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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
FORM 8-K
CURRENT REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES ACT OF 1934
Date of Report (Date of earliest event reported): APRIL 6, 2000
UPGRADE INTERNATIONAL CORPORATION
(Exact name of registrant as specified in its charter)
FLORIDA 0-27649 58-244-1311
(State or other (Commission (I.R.S. Employer
jurisdiction File Number) Identification No.)
of incorporation)
1411 Fourth Avenue - Suite 629 Seattle, Washington 98101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (206) 903-3116
Former Name and Address (on Form 10-KSB filed March 7, 2000):
Second CMA, Inc.
7331 S. Meadow Ct.
Boulder, CO 80301
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ITEM 1. CHANGES IN CONTROL OF REGISTRANT
Pursuant to an Agreement and Plan of Merger (the "Merger Agreement") dated as of
April 4, 2000 between Upgrade International Corporation ("Upgrade"), a Florida
corporation, and Second CMA, Inc., a Colorado corporation ("2nd CMA"), all the
outstanding shares of common stock of 2nd CMA were exchanged for 45,000 shares
of common stock of Upgrade in a merger transaction in which Upgrade was the
surviving company.
The Merger Agreement was adopted by the unanimous consent of 2nd CMA's Board
of Directors and approved by the unanimous consent of its shareholders on April
3, 2000. The Merger Agreement was adopted by the unanimous consent of the Board
of Directors of Upgrade on April 4, 2000.
Prior to the merger, 2nd CMA had 12,000,000 shares of common stock
outstanding which shares were exchanged for 45,000 shares of common stock of
Upgrade. By virtue of the merger, Upgrade acquired 100% of the issued and
outstanding common stock of 2nd CMA. As a result of the merger, Grant W.
Peck and Dean F. Sessions, the directors and executive officers of 2nd CMA,
no longer control the registrant.
Prior to the effectiveness of the merger, Upgrade had an aggregate of 19,191,717
shares of common stock, par value $.001, issued and outstanding.
Upon effectiveness of the merger, Upgrade had an aggregate of 19,236,717 shares
of common stock outstanding.
The Articles of Incorporation and Bylaws of Upgrade will be the Articles of
Incorporation and Bylaws of the successor issuer. The directors and officers of
Upgrade will be the directors and officers of the successor issuer. Daniel S.
Bland, the President of Upgrade, owns approximately 32% of the outstanding
equity securities of Upgrade, taking into account securities that permit Mr.
Bland to acquire shares of common stock within the next 60 days, as follows:
4,000,000 shares and 1,000,000 warrants (exercisable at $0.25 per share and
expiring 1/20/2001) owned by the Bland Family Trust, as to which Mr. Bland, as
trustee, has sole voting and investment powers, 476,100 shares owned by
International Internet Corporation, which Mr. Bland controls, and 650,000
options (exercisable at $0.25 per share and expiring 1/20/2004) owned directly
by Mr. Bland. No other shareholder of Upgrade owns more than 5% of Upgrade's
outstanding equity securities. As a group, the directors and executive officers
of Upgrade (seven persons) own approximately 40% of the outstanding equity
securities of Upgrade, taking into account securities that permit them to
acquire shares of common stock within the next 60 days.
Upgrade is not aware of any arrangements which may result in a change of control
of the registrant.
The Merger Agreement is filed as an exhibit to this report on Form 8-K and is
incorporated in its entirety herein by reference. The foregoing description is
modified by such reference.
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ITEM 2. ACQUISITION OR DISPOSITION OF ASSETS
The consideration exchanged pursuant to the Merger Agreement was negotiated
between 2nd CMA and Upgrade. The total consideration of approximately
$1,425,000 will be accounted for as a financing expense in Upgrade's
consolidated financial statements for the quarter ended June 30, 2000.
In evaluating Upgrade as a candidate for the proposed merger, 2nd CMA used
criteria such as the value of the assets of Ugrade, Upgrade's current business
operations and anticipated operations, and its business name and reputation. 2nd
CMA determined that the consideration for the merger was reasonable.
Upgrade intends to continue its business and enhance shareholder value through
the identification, acquisition and or development and commercialization of
proprietary technology, both hardware and software, in the information
technology industry.
BUSINESS OF UPGRADE
Upgrade International Corporation was incorporated in Florida on February 5,
1997, to identify, acquire and/or develop and commercialize proprietary
technology, both hardware and software, in the information technology industry.
To date, Upgrade has implemented this objective by identifying and acquiring
substantial interests in three companies, which collectively own certain
patented and patent pending technologies, know-how and personnel capable of
commercializing the technology.
The core technology that Upgrade acquired an interest in, through the
acquisition of more than 50% of UltraCard, Inc., is a system for ultra high
capacity data storage and retrieval in a credit card format. This technology is
controlled through an exclusive license agreement that UltraCard holds from
Cardtech Inc., along with certain patent applications and know-how developed
within UltraCard Inc. Upgrade currently owns more than 50% of Ultracard.
A second developing technology and know-how, that Upgrade has acquired and is
developing through a 50% interest in EforNet Corporation ("EforNet"), is a suite
of software and an operating system which will reside on the UltraCard and
will be capable of providing through the use of the UltraCard a means to achieve
secure e-commerce transactions anonymously over the Internet. This technology is
more fully described below in the EforNet business description, and has been
developed in the most part by Mr. David Zucker who owns the remaining 50%
interest in EforNet.
The third developing technology is a Web-enabled, transaction-processor software
application that represents a significant advancement in the electronic
distribution of information over the Internet. The primary market focus of this
technology is in the medical industry, developing a medical card on a smart card
platform, capable of providing a host of interrelated services on line including
such things as pharmacology conflict analysis. This technology is controlled and
is being developed by Centurion Technologies, Inc. ("Centurion"). Upgrade
currently owns a 50% equity interest in Centurion.
In addition, Upgrade has proxies which permit it to exercise control over its
subsidiaries.
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Upgrade represents the strategic interface for each of the complimentary
operating units. As such, Upgrade is active in the subsidiary business units
providing strategic direction to the companies, financial and financing
services, business and investor relations services and additional services
facilitating the development of each business units operating plans. Upgrade
will continue to seek other technologies and strategic partners within its area
of business that it believes have strong potential, with a view to acquiring
interests in such technologies and companies and providing support for their
development. This may involve a combination of licensing agreements, various
financing arrangements and joint development projects. Depending upon the
circumstances, such ownership may be 100% or some partial amount as with the
first technologies acquired. In those situations where the development of a core
technology may serve various investees, Upgrade may internally develop
technologies or products as well.
By allowing those individuals who are directly involved with the development of
a certain technology to retain direct ownership interest in their technology,
Upgrade believes that optimum focus and effort will be achieved and maintained
for each technology. At such time as each company has achieved a product
development stage which will secure its commercial success, Upgrade
anticipates that a public offering of such entities' securities will occur,
providing such company with its own direct access to capital for the
commercialization of its products.
Upgrade anticipates continuing to hold its interest and maintain an active
involvement with the companies and technologies it has developed.
To date, Upgrade has achieved a number of significant milestones as follows;
- December 1997, Upgrade International Corp. was acquired by Mr. Daniel
Bland and at that time Mr. Bland contributed certain business interests
and commenced the development of Upgrade.
- January 1998, Upgrade entered into a letter agreement for the
acquisition of 20% of UltraCard Inc., and an option agreement to acquire
a further 15% of UltraCrad Inc.
- July 1998, UltraCard successfully demonstrated the "Proof of Concept",
setting up a working model of the card and read/write systems which
demonstrates the capability of placing 5,000,000 bytes of information on
the magnetic stripe card, reading, writing erasing and replacing data.
- August 1998, Upgrade renegotiates option agreement to increase
acquisition of UltraCard Inc. to 50%.
- February 1999, Upgrade commences trading on the Frankfurt stock
exchange.
- February 1999, Upgrade forms EforNet Corporation owned jointly with Mr.
David Zucker for the development of application software and an
operating systems for the UltraCard.
- May 1999, Upgrade acquired Centurion Technologies Inc., developing a
medical application on a smart card platform, with a view to an
conversion to the UltraCard.
- September 1999, Upgrade completes the acquisition of more than 50%
of UltraCard Inc.
- November 1999, UltraCard Inc. demonstrates technology in Las Vegas
during Comdex, inviting OEM's, financiers and the press.
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- November 1999, UltraCard licenses from Ampex Corporation a license for
use of the patented Keepered Media technology on magnetic cards.
- December 1999, Upgrade acquires a further 1% of UltraCard Inc.
- February 2000, Upgrade commences working with Emprise Management Group
AG for the commercialization beta testing of the UltraCard.
- February 2000, UltraCard enters into cooperative affiliation with SciVac
to produce a computerized sputtering system for UltraCard's advanced
memory card technology. This represents the initial step towards
commercial production of the card.
At the present time, the management of Upgrade is comprised of the President,
Mr. Daniel Bland, an active Director, a corporate secretary and a group of
contractors providing a variety of services to Upgrade and its subsidiaries in
North America and Europe. Upgrade's head office is in Seattle at 1411 Fourth
Avenue, Suite 601, Seattle Washington, with the operations of the subsidiaries
in Redmond, Washington and two locations in California.
YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS BECAUSE THEY ARE INHERENTLY
UNCERTAIN
You should not relay on forward-looking statements in this report. This report
contains forward-looking statements that involve risks and uncertainties. We
use words such as "anticipates", "believes", "plans", "expects", "future",
"intends" and similar expressions to identify these forward-looking statements.
You should not place undue reliance on forward-looking statements, which apply
only as of the date of this report. Upgrade's actual results could differ
materially from those anticipated in these forward-looking statements for many
reasons, including the risks faced by Upgrade described in "Risk Factors" and
elsewhere in this report. Where the context requires, references to years for
accounting purposes refer to fiscal year ending September 30.
Management Discussion and Analysis - Upgrade International Corp.
Upgrade and its subsidiaries are a development stage enterprise.
From the date that Upgrade was acquired by Mr. Daniel Bland (through
International Internet Corp.) in December 1997, Upgrade has been focused upon
raising financing in order to effect the completion of the acquisition of equity
interests and commercialization of a group of companies, holding and developing
synergistic technologies. Upgrade in all cases acquired equity interest in its
subsidiary companies in excess of 50% (including voting proxies). In aggregate
to December 31, 1999 Upgrade has raised $14,504,184 by way of the sale of common
stock and stock subscriptions, and $1,000,000 by way of issuance of a
convertible debentures. Subsequent to December 31, 1999, Upgrade raised a
further $4,400,000 through a sale of its common stock.
The following table sets forth certain financial highlights providing on a
consolidated basis key financial data of Upgrade:
<TABLE>
<CAPTION>
Quarter ended Quarter ended Year ended Year ended
December 31, December 31, September September
$ US Funds 1999 1998 30,1999 30,1998
- ---------- ------------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Total assets 5,375,517 218,914 6,547,560 217,611
Total current liabilities 1,969,099 427,754 2,551,219 347,347
Long term debt 621,080 -- -- --
Common stock & paid in
capital 17,056,973 1,564,788 14,440,050 1,083,794
Research and development 916,008 193,180 6,229,331 632,636
General and Administrative
</TABLE>
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<TABLE>
<S> <C> <C> <C> <C>
expenses 1,719,244 220,125 1,972,283 404,862
Net loss 2,930,557 559,781 10,623,048 1,213,530
Loss per share .16 .04 .79 .15
</TABLE>
The reader should take into account in comparing the data reflected in the
preceding table the fact that in the December and September 1998 data Upgrade
did not reflect the net assets or results of operations of UltraCard Inc.,
Centurion Technologies Inc., or EforNet Corporation on a consolidated basis.
However the results of operations in both September and December 1999 reflect
the results of operations of Centurion and EforNet on a consolidated basis.
December 1999 financial statements also reflect UltraCard's results of
operations. The individual financial statement summaries for each of those
subsidiaries is provided in a separate schedule in the section of this report
addressing each of those operations.
The research and development expenditures incurred by Upgrade are comprised of
both direct research and development expenditures, and the acquisition of
"in-process research and development".
Acquisition costs - UltraCard
With respect to the acquisition of UltraCard, Inc., Upgrade invested $7,950,000
into UltraCard for the acquisition of more than 50% of the issued and
outstanding common stock of UltraCard. The purchase price paid in excess of the
fair market value of identifiable assets acquired and liabilities assumed has
been allocated to "in-process research and development" aggregating $4,193,870
in fiscal year 1999, $423,857 in 1998.
The projects acquired relate to a specially designed reader/writer and a credit
card size storage card. More specifically, UltraCard uses conventional hard disk
media and technology and stores the information to a credit card instead of a
hard disk. This has enabled the ability to write and read high amounts of data
in a fast efficient manner from and to a credit card. The in-process research
and development projects referred to above relate to the density of data
managed, the nature of the surfaces, the speed of transmission of the data, the
integration of operating and application software, and the protection of the
data integrity.
During 1998, the initial investment into "in-process research and development"
provided for the development of a "proof of concept" demonstration for a group
of analysts, in which a working model of the drives and various types of
removable media could be processed through read, write and erase cycles,
verified by oscilloscope.
During 1999, the projects comprising "in-process research and development"
included three read/write form factors and ten credit card designs. In addition,
DOS software was replaced with Windows and all prototype boards were built using
etched boards. As previously addressed in November 1999, Upgrade unveiled its
technology demonstrating four alpha x/y read/write units with ceramic material
credit cards.
Upgrade expects to complete a phase II demonstration product by June 2000 which
will represent the first unit upon which Beta test programs may commence in
various industries. The operating costs to complete the above-referenced stage
of development will be approximately $3,500,000.
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The technological challenges of the phase II demonstration model are to
establishing the optimal combinations for specific applications of, data
density, speed of transmission, size and operating configuration of read/write
devices, software platform, application software, and maintenance of data
integrity in variable environments including protection against intentional
unauthorized access to the data.
The economic benefits from the in-process research and development are expected
to be immediate, so that licensing arrangements can be established once the
phase II demonstration model is complete.
The risk associated with not completing the development of this operating model
within a reasonable time is minimal as Upgrade is not faced with unresolved
technological challenges, but rather selection among various alternatives or the
best combination of alternatives for initial product launch.
Upgrade will then embark upon a substantive commercialization phase of
development more fully described in the UltraCard section of this document.
Acquisition Costs - Centurion
In addition to the in-process research and development related to UltraCard's
acquisition of UltraCard Inc., in May 1999 Upgrade acquired 50% of Centurion
Technologies Inc., for $1,100,000 of which $803,076 has been allocated to
"in-process research and development".
Centurion Technologies Inc. has developed expertise in the areas of smart card
technology and online transmission and management of data.
The target market or initial application of the Centurion product and technology
will be in the medical industry. The projects comprising in-process research and
development related to work by Centurion focused upon establishing security
features, maintaining data integrity and effective data management and
transmission techniques. Upgrade has commenced development on a joint basis with
the University of Illinois at Chicago of a real-time, on-line, interactive,
MD-based order entry system. The system is designed to maintain the user's
personal and medical information on a data storage card.
The estimated research and development costs to complete the project is
approximately $1.9 million dollars with revenues commencing immediately
thereafter.
Liquidity
At December 31, 1999 Upgrade had a working capital balance of $1,659,323. This
was further augmented from a financing made by way of the sale of common stock
in February 2000 of $4,400,000. Upgrade has entered into funding arrangements
with each of its consolidated subsidiaries (more fully described in each
companies section below) and accordingly is responsible for the funding of their
operations. Upgrade does so by the sale of common stock,
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and long term debt arrangements. The ongoing ability of Upgrade to maintain the
funding requirements of its subsidiaries is dependent upon its ability to raise
additional debt or equity capital. In the event that Upgrade is unable to do so,
or if certain strategic partners enter into an agreement with Upgrade to do so,
the working capital requirements of the subsidiary companies may be met by
others. This may cause substantial dilution to the interest of Upgrade in its
subsidiary companies or, if they are unable to raise financing independently,
they may not be capable of carrying on the development of their operations.
Capital resources
At the date of the most recent financial statement (December 31, 1999), Upgrade
did not have any specific commitments for significant capital expenditures.
However, on February 25, 2000, subsequent to the most recent financial
statements, UltraCard entered into an agreement with SciVac for the development
and acquisition of a sputtering system to be developed by SciVac for the
production of thin film coating for magnetically encoded credit cards. The
capital commitment for the sputtering systems is $3,000,000 and will be paid
from operating capital pursuant to the payment terms provided for in the
contract. The acquisition of this system logically will result in the
acceleration of a number of capital expenditures related to the development of a
production facility. The cost of this development in the next year is estimated
to be in the range of $20M to $30M, to be funded in part by Upgrade and in part
by the issuance of equity securities by UltraCard Inc.
Certain of Upgrade shareholders hold a right of first refusal to fund future
financings.
Results of Operations
Research and development expenses acquired and incurred during fiscal year 1999
aggregate $6,229,331 (1998 - $632,636) and are more fully addressed in the
preceding sections. In addition, Upgrade has incurred general and administrative
expenses of $1,972,283 in 1999 and $1,642,125 (none in 1998) in selling and
marketing expenses (1998 - $404,862). These 1999 results of operations reflect
UltraCard on an equity basis showing the proportional interest that Upgrade held
in UltraCrad Inc. over the year which finally resulted in a more than 50%
interest by September 30, 1999. In addition, the results reflect on a
consolidated basis the results of EforNet Corporation from February 1999 and the
results of Centurion Technologies Inc. from the date of acquisition, May, 1999.
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BUSINESS OF ULTRACARD, INC.
ULTRACARD, INC. NATURE OF BUSINESS AND INTENDED USE OF ASSETS
UltraCard is a Nevada corporation which was formed in 1997. It is headquartered
in Campbell, California, and has research and development facilities in
Campbell, San Jose, and Newport Beach, California. UltraCard's principal assets
are patented and unpatented proprietary intellectual property, that it either
owns or holds a license to use. See "Intellectual Property." UltraCard is a
development stage company; its operations to date have principally been limited
to research and development activities.
DEVELOPMENT ACTIVITIES
UltraCard has created a product that looks like a credit card, but functions
like a computer disk. UltraCard intends to market this product under the
tradename UltraCard(TM). The UltraCard's principal advantages over current
credit card technology are greatly enhanced memory capacity and the ability to
change the stored data (also referred to as "read/write capability") and to
protect that data from unauthorized access and from being demagnetized.
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Memory. UltraCard's technology is intended to provide a high capacity
memory in a card format. In its current state of development, the UltraCard
stores 5 megabytes (i.e., 5,000,000 bytes) of unformatted data as compared to
current magnetic strip cards, which store 265 bytes.
Read/Write. Unlike the magnetic strip card, the UltraCard technology
allows data stored on the UltraCard to be easily removed and changed (much like
a computer disk). In order to change the information on its card, UltraCard is
developing a device, to be marketed under the tradename UltraDrive(TM), that
will be designed to read information from and write information on to the card.
UltraCard has not yet completed the design of the UltraDrive, which will be
based on exiting read/write technology and is intended to function in much the
same manner as the hard drive found in most personal computers.
Manufacturing. UltraCard plans to manufacture its cards directly and to
enter into strategic alliances with third-parties for the manufacture of
UltraDrives. UltraCard has entered into and agreement for "second source"
production (i.e., in addition to its own manufacture) of its cards with
SciVac, and during March 2000, UltraCard acquired from SciVac for $3,000,000
equipment which deposits UltraCard's proprietary magnetic memory capacity to the
UltraCard(TM) UltraCard has also entered into an agreement with SciVac for
SciVac to assemble the manufacturing equipment at UltraCard's northern
California facility, and SciVac has agreed to allow UltraCard to manufacture
cards necessary for beta-site testing at SciVac's northern California facility.
UltraCard had entered into preliminary negotiations with established disc drive
manufacturers and contract engineering firms for the completion of design and
manufacture of the UltraDrive but has not yet entered into any final agreements
for these matters.
COMPETITION
UltraCard's intended market is highly competitive and is dominated by any
number of very large companies, all of which are larger, better capitalized,
and more established than UltraCard. The competitors for the magnetic strip card
market include, Banks, Visa, MasterCard, and American Express, as well as
Schlumbergera, Gemplus and Bull. In addition, there are numerous competitors in
the "smart card" industry and other companies that are seeking to develop
products similar to UltraCard.
INTELLECTUAL PROPERTY
UltraCard relies primarily on a combination of patents, trademarks,
copyright and trade secret laws and employee and third-party non-disclosure
agreements to protect its intellectual property assets. Defense of these types
of assets can be difficult and costly, and there is no assurance that UltraCard
will be able to effectively protect all of its intellectual property assets from
misappropriation by competitors. If UltraCard is unable to protect its
intellectual property assets, its financial condition and business would be
materially and adversely affected.
Patents. UltraCard holds, through an exclusive license with CardTech,
Inc., a patent on its Magnetic Card Reader and Method. This patent, which was
issued on April 21, 1992 (Number 5,107,099), includes the apparatus and method
for a magnetic storage memory and
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readout for a credit card sized memory. UltraCard also holds, through an
exclusive license with CardTech, Inc., a Continuation in Part on that patent
which includes optical recording, oscillating recording and various types of
card substrates. UltraCard is in the process of purchasing patents pertaining to
memory storage modules for applications of the Personal Computer Memory Card
International Association (commonly known as "PCMCIA").
Patents Pending. UltraCard has pending two patent applications (one
Provisional and one Regular) for a linear and a high speed rotary portable
storage apparatus and methods for using the apparatuses. These patents include
optical, magneto-optical, near field, far field, vertical and other modern
recording technologies, all contained on a credit card-like portable memory.
These two patent applications are very broad and UltraCard's patent counsel
expects that the United States Patent Office will break them up into at least 20
separate patents. UltraCard also has pending a patent application for a data
storage unit with an embedded but accessible storage member including the
read/write apparatus and methods for using the unit. This patent application is
also very broad and UltraCard's patent counsel believes that it may result in 10
to 12 separate patents.
Licensed and Proprietary Technology. UltraCard has licensed technology
arising from six patents held by AMPEX Corporation to exclusively use modern
enhancements to hard disk and particulate media. In addition, UltraCard holds
certain proprietary technology related to security, fraud protection, and
privacy enhancement for its portable memory technology.
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PLAN OF OPERATION FOR CURRENT FISCAL YEAR
UltraCard will continue to focus on increasing the storage capacity of the
ULTRACARD(TM), currently at 5 MB, while developing commercial applications that
take advantage of the improvements offered by UltraCard. UltraCard is currently
developing e-commerce applications, a highly secure Department of Defense
application, and a point of sale ATM. UltraCard has budgeted approximately $9.8
million for such research and development efforts in fiscal year ending
September 30, 2000. During fiscal year 2000, UltraCard anticipates increasing
the number of employees dedicated to Research and Development Department from 10
to 40. During fiscal year 1999, UltraCard spent $1,195,828 on research and
development with an average of approximately 6 employees working on research and
development during the year.
UltraCard is vertically integrating the manufacturing facility and plans to be
capable of producing 1 million cards per day by the end of first quarter 2001.
UltraCard has budgeted approximately $19.5 million for 2000 for the development
of production capacity. UltraCard plans to add an additional 20 employees to the
Production Department.
Sales and Administration will increase to 5 employees from the current 3
employees. UltraCard plans to increase sales and marketing expenditures in 2001
by $9.7M
UltraCard is a development stage company. To date it has had no material
revenues. UltraCard's operations have been funded by equity investments in the
company and by loans from Upgrade. In Fiscal Year 1999, ended September 30,
1999, UltraCard spent $1,195,828, $1,087,712 respectively, on research and
development and the balance on general and administrative expenses.
The detailed financial statements for UltraCard for the two fiscal years ending
September 30, 1998 and 1999, and two quarters ended December 31, 1998 and 1999
are reported in the financial statements attached hereto. The schedule below is
a summary of financial highlights reflecting the financial position and results
of operation of UltraCard Inc. for the last two fiscal periods and latest
quarterly financial information provided on a comparative basis.
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<TABLE>
<CAPTION>
Quarter ended Quarter ended Year ended Year ended
December 31, December 31, September September
$ US Funds 1999 1998 30,1999 30,1998
- ---------- ------------- ------------- ---------- ----------
<S> <C> <C> <C> <C>
Total assets 2,608,178 600,245 4,083,468 260,380
Total liabilities 1,021,002 658,679 682,077 604,532
Common stock & paid in
capital 9,414,002 2,130,464 9,414,002 1,829,577
Research and development 651,439 43,233 1,195,828 385,528
Royalty & license fee 162,500 104,862 1,484,636 345,125
Administrative expenses 1,025,720 168,387 1,087,712 1,146,039
Net loss 1,814,215 315,169 3,738,882 1,873,729
Loss per share .16 .05 .56 .42
</TABLE>
Research and development expenditures from inception to December 31, 1999
aggregate $2,232,795. In addition, general and administrative costs and selling
and marketing from inception aggregate $2,759,388 and $500,083 respectively.
Together these expenditures have brought UltraCard to the stage of a Phase I,
set of demonstration models which were provided for viewing by industry
personnel in November 1999.
UltraCard entered into a royalty and licensing agreement with CardTech Inc. on
October 10, 1997 which provides to UltraCard the rights to certain technology
and know-how concerning card-based storage media and read/write systems covered
by certain patents and patent applications. Under the terms of that agreement,
UltraCard issued 2,500,000 shares of common stock to the owner and other
individuals involved in the development of the patented technology. The royalty
and license fees of $1,484,636 for fiscal year ended September 30, 1999 (1998 -
$345,125) reflect payments that are required to be made to CardTech Inc.
UltraCard's president is also the majority shareholder in CardTech Inc. Under
the terms of the licensing agreement, UltraCard paid $30,000 for initial
licensing fees, $950,000 in minimum royalty fees and $1,009,813 in capital fees
during the years ended September 30, 1999 and 1998.
Future commitments under this agreement are described in the notes to the
UltraCard, Inc. financial statements attached thereon.
Liquidity
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At December 31, 1999 UltraCard had a working capital balance of $109,967.
Subsequent to the September 30, 1999 acquisition aggregating $7,950,000 from
Upgrade, UltraCard is funded as required by Upgrade, which provides for debt
financing on mutually agreeable terms between the companies, up to the time that
UltraCard completes an initial public offering, if any, of its common stock.
Subsequent to the quarterly balance sheet date December 31, 1999, and the date
of filing, Upgrade has funded UltraCard an additional $2.75 million dollars
under the terms of the exclusive funding arrangement between the parties. The
ongoing liquidity requirements of UltraCard are to be funded by Upgrade until
such time as UltraCard completes its initial public offering, if any.
Upgrade has in turn provided to certain shareholders of Upgrade, pursuant to a
private placement memorandum entered into by UltraCard, at the shareholders'
request, the opportunity to participate in financing the operations of Upgrade's
subsidiary companies.
Further, Upgrade has had discussions with a potential strategic partner, for
equity financing, providing to that strategic partner a minority equity interest
in UltraCard. These negotiations are in an early stage and no reportable
commitments have been arrived at to date.
Capital resources
At the balance sheet date, December 31, 1999 UltraCard was not party to any
commitments for capital expenditures.
However, as previously provided, UltraCard entered into an agreement with SciVac
for the development and acquisition of a sputtering system to be developed by
SciVac and provided to UltraCard, for the production of thin film coating for
magnetically encoded credit cards. The capital commitment for the sputtering
systems is $3,000,000 and will be paid from operating capital pursuant to the
payment terms provided for in the contract. The acquisition of this system
logically will result in the acceleration of a number of capital expenditures
related to the development of a production facility. The cost of this
development in the next year is estimated to be in the range of $20M to $30M, to
be funded in part by Upgrade and in part by the issuance of equity securities by
UltraCard.
UltraCard is currently in the process of entering into a long term commitment to
lease a 66,000 square foot production facility in Campbell, California. The
lease is expected to commence in June 2000 and the facility will serve as both
the primary production facility for the UltraCard as well as a research and
development center.
Results of Operations
The results of operations to date reflect continuing losses in UltraCard, due to
the fact that UltraCard is engaged in development activities. The extent of
development activities have been accelerating and total losses have increased
from $1.9 million dollars for fiscal year ended September 30, 1998 to $3.8
million dollars for fiscal year ended September 30, 1999. These losses are
expected to continue until the first significant revenues are received from
licensing of UltraCard's technology. This revenue should follow or be in
conjunction with the development
14
<PAGE> 15
of operating beta projects which are expected to take place in the last two
quarters of calendar year 2000; however these revenues are not expected to
generate profitability to UltraCard. Revenues from product sales are expected to
develop within the 2001 fiscal year.
BUSINESS OF EFORNET CORPORATION
EforNet Corporation (EforNet) was formed by Upgrade in February, 1999, to pursue
opportunities offered by the burgeoning market for electronic commerce
(eCommerce) over the Internet. EforNet has designed secure transaction software
intended to offer possibly the first "open architecture" solutions for monetary
transfer in this market.
One problem eCommerce faces today is people's wariness of the ordering process.
The Internet is an open communications medium. Messages to and from
correspondents using the Internet may pass through many switching points before
they are completed. The press has made much of the fact that it is possible for
bad guys to intercept such messages. This raises the general fear in the
public's mind that transmission of private messages and monetary transactions
over the Internet may be intercepted. These fears are not entirely unfounded.
Such activities do take place.
eCommerce activity is increasing even in the face of such security fears. But it
is not increasing at a fast enough pace to assure the success of early eCommerce
merchants, especially those relying on mass-market appeal for high volume
business. While Internet usage is increasing in geometric proportions on a
worldwide basis, the use of eCommerce does not seem to be keeping pace. In order
that eCommerce becomes a successful method for distribution of goods and
services in the future, the general public must accept it as being no less
secure than buying groceries using a bank debit card. EforNet intends to assist
in making this transition happen.
THE EFORNET SOLUTION
EforNet's objective is to offer the first "open architecture" software for
Internet secure monetary transactions. The open architecture of EforNet software
is the first element necessary to reach EforNet's objective of producing the
worldwide standard for eCommerce transactions. OpenWallet(TM) and
OpenRegister(TM) are designed to work on virtually any client or server platform
available today. There are no barriers to widespread proliferation based upon
conflicting technical standards.
The second element that is necessary for reaching worldwide standard status is
widespread use of the EforNet software. EforNet intends to distribute
OpenWallet(TM) through its own website, as attachments to Internet related
programs (such as browsers), and through widespread distribution on floppy disk
and CD-ROM media. All of these distributions are intended to be free to the
user.
Concurrent with free distribution of OpenWallet(TM), EforNet intends to
establish business alliances with eCommerce clearinghouses, credit card
companies and banks. This is the third key element to reach EforNet's objective.
Such business arrangements would be established to
15
<PAGE> 16
encourage the use of OpenRegister(TM) server software as a complement to the
growing use of OpenWallet(TM) client software.
Commencing before the time that OpenWallet(TM) and OpenRegister(TM) are
introduced, EforNet plans to begin a media awareness campaign in print, radio,
television and Internet formats that would include extensive advertising of
product security features. EforNet also intends to rely on a combination of
publicity and advertising to achieve its goals of universal acceptance of the
security of eCommerce transactions in general and of the reliability of
OpenWallet(TM) and OpenRegister(TM) in particular. This public awareness and
acceptance campaign is a critical fourth element to EforNet's success.
The fifth and final element to EforNet's success is distribution of developer
packages to all interested software developers. In addition to free distribution
of OpenWallet(TM) and sale of OpenRegister(TM), the software suites would be
available to software developers for further enhancement of function and
capability. The "open architecture" of EforNet software is expected to encourage
developers on a worldwide basis to enhance the software for more and more
applications over time.
All five of these elements combined are intended to overcome the ordinary
person's reluctance to buy over the Internet. EforNet believes that this goal
can be attained within the next 3 years.
16
<PAGE> 17
BUSINESS OF CENTURION TECHNOLOGIES, INC.
Centurion Technologies, Inc. ("Centurion") is a systems and communications
developer that has created a database system that provides secure network
services to the medical, educational and government markets. Centurion was
formed in November 1996. Its offices are located in Redmond and Bellevue,
Washington. In addition, a marketing and sales office is located in Silicon
Valley (Campbell, CA). Upgrade holds a 50% equity interest in Centurion.
Centurion's founders, John A. French, David J. Lee, Robert D. Highley, M.D., and
Dale D. Smith bring together their expertise in the areas of applied software
development, Smart Card integration, and medical background qualifications.
THE TECHNOLOGY
Centurion has designed a Web-based software application that manages data stored
on a "smart card" and has the capability of disseminating private, as well as
critical, information securely, easily and efficiently. The product currently
uses the available Smart card technology, which will hereafter be referred to as
"data storage technology." The application can be accessed through any dial up,
dedicated, hard-wired (Ethernet) or wireless connection running over a Virtual
Private Network (VPN) or Windows NT Web or LAN Server.
The centerpiece of the Centurion product line is the interactive software known
as Electronic Portable Record Interactive Manager (EPRIM(R)). EPRIM(R) is
designed to connect any person around the globe with real time, encrypted data
transfer. Once entered, the information is stored onto a server. That
information can be securely retrieved and selectively stored on a person's data
storage card for subsequent use.
HEALTH MARKETS
Centurion's medical division makes patient data readily available in a secure,
universally accessible, digital format. EPRIM(R) is designed to store and manage
personal demographic and medical data and deliver the information in real-time.
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<PAGE> 18
By providing a card with information such as a person's medical, insurance and
personal data protected by a confidential code, physician access and Rx
prescription services are streamlined, and errors in treatment and medication
are decreased. In addition, fraud is controlled, and the patient is given the
ability to selectively release information when and where it is needed. The card
can provide better billing and inventory control within a medical facility,
faster settlement with insurance providers, and cut administrative costs all
around.
Centurion's lead pilot project is a healthcare order entry program named MD
Order System. Using a data storage card and the EPRIM(R) application software,
the project provides a real-time, on-line, interactive, MD-based order entry
system. The system is designed to maintain the user's personal and medical
information on a data storage card. Each segment of the healthcare delivery
network will see immediate advantages of a fully automated electronic order
entry system, including the Health Delivery Providers (HMOs, PPOs), Physicians,
Pharmacists, Insurers and Patients. The pilot project is sponsored by the
University of Illinois at Chicago.
EDUCATION MARKETS
Centurion's lead market launched product is EPRIM ED, a multi-application
Web-enabled data storage card developed for the University of Illinois at
Chicago. The project is being released into the first pilot phase in May 2000,
with additional software code to be integrated to expand the capabilities of the
total EPRIM Brand to include full system management for our fast growing markets
in: Government, Healthcare, Education and Commercial organizations.
GOVERNMENT & INSTITUTIONAL MARKETS
By utilizing the latest technology and maintaining an understanding of evolving
legislative and government regulations impacting privacy and security data
communication, Centurion is becoming a leader in the public sector. The product
is in the final stages of initial project implementation with:
1) The University of Illinois at Chicago
2) Canadian Indian Health Care Program
3) Federal Government Smart Card Program
4) Department of Defense Health Records Automation Program
MARKETING STRATEGY
Strategic alliances are being formed with software developers and data storage
card manufacturers in the EPRIM software application. Centurion has also
developed relationships with manufacturers of peripheral devices, leading to
opportunities for new software applications. Centurion has participated in trade
shows and exhibits with manufacturers, as well as marketing consortiums with
industry leaders to create an integrated universal secured data access system.
PRODUCT DEVELOPMENT STRATEGY
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<PAGE> 19
As previously provided, Centurion is developing its product through the
integration of its proprietary technologies and expertise with existing
softwares with the developments on a smart card platform. Through specific
project development such as the medical card application developed in
conjunction with the University of Illinois, Centurion will create market ready
product meeting a diverse set of needs. The revision of the smart card to the
UltraCard platform represents an important part of Centurion's development
strategy setting Centurion apart from other smartcard developers by virtue of
its higher memory capacity, lower cost attribute offered through the UltraCard.
COMPETITION
There are many companies engaged in electronic medical records management, but
few have moved to the new dynamic of the Web and data storage cards. One notable
exception is Healtheon/WebMD which is engaged in developing one of the leading
platforms for doctors and other health providers. Centurion's competitive
analysis of potential competitors is broken into categories: e-prescribing,
electronic medical records, managed care transactions.
- - e-prescribing with PDA's or Devices: Allscripts, eMD, PocketScripts,
Cyber-CARE, ePhysician, ePorcrates, eScript, Healtheon/WebMD,HIE, iScribe.
Med-I-Net, TechRx,
- - Smart Card/Medical Group: Med-Assure (DataCard), LeapFrog, National
CacheCard, and most smart card integrators offer some limited capability of
medical applications.
- - Managed care processing services: WebMD, CareInsite, AmericasDocstor,
HealthAxis, EDIC, SoftMed, PBX, IDX, HBOC.
Most competitors use the traditional method of developing pilots, then continue
to expand from one provider to another through a process of building strategic
alliances. The pricing models are typically end-user licensing agreements and/or
site licensing.
19
<PAGE> 20
PROPERTIES.
Upgrade's headquarters and executive offices are located at 1411 Fourth Avenue
Suite 629, Seattle, Washington 98101, where Upgrade leases approximately 1127
square feet of space at a monthly cost of $1,878 for a period of three years
commencing September 1, 1999.
UltraCard's headquarters and executive offices are located at 1550 South Bascom
Avenue -Suite 100, Campbell, California 95008, where UltraCard leases
approximately 4052 square feet of space at a monthly cost of $15,769 under the
terms of five year lease expiring May of 2004. UltraCard also leases an
additional 1,184 square feet of space in Newport Beach, California at a monthly
cost of $1,657 which it uses for research and development activities.
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<PAGE> 21
EforNet's headquarters and executive offices are located at 180 Knowles Drive
- - Suite 100, Los Gatos, California , where EforNet leases approximately 4,500
square feet of space at a monthly cost of $8,700.
Centurion's headquarters and executive offices are located at 10900 N.E. 8th
Street - Suite 900, Bellevue, Washington 98004, where Centurion leases
approximately 720 square feet of space at a monthly cost of $7,500. Centurion
also leases an additional 120 square feet of space in Campbell California at a
monthly cost of $ $865 which it uses as sales office.
LITIGATION
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. The complaint
alleges material misrepresentations and omissions were made y 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. 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 in the process of engaging defense counsel, reviewing the facts
alleged in the complaints and developing an appropriate response. As a result,
Upgrade has not yet responded. Because legal counsel has not been engaged to
review the complaints, management is unable to assess the ultimate outcome of
these matters.
RISK FACTORS
1. LIMITED OPERATING HISTORY; NEGATIVE CASH FLOW
The success of Upgrade cannot be guaranteed or accurately predicted. There is no
assurance that Upgrade or any of its subsidiaries will be able to operate
profitably. Prospects must be considered in light of the risks, expenses and
difficulties frequently encountered in the establishment of new technologies and
products in emerging markets in evolving industries.
Upgrade began operation in December 1997 and to date has generated no material
revenues. Upgrade has limited operating history. There is no assurance that
Upgrade will be able to operate on a profitable basis or that cash flow from
operations will be sufficient to pay its operating costs. Upgrade will need to
raise additional capital to finance its initial operations. Upgrade will seek
additional financing through debt or equity financings. There is no assurance
that additional financing will be available to Upgrade or its subsidiaries, or
that, if available, the financing will be on acceptable terms. There is no
assurance that Upgrade 's estimate of its reasonably anticipated liquidity needs
is accurate or that new business developments or other unforeseen events will
not occur that will result in the need to raise additional funds. In the event
that Upgrade cannot raise needed capital, it will have a material adverse effect
on Upgrade.
Upgrade expects to incur significant operating losses and to generate negative
cash flow from operating activities during the next several years, while it
develops its technologies and products. There is no assurance that Upgrade will
achieve or sustain profitability or positive cash flow from operating activities
in the future or that it will generate sufficient cash flow to service any debt
requirements.
2. SIGNIFICANT CAPITAL REQUIREMENTS; NEED FOR ADDITIONAL
FINANCING
Upgrade's capital requirements are and will continue to be significant. Upgrade
anticipates, based on management's internal forecasts and assumptions relating
to its operations (including the costs associated with marketing), that its
current cash resources will be sufficient to satisfy its contemplated cash
requirements for no more than the next few months. In the event Upgrade's plans
change, its assumptions change or prove inaccurate, or if its capital resources
and projected cash flow prove to be insufficient to fund operations, Upgrade
will be required to seek additional financing sooner than currently anticipated.
Upgrade has no current arrangements with respect to sources of additional
financing, but it is in negotiations for additional financing. There can be no
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<PAGE> 22
assurance that Upgrade will be able to obtain additional financing on acceptable
terms. To the extent that any financing involves the sale of Upgrade's equity
securities, the interests of Upgrade's then existing shareholders could be
substantially diluted.
3. UNCERTAINTY OF NEW PRODUCT DEVELOPMENT
Upgrade has not yet released commercial versions of its technologies and
products. Substantial additional efforts and expenditures to enhance their
capabilities are critical to commercial viability. Accordingly, no meaningful
revenues have been generated to date.
4. TECHNOLOGICAL RISKS; RISK OF OBSOLESCENCE
Technological obsolescence of Upgrade's technologies and products remains a
possibility. There is no assurance that the competitors of Upgrade will not
succeed in developing related products using similar processes and marketing
strategies prior to Upgrade, or that they will not develop technologies and
products that are more effective than any which have been or are being developed
by Upgrade. Accordingly, the ability for Upgrade to compete will be dependent on
timely enhancement and development of its technologies and products as well as
the development and enhancement of future products. There is no assurance that
Upgrade will be able to keep pace with technological developments or that its
system will not become obsolete.
5. DEVELOPING MARKETS; UNPROVEN ACCEPTANCE OF UPGRADE'S PRODUCTS
The markets for Upgrade's technologies and products have only recently begun to
develop. As is typical in the case of a new and rapidly evolving industry,
demand and market acceptance for recently introduced products and services are
subject to a high level of uncertainty and risk. Because the markets for
Upgrade's technologies and products are new and evolving, it is difficult to
predict the future growth rate, if any, and size of this market. There is no
assurance either that the markets for Upgrade's technologies and products will
emerge or become sustainable. If the markets fail to develop, develop more
slowly than expected or become saturated with competitors, or if Upgrade's
technologies and products do not achieve or sustain market acceptance, Upgrade's
business, results of operations and financial condition will be materially and
adversely affected.
6. NEED FOR COMPLEX GLOBAL MARKETING AND SALES
The successful execution of Upgrade's business plan entails marketing, brand
development and sales on a global basis. There is no guarantee that Upgrade will
be successful in managing such a complex strategy of marketing and sales to
effect a reasonable penetration of its technologies into its target markets on a
timely basis.
7. NEED FOR FUTURE STRATEGIC PARTNERSHIPS
The successful execution of Upgrade's business strategy is dependent upon
enlisting a number of Strategic Partners globally, regionally, and nationally in
order to assist in a focused marketing effort and to provide financial strength.
There is no assurance that Upgrade will be successful in
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<PAGE> 23
developing such Strategic Partnerships on a timely basis or in developing enough
Strategic Partnerships to successfully market its technologies and products
globally.
8. SUBSTANTIAL DEPENDENCE UPON THIRD PARTIES
Upgrade is in an early stage of development and has yet to establish substantial
internal management, personnel and other resources. Upgrade depends
substantially upon third parties for several critical elements of its business
including, among others, promotion and marketing, technology and infrastructure
development and distribution activities.
9. INTELLECTUAL PROPERTY PROTECTION
Upgrade's success substantially depends upon its ability to obtain and enforce
intellectual property protection for its technologies in both the United States
and other countries. Upgrade's affiliated companies have filed applications for
patent and trademark protection of some of their intellectual property in the
United States Patent and Trademark Office and certain patents have been granted.
No assurance can be given that any additional patents will be issued, or that,
if obtained, will withstand challenge. Furthermore, the possibility exists that
Upgrade could be found to infringe on patents, service marks, trademarks or
copyrights held by others. Upgrade's use of trademarks, service marks,
tradenames, slogans, phrases and other expressions in the course of its business
may be the subject of dispute and possible litigation. There can be no assurance
that Upgrade will be able to continue to use its current tradename and marks.
Any changes could result in confusion to potential customers and negatively
affect Upgrade's business.
10. DEPENDENCE UPON KEY PERSONNEL; SENIOR MANAGEMENT'S LIMITED
EXPERIENCE
The success of Upgrade will be largely dependent upon the personal efforts of
certain research and development personnel. Competition for qualified employees
is intense, and the loss of key personnel or the inability to attract and retain
the additional highly skilled employees required for Upgrade's activities could
adversely affect its business. There can be no assurance that Upgrade will be
able to hire or retain such necessary personnel.
While Senior Management brings a wide variety of experiences in successfully
establishing and growing other companies, none have had direct experience in
doing so with Upgrade's specific new technologies. While they intend to recruit
and rely upon a senior group of experienced executives, consultants and
personnel and have met with some initial success in this arena, there is no
assurance that they will be successful in doing so as rapidly as other
experienced personnel might, and additional personnel may prove to be required.
11. COMPETITION
There is no assurance that Upgrade will be able to compete successfully.
Competition may be intense. Given the rapid advances in technology generally,
there is no assurance that new technologies will not evolve that will compete
with Upgrade's technologies and products. In
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<PAGE> 24
addition, many of Upgrade's potential competitors have substantially greater
financial, technical, marketing, sales, manufacturing and distribution resources
than those of Upgrade and have significantly greater experience than Upgrade in
developing and marketing new or improved technologies.
12. ABSENCE OF DIVIDENDS; DIVIDEND POLICY
Upgrade has never paid dividends on its Common Stock and does not anticipate
paying any dividends on its Common Stock in the foreseeable future. The
declaration and payment of dividends by Upgrade are subject to the discretion of
its Board of Directors. Any determination as to the payment of dividends in the
future will depend upon results of operations, capital requirements,
restrictions in loan agreements, if any, and such other factors as the Board of
Directors may deem relevant.
13. LITIGATION
Upgrade and its president, Daniel S. Bland, have been named as defendants in two
lawsuits filed in United States District Court, alleging securities violations.
Upgrade's counsel believes the Court will consolidate these complaints. This
litigation could subject Upgrade to significant liability for damages, and,
regardless of its success, will likely be time-consuming and expensive to defend
and will divert management's time and attention.
ITEM 5. OTHER EVENTS
Successor Issuer Election.
Upon effect of the merger, pursuant to Rule 12g-3(a) of the General Rules and
Regulations of the Securities and Exchange Commission, Upgrade became the
successor issuer to the Company for reporting purposes under the Securities
Exchange Act of 1934 and elected to report under the Act effective April 6,
2000.
ITEM 7. FINANCIAL STATEMENTS, PRO FORMA INFORMATION AND EXHIBITS
FINANCIAL STATEMENTS
Accompanying this Form 8-K are the financial statements of Upgrade
and UltraCard required by Regulation S-B, Item 310(c).
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<PAGE> 25
Consolidated Financial Statements and Report of
Independent Certified Public Accountants
UPGRADE INTERNATIONAL CORPORATION AND
SUBSIDIARIES
(A development stage enterprise)
September 30, 1998 and 1999, and
December 31, 1998 and 1999 (unaudited)
25
<PAGE> 26
C O N T E N T S
<TABLE>
<CAPTION>
Page
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 36
FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS 37
CONSOLIDATED STATEMENTS OF OPERATIONS 38
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY 39
CONSOLIDATED STATEMENTS OF CASH FLOWS 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 43
</TABLE>
26
<PAGE> 27
Report of Independent Certified Public Accountants
Board of Directors
Upgrade International Corporation
We have audited the accompanying consolidated balance sheets of Upgrade
International Corporation and Subsidiaries (a development stage enterprise) as
of September 30, 1998 and 1999, and the related consolidated statements of
operations, stockholders' equity and cash flows for the years then ended. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits 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 audits provide 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 Upgrade
International Corporation and Subsidiaries as of September 30, 1998 and 1999,
and the results of their consolidated operations and their consolidated cash
flows for the years then ended, in conformity with accounting principles
generally accepted in the United States.
GRANT THORNTON LLP
Seattle, Washington
January 27, 2000 (except for note M,
as to which the date is March 8, 2000,
and for note C1, as to which the
date is March 24, 2000)
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<PAGE> 28
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
September 30,
------------------------------- December 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS (unaudited)
Cash and cash equivalents $ 3,697 $ 4,781,330 $ 3,544,503
Subscription receivable -- 165,000 22,172
Prepaid expenses, deposits and other 1,736 209,054 61,747
------------ ------------ ------------
Total current assets 5,433 5,155,384 3,628,422
PROPERTY AND EQUIPMENT - AT COST, less accumulated
depreciation and amortization 10,928 1,003,381 1,374,620
OTHER ASSETS
Intangible assets, net of accumulated amortization -- 253,763 245,444
Deposits -- 135,032 127,031
Investment in options 201,250 -- --
------------ ------------ ------------
Total assets $ 217,611 $ 6,547,560 $ 5,375,517
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 76,721 $ 1,068,769 $ 800,647
Accrued liabilities 121,600 843,493 844,097
Payable to related parties 149,026 370,270 241,002
Loans payable to related parties -- 237,365 53,154
Other -- 31,322 30,199
------------ ------------ ------------
Total current liabilities 347,347 2,551,219 1,969,099
CONVERTIBLE DEBENTURES, net of unamortized discount -- -- 621,080
MINORITY INTEREST -- 1,792,869 895,500
COMMITMENTS AND CONTINGENCIES -- -- --
STOCKHOLDERS' EQUITY
Common stock - $.001 par value, 50,000,000 shares
authorized 10,210 12,958 18,770
Stock subscriptions 146,250 12,344,613 615,974
Additional paid in capital 927,334 2,082,479 16,422,229
Receivable from stockholders of subsidiary -- (400,000) (400,000)
Accumulated development stage deficit (1,213,530) (11,836,578) (14,767,135)
------------ ------------ ------------
(129,736) 2,203,472 1,889,838
------------ ------------ ------------
Total liabilities and stockholders' equity $ 217,611 $ 6,547,560 $ 5,375,517
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 29
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Cumulative
Three months ended results of
Year ended September 30, December 31, operations since
---------------------------- --------------------------- inception
1998 1999 1998 1999 (February 5, 1997)
------------ ------------ ------------ ------------ ------------------
<S> <C> <C> <C> <C> <C>
Costs and expenses (unaudited) (unaudited) (unaudited)
Research and development $ 208,779 $ 1,107,385 $ 21,492 $ 759,808 $ 2,075,972
Purchased in-process research and development 423,857 5,121,946 171,638 156,200 5,702,003
Selling and marketing -- 1,642,125 -- 742,983 2,385,108
General and administrative 404,862 1,972,283 220,125 1,719,244 4,096,389
------------ ------------ ------------ ------------ ------------------
1,037,498 9,843,739 413,255 3,378,235 14,259,472
Other expenses (income)
Equity in losses of UltraCard 176,143 1,088,173 67,262 -- 1,264,316
Interest expense -- 10,708 -- 456,751 467,459
Other, net (111) 36,472 79,264 (40,859) (4,498)
------------ ------------ ------------ ------------ ------------------
176,032 1,135,353 146,526 415,892 1,727,277
Minority interest in losses of subsidiaries -- (356,044) -- (863,570) (1,219,614)
------------ ------------ ------------ ------------ ------------------
NET LOSS $ 1,213,530 $ 10,623,048 $ 559,781 $ 2,930,557 $ 14,767,135
============ ============ ============ ============ ==================
Loss per common
share-basic and diluted $ 0.15 $ 0.79 $ 0.04 $ 0.16 $ 1.63
============ ============ ============ ============ ==================
</TABLE>
The accompanying notes are an integral part of these statements.
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<PAGE> 30
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
STATEMENT OF STOCKHOLDERS' EQUITY
Years ended September 30, 1998 and 1999, and three months ended December 31,
1999 (unaudited)
<TABLE>
<CAPTION>
Voting common stock Common stock subscribed Additional Receivable from
------------------------- ------------------------- paid-in stockholders
Shares Amount Shares Amount capital of subsidiary
----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Balance at February 5, 1997 -- $ -- -- $ -- $ -- $ --
Issuance of founder's
shares at $.03 per
share in February 1997
adjusted for December
1997 1:2 reverse stock
split 500,000 500 -- -- 29,500 --
Issuance of common stock
in February 1997 at
$.10 per share
adjusted for December
1997 1:2 reverse stock 29,000 29 -- -- 5,771 --
split
Issuance of common stock
at $.0025 per share in
December 1997 Reg. D
Rule 504 offering 4,000,000 4,000 -- -- 6,000 --
Issuance of common stock
in December 1997 to an
officer in exchange
for property
contribution 4,000,000 4,000 -- -- 47,250 --
Sale of common stock at
$.50 per share in
January 1998 Reg. D
Rule 504 offering 1,680,988 1,681 -- -- 838,813 --
Common stock subscribed
in September 1998 at
$.0065 per share -- -- 2,250,000 146,250 -- --
Net loss for the year
ended September 30, 1998 -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- ------------
Balances at September 30, 1998 10,209,988 10,210 2,250,000 146,250 927,334 --
<CAPTION>
Accumulated
Development
stage deficit Total
--------------- ---------------
<S> <C> <C>
Balance at February 5, 1997 $ -- $ --
Issuance of founder's
shares at $.03 per
share in February 1997
adjusted for December
1997 1:2 reverse stock
split -- 30,000
Issuance of common stock
in February 1997 at
$.10 per share
adjusted for December
1997 1:2 reverse stock -- 5,800
split
Issuance of common stock
at $.0025 per share in
December 1997 Reg. D
Rule 504 offering -- 10,000
Issuance of common stock
in December 1997 to an
officer in exchange
for property
contribution -- 51,250
Sale of common stock at
$.50 per share in
January 1998 Reg. D
Rule 504 offering -- 840,494
Common stock subscribed
in September 1998 at
$.0065 per share -- 146,250
Net loss for the year
ended September 30, (1,213,530) (1,213,530)
1998
--------------- ---------------
Balances at September 30, 1998 (1,213,530) (129,736)
</TABLE>
Continued
30
<PAGE> 31
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - Continued
Years ended September 30, 1998 and 1999, and three months ended
December 31, 1999 (unaudited)
<TABLE>
<CAPTION>
Voting common stock Common stock subscribed Additional Receivable from
------------------------- ------------------------- paid-in stockholders
Shares Amount Shares Amount capital of subsidiary
----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Issuance of subscribed
shares in November
1998 Reg. D Rule 504
offering 2,250,000 2,250 (2,250,000) (146,250) 144,000 --
Issuance of common stock
in January 1999 to
satisfy trade
liabilities 437,500 438 -- -- 103,312 --
Issuance of common stock
warrants at $.25 per
share in January 1999 -- -- -- -- 221,000 --
Common stock subscribed
at $1.80 per share in
February 1999 private
placement -- -- 999,999 1,799,998 -- --
Issuance of common stock
warrants for services
in August 1999 -- -- -- -- 64,155 --
Common stock subscribed
at $.25 per share in
August 1999 through
exercise of common
stock warrants -- -- 27,500 71,030 (64,155) --
Issuance of common stock
warrants and options
at prices of $.25 and
$2.50 per share in
September 1999 for -- -- -- -- 671,893 --
services
Issuance of common stock
at $.25 per share in
September 1999 through
exercise of employee
stock options 60,000 60 -- -- 14,940 --
Common shares subscribed
at $2.50 per share in
September 1999 -- -- 4,189,434 10,473,585 -- --
Receivable from UltraCard
stockholders for payroll
taxes and related
charges in connection
with stock issued by
UltraCard as compensation -- -- -- -- -- (400,000)
Net consolidated loss for
the year ended
September 30, 1999 -- -- -- -- -- --
----------- ----------- ----------- ----------- ----------- -----------
Balances at September 30,
1999 12,957,488 12,958 5,216,933 12,344,613 2,082,479 (400,000)
<CAPTION>
Accumulated
Development
stage deficit Total
------------- ---------
<S> <C> <C>
Issuance of subscribed
shares in November
1998 Reg. D Rule 504
offering -- --
Issuance of common stock
in January 1999 to
satisfy trade
liabilities -- 103,750
Issuance of common stock
warrants at $.25 per
share in January 1999 -- 221,000
Common stock subscribed
at $1.80 per share in
February 1999 private
placement -- 1,799,998
Issuance of common stock
warrants for services
in August 1999 -- 64,155
Common stock subscribed
at $.25 per share in
August 1999 through
exercise of common
stock warrants -- 6,875
Issuance of common stock
warrants and options
at prices of $.25 and
$2.50 per share in
September 1999 for -- 671,893
services
Issuance of common stock
at $.25 per share in
September 1999 through
exercise of employee
stock options -- 15,000
Common shares subscribed
at $2.50 per share in
September 1999 -- 10,473,585
Receivable from UltraCard
stockholders for payroll
taxes and related
charges in connection
with stock issued by
UltraCard as compensation -- (400,000)
Net consolidated loss for
the year ended
September 30, 1999 (10,623,048) (10,623,048)
--------------- -----------
Balances at September 30,
1999 (11,836,578) 2,203,472
</TABLE>
Continued
31
<PAGE> 32
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY - Continued
Years ended September 30, 1998 and 1999,
and three months ended December 31, 1999 (unaudited)
<TABLE>
<CAPTION>
Voting common stock Common stock subscribed Additional Receivable from
-------------------------- --------------------------- paid-in stockholders
Shares Amount Shares Amount capital of subsidiary
----------- ----------- ----------- ----------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
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 4,652,281 4,652 (4,045,583) (10,113,957) 11,626,038 --
Issuance of common stock
at $.25 per share in
December 1999 through
exercise of employee
stock options 90,000 90 -- -- 22,410 --
Common shares subscribed
in December 1999 at
$.25 per share through
exercise of common
stock warrants -- -- 75,000 185,316 (166,566) --
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 --
Net consolidated loss for
the three months ended
December 31, 1999 -- -- -- -- -- --
------------ ------------ ------------ ------------ ------------ ------------
Balances at December 31,
1999 18,769,768 $ 18,770 246,351 $ 615,974 $ 16,422,229 $ (400,000)
============ ============ ============ ============ ============ ============
<CAPTION>
Accumulated
Development
stage deficit Total
-------------- ----------
<S> <C> <C>
Issuance of subscribed
shares in November 1999 -- --
Issuance of common
shares, including
shares subscribed, in
November 1999 at $2.50
per share -- 1,516,733
Issuance of common stock
at $.25 per share in
December 1999 through
exercise of employee
stock options -- 22,500
Common shares subscribed
in December 1999 at
$.25 per share through
exercise of common
stock warrants -- 18,750
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
Net consolidated loss for
the three months ended
December 31, 1999 (2,930,557) (2,930,557)
--------------- ------------
Balances at December 31,
1999 $ (14,767,135) $ 1,889,838
=============== ============
</TABLE>
The accompanying notes are an integral part of this statement.
32
<PAGE> 33
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
Year ended September 30, December 31,
---------------------------- -----------------
1998 1999 1998
------------ ------------ -----------------
(unaudited)
<S> <C> <C> <C>
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $ (1,213,530) $(10,623,048) $ (559,781)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 705 11,262 630
Amortization of beneficial conversion feature -- -- --
Amortization of debenture discount -- -- --
Write off of option cost -- 76,250 76,250
Equity in loss of UltraCard 176,143 1,088,173 67,262
Purchased in-process research and
development 423,857 5,121,946 171,638
Warrants and options issued for services -- 1,962,205 --
Shares issued for services -- 55,750 --
Expenses incurred through loan assumption -- 470,005 --
Stock of subsidiary issued in exchange for
contribution of intellectual property
charged to expense -- 125,000 --
Minority interest -- (356,044) --
Changes in assets and liabilities:
Prepaid expenses, deposits and other (1,736) 615,902 (60,415)
Accounts payable and accrued liabilities 210,963 204,215 111,452
------------ ------------ ------------
Net cash used in operating activities (403,598) (1,248,384) (192,964)
Cash flows from investing activities
Acquisition of property and equipment (11,633) (55,862) --
Acquisition of Centurion Technologies, Inc.,
net of cash acquired -- (650,000) --
Acquisition of UltraCard, Inc., net of cash acquired (600,000) (4,710,805) (238,900)
Additions to intangible assets -- -- --
------------ ------------ ------------
Net cash used in investing activities (611,633) (5,416,667) (238,900)
Cash flows from financing activities
Borrowings 32,633 185,805 --
Repayments of payables to related parties (46,249) (513,950) (31,044)
Proceeds from sale of common stock and stock
subscriptions 1,032,544 11,770,829 480,993
------------ ------------ ------------
Net cash provided by
financing activities 1,018,928 11,442,684 449,949
------------ ------------ ------------
Net increase (decrease) in cash and cash equivalents 3,697 4,777,633 18,085
Cash and cash equivalents at the beginning of the period -- 3,697 3,697
------------ ------------ ------------
Cash and cash equivalents at the end of the period $ 3,697 $ 4,781,330 $ 21,782
============ ============ ============
<CAPTION>
Three months ended
December 31, Cumulative
------------------ since inception
1999 (February 5, 1997)
------------------ ------------------
(unaudited) (unaudited)
Increase (Decrease) in Cash and Cash Equivalents
Cash flows from operating activities
Net loss $ (2,930,557) $ (14,767,135)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 30,266 42,233
Amortization of beneficial conversion feature 400,000 400,000
Amortization of debenture discount 37,120 37,120
Write off of option cost -- 76,250
Equity in loss of UltraCard -- 1,264,316
Purchased in-process research and
development 156,200 5,702,003
Warrants and options issued for services -- 1,962,205
Shares issued for services 242,900 298,650
Expenses incurred through loan assumption -- 470,005
Stock of subsidiary issued in exchange for
contribution of intellectual property
charged to expense -- 125,000
Minority interest (863,570) (1,219,614)
Changes in assets and liabilities:
Prepaid expenses, deposits and other 155,308 769,474
Accounts payable and accrued liabilities (267,518) 147,660
------------ ------------------
Net cash used in operating activities (3,039,851) (4,691,833)
Cash flows from investing activities
Acquisition of property and equipment (392,571) (460,066)
Acquisition of Centurion Technologies, Inc.,
net of cash acquired -- (650,000)
Acquisition of UltraCard, Inc., net of cash acquired (190,000) (5,500,805)
Additions to intangible assets (611) (611)
------------ ------------------
Net cash used in investing activities (583,182) (6,611,482)
Cash flows from financing activities
Borrowings 1,000,000 1,218,438
Repayments of payables to related parties (314,605) (874,804)
Proceeds from sale of common stock and stock
subscriptions 1,700,811 14,504,184
------------ ------------------
Net cash provided by
financing activities 2,386,206 14,847,818
------------ ------------------
Net increase (decrease) in cash and cash equivalents (1,236,827) 3,544,503
Cash and cash equivalents at the beginning of the period 4,781,330 --
------------ ------------------
Cash and cash equivalents at the end of the period $ 3,544,503 $ 3,544,503
============ ==================
</TABLE>
See note E for non-cash activities.
The accompanying notes are an integral part of these statements.
33
<PAGE> 34
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999, and December 31, 1998 and 1999 (unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Upgrade International Corporation (the Company) is a development stage company
incorporated on February 5, 1997 (inception) in the State of Florida and
currently headquartered in Blaine, Washington. The Company is active in the
acquisition and development of proprietary hardware and software in the
information technology industry. Its primary business focus has been
acquisition, development and commercial exploitation of the UltraCard
technology, a super high capacity data storage and retrieval device. The
aforementioned activities are conducted through its subsidiary, UltraCard, Inc.
In addition, the Company has investments in two technology companies that are
currently developing application software and "know-how" integral to
commercialization of the Company's base technology.
1. Basis of Presentation
The Company consolidates all companies in which it invests when the Company has
a controlling financial interest in the investee. This generally occurs when the
Company owns more than 50% of the outstanding voting shares of the investee. 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 September 30, 1998, and the statements of operations and
cash flows for the year then ended and the three months ended December 31, 1998,
reflect the financial position and results of operations and cash flows of the
parent company only. The results of operations and the cash flows for the eight
months ended September 30, 1997 are nominal to the consolidated financial
statements and were combined with the results of operations and cash flows for
the year ended September 30, 1998 for financial statements presentation
purposes.
The balance sheet as of September 30, 1999 and December 31, 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); and EforNet Corporation (EforNet). The statements of operations and
cash flows for the year ended September 30, 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 three months ended December 31, 1999
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 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.
34
<PAGE> 35
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999, and December 31, 1998 and 1999 (unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
2. Property and Equipment
Property and equipment are stated at cost. Depreciation expense is charged to
operations using the straight-line depreciation method over the estimated useful
life of the assets ranging as follows:
Equipment 3-5 years
Office Furniture 10 years
Corporate Condominium 30 years
The Company uses accelerated depreciation methods for tax purposes.
3. Intangible Assets
Intangible assets consist of capitalized license fees, patent and trademark
costs. The amounts are amortized using the straight-line method over seven
years, the estimated useful life of the underlying technology.
4. Research and Development
Research and development costs are expensed as incurred.
5. Software Development Costs
Statement of Financial Accounting Standards No. 86, Accounting for the Costs of
Computer Software to be Sold, Leased or Otherwise Marketed, requires
capitalization of certain software developments costs subsequent to the
establishment of technological feasibility. The Company considers technological
feasibility to be established upon completion of a working model. The Company
believes that costs incurred between completion of a working model and the point
at which the product will be ready for general release will be insignificant. As
a result, all product development costs have been expensed as incurred.
6. Cash Equivalents
For purposes of the statement of cash flows the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
7. Financial Instruments
The Company's financial instruments consist of cash, receivables, accounts
payable, payable to related parties and notes payable. The Company believes that
the fair value of these financial instruments approximates their carrying
amounts based on their short-term nature or current market indicators such as
prevailing interest rates.
Included in cash and cash equivalents is a trust account with the Company's
corporate counsel. The balance of the account was $1,725,460 and $202,086 at
September 30, 1999 and December 31, 1999, respectively.
35
<PAGE> 36
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999, and December 31, 1998 and 1999 (unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - Continued
UltraCard maintains its bank accounts with one financial institution. At
September 30, 1999, the total cash balance was in excess the of $100,000
federally insured limit. The Company has not experienced any losses with these
cash accounts.
8. Loss per Common Share
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 7,883,551 and 13,467,876 for the years
ended September 30, 1998 and 1999, respectively, 12,459,988 and 18,388,001 for
the three months ended December 31, 1998 and 1999, and 9,067,918 since inception
(February 5, 1997) through December 31, 1999. Diluted loss per share for all
periods presented equaled basic loss per share due to antidilutive effect of the
potentially dilutive securities.
9. Use of Estimates
In preparing the Company's financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets,
liabilities and equity, the disclosure of contingent assets and liabilities at
the date of the financial statements, and the reported amounts of revenue and
expenses during the reporting period. Actual results could differ from those
estimates.
10. Interim Financial Information (Unaudited)
The interim financial statements of the Company as of December 31, 1999 and for
the three months ended December 31, 1998 and 1999, included herein, have been
prepared by he Company, without audit, pursuant to the rules and regulations of
the SEC on a basis consistent with the audited financial statements. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations relating to interim
financial statements.
In the opinion of management, the accompanying unaudited interim financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position, results of the
Company's operations and its cash flows in accordance with generally accepted
accounting principles. The accompanying unaudited interim financial statements
are not necessarily indicative of full year results.
NOTE B - 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
36
<PAGE> 37
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999, and December 31, 1998 and 1999 (unaudited)
NOTE B - MANAGEMENT PLANS - Continued
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. 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.
The Company has completed seven rounds of private placement financings comprised
of both shares issued and shares subscribed, raising a total of $12,803,373, net
of issuance costs as of September 30, 1999. Subsequent to September 30, 1999,
the Company completed additional equity financings totaling approximately
$6,100,000.
NOTE C - INVESTMENTS
1. UltraCard, Inc.
On January 16, 1998, the Company entered into an agreement to acquire an 18.53%
equity interest in UltraCard, Inc., a high-tech development stage company
located in Campbell, California, for cash of $450,000. The agreement was
subsequently modified to provide Upgrade with an option to acquire additional
equity interest in UltraCard for $7,500,000 and bring its ownership interest to
a non-diluted 50%. During the year ended September 30, 1998, the Company
invested $600,000 and held an approximately 19% interest in UltraCard.
The Company's investment in UltraCard was accounted for using the equity method
until the Company acquired its controlling interest on September 30, 1999. On
this date, the investment was accounted for using the purchase method of
accounting, and accordingly, the balance sheet of UltraCard has been included in
the Company's consolidated balance sheet at September 30, 1999. At the date of
investment in UltraCard, the purchase price totaling $7,950,000 was allocated to
the assets acquired and liabilities assumed based on their estimated fair values
at the date of acquisition, which approximated the carrying amounts recorded by
UltraCard. The remaining unallocated amount of purchase price was allocated to
purchased in-process research and development (IPR&D). During the years ended
September 30, 1998 and 1999 and the three months ended December 31, 1998 and
1999, the Company expensed $423,857, $4,193,870, $171,638 and $156,200,
respectively, of IPR&D associated with its investments in UltraCard.
37
<PAGE> 38
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999, and December 31, 1998 and 1999 (unaudited)
NOTE C - INVESTMENTS - Continued
On September 30, 1999, the Board of Directors of UltraCard approved an employee
stock option plan which authorized the issuance of up to one million shares in
the share capital of UltraCard to its directors, officers and employees. No
options have been granted under this plan. In order to avoid dilution of the 50%
equity interest of Upgrade if these stock options are granted and exercised, the
Company was issued an additional 1,000,000 shares. In the event that UltraCard
completes an Initial Public Offering, UltraCard reserves the right to buy back
from Upgrade any portion of those shares issued to the extent that option grants
have not been completed under the terms of the employee stock option plan. As a
result, at September 30, 1999, the Company holds shares of approximately 54% of
the outstanding common shares of UltraCard. The Company cannot vote the
1,000,000 shares issued as a result of the antidilution provisions described
above until the occurrence of an initial public offering (IPO) or the exercise
of options and issuance of shares under the UltraCard stock option agreement. In
addition, a stockholder of UltraCard has granted to the Company certain proxy
rights that allow the Company to vote an additional 2% of the outstanding common
stock of UltraCard. Subsequent to September 30, 1999, the Company acquired an
additional 1% interest in UltraCard from one of UltraCard's stockholders,
increasing the Company's interest in UltraCard to approximately 55%.
The Company has expressed an intention to acquire an additional interest in
UltraCard and to continue funding its operations until UltraCard completes an
anticipated IPO. Under terms of the Funding Agreement between the Company and
UltraCard dated March 21, 2000, should UltraCard require additional financing
prior to an IPO, the Company has agreed to provide sufficient funds on a firm
commitment basis in an amount not to exceed $20 million. All such funds advanced
by the Company will be subject to a note payable agreement, the terms of which
will require the accrual of interest at the bank's prime interest rate and
repayment of principal and accrued interest on the earlier of the occurrence of
the following events: the payment of dividends to stockholders; the completion
of an IPO where the proceeds exceed $35 million subject to the conversion
provisions described below; or upon the occurrence of a change in control of
UltraCard; but no later than March 31, 2001. Pursuant to the terms of the
Funding Agreement, the unpaid principal and accrued interest is convertible into
common stock of UltraCard at specified conversion rates upon the completion of
an IPO. The graduated conversion rates range from $1.90 to $15.00 per share
depending on the amount owed to the Company at the time of conversion.
Subsequent to December 31, 1999, the Company loaned to UltraCard approximately
$2,750,000 to fund its operations.
38
<PAGE> 39
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999, and December 31, 1998 and 1999 (unaudited)
NOTE C - INVESTMENTS - Continued
The following is a summary of the balance sheets and operations of UltraCard:
<TABLE>
<CAPTION>
As of
September 30,
1998
------------
<S> <C>
Balance sheet:
Total current assets $ 23,616
Non current assets, net 236,764
------------
Total assets $ 260,380
============
Current and total liabilities $ 604,532
Stockholders' deficit (344,152)
------------
Total liabilities and stockholders' deficit $ 260,380
============
</TABLE>
<TABLE>
<CAPTION>
Year ended September 30, Three months
----------------------------- ended
December 31,
1998 1999 1998
----------- ----------- -----------
<S> <C> <C> <C>
Operations:
Research and development expenses $ 385,528 $ 1,195,828 $ 43,233
Royalty and license fees 345,125 1,484,636 104,862
General and administrative expenses 1,146,039 1,087,712 168,387
Other income (2,963) (29,294) (1,313)
----------- ----------- -----------
Net loss $ 1,873,729 $ 3,738,882 $ 315,169
=========== =========== ===========
</TABLE>
39
<PAGE> 40
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999, and December 31, 1998 and 1999 (unaudited)
NOTE C - INVESTMENTS - Continued
2. EforNet Corporation
On February 22, 1999, the Company and one of its directors formed EforNet, a
Washington corporation, each receiving a 50% interest in the company. At
formation, certain intellectual property assets under development, including
switching software valued at $250,000, was transferred to EforNet. Since the
intellectual property was still under development and had not yet reached
technological feasibility, it was considered contributed IPR&D, and accordingly
IPR&D in the amount of $125,000 (Upgrade's contribution) was charged to expense
during the year ended September 30, 1999. EforNet is currently developing an
application for the UltraCard technology, for secure, anonymous electronic
commerce over the Internet, utilizing the UltraCard technology and the switching
software referred to above. The results of operations of EforNet since formation
have been included in the accompanying consolidated financial statements. The
stockholders of EforNet have entered into stockholder's agreement that includes,
among other things, a buy and sell agreement. In addition, the other stockholder
of EforNet has granted to Upgrade International Corporation (Upgrade) certain
proxy rights that allow Upgrade to vote an additional 1% of the outstanding
common stock of EforNet. As a result, Upgrade holds a 51% voting interest in
EforNet. In January 2000, EforNet re-incorporated in the state of California.
3. CTI Acquisition Corporation and Centurion Technologies Inc.
On May 12, 1999, the Company formed CTI Acquisition Corporation for the sole
purpose of acquiring an equity interest in Centurion Technologies, Inc., a
development stage company headquartered in Redmond, Washington. Centurion is
developing a proprietary transaction processing software "EPRIM," designed for
the real-time transmission of encrypted data over the Internet with a business
focus in the medical, educational and government market niches. CTI then
acquired an option from one of the Centurion's stockholders' to purchase up to
50% equity interest in Centurion. On May 13, 1999, CTI acquired a 50% interest
in Centurion for an aggregate price of $1,100,000, including the option cost of
$100,000. As of September 30, 1999, Upgrade owed $350,000 to Centurion for its
50% interest, which was paid prior to December 31, 1999. In addition, Upgrade
has a liability of $100,000 and $50,000, as of September 30, 1999 and December
31, 1999, respectively, related to the option to purchase shares of Centurion,
which is included in loans payable to related parties. The results of operations
of Centurion from the date of acquisition have been recorded in these
consolidated financial statements. The purchase price of the acquisition in
excess of the carrying amount of Centurion's net assets, aggregating $803,076,
was accounted for as IPR&D and was expensed during the year ended September 30,
1999.
Two stockholders of Centurion have granted to Upgrade certain proxy rights that
allow Upgrade to vote an additional 1% of the outstanding common stock of the
Centurion. As a result, Upgrade holds a 51% voting interest in Centurion.
40
<PAGE> 41
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999, and December 31, 1998 and 1999 (unaudited)
NOTE C - INVESTMENTS - Continued
4. Global CyberSystems, Inc.
Global CyberSystems Inc., was incorporated in Nevada on January 12, 1998. As
part of the UltraCard acquisition agreement (see note C (1)), the Company
received a 50% interest in the newly formed corporation with the remaining 50%
being owned by UltraCard. On July 11, 1998, the Company entered into a master
distribution agreement with UltraCard which provided Global with the exclusive
distribution rights for the UltraCard products and technology in territories and
applications as follows: (1) in the U.S., Global holds the exclusive
distribution for banking applications and retail/convenience applications; and
(2) worldwide, Global holds the exclusive rights to gaming applications for the
UltraCard products and technology. As of September 30, 1999 and December 31,
1999, Global had not commenced its operations and the carrying amounts of its
assets, liabilities and stockholders' equity were nominal.
5. Purchased In-Process Research and Development Costs
The purchased or contributed cost of in-process research and development
represents the value assigned in a purchase business combination to research and
development projects of the acquired business that had commenced but had not yet
reached technological feasibility at the date of the acquisition and have no
future alternative use. In accordance with Statement on Financial Accounting
Standards No. 2, Accounting for Research and Development Costs, as clarified by
Financial Accounting Standards Board Interpretation No. 4, the amounts assigned
to IPR&D meeting these criteria are charged to expense as part of the allocation
of the purchase price of the business combination. A similar accounting was also
utilized for the Company's investment in UltraCard accounted for under the
equity method. Accordingly, charges totaling $423,857, $5,121,946, $171,638 and
$156,200 were recorded as IPR&D during the years ended September 30, 1998 and
1999 and the three months ended December 31, 1998 and 1999, respectively, as
part of the allocations of purchase price and equity investment of the
Subsidiaries.
Since all of the Subsidiaries are development stage companies, which had not
commenced their respective planned principal operations nor generated any
significant revenues, the entire amount of the excess of the purchase price or
investment amount over the fair market value of the identifiable assets and
liabilities of the investee, which approximated the carrying amount of these
assets and liabilities, was allocated to IPR&D. As a result, no amount of the
purchase prices or investment amounts were allocated to goodwill or other
intangibles, except those already recorded by the investees.
6. Proforma Results of Operations
Had the operations of the Subsidiaries been consolidated with those of the
Company during the years ended September 30, 1998 and 1999 and the three months
ended December 31, 1998, the net losses would have been approximately
$1,440,000, $11,400,000 and $610,000, respectively.
41
<PAGE> 42
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999, and December 31, 1998 and 1999 (unaudited)
NOTE D - RELATED PARTY TRANSACTIONS
During the years ended September 30, 1998 and 1999 the Company incurred $5,000
and $60,000, respectively, in fees for consulting services provided by a company
owned by one of the Company's directors. For the three months ended December 31,
1998 and 1999, there were no such fees. At September 30, 1998 and 1999, $5,000
and $40,000, respectively, of the aforementioned fees were included in accounts
payable. At December 31, 1999 there were no such amounts included in accounts
payable.
Payable to related parties is comprised of the following:
<TABLE>
<CAPTION>
September 30,
------------------------------ December 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Stockholders and officers $ 149,026 $ 213,625 $ 84,357
Bridge loan from a Centurion stockholder -- 156,645 156,645
------------ ------------ ------------
$ 149,026 $ 370,270 $ 241,002
============ ============ ============
</TABLE>
All of the above borrowings are non-interest bearing with terms of one year or
less.
In February 1999, the Company assumed liabilities of $470,005, including
principal and accrued interest. The original loan was entered into by the
Company's president and proceeds were used principally to fund research and
development activities. As a result, this amount was expensed as research and
development costs during the year ended September 30, 1999. As of the September
30, 1999, the outstanding balance of principal and interest on this note was
$137,365 and is included in loans payable to related parties. The loan,
including accrued interest, was paid in full in October 1999.
NOTE E - NONMONETARY EXCHANGES AND TRANSACTIONS
On the dates of acquisition and consolidation of the Subsidiaries, as described
in note C, the Subsidiaries had non-cash assets with an estimated fair value
aggregating approximately $2,000,000 and liabilities aggregating approximately
$1,300,000.
On December 12, 1997, the Company purchased options, to acquire equity interests
in Finet Corporation (Finet) and World Wide Wireless Web (WWWW) from the
Company's President in exchange for a note payable in the amount of $150,000,
bearing interest at prime rate plus two percent, and 4,000,000 shares of the
Company's common stock. The stock was valued at $51,250 based on the cost of the
assets received. During the year ended September 30, 1999, the option to acquire
WWWW lapsed, and was written off as a loss in the amount of $76,250. The Finet
option was transferred to EforNet, (see note C (2)) after negotiation with
Finet's controlling stockholder who, at the time, also held an interest in
EforNet.
42
<PAGE> 43
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999, and December 31, 1998 and 1999 (unaudited)
NOTE E - NONMONETARY EXCHANGES AND TRANSACTIONS
In connection with a Regulation D Rule 504 private placement in 1999, the
Company incurred the following costs: $645,529 fees accrued as a liability at
September 30, 1999, 143,851 shares of its voting common stock included in total
shares subscribed at September 30, 1999, and warrants to acquire 279,814 common
shares (with exercise prices of $0.25 per share for 100,000 shares and $2.50 per
share for 179,814 shares) that vested immediately at the date of grant on
September 30, 1999. See note K for additional information related to warrants.
These costs totaled $1,703,612 and are accounted for as placement costs.
In connection with a private placement in fiscal year 1999, the Company recorded
a subscription receivable from a shareholder in the amount of $165,000. Since
the subscription receivable has been collected in full subsequent to September
30, 1999, it was classified as a current receivable at September 30, 1999.
In connection with a private placement in November 1999, the Company recorded a
subscription receivable in the amount of $22,172. The subscription has been
collected in full subsequent to December 31, 1999 and thus, was classified as a
current receivable at December 31, 1999.
On October 15, 1999, the Company issued 70,000 shares in lieu of a payment for
public relation services performed. The shares were valued using the closing
market price on October 18, 1999 and were recorded as marketing expense of
$242,900.
NOTE F - PROPERTY AND EQUIPMENT
The composition of property and equipment is as follows:
<TABLE>
<CAPTION>
September 30,
------------------------------ December 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Equipment $ 10,001 $ 360,784 $ 734,781
Office furniture and fixtures 1,632 43,766 62,344
Corporate condominium -- 643,532 643,532
------------ ------------ ------------
11,633 1,048,082 1,440,657
Accumulated depreciation and amortization 705 44,701 66,037
------------ ------------ ------------
$ 10,928 $ 1,003,381 $ 1,374,620
============ ============ ============
</TABLE>
43
<PAGE> 44
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999, and December 31, 1998 and 1999 (unaudited)
NOTE G - ACCRUED LIABILTIES
Accrued liabilities are comprised of the following:
<TABLE>
<CAPTION>
September 30,
------------------------------ December 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Compensation $ 112,500 $ 283,021 $ 99,132
Payroll taxes and related costs 6,600 539,850 634,120
Vacation and other 2,500 20,622 110,845
------------ ------------ ------------
$ 121,600 $ 843,493 $ 844,097
============ ============ ============
</TABLE>
NOTE H - INCOME TAXES
The differences between financial and tax reporting are comprised primarily of
the timing in the recognition of net operating loss (NOL) and tax credit
carryforwards, vacation expenses and methods used to compute depreciation
expense. The income tax benefits reconciled to the tax computed at the statutory
rate were approximately as follows during the years ended September 30:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Tax benefit computed at federal statutory rate $ (400,000) $(3,600,000)
Non-deductible expenses 150,000 1,810,000
Research credit (20,000) (220,000)
Valuation allowance 270,000 2,010,000
----------- -----------
$ -- $ --
=========== ===========
</TABLE>
44
<PAGE> 45
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999, and December 31, 1998 and 1999 (unaudited)
NOTE H - INCOME TAXES - Continued
Deferred tax assets and liabilities are measured using enacted tax rates that
are expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. A valuation allowance is
recorded for deferred tax assets when it is more likely than not that such
deferred tax assets will not be realized. Deferred income taxes reflect the net
tax effects of temporary differences between the consolidated carrying amounts
of assets and liabilities for financial reporting purposes and the respective
amounts used for income tax purposes. Significant components of the Company's
deferred tax assets are as follows at September 30:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 190,000 $ 1,390,000
Research credit 20,000 240,000
Equity in losses of UltraCard 60,000 430,000
Other -- 220,000
----------- -----------
Total gross deferred tax asset 270,000 2,280,000
----------- -----------
Valuation allowance (270,000) (2,280,000)
----------- -----------
Net deferred tax asset $ -- $ --
=========== ===========
</TABLE>
Upgrade and its subsidiaries are each required to file their own corporate
federal and state tax returns. As of September 30, 1999, the Company and
Subsidiaries had aggregated NOL carryforwards and tax credits carryforwards of
approximately $10,200,000 and $260,000, respectively, of which the majority of
the carryforwards begin expiring in 2018.
Internal Revenue Code Section 382 and similar California rules place a
limitation on the amount of taxable income that can be offset by carryforwards
after a change in control (generally greater than a 50% change in ownership). As
a result of these provisions, utilization of the NOL and tax credit
carryforwards may be limited.
NOTE I - COMMITMENTS AND CONTINGENCIES
1. License Agreements
a. AMPEX Agreement
Effective October 1, 1999, UltraCard entered into a license
agreement with AMPEX Corporation (AMPEX) to use AMPEX developed
proprietary technology, generally referred to as Keepered Media
Technology, for incorporation into UltraCard's development, use and
sale of its core product. The agreement is scheduled to continue for
the life of each Keepered Media patent, for the life of each
Keepered Media patent issued under a patent application, and for of
each license granted under the Keepered Media Technology, in
perpetuity.
45
<PAGE> 46
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999, and December 31, 1998 and 1999 (unaudited)
NOTE I - COMMITMENTS - Continued
Under the terms of the agreement, UltraCard is required to pay royalties for
each sale of the UltraCard's magnetic card product on a per card basis.
Additionally, in order for UltraCard to maintain an exclusive license agreement,
the minimum yearly payments are as follows:
Year ending September 30,
-------------------------
2000 None
2001 $ 3,500,000
2002 15,000,000
Thereafter 24,000,000 per year
Either party has a right to terminate all or part of the agreement with 30 days
notice.
b. CardTech Agreement
On October 10, 1997, UltraCard licensed the rights to two technology patents
from CardTech, Inc. (CardTech). UltraCard's President is also the majority
stockholder of CardTech. The license agreement terminates upon the expiration of
the last licensed patent. Because the agreement covers any new patent
applications filed in conjunction with the original technology patents, the
agreement does not have a definite expiration date.
UltraCard paid $30,000 for an initial licensing fee, $950,000 in minimum royalty
fees and $1,009,813 in capital fees under the license agreement. Capital fees
were paid as part of the agreement requiring UltraCard to remit to the CardTech
12.5% of every dollar received from equity financing. In October 1997, as
required by the license agreement, UltraCard issued 2,500,000 shares of its
common stock, valued at the time of the issuance at $250,000. Related to the
shares issued, UltraCard capitalized as license cost the amount of $250,000.
During the years ended September 30, 1998 and 1999 and the three months ended
December 31, 1998 and 1999, the UltraCard recorded license and royalty expenses
of $345,125, $1,484,636, $104,862 and $162,500, respectively.
As of September 30, 1999 and December 31, 1999, UltraCard's remaining
commitments under the license agreement are summarized as follows:
- An earned royalty fee of 5% of the gross proceeds generated
from sales, leases or other distributions of products
incorporating the CardTech technology. The minimum annual
royalty fee is payable at $650,000 per calendar year through
2009.
- A capital fee equal to 12.5% of all capital invested in the
UltraCard until such time that CardTech has received a total
of $3,000,000 in such fees. The maximum remaining amount of
the commitment is $1,990,187.
46
<PAGE> 47
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999, and December 31, 1998 and 1999 (unaudited)
NOTE I - COMMITMENTS - Continued
2. Agreement with International Funding Corporation
Effective July 1, 1999, the Company entered into an agreement with International
Funding Corporation (IFC). Under the terms of the agreement, IFC provides
various investment banking services and assisted the Company in conducting its
private placement to sell shares at $2.50 in exchange for the following
consideration:
a) Warrant for the purchase of 100,000 shares of common stock at
a price of $0.25 which vest at the time the Company raises
$6,000,000;
b) cash fee of 7% of the gross proceeds raised through the equity
placement;
c) fee of 4% of the gross proceeds of the placement payable in
the Company's voting common stock;
d) fee of 5% of the gross proceeds of the placement payable in
$2.50 common stock warrants which vested immediately.
At September 30, 1999, the Company issued 143,851 shares of its voting common
stock and granted to IFC warrants to purchase 279,814 shares of common stock,
100,000 with an exercise price of $0.25 per share and 179,814 with an exercise
price of $2.50 per share. At September 30, 1999 and December 31, 1999, the
Company recorded fees payable in the amount of $645,529 and $16,180,
respectively, to IFC. The warrants issued were valued using the Black-Scholes
pricing model described in note J. All of the expenses associated with the
warrants and cash fees payable were recorded as a reduction of the proceeds from
the offering.
In addition to the aforementioned placement costs, during the year ended
September 30, 1999 and the three months ended December 31, 1999, the Company
incurred $30,000 and $56,250, respectively, in consulting fees for investor
relation services performed by IFC.
The IFC agreement expires on June 30, 2000, and has an automatic renewal clause
unless terminated in writing by either party. If renewed, in the event of any
future private placements conducted through IFC, fees described in (b)-(d) above
would be payable by the Company out of the proceeds raised. In addition, IFC is
entitled to a monthly retainer in the amount of $7,500 and a reimbursement of
expenses incurred while providing services to the Company.
47
<PAGE> 48
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999, and December 31, 1998 and 1999 (unaudited)
NOTE I - COMMITMENTS - Continued
3. Employment and Consulting Agreements
UltraCard has entered into a number of employment and consulting agreements. The
agreements vary in length from one to five years with total remaining commitment
amounts, excluding shares to be issued, as follows:
Year ending
September 30,
-------------
2000 $1,246,933
2001 748,333
2002 577,500
2003 87,500
----------
$2,660,266
==========
Some of the employment and consulting agreements also call for issuance of a
specified number of shares of the Company's common stock. The estimated market
value of these shares issued were charged to expense in the period issued.
During the years ended September 30, 1998 and 1999, the Company recorded
$1,038,564 and $226,925, respectively, of employee compensation and consulting
expenses related to the issuance of these shares of the Company. No shares were
issued in compensation or for consulting services under the aforementioned
agreements during the three months ended December 31, 1998 and 1999.
4. Operating Lease Agreements
The Company has entered into operating lease agreements for its office and
engineering facilities located in Washington and California. The leases have
terms varying from monthly to five years, which expire in 2000 to 2004, some of
which provide for one and two year extensions. Certain leases provide for fixed
annual increases in base rent and others require adjustments based on the change
in the Consumer Price Index and in facility maintenance costs. Total minimum
operating lease commitment for the Company are as follows:
Year ending
September 30,
-------------
2000 $ 202,872
2001 203,994
2002 203,007
2003 189,228
2004 118,268
---------
$ 917,369
=========
48
<PAGE> 49
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999, and December 31, 1998 and 1999 (unaudited)
NOTE I - COMMITMENTS - Continued
Rent expense for the year ended September 30, 1998, and the three months ended
December 31, 1998 was $3,500 and $6,310, respectively. Total consolidated rent
expenses for the year ended September 30, 1999 and three months ended December
31, 1999 were $54,825 and $103,375, respectively.
Total sublease income for the year ended September 30, 1999 and the three months
ended December 31, 1999 was $12,075 and $6,620, respectively. During the year
ended September 30, 1999, UltraCard entered into a month-to-month sublease
agreement with one of its stockholders to sublease part of its office space.
At the commencement of its office lease, UltraCard paid a refundable security
deposit of $115,000. If UltraCard is in compliance with the provisions of the
lease agreement, the amount of the deposit should be reduced by $20,000 per year
during the third, fourth and fifth years of the lease.
NOTE J - STOCK OPTION PLAN
In January 1999, the Company established the 1999 Stock Option Plan (1999 Plan).
The 1999 Plan allows the Company to grant options to employees, consultants, and
directors for up to 1,550,000 shares of common stock. On September 30, 1999, the
Company implemented the 2000 Stock Option Plan (2000 Plan) allotting an
additional 800,000 shares for grants to employees and contractors. Option prices
are generally equal to the fair market value of the shares of the Company's
common stock on the date of grant. Options, generally, vest over a four-year
period and expire four to five years from the date of the grant.
The following is a summary of the employee stock option information for the year
ended September 30, 1999.
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
--------- ----------------
<S> <C> <C>
Options outstanding at September 30, 1998 -- $ --
Options granted 2,310,000 1.05
Options exercised 60,000 0.25
--------- --------------
Options outstanding at September 30, 1999 2,250,000 $ 1.07
========= ==============
</TABLE>
49
<PAGE> 50
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999, and December 31, 1998 and 1999 (unaudited)
NOTE J - STOCK OPTION PLAN - Continued
The following table summarizes information about options outstanding at
September 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- -------------------------------------
Weighted Weighted
Average Average
Range of Number Exercise Remaining Number Weighted Average
Exercise Prices Outstanding Price Contractual Life Exercisable Exercise Price
--------------- ------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
$0.25 940,000 $ 0.25 4.30 years 940,000 $ 0.25
$0.50 - $2.50 1,310,000 1.66 4.71 years 393,384 0.82
------------- ---------------
2,250,000 1,333,384 0.42
============= ===============
</TABLE>
The weighted average fair value of the options granted during the year ended
September 30, 1999 was $0.98.
The Company accounts for its stock-based compensation plan in accordance with
Accounting Principle Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, under which no compensation was recognized in connection with
options granted to employees. The Company adopted the disclosure requirements
SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, the Company
is required to calculate and present the pro forma effect of all awards granted.
For disclosure purposes, the fair value of each option granted to an employee
has been estimated as of the date of grant using the Black-Scholes option
pricing model with the following assumptions: risk-free interest rate of 6.00%,
dividend yield 0%, and volatility of 218%, and expected lives of 4 and 5 years.
Based on the computed option values and the number of the options issued, had
the Company recognized compensation expense, the following would have been its
effect on the Company's net loss:
<TABLE>
<CAPTION>
Year ended
September 30, 1999
------------------
Net loss
- ---------------
<S> <C>
As reported $10,623,048
Pro forma 10,918,275
Loss per share
- ---------------
As reported $ 0.79
Pro forma 0.81
</TABLE>
On September 30, 1999, the Company granted 40,000 options to non-employee
consultants. Options were granted at an exercise price of $2.50 per share which
at the time was equal to the private placement price of the underlying Company's
common stock. The options expire five years from the date of grant and vest over
a four-year period. The Company recorded $98,720 in compensation expense in
connection with the options granted to non-employees. At September 30, 1999,
3,336 of these options became exercisable.
50
<PAGE> 51
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999, and December 31, 1998 and 1999 (unaudited)
NOTE J - STOCK OPTION PLAN - Continued
As of September 30, 1999, UltraCard, Inc. has adopted a stock option plan of up
to 1,000,000 shares of its common stock and granted 280,666 options to its
employees. The pro forma effect on the consolidated loss would not be material.
As of September 30, 1999, certain other subsidiaries were in the process of
establishing stock option plans. It is expected that such plans will be adopted
during the year ending September 30, 2000.
No options were granted by the Company during the three months ended December
31, 1999. In November 1999, a director exercised 90,000 options with a strike
price of $0.25 per share. At December 31, 1999 2,160,000 and 40,000 shares of
employee and non-employee stock options, respectively, remain outstanding.
NOTE K - Warrants
During the year ended September 30, 1999, the Company granted 2,069,641 warrants
to investment bankers, consultants and other service providers as follows:
- - On January 20, 1999, warrants to purchase 1,000,000 shares of common
stock were granted to a family trust in which the Company's
President is the sole trustee. The warrants have an exercise price
of $0.25 per share (the fair value price of the stock on the date of
grant), vested immediately, and are exercisable within two years.
They were valued using the Black-Scholes pricing model using a 6%
risk-free rate, 218% volatility, and a 0% dividend yield. The
Company recorded a $221,000 expense in connection with this grant.
- - On August 1, 1999, warrants to purchase 27,500 shares of common
stock were granted to a consulting company. The warrants had a
exercise price of $0.25 per share, vested immediately and had a term
of two years. On August 15, 1999, all of the warrants were exercised
for $6,875. The warrants were valued at the date of grant using the
Black-Scholes model and assumptions described in note J. In
connection with the grant, the Company recorded an expense of
$64,155.
- - On September 30, 1999, the Company granted warrants to acquire
762,327 shares of common stock to various consultants. The warrants
have exercise prices ranging $0.25 to $2.50, vested immediately and
have contractual lives of two and five years, respectively. The
warrants were valued using the Black-Scholes pricing model described
in note J. In connection with the grant, $1,642,485 was recorded as
a professional service expense.
At September 30, 1999, there were 1,250,000 and 792,141 warrants exercisable at
$0.25 and $2.50 per share, respectively.
During the three months ended December 31, 1999, the Company granted 120,000
warrants in conjunction with the issuance of a convertible debenture (see note
L). During the three months ended December 31, 1999, 75,000 warrants with strike
price of $0.25 were exercised. At December 31, 1999, there were 1,175,000 and
912,141 warrants exercisable at $0.25 and $2.50 per share, respectively.
51
<PAGE> 52
Upgrade International Corporation and Subsidiaries
(A development stage enterprise)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
September 30, 1998 and 1999, and December 31, 1998 and 1999 (unaudited)
NOTE L - CONVERTIBLE DEBENTURE
On October 15, 1999, the Company completed the issuance of a convertible
debenture to an outside investor with the principal amount of $1,000,000 bearing
interest at a simple annual rate of 7% with a maturity date of October 15, 2001.
The debenture is convertible into the Company's common stock at a price equal to
75% of the average bid price of the stock for the five consecutive trading days
immediately preceding the date of conversion, not to exceed $2.50 per share.
Pursuant to the debenture agreement, the Company granted a warrant to acquire up
to 120,000 shares of common stock at a price of $2.50 per share to the holder of
the debenture. The Company allocated part of the debenture proceeds to the
warrants valued using Black-Scholes pricing model described in the note J. The
allocation resulted in a discount of $416,040 to be amortized using effective
interest method over the contractual life of the debenture (two years). During
the three months ended December 31, 1999, the Company recorded $37,120 in
related discount amortization which is included with interest expense.
The Company also allocated part of the debenture proceeds to the debenture's
beneficial conversion feature resulting in $400,000 increase to additional paid
in capital. Due to holder's ability to convert at any time starting with the
date of issuance, the entire amount was expensed as interest on October 15,
1999.
During the three months ended December 31, 1999, the Company recorded
approximately $14,800 in interest accrued on the debentures.
NOTE M - SUBSEQUENT EVENTS
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 is in the process of
engaging defense counsel, reviewing the facts alleged in the complaints and
developing an appropriate response. As a result, the Company has not yet
responded. Because legal counsel has not been engaged to review the complaints,
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.
52
<PAGE> 53
Financial Statements and Report of
Independent Certified Public Accountants
ULTRACARD, INC.
(A development stage company)
September 30, 1998 and 1999 and
December 31, 1998 and 1999 (unaudited)
53
<PAGE> 54
C O N T E N T S
<TABLE>
<CAPTION>
Page
<S> <C>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS 64
FINANCIAL STATEMENTS
BALANCE SHEETS 65
STATEMENTS OF OPERATIONS 66
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT) 67
STATEMENTS OF CASH FLOWS 68
NOTES TO FINANCIAL STATEMENTS 70
</TABLE>
54
<PAGE> 55
Report of Independent Certified Public Accountants
Board of Directors
UltraCard, Inc.
We have audited the accompanying balance sheets of UltraCard, Inc. (a
development stage company) as of September 30, 1998 and 1999, and the related
statements of operations, stockholders' equity (deficit) and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits 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 audits provide a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of UltraCard, Inc. as of September
30, 1998 and 1999, and the results of its operations and its cash flows for the
years then ended, in conformity with accounting principles generally accepted in
the United States.
GRANT THORNTON LLP
Seattle, Washington
January 27, 2000 (except for note B,
as to which the date is March 24, 2000)
55
<PAGE> 56
UltraCard, Inc.
(A development stage company)
BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS
September 30,
------------------------------ December 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
CURRENT ASSETS (unaudited)
Cash and cash equivalents $ 17,278 $ 2,639,195 $ 1,130,249
Prepaid royalty to CardTech -- 162,500 --
Prepaid expenses 6,338 16,489 720
------------ ------------ ------------
Total current assets 23,616 2,818,184 1,130,969
PROPERTY AND EQUIPMENT - AT COST,
less accumulated depreciation and amortization 20,053 885,206 1,113,450
OTHER ASSETS
Intangible assets, net of accumulated amortization 215,841 253,763 245,444
Deposits 870 126,315 118,315
------------ ------------ ------------
Total assets $ 260,380 $ 4,083,468 $ 2,608,178
============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable $ 20,630 $ 185,982 $ 493,819
Accrued liabilities 332,115 496,095 527,183
License fees payable to CardTech, Inc. 251,787 -- --
------------ ------------ ------------
Total current liabilities 604,532 682,077 1,021,002
COMMITMENTS -- -- --
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock - $.001 par value, 50,000,000 shares
authorized 5,978 11,247 11,247
Stock subscriptions 150,000 -- --
Additional paid in capital 1,673,599 9,402,755 9,402,755
Receivable from stockholders (300,000) (400,000) (400,000)
Accumulated development stage deficit (1,873,729) (5,612,611) (7,426,826)
------------ ------------ ------------
(344,152) 3,401,391 1,587,176
------------ ------------ ------------
Total liabilities and stockholders' equity $ 260,380 $ 4,083,468 $ 2,608,178
============ ============ ============
</TABLE>
The accompanying notes are an integral part of these statements.
56
<PAGE> 57
UltraCard, Inc.
(A development stage company)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three months ended Cumulative
Year ended September 30, December 31, results of operations
----------------------------- ----------------------------- since inception
1998 1999 1998 1999 (September 9, 1997)
----------- ----------- ----------- ----------- ----------------------
<S> <C> <C> <C> <C> <C>
Costs and expenses (unaudited) (unaudited) (unaudited)
Research and development
Stock compensation $ 273,550 $ 187,789 $ -- $ -- $ 461,339
Other 111,978 1,008,039 43,233 651,439 1,771,456
Royalty and license fees 345,125 1,484,636 104,862 162,500 1,992,261
Selling and marketing -- -- -- 500,083 500,083
General and administrative
Stock compensation 580,027 39,136 -- -- 619,163
Other 566,012 1,048,576 168,387 525,637 2,140,225
----------- ----------- ----------- ----------- ------------------
1,876,692 3,768,176 316,482 1,839,659 7,484,527
Other income (2,963) (29,294) (1,313) (25,444) (57,701)
----------- ----------- ----------- ----------- ------------------
NET LOSS $ 1,873,729 $ 3,738,882 $ 315,169 $ 1,814,215 $ 7,426,826
=========== =========== =========== =========== ==================
NET LOSS PER SHARE - BASIC $ 0.42 $ 0.56 $ 0.05 $ 0.16 $ 1.23
=========== =========== =========== =========== ==================
</TABLE>
The accompanying notes are an integral part of these statements.
57
<PAGE> 58
UltraCard, Inc.
(A development stage company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended September 30, 1998 and 1999 and three months ended
December 31, 1999 (unaudited)
<TABLE>
<CAPTION>
Voting common stock Common stock subscribed Additional
---------------------------- ---------------------------- paid-in
Shares Amount Shares Amount capital
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Balance at September 9, 1997 -- $ -- -- $ -- $ --
Issuance of founders'
shares at $0.01 per
share on September 9,
1997 in exchange for 500,000 500 -- -- 4,500
services
Sale of common stock in
September of 1997
through the first round
of private placement at
$.10 per share 310,000 310 -- -- 30,690
Issuance of common stock in
December 1997 as part of
license agreement at
$.10 per share 2,500,000 2,500 -- -- 247,500
Sale of common stock at
various dates from
October 1997 through
February 1998 through
the first round of private
placement at $.10 per share 900,000 900 -- -- 89,100
Issuance of common stock
for compensation in
January 1998 at $.44 per
share 250,000 250 -- -- 110,850
Sale of common stock in
January 1998 to Upgrade
at $.44 per share 1,012,500 1,013 -- -- 448,987
Issuance of common stock
for consulting services
in April 1998 at $1.47
per share 110,511 110 -- -- 162,340
Issuance of common stock as
compensation for in
April and August 1998 at
$1.47 per share 394,576 395 -- -- 579,632
Receivable from
stockholders for payroll
taxes and related
charges in connection
with stock issued as -- -- -- -- --
compensation
Common stock subscribed at
$1.47 per share -- -- 102,223 150,000 --
Net loss for the year ended
September 30, 1998 -- -- -- -- --
----------- ----------- ----------- ----------- -----------
Balance at September 30,
1998 5,977,587 5,978 102,223 150,000 1,673,599
<CAPTION>
Receivable Accumulated
from development
stockholders stage deficit Total
------------ --------------- ------------
<S> <C> <C> <C>
Balance at September 9, 1997 $ -- $ -- $ --
Issuance of founders'
shares at $0.01 per
share on September 9,
1997 in exchange for -- -- 5,000
services
Sale of common stock in
September of 1997
through the first round
of private placement at
$.10 per share -- -- 31,000
Issuance of common stock in
December 1997 as part of
license agreement at
$.10 per share -- -- 250,000
Sale of common stock at
various dates from
October 1997 through
February 1998 through
the first round of private
placement at $.10 per share -- -- 90,000
Issuance of common stock
for compensation in
January 1998 at $.44 per
share -- -- 111,100
Sale of common stock in
January 1998 to Upgrade
at $.44 per share -- -- 450,000
Issuance of common stock
for consulting services
in April 1998 at $1.47
per share -- -- 162,450
Issuance of common stock as
compensation for in
April and August 1998 at
$1.47 per share -- -- 580,027
Receivable from
stockholders for payroll
taxes and related
charges in connection
with stock issued as (300,000) -- (300,000)
compensation
Common stock subscribed at
$1.47 per share -- -- 150,000
Net loss for the year ended
September 30, 1998 -- (1,873,729) (1,873,729)
------------ --------------- ------------
Balance at September 30,
1998 (300,000) (1,873,729) (344,152)
</TABLE>
Continued
58
<PAGE> 59
UltraCard, Inc.
(A development stage company)
STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIT)
Years ended September 30, 1998 and 1999 and three months ended
December 31, 1999 (unaudited)
<TABLE>
<CAPTION>
Voting common stock Common stock subscribed Additional
---------------------------- ---------------------------- paid-in
Shares Amount Shares Amount capital
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
Sale of common stock in
December 1998 to April
1999 to Upgrade at $1.47
per share 963,632 964 (102,223) (150,000) 1,413,036
Sale of common stock in
March and July 1999
through a private
placement at $1.89 per
share 3,948 4 -- -- 7,496
Issuance of common stock as
compensation in May
through September 1999
at $1.47 per share 154,623 154 -- -- 226,771
Receivable from
stockholders for payroll
taxes and related
charges in connection
with stock issued as -- -- -- -- --
compensation
Sale of common stock in
September 1999 to
Upgrade at $1.47 per
share 4,147,526 4,147 -- -- 6,081,853
Net loss for the year ended
September 30, 1999 -- -- -- -- --
----------- ----------- -------- ---------- -----------
Balance at September 30, 1999 11,247,316 11,247 -- -- 9,402,755
Net loss for the three
months ended December -- -- -- -- --
31, 1999
----------- ----------- -------- ---------- -----------
Balance at December 31, 1999 11,247,316 $ 11,247 -- $ -- $ 9,402,755
=========== =========== ======== ========== ===========
<CAPTION>
Receivable Accumulated
from development
stockholders stage deficit Total
------------ --------------- ------------
<S> <C> <C> <C>
Sale of common stock in
December 1998 to April
1999 to Upgrade at $1.47
per share -- -- 1,264,000
Sale of common stock in
March and July 1999
through a private
placement at $1.89 per
share -- -- 7,500
Issuance of common stock as
compensation in May
through September 1999
at $1.47 per share -- -- 226,925
Receivable from
stockholders for payroll
taxes and related
charges in connection
with stock issued as (100,000) -- (100,000)
compensation
Sale of common stock in
September 1999 to
Upgrade at $1.47 per
share -- -- 6,086,000
Net loss for the year ended
September 30, 1999 -- (3,738,882) (3,738,882)
------------ --------------- ------------
Balance at September 30, 1999 (400,000) (5,612,611) 3,401,391
Net loss for the three
months ended December -- (1,814,215) (1,814,215)
31, 1999
------------ --------------- ------------
Balance at December 31, 1999 $ (400,000) $ (7,426,826) $ 1,587,176
============ =============== ============
</TABLE>
The accompanying notes are an integral part of this statement.
59
<PAGE> 60
UltraCard, Inc.
(A development stage company)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three months ended
Year ended September 30, December 31,
----------------------------- ------------------
1998 1999 1998
----------- ----------- -----------
Increase (Decrease) in Cash and Cash Equivalents (unaudited)
<S> <C> <C> <C>
Cash flows from operating activities
Net loss $(1,873,729) $(3,738,882) $ (315,169)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 38,551 47,628 12,607
Stock issued to founders in exchange for
pre-incorporation expenses 5,000 -- --
Stock issued for compensation and services 853,577 226,925 --
Changes in assets and liabilities:
Prepaid expenses (6,338) (172,651) --
Deposits and other assets (870) (125,445) 5,618
Accounts payable and accrued liabilities, net 52,745 229,332 --
License fees payable 251,787 (251,787) 54,147
----------- ----------- -----------
Net cash used in operating activities (679,277) (3,784,880) (242,797)
Cash flows from investing activities
Acquisition of property and equipment (22,730) (875,939) (6,124)
Additions to intangible assets (1,715) (74,764) --
----------- ----------- -----------
Net cash used in investing activities (24,445) (950,703) (6,124)
Cash flows from financing activities
Proceeds from sale of common stock and stock
subscriptions 721,000 7,357,500 238,900
----------- ----------- -----------
Net cash provided by financing activities 721,000 7,357,500 238,900
----------- ----------- -----------
Net increase (decrease) in cash and cash equivalents 17,278 2,621,917 (10,021)
Cash and cash equivalents at beginning of the period -- 17,278 17,278
----------- ----------- -----------
Cash and cash equivalents at end of the period $ 17,278 $ 2,639,195 $ 7,257
=========== =========== ===========
<CAPTION>
Three months ended
December 31, Cumulative
------------------ since inception
1999 (September 9, 1997)
----------- -------------------
Increase (Decrease) in Cash and Cash Equivalents (unaudited) (unaudited)
<S> <C> <C>
Cash flows from operating activities
Net loss $(1,814,215) $ (7,426,826)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization 22,274 108,453
Stock issued to founders in exchange for
pre-incorporation expenses -- 5,000
Stock issued for compensation and services -- 1,080,502
Changes in assets and liabilities:
Prepaid expenses 178,269 (720)
Deposits and other assets 8,000 (118,315)
Accounts payable and accrued liabilities, net 338,925 621,002
License fees payable -- --
----------- ------------------
Net cash used in operating activities (1,266,747) (5,730,904)
Cash flows from investing activities
Acquisition of property and equipment (241,588) (1,140,257)
Additions to intangible assets (611) (77,090)
----------- ------------------
Net cash used in investing activities (242,199) (1,217,347)
Cash flows from financing activities
Proceeds from sale of common stock and stock
subscriptions -- 8,078,500
----------- ------------------
Net cash provided by financing activities -- 8,078,500
----------- ------------------
Net increase (decrease) in cash and cash equivalents (1,508,946) 1,130,249
Cash and cash equivalents at beginning of the period 2,639,195 --
----------- ------------------
Cash and cash equivalents at end of the period $ 1,130,249 $ 1,130,249
=========== ==================
Non-cash disclosures:
</TABLE>
During fiscal year ended September 30, 1998, the Company issued 2,500,000 shares
of its common stock at $0.10 per share as it was required under the terms of the
technology license agreement (see note F (1)).
The accompanying notes are an integral part of these statements.
60
<PAGE> 61
UltraCard, Inc.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1999 and December 31, 1998 and 1999 (unaudited)
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
UltraCard, Inc. (the Company), a Nevada corporation, incorporated September 9,
1997, is currently developing and plans to market a patented data storage
technology that allows application of conventional hard drive storage technology
onto a standard credit card. The Company adopted September 30 as its fiscal year
end. The results of the Company's operations and cash flows for the period from
inception through September 30, 1997 were nominal and were combined with the
results of operations and the cash flows for the year ended September 30, 1998
for financial statement presentation purposes.
On January 16, 1998, the Company entered into an agreement (the Agreement) with
Upgrade International Corporation (Upgrade) to sell a 20% interest in the
Company to Upgrade for $450,000. The Agreement also provided Upgrade an option
to acquire an additional 15% interest in the Company for $2,000,000. After
several modifications, the parties entered into a final agreement allowing
Upgrade to acquire 18.5% of the interest in the Company for $450,000 and
providing an option to acquire an additional 31.5% interest for $7,500,000.
Pursuant to antidilution provisions of the Agreement further described in note
F(4), the Company issued 1,000,000 additional shares of its common stock to
Upgrade at September 30, 1999, resulting from the stock option plan described in
note H. Voting of these shares is tied to the exercise of options and issuance
of shares under the stock option plan. As of September 30, 1998 and 1999,
Upgrade owned approximately 18% and 54%, respectively, of the Company's common
stock. During the three months ended December 31, 1999, Upgrade acquired an
additional 1% interest in the Company from another stockholder.
1. Research and Development
Research and development costs are expensed as incurred.
2. Property and Equipment
Property and equipment are stated at cost. Depreciation expense is charged to
operations over the estimated service period of the assets using straight-line
method and ranging as follows:
Equipment 3-5 years
Office Furniture 10 years
Corporate Condominium 30 years
3. Intangible Assets
Intangible assets consist of capitalized license fees and patent and trademark
costs. The amounts are amortized using the straight-line method over seven
years, the estimated useful life of the underlying technology.
61
<PAGE> 62
UltraCard, Inc.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1999 and December 31, 1998 and 1999 (unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
4. Loss per Common Share
Basic net 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 4,478,057 and 6,634,347 for the years
ended September 30, 1998 and 1999, respectively, 6,109,018 and 11,247,316 for
the three months ended December 31, 1998 and 1999, and 6,041,433 since inception
(September 9, 1997) through December 31, 1999 (unaudited).
5. Cash Equivalents
For purposes of the statement of cash flows the Company considers all highly
liquid debt instruments purchased with a maturity of three months or less to be
cash equivalents.
6. Financial Instruments
The Company's financial instruments consist of cash and accounts payable. The
Company believes that the fair value of these financial instruments approximates
their carrying amounts based on their short-term nature.
7. Concentrations of Credit Risk
As of September 30, 1999 and December 31, 1999, the Company maintained all bank
accounts with one financial institution. The total balance was in excess of the
$100,000 federally insured limit. The Company has not experienced any losses
with these cash accounts.
8. Use of Estimates
In preparing the Company's financial statements, management is required to make
estimates and assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenue and expenses
during the reporting period. Actual results could differ from those estimates.
9. Interim Financial Information (Unaudited)
The interim financial statements of the Company as of December 31, 1999 and for
the three months ended December 31, 1998 and 1999, included herein, have been
prepared by the Company, without audit, pursuant to the rules and regulations of
the SEC, on a basis consistent with the audited financial statements. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations relating to interim
financial statements.
62
<PAGE> 63
UltraCard, Inc.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1999 and December 31, 1998 and 1999 (unaudited)
NOTE A - SUMMARY OF ACCOUNTING POLICIES - Continued
In the opinion of management, the accompanying unaudited interim financial
statements reflect all adjustments, consisting only of normal recurring
adjustments, necessary to present fairly the financial position, results of the
Company's operations and its cash flows in accordance with generally accepted
accounting principles. The accompanying unaudited interim financial statements
are not necessarily indicative of full year results.
NOTE B - MANAGEMENT PLANS
The Company is a development stage enterprise as defined under Statement of
Financial Accounting Standards No. 7. The Company is devoting substantially all
of its present efforts to establishing a new business and its planned operations
have not commenced; accordingly, the Company has not generated any operating
revenues. 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.
As of September 30, 1999, the Company raised a total of $8,078,500 through the
private sale of its common stock, of which $7,950,000 was from Upgrade. Upgrade
has expressed an intention to acquire an additional interest in the Company and
to continue funding its operations until the Company completes an anticipated
initial public offering (IPO). Under terms of the Funding Agreement between
Upgrade and UltraCard dated March 21, 2000, should UltraCard require additional
financing prior to an IPO, Upgrade has agreed to provide sufficient funds on a
firm commitment basis in an amount not to exceed $20 million. All such funds
advanced by Upgrade will be subject to a note payable agreement, the terms of
which will require the accrual of interest at the bank's prime interest rate and
repayment of principal and accrued interest on the earlier of the occurrence of
the following events: the payment of dividends to stockholders; the completion
of an IPO where the proceeds exceed $35 million subject to the conversion
provisions described below; or upon the occurrence of a change in control of the
Company; but no later than March 31, 2001. Pursuant to the terms of the Funding
Agreement, the unpaid principal and accrued interest is convertible into common
stock of the Company at specified conversion rates upon the completion of an
IPO. The graduated conversion rates range from $1.90 to $15.00 per share
depending on the amount owed to Upgrade at the time of conversion. Subsequent to
December 31, 1999, Upgrade loaned to the Company approximately $2,750,000 to
fund its operations. There can be no assurances that additional funding will be
available, or whether other sources of funding will be available on acceptable
terms, if at all.
63
<PAGE> 64
UltraCard, Inc.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1999 and December 31, 1998 and 1999 (unaudited)
NOTE C - PROPERTY AND EQUIPMENT
The composition of the Company's fixed assets was as follows at:
<TABLE>
<CAPTION>
September 30,
-------------------------- December 31,
1998 1999 1999
---------- ---------- ------------
<S> <C> <C> <C>
Equipment $ 18,703 $ 225,469 $ 463,922
Office furniture 4,027 29,668 32,803
Corporate condominium -- 643,532 643,532
---------- ---------- ----------
22,730 898,669 1,140,257
Accumulated depreciation and amortization 2,677 13,463 26,807
---------- ---------- ----------
$ 20,053 $ 885,206 $1,113,450
========== ========== ==========
</TABLE>
NOTE D - ACCRUED LIABILTIES
The following is a composition of accrued liabilities at:
<TABLE>
<CAPTION>
September 30,
------------------------------ December 31,
1998 1999 1999
------------ ------------ ------------
<S> <C> <C> <C>
Accrued payroll taxes and related charges $ 325,000 $ 480,499 $ 477,449
Accrued compensation 7,115 15,596 49,734
------------ ------------ ------------
$ 332,115 $ 496,095 $ 527,183
============ ============ ============
</TABLE>
NOTE E - INCOME TAXES
The differences between financial and tax reporting are comprised primarily of
the timing in the recognition of net operating loss (NOL) carryforwards,
vacation expense, research and development credits and methods used to compute
depreciation expense. The income tax benefits reconciled to the tax computed at
the statutory rate were as follows during the years ended September 30:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Tax benefit at statutory rate $ (637,000) $(1,271,000)
Non-deductible expenses 25,000 51,000
Research credit (38,000) (120,000)
Valuation allowance 650,000 1,340,000
----------- -----------
Total $ -- $ --
=========== ===========
</TABLE>
64
<PAGE> 65
UltraCard, Inc.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1999 and December 31, 1998 and 1999 (unaudited)
NOTE E - INCOME TAXES - Continued
Deferred tax assets and liabilities are measured using enacted tax rates that
are expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax
assets and liabilities of a change in tax rates is recognized in operations in
the period that includes the enactment date. A valuation allowance is recorded
for deferred tax assets when it is more likely than not that such deferred tax
assets will not be realized.
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. Significant components of
the Company's deferred tax assets are approximately as follows at September 30:
<TABLE>
<CAPTION>
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 612,000 $ 1,832,000
Research credit 38,000 158,000
----------- -----------
Total deferred tax asset 650,000 1,990,000
Valuation allowance (650,000) (1,990,000)
----------- -----------
Net deferred tax assets $ -- $ --
=========== ===========
</TABLE>
As of September 30, 1999, the Company had aggregate NOL and tax credit
carryforwards of approximately $5,380,000 and $158,000, respectively, of which
the majority of these carryforwards begin expiring in 2018. Internal Revenue
Code Section 382 and similar California rules place a limitation on the amount
of taxable income that can be offset by carryforwards after a change in control
(generally greater than a 50% change in ownership). As a result of these
provisions, utilization of the NOL and tax credit carryforwards may be limited.
NOTE F - COMMITMENTS
1. License Agreements
a. AMPEX Agreement
Effective October 1, 1999, the Company entered into a license
agreement with AMPEX Corporation (AMPEX) to use AMPEX-developed
proprietary technology, generally referred to as Keepered Media
Technology, for incorporation into UltraCard's development, use and
sale of its core product. The agreement is scheduled to continue for
the life of each Keepered Media patent, for the life of each
Keepered Media patent issued under a patent application, and for of
each license granted under the Keepered Media Technology, in
perpetuity.
65
<PAGE> 66
UltraCard, Inc.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1999 and December 31, 1998 and 1999 (unaudited)
NOTE F - COMMITMENTS - Continued
Under the terms of the agreement, the Company is required to pay royalties for
each sale of UltraCard's magnetic card product on per card basis. Additionally,
in order for the Company to maintain an exclusive license agreement, the minimum
yearly payments are as follows:
Year ending September 30,
------------------------
2000 None
2001 $ 3,500,000
2002 15,000,000
Thereafter 24,000,000 per year
Either party has a right to terminate all or part of the agreement with a 30
days notice.
b. CardTech Agreement
On October 10, 1997, the Company entered into an exclusive worldwide license
agreement with CardTech, Inc. (CardTech) for the rights to certain technology
and know-how concerning card-based storage media and read/write systems covered
by certain patents and patent applications. The Company's President is the
majority stockholder of CardTech. The license agreement terminates upon the
expiration of the last licensed patent. Because the agreement covers any new
patent applications to be filed in conjunction with the original technology
patents, the agreement does not have a definite expiration date.
Under the terms of the license agreement, the Company paid $30,000 for an
initial licensing fee, $950,000 in minimum royalty fees and $1,009,813 in
capital fees during the years ended September 30, 1998 and 1999. Capital fees
were paid as part of the agreement requiring the Company to remit to the
licensor 12.5% of every dollar received from equity financing. In October 1997,
as required by the license agreement, the Company issued 2,500,000 of its common
shares valued at the time of the issuance at $250,000. Related to the shares
issued, the Company capitalized license fees of $250,000.
For the years ended September 30, 1998 and 1999, the Company recorded license
and royalty expenses of $345,125 and $1,484,636, respectively. During the three
months ended December 31, 1998 and 1999 the Company recorded license and royalty
expenses of $104,862 and $162,500, respectively.
66
<PAGE> 67
UltraCard, Inc.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1999 and December 31, 1998 and 1999 (unaudited)
NOTE F - COMMITMENTS - Continued
As of September 30, 1999 and December 31, 1999, the Company's remaining
commitments under the license agreement are summarized as follows:
- An earned royalty fee of 5% of the gross proceeds generated
from sales, leases or other distributions of products
incorporating the CardTech technology. The minimum annual
royalty fee is payable at $650,000 per calendar year.
- A capital fee equal to 12.5% of all capital invested in the
Company until such time that CardTech has received a total of
$3,000,000 in such fees. The maximum remaining amount of the
commitment was $1,990,187 at September 30 and December 31,
1999.
1. Employment and Consulting Agreements
The Company has entered into a number of employment and consulting agreements.
The agreements vary in length from one to five years with total remaining cash
commitment amounts, as follows:
Year ending
September 30,
-------------
2000 $1,246,933
2001 748,333
2002 577,500
2003 87,500
----------
$2,660,266
==========
Some of the employment and consulting agreements also call for issuance of a
specified number of shares of the Company's common stock. The estimated market
value of these shares issued was charged to expense in the period issued. During
the years ended September 30, 1998 and 1999, the Company recorded $853,577 and
$226,925, respectively, of employee compensation and consulting expenses related
to the issuance of these shares of the Company. No shares were issued in
compensation or for consulting services during the three months ended December
31, 1998 and 1999.
67
<PAGE> 68
UltraCard, Inc.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1999 and December 31, 1998 and 1999 (unaudited)
NOTE F - COMMITMENTS - Continued
2. Lease Agreements
The Company leases its main office under a five-year lease expiring in May of
2004. The scheduled minimum lease payments are as follows:
Year ending
September 30,
-------------
2000 $189,228
2001 189,228
2002 189,228
2003 189,228
2004 118,268
--------
$875,180
========
The above commitment schedule was prepared based on monthly base payments of
$12,179 and minimum direct expenses of $3,590. However, the contract provides
for an adjustment in the base rent on each anniversary date to reflect Consumer
Price Index increases and additional increases in direct expenses to compensate
for any change in facility maintenance expenses that facility may experience.
During the year ended September 30, 1999 the Company entered into a
month-to-month sublease agreement with one of its stockholders to sublease part
of its office space. Total sublease income for the year ended September 30, 1999
and the three months ended December 31, 1999 was $12,075 and $6,620,
respectively.
At commencement of the lease, the Company paid a refundable security deposit in
the amount of $115,000. If the Company is in compliance with all of the lease
provisions, the amount of the deposit should be reduced by $20,000 per year
during the third, fourth and fifth year of the lease.
The Company entered into several other operating leases with terms of a year or
less and monthly payments varying from $170 to $2,620. Rent expense for the
years ended September 30, 1998 and 1999, and for the three months ended December
31, 1998 and 1999, was $6,170, $99,200, $2,800 and $55,758, respectively.
4. Antidilution Provisions
The terms of the Agreement described in note A, as amended, provide that the
Company will not take any action, until the date of any IPO of the Company
shares, that would cause Upgrade's percentage of ownership in the Company to
become diluted so as to result in Upgrade owing less than 50% of the issued and
outstanding shares of the Company. The antidilution provisions are not affected
by subsequent stock purchases by Upgrade directly from stockholders of the
Company.
68
<PAGE> 69
UltraCard, Inc.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1999 and December 31, 1998 and 1999 (unaudited)
NOTE G - OTHER RELATED PARTY TRANSACTIONS
The Company and Upgrade each hold a 50% interest in Global CyberSystems, Inc.
(Global CyberSystems), a Nevada corporation. On July 11, 1997, the Company
entered into a Master Distribution Agreement with Global CyberSystems under
which Global CyberSystems was granted the exclusive distribution rights of
UltraCard products as follows: (1) worldwide for gaming applications, and (2) in
the United States for banking, retail and convenience applications, as defined
in the agreement. As of September 30, 1999, Global CyberSystems had not
commenced its operations and the carrying amounts of its assets, liabilities and
stockholders' equity were nominal.
During the year ended September 30, 1999, the Company accrued approximately
$42,500 in marketing expenses payable to a company owned by a spouse of one of
the Company's key employees. The fees were paid in full subsequent to September
30, 1999.
The receivable from stockholders is comprised of payroll withholding taxes and
related charges associated with common stock issued to them as compensation and
are interest free. Certain of these receivables are collateralized with the
common stock. The other receivables are to be realized from the sale of their
shares pursuant to an IPO.
NOTE H - STOCK OPTION PLAN
In September 1999, the Company established the 1999 Stock Option Plan (1999
Plan). The 1999 Plan allows the Company to grant options to employees,
consultants, and directors for up to 1,000,000 shares of common stock. Option
prices are generally equal to the fair market value of the shares of the
Company's common stock on the date of grant. Options, generally, vest
immediately and expire six years from the date of the grant.
The following is a summary of the employee stock option information for the year
ended September 30, 1999.
<TABLE>
<CAPTION>
Weighted Average
Shares Exercise Price
------- ----------------
<S> <C> <C>
Options outstanding at September 30, 1998 -- $ --
Options granted 280,666 1.62
------- ----------------
Options outstanding at September 30, 1999 280,666 $ 1.62
======= ================
</TABLE>
69
<PAGE> 70
UltraCard, Inc.
(A development stage company)
NOTES TO FINANCIAL STATEMENTS
September 30, 1998 and 1999 and December 31, 1998 and 1999 (unaudited)
NOTE H - STOCK OPTION PLAN - Continued
The following table summarizes information about options outstanding at
September 30, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------- -------------------------------------
Weighted Weighted
Average Average
Range of Number Exercise Remaining Number Weighted Average
Exercise Prices Outstanding Price Contractual Life Exercisable Exercise Price
--------------- ------------- --------------- ---------------- --------------- ----------------
<S> <C> <C> <C> <C> <C>
$1.62 280,666 $1.62 6 years 280,666 $1.62
</TABLE>
The weighted average fair value of the options granted during the year ended
September 30, 1999 was $0.34.
The Company accounts for its stock-based compensation plan in accordance with
Accounting Principle Board ("APB") Opinion No. 25, Accounting for Stock Issued
to Employees, under which no compensation was recognized in connection with
options granted to employees. The Company adopted the disclosure requirements
SFAS No. 123, Accounting for Stock-Based Compensation. Accordingly, the Company
is required to calculate and present the pro forma effect of all awards granted.
For disclosure purposes, the fair value of each option granted to an employee
has been estimated as of the date of grant using the Black-Scholes option
pricing model with the following assumptions: risk-free interest rate of 6.00%,
dividend yield and volatility of 0%, and expected lives of 6 years. Based on the
computed option values and the number of the options issued, had the Company
recognized compensation expense, the following would have been its effect on the
Company's net loss:
<TABLE>
<CAPTION>`
Year ended
September 30, 1999
------------------
Net loss
- ----------------
<S> <C>
As reported $3,738,882
Pro forma 3,834,308
Loss per share
- ----------------
As reported $ 0.56
Pro forma 0.58
</TABLE>
70
<PAGE> 71
PRO FORMA FINANCIAL INFORMATION
The financial statements set forth above serve as the pro forma
financial statements required by Regulation S-B, Item 310(d), as 2nd CMA's
financial information taken as a whole is immaterial to that of Upgrade.
EXHIBITS
<TABLE>
<CAPTION>
Exhibit No. Description
----------- -----------
<S> <C>
2.1 Agreement and Plan of Merger
3.1 Articles of Incorporation
3.2 Articles of Amendment
3.3 Bylaws
</TABLE>
71
<PAGE> 72
<TABLE>
<S> <C>
4.1 Specimen Share Certificate
4.2 2000 Stock Option Plan
4.3 1999 Stock Option Plan, as Amended and Restated
4.4 Warrant (Bland)
4.5 Form of Warrant (European)
27.1 Financial Data Schedule (Upgrade)
99 Financial Data Schedule (UltraCard)
</TABLE>
72
<PAGE> 73
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UPGRADE INTERNATIONAL CORPORATION
By: /s/ Daniel S. Bland 4/6/2000
--------------------------- ------------
Name: Daniel S. Bland (Date)
Title: President
73
<PAGE> 74
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Description Page No.
----------- ----------- --------
<S> <C> <C>
2.1 Agreement and Plan of Merger
3.1 Articles of Incorporation
3.2 Articles of Amendment
3.3 Bylaws
4.1 Specimen Share Certificate
4.2 2000 Stock Option Plan
4.3 1999 Stock Option Plan, as Amended and Restated
4.4 Warrant (Bland)
4.5 Form of Warrant (European)
27.1 Financial Data Schedule (Upgrade)
99 Financial Data Schedule (UltraCard)
</TABLE>
74
<PAGE> 1
EXHIBIT 2.1
AGREEMENT AND PLAN OF MERGER
BETWEEN
UPGRADE INTERNATIONAL CORPORATION
AND
SECOND CMA INC.
APRIL 2, 2000
<PAGE> 2
AGREEMENT AND PLAN OF MERGER
Agreement entered as of April 2, 2000 by and between Upgrade
International Corporation, a Florida corporation (the "Buyer"), and Second Cma,
Inc., a Colorado corporation (the "Target"). The Buyer and the Target are
referred to collectively herein as the "Parties."
This Agreement contemplates a merger of the Target with and into the
Buyer. The Target Stockholders will receive 45,000 restricted shares of Buyer
stock and cash in the aggregate amount of $300,000 in exchange for their capital
stock in the Target. The Parties expect that the Merger will further certain of
their business objectives. Now, therefore, in consideration of the premises and
the mutual promises herein made, and in consideration of the representations,
warranties, and covenants herein contained, the Parties agree as follows.
1. Definitions.
"Accredited Investor has the meaning set forth in Rule 501 of the
regulations promulgated under the Securities Act
"Affiliate" has the meaning set forth in Rule 12b-2 of the regulations
promulgated under the Securities Exchange Act.
"Articles of Merger" has the meaning set forth in Section 2(c) below.
"Buyer" has the meaning set forth in the preface above.
"Closing" has the meaning set forth in Section 2(b) below.
"Closing Date" has the meaning set forth in Section 2(b) below.
"Effective Time" has the meaning set forth in Section 2(d)(i) below.
"Exchange Agent" has the meaning set forth in Section 2(e) below.
"Merger" has the meaning set forth in Section 2(a) below.
"Most Recent Fiscal Year End" has the meaning set forth in Section 3(f)
below.
"Party" has the meaning set forth in the preface above.
"Person" means an individual, a partnership, a corporation, an
association, a joint stock company, a trust, a joint venture, an unincorporated
organization, or a governmental entity (or any department, agency, or political
subdivision thereof).
"Public Reports" has the meaning set forth in Section 3(e) below.
"Requisite Target Stockholder Approval" means the unanimous written
consent of the holders of Target Shares in favor of this Agreement and the
Merger.
"SEC" means the Securities and Exchange Commission.
-1-
<PAGE> 3
"Securities Act" means the Securities Act of 1933, as amended.
"Securities Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Security Interest" means any mortgage, pledge, lien, encumbrance,
charge, or other security interest, other than (a) mechanic's, materialmen's,
and similar liens, (b) liens for taxes not yet due and payable or for taxes that
the taxpayer is contesting in good faith through appropriate proceedings, (c)
purchase money liens and liens securing rental payments under capital lease
arrangements, and (d) other liens arising in the Ordinary Course of Business and
not incurred in connection with the borrowing of money.
"Subsidiary" means any corporation with respect to which a specified
Person (or a Subsidiary thereof) owns a majority of the common stock or has the
power to vote or direct the voting of sufficient securities to elect a majority
of the directors.
"Surviving Corporation" has the meaning set forth in Section 2(a) below.
"Target" has the meaning set forth in the preface above.
"Target Share" means any share of the Common Stock of the Target.
"Target Stockholder" means any Person who or which holds any Target
Shares.
2. Basic Transaction.
(a) The Merger. On and subject to the terms and conditions of this
Agreement, the Target will merge with and into the Buyer (the "Merger") at the
Effective Time. The Buyer shall be the corporation surviving the Merger (the
"Surviving Corporation").
(b) The Closing. The closing of the transactions contemplated by this
Agreement (the "Closing") shall take place at the offices of Ogden Murphy
Wallace, PLLC, in Seattle, Washington, commencing at 9:00 a.m. local time on the
first business day following the satisfaction or waiver of all conditions to the
obligations of the Parties to consummate the transactions contemplated hereby
(other than conditions with respect to actions the respective Parties will take
at the Closing itself) or such other date as the Parties may mutually determine
(the "Closing Date")
(c) Actions at the Closing. At the Closing, (i) the Target will deliver
to the Buyer the various certificates, instruments, and documents referred to in
Section 6(a) below, (ii) the Buyer will deliver to the Target the various
certificates, instruments, and documents referred to in Section 6(b) below,
(iii) the Buyer and the Target will file with the Secretary of State of the
States of Florida and Colorado Articles of Merger (the "Articles of Merger"),
and (iv) the Buyer will deliver to the Exchange Agent in the manner provided
below in this Section 2 the certificates representing the shares and the sum of
$300,000 to be distributed to the Target Shareholders.
-2-
<PAGE> 4
(d) Effect of Merger.
(i) General. The Merger shall become effective at the time (the
"Effective Time") the Buyer and the Target file the Articles of Merger
with the Secretary of State of the States of Florida and Colorado. The
Merger shall have the effect set forth in the laws of the States of
Florida and Colorado. The Surviving Corporation may, at any time after
the Effective Time, take any action (including executing and delivering
any document) in the name and on behalf of either the Buyer or the
Target in order to carry out and effectuate the transactions
contemplated by this Agreement.
(ii) Articles of Incorporation. The Articles of Incorporation of
the Buyer in effect at and as of the Effective Time will remain the
Articles of Incorporation of the Surviving Corporation without any
modification or amendment in the Merger.
(iii) Bylaws. The Bylaws of the Buyer in effect at and as of the
Effective Time will remain the Bylaws of the Surviving Corporation
without any modification or amendment in the Merger.
(iv) Directors and Officers. The directors and officers of the
Buyer in office at and as of the Effective Time will remain the
directors and officers of the Surviving Corporation (retaining their
respective positions and terms of office).
(v) Cancellation of Target Shares. At and as of the Effective
Time, each Target Share shall be canceled.
(vi) Buyer Shares. Each Buyer Share issued and outstanding at and
as of the Effective Time will remain issued and outstanding.
(e) Procedure for Payment.
(i) Immediately after the Effective Time, the Buyer will furnish
to Frascona Joiner & Goodman, counsel for Target, as Exchange Agent, the
sum of $300,000 and instruct its transfer agent to issue a certificate
for 45,000 shares of restricted stock of Buyer in the names provided to
Buyer prior to closing.
(ii) The Exchange Agent shall deduct all of its charges and
expenses of the from the proceeds before distributing to the Target
Shareholders.
3. Representations and Warranties of the Target. The Target and each of
its shareholders represent and warrant to the Buyer that the statements
contained in this Section 3 are correct and complete as of the date of this
Agreement and will be correct and complete as of the Closing Date (as though
made then and as though the Closing Date were substituted for the date of this
Agreement throughout this Section 3)
(a) Organization, Qualification, and Corporate Power. Each of the Target
and its Subsidiaries is a corporation duly organized, validly existing, and in
good standing under the laws of the jurisdiction of its incorporation. Each of
the Target and its Subsidiaries is duly authorized to conduct business and is in
good standing under the laws of each jurisdiction where
-3-
<PAGE> 5
such qualification is required Each of the Target and its Subsidiaries has full
corporate power and authority to carry on the businesses in which it is engaged
and to own and use the properties owned and used by it.
(b) Capitalization. The entire authorized capital stock of the Target
consists of 10,000,000 shares of Preferred Stock and 100,000,000 shares of
Common Stock, of which 12,000,000 Target Shares are issued and outstanding. All
of the issued and outstanding Target Shares have been duly authorized and are
validly issued, fully paid, and nonassessable. There are no outstanding or
authorized options, warrants, purchase rights, subscription rights, conversion
rights, exchange rights, or other contracts or commitments that could require
the Target to issue, sell, or otherwise cause to become outstanding any of its
capital stock. There are no outstanding or authorized stock appreciation,
phantom stock, profit participation, or similar rights with respect to the
Target.
(c) Authorization of Transaction. The Target has full power and
authority (including full corporate power and authority) to execute and deliver
this Agreement and to perform its obligations hereunder; provided, however, that
the Target cannot consummate the Merger unless and until it receives the
Requisite Target Stockholder Approval. This Agreement constitutes the valid and
legally binding obligation of the Target, enforceable in accordance with its
terms and conditions.
(d) Noncontravention. Neither the execution and the delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, will
(i) violate any constitution, statute, regulation, rule, injunction, judgment,
order, decree, ruling, charge, or other restriction of any government,
governmental agency, or court to which any of the Target and its Subsidiaries is
subject or any provision of the charter or bylaws of any of the Target and its
Subsidiaries or (ii) conflict with, result in a breach of, constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument or other arrangement to which
any of the Target and its Subsidiaries is a party or by which it is bound or to
which any of its assets is subject (or result in the imposition of any Security
Interest upon any of its assets) Other than in connection with the provisions of
Colorado law, none of the Target and its Subsidiaries needs to give any notice
to, make any filing with, or obtain any authorization, consent, or approval of
any government or governmental agency in order for the Parties to consummate the
transactions contemplated by this Agreement
(e) Filings with the SEC. The Target has made all filings with the SEC
that it has been required to make under the Securities Act and the Securities
Exchange Act (collectively the "Public Reports") and has received from the SEC a
letter to the effect that the SEC will have no further comment on Target's Form
10SB. Each of the Public Reports has complied with the Securities Act and the
Securities Exchange Act in all material respects. None of the Public Reports, as
of their respective dates, contained any untrue statement of a material fact or
omitted to state a material fact necessary in order to make the statements made
therein, in light of the circumstances under which they were made, not
misleading. The Target has delivered to the Buyer a correct and complete copy of
each Public Report (together with all exhibits and schedules thereto and as
amended to date).
-4-
<PAGE> 6
(f) Financial Statements. The Target has filed an Annual Report on Form
10-KSB for the fiscal year ended December 31, 1999 ("Most Recent Fiscal Year
End"). The financial statements included in or incorporated by reference into
these Public Reports (including the related notes and schedules) have been
prepared in accordance with GAAP applied on a consistent basis throughout the
periods covered thereby, and present fairly the financial condition of the
Target and its Subsidiaries as of the indicated dates and the results of
operations of the Target and its Subsidiaries for the indicated periods;
provided, however, that the interim statements are subject to normal year-end
adjustments.
(g) Events Subsequent to Most Recent Fiscal Quarter End. Since the Most
Recent Fiscal Year End, there has not been any material adverse change in the
business, financial condition, operations, results of operations, or future
prospects of the Target and its Subsidiaries taken as a whole.
(h) Undisclosed Liabilities. None of the Target and its Subsidiaries has
any liability (whether known or unknown, whether asserted or unasserted, whether
absolute or contingent, whether accrued or unaccrued, whether liquidated or
unliquidated, and whether due or to become due), including any liability for
taxes, except for (i) liabilities set forth on the face of the balance sheet
dated as of the Most Recent Fiscal Year End (rather than in any notes thereto)
and (ii) liabilities which have arisen after the Most Recent Fiscal Year End in
the Ordinary Course of Business (none of which results from, arises out of,
relates to, is in the nature of, or was caused by any breach of contract, breach
of warranty, tort, infringement, or violation of law).
(i) Brokers' Fees. None of the Target and its Subsidiaries has any
liability or obligation to pay any fees or commissions to any broker, finder, or
agent with respect to the transactions contemplated by this Agreement.
(j) Affiliate and Accredited Investor Status All shareholders of Target
are Affiliates of Target and are Accredited Investors.
4. Representations and Warranties of the Buyer. The Buyer represents and
warrants to the Target that the statements contained in this Section 4 are
correct and complete as of the date of this Agreement and will be correct and
complete as of the Closing Date (as though made then and as though the Closing
Date were substituted for the date of this Agreement throughout this Section 4).
(a) Organization. The Buyer is a corporation duly organized, validly
existing, and in good standing under the laws of the jurisdiction of its
incorporation.
(b) Authorization of Transaction. The Buyer has full power and authority
(including full corporate power and authority) to execute and deliver this
Agreement and to perform its obligations hereunder. This Agreement constitutes
the valid and legally binding obligation of the Buyer, enforceable in accordance
with its terms and conditions.
(c) Noncontravention. To the Knowledge of any director or officer of the
Buyer, neither the execution and the delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, will (i) violate any
constitution, statute, regulation, rule, injunction, judgment, order, decree,
ruling, charge, or other restriction of any government,
-5-
<PAGE> 7
governmental agency, or court to which the Buyer is subject or any provision of
the charter or bylaws of the Buyer or (ii) conflict with, result in a breach of,
constitute a default under, result in the acceleration of, create in any party
the right to accelerate, terminate, modify, or cancel, or require any notice
under any agreement, contract, lease, license, instrument or other arrangement
to which the Buyer is a party or by which it is bound or to which any of its
assets is subject except where the violation, conflict, breach, default,
acceleration, termination, modification, cancellation, or failure to give notice
would not have a material adverse effect on the ability of the Parties to
consummate the transactions contemplated by this Agreement. To the Knowledge of
any director or officer of the Buyer, and other than in connection with the
provisions of Florida law, the Buyer does not need to give any notice to, make
any filing with, or obtain any authorization, consent, or approval of any
government or governmental agency in order for the Parties to consummate the
transactions contemplated by this Agreement, except where the failure to give
notice, to file, or to obtain any authorization, consent, or approval would not
have a material adverse effect on the ability of the Parties to consummate the
transactions contemplated by this Agreement.
(d) Brokers' Fees. The Buyer does not have any liability or obligation
to pay any fees or commissions to any broker, finder, or agent with respect to
the transactions contemplated by this Agreement for which any of the Target and
its Subsidiaries could become liable or obligated.
5. Covenants.
The Parties agree as follows with respect to the period from and after
the execution of this Agreement.
(a) General. Each of the Parties will use its best efforts to take all
action and to do all things necessary, proper, or advisable in order to
consummate and make effective the transactions contemplated by this Agreement
(including satisfaction, but not waiver, of the closing conditions set forth in
Section 6 below).
(b) Notices and Consents. The Target will give any notices (and will
cause each of its Subsidiaries to give any notices) to third parties, and will
use its best efforts to obtain any third party consents, that the Buyer
reasonably may request in connection with the matters referred to in Section
3(d) above.
(c) Regulatory Matters and Approvals.(i) Each of the Parties will give
any notices to, make any filings with, and use its reasonable best efforts to
obtain any authorizations, consents, and approvals of governments and
governmental agencies in connection with the matters referred to in Section 3(d)
and Section 4(d) above.
(ii) Colorado Law. The Target will obtain the unanimous written
consent of its stockholders for the adoption of this Agreement and the
approval of the Merger in accordance with Colorado Law.
6. Conditions to Obligation to Close.
-6-
<PAGE> 8
(a) Conditions to Obligation of the Buyer. The obligation of the Buyer
to consummate the transactions to be performed by it in connection with the
Closing is subject to satisfaction of the following conditions:
(i) this Agreement and the Merger shall have been approved by the
unanimous written consent of the shareholders of Target;
(ii) Target and its Subsidiaries shall have procured all of the
third party consents specified in Section 5(b) above;
(iii) the representations and warranties set forth in Section 3
above shall be true and correct in all material respects at and as of
the Closing Date;
(iv) the Target shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(v) No action, suit, or proceeding shall be pending or threatened
before any court or quasi-judicial or administrative agency of any
federal, state, local, or foreign jurisdiction or before any arbitrator
wherein an unfavorable injunction, judgment, order, decree, ruling, or
charge would (A) prevent consummation of any of the transactions
contemplated by this Agreement, (B) cause any of the transactions
contemplated by this Agreement to be rescinded following consummation,
(C) affect adversely the right of the Surviving Corporation to own the
former assets, to operate the former businesses, and to control the
former Subsidiaries of the Target, or (D) affect adversely the right of
any of the former Subsidiaries of the Target to own its assets and to
operate its businesses (and no such injunction, judgment, order, decree,
ruling, or charge shall be in effect);
(vi) the Target shall have delivered to the Buyer a certificate
to the effect that each of the conditions specified above in Section
6(a)(i)-(v) is satisfied in all respects;
(vii) the Buyer shall have received from counsel to the Target an
opinion in form and substance satisfactory addressed to the Buyer, and
dated as of the Closing Date; and
(viii) all actions to be taken by the Target in connection with
consummation of the transactions contemplated hereby and all
certificates, opinions, instruments, and other documents required to
effect the transactions contemplated hereby will be reasonably
satisfactory in form and substance to the Buyer.
The Buyer may waive any condition specified in this Section 6(a) if it executes
a writing so stating at or prior to the Closing.
(b) Conditions to Obligation of the Target. The obligation of the Target
to consummate the transactions to be performed by it in connection with the
Closing is subject to satisfaction of the following conditions:
(i) the representations and warranties set forth in Section 4
above shall be true and correct in all material respects at and as of
the Closing Date;
-7-
<PAGE> 9
(ii) the Buyer shall have performed and complied with all of its
covenants hereunder in all material respects through the Closing;
(iii) all actions to be taken by the Buyer in connection with
consummation of the transactions contemplated hereby and all
certificates, opinions, instruments, and other documents required to
effect the transactions contemplated hereby will be satisfactory in form
and substance to the Target;
(iv) Buyer shall have delivered to Target its audited financial
statements for the fiscal year ended December 31, 1999.
The Target may waive any condition specified in this Section 6(b) if it executes
a writing so stating at or prior to the Closing.
7. Termination.
(a) Termination of Agreement. Either of the Parties may terminate this
Agreement with the prior authorization of its board of directors (whether before
or after stockholder approval) as provided below:
(i) the Parties may terminate this Agreement by mutual written
consent at any time prior to the Effective Time;
(ii) the Buyer may terminate this Agreement by giving written
notice to the Target at any time prior to the Effective Time (A) in the
event the Target has breached any material representation, warranty, or
covenant contained in this Agreement in any material respect, the Buyer
has notified the Target of the breach, and the breach has continued
without cure for a period of 30 days after the notice of breach or (B)
if the Closing shall not have occurred on or before April 30, 2000, by
reason of the failure of any condition precedent under Section 6(a)
hereof (unless the failure results primarily from the Buyer breaching
any representation, warranty, or covenant contained in this Agreement);
(iii) the Target may terminate this Agreement by giving written
notice to the Buyer at any time prior to the Effective Time (A) in the
event the Buyer has breached any material representation, warranty, or
covenant contained in this Agreement in any material respect, the Target
has notified the Buyer of the breach, and the breach has continued
without cure for a period of 30 days after the notice of breach or (B)
if the Closing shall not have occurred on or before April 30, 2000, by
reason of the failure of any condition precedent under Section 6(b)
hereof (unless the failure results primarily from the Target breaching
any representation, warranty, or covenant contained in this Agreement);
(b) Effect of Termination. If any Party terminates this Agreement
pursuant to Section 7(a) above, all rights and obligations of the Parties
hereunder shall terminate without any liability of any Party to any other Party
(except for any liability of any Party then in breach).
8. Miscellaneous.
(a) Survival.
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<PAGE> 10
None of the representations, warranties, and covenants of the Parties
(other than the provisions in Section 2 above concerning issuance of the Buyer
Shares) will survive the Effective Time.
(b) Entire Agreement. This Agreement (including the documents referred
to herein) constitutes the entire agreement between the Parties and supersedes
any prior understandings, agreements, or representations by or between the
Parties, written or oral, to the extent they related in any way to the subject
matter hereof.
(c) Succession and Assignment. This Agreement shall be binding upon and
inure to the benefit of the Parties named herein and their respective successors
and permitted assigns. No Party may assign either this Agreement or any of its
rights, interests, or obligations hereunder without the prior written approval
of the other Party.
(d) Counterparts. This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
(e) Headings. The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this Agreement.
(f) Notices. All notices, requests, demands, claims, and other
communications hereunder will be in writing. Any notice, request, demand, claim,
or other communication hereunder shall be deemed duly given if (and then two
business days after) it is sent by registered or certified mail, return receipt
requested, postage prepaid, and addressed to the intended recipient at the last
address give to the other party.
Any Party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the last address give to the other party
using any other means (including personal delivery, expedited courier, messenger
service, telecopy, telex, ordinary mail, or electronic mail), but no such
notice, request, demand, claim, or other communication shall be deemed to have
been duly given unless and until it actually is received by the intended
recipient. Any Party may change the address to which notices, requests, demands,
claims, and other communications hereunder are to be delivered by giving the
other Party notice in the manner herein set forth.
(g) Governing Law. This Agreement shall be governed by and construed in
accordance with the domestic laws of the State of Florida without giving effect
to any choice or conflict of law provision or rule (whether of the State of
Florida or any other jurisdiction) that would cause the application of the laws
of any jurisdiction other than the State of Florida.
(h) Amendments and Waivers. The Parties may mutually amend any provision
of this Agreement at any time prior to the Effective Time with the prior
authorization of their respective boards of directors; provided, however, that
any amendment effected subsequent to stockholder approval will be subject to the
restrictions contained in the laws of the State of Florida. No amendment of any
provision of this Agreement shall be valid unless the same shall be in writing
and signed by both of the Parties. No waiver by any Party of any default,
-9-
<PAGE> 11
misrepresentation, or breach of warranty or covenant hereunder, whether
intentional or not, shall be deemed to extend to any prior or subsequent
default, misrepresentation, or breach of warranty or covenant hereunder or
affect in any way any rights arising by virtue of any prior or subsequent such
occurrence.
(i) Severability. Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not affect
the validity or enforceability of the remaining terms and provisions hereof or
the validity or enforceability of the offending term or provision in any other
situation or in any other jurisdiction.
(j) Expenses. Each of the Parties will bear its own costs and expenses
(including legal fees and expenses) incurred in connection with this Agreement
and the transactions contemplated hereby.
(k) Construction. The Parties have participated jointly in the
negotiation and drafting of this Agreement. In the event an ambiguity or
question of intent or interpretation arises, this Agreement shall be construed
as if drafted jointly by the Parties and no presumption or burden of proof shall
arise favoring or disfavoring any Party by virtue of the authorship of any of
the provisions of this Agreement. Any reference to any federal, state, local, or
foreign statute or law shall be deemed also to refer to all rules and
regulations promulgated thereunder, unless the context otherwise requires.
IN WITNESS WHEREOF, the Parties hereto have executed this Agreement on
[as of] the date first above written.
BUYER:
By:
-------------------------------------
Title:
----------------------------------
TARGET:
By:
-------------------------------------
Title:
----------------------------------
-10-
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
UPGRADE INTERNATIONAL CORP.
The undersigned, desiring to form a corporation (the "Corporation")
under the laws of Florida, hereby adopts the following Articles of
Incorporation:
ARTICLE I
CORPORATE NAME
The name of the Corporation is UPGRADE INTERNATIONAL CORP.
ARTICLE II
PURPOSE
The Corporation shall be organized for any and all purposes authorized
under the laws of the state of Florida.
ARTICLE III
PERIOD OF EXISTENCE
The period during which the Corporation shall continue is perpetual.
ARTICLE IV
SHARES
The capital stock of this corporation shall consist of 50,000,000
shares of common stock, $.001 par value.
ARTICLE V
PLACE OF BUSINESS
The initial address of the principal place of business of this
corporation in the State of Florida shall be 19370 Collins Avenue, Suit 327,
North Miami Beach, FL 33160. The Board of Directors may at any time and from
time to time move the principal office of this corporation.
ARTICLE VI
DIRECTORS AND OFFICERS
The business of this corporation shall be managed by its Board of
Directors. The number of such directors shall be not be less than one (1) and,
subject to such minimum may be increased or decreased from time to time in the
manner provided in the By-Laws.
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<PAGE> 2
The number of persons constituting the initial Board of Directors shall be 1.
The Board of Directors shall be elected by the Stockholders of the corporation
at such time and in such manner as provided in the By-Laws. The name and
addresses of the initial Board of Directors and officers are as follows:
Leonard Bere President/Director
19370 Collins Avenue, Suite 327
N. Miami Beach, FL 33160
ARTICLE VII
DENIAL OF PREEMPTIVE RIGHTS
No shareholder shall have any right to acquire shares or other
securities of the Corporation except to the extent such right may be granted by
an amendment to these Articles of Incorporation or by a resolution of the board
of Directors.
ARTICLE VIII
AMENDMENT OF BYLAWS
Anything in these Articles of Incorporation, the Bylaws, or the Florida
Corporation Act notwithstanding, bylaws shall not be adopted, modified, amended
or repealed by the shareholders of the Corporation except upon the affirmative
vote of a simple majority vote of the holders of all the issued and outstanding
shares of the corporation entitled to vote thereon.
ARTICLE IX
SHAREHOLDERS
9.1. INSPECTION OF BOOKS. The board of directors shall make reasonable
rules to determine at what times and places and under what conditions the books
of the Corporation shall be open to inspection by shareholders or a duly
appointed representative of a shareholder.
9.2. CONTROL SHARE ACQUISITION. The provisions relating to any control
share acquisition as contained in Florida Statutes now, or hereinafter amended,
and any successor provision shall not apply to the Corporation.
9.3. QUORUM. The holders of shares entitled to one-third of the votes
at a meeting of shareholder's shall constitute a quorum.
9.4. REQUIRED VOTE. Acts of shareholders shall require the approval of
holders of 50.01% of the outstanding votes of shareholders.
2
<PAGE> 3
ARTICLE X
LIABILITY AND INDEMNIFICATION OF DIRECTORS AND OFFICERS
To the fullest extent permitted by law, no director or officer of the
Corporation shall be personally liable to the Corporation or its shareholders
for damages for breach of any duty owed to the Corporation or its shareholders.
In addition, the Corporation shall have the power, in its By-Laws or in any
resolution of its stockholders or directors, to undertake to indemnify the
officers and directors of this corporation against any contingency or peril as
may be determined to be in the best interests of this corporation, and in
conjunction therewith, to procure, at this corporation's expense, policies of
insurance.
ARTICLE XI
SUBSCRIBER
The name and address of the person signing these Articles of
Incorporation as
subscriber is:
Eric P. Littman
8th Floor
1428 Brickell Avenue
Miami, FL 33131
ARTICLE XII
CONTRACTS
No contract or other transaction between this corporation and any
person, firm or corporation shall be affected by the fact that any officer or
director of this corporation is such other party or is, or at some time in the
future becomes, an officer, director or partner of such other contracting party,
or has now or hereafter a direct or indirect interest in such contract.
ARTICLE XIII
RESIDENT AGENT
The name and address of the initial resident agent of this corporation
is:
Eric P. Littman
1428 Brickell Avenue
8th Floor
Miami, FL 33131
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<PAGE> 4
IN WITNESS WHEREOF, I have hereunto subscribed to and executed these
Articles of Incorporation this on February 3, 1997.
/s/ Eric P. Littman
---------------------------------
Eric P. Littman, Subscriber
Subscribed and Sworn on February 3, 1997 Before me:
/s/ Isabel Cantera
- --------------------------------
Isabel Cantera, Notary Public
[SEAL]
My Commission Expires
4
<PAGE> 5
CERTIFICATE DESIGNATING PLACE OF BUSINESS OR
DOMICILE FOR SERVICE OF PROCESS WITHIN THIS STATE
NAMING THE AGENT UPON WHOM PROCESS MAY BE SERVED
Having been named to accept service of process for UPGRADE
INTERNATIONAL CORP. at the place designated in the Articles of Incorporation,
the undersigned is familiar with and accepts the obligations of that position
pursuant to F.S. 607.0501(3).
/s/ Eric P. Littman
------------------------------
Eric P. Littman
<PAGE> 1
EXHIBIT 3.2
ARTICLES OF AMENDMENT
TO
ARTICLES OF INCORPORATION
OF
UPGRADE INTERNATIONAL CORP.
Pursuant to the provisions of Section 607.1006 and 607.1002, Florida
Statutes, this Florida profit corporation adopts the following articles of
amendment to its articles of incorporation:
FIRST: Amendment adopted:
Article I of the Articles of Incorporation is hereby amended
as follows:
ARTICLE I
CORPORATION NAME
The name of the Corporation is UPGRADE INTERNATIONAL CORPORATION.
SECOND: The amendment does not provide for an exchange,
reclassification or cancellation of issued shares.
THIRD: The date of the adoption of the amendment is JANUARY 12, 2000.
-----------------
FOURTH: The amendment was adopted by the Board of Directors without
shareholder action and shareholder action was not required.
Signed this 12th day of JANUARY 2000.
------------------ --------------
UPGRADE INTERNATIONAL CORPORATION
/s/ Daniel Bland
------------------------------
Daniel Bland
President
<PAGE> 1
EXHIBIT 3.3
BY-LAWS
OF
UPGRADE INTERNATIONAL CORP.
ARTICLE I. MEETINGS OF SHAREHOLDERS
SECTION 1. ANNUAL MEETING. The annual meeting of the shareholders of
this corporation shall be held on the 30th day of June of each year or at such
other time and place designated by the Board of Directors of the corporation.
Business transacted at the annual meeting shall include the election of
directors of the corporation. If the designated day shall fall on a Sunday or
legal holiday, then the meeting shall be held on the first business day
thereafter.
SECTION 2. SPECIAL MEETINGS. Special meetings of the shareholders shall
be held when directed by the President or the Board of Directors, or when
requested in writing by the holders of not less than 10% of all the shares
entitled to vote at the meeting. A meeting requested by shareholders shall be
called for a date not less than 3 nor more than 30 days after the request is
made, unless the shareholders requesting the meeting designate a later date. The
call for the meeting shall be issued by the Secretary, unless the President,
Board of Directors, or shareholders requesting the meeting shall designate
another person to do so.
SECTION 3. PLACE. Meetings of shareholders shall be held at the
principal place of business of the corporation or at such other place as may be
designated by the Board of
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<PAGE> 2
Directors.
SECTION 4. NOTICE. Written notice stating the place, day and hour of
the meeting and in the case of a special meeting, the purpose or purposes for
which the meeting is called, shall be delivered not less than 3 nor more than 30
days before the meeting, either personally or by first class mail, or by the
direction of the President, the Secretary or the officer or persons calling the
meeting to each shareholder of record entitled to vote at such meeting. If
mailed, such notice shall be deemed to be delivered when deposited in the United
States mail addressed to the shareholder at his address as it appears on the
stock transfer books of the corporation, with postage thereon prepaid.
SECTION 5. NOTICE OF ADJOURNED MEETING. When a meeting is adjourned to
another time or place, it shall not be necessary to give any notice of the
adjourned meeting if the time and place to which the meeting is adjourned are
announced at the meeting at which the adjournment is taken, and at the adjourned
meeting any business may be transacted that might have been transacted on the
original date of the meeting. If, however, after the adjournment the Board of
Directors fixes a new record date for the adjourned meeting, a notice of the
adjourned meeting shall be given as provided in this Article to each shareholder
of record on a new record date entitled to vote at such meeting.
SECTION 6. SHAREHOLDER QUORUM AND VOTING. A majority of the shares
entitled to vote, represented in person or by proxy, shall constitute a quorum
at a meeting of shareholders. If a quorum is present, the affirmative vote of a
majority of the shares represented at the meeting and entitled to vote on the
subject matter shall be the act of the shareholders unless otherwise provided by
law.
SECTION 7. VOTING OF SHARES. Each outstanding share shall be entitled
to one vote
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<PAGE> 3
on each matter submitted to a vote at a meeting of shareholders.
SECTION 8. PROXIES. A shareholder may vote either in person or by proxy
executed in writing by the shareholder or his duly authorized attorney-in-fact.
No proxy shall be valid after the duration of 11 months from the date thereof
unless otherwise provided in the proxy.
SECTION 9. ACTION BY SHAREHOLDERS WITHOUT A MEETING. Any action
required by law or authorized by these by-laws or the Articles of Incorporation
of this corporation or taken or to be taken at any annual or special meeting of
shareholders, or any action which may be taken at any annual or special meeting
of shareholders, may be taken without a meeting, without prior notice and
without a vote, if a consent in writing, setting forth the action so taken,
shall be signed by the holders of outstanding stock having not less than the
minimum number of votes that would be necessary to authorize or take such action
at a meeting at which all shares entitled to vote thereon were present and
voted.
ARTICLE II. DIRECTORS
SECTION 1. FUNCTION. All corporate powers shall be exercised by or
under the authority of, and the business and affairs of the corporation shall be
managed under the direction of, the Board of Directors.
SECTION 2. QUALIFICATION. Directors need not be residents of this state
or shareholders of this corporation.
SECTION 3. COMPENSATION. The Board of Directors shall have authority to
fix the compensation of directors.
SECTION 4. PRESUMPTION OF ASSENT. A director of the corporation who is
present at a meeting of the Board of Directors at which action on any corporate
matter is taken shall
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<PAGE> 4
be presumed to have assented to the action taken unless he votes against such
action or abstains from voting in respect thereto because of an asserted
conflict of interest.
SECTION 5. NUMBER. This corporation shall have a minimum of 1 director
but no more than 7.
SECTION 6. ELECTION AND TERM. Each person named in the Articles of
Incorporation as a member of the initial Board of Directors shall hold office
until the first annual meeting of shareholders, and until his successor shall
have been elected and qualified or until his earlier resignation, removal from
office or death. At the first annual meeting of shareholders and at each annual
meeting thereafter the shareholders shall elect directors to hold office until
the next succeeding annual meeting. Each director shall hold office for a term
for which he is elected and until his successor shall have been elected and
qualified or until his earlier resignation, removal from office or death.
SECTION 7. VACANCIES. Any vacancy occurring in the Board of Directors,
including any vacancy created by reason of an increase in the number of
Directors, may be filled by the affirmative vote of a majority of the remaining
directors though less than a quorum of the Board Of Directors. A director
elected to fill a vacancy shall hold office only until the next election of
directors by the shareholders.
SECTION 8. REMOVAL OF DIRECTORS. At a meeting of shareholders called
expressly for that purpose, any director or the entire Board of Directors may be
removed, with or without cause, by a vote of the holders of a majority of the
shares then entitled to vote at an election of directors.
SECTION 9. QUORUM AND VOTING. A majority of the number of directors
fixed by these by-laws shall constitute a quorum for the transaction of
business. The act of a majority of
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<PAGE> 5
the directors present at a meeting at which a quorum is present shall be the act
of the Board of Directors.
SECTION 10. EXECUTIVE AND OTHER COMMITTEES. The Board of Directors, by
resolution adopted by a majority of the full Board of Directors, may designate
from among its members an executive committee and one or more other committees
each of which, to the extent provided in such resolution shall have and may
exercise all the authority of the Board of Directors, except as is provided by
law.
SECTION 11. PLACE OF MEETING. Regular and special meetings of the Board
of Directors shall be held at the principal place of business of the corporation
or as otherwise determined by the Directors.
SECTION 12. TIME, NOTICE AND CALL OF MEETINGS. Regular meetings of the
Board of Directors shall be held without notice on the first Monday of the
calendar month two (2) months following the end of the corporation's fiscal, or
if the said first Monday is a legal holiday, then on the next business day.
Written notice of the time and place of special meetings of the Board of
Directors shall be given to each director by either personal delivery, telegram
or cablegram at least three (3) days before the meeting or by notice mailed to
the director at least 3 days before the meeting.
Notice of a meeting of the Board of Directors need not be given to any
director who signs a waiver of notice either before or after the meeting.
Attendance of a director at a meeting shall constitute a waiver of notice of
such meeting and waiver of any and all objections to the place of the meeting,
the time of the meeting, or the manner in which it has been called or convened,
except when a director states, at the beginning of the meeting, any objection to
the transaction of business because the meeting is not lawfully
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<PAGE> 6
called or convened.
Neither the business to be transacted at, nor the purpose, of any
regular or special meeting of the Board of Directors need be specified in the
notice of waiver of notice of such meeting. A majority of the directors present,
whether or not a quorum exists, may adjourn any meeting of the Board of
Directors to another time and place. Notice of any such adjourned meeting shall
be given to the directors who were not present at the time of the adjournment,
and unless the time and place of adjourned meeting are announced at the time of
the adjournment, to the other directors. Meetings of the Board of Directors may
be called by the chairman of the board, by the president of the corporation or
by any two directors.
Members of the Board of Directors may participate in a meeting of such
board by means of a conference telephone or similar communications equipment by
means of which all persons participating in the meeting can hear each other at
the same time. Participation by such means shall constitute presence in person
at a meeting.
SECTION 13. ACTION WITHOUT A MEETING. Any action, required to be taken
at a meeting of the Board of Directors, or any action which may be taken at a
meeting of the Board of Directors or a committee thereof, may be taken without a
meeting if a consent in writing, setting forth the action so to be taken, is
signed by such number of the directors, or such number of the members of the
committee, as the case may be, as would constitute the requisite majority
thereof for the taking of such actions, is filed in the minutes of the
proceedings of the board or of the committee. Such actions shall then be deemed
taken with the same force and effect as though taken at a meeting of such board
or committee where at all members were present and voting throughout and those
who signed such
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<PAGE> 7
action shall have voted in the affirmative and all others shall have voted in
the negative. For informational purposes, a copy of such signed actions shall be
mailed to all members of the board or committee who did not sign said action,
provided however, that the failure to mail said notices shall in no way
prejudice the actions of the board or committee.
ARTICLE III. OFFICERS
SECTION 1. OFFICERS. The officers of this corporation shall consist of
a president, a secretary and a treasurer, each of whom shall be elected by the
Board of Directors. Such other officers and assistant officers and agents as may
be deemed necessary may be elected or appointed by the Board of Directors from
time to time. Any two or more offices may be held by the same person.
SECTION 2. DUTIES. The officers of this corporation shall have the
following duties:
The President shall be the chief executive officer of the corporation,
shall have general and active management of the business and affairs of the
corporation subject to the directions of the Board of Directors, and shall
preside at all meetings of the shareholders and Board of Directors.
The Secretary shall have custody of, and maintain, all of the corporate
records except the financial records; shall record the minutes of all meetings
of the shareholders and Board of directors, send all notices of all meetings and
perform such other duties as may be prescribed by the Board of Directors or the
President.
The Treasurer shall have custody of all corporate funds and financial
records, shall keep full and accurate accounts of receipts and disbursements and
render accounts thereof at the annual meetings of shareholders and whenever else
required by the Board of Directors or the President, and shall perform such
other duties as may be prescribed by
7
<PAGE> 8
the Board of Directors or the President.
SECTION 3. REMOVAL OF OFFICERS. An officer or agent elected or
appointed by the Board of Directors may be removed by the board whenever in its
judgment the best interests of the corporation will be served thereby. Any
vacancy in any office may be filed by the Board of Directors.
ARTICLE IV. STOCK CERTIFICATES
SECTION 1. ISSUANCE. Every holder of shares in this corporation shall
be entitled to have a certificate representing all shares to which he is
entitled. No certificate shall be issued for any share until such share is fully
paid.
SECTION 2. FORM. Certificates representing shares in this corporation
shall be signed by the President or Vice President and the Secretary or an
Assistant Secretary and may be sealed with the seal of this corporation or a
facsimile thereof.
SECTION 3. TRANSFER OF STOCK. The corporation shall register a stock
certificate presented to it for transfer if the certificate is properly endorsed
by the holder of record or by his duly authorized attorney.
SECTION 4. LOST, STOLEN OR DESTROYED CERTIFICATES. If the shareholder
shall claim to have lost or destroyed a certificate of shares issued by the
corporation, a new certificate shall be issued upon the making of an affidavit
of that fact by the person claiming the certificate of stock to be lost, stolen
or destroyed, and, at the discretion of the Board of Directors, upon the deposit
of a bond or other indemnity in such amount and with such sureties, if any, as
the board may reasonably require.
ARTICLE V. BOOKS AND RECORDS
SECTION 1. BOOKS AND RECORDS. This corporation shall keep correct and
complete
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<PAGE> 9
books and records of account and shall keep minutes of the proceedings of its
shareholders, Board of Directors and committee of directors.
This corporation shall keep at its registered office, or principal
place of business a record of its shareholders, giving the names and addresses
of all shareholders and the number of the shares held by each.
Any books, records and minutes may be in written form or in any other
form capable of being converted into written form within a reasonable time.
SECTION 2. SHAREHOLDERS' INSPECTION RIGHTS. Any person who shall have
been a holder of record of shares of voting trust certificates therefor at least
six months immediately preceding his demand or shall be the holder of record of,
or the holder of record of voting trust certificates for, at least five percent
of the outstanding shares of the corporation, upon written demand stating the
purpose thereof, shall have the right to examine, in person or by agent or
attorney, at any reasonable time or times, for any proper purpose its relevant
books and records of accounts, minutes and records of shareholders and to make
extracts therefrom.
SECTION 3. FINANCIAL INFORMATION. Not later than four months after the
close of each fiscal year, this corporation shall prepare a balance sheet
showing in reasonable detail the financial condition of the corporation as of
the close of its fiscal year, and a profit and loss statement showing the
results of the operations of the corporation during the fiscal year.
Upon the written request of any shareholder or holder of voting trust
certificates for shares of the corporation, the corporation shall mail to each
shareholder or holder of voting trust certificates a copy of the most recent
such balance sheet and profit and loss statement. The balance sheets and profit
and loss statements shall be filed in the
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<PAGE> 10
registered office of the corporation in this state, shall be kept for at least
five years, and shall be subject to inspection during business hours by any
shareholder or holder of voting trust certificates, in person or by agent.
ARTICLE VI. DIVIDENDS
The Board of Directors of this corporation may, from time to time,
declare and the corporation may pay dividends on its shares in cash, property or
its own shares, except when the corporation is insolvent or when the payment
thereof would render the corporation insolvent subject to the provisions of the
Florida Statutes.
ARTICLE VII. CORPORATE SEAL
The Board of Directors shall provide a corporate seal which shall be in
circular form.
ARTICLE VIII. AMENDMENT
These by-laws may be altered, amended or repealed, and new by-laws may
be adopted by the a majority vote of the directors of the corporation.
10
<PAGE> 1
EXHIBIT 4.1
UPGRADE
Number INTERNATIONAL Shares
UPG CORPORATION
INCORPORATED UNDER THE LAWS OF THE STATE OF FLORIDA
THIS CERTIFICATE IS TRANSFERABLE IN NEW YORK, NY OR RIDGEFIELD PARK, NJ
THIS CERTIFIES that SEE REVERSE FOR
CERTAIN DEFINITIONS
is the record holder of
FULLY PAID AND NONASSESSABLE SHARE OF COMMON STOCK, $.001 PAR VALUE PER SHARE,
OF
=======================UPGRADE INTERNATIONAL CORPORATION========================
transferable on the share register of the Corporation in person or by a duly
authorized attorney upon surrender of this Certificate properly endorsed. This
Certificate is not valid unless countersigned by the Transfer Agent and
registered by the Registrar.
WITNESS the facsimile seal of the Corporation and the facsimile signatures
of its duly authorized officers.
Dated:
SECRETARY PRESIDENT
<PAGE> 2
UPGRADE INTERNATIONAL CORPORATION
A statement of the powers, designations, preferences and relative,
participating, optional or other special rights of each class of stock or
series thereof and the qualifications, limitations or restrictions of such
preference and/or rights as established, from time to time, by the Certificate
of Incorporation of the Corporation and by any certificate of designation, the
number of shares constituting each class and series, and the designations
thereof, may be obtained by the holder hereof upon request and without charge
at the principal office of the Corporation.
The following abbreviations, when used in the inscription on the face of
this certificate, shall be construed as though they were written out in full
according to applicable laws or regulations:
TEN COM - as tenants in common UNIF GIFT MIN ACT ______ Custodian _______
TEN ENT - as tenants by the (Date) (Minor)
entireties under Uniform Gifts to Minors
JT TEN - as joint tenant with Act_______________________________
right of survivorship (State)
and not as tenants in UNIF TRF MIN ACT ____ Custodian (until
common age___) ________ under Uniform Transfers
(Minor)
to Minors Act __________________________
(State)
Additional abbreviations may also be used though not in the above list
FOR VALUE RECEIVED, ___________________ hereby sell, assign and transfer unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
[ ]
- --------------------------------------------------------------------------------
PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE
________________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
_________________________________________________________________________ Shares
of the common stock represented by the within Certificate, and do hereby
irrevocably constitute and appoint
_______________________________________________________________________ Attorney
To transfer the said stock on the books of the within named Corporation with
full power of substitution in the premises.
Dated:____________ __________________________________
__________________________________
NOTICE: THE SIGNATURE(S) TO THIS
ASSIGNMENT MUST CORRESPOND
WITH THE NAME(S) AS WRITTEN
UPON THE FACE OF THIS CERTIFICATE
IN EVERY PARTICULAR, WITHOUT
ALTERATION OR ENLARGEMENT OR ANY
CHANGE WHATEVER
Signature(s) Guaranteed
By:___________________________________
THE SIGNATURE(S) MUST BE GUARANTEED BY
AN ELIGIBLE GUARANTOR INSTITUTION
(BANKS, STOCKBROKERS, SAVINGS AND LOAN
ASSOCIATIONS AND CREDIT UNIONS WITH
MEMBERSHIP IN AN APPROVED SIGNATURE
GUARANTEE MEDALLION PROGRAM) PURSUANT
TO S.E.C. RULE 17Ad-15
<PAGE> 3
Regulation S legend
"These Shares have not been registered under the Securities Act of 1933, as
amended. Such Shares may be sold or offered for sale, transferred, hypothecated
or otherwise assigned only in accordance with the provisions of Regulation S
under such Act, pursuant to registration under such Act or pursuant to an
available exemption from registration supported by an opinion reasonably
acceptable to the Company of counsel reasonably acceptable to the Company that
an exemption from registration for such sale, offer, transfer, hypothecation or
other assignment is available under such Act. Hedging transactions involving
these Shares may not be conducted unless in compliance with such Act."
<PAGE> 4
Regulation D Legend
"These Shares have not been registered under the Securities Act of 1933, as
amended. Such Shares may be sold or offered for sale, transferred, hypothecated
or otherwise assigned only pursuant to registration under such Act or pursuant
to an available exemption from registration supported by an opinion reasonably
acceptable to the Company by counsel reasonably acceptable to the Company that
an exemption from registration for such sale, offer, transfer, hypothecation or
other assignment is available under such Act."
<PAGE> 1
EXHIBIT 4.2
UPGRADE INTERNATIONAL CORPORATION
(A FLORIDA CORPORATION)
2000 STOCK OPTION PLAN
1. Purpose. The purpose of the 2000 Stock Option Plan (the "Plan") is to provide
a means by which Upgrade International Corporation, a Florida corporation, (the
"Company") may attract, reward, and retain services or advice of current or
future employees, officers, directors, and agents of the Company and to provide
added incentives to them by encouraging stock ownership in the Company.
2. Administration. This Plan shall be administered by the Board of Directors of
the Company (the "Board") or, if the Board shall authorize a committee to
administer this Plan, by such committee to the extent so authorized; provided,
however, that only the Board of Directors may suspend, amend or terminate this
Plan as provided in Section 13, and provided further that a committee that
includes officers of the Company shall not be permitted to grant options to
persons who are officers of the company. The administrator of this Plan is
referred to as the "Plan Administrator."
2.1 Procedures. The Board of Directors shall designate one member of the
Plan Administrator as chairman. The Plan Administrator may hold meetings at such
times and places as it shall determine. The acts of a majority of the members of
the Plan Administrator present at meetings at which a quorum exits, or acts
approved in writing by all Plan Administrator members, shall constitute valid
acts of the Plan Administrator.
2.2 Powers. Subject to the specific provisions of this Plan, the Plan
Administrator shall have the authority, in its discretion: (a) to grant the
stock options described in Section 5, including Incentive Stock Options and
Non-Qualified Stock Options, and to designate each option granted as an
Incentive Stock Option or a Non-Qualified Stock Option; (b) to determine, in
accordance with Section 5.1(f) of this Plan, the fair market value of the shares
of Common Stock subject to options; (c) to determine the exercise price per
share of options; (d) to determine the Optionees to whom, and the time or times
at which, options shall be granted and the number of shares of common stock to
be represented by each option; (e) to interpret this Plan; (f) to prescribe,
amend and rescind rules and regulations relating to this Plan; (g) to determine
the terms and provisions of each option granted (which need not be identical)
and, with the consent of the Optionee, modify or amend each option; (h) to
reduce the exercise price per share of outstanding and unexercised options; (i)
to defer, with the consent of the Optionee, or to accelerate the exercise date
of any option; (j) to waive or modify any term or provisions contained in any
option applicable to the underlying shares of Common Stock; (k) to authorize any
person to execute on behalf of the Company any instrument required to effectuate
the grant of an option previously granted by the Plan Administrator; and (l) to
make all other determinations deemed necessary or advisable for the
administration of
<PAGE> 2
this Plan. The interpretation and construction by the Plan Administrator of any
terms or provisions of this Plan, any option issued hereunder or of any rule or
regulation promulgated in connection herewith and all actions taken by the Plan
Administrator shall be conclusive and binding on all interested parties. The
Plan Administrator may delegate administrative functions to individuals who are
officers or employees of the Company.
2.3 Limited Liability. No member of the Board of Directors or the Plan
Administrator or officer of the Company shall be liable for any action or
inaction of the entity or body, or another person or, except in circumstances
involving bad faith, of himself or herself. Subject only to compliance with the
explicit provisions hereof, the Board of Directors and Plan Administrator may
act in their absolute discretion in all matters related to the Plan.
2.4 Securities Exchange Act of 1934. At any time that the Company has a
class of securities registered pursuant to Section 12 of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"), this Plan shall be administered in
accordance with Rule 16b-3 adopted under the Exchange Act and Section 162(m) of
the Internal Revenue Code of 1986, as amended, and the regulations, proposed and
final, thereunder, as all may be amended from time to time, and each member of
the Plan Administrator shall be a "disinterested director" and an "outside
director" with the meaning of such Rule 16b-3 and Section 162(m), respectively.
3. Stock Subject to This Plan. Subject to adjustment as provided below and in
Section 11 hereof, the stock subject to this Plan shall be the Company's common
stock (the "Common Stock"), and the total number of shares of Common Stock to be
delivered on the exercise of all options granted under this Plan shall not
exceed 800,000 shares as such Common Stock was constituted on the Effective Date
of this Plan (as defined in Section 15 hereof). If any option granted under this
Plan expires, is surrendered, exchanged for another option, canceled or
terminated for any reason without having been exercised in full, the unpurchased
shares subject thereto shall again be available for purposes of this Plan,
including for replacement options that may be granted in exchange for such
surrendered, canceled or terminated options. Shares issued on exercise of
options granted under this Plan may be subject to restrictions on transfer,
repurchase rights or other restrictions as determined by the Plan Administrator.
4. Eligibility.
4.1 Optionees. The Plan Administrator may award options to any current
or future employee, officer, agent, consultant or director of the Company or its
subsidiaries. Any party to whom an option is granted under this Plan is referred
to as an "Optionee."
4.2 Subsidiaries. As used in this Plan, the term "subsidiary" of a
company shall include any corporation in which such company owns, directly or
indirectly, at the
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<PAGE> 3
time of the grant of an option hereunder, stock having 50% or more of the total
combined voting power of all classes of stock thereof.
5. Awards. The Plan Administrator, from time to time, may take the following
actions, separately or in combination, under this Plan: (a) grant Incentive
Stock Options, as defined in Section 422 of the Internal Revenue Code of 1986,
as amended (the "Code"), to any employee of the Company or its subsidiaries, as
provided in Section 5.1 of this Plan; (b) grant options other than Incentive
Stock Options ("Non-Qualified Stock Options"), as provided in Section 5.2 of
this Plan; (c) grant options to officers, employees and others in foreign
jurisdictions, as provided in Section 7 of this Plan; and (d) grant options in
certain acquisition transactions, as provided in Section 8 of this Plan. No
employee may be granted options to acquire more than 100,000 shares in any
fiscal year of the Company.
5.1 Incentive Stock Options. Incentive Stock Options shall be subject to
the following terms and conditions:
(a) Incentive Stock Options may be granted under this Plan only to
employees of the company or its subsidiaries, including employees who are
directors.
(b) No employee may be granted Incentive Stock Options under this
Plan to the extent that the aggregate fair market value, on the date of grant,
of the Common Stock with respect to which Incentive Stock Options are
exercisable for the first time by that employee during any calendar year, under
this Plan and under any other incentive stock option plan (within the meaning of
Section 422 of the Code) of the Company or any subsidiary, exceeds $100,000. To
the extent that any option designated as an Incentive Stock Option exceeds the
$100,000 limit, such option shall be treated as a Non-Qualified Stock Option. In
making this determination, options shall be taken into account in the order in
which they were granted, and the fair market value of the shares of Common Stock
shall be determined as of the time that the option with respect to such shares
was granted.
(c) An Incentive Stock Option may be granted under this Plan to an
employee possessing more than 10% of the total combined voting power of all
classes of stock of the Company (as determined pursuant to the attribution rules
contained in Section 424(d) of the Code) only if the exercise price is at least
110% of the fair market value of the Common Stock subject to the option on the
date the option is granted, as described in Section 5.1(f) of this Plan, and
only if the option by its terms is not exercisable after the expiration of five
years from the date it is granted.
(d) Except as provided in Section 5.5 of this Plan, no Incentive
Stock Option granted under this Plan may be exercised unless at the time of such
exercise the
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<PAGE> 4
Optionee is employed by the Company or any subsidiary of the company and the
Optionee has been so employed continuously since the date such option was
granted.
(e) Subject to Sections 5.1.(c) and 5.1.(d) of this Plan, Incentive
Stock Options granted under this Plan shall continue in effect for the period
fixed by the Plan Administrator, except that no Incentive Stock Option shall be
exercisable after ten years from the date it is granted.
(f) The exercise price shall not be less than 100% of the fair
market value of the shares of Common Stock covered by the Incentive Stock Option
at the date the option is granted. The fair market value of shares shall be the
closing price per share of the Common Stock on the date of grant as reported on
a securities quotation system or stock exchange. If such shares are not so
reported or listed, the Plan Administrator shall determine the fair market value
of the shares of Common Stock in its discretion.
(g) The provisions of clauses (b) and (c) of this Section shall not
apply if either the applicable sections of the Code or the regulations
thereunder are amended so as to change or eliminate such limitations or to
permit appropriate modifications of those requirements by the Plan
Administrator.
5.2 Non-Qualified Stock Options. Non-Qualified Stock Options shall be
subject to the following terms and conditions:
(a) The exercise price may be more or less than or equal to the fair
market value of the shares of Common Stock covered by the Non-Qualified Stock
Option on the date the option is granted, and the exercise price may fluctuate
based on criteria determined by the Plan Administrator. The fair market value of
shares of Common Stock covered by a Non-Qualified Stock Option shall be
determined by the Plan Administrator, as described in Section 5.1(f).
(b) Unless otherwise established by the Plan Administrator, any
Non-Qualified Stock Option shall terminate ten years after the date it is
granted.
5.3 Vesting. To ensure that the Company will achieve the purposes of and
receive the benefits contemplated in this Plan, any option granted to any
Optionee hereunder shall be exercisable according to a vesting schedule or no
vesting schedule as established or determined by the Plan Administrator.
5.4 Nontransferability. Options granted under this Plan and the rights
and privileges conferred hereby may not be transferred, assigned, pledged or
hypothecated in any manner (whether by operation of law or otherwise) other than
by will or by the applicable laws of descent and distribution, shall not be
subject to execution, attachment or similar process, and shall be exercisable
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<PAGE> 5
during the Optionee's lifetime only by the Optionee. Any purported transfer or
assignment in violation of this provision shall be void.
5.5 Termination of Options.
(a) Generally. Unless otherwise determined by the Plan Administrator
or specified in the Optionee's Option Agreement, if the Optionee's employment or
service with the Company Terminates for any reason other than for cause,
resignation, retirement, disability or death, and unless by its terms the option
sooner terminates or expires, then the Optionee may exercise, for a three-month
period, that portion of the Optionee's option that was exercisable at the time
of such termination of employment or service (provided the conditions of Section
6.4 and any other conditions specified in the Option Agreement shall have been
met by the date of exercise of such option).
(b) For Cause; Resignation.
(i) If an Optionee is terminated for cause or resigns in lieu of
dismissal, any option granted hereunder shall be deemed to have terminated as of
the time of the first act that led or would have led to the termination for
cause or resignation in lieu of dismissal and such Optionee shall thereupon have
no right to purchase any shares of Common Stock pursuant to the exercise of such
option, and any such exercise shall be null and void. Termination for "cause"
shall include (i) the violation by the Optionee of any reasonable rule or policy
of the Board of Directors or the Optionee's superiors or the chief executive
officer or the chief operating officer of the Company that results in damage to
the Company or which, after notice to do so, the Optionee fails to correct
within a reasonable time; (ii) any willful misconduct or gross negligence by the
Optionee in the responsibilities assigned to him or her: (iii) any willful
failure to perform his or her job as required to meet the objectives of the
Company; (iv) any wrongful conduct of an Optionee that has an adverse impact on
the Company or that constitutes a misappropriation of the assets of the Company;
(v) unauthorized disclosure of confidential information; or (vi) the Optionee's
performing services for any other company or person that competes with the
Company while he or she is employed by or provides services to the Company,
without the written approval of the chief executive officer of the Company.
"Resignation in lieu of dismissal" shall mean a resignation by an Optionee of
employment with or service to the Company if (i) the Company has given prior
notice to such Optionee of its intent to dismiss the Optionee for circumstances
that constitute cause, or (ii) within two months of the Optionee's resignation,
the chief operating officer or the chief executive officer of the Company or the
Board of Directors determines, which determination shall be final and binding,
that such resignation was related to an act that would have led to a termination
for cause.
(ii) If an Optionee resigns from the Company, the right of the
Optionee to exercise his or her option shall be suspended for a period of two
months from
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<PAGE> 6
the date of resignation, unless the chief executive officer of the Company or
the Board of Directors determines otherwise in writing. Thereafter, unless there
is a determination that the Optionee resigned in lieu of dismissal, the option
may be exercised at any time before the earlier of (i) the expiration date of
the option (which shall have been similarly suspended) or (ii) the expiration of
three months after the date of resignation, for that portion of the Optionee's
option that was exercisable at the time of such resignation (provided the
conditions of Section 6.4 and any other conditions specified in the Option
Agreement shall have been met at the date of exercise of such option).
(c) Retirement. Unless otherwise determined by the Plan
Administrator, if an Optionee's employment or service with the Company is
terminated with the company's approval for reasons of age, the Option may be
exercised at any time before the earlier of (a) the expiration date of the
option or (b) the expiration of three months after the date of such termination
of employment or service, for that portion of the Optionee's option that was
exercisable at the time of such termination of employment or service (provided
the conditions of Section 6.4 and any other conditions specified in the Option
Agreement shall have been met at the date of exercise of such option).
(d) Disability. Unless otherwise determined by the Plan
Administrator, if an Optionee's employment or relationship with the Company
terminates because of a permanent or total disability (as defined in Section
22(e)(3) of the Code), the option may be exercised at any time before the
earlier of (a) the expiration date of the option or (b) the expiration of 12
months after the date of such termination, for up to the full number of shares
of Common Stock covered thereby, including any portion not yet vested (provided
the conditions of Section 6.4 and any other conditions specified in the Option
Agreement shall have been met by the date of exercise of such option).
(e) Death. Unless otherwise determined by the Plan Administrator, in
the event of the death of an Optionee while employed by or providing service to
the Company, the option may be exercised at any time before the earlier of (a)
the expiration date of the option or (b) the expiration of 12 months after the
date of death by the person or persons to whom such Optionee's rights under the
option shall pass by the Optionee's will or by the applicable laws of descent
and distribution, for up to the full number of shares of Common Stock covered
thereby, including any portion not yet vested (provided the conditions of
Section 6.5 and any other conditions specified in the Option Agreement shall
have been met by the date of exercise of such option).
(f) Extension of Exercise Period Applicable to Termination. The Plan
Administrator, at the time of grant or at any time thereafter, may extend the
one-month, three-month and 12-month exercise periods to any length of time not
longer than the original expiration date of the option, and may increase the
portion of an option that is exercisable, subject to such terms and conditions
as the Plan Administrator may determine; provided, that any extension of the
exercise period or other modification of an
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<PAGE> 7
Incentive Stock Option shall be subject to the written agreement and
acknowledgment by the Optionee that the extension or modification disqualifies
the option as an Incentive Stock Option.
(g) Failure to Exercise Option. To the extent that the option of any
deceased Optionee or of any optionee whose employment or service terminates is
not exercised within the applicable period, all rights to purchase shares of
Common Stock pursuant to such options shall cease and terminate.
(h) Transfers; Leaves. For purposes of this Section 5.5, a transfer
of employment or other relationship between or among the Company and/or any
subsidiaries shall not be deemed to constitute a termination of employment or
other cessation of relationship with the Company or any of its subsidiaries. For
purposes of this Section 5.5, with respect to Incentive Stock Options,
employment shall be deemed to continue while the Optionee is on military leave,
sick leave or other bona fide leave of absence (as determined by the Plan
Administrator) in accordance with the policies of the Company.
6. Exercise.
6.1 Procedure. Subject to the provisions of Section 5.3 above, each
option may be exercised in whole or in part; provided, however, that no fewer
than 100 shares (or the remaining shares then purchasable under the option, if
less than 100 shares) may be purchased on any exercise of any option granted
hereunder and that only whole shares will be issued pursuant to the exercise of
any option (the number of 100 shares shall not be changed by any transaction or
action described in Section 8 or Section 11 unless the Plan Administrator
determines that such a change is appropriate). Options shall be exercised by
delivery to the Secretary of the Company or his or her designated agent of
notice of the number of shares with respect to which the option is exercised,
together with payment in full of the exercise price and any applicable
withholding taxes.
6.2 Payment. Payment of the option exercise price shall be made in full
when the notice of exercise of the option is delivered to the Secretary of the
Company or his or her designated agent and shall be in cash or bank certified or
cashier's check or through irrevocable instructions to a stock broker to deliver
the amount of sales proceeds necessary to pay the appropriate exercise price and
withholding tax obligations, all in accordance with applicable governmental
regulations, for the shares of Common Stock being purchased. The Plan
Administrator may determine at the time the option is granted for Incentive
Stock Options, or at an time before exercise for Non-Qualified Stock Options,
that additional forms of payment will be permitted.
6.3 Withholding. Before the issuance of shares of Common Stock on the
exercise of an option, the Optionee shall pay to the Company the amount of any
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<PAGE> 8
applicable federal, state or local tax withholding obligations. The Company may
withhold any distribution in whole or in part until the Company is so paid. The
Company shall have the right to withhold such amount from any other amounts due
or to become due from the Company to the Optionee, including salary (subject to
applicable law) or to retain and withhold a number of shares having a market
value not less than the amount of such taxes required to be withheld by the
Company to reimburse it for any such taxes and cancel (in whole or in part) any
such shares so withheld.
6.4 Conditions Precedent to Exercise. The Plan Administrator may
establish conditions precedent to the exercise of any option, which shall be
described in the relevant Option Agreement.
7. Foreign Qualified Grants. Options under this Plan may be granted to officers
and employees of the Company and other person described in Section 4 who reside
in foreign jurisdictions as the Plan Administrator may determine form time to
time. The Board of Directors may adopt supplements to the Plan as needed to
comply with the applicable laws of such foreign jurisdictions and to give
Options favorable treatment under such laws; provided, however, that no award
shall be granted under any such supplement on terms more beneficial to such
Optionees than those permitted by this Plan.
8. Corporate Mergers, Acquisitions, Etc. The Plan Administrator may also grant
options under this Plan having terms, conditions and provisions that vary from
those specified in this Plan provided that such options are granted in
substitution for, or in connection with the assumption of, existing options
granted, awarded or issued by another corporation and assumed or otherwise
agreed to be provided for by the Company pursuant to or by reason of a
transaction involving a corporate merger, consolidation, acquisition of property
or stock, reorganization or liquidation to which the Company is a party.
9. Holding Period. Unless otherwise determined by the Plan Administrator, if a
person subject to Section 16 of the Exchange Act exercises an option within six
months of the date of grant of the option, the shares of Common Stock acquired
on exercise of the option may not be sold until six months after the date of
grant of the option.
10. Option Agreements. Options granted under this Plan shall be evidenced by
written stock option agreements (the "Option Agreements") that shall contain
such terms, conditions, limitations and restrictions as the Plan Administrator
shall deem advisable and that are consistent with this Plan. All Option
Agreements shall include or incorporate by reference the applicable terms and
conditions contained in this Plan.
11. Adjustments On Changes in Capitalization.
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11.1 Stock Splits, Capital Stock Adjustments. The aggregate number and
class of shares for which options may be granted under this Plan, the number and
class of shares covered by each outstanding option and the exercise price per
share thereof (but not the total price), and each such option, shall all be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock of the Company resulting from a stock split, stock
dividend or consolidation of shares or any like capital stock adjustment.
11.2 Effect of Merger, Sale of Assets, Liquidation or Dissolution.
(a) Mergers, Sale of Assets, Other Transactions. In the event of a
merger, consolidation or plan of exchange to which the Company is a party or a
sale of all or substantially all of the Company's assets (each, a
"Transaction"), the Board of Directors, in its sole discretion and to the extent
possible under the structure of the Transaction, shall select one of the
following alternatives for treating outstanding options under this Plan:
(i) Outstanding options shall remain in effect in accordance
with their terms;
(ii) Outstanding options shall be converted into options to
purchase stock in the corporation that is the surviving or acquiring corporation
in the Transaction. The amount, type of securities subject thereto and exercise
price of the converted options shall be determined by the Board of Directors of
the Company, taking into account the relative values of the companies involved
in the Transaction and the exchange rate, if any, used in determining shares of
the surviving corporation to be issued to holders of shares of the Company.
Unless otherwise determined by the Board of Directors, the converted options
shall be vested only to the extent that the vesting requirements relating to
options granted hereunder have been satisfied;
(iii) The Board of Directors provides a period before the
consummation of the transaction during which outstanding options shall be
exercisable to the extent vested and, on the expiration of such period, all
unexercised options shall immediately terminate. The Board of Directors, in its
sole discretion, may accelerate the vesting of such options so that they are
exercisable in full during such period; or
(iv) The Board of Directors shall take such other action with
respect to outstanding options as the Board deems to be in the best interests of
the Company.
(b) Liquidation; Dissolution. If the Company is liquidated or
dissolved, options shall be treated in accordance with Section 11.2(a)(iii).
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11.3 Fractional Shares. If the number of shares covered by any option is
adjusted, any fractional shares resulting from such adjustment shall be
disregarded and each such option shall cover only the number of full shares
resulting from such adjustment.
11.4 Determination of Board to Be Final. All adjustments under this
Section 11 shall be made by the Board of Directors, and its determination as to
what adjustments shall be made, and the extent thereof, shall be final, binding
and conclusive. Unless an Optionee agrees otherwise, any change or adjustment to
an Incentive Stock Option shall be made, if possible, in such a manner so as not
to constitute a "modification," as defined in Section 424(h) of the Code, and so
as not to cause the Optionee's Incentive Stock Option to fail to continue to
qualify as an Incentive Stock Option.
12. Securities Regulations.
Shares of Common Stock shall not be issued with respect to an option
granted under this Plan unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, any applicable state
securities laws, the Securities Act of 1933, as amended, the Exchange Act, the
rules and regulations promulgated thereunder, applicable laws of foreign
countries and other jurisdictions and the requirements of any quotation service
or stock exchange on which the shares may then be listed, and shall be further
subject to the approval of counsel for the Company with respect to such
compliance, including the availability of an exemption from registration for the
issuance and sale of any shares hereunder. The inability of the Company to
obtain, from any regulatory body having jurisdiction, the authority deemed by
the Company's counsel to be necessary for the lawful issuance and sale of any
shares hereunder or the unavailability of an exemption from registration for the
issuance and sale of any shares hereunder shall relieve the Company of any
liability with respect of the nonissuance or sale of such shares as to which
such requisite authority shall not have been obtained.
As a condition to the exercise of an option, the company may require the
Optionee to represent and warrant at the time of any such exercise that the
shares of Common Stock are being purchased only for investment and without any
present intention to sell or distribute such shares if, in the opinion of
counsel for the Company, such a representation is required by any relevant
provision of the aforementioned laws. The Company may place a stop-transfer
order against any shares of Common Stock on the official stock books and the
records of the Company, and a legend may be stamped on stock certificates to the
effect that the shares of Common Stock may not be pledged, sold or otherwise
transferred unless an opinion of counsel is provided (concurred in by counsel
for the Company) stating that such transfer is not in violation of any
applicable law or regulation. The Plan Administrator may also require such other
action or agreement by the Optionees as may from time to time be necessary to
comply with the
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federal and state securities laws. THE PROVISION SHALL NOT OBLIGATE THE COMPANY
TO UNDERTAKE REGISTRATION OF THE OPTIONS OR STOCK THEREUNDER.
If any of the Company's capital stock of the same class as the Common
Stock subject to options granted hereunder is listed on a national securities
exchange, all shares of Common Stock issued hereunder if not previously listed
on such exchange shall be authorized by that exchange for listing thereon before
the issuance thereof.
13. Amendment and Termination.
13.1 Plan. The Board of Directors may at any time suspend, amend or
terminate this Plan, provided that, except as set forth in Section 8, the
approval of the Company's shareholders is necessary within twelve months before
or after the adoption by the Board of Directors of any amendment that will:
(a) increase the number of shares of Common Stock to be reserved
for the issuance of options under this Plan;
(b) permit the granting of stock options to a class of persons
other than those now permitted to receive stock options under this Plan; or
(c) require shareholder approval under applicable law, including
Section 16(b) of the Exchange Act.
13.2 Options. Subject to the requirements of Section 422 of the Code
with respect to Incentive Stock Options and to the terms and conditions and
within the limitations of this Plan, the Plan Administrator may modify or amend
outstanding options granted under this Plan. The modification or amendment of an
outstanding option shall no, without the consent of the Optionee, impair or
diminish any of his or her rights or any of the obligations of the Company under
such option. Except as otherwise provided in this Plan, no outstanding option
shall be terminated without the consent of the Optionee. Unless the Optionee
agrees otherwise, any changes or adjustments made to outstanding Incentive Stock
Options granted under this Plan shall be made in such a manner so as not to
constitute a "modification," as defined in Section 425(h)of the Code, and so as
not to cause any Incentive Stock Option issued hereunder to fail to continue to
qualify as an Incentive Stock Option as defined in Section 422(b) of the Code.
13.3 Automatic Termination. Unless sooner terminated by the Board of
Directors, this Plan shall terminate ten years from the date on which this Plan
is adopted by the Board. No option may be granted after such termination or
during any suspension of this Plan. The amendment or termination of this Plan
shall not, without the consent of
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<PAGE> 12
the Optionee, alter or impair any rights or obligations under any option
theretofore granted under this Plan.
14. Miscellaneous.
14.1 Time of Granting Options. The date of grant of an option shall, for
all purposes, be the date on which the Company completes the required corporate
action relating to the grant of an option; the execution of an Option Agreement
and the conditions to the exercise of an option shall not defer the date of
grant.
14.2 No Status as Shareholder. Neither the Optionee nor any party to
which the Optionee's rights and privileges under the option may pass shall be,
or have any of the rights or privileges of, a shareholder of the Company with
respect to any of the shares of Common Stock issuable on the exercise of any
option granted under this Plan unless and until such option has been exercised
and the issuance (as evidenced by the appropriate entry on the books of the
Company or duly authorized transfer agent of the Company) of the stock
certificate evidencing such shares.
14.3 Status as an Employee. Nothing in this Plan or any option granted
pursuant to this Plan shall confer on any Optionee any right to continue in the
employ of the Company, or to interfere in any way with the right of the Company
to terminate his or her employment or other relationship with the Company at any
time.
14.4 Reservation of Shares. The Company, during the term of this Plan,
at all times will reserve and keep available such number of shares of Common
Stock as shall be sufficient to satisfy the requirements of this Plan.
15. Effectiveness of This Plan. This Plan shall become effective on the date on
which it is adopted by the Board of Directors of the Company (the "Effective
Date"). No option granted under this Plan to any officer or director of the
Company shall become exercisable until the Plan is approved by the shareholders,
and any option granted before such approval shall be conditioned on and is
subject to such approval.
Adopted by the Board of Directors on __________________________
1999 and approved by the shareholders on ______________________________ , 2000.
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EXHIBIT 4.3
UPGRADE INTERNATIONAL CORP.
AMENDED
1999 COMBINED INCENTIVE AND NONQUALIFIED
STOCK OPTION PLAN
THIS AGREEMENT is adopted by the Board of Directors of Upgrade
International Corp. and is effective as of the ___ day of ____________________,
1999.
SECTION 1. Purpose. The purpose of the Plan is to enable Upgrade
International Corp. (the "Company") to attract and retain the services of people
with training, experience and ability and to provide additional incentive to
such persons by granting them an opportunity to participate in the ownership of
the Company.
SECTION 2. Stock Subject to Plan. The stock subject to this Plan shall
be the Company's common stock, par value $0.001 per share (the "Common Stock"),
presently authorized but unissued or now held or subsequently acquired by the
Company as treasury shares. Subject to adjustment as provided in Section 10, the
aggregate amount of Common Stock reserved for issuance or delivery upon exercise
of all options granted under this Plan shall not exceed 1,550,000 shares of
Common Stock, as constituted on the date of adoption of this Plan by the Board
of Directors. If any option granted under this Plan shall expire or terminate
for any reason without having been exercised in full, the unpurchased shares
subject thereto shall thereupon again be available for purposes of this Plan.
SECTION 3. Administration. The Plan shall be administered by the Board
of Directors of the Company, in accordance with the following terms and
conditions:
3.1 General Authority. Subject to the express provisions of the Plan,
the Board of Directors shall have the authority, in its discretion, to determine
all matters relating to options to be granted under the Plan, including the
selection of individuals to be granted options, the number of shares to be
subject to each option, the exercise price, the term, whether such options shall
be immediately exercisable or shall become exercisable in increments over time,
and all other terms and conditions thereof. Grants under this Plan to persons
eligible need not be identical in any respect, even when made simultaneously.
The Board of Directors may from time to time adopt rules and regulations
relating to the administration of the Plan. The interpretation and construction
by the Board of Directors of any terms or provisions of this Plan or any option
issued hereunder, or of any rule or regulation promulgated in connection
herewith, shall be conclusive and binding on all interested parties. The Board
of Directors in its sole discretion, may grant incentive stock options
("Incentive Stock Options") as such term is defined in Section 422 of the U.S.
Internal Revenue Code of 1986, as amended, (the "Code") or nonqualified stock
options ("Nonqualified Stock Options") or both. A Nonqualified Stock Option is a
stock option that is not an Incentive Stock Option. The type of option granted,
whether an Incentive Stock option or a Nonqualified Stock Option shall be
clearly identified by the Board of Directors when granted. At no time shall the
Board grant an Incentive Stock Option and a Nonqualified Stock Option together,
or grant either an Incentive Stock Option or a Nonqualified Stock Option when
the exercise of one such option affects the right to exercise the other. The
term option when used in this Plan shall refer to Incentive Stock Options and
Nonqualified Stock Options, collectively.
3.2 Directors. A member of the Board of Directors may be eligible to
participate in or receive or hold options under this Plan; provided, however,
that no
<PAGE> 2
member of the Board of Directors shall vote with respect to the granting of an
option hereunder to himself or herself, as the case may be.
3.3 Delegation to a Committee. Notwithstanding the foregoing, the
Board of Directors, if it so determines, may delegate to a committee of the
Board of Directors any or all authority for the administration of the Plan, and
thereafter references to the Board of Directors in this Plan shall be deemed to
be references to the committee to the extent provided in the resolution
establishing the committee. Once appointed, any such committee shall continue to
serve until otherwise directed by the Board of Directors. From time to time the
Board of Directors may increase the size of the committee and appoint additional
members thereof, remove members (with or without cause), appoint substitutions
therefor, and fill vacancies however caused. Each member of the committee shall
be an individual qualifying as an "outside director," as such term is used in
Section 162(m) of the Code, and "non-employee director," as such term is used in
Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended
(the "1934 Act"). At least annually, such committee shall present a written
report to the Board of Directors indicating the persons to whom options have
been granted hereunder since the date of the last report, and in each case the
date or dates of options granted, the number of shares as to which options were
granted, and the exercise price per share. At all times the Board of Directors
shall have the power to remove all members of the committee and thereafter to
administer the Plan directly.
3.4 Persons Subject to Section 16(b). Notwithstanding anything in the
Plan to the contrary, the Board of Directors, in its absolute discretion, may
bifurcate the Plan so as to restrict, limit or condition the use of any
provision of the Plan to participants who are officers and directors subject to
Section 16(b) of the 1934 Act without so restricting, limiting or conditioning
the Plan with respect to other participants
3.5 Replacement of Options. The Board of Directors, in its absolute
discretion, may grant options subject to the condition that options previously
granted at a higher or lower exercise price under the Plan be canceled or
exchanged in connection with such grant. The number of shares covered by the new
options, the exercise price, the term and the other terms and conditions of the
new option, shall be determined in accordance with the Plan and may be different
from the provisions of the canceled or exchanged options. Alternatively, the
Board of Directors may, with the agreement of the Optionee, amend previously
granted options to establish the exercise price at the then current fair market
value of the Company's Common Stock, maintaining existing vesting and expiration
dates.
3.6 Loans to Optionees. The Board of Directors, in its absolute
discretion, may provide that the Company loan to Optionees sufficient funds to
exercise any option granted under the Plan and/or to pay withholding tax due
upon exercise of such option. The Board of Directors shall have the authority to
make such determinations at the time of grant or exercise and shall establish
repayment terms thereof, including installments, maturity and interest rate.
SECTION 4. Eligibility. Options may be granted only to persons who, at
the time the option is granted, are employees, directors, consultants or
independent contractors of or to the Company or any of its present or future
parent or subsidiary corporations (hereafter a "Parent" or "Subsidiary") or to
any other person providing good and valuable consideration to the Company is
received as may be determined by the Board of Directors. Any individual to whom
an option is granted under this Plan may be referred to hereinafter as
"Optionee". Any Optionee may receive one or more grants of options as the Board
of Directors as shall from time to time determine, and such
2
<PAGE> 3
determinations may be different as to different Optionees and may vary as to
different grants. Optionees who are not employees are eligible to receive only
Nonqualified Stock Options.
SECTION 5. Terms and Conditions of Options. Options granted under this
Plan shall be evidenced by written agreements which shall contain such terms,
conditions, limitations and restrictions as the Board of Directors shall deem
advisable and which are not inconsistent with this Plan. Each option granted
hereunder shall clearly indicate whether it is an Incentive Stock Option or a
Nonqualified Stock Option. Notwithstanding the foregoing, all such options shall
include or incorporate by reference the following terms and conditions:
5.1 Number of Shares. The maximum number of shares that may be
purchased pursuant to the exercise of each option and the price per share at
which such option is exercisable (the "exercise price") shall be as established
by the Board of Directors, provided that the exercise price of Incentive Stock
Options shall not be less than the fair market value per share of the Common
Stock at the time the option is granted, as determined in good faith by the
Board of Directors. The exercise price of Nonqualified Stock Options may be
greater or less than the fair market value per share of the Common Stock at the
time the option is granted.
5.2 Duration of Options. Subject to the restrictions contained in
Section 9, the term of each option shall be established by the Board of
Directors and, if not so established, shall be ten years from the date it is
granted; in no event, however, shall the term of an Incentive Stock Option
exceed ten years.
5.3 Exercisability. Each option shall prescribe the installments, if
any, in which an option granted under the Plan shall become exercisable. The
Board of Directors, in its absolute discretion, may waive or accelerate any
installment requirement contained in outstanding options. In no case may an
option be exercised as to less than 100 shares at any one time (or the remaining
shares covered by the option if less than 100). Only whole shares shall be
issued upon the exercise of an option.
5.4 Incentive Stock Option. Any option which is issued as an
Incentive Stock Option under this Plan shall, notwithstanding any other
provisions of this Plan or any option terms to the contrary, contain all of the
terms, conditions, restrictions, rights and limitations required to be contained
in an Incentive Stock Option, and any provision to the contrary shall be
disregarded.
SECTION 6. Nontransferability of Options. Options granted under this
Plan and the rights and privileges conferred hereby may not be transferred,
assigned, pledged or hypothecated in any manner (whether by operation of law or
otherwise) other than by will or the applicable laws of descent and
distribution, and shall not be subject to execution, attachment or similar
process. Upon any attempt to transfer, assign, pledge, hypothecate or otherwise
dispose of any option under this Plan or any right or privilege conferred
hereby, contrary to the provisions hereof, or upon the sale or levy or any
attachment or similar process, such option thereupon shall terminate and become
null and void. During an Optionee's lifetime, any options granted under this
Plan are personal to him or her and are exercisable solely by such Optionee.
SECTION 7. Certain Limitations Regarding Incentive Stock Options. The
grant of Incentive Stock Options shall be subject to the following special
limitations:
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<PAGE> 4
7.1 Limitation on Amount of Grants. In any calendar year, only
options up to a maximum aggregate of ten percent (10%) of the number of shares
specified in Section 2 of this Plan shall be granted to any one person. In
addition, in no event shall any Optionee be granted Incentive Stock Options that
in the aggregate (together with all other Incentive Stock Options granted by the
Company or any Parents or Subsidiaries) entitle the Optionee to purchase, in any
calendar year during which such options first become exercisable, stock of the
Company, any Parent or any Subsidiary having a fair market value (determined as
of the time such options are granted) in excess of $100,000 plus the amount of
any unused limit carry-over permitted under the applicable provisions of the
Code. No limitation shall apply to Nonqualified Stock options.
7.2 Grants to 10% Shareholders. Incentive Stock options may be
granted a person owning more than 10% of the total combined voting power of all
classes of stock of the Company and any Parent or Subsidiary only if (i) the
exercise price is at least 110% of the fair market value of the stock at the
time of grant, and (ii) the option is not exercisable after the expiration of
five years from the date of grant.
SECTION 8. Exercise of Options. Options shall be exercised in accordance
with the following terms and conditions:
8.1 Procedure. Options shall be exercised by delivery to the Company
of written notice of the number of shares with which the option is exercised.
8.2 Payment. Payment of the option price shall be made in full within
5 business days of the notice of exercise of the option and shall be in cash or
bank-certified or cashier's checks, or personal check if permitted by the Board
of Directors. To the extent permitted by applicable laws and regulations
(including, but not limited to, federal tax and securities laws and
regulations), an option may be exercised by delivery of shares of Common Stock
of the Company held by the Optionee having a fair market value equal to the
exercise price, such fair market value to be determined in good faith by the
Board of Directors. Such payment in stock may occur in the context of a single
exercise of an option, sometimes referred to as a "cashless" exercise, or
successive and simultaneous exercises, sometimes referred to as "pyramiding",
which provides that, rather than physically exchanging certificates for a series
of exercises, bookkeeping entries will be made pursuant to which the Optionee is
permitted to retain his existing stock certificate and a new stock certificate
is issued for the net shares.
If the Company's Common Stock is registered under the 1934 Act, and if
permitted by the Board of Directors, and to the extent permitted by applicable
laws and regulations, (including, but not limited to, federal tax and securities
laws and regulations) an option also may be exercised by delivery of a properly
executed exercise notice together with irrevocable instructions to a broker to
promptly deliver to the Company the amount of sale or loan proceeds to pay the
exercise price.
8.3 Federal Withholding Tax Requirements. Upon exercise of an option,
the Optionee shall, upon notification of the amount due and prior to or
concurrently with the delivery of the certificates representing the shares, pay
to the Company amounts necessary to satisfy applicable federal, state and local
withholding tax requirements or shall otherwise make arrangements satisfactory
to the Company for such requirements. Such arrangements may include payment of
the appropriate withholding tax in shares of stock of the Company having a fair
market value equal to such withholding tax, either through delivery of shares
held by the Optionee or by reduction in the number of shares to be delivered to
the optionee upon exercise of such option.
4
<PAGE> 5
SECTION 9. Termination of Employment, Disability and Death.
9.1 General. If the employment of an Optionee by the Company, a
Parent or a Subsidiary shall terminate by retirement or for any reason other
than death, disability or cause as hereinafter provided, an option held by the
Optionee may be exercised by the Optionee at any time prior to the expiration of
three months after the date of such termination of employment (unless by its
terms the option sooner terminates or expires), but only if, and to the extent,
the Optionee was entitled to exercise the option at the date of such
termination. Such three-month period shall be extended to one year after the
date of such termination in the event the Optionee dies during such three-month
period.
9.2 Disability. If the employment of an Optionee by the Company, a
Parent or a Subsidiary is terminated because of the Optionee's disability (as
herein defined), an option held by the Optionee may be exercised by the Optionee
at any time prior to the expiration of one year after the date of such
termination of employment (unless by its terms the option sooner terminates or
expires), but only if, and to the extent, the Optionee was entitled to exercise
the option at the date of such termination. For purposes of this section, an
Optionee will be considered to be disabled if the Optionee is unable to engage
in any substantial gainful activity by reason of any medically determinable
mental or physical impairment which can be expected to result in death or which
has lasted or can be expected to last a continuous period of not less than 12
months.
9.3 Death. In the event of the death of an Optionee while in the
employ of the Company, a Parent or a Subsidiary, an option held by the Optionee
shall be exercisable on or prior to the expiration of one year after the date of
such death (unless by its terms the option sooner terminates and expires), but
only if, and to the extent, the Optionee was entitled to exercise the option at
date of death and only by the Optionee's personal representative if the option
is then subject to administration as part of the Optionee's estate, or by the
person or persons to whom such Optionee's rights under the option shall have
passed by the Optionee's will or by applicable laws of descent and distribution.
9.4 Termination for Cause. If an Optionee's employment with the
Company, a Parent or a Subsidiary is terminated for cause, any option granted
hereunder shall automatically terminate as of the first advice or discussion of
termination and such Optionee shall thereupon have no right to purchase any
shares pursuant to such option. "Termination for Cause" shall include but not be
limited to dismissal for dishonesty, conviction or confession of a crime
punishable by law (except minor violations), intoxication while at work, fraud,
misconduct or disclosure of confidential information.
9.5 Waiver or Extension of Time Periods. The Board of Directors shall
have the authority, prior to or within the times specified in this Section 9 for
the exercise of any such option, to extend such time period or waive in its
entirety any such time period to the extent that such time period expires prior
to the expiration of the term of such option. In addition, the Board of
Directors may grant, pursuant to a specific resolution adopted at the time of
grant, modify or eliminate the time periods specified in this Section 9.
However, no Incentive Stock Option may be exercised after the expiration of ten
(10) years from the date such option is granted. If an Optionee holding an
Incentive Stock Option exercises such option, by permission, after the
expiration of the time period specified in this Section 9, the option will no
longer be treated as an Incentive
5
<PAGE> 6
Stock Option under the Code and shall automatically be converted into a
Nonqualified Stock Option.
9.6 Termination of Options. To the extent that the option of any
deceased Optionee or of any Optionee whose employment is terminated shall not
have been exercised within the limited periods prescribed in this Section 9, all
further rights to purchase shares pursuant to such option shall cease and
terminate at the expiration of such period. No Incentive Stock Option may be
exercised after the expiration of ten (10) years from the date such option is
granted, notwithstanding any provision to the contrary.
9.7 Non-Employee Optionees. Options granted to Optionees who are not
employees of the Company, a Parent or a Subsidiary at the time of grant shall
not be subject to the provisions of this Section 9, except as specifically
provided in the option.
SECTION 10. Option Adjustments.
10.1 Adjustments Upon Changes in Capitalization. The aggregate number
and class of shares on which options may be granted under this Plan, the number
and class of shares covered by each outstanding option and the exercise price
per share thereof (but not the total price), and all such options, shall each be
proportionately adjusted for any increase or decrease in the number of issued
shares of Common Stock of the Company resulting from a split-up or consolidation
of shares or any like capital adjustment, or the payment of any stock dividend,
or any other increase or decrease in the number of shares of Common Stock of the
Company without the receipt of consideration by the Company.
10.2 Effect of Certain Transactions. Except as provided in subsection
10.3, upon a merger, consolidation, acquisition of property or stock,
separation, reorganization or liquidation of the Company, as a result of which
the shareholders of the Company receive cash, stock or other property in
exchange for their shares of Common Stock, any option granted hereunder shall
terminate, provided, however, that the Optionee shall have the right for twenty
(20) days prior to any such merger, consolidation, acquisition of property or
stock, separation, reorganization or liquidation to exercise his or her option
in whole or in part whether or not the vesting requirements set forth in the
option agreement have been satisfied.
10.3 Conversion of Options on Stock for Stock Exchange. If the
shareholders of the Company receive capital stock of another corporation
("Exchange Stock") in exchange for their shares of Common Stock in any
transaction involving a merger, consolidation, acquisition of property or stock,
separation or reorganization, all options granted hereunder shall terminate in
accordance with the provision of subsection 10.2 unless the Board of Directors
and the corporation issuing the Exchange Stock, in their sole and arbitrary
discretion and subject to any required action by the shareholders of the Company
and such corporation, agree that all such options granted hereunder are
converted into options to purchase shares of Exchange Stock. The amount and
price of the such options shall be determined by adjusting the amount and price
of the options granted hereunder in the same proportion as used for determining
the number of shares of Exchange Stock the holders of the Common Stock receive
in such merger, consolidation, acquisition of property or stock, separation or
reorganization. The vesting schedule set forth in the option agreement shall
continue to apply to the options granted for the Exchange Stock. In the case of
Incentive Stock Options, the provisions of this paragraph 10.3 shall be subject
to, and all related action shall satisfy, the requirements of Section 424(a) of
the Code.
6
<PAGE> 7
10.4 Fractional Shares. In the event of any adjustment in the number
of shares covered by any option, any fractional shares resulting from such
adjustment shall be disregarded and each such option shall cover only the number
of full shares resulting from such adjustment.
10.5 Determination of Board of Directors to be Final. All such
adjustments pursuant to this Section 10, shall be made by the Board of
Directors, and its determination as to what adjustments shall be made, and the
extent thereof, shall be final, binding and conclusive.
SECTION 11. Securities Regulations.
11.1 Compliance. Shares shall not be issued with respect to an option
granted under this Plan unless the exercise of such option and the issuance and
delivery of such shares pursuant thereto shall comply with all relevant
provisions of law, including, without limitation, any applicable state
securities laws, the Securities Act of 1933, as amended, the 1934 Act, the rules
and regulations promulgated thereunder, and the requirements of any stock
exchange upon which the shares may then be listed, and shall further be subject
to the approval of counsel for the Company with respect to such compliance.
Inability of the Company to obtain, after reasonable efforts, from any
regulatory body having jurisdiction, the authority, deemed by the Company's
counsel to be necessary, for the lawful issuance and sale of shares upon
exercise of any option granted hereunder, shall relieve the Company of any
liability in respect of the nonissuance or sale of such shares as to which such
authority shall not have been obtained.
11.2 Representations by Optionee. As a condition to the exercise of
an option, the Company may require the optionee to represent and warrant at the
time of any such exercise that the shares are being purchased only for
investment and without any present intention to sell or distribute such shares,
if, in the opinion of counsel for the Company, such representation is required
by any relevant provision of the laws referred to in Section 11.1. At the option
of the Company, a stop transfer order against any shares of stock so issued may
be placed on the official stock books and records of the Company, and a legend
indicating that the stock may not be pledged, sold or otherwise transferred
unless an opinion of counsel is provided (concurred in by counsel for the
Company) stating that such transfer is not in violation of any applicable law or
regulation, may be stamped on the stock certificate in order to assure exemption
from registration. The Board of Directors may also require such other action or
agreement by Optionees as may from time to time be necessary to comply with
federal and state securities laws. The Company shall not be obligated to
register options granted hereunder or the stock that may be purchased upon
exercise of such options.
SECTION 12. Employment or Other Rights. Nothing in this Plan or any
option or right granted pursuant hereto shall confer upon any Optionee any right
to be continued in the employment of the Company, a Parent or Subsidiary or to
remain a director, officer or consultant, or to interfere in any way with the
right of the Company, a Parent or Subsidiary, in its sole discretion, to
terminate such Optionee's employment or other relationship at any time or to
remove the Optionee as a director or officer at any time.
SECTION 13. Amendment and Termination.
13.1 Action by Shareholders. The Plan may be terminated, modified or
amended by the shareholders of the Company.
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<PAGE> 8
13.2 Action by Board of Directors. The Board of Directors may also
terminate the Plan, or modify or amend the Plan in such respects as it shall
deem advisable in order to conform to any changes in law or regulation
applicable thereto, or in other respects; provided, however, that the Board of
Directors may not, without further approval by the shareholders of the Company:
(i) Increase the number of shares in the aggregate which may be
sold pursuant to options granted under the Plan;
(ii) Increase the period during which options may be granted or
exercised; or
(iii) Change the terms of the Plan in such manner as causes the
Plan to lose its qualification as an incentive stock option plan under Section
422 of the Code.
No termination, modification or amendment of the Plan may, without the consent
of each optionee to whom an option shall theretofore have been granted
hereunder, adversely affect the rights of such Optionee under such option.
13.3 Automatic Termination. Unless the Plan shall theretofore have been
terminated as herein provided, this Plan shall terminate ten (10) years from the
earlier of: (i) the date on which the Plan is adopted; or (ii) the date on which
this Plan is approved by the shareholders of the Company. No option may be
granted after any such termination of this Plan. The termination, modification
or amendment of this Plan shall not, without the consent of an Optionee, alter
or impair any rights or obligations under any option theretofore granted under
this Plan to any such Optionee..
SECTION 14. Effective Date of the Plan. This Plan shall become effective
on the date of its adoption by the Board of Directors of the Company and options
may be granted immediately thereafter, but no option may be exercised under the
Plan unless and until the Plan shall have been approved by the Company's
shareholders within 12 months after the date of adoption of the Plan by the
Board of Directors. If such approval is not obtained within such period, the
Plan and any options granted hereunder shall be null and void.
Adopted by the Board of Directors as of the ___ day of ___________________,
1999.
8
<PAGE> 1
EXHIBIT 4.4
- --------------------------------------------------------------------------------
WARRANT TO PURCHASE COMMON STOCK
OF
UPGRADE INTERNATIONAL CORPORATION
- --------------------------------------------------------------------------------
THIS WARRANT AND THE SHARES OF COMMON STOCK
ISSUABLE PURSUANT TO THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED UNLESS REGISTERED UNDER THE ACT OR
AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE
FOR VALUE RECEIVED
Upgrade International Corporation, a Florida corporation (the "Company"), grants
the following rights to the Bland Family Trust, having an address at 5535
Peregrine Way, Blaine, WA 98230 ("Holder").
ARTICLE 1. DEFINITIONS
As used herein, the following terms shall have the following meanings, unless
the context shall otherwise require:
(a) "Common Stock" shall mean the common stock, par value $0.001 per
share, of the Company.
(b) "Corporate Office" shall mean the office of the Company (or its
successor) at which at any particular time its principal
business shall be administered, which office is located at the
date hereof at 1411 Fourth Avenue, Suite #629, Seattle, WA
98104.
c) "Exercise Date" shall mean any date upon which the Holder shall
give the Company a Notice of Exercise, which shall be deemed the
date the Notice of Exercise was first deposited in the U.S.
Mails, if mailed, or the date received by the courier company if
delivered by recognized courier company, or the date received by
the Company if otherwise given or delivered.
(d) "Exercise Price" shall mean the price to be paid to the Company
for each share of Common Stock to be purchased upon exercise of
this Warrant in accordance with the terms hereof, which shall be
$0.25 per share.
(e) "Expiration Date" shall mean 5:00 PM (Pacific Standard time) on
January 20, 2001.
<PAGE> 2
(f) "SEC" shall mean the United States Securities and Exchange
Commission.
ARTICLE 2. EXERCISE
2.1 EXERCISE OF WARRANT
This Warrant shall entitle Holder to purchase up to 1,000,000 shares of
Common Stock (the "Shares") at the Exercise Price. This Warrant shall be
exercisable at any time and from time to time prior to the Expiration
Date (the "Exercise Period") upon execution. This Warrant and the right
to purchase Shares hereunder shall expire and become void at the
Expiration Date.
2.2 MANNER OF EXERCISE
(a) Holder may exercise this Warrant at any time and from time to
time during the Exercise Period, in whole or in part (but not in
denominations of fewer than 5,000 Shares, except upon an
exercise of this Warrant with respect to the remaining balance
of Shares purchasable hereunder at the time of exercise), by
delivering to the Company at its Corporate Office (i) a duly
executed Notice of Exercise in substantially the form attached
as Appendix I hereto and (ii) a bank cashier's or certified
check for the aggregate Exercise Price of the Shares being
purchased.
(b) From time to time upon exercise of this Warrant, in whole or
part, in accordance with its terms, the Company will cause its
transfer agent to countersign and deliver stock certificates to
the Holder representing the number of Shares being purchased
pursuant to such exercise, subject to adjustment as described
herein.
(c) Promptly following any exercise of this Warrant, if the Warrant
has not been fully exercised and has not expired, the Company
will deliver to the Holder a new Warrant for the balance of the
Shares covered hereby.
2.3 TERMINATION
All rights of the Holder in this Warrant, to the extent they have not
been exercised, shall terminate on the Expiration Date.
2.4 NO RIGHT PRIOR TO EXERCISE
Prior to its exercise pursuant to Section 2.3 above, this Warrant shall
not entitle the Holder to any voting or other rights as holder of
Shares.
2.5 ADJUSTMENTS
In case of any reclassification, capital reorganization, stock dividend,
or other change of outstanding shares of Common Stock, or in case of any
consolidation or merger of the Company with or into another corporation
(other than a consolidation or merger in which the Company is the
continuing corporation and which does not result in any
reclassification, capital reorganization, stock dividend, or other
change of outstanding shares of Common Stock), or in case of any sale or
conveyance to another corporation of the property of the Company as, or
substantially as, an entirety (other than a
<PAGE> 3
sale/leaseback, mortgage or other financing transaction), the Company
shall cause effective provision to be made so that the Holder shall have
the right thereafter, by exercising this Warrant, to purchase the kind
and number of shares of stock or other securities or property (including
cash) receivable upon such reclassification, capital reorganization,
stock dividend, or other change, consolidation, merger, sale or
conveyance as the Holder would have been entitled to receive had the
Holder exercised this Warrant in full immediately before such
reclassification, capital reorganization, stock dividend, or other
change, consolidation, merger, sale or conveyance. Any such provision
shall include provision for adjustments that shall be as nearly
equivalent as may be practicable to the adjustments provided for in this
Section 2.6. The foregoing provisions shall similarly apply to
successive reclassifications, capital reorganizations, stock dividends,
and other changes of outstanding shares of Common Stock and to
successive consolidations, mergers, sales or conveyances.
2.6 FRACTIONAL SHARES
No fractional Shares shall be issuable upon exercise or conversion of
this Warrant and the number of Shares to be issued shall be rounded down
to the nearest whole Share. If a fractional Share interest arises upon
any exercise or conversion of the Warrant, the Company shall eliminate
such fractional Share interest by paying Holder the amount computed by
multiplying the fractional interest by the closing bid price of a full
Share on the date of the Notice of Exercise.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY
3.1 REPRESENTATIONS AND WARRANTIES
The Company hereby represents and warrants to the Holder as follows:
(a) All Shares which may be issued upon the exercise of the purchase
right represented by this Warrant shall, upon issuance, by duly
authorized, validly issued, fully-paid and nonassessable, and
free of any liens and encumbrances except for restrictions on
transfer provided for herein or under applicable federal and
state securities laws, and not subject to any pre-emptive
rights.
(b) The Company is a corporation duly organized and validly existing
under the laws of the State of Florida, and has the full power
and authority to issue this Warrant and to comply with the terms
hereof. The execution, delivery and performance by the Company
of its obligations under this Warrant, including, without
limitation, the issuance of the Shares upon any exercise of the
Warrant, have been duly authorized by all necessary corporate
action. This Warrant has been duly executed and delivered by the
Company and is a valid and binding obligation of the Company,
enforceable in accordance with its terms, except as enforcement
may be limited by applicable bankruptcy, insolvency,
reorganization or similar laws affecting enforceability of
creditors' rights generally and except as the availability of
the remedy of specific enforcement, injunctive relief or other
<PAGE> 4
equitable relief is subject to the discretion of the court
before which any proceeding therefor may be brought.
(c) The Company is not subject to or bound by any provision of any
certificate or articles of incorporation or by-laws, mortgage,
deed of trust, lease, note, bond, indenture, other instrument or
agreement, license, permit, trust, custodianship, other
restriction or any applicable provision of any law, statute, any
court, governmental body, administrative agency or arbitrator
which could prevent or be violated by or under which there would
be a default (or right of termination) as a result of the
execution, delivery and performance by the Company of this
Warrant.
ARTICLE 4. MISCELLANEOUS
4.1 TRANSFER
This Warrant may not be transferred or assigned, in whole or in
part, at any time without the consent of the Company.
4.2 LOSS, THEFT, DESTRUCTION OR MUTILATION
If this Warrant shall become mutilated or defaced or be
destroyed, lost or stolen, the Company shall execute and deliver
a new Warrant in exchange for and upon surrender and
cancellation of such mutilated or defaced Warrant or, in lieu of
and in substitution for such Warrants so destroyed, lost or
stolen, upon the Holder filing with the Company evidence
satisfactory to it that such Warrant has been so mutilated,
defaced, destroyed, lost or stolen. However, the Company shall
be entitled, as a condition to the execution and delivery of
such new Warrant, to demand indemnity satisfactory to it and
payment of the expenses and charges incurred in connection with
the delivery of such new Warrant. Any Warrant so surrendered to
the Company shall be canceled.
4.3 NOTICES
All notices and other communications from the Company to the
Holder or vice versa shall be deemed delivered and effective
when given personally, by facsimile transmission and confirmed
in writing, or mailed by first-class registered or certified
mail, postage prepaid, at such address and/or facsimile number
as may have been furnished to the Company or the Holder, as the
case may be, in writing by the Company or the Holder from time
to time; provided, however, that the Notice of Exercise may not
be delivered by facsimile transmission.
4.4 WAIVER
This Warrant and any term hereof may be changed, waived, or
terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or
termination is sought.
<PAGE> 5
4.5 GOVERNING LAW
This Warrant shall be governed by and construed in accordance
with the laws of the State of Washington, without giving effect
to its principles regarding conflicts of law.
Dated: , 1999 UPGRADE INTERNATIONAL CORP.
---------
---------------------------------
By: Daniel Bland
Its: President
Attest:
--------------------------
<PAGE> 6
APPENDIX I
NOTICE OF EXERCISE
1. The undersigned hereby elects to purchase ____________ shares of the
Common Stock of Upgrade International Corporation pursuant to the terms
of the attached Warrant, and tenders herewith payment of the purchase
price of such shares in full.
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as specified below.
------------------------------------
(Name)
------------------------------------
------------------------------------
(Address)
3. The undersigned represents it is acquiring the shares solely for its own
account and not as a nominee for any other party and not with a view
toward the resale or distribution thereof except in compliance with
applicable securities laws.
------------------------------ ------------------------------
(Signature) (Date)
<PAGE> 1
EXHIBIT 4.5
- --------------------------------------------------------------------------------
WARRANT TO PURCHASE COMMON STOCK
OF
- --------------------------------------------------------------------------------
THIS WARRANT AND THE SHARES OF COMMON STOCK
ISSUABLE PURSUANT TO THIS WARRANT HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED (THE "ACT"), AND MAY NOT BE SOLD, PLEDGED OR
OTHERWISE TRANSFERRED UNLESS REGISTERED UNDER THE ACT OR
AN EXEMPTION FROM SUCH REGISTRATION IS AVAILABLE
FOR VALUE RECEIVED
_____________________________________, a _____________________ corporation (the
"Company"), grants the following rights to __________________________________,
having an address at ____________________________________ ("Holder").
ARTICLE 1. DEFINITIONS
As used herein, the following terms shall have the following meanings, unless
the context shall otherwise require:
(a) "Common Stock" shall mean the common stock, par value $______
per share, of the Company.
(b) "Corporate Office" shall mean the office of the Company (or its
successor) at which at any particular time its principal
business shall be administered, which office is located at the
date hereof at _________________________________
c) "Exercise Date" shall mean any date upon which the Holder shall
give the Company a Notice of Exercise, which shall be deemed the
date of the Notice of Exercise was first deposited in the US
Mails, if mailed, or the date received by the courier company if
delivered by recognized courier company, or the date received by
the Company if otherwise given or delivered.
<PAGE> 2
(d) "Exercise Price" shall mean the price to be paid to the Company
for each share of Common Stock to be purchased upon exercise of
this Warrant in accordance with the term hereof, which shall be
$_________ per share.
(e) "Expiration Date" shall mean 5:00 PM (Pacific Standard time) on
the second anniversary of the date hereof, if a business day, or
the next succeeding business day thereafter.
(f) "SEC" shall mean the United States Securities and Exchange
Commission.
ARTICLE 2. EXERCISE
2.1 EXERCISE OF WARRANT
This Warrant shall entitle Holder to purchase up to ______ shares of
Common Stock (the "Shares") at the Exercise Price. This Warrant shall be
exercisable at any time and from time to time prior to the Expiration
Date (the "Exercise Period"). This Warrant and the right to purchase
Shares hereunder shall expire and become void at the Expiration Date.
2.2 ACCELERATION OF EXERCISE PERIOD
The Company shall have the right, at any time after the Common Stock has
traded on a recognized public market for twenty-one consecutive days
with a daily closing bid price of $_____________ or more per share, to
accelerate the Exercise Period by sending to the Holder, at the Holder's
address written above, a Notice of Acceleration in substantially the
form attached as Appendix I hereto (the "Notice"). In the event the
Company does accelerate the Exercise Period, the Holder shall have ten
(10) days from the date the Holder receives the Notice within which to
exercise this Warrant in the manner provided for in Section 2.3, after
which time this Warrant and the right to purchase the Shares hereunder,
to the extent not previously exercised, shall expire and become void.
The Holder shall be deemed to have received the Notice five (5) days
after the date the Notice is deposited in the U.S. Mails.
2.3 MANNER OF EXERCISE
(a) Holder may exercise this Warrant at any time and from time to
time during the Exercise Period, in whole or in part (but not in
denominations of fewer than 5,000 Shares, except upon an
exercise of this Warrant with respect to the remaining balance
of Shares purchasable hereunder at the time of exercise), by
delivering to the Company at its Corporate Office (i) a duly
executed Notice of Exercise in substantially the form attached
as Appendix II hereto and (ii) a bank cashier's or certified
check for the aggregate Exercise Price of the Shares being
purchased.
(b) From time to time upon exercise of this Warrant, in whole or
part, in accordance with its terms, the Company will cause its
transfer agent to countersign and deliver stock certificates to
the Holder representing the number of Shares being purchased
pursuant to such exercise, subject to adjustment as described
herein.
<PAGE> 3
(c) Promptly following any exercise of this Warrant, if the Warrant
has not been fully exercised and has not expired, the Company
will deliver to the Holder a new Warrant for the balance of the
Shares covered hereby.
2.4 TERMINATION
All rights of the Holder in this Warrant, to the extent they have not
been exercised, shall terminate on the Expiration Date.
2.5 NO RIGHT PRIOR TO EXERCISE
Prior to its exercise pursuant to Section 2.3 above, this Warrant shall
not entitle the Holder to any voting or other rights as holder of
Shares.
2.6 ADJUSTMENTS
In case of any reclassification, capital reorganization, stock dividend,
or other change of outstanding shares of Common Stock, or in case of any
consolidation or merger of the Company with or into another corporation
(other than a consolidation or merger in which the Company is the
continuing corporation and which does not result in any
reclassification, capital reorganization, stock dividend, or other
change of outstanding shares of Common Stock), or in case of any sale or
conveyance to another corporation of the property of the Company as, or
substantially as, an entirety (other than a sale/leaseback, mortgage or
other financing transaction), the Company shall cause effective
provision to be made so that the Holder shall have the right thereafter,
by exercising this Warrant, to purchase the kind and number of shares of
stock or other securities or property (including cash) receivable upon
such reclassification, capital reorganization, stock dividend, or other
change, consolidation, merger, sale or conveyance as the Holder would
have been entitled to receive had the Holder exercised this Warrant in
full immediately before such reclassification, capital reorganization,
stock dividend, or other change, consolidation, merger, sale or
conveyance. Any such provision shall include provision for adjustments
that shall be as nearly equivalent as may be practicable to the
adjustments provided for in this Section 2.6. The foregoing provisions
shall similarly apply to successive reclassifications, capital
reorganizations, stock dividends, and other changes of outstanding
shares of Common Stock and to successive consolidations, mergers, sales
or conveyances.
2.7 FRACTIONAL SHARES
No fractional Shares shall be issuable upon exercise or conversion of
this Warrant and the number of Shares to be issued shall be rounded down
to the nearest whole Share. If a fractional Share interest arises upon
any exercise or conversion of the Warrant, the Company shall eliminate
such fractional Share interest by paying Holder the amount computed by
multiplying the fractional interest by the closing bid price of a full
Share on the date of the Notice of Exercise.
ARTICLE 3. REPRESENTATIONS AND COVENANTS OF THE COMPANY
3.1 REPRESENTATIONS AND WARRANTIES
<PAGE> 4
The Company hereby represents and warrants to the Holder as follows:
(a) All Shares which may be issued upon the exercise of the purchase
right represented by this Warrant shall, upon issuance, by duly
authorized, validly issued, fully-paid and nonassessable, and
free of any liens and encumbrances except for restrictions on
transfer provided for herein or under applicable federal and
state securities laws, and not subject to any pre-emptive
rights.
(b) The Company is a corporation duly organized and validly existing
under the laws of the State of ____________________, and has the
full power and authority to issue this Warrant and to comply
with the terms hereof. The execution, delivery and performance
by the Company of its obligations under this Warrant, including,
without limitation, the issuance of the Shares upon any exercise
of the Warrant, have been duly authorized by all necessary
corporate action. This Warrant has been duly executed and
delivered by the Company and is a valid and binding obligation
of the Company, enforceable in accordance with its terms, except
as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization or similar laws affecting
enforceability of creditors' rights generally and except as the
availability of the remedy of specific enforcement, injunctive
relief or other equitable relief is subject to the discretion of
the court before which any proceeding therefor may be brought.
(c) The Company is not subject to or bound by any provision of any
certificate or articles of incorporation or by-laws, mortgage,
deed of trust, lease, note, bond, indenture, other instrument or
agreement, license, permit, trust, custodianship, other
restriction or any applicable provision of any law, statute, any
court, governmental body, administrative agency or arbitrator
which could prevent or be violated by or under which there would
be a default (or right of termination) as a result of the
execution, delivery and performance by the Company of this
Warrant.
ARTICLE 4. MISCELLANEOUS
4.1 TRANSFER
This Warrant may not be transferred or assigned, in whole or in
part, at any time, except in compliance with applicable federal
and state securities laws by the transferor and the transferee
(including, without limitation, the delivery of an investment
representation letter and a legal opinion reasonably
satisfactory to the Company), provided that this Warrant may not
be transferred or assigned such that either the Holder or any
transferee will, following such transfer or assignment, hold a
Warrant for the right to purchase fewer than 5,000 Shares.
4.2 TRANSFER PROCEDURE
Subject to the provisions of Section 4.1, Holder may transfer or
assign this Warrant by giving the Company notice setting forth
the name, address and taxpayer identification number of the
transferee or assignee, if applicable (the
<PAGE> 5
"transferee"), and surrendering this Warrant to the Company for
reissuance to the transferee (and the Holder, in the event of a
transfer or assignment of this Warrant in part). (Each of the
persons or entities in whose name any such new Warrant shall be
issued are herein referred to as a Holder)
4.3 LOSS, THEFT, DESTRUCTION OR MUTILATION
If this Warrant shall become mutilated or defaced or be
destroyed, lost or stolen, the Company shall execute and deliver
a new Warrant in exchange for and upon surrender and
cancellation of such mutilated or defaced Warrant or, in lieu of
and in substitution for such Warrants so destroyed, lost or
stolen, upon the Holder filing with the Company evidence
satisfactory to it that such Warrant has been so mutilated,
defaced, destroyed, lost or stolen. However, the Company shall
be entitled, as a condition to the execution and delivery of
such new Warrant, to demand indemnity satisfactory to it and
payment of the expenses and charges incurred in connection with
the delivery of such new Warrant. Any Warrant so surrendered to
the Company shall be canceled.
4.4 NOTICES
All notices and other communications from the Company to the
Holder or vice versa shall be deemed delivered and effective
when given personally, by facsimile transmission and confirmed
in writing, or mailed by first-class registered or certified
mail, postage prepaid, at such address and/or facsimile number
as may have been furnished to the Company or the Holder, as the
case may be, in writing by the Company or the Holder from time
to time; provided, however, that the Notice of Exercise may not
be delivered by facsimile transmission.
4.5 WAIVER
This Warrant and any term hereof may be changed, waived, or
terminated only by an instrument in writing signed by the party
against which enforcement of such change, waiver, discharge or
termination is sought.
4.6 GOVERNING LAW
This Warrant shall be governed by and construed in accordance
with the laws of the State of Washington, without giving effect
to its principles regarding conflicts of law.
Dated: , 1998
----------------
Attest: COMPANY NAME
--------------------------
By:
---------------------------
Name:
-------------------------
Title:
------------------------
<PAGE> 6
APPENDIX I
NOTICE OF ACCELERATION
Dated:
--------------------
__________________________________ (the "Company") does hereby notify you of its
election to exercise its right, pursuant to Section 2.2 of the Warrants issued
to you by the Company on _________________, 1998 (the "Warrant"), to accelerate
the exercise period of such Warrants. Please be advised that you have ten (10)
days from the date you receive this Notice of Acceleration (the "Ten-Day
Period") to exercise your Warrants in the manner provided for in the Warrants.
You will be deemed to have received this Notice of Acceleration five (5) days
after the date when this Notice of Acceleration was first deposited in the U.S.
Mails.
YOU WILL AUTOMATICALLY FORFEIT YOUR RIGHT TO PURCHASE THE SHARES OF COMMON STOCK
ISSUABLE UPON EXERCISE OF SUCH WARRANTS, TO THE EXTENT NOT PREVIOUSLY PURCHASED,
UNLESS THE WARRANTS ARE EXERCISED BEFORE THE END OF THE TEN-DAY PERIOD.
COMPANY NAME
By:
-------------------------
Name:
-----------------------
Title:
----------------------
<PAGE> 7
APPENDIX II
NOTICE OF EXERCISE
1. The undersigned hereby elects to purchase ________ shares of the Common
Stock of _____________________________ pursuant to the terms of the
attached Warrant, and tenders herewith payment of the purchase price of
such shares in full.
2. Please issue a certificate or certificates representing said shares in
the name of the undersigned or in such other name as specified below.
- ----------------------------
(Name)
- ----------------------------
- ----------------------------
(Address)
3. The undersigned represents it is acquiring the shares solely for its own
account and not as a nominee for any other party and not with a view
toward the resale or distribution thereof except in compliance with
applicable securities laws.
- ---------------------------- ----------------------------
(Signature) (Date)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C> <C> <C>
<PERIOD-TYPE> YEAR YEAR 3-MOS 3-MOS
<FISCAL-YEAR-END> SEP-30-1999 SEP-30-1998 DEC-31-1999 DEC-31-1998
<PERIOD-START> OCT-01-1998 OCT-01-1997 OCT-01-1999 OCT-01-1998
<PERIOD-END> SEP-30-1999 SEP-30-1998 DEC-31-1999 DEC-31-1998
<CASH> 4,781,330 3,697 3,544,503 0
<SECURITIES> 0 0 0 0
<RECEIVABLES> 0 0 0 0
<ALLOWANCES> 0 0 0 0
<INVENTORY> 0 0 0 0
<CURRENT-ASSETS> 5,155,384 5,433 3,628,422 0
<PP&E> 1,048,082 11,633 1,440,657 0
<DEPRECIATION> (44,701) (705) (66,037) 0
<TOTAL-ASSETS> 6,547,560 217,611 5,375,517 0
<CURRENT-LIABILITIES> 2,551,219 347,347 1,969,099 0
<BONDS> 0 0 0 0
0 0 0 0
0 0 0 0
<COMMON> 14,440,050 1,083,794 17,056,973 0
<OTHER-SE> (12,236,578) (1,213,530) (15,167,135) 0
<TOTAL-LIABILITY-AND-EQUITY> 6,547,560 217,611 5,375,517 0
<SALES> 0 0 0 0
<TOTAL-REVENUES> 0 0 0 0
<CGS> 0 0 0 0
<TOTAL-COSTS> 9,843,739 1,037,498 3,378,235 413,255
<OTHER-EXPENSES> 768,601 176,032 (904,429) 146,526
<LOSS-PROVISION> 0 0 0 0
<INTEREST-EXPENSE> 10,708 0 456,751 0
<INCOME-PRETAX> 0 0 0 0
<INCOME-TAX> 0 0 0 0
<INCOME-CONTINUING> 0 0 0 0
<DISCONTINUED> 0 0 0 0
<EXTRAORDINARY> 0 0 0 0
<CHANGES> 0 0 0 0
<NET-INCOME> (10,623,048) (1,213,530) (2,930,557) (559,781)
<EPS-BASIC> (0.79) (0.15) (0.16) (0.04)
<EPS-DILUTED> (0.79) (0.15) (0.16) (0.04)
</TABLE>
<PAGE> 1
EXHIBIT 99
ARTICLE 5
<TABLE>
<S> <C> <C> <C> <C>
PERIOD-TYPE YEAR YEAR 3-MOS 3-MOS
FISCAL-YEAR-END SEP-30-1999 SEP-30-1998 DEC-31-1999 DEC-31-1998
PERIOD-START OCT-01-1998 OCT-01-1997 OCT-01-1999 OCT-01-1998
PERIOD-END SEP-30-1999 SEP-30-1998 DEC-31-1999 DEC-31-1998
CASH 2,639,195 17,278 1,130,249 0
SECURITIES 0 0 0 0
RECEIVABLES 0 0 0 0
ALLOWANCES 0 0 0 0
INVENTORY 0 0 0 0
CURRENT-ASSETS 2,818,184 23,616 1,130,969 0
PP&E 898,669 22,730 1,140,257 0
DEPRECIATION (13,463) (2,677) (26,807) 0
TOTAL-ASSETS 4,083,468 260,380 2,608,178 0
CURRENT-LIABILITIES 682,077 604,532 1,021,002 0
BONDS 0 0 0 0
PREFERRED-MANDATORY 0 0 0 0
PREFERRED 0 0 0 0
COMMON 9,414,002 1,829,577 9,414,002 0
OTHER-SE (6,012,611) (2,173,729) (7,826,826) 0
TOTAL-LIABILITY-AND-EQUITY 4,083,468 260,380 2,608,178 0
SALES 0 0 0 0
TOTAL-REVENUES 0 0 0 0
CGS 0 0 0 0
TOTAL-COSTS 3,768,176 1,876,692 1,839,659 316,482
OTHER-EXPENSES 0 0 0 0
LOSS-PROVISION 0 0 0 0
INTEREST-EXPENSE 0 0 0 0
INCOME-PRETAX 0 0 0 0
INCOME-TAX 0 0 0 0
INCOME-CONTINUING 0 0 0 0
DISCONTINUED 0 0 0 0
EXTRAORDINARY 0 0 0 0
CHANGES 0 0 0 0
NET-INCOME (3,738,882) (1,873,729) (1,814,215) (315,169)
EPS-PRIMARY (0.56) (0.42) (0.16) (0.05)
EPS-DILUTED (0.56) (0.42) (0.16) (0.05)
</TABLE>
