
(February 1999). Prior thereto he served as senior consultant, of Innovative
Consulting Services. From August 1996 to June 1998 he was president of the
Eyestream Group of Quadstate Corporation, where he was engaged in Internet video
development. From January 1995 to July 1996 Mr. Zucker was employed by Altamira
Group as manager of product development for a fractal compression plug-in for
Adobe Photoshop software. Previously, Mr. Zucker developed the point of sale
"POS" credit card switching and merchant authorization processing software base
upon which ATM point of purchase processing was developed.
-15-
<PAGE>
E. Submission of Matters to a Vote of Security Holders
The Agreement and Plan of Merger was approved by the unanimous consent of the
Board of Directors of Second CMA, Inc. and approved by unanimous consent
of its shareholders on April 3, 2000.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit No. Description
----------- -----------
10.1 Funding Agreement (UltraCard)
10.2 Stock Purchase Agreement
27.1 Financial Data Schedule
(b) Reports on Form 8-K
Form 8-K for Period April 6, 2000
The Company filed one report on Form 8-K on April 6, 2000 in which the Company
announced the merger between Upgrade International Corp., and Second CMA Inc.,
pursuant to which Upgrade International Corp. was the surviving entity.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Upgrade International Corp.
Date: May 13, 2000 /s/ Daniel Bland
---------------------------------------
Daniel Bland, President and Chief
Executive Officer, and Secretary
-16-
<PAGE>
EXHIBIT INDEX
Exhibit No. Description
----------- -----------
10.1 Funding Agreement (UltraCard)
10.2 Stock Purchase Agreement
27.1 Financial Data Schedule
-17-
<PAGE>
EXHIBIT 10.1
FUNDING AGREEMENT
THIS FUNDING AGREEMENT (this "Agreement") is made and entered into as of
March 21, 2000 (the "Effective Date"), by and between ULTRACARD, INC. a Nevada
corporation (the "Borrower"), and UPGRADE INTERNATIONAL CORPORATION, a Florida
corporation (the "Lender").
WHEREAS, the Borrower desires, from time to time, to borrow additional
funds from the Lender for general working capital, and the Lender is willing,
subject to and upon the terms and conditions herein set forth, to advance and
lend such additional funds to Borrower;
Now, therefore, in consideration of the mutual covenants and agreements
herein contained and for other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
1. Funding Commitment. Lender hereby acknowledges its firm
------------------
commitment to secure or provide additional funding for Borrower, not to exceed
in the aggregate the sum of Twenty Million Dollars ($20,000,000), upon
satisfaction of all of the following conditions precedent:
(a) Borrower shall have provided Lender with a copy of Borrower's
budget for the current fiscal year, which budget has been provided and approved
by Lender.
2. Note. All funds which may be advanced by Lender to Borrower
----
under this Agreement shall be evidenced by a promissory note payable to the
order of the Lender substantially in the form of Exhibit A attached hereto (the
---------
"Note"), duly executed by the Borrower. The terms of the Note shall provide that
all principal and accrued interest thereon shall be due and payable in
accordance with the following terms and conditions: (a) repayment shall be made
prior to the payment of any dividends to shareholders of Borrower; and (b)
subject to the terms of Section 8 below, all principal and accrued interest
shall be due and payable upon the effectiveness of a registration statement
under the Securities Act of 1933 (the "Act") of an initial public offering by
Borrower of its Common Stock which results in net proceeds to the Company of not
less than Thirty Five Million Dollars ($35,000,000) (an "IPO"), or upon the
occurrence of any merger, acquisition or other reorganization of Borrower which
results in a change in control of Borrower. Notwithstanding the foregoing
provisions, the outstanding principal balance on any Note(s), together with all
accrued interest thereon, shall be due and payable in full on March 31, 2004.
3. Transferability of Notes. The Lender may transfer or assign any
------------------------
such Note(s).
4. Interest. Notwithstanding anything herein or in the Note(s) to
--------
the contrary, it is not the intention of the parties hereto to charge, nor at
any time shall there be charged or become due and/or payable hereunder or under
the Note(s) any interest which would result in a rate of interest being charged
which is in excess of the maximum rate permitted to be charged by law, and in
the event that any sum in excess of the maximum legal rate of interest is paid
or charged, the same shall, immediately upon discovery thereof, be deemed to
have been a prepayment of principal (which prepayment shall be permitted, and be
without premium or penalty) as of the date of such receipt, and all payments
made thereafter shall be appropriately reapplied to interest and principal to
give effect to the maximum rate permitted by law, and after such reapplication,
any excess payment shall be immediately refunded to Borrower.
5. Use of Proceeds. The proceeds of any funds advanced or
----------------
loaned to Borrower by Lender under this Agreement shall be used for operating
expenses and working capital in the business of Borrower. The Borrower
acknowledges that any funds advanced or loaned to Borrower pursuant to this
Agreement are made expressly and only for business and commercial purposes.
6. Affirmative Covenants. The Borrower covenants and agrees
---------------------
that, until all Notes, together with any accrued and unpaid interest thereon,
and all of Borrower's other indebtedness to the Lender under this Agreement or
otherwise are paid in full, unless specifically waived by the Lender in
1
<PAGE>
writing, the Borrower shall furnish the Lender, if requested, annual statements
itemizing the income and expenses of the operations of the Borrower and
Borrower's projects, copies of all written instruments affecting the Borrower's
operations, together with complete and accurate balance sheets prepared at the
expense of the Borrower.
7. Negative Covenants. The Borrower covenants and agrees that, until
------------------
all Notes, together with any accrued and unpaid interest thereon, and all of
Borrower's other indebtedness to the Lender are paid in full, the Borrower shall
not, without the prior written consent of the Lender, which consent shall not be
unreasonably withheld, enter into any transaction of merger, or transfer, sell,
assign, lease, or otherwise dispose of all or a substantial part of its
properties or assets, or any interest in its operations, or change the nature of
its business or its company name, or wind up, liquidate, or dissolve, or agree
to do any of the foregoing, without the prior written consent of the Lender.
8. Conversion of Notes to Common Stock of Borrower.
-----------------------------------------------
8.1. Conversion Rates. Effective upon the closing of an IPO, the
outstanding debt of Borrower to Lender (including, but not limited to, any
outstanding principal and interest) under this Agreement as represented by the
Notes shall convert into Common Stock of Borrower at the following rates:
a. With respect to the first $3,800,000 loaned by Lender to Borrower
hereunder and any interest or other indebtedness accrued with respect thereto,
at a rate of $1.90 per share;
b. Any additional amounts (over $3,800,000 in principle) loaned to
Borrower up to $10,000,000 loaned to Borrower hereunder and any interest or
other indebtedness accrued with respect thereto, at a rate of $10.00 per share;
a. Any additional amounts (over $10,000,000 in principle) loaned to
Borrower up to $20,000.000 loaned to Borrower hereunder and any interest or
other indebtedness accrued with respect thereto, at a rate of $15.00 per share.
8.2. Lock-Up Period. Lender agrees that any Common Stock of Borrower
--------------
received as a result of the stock conversion under this section (the "Conversion
Stock ") shall not be re-sold without the consent of Borrower, which consent
shall not be unreasonably withheld or delayed, for a period of two (2) years
after the effective date of the conversion of the debt into Common Stock.
8.3. Restrictive Legend. The certificates representing the Conversion
------------------
Stock shall contain a legend reflecting the restrictions on transfer contained
herein, and by applicable law.
8.4. Registration Rights. Following the IPO and after the Lock-Up
-------------------
Period has expired, if Borrower undertakes a registered offering of its
securities it agrees to cooperate with Lender and include so much of the
Conversation Stock in such offering as is reasonably practicable, and subject to
the restrictions and conditions, if any, imposed by any underwriter in
connection with such offering.
9. Defaults and Remedies.
---------------------
9.1 Events of Default. If any one or more of the following events
-----------------
(herein called "Events of Default") shall occur for any reason whatsoever (and
whether such occurrence shall be voluntary or involuntary or come about or be
effected by operation of law or pursuant to or in compliance with any judgment,
decree, or order of any court or any order, rule, or regulation of any
administrative or governmental body), that is to say:
(a) If default shall be made in the payment of the principal or
interest of any Note, when and as the same shall become due and payable, whether
at maturity or by acceleration or otherwise, and such default shall continue for
thirty (30) days after written notice of default is given;
<PAGE>
(b) If default shall be made in the performance or observance of,
or shall occur under, any covenant, agreement, or other provision of this
Agreement or in any instrument or document delivered to the Lender in connection
with or pursuant to this Agreement, or if any such instrument or document shall
terminate or become void or unenforceable without the written consent of the
Lender, and such default shall continue for thirty (30) days after written
notice of default is given;
(c) If any representation or warranty or any other statement of
fact herein or in any writing, certificate, report, or statement at any time
furnished to the Lender pursuant to or in connection with this Agreement, or
otherwise, shall be intentionally false or misleading in any material respect;
(d) If the Borrower shall admit in writing its inability to pay
its debts generally as they become due, file a petition in bankruptcy or a
petition to take advantage of any insolvency act; make an assignment for the
benefit of its creditors; commence a proceeding for the appointment of a
receiver, trustee, liquidation, or conservator of itself or of a whole or any
substantial part of its property; file a petition or answer seeking
reorganization or arrangement or similar relief under the federal bankruptcy
laws or any other applicable law or statute of the United States or any state;
(e) If the Borrower shall be adjudged a bankrupt; or a court of
competent jurisdiction shall enter an order, judgment, or decree appointing a
receiver, trustee, liquidator, or conservator of the Borrower or of the whole or
any substantial part of its respective properties, or approve a petition filed
against the Borrower seeking reorganization or similar relief under the federal
bankruptcy laws or any other applicable law or statute of the United States or
any state, or if, under the provisions of any other law for the relief or aid of
debtors, a court of competent jurisdiction shall assume custody or control of
the Borrower or of the whole or any substantial part of its respective assets;
or if there is commenced against the Borrower any proceeding for any of the
foregoing relief or if a petition in bankruptcy is filed against the Borrower
and such proceeding or petition remains undismissed for a period of 30 days; or
if the Borrower by any act indicates its consent to, approval of or acquiescence
in any such proceeding or petition; or
(f) If any judgment against the Borrower or any attachment or
execution against any of its property for any amount in excess of $500,000
remains unpaid, unstayed, or undismissed for a period of more than 30 days;
Then and in any such event, and at any time thereafter, if such or any other
Event of Default shall then be continuing, the Lender may, at its option,
declare any outstanding Note(s) to be due and payable, whereupon the maturity of
the then unpaid balance of any and all such Note(s) shall be accelerated and the
same, together with all interest accrued thereon, shall forthwith become due and
payable without presentment, demand, protest, or notice of any kind, all of
which are hereby expressly waived, anything contained herein or in any Note(s)
to the contrary notwithstanding.
9.2 Suits for Enforcement. In case any one or more Events of
---------------------
Default shall occur and be continuing, the Lender may proceed to protect and
enforce its rights or remedies, whether for the specific performance of any
covenant, agreement, or other provision contained herein, in any Note(s), or in
any document or instrument delivered in connection with or pursuant to this
Agreement, or to enforce the payment of any Note(s) or any other legal or
equitable right.
9.3 Rights and Remedies Cumulative. No right or remedy herein
------------------------------
conferred upon the Lender is intended to be exclusive of any other right or
remedy contained herein, in any Note(s), or in any instrument or document
delivered in connection with or pursuant to this Agreement, and every such right
or remedy shall be cumulative and shall be in addition to every other such right
or remedy contained herein and therein, or now or hereafter existing at law or
in equity or by statute, or otherwise.
<PAGE>
9.4 Rights and Remedies Not Waived. No course of dealing between the
------------------------------
Borrower and the Lender or any failure or delay on the part of the Lender in
exercising any rights or remedies hereunder shall operate as a waiver of any
rights or remedies of the Lender, and no single or partial exercise of any
rights or remedies hereunder shall operate as a waiver or preclude the exercise
of any other rights or remedies hereunder.
10. Representations and Warranties. In order to induce the Lender or the
------------------------------
Borrower, as the case may be, to enter into this Agreement and to make any loans
as herein provided for, the Borrower makes the following representations and
warranties which shall survive the execution and delivery of this Agreement and
any Note(s), and any inspection or examination at any time made by or on behalf
of the Lender and the Borrower.
10.1 Corporate Status. The Borrower is a duly organized corporation
----------------
in good standing under the laws of the State of Nevada, and has the power and
authority to own its properties and to transact the business in which it is
engaged or presently proposes to engage. The Borrower is duly qualified as a
foreign company and is in good standing in all states where the nature of its
business or the ownership or use of property requires such qualification.
10.2 Corporate Power and Authority. The Borrower and the Lender each
-----------------------------
has the power to borrow and to execute, deliver, and carry out the terms and
provisions of this Agreement, any Note(s), and all instruments and documents
delivered by it pursuant to this Agreement, and the Borrower and the Lender will
each have taken or caused to be taken all necessary corporate action (including
but not limited to, the obtaining of any consent of its shareholders as required
by law or by the Articles of Incorporation of the Borrower and the Lender) to
authorize the execution, delivery, and performance of this Agreement, any
borrowing hereunder, the making and delivery of any Note(s), and the execution,
delivery, and performance of the instruments and documents delivered by it
pursuant to this Agreement.
10.3 No Violation of Agreements. The Borrower is not in default
--------------------------
under any debenture, mortgage, deed of trust, agreement, or other instrument to
which it is a party or by which it may be bound. Neither the execution and
delivery of this Agreement, any Note(s), or any of the instruments and documents
to be delivered pursuant to this Agreement, nor the consummation of the
transactions herein and therein contemplated, nor compliance with the provisions
hereof or thereof will violate any law or regulation, or any order or decree of
any court or governmental instrumentality, or will conflict with, or result in
the breach of, or constitute a default under, any indenture, mortgage, deed of
trust, agreement, or other instrument to which the Borrower is a party or by
which it may be bound, or result in the creation or imposition of any lien,
charge, or encumbrance upon any of the property of the Borrower thereunder, or
violate any provision of the Articles of Incorporation or Bylaws.
11. Miscellaneous.
-------------
11.1 Collection Costs. In the event that the Lender shall retain or
----------------
engage an attorney or attorneys to collect, enforce, or protect its interests
with respect to this Agreement, any Note(s), or any instrument or document
delivered pursuant to this Agreement, or as to any collateral securing any
Note(s), the Borrower shall pay all of the costs and expenses of such
collection, enforcement, or protection, including reasonable attorneys' fees,
and the Lender may take judgment for all such amounts, in addition to the unpaid
principal balance of any Note(s) and accrued interest thereon. Such amounts
shall be deemed additional indebtedness under the Note(s) and shall bear
interest at the Note interest rate from the date such costs are incurred by
Borrower. In the event Borrower shall retain or engage an attorney to collect,
enforce, or protect its interests with respect to this Agreement, in the event
of a breach by Lender, Lender shall pay the costs, including reasonable
attorneys' fees of Borrower in connection therewith.
11.2 Modification and Waiver. No modification or waiver of any
-----------------------
provision of any Note(s) or of this Agreement and no consent by the Lender to
any departure therefrom by the Borrower
<PAGE>
shall be effective unless such modification or waiver shall be in writing and
signed by a duly authorized officer of the Lender, and the same shall then be
effective only for the period, on the conditions and for the specific instances
and purposes specified in such writing. No notice to or demand on the Borrower
in any case shall entitle the Borrower to any other or further notice or demand
in similar or other circumstances.
11.3 Nevada Law. All Note(s) and this Agreement shall be
----------
interpreted, construed and enforced in accordance with and governed by the laws
of the State of Nevada.
11.4 Notices. All notices, requests, demands, or other
-------
communications provided for herein shall be in writing and shall be deemed to
have been given when sent by mail, telex, or other means of electronic
transmission, including telecopiers, to the addresses listed below for each
party, or to such other person or address as either party shall designate to the
other from time to time in writing forwarded in like manner:
Lender: UPGRADE INTERNATIONAL CORPORATION
435 Martin Street, Suite 1010
Blaine, Washington 98231
Borrower: ULTRACARD, INC.
1550 S. Bascom Ave., Ste. 100
Campbell, California 95008
11.5 Captions. The captions of the various Sections and paragraphs
--------
of this Agreement have been inserted only for the purposes of convenience. Such
captions are not a part of this Agreement and shall not be deemed in any manner
to modify, explain, enlarge, or restrict any of the provisions of this
Agreement.
11.6 Benefit of Agreement. This Agreement shall be binding upon and
--------------------
inure to the benefit of the Borrower and the Lender and their respective
successors and assigns, and all subsequent holders of any Note(s).
11.7 Counterparts. This Agreement may be executed in two or more
------------
counterparts, or by facsimile, any of which shall be deemed an original but all
of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the Borrower and the Lender have caused this Agreement
to be duly executed by their respective officers thereunto duly authorized as of
the day and year first above written.
Lender: Borrower:
UPGRADE INTERNATIONAL ULTRACARD, INC.
CORPORATION, a Florida corporation a Nevada corporation|
By: _________________________ By: ______________________
Daniel Bland Daniel Kehoe
Its: President Its: President
<PAGE>
EXHIBIT A
---------
THE SECURITIES REPRESENTED BY THIS NOTE (INCLUDING A CONVERSION OF SAME) HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AND HAVE BEEN ACQUIRED FOR
INVESTMENT AND NOT WITH A VIEW TO, OR IN CONNECTION WITH, THE SALE OR
DISTRIBUTION THEREOF. NO SUCH SALE OR DISTRIBUTION MAY BE EFFECTED WITHOUT AN
EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL IN A
FORM SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER
THE SECURITIES ACTO OF 1933.
CONVERTIBLE PROMISSORY NOTE
---------------------------
Borrower: ULTRACARD, INC.
- --------
A Nevada Corporation
Lender: UPGRADE INTERNATIONAL CORPORATION
- ------
A Florida Corporation
Loan Amount: U.S. $___________________
- -----------
Dated: ________________________
- -----
1. Borrower's Promise to Pay. Borrower hereby promises to pay to the
-------------------------
order of Lender or subsequent holder of this Note, the principal sum of
__________________________________ Dollars (USD $________), hereinafter referred
to as the "principal", plus interest on the principal amount outstanding from
time to time at the rate set forth in Section 4 herein.
2. Maturity Date. Subject to the terms of Section 8, below, all
-------------
principal and accrued interest thereon shall mature and be due and payable in
accordance with the following terms and conditions: (a) repayment shall be made
prior to the payment of any dividends to shareholders of Borrower; and (b) all
principal and accrued interest shall be due and payable upon the registration of
any shares of Borrower under the Securities Act of 1933 pursuant to an initial
public offering (IPO) of Borrower's Common Stock which results in net proceeds
to the Borrower of not less than Thirty Five Million Dollars ($35,000,000), or
upon the occurrence of any merger, acquisition or other reorganization of
Borrower which results in a change in control of Borrower. Notwithstanding the
foregoing provisions, the outstanding principal balance, together with all
accrued interest thereon, shall be due and payable in full on March 31, 2004.
3. Transferability of Note. The Lender may transfer or assign this Note.
-----------------------
The Lender or anyone who takes this Note by transfer or assignment and who is
entitled to receive payments under this Note will be called the "Note Holder."
4. Interest. Interest will be charged on that part of principal that has
--------
not been paid. Interest will be charged on the outstanding principal balance
beginning on the date hereof and continuing until the full amount of principal
has been paid. Interest shall accrue on the outstanding principal balance at
the rate of eight percent (8%) per annum. The Borrower acknowledges this loan
is made expressly and only for business and commercial purposes.
5. Required Loan Payments: The Borrower shall make payments to the
-----------------------
Lender in lawful money of the United States of America, in immediately available
funds, as follows:
(a) Place of Payments. All loan payments shall be paid to Lender at:
-----------------
<PAGE>
Upgrade International Corporation
435 Martin Street, Suite 1010
Blaine, Washington 98231
or at such other place as may be designated by Lender or the Note Holder from
time to time.
(b) Application of Payments. Each loan payment shall be applied as
-----------------------
follows: (i) first, toward payment of any amounts owed under Section 9.3 below,
(ii) second, toward payment of any and all accrued and unpaid interest; and (ii)
third, toward payment of any outstanding principal balance.
(c) Prepayment of Principal. This Note may be prepaid in whole or in
-----------------------
part without premium or penalty subject to the prior written consent of the Note
Holder to such prepayment.
6. Acceleration of Debt. It is expressly agreed that the full amount of
--------------------
both principal and interest due pursuant to this Note shall become due and
payable at the option of the Note Holder on the happening of any Event of
Default under the terms of the Funding Agreement.
7. Funding Agreement. This Note is issued pursuant to a Funding
-----------------
Agreement between the Borrower and Lender dated March 22, 2000. Reference is
made to the Funding Agreement concerning additional terms and conditions
pertaining to Lender's rights as to acceleration.
8. Conversion into Common Stock of Borrower.
----------------------------------------
9.
10. (a) The entire principal amount of and accrued interest on this
Note and any other indebtedness accrued with respect to this Note shall be
converted into shares of Common Stock of the Company at a rate of $____ per
share upon the effective date of an IPO by Borrower (as defined in the Funding
Agreement).
11.
12. (b) Mechanics and Effect of Conversion. No fractional shares of the
Borrower's Common Stock will be issued upon conversion of this Note. In lieu of
any fractional share to which the Note Holder would otherwise be entitled, the
Borrower will pay to the Note Holder in case the amount of the unconverted
principal and interest balance of this Note that would otherwise be converted
into such fractional share. Upon conversion of this Note pursuant to this
Section 8, the Note Holder shall surrender this Note, duly endorsed, at the
principal offices of the Borrower or any transfer agent of the Borrower. At its
expense, the Borrower will, as soon as practical thereafter, issue and deliver
to such Note Holder, at such principal office, a certificate or certificates for
the number of shares to which such Note Holder is entitled upon such conversion
under the terms of this Note, including a check payable to the Note Holder for
any cash amounts payable as described herein. Upon conversion of this Note, the
Borrower will be forever released from all of its obligations and liabilities
under this Note with regard to that portion of the principal amount and accrued
interest being converted including without limitation the obligation to pay such
portion of the principal amount and accrued interest. The certificates
evidencing the Common Stock issued hereunder may have such legends as Borrower
may reasonably require to comply with applicable securities laws and to
reference the terms of the Funding Agreement.
13.
14. 9. Miscellaneous.
-------------
15.
16. 9.1 Borrower and all guarantors and endorsers of this Note,
severally waive diligence, demand, presentment, notice of nonpayment and
protest, and assent to extensions of time of payment, surrender or substitution
of security, or forbearance, or other indulgence, without notice.
17.
18. 9.2 Borrower and all others who may become liable for all or any
part of this obligation, consent to any number of renewals or extensions of the
time of payment hereof and to the release of all or any part of any security
which may be given for the payment hereof. Any such renewals, extensions or
releases may be made without notice to any of said parties and without affecting
their liability.
<PAGE>
19.
20. 9.3 In the event that the Lender shall retain or engage an
attorney or attorneys to collect, enforce, or protect its interests with respect
to the Funding Agreement or this Note, or any instrument or document delivered
pursuant to this Note or the Funding Agreement, or as to any collateral securing
this Note or any other Notes issued under the Funding Agreement, the Borrower
shall pay all of the costs and expenses of such collection, enforcement, or
protection, including reasonable attorneys' fees, and the Lender may take
judgment for all such amounts, in addition to the unpaid principal balance of
any Note(s) and accrued interest thereon. Such amounts shall be deemed
additional indebtedness under this Note and shall bear interest at the Note
interest rate from the date such costs are incurred by Borrower.
21.
9.4 This Note shall be governed by and construed in accordance
with the laws of the State of Nevada.
BORROWER/MAKER:
- --------------
ULTRACARD, INC.
By: ___________________________
Daniel Kehoe
Its: President
<PAGE>
EXHIBIT 10.2
STOCK PURCHASE AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into as of this 29th of
March, 2000, between Upgrade International Corporation (the "Purchaser") and
David Zucker (the "Seller").
R E C I T A L S
WHEREAS, EforNet Corporation, a Washington corporation, (the "Company") is a
corporation with 25,000,000 shares of $.001 par value common stock authorized
(the "Stock"); and
WHEREAS, the Purchaser desires to purchase and the Seller desires to sell
200,000 (the "Shares") of the 10,000,000 shares of issued and outstanding Stock,
all pursuant to the terms and conditions of this Agreement.
NOW, THEREFORE, IT IS AGREED AS FOLLOWS:
1. Sale and Purchase of Shares.
---------------------------
Subject to the provisions of this Agreement, the Seller agrees to sell, and
the Purchaser agrees to buy, the Shares, consisting of 200,000 shares of Stock,
which will at Closing constitute 2% of the issued and outstanding shares of
Stock of the Company.
2. Purchase Price.
--------------
Purchaser agrees to pay to the Seller, as the purchase price for the
Shares, the sum of Two Hundred Thousand Dollars ($200,000.00) at closing.
3. Closing.
-------
The closing shall occur at the offices of Upgrade International
Corporation, 1411 Fourth Avenue - Suite 629 Seattle, Washington 98101, at such
time as is mutually agreeable to Purchaser and the Sellers (the "Closing Date").
Purchaser shall deliver the consideration set forth in Section 2 above. The
Seller shall deliver to the Purchaser at closing Stock certificates together
with stock powers representing the Shares.
4. Representations, Warranties and Covenants of the Seller.
-------------------------------------------------------
Seller represents and warrants to the Purchaser that the following are and
will be true and correct on the Closing Date and such representations and
warranties shall survive the Closing:
(a) Authorization of Agreement. This Agreement constitutes a valid
obligation, legally binding upon the Seller in accordance with its terms. The
execution and delivery of this
Stock Purchase Agreement
Page 1 of 1
<PAGE>
Agreement and the consummation of the transaction do not and will not result in
any breach of, or default under, any agreement, license or other obligation of
Seller.
(b) Stock Ownership. Upon issuance and on the Closing Date, Seller owns
the Shares, the Shares were fully paid, non-assessable, free and clear of all
restrictions, liens, security interests, hypothecations, pledges and
encumbrances of every kind and nature whatsoever, and Seller has full and
exclusive power and legal right to sell the Shares in accordance with the terms
of this Agreement.
(c) Market Conditioning. Seller undertook no activity for the purpose of,
or that could reasonably be expected to have the effect of, conditioning the
market in the United States for the Stock. Seller did not place any
advertisements in any publication referring to the offering of the Stock for
sale.
5. Indemnification by the Sellers.
------------------------------
The Seller, and his successors and assigns, shall indemnify, defend and
hold Purchaser harmless from any and all losses, claims, damages or liabilities,
including any costs of recovery, suffered by Purchaser as a result of:
(a) The failure of any representation or warranty of Seller contained in
this Agreement to be true and accurate when made and as of the Closing Date; and
(b) The failure of the Seller to comply with any obligations, agreements
or covenants contained in this Agreement.
The Seller, and his successors and assigns, shall reimburse Purchaser for any
legal or other expense reasonably incurred by Purchaser in connection with any
loss, claim, damage or liability indemnified hereby. This indemnification shall
benefit and inure to the successors and assigns of Purchaser, and shall survive
the Closing. In the event Purchaser, and its successors or assigns, believe
they are entitled to indemnification hereunder, they shall give the Seller
written notice of the basis for the claim for indemnification.
6. Certifications, Representations, Warranties and Covenants of the Purchaser.
--------------------------------------------------------------------------
The Purchaser hereby certifies, represents and warrants to the Seller that
the following are and will be true and correct on the Closing Date and such
representations and warranties shall survive the Closing:
(a) Valid Obligation. This Agreement constitutes a valid obligation,
legally binding upon the Purchaser in accordance with its terms.
(b) Compliance with the Securities Act of 1933. The Purchaser agrees to
resell the Stock only in accordance with the provisions of the Securities Act of
1933 (the "Act"), pursuant
Stock Purchase Agreement
Page 2 of 2
<PAGE>
to registration under the Act, or pursuant to an available exemption from
registration; and agrees not to engage in hedging transactions with regard to
the Stock unless in compliance with the Act.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first set forth above.
SELLER: PURCHASER:
Upgrade International Corporation
- ------------------------------ ------------------------------------
David Zucker Daniel Bland, President
Stock Purchase Agreement
Page 3 of 3
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
FORM 10-Q FOR THE PERIOD ENDED MARCH 31, 2000 AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> SEP-30-1999
<PERIOD-START> DEC-31-1999
<PERIOD-END> MAR-31-2000
<CASH> 2,867
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,881
<PP&E> 1,381
<DEPRECIATION> 46
<TOTAL-ASSETS> 6,070
<CURRENT-LIABILITIES> 2,001
<BONDS> 662
0
0
<COMMON> 21,933
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 6,070
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 4,235
<OTHER-EXPENSES> 18
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 64
<INCOME-PRETAX> (3,429)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,429)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,429)
<EPS-BASIC> (0.18)<F1>
<EPS-DILUTED> (0.18)
<FN>
<F1>For purpose of this statement, primary means basic.
</FN>
</TABLE>
