SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[Mark One]
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 1998
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________________ to _____________________.
Commission file no.: 0-22848
U.S. WIRELESS DATA, INC.
------------------------
(Name of small business issuer in its charter)
Colorado 84 -1178691
------------------------------ -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
2200 Powell Street, Suite 800, Emeryville, California 94608
-----------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (510) 596-2025
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered under Section 12(g) of the Exchange Act
No Par Value Class A Common Stock
---------------------------------
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days.
Yes _X_ No ___
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and nodisclosure will be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ X ]
The issuer's revenues for the fiscal year ended June 30, 1998 were $909,000.
The aggregate market value of the issuer's voting stock held as of September 30,
1998 by non-affiliates of the Registrant was approximately $29,784,000 based on
an average price of $3.84 as of September 30, 1998.
As of September 30, 1998, the issuer had 13,476,318 shares of its no par value
common stock outstanding.
Transitional Small Business Disclosure Format (check one):
Yes ___ No _X_
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
U.S. Wireless Data, Inc., a Colorado corporation (the "Company" or "USWD")
is in the business of providing products and services to enable the use of
wireless technology for electronic payment and other transactions. The Company's
business is centered on a vision that consumers will have anytime, anywhere
access to all of their financial resources.
While the vision statement is simple, it encapsulates the Company's belief
that consumers want and will ultimately have the ability to access and exchange
value regardless of where they are or which financial resources they wish to
use. Confidence in this belief is supported by historical trends over the last
twenty years as electronic payments from credit, debit, stored value, Electronic
Benefit Transfer (EBT), equity, and investment accounts continue to replace cash
and checks. Correspondingly, electronic payments are becoming more pervasive,
more global, available through a broader range of devices, and accepted in more
market segments. Indeed, cash and checks are still the overwhelming choice for
consumer payments. However, because no fundamental obstacle exists to prevent
replacing cash and checks, it is reasonable to expect that growth in electronic
payments within the United States will likely continue to be in the 12% to 17%
range, while growth outside the U.S. will be even greater.
Communications systems have played a significant part in the movement to
electronic payments. With faster, more reliable, and less expensive
communications facilities becoming available year after year, more and more
merchants and their customers have opted for electronic value exchange. Now,
with wireless data transmission capabilities following and leveraging on the
success of cellular voice systems, electronic payments become an even more
justified reality for many market segments that heretofore have been
under-served by land-based communications facilities.
The Company's mission is to become the recognized leader in capture and
delivery of electronic payment, informational, and other transactions, from the
point of creation to the point of processing, using wireless communications
technologies. As the mission statement implies, the Company defines its primary
role as a service provider, delivering payment transactions from merchants to
merchant processors (i.e. acquirers), using wireless technology.
The strategy of the Company is to enable widespread use of wireless
transaction delivery in the payment sector by surrounding existing
communications carrier capabilities with products and services as required to
transmit electronic payments. Initially, this strategy required the Company to:
(i) build terminal and modem equipment to read credit and debit cards and
transmit to the carrier facilities; (ii) establish contracts with the carriers
for sending transactions; (iii) develop interface software required to translate
wireless transactions into a form recognizable by processors' existing systems;
and, (iv) create an awareness within the payment industry that wireless
transmission is superior to traditional methods for many, if not most,
merchants. The Company's primary customers are acquirers already in the
marketplace and looking to improve their merchant services.
History of the Company
- ----------------------
U.S. Wireless Data, Inc., a Colorado corporation (the "Company" or "USWD"),
was organized on July 30, 1991 for the purpose of designing, manufacturing and
marketing a line of wireless and portable credit card and check authorization
terminals. It went public in December 1993, raising a total of approximately
$12,200,000 of net proceeds through the sale of 1,650,000 shares of Common
Stock.
The Company's focus until mid 1997 had been as a "box" maker and seller of
its cellular-based credit card terminal products. The Company designed,
manufactured and marketed its first product, the POS-50(R), through acquiring
banks, POS hardware distributors, independent sales organizations, and by the
company directly.
2
<PAGE>
In early 1997, USWD focused its product development efforts on incorporating
Cellular Digital Packet Data (CDPD) technology into its product lines. CDPD is a
high-speed digital packet data; internet protocol (IP) based technology that
operates in parallel with current cellular voice networks. It is designed for
high speed encrypted data transmission over dedicated channels and will not
interfere with or degrade cellular voice traffic. Because of the high-speed
nature of CDPD technology, and the ability to bypass the public switched
telephone network, CDPD-based terminals have significant performance and
communication cost advantages when compared with the traditional dial-up
terminals currently being sold in the U.S. market today. The Company has
developed two CDPD-based products (POS-500 & TRANZ Enabler) that reduce the
current authorization time for a credit or debit card transaction from
approximately 15 seconds to 3 to 5 seconds.
In early 1997, management made the fundamental shift to transition the
Company into a position where it would earn recurring revenue from the
CDPD-based wireless terminal products and processing services it marketed to
retail merchants. To facilitate this change in strategy, the Company has entered
into various consulting agreements and has been required to generate funds
through sales of securities. Detailed descriptions of these agreements and the
securities sold by the Company are contained in Item 6 of this Report entitled
"Management's Discussion and Analysis of Financial Condition and Results of
Operations."
In order to market credit card acceptance and electronic processing
services, in January 1997, the Company executed a Member Service Provider
("MSP") agreement with NOVA Information Systems ("NOVA"), the nation's 7th
largest credit card transaction processor. In March 1998, the Company also
entered into a "Merchant Marketing and Services Agreement" with National Bank of
Commerce ("NBC"). As a registered MSP with NOVA and NBC, the Company is
positioned to provide transaction processing and bankcard acceptance services to
merchants.
In order to create awareness that wireless processing is competitive with
land-based alternatives, the Company focused on selling its products and
transaction processing services directly to merchants. In August 1997, the
Company began marketing its products and services through a series of joint
marketing agreements with major CDPD service providers. This effort included the
creation of a regionalized USWD sales organization that would train and support
the data sales representatives of each respective cellular carrier organization
to actively market the Company's TRANZ Enabler product and transaction
processing services. GTE Wireless was the first cellular organization mobilized
to sell the Company's products and services followed by Bell Atlantic Mobile and
Ameritech.
The combined joint marketing efforts with cellular service providers
allowed the Company to establish its presence as a leading provider of wireless
transaction processing equipment and services; however, unit placements did not
reach anticipated levels.
In July of 1998, Roger Peirce, previous Chief Operating Officer for Visa
and most recently Group President of First Data Merchant Services joined the
USWD Board of Directors. While acclimating to USWD's business plan and strategy,
Mr. Peirce was asked by the Board of Directors to take a more active role in the
Company. On August 21, 1998 Mr. Peirce became the Chief Executive Officer of the
Company.
As a senior executive with extensive experience in the industry, Mr. Peirce
identified several areas in the Company's distribution and operational strategy
that required immediate redirection. In late August 1998, several changes in the
Company's strategy were implemented. The fundamental change in the strategy
involves positioning the Company as an enabler of wireless products and services
to the marketplace and not as a competitor to the current incumbents. This
repositioning of the Company in the marketplace encompasses the discontinuation
of soliciting and owning merchant contracts for providing bankcard-processing
services, an approach that effectively positioned the Company as a direct
competitor to the major merchant acquirers. The Company's new strategy involves
an end-to-end systems approach to enabling the marketplace. The Company is
enabling the marketplace with a new service offering - Wireless Express Payment
ServiceSM (WEPS). WEPS includes an expandable set of wireless terminal devices
that incorporate the Company's proprietary CDPD modem, a web-based IP address
provisioning and terminal activation process that includes real time remote
diagnostic capabilities, the CDPD network service, and server technology that
delivers wireless transactions to the current front end card processors. The
Company is targeting the top 30 merchant acquirers and card processors for this
service.
3
<PAGE>
The Company recently announced a non-binding Letter Of Intent to form a
non-exclusive strategic partnership with Cardservice International Inc. (CSI) to
jointly exploit payment system opportunities using wireless technologies. Under
the terms of the agreement, CSI will produce its LinkPoint(TM) processing
terminals using the Company's proprietary Wireless Express Payment ServiceSM.
Given CSI's position in the industry and its shared ownership with First Data
Merchant Services, the largest payment processor in the world, this agreement is
viewed by management as validation of the Company's strategy. Completion of
these transactions is subject to various conditions, including the entry of
definitive agreements. See "Management's Discussions and Analysis of Financial
Condition and Results of Operations - Current Financing Initiatives."
Recent Significant Securities Issuances
During the past two years, the Company has issued a number of securities
related to financing and consulting activities. For a description of these
securities, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financial Condition, Capital Resources and Liquidity -
Recent Significant Securities Issuances."
Industry Overview
- -----------------
Credit and Debit Card Industry
Americans reached for their plastic credit and debit cards over 12 billion
times to purchase over $2 trillion in goods and services and for delivery of
cash in 1997, representing a 20.6% increase over 1996. Recent studies have
indicated that consumers spend 30% more per transaction when using credit cards
than when using cash or checks. The proliferation in the uses and types of
credit, debit, stored-value and electronic benefits transfer (EBT), rapid
technological advances in transaction processing and financial incentives
offered by credit card associations and issuers have contributed greatly to
wider merchant acceptance and increased consumer use of transaction cards.
Unfortunately, fraud is also on the rise and as a result, merchant
acquirers, transaction processors and card issuers are trying to minimize their
losses by offering incentives and requiring merchants to utilize electronic
draft capture ("EDC") terminals to conduct on-line credit and debit card
transactions. An EDC terminal magnetically reads the encoded account information
from the magnetic strip on the back of a credit or debit card and sends it to a
transaction processor for electronic on-line authorization. The transaction
processor authorizes the card with the issuer, electronically captures the
transaction, generates an approval code and returns the data to the terminal,
which prints a customer receipt. Presently, the majority of EDC terminals
communicate with the transaction processor via a telephone or leased line. This
dial-up type transaction process takes approximately 10 - 30 seconds to
complete. At the end of the business day, the EDC terminal dials the transaction
processor to initiate the settlement, collection and electronic deposit of funds
to the merchant's local bank account. Losses from fraudulent cardholder use
where no authorization was obtained at the retail point of sale are
electronically "charged back" to the merchant.
Payment acceptance guidelines have been introduced by Visa that require a
merchant to comply with specific procedures in order to receive the lowest
transaction processing fees or discount rates. These requirements include: (1)
the presence of the bank card at the point of sale, (2) transmission of all data
encoded on the card's magnetic strip, and (3) settlement within two days of the
authorization. If any one of these requirements is not met, the merchant is
penalized with a higher discount rate and a surcharge is applied to each
transaction not complying with the new requirements. In addition, several new
card types have been introduced to the marketplace that require merchants to
capture additional information on each transaction such as sales tax or line
item detail to receive the lowest discount rates.
4
<PAGE>
Transaction Processing Industry
The transaction processing industry is characterized by a small number of
large transaction processors that primarily focus on servicing large merchants
and by many smaller transaction processors that provide a limited range of
services to small-to-medium sized merchants. Large merchants (i.e. those with
multiple locations and high volumes of card transactions) typically demand and
receive the full range of transaction processing services as well as customized
information services at low per-transaction costs. By contrast, small-to-medium
sized merchants historically have not been offered the same level of services as
large merchants and have incurred relatively higher per-transaction costs. The
growth in card transactions and the transition from paper-based to electronic
transaction processing have caused small-to-medium sized merchants increasingly
to demand sophisticated transaction processing and services similar to those
provided to large merchants.
Transaction processing services are marketed and sold to the
small-to-medium sized merchant market segment primarily by community and
regional banks and Independent Sales Organizations (ISO's) that outsource all or
a portion of the transaction processing services they offer. The costs to
convert from paper-based to electronic processing, merchant requirements for
improved customer service, and demands for additional customer applications have
made it difficult for community and regional banks and ISO's to remain
competitive. As a result, transaction processing continues to undergo rapid
consolidation in recent years. The industry remains fragmented with respect to
the number of entities providing merchant services and the economic factors are
expected to drive additional consolidation of merchant acquirers and transaction
processors.
Check Payment Industry
Checks are still the American consumer's second favorite way to pay for
purchases, behind cash. Americans wrote 66 billion checks in 1997 totaling over
$12 trillion dollars representing a 5.2% increase in dollar volume and a 3.4%
increase in transactions. Checks represent 23-24% of all retail sales and about
75% of all non-cash transactions.
Unfortunately, as the number of checks written continues to increase, the
number of bad checks is increasing. The cost of insufficient funds checks often
leads merchants either to refuse to accept checks or to utilize check
verification and guarantee services. Check verification or guarantee services
require the merchant to magnetically read the MICR line of a check or hand key
certain information into an EDC terminal which communicates with a database
maintained and operated by the verification service. If the check is approved,
an approval code is generated and sent back to the terminal to complete the
check verification or guarantee transaction.
The Company's Current Products and Services
- -------------------------------------------
The Company markets wireless point-of-sale ("POS") equipment and services
to merchant acquirers and card processors. The Company's products and services
introduce a new standard in performance and allow card acceptance in new and
under-served markets where traditional dial-up solutions either are too slow or
are not practical such as taxicabs, and other semi-mobile applications.
From a merchant's perspective, the Company's products and services provide
high speed transaction processing of credit, debit and check transactions
without the need and recurring cost of a phone line. From a merchant acquirer
and card processor perspective, the Company's products and services provide high
speed end-to-end wireless solutions that allow the respective bankcard service
providers to offer their customers a competitive and technologically superior
alternative to dial up solutions. The following section describes the respective
product and service offerings:
Wireless Express Payment ServiceSM
Wireless Express Payment ServiceSM is the Company's newest product and
service offering. It is an end-to-end product and service offering that allows
its users a simple and easy way to offer wireless transaction-processing
services. It begins with a rich set of wireless terminal devices that
incorporate the Company's proprietary USWD500 modem, and includes a web-based IP
address provisioning and terminal activation process with real-time remote
diagnostic capability that allows merchant acquirers and card processors to
easily resolve problems associated with wireless transaction processing
services. It also includes the CDPD network service and server technology that
simplifies the interface between the wireless networks and the various front-end
of
5
<PAGE>
card processors and card associations. The final (and optional) component of
WEPS is complete terminal deployment and management services. The net result and
value of this service is that it provides the acquirers and card processors a
simple and easy to use method of providing end-to-end wireless processing
solutions to their merchants without the need for extensive systems development
or customer service training.
USWD500 CDPD Modem
The Company and Z-Com are jointly developing a proprietary CDPD modem, the
USWD500, which the Company is now incorporating into its CDPD-based products.
This modem is a fundamental component of the Wireless Express Payment Service,
and is currently being integrated by several of the credit card terminal
manufacturers. The USWD500 CDPD modem incorporates several proprietary features
that improve the performance and reliability of credit, debit and ATM
transactions. It also provides real time remote diagnostic capability when used
with the Wireless Express Payment Service offering described above. This feature
is extremely valuable to merchant help desk and customer service organizations
that desire to provide fast and efficient problem resolution.
CDPD-Based Products
POS-500 - During the third quarter of fiscal 1996, the Company introduced
two new products utilizing CDPD technology. The Company's first CDPD product,
known as the POS-500, is a fully integrated EDC terminal, receipt printer and
CDPD wireless modem that allows a merchant to complete a credit or debit card
transaction in less than 5 seconds. The POS-500 is designed to target the
traditional small-to-medium sized retailer. Because response times are 3-4 times
faster than dial-up terminals, and per-transaction communication costs are
competitive with current dial-up costs, the POS-500 can compete favorably and
eventually replace dial-up credit card terminal technology in areas where CDPD
service is available.
TRANZ Enabler - The TRANZ Enabler was also released in test mode during the
third fiscal quarter of 1996, and was designed to enable the existing installed
base of Verifone TRANZ(R) 330, 380, or 460 dial-up terminals to operate over the
CDPD network resulting in high speed, low cost transaction processing for the
retail marketplace. The TRANZ Enabler connects to the printer port of the
TRANZ(R) 330, 380, or 460 terminal and utilizes power from the credit card
terminal power supply. The TRANZ Enabler features a printer port for connection
to a receipt printer and can complete a credit or debit card transaction in less
than 5 seconds.
The POS-50(R)
The Company's first product, known as the POS-50(R), was the world's first
integrated wireless credit card and check authorization terminal using cellular
communication technology. The POS-50(R) is certified to operate on the major
credit card transaction processing networks and is presently being marketed in
the U.S. by a variety of Independent Sales Organizations ("ISO's"), cellular
service providers, and directly by the Company. The POS-50(R) allows a merchant
to electronically capture a credit card, debit card or check transaction at the
point of sale virtually anywhere cellular voice service exists and complete the
authorization process in approximately 16-18 seconds. Because of its portable
and wireless nature, the POS-50(R) is well suited for the small to medium sized
mobile retailer or service company. Examples of current POS-50(R) customers
include craft show vendors, sporting event concessionaires, towing services,
cart and kiosk vendors and essentially any business on the go that wants to
safely accept credit cards, debit cards or checks for their products and
services. With over 7,000 POS-50(R) terminals in the marketplace, the Company is
recognized as the leader in providing wireless terminal transaction equipment
for the mobile marketplace.
6
<PAGE>
Product Benefits
- ----------------
The Company's CDPD products and transaction processing services benefit
merchants in the following ways:
Faster Transactions. A CDPD-enabled credit card authorization is 3 to 4
times faster than a transaction completed via a telephone line. A CDPD-enabled
credit card transaction bypasses the local telephone and interexchange carrier
networks resulting in faster transactions and fewer delays due to busy telephony
networks and inefficiencies. The TRANZ Enabler and POS-500 can complete a credit
card transaction in less than 5 seconds. Faster transactions afford the merchant
the ability to process more business in a given period of time while improving
customer convenience and satisfaction.
Competitive Transaction Fees. Because of the ability to bypass the
traditional telephony networks and the costs associated with them, the Company
can often offer its customers competitive transaction fees and discount rates.
Lower transaction fees and discount rates are a key component in the merchant's
decision making process when evaluating a transaction processing relationship.
Increased Sales. Consumers often make purchases when they have no cash on
hand if the merchant accepts credit cards or checks. Research indicates that
when customers have the option to use a credit card, they spend 30% more per
transaction. Merchants that accept alternative methods of payment such as
credit/debit cards or checks believe such alternative methods provide a
competitive advantage over merchants who do not. The Company's products and
services afford faster authorization response times resulting in the ability to
process more transactions and sales over a given period of time. The products
and services allow card acceptance in new and under-served markets such as fast
food restaurants, parking garages, transportation and markets that are time and
queue sensitive.
Controls Bad Debt. All of the Company's products allow a merchant to obtain
an on-line authorization and electronically capture each credit/debit card
transaction. Once the customer's card transaction has been electronically
authorized, an approval code is assigned and funds are electronically "captured"
(i.e., reserved to pay for the authorized transaction). Since each transaction
begins by swiping the card through the terminal's magnetic card reader, there is
a significant reduction in the risk of fraud loss due to lost, stolen,
overextended, or physically altered credit cards. Debit or ATM transactions
require that the customer keys in a personal identification number ("PIN") to
complete a transaction. Debit or ATM transactions cannot be reversed or charged
back to a merchant thereby further reducing bad debt. Losses from checks with
insufficient funds are collected or guaranteed by check service companies under
a separate fee agreement with the merchant.
Improves Cash Flow. Once funds have been authorized and electronically
captured and the settlement procedure initiated, they are transferred
electronically to the merchant's local bank account. When compared to paper
submission of credit card transactions, the Company's products expedite the
funding process by electronically depositing the day's credit card transactions
into the merchant's local bank account usually within 24 to 48 hours.
Overview of Cellular Technology
- -------------------------------
Circuit Switched Cellular, CDPD, and EDC Terminal Technology
The Company's products integrate circuit-switched cellular, CDPD, and
credit card terminal technology to access credit card, debit card and check
verification services. The POS-50(R) terminal can be used anywhere advanced
mobile phone service (AMPS) cellular service is available. Upon card swipe, and
once the sales amount is entered via the terminal keypad, the cellular
transceiver acquires a cellular channel and transmits the data over the air
waves to a cell site, which is connected to a mobile telephone switching office
(MTSO) and then connected to the public switched telephone network (PSTN). The
call is then routed over one of several inter-exchange carriers (IEC's) to the
transaction processor. Once an authorization is obtained, a corresponding
approval code is returned to the terminal, which prints a duplicate customer
receipt and electronically captures the entire transaction data. A check
authorization utilizes essentially the same technology and communication path,
but authorizes the check data with a database maintained by a check verification
or guarantee company.
The CDPD products, including the TRANZ Enabler and POS-500, utilize
dedicated CDPD channels to transmit high speed, encrypted credit card data from
the merchant location to the nearest CDPD cell site which routes the data to the
local mobile data intermediate system (MDIS) which then routes the transaction
to the
7
<PAGE>
transaction processor via a leased line or frame relay connection. Once the
transaction is authorized, the response is returned to the terminal in less than
300 milliseconds. The CDPD protocol is based on Internet protocol (IP) and each
terminal and authorization host has its own unique IP address. The CDPD
infrastructure includes a network of routers that direct the data to the
appropriate IP addresses. A CDPD enabled terminal is essentially on-line with
the transaction processor whenever it is powered up.
Cellular Communication Networks
Presently there are cellular communication networks providing coverage in
over 700 metropolitan statistical area ("MSA") and rural service area ("RSA")
markets in the U.S. It is estimated that the present cellular service footprint
covers 95% of the U.S. population. The POS-50(R) can be used in any area where
cellular voice-grade coverage is present.
With approximately 30,000 cellular phones being sold each day, cellular
voice technology is a commodity service. To support this type of explosive
growth, the cellular carriers are spending a substantial part of their revenues
to expand capacity by upgrading their infrastructure and capacity with new
digital technology. The cellular carriers are now focusing on incremental
revenue streams, including wireless data transmission. Wireless data can be
transmitted over the same cellular infrastructure as voice. It has been
estimated that, by the year 2000, as much as 30% of cellular revenues will be
derived from data transmission.
Wireless Data Networks
There are several land-based wireless data networks currently providing
regional and national data services in the U.S. market. Listed below are several
networks the Company perceives as current and potential future carriers of POS
data traffic. USWD continuously monitors and evaluates this technology to
determine feasibility, and applicability for POS data transmission.
Cellular Digital Packet Data (CDPD). The Company believes that CDPD is the
superior wireless data technology for transaction processing. Presently over 260
metropolitan statistical areas have CDPD service provided by AT&T Wireless
Services, Bell Atlantic Mobile, GTE Wireless, Ameritech Cellular and 360
Communications, and an aggressive deployment schedule is expected to continue
throughout the U.S., Canada and Latin America. Despite the widespread presence
of CDPD networks, there are presently two major markets that do not have
operating CDPD networks - Los Angeles, California and Atlanta, Georgia. Recent
developments in the Los Angeles market seem to suggest that LA will soon be
deploying CDPD, which is a major retail market that could then be served by the
Company's products and services.
CDPD appears to be fast becoming the standard protocol for transmitting
data over a cellular network and presently covers approximately 70% of the
retail marketplace. Because of the encrypted packet data and IP (Internet
protocol) nature of CDPD technology, CDPD-enabled POS terminals can out-perform
traditional dial-up terminal technology operating over public switched telephone
networks. A CDPD network provides high-speed (19.2 bps) wireless access between
a CDPD-enabled POS terminal and a transaction processor, effectively bypassing
local phone line service and the monthly costs associated with it. The result of
utilizing CDPD technology is sub-5 second authorization response times at lower
than dial-up rates. In addition to fast, secure and low transaction costs, the
merchant can also eliminate the monthly recurring cost of a dedicated phone
line, which averages between $30-40 per month.
Digital Cellular. Present cellular networks consist of digital and analog
technology. There are three digital voice technologies competing for market
acceptance and dominance: Code Division Multiplexing Access (CDMA), Time
Division Multiplexing Access (TDMA), and the European standard known as GSM. All
three digital technologies have the ability to transmit data over their
respective networks. The Company is evaluating the respective data protocols and
pricing structure for each of the digital technologies and intends to develop
products and services based on competitive rate structures and the availability
of new digital data modules.
Personal Communication Services (PCS). With the allocation of additional RF
spectrum and the FCC's successful auctioning of these air wave licenses, a
variety of competing Personal Communication Services networks are beginning to
offer local and regional wireless voice and data services. As these networks are
developed and deployed, PCS could become a viable POS wireless access
technology. The future viability of PCS as a wireless POS access technology will
be contingent on a "standardized" protocol and a competitive data pricing
structure. Presently, the major PCS service providers are deploying GSM, CDMA
and TDMA infrastructure and products. As an alternative to traditional cellular
service, the PCS service providers have the
8
<PAGE>
benefit of building infrastructure with state-of-the-art digital voice and data
technologies. As the coverage area increases and favorable data rate plans are
created, the Company views PCS as a viable network for its wireless product and
service offerings.
BellSouth Mobile Data. BellSouth Mobile Data ("BMD") is a wireless packet
data network currently available in over 7,500 U.S. cities and towns, covering
90% of the urban business population. The network is very similar to, but
separate from the cellular voice network. BMD is designed as a data-only
infrastructure. BMD is also connected to a limited number of transaction
processors and currently has credit card data transversing its network. BMD has
recently upgraded the network to improve overall coverage area and in building
penetration efficiencies to support a new two-way paging service. This network
expansion and upgrade positions BMD as a viable competitor to CDPD and digital
cellular as a transport network for point-of-sale transactions. The Company is
currently negotiating with BMD to be able to offer its new Wireless Express
Payment ServiceSM utilizing the BMD wireless data network.
Nextel. Nextel currently has a digital Specialized Mobile Radio (SMR)
network, based on TDMA technology, providing voice and messaging services in the
top 50 major metropolitan service areas, covering approximately 65% of the U.S.
population. Presently, Nextel's network is not compatible for POS data traffic,
but it is anticipated that it will be upgraded to a packet-based data-ready
network. When the network is upgraded to packet-based status, it could become a
viable POS data network if the pricing structure is competitive. The Company
will continue to evaluate Nextel as a potential data highway for its wireless
products and services.
Metrocom. Metrocom is currently operating a packet-based data network in a
few major cities including San Francisco, Seattle, and Washington D.C.
Metrocom's Ricochet network is a packet data network designed for wireless
mobile computing applications including E-mail and Internet access. The Company
perceives the Ricochet network as a potentially viable POS data network when the
coverage area expands to a nationwide footprint and competitive data rates are
created for POS transactions. To date, however, the expansion of the Metrocom
network has been slow to develop which may limit the overall potential of this
wireless network as a competitive service offering.
Markets
- -------
Current market research indicates that there are over 4 million stand-alone
credit card terminals installed in the U.S. market. In 1997, 1,312,098 POS
terminals were shipped in the U.S. market, a 20% increase over 1996. Several
factors contributing to this increase are the growth of credit and debit cards,
electronic benefits transfer (EBT) acceptance and the larger memory requirements
due to the amount of data a credit card terminal must capture on each
transaction. A debit card transaction requires a personal identification number
(PIN) to be entered into the POS terminal, and a large percentage of the
existing terminal base is not debit ready. These factors suggest that a growing
percentage of the legacy terminals will need to be replaced to meet the various
technical and functional demands of the changing marketplace.
In the U.S., mobile service and retail sales companies have experienced
large growth as Americans have developed a demand for convenience and a need to
save time. To a larger extent than in past years, the retail point of sale is
located wherever the customer resides and the merchant must be prepared to
complete the sale at that location. Thus, a wide range of business services such
as towing services, locksmiths, concessionaires, special event vendors, in-home
appliance repair services, mobile auto repair, delivery, and similar businesses
depend almost exclusively on completing the sales transactions at the customer's
location.
International Applications
The Company believes that international markets, particularly Latin America
and China, where land-based telephone lines are not in place or are unreliable,
represent realistic market potential for the Company's products and services.
Several Chinese provinces and cities and Latin American countries have
operational CDPD networks and POS transaction processing is being viewed as one
of the initial and most immediate applications to be pursued.
The Company is presently evaluating its international strategy and may
attempt to form alliances or partnerships with the respective financial
institutions, wireless service providers and the local transaction processors to
enter these markets.
9
<PAGE>
Transaction Processing Agreements
- ---------------------------------
NOVA Information Systems. In January, 1997 the Company entered into a
Member Service Provider ("MSP") agreement with NOVA Information Systems
("NOVA"), of Atlanta, Georgia, the nation's 7th largest credit card transaction
processor, together with Regions Bank (NOVA's procuring bank), a principal
member of VISA U.S.A., Inc. and MasterCard International Incorporated. As a
registered MSP of NOVA, the Company is entitled to enroll merchants to process
their credit and debit card transactions with NOVA. The Company sells processing
to merchants it enrolls at a retail rate and purchases that processing from NOVA
at wholesale, thereby generating revenue on each card swipe and every dollar
processed from merchants enrolled by the Company. The Company is required to
train the merchants it enrolls in using credit card processing hardware and
services and must also provide merchant support to assure that the merchants are
continually apprised of their customer service requirements and to remedy any
problems encountered by the merchants in conjunction with credit card
processing. The term of the agreement is for three years from January 1, 1997,
and renews automatically for additional, successive one-year terms if not
terminated at least 90 days prior to the expiration of the current term. Due to
the Company's new Wireless Express Payment Service SM, it is anticipated that
the Company will sell its interest in the current merchant portfolio to remove
any perceived conflicts of interest in the marketplace.
National Bank of Commerce. The Company entered into a "Merchant Marketing
and Services Agreement" with National Bank of Commerce ("NBC") as of March 9,
1998, under which the Company also became an ISO/MSP of NBC and can thereby
offer NBC's transaction processing services to merchants. The Company will
solicit potential merchants for submission of applications to NBC, which then
has the right to accept the merchant for participation in NBC's program. Once a
merchant is accepted, the Company sets up point of sale access, including
maintenance of electronic terminal hardware and other equipment, and must also
supply the merchant with training, supplies, program information and other
services related to the program. The Company will receive a residual on all
transactions processed through NBC for which it is the procurer. The Company
also has been granted the right to own a 50% equity interest in the merchant
accounts it procures for NBC. This means that the Company will receive 50% of
the amount paid by a third party upon a sale of the merchant account. However,
the Company must also stand behind nonpayment of amounts owed to NBC by the
merchant, which remain unpaid for 60 days, including fraud, chargebacks,
adjustments, fees and any other charges, related to the merchant. Upon
termination of the agreement (for any reason other than de-registration of the
Company with Visa U.S.A., Inc. or MasterCard International, Inc.), the Company
has the right to transfer NBC's interest in the merchant accounts in which the
Company owns an interest to another processor upon payment to NBC of one-half of
the equity value of the portfolio, or, if such a transfer is not practicable,
NBC has agreed to terminate the merchant agreements to allow the Company to
allow the merchants to sign with another processor. To allow this transfer, NBC
is entitled to be paid its out-of-pocket expenses incurred in effecting the
transaction. The agreement is for a term of three years, subject to one-year
automatic renewals if not terminated at least 90 days prior to the end of the
original or any renewal term. The agreement can also be terminated early for
certain specified causes. Due to the Company's new Wireless Express Payment
ServiceSM strategy it is anticipated that the Company will sell its interest in
the current merchant portfolio to remove any perceived conflicts of interest in
the marketplace.
Marketing and Distribution Arrangements for the Company's Products and Related
Services
- --------------------------------------------------------------------------------
POS-50(R)
The POS-50(R) can be purchased or leased through Cardservice International
or the Company directly. The Company has no agreements in which the reseller or
distributor is obligated to purchase any specific quantity of product from the
Company.
The Company's most successful distributor to date has been Cardservice
International, Inc. ("CSI") of Agoura Hills, California. CSI currently processes
in excess of $4.5 billion in credit and debit card transactions for
approximately 100,000 merchant accounts. POS-50(R) sales to CSI accounted for
approximately 53% and 20% of the Company's total revenue in fiscal 1997 and
1998, respectively. Sales of POS-50(R) units through CSI are expected to
diminish as a percent of total revenue as the Company shifts from an emphasis on
selling boxes to selling its Wireless Express Payment ServiceSM.
The Company also sells its POS-50(R) units directly to merchants. Due to
the focus on Wireless Express Payment ServiceSM it is likely that the Company
will direct all new sales inquiry's to Cardservice International.
10
<PAGE>
CSI has a large sales and service organization and is well positioned to accept
essentially all types of merchants that fit the POS-50(R) profile.
For existing POS-50(R) customers who do not process with Cardservice
International and simply want to add additional terminals, Finite Technology,
through its repair and service facility in Pueblo, Colorado will provide
distribution of the POS-50(R).
TRANZ Enabler and POS-500 Sales and Marketing Plan
During fiscal year 1998, the Company implemented new sales and marketing
strategy for its CDPD-based products and bankcard processing services. The
Company decided to only sell or provide these products to merchants that sign up
for bankcard processing services with the Company. The Company will no longer
just sell a "box" without the ability to earn recurring revenue from each
transaction originated by its customers.
The Company marketed its products and bankcard processing services through
joint marketing and operating agreements with its cellular alliances and through
its own direct sales organization. The Company focused its initial efforts on
launching the TRANZ Enabler and its bankcard processing program through joint
marketing efforts with GTE, Bell Atlantic Mobile and Ameritech.
To operationalize this marketing strategy, the Company has entered into the
following agreements:
Agreement with GTE Wireless. On August 1, 1997, the Company entered into a
CDPD Service and Equipment Agreement (the "GTE Agreement") with GTE Mobile
Communications Service Corporation, on its behalf and on behalf of GTE Mobilnet
Incorporated and Contel Cellular Inc. and their respective affiliates
(collectively "GTE Wireless") by which the Company has agreed to purchase CDPD
services in the markets served by GTE Wireless and GTE Wireless has agreed to
market CDPD-based processing services to merchants in its service territories
using the Company's TRANZ Enabler hardware, a USWD provided credit/debit card
transaction payment service and GTE Wireless's CDPD data network (the "USWD
Solution"). The initial term of the GTE Agreement is for a two-year period
ending August 1, 1999. The GTE Agreement contains provisions by which GTE
Wireless has agreed to exclusively market and sell the "USWD Solution" to
merchants that utilize VeriFone TRANZ(R) 330 or 380 equipment. In return, USWD
has agreed to exclusively use GTE Wireless's CDPD services in all of GTE
Wireless's markets, except in the case of customers referred to USWD by an
alternative CDPD service provider. The Company has agreed to pay GTE Wireless a
fixed activation fee for each CDPD address it requests be activated on GTE
Wireless's network and a fixed fee for each merchant referred to the Company
through GTE Wireless's marketing efforts. The Company was also required to put a
sales support staff in place to service the GTE Wireless representatives in the
field. As of June 30, 1998 the Company had approximately 28 sales and support
personnel deployed in the various GTE markets. The GTE Agreement also required
the Company to generate minimum CDPD service billings to GTE Wireless from
merchants signed up for GTE Wireless's CDPD service through the Company. The
minimum amount due escalated over the term of the GTE Agreement from $20,000
during the first quarter to $2.75 million by the eighth quarter. GTE Wireless
agreed to adjust the commencement date for these obligations so that the start
date for the first quarter began February 1, 1998. Actual sales results did not
allow the Company to meet the renegotiated minimum purchase obligations. To
remedy this minimum purchase requirement, the Company and GTE amended the
agreement on September 9, 1998 which removed any minimum purchase requirement
and established new IP address pricing for merchants acquired under the
agreement.
In addition to the amended agreement, the Company and GTE management have
discussed additional changes to be made to the sales and marketing program with
respect to the Wireless Express Payment ServiceSM model now being implemented.
The Company expects to amend the agreement again to be consistent with this new
product and service offering.
Agreements with Bell Atlantic Mobile. The Company has entered into two
agreements with Cellco Partnership, doing business as Bell Atlantic Mobile
(BAM). The first, a CDPD airtime reseller agreement was executed on August 14,
1997 and allows the Company to resell Bell Atlantic Mobile's CDPD service in
markets served by Bell Atlantic Mobile. The agreement is for a term of three
years with automatic one-year renewals unless terminated by 60 days notice prior
to the end of a term. The Company does not have any minimum purchase obligations
to Bell Atlantic Mobile under this CDPD airtime agreement. The Company also
entered into a Joint CDPD Sales and Marketing Agreement with Bell Atlantic
Mobile as of March 23, 1998, which provides for joint sales and promotion of the
Company's products and processing solutions in Bell Atlantic Mobile markets.
With certain exceptions, the Company is obligated to use Bell Atlantic Mobile
CDPD Service
11
<PAGE>
exclusively within certain defined "Bell Atlantic Mobile Market Areas" whenever
it places a solution through Company agents or employees. The agreement runs for
two years from March 23, 1998; however, the agreement is terminable by either
party on 30 days prior written notice "with or without cause." The Company also
must pay Bell Atlantic Mobile an activation fee for each unit placed through the
efforts of Bell Atlantic Mobile under the agreement, plus a monthly fee
commencing with the thirteenth month after activation for each merchant which
has met certain minimum processing volume criteria.
Beginning April 1998, the Company began acquiring merchants under the terms
of the joint marketing agreement and initiated a telemarketing program to
pre-qualify leads in the Bell Atlantic Mobile coverage areas.
The Company and BAM management have discussed additional changes to be made
to the sales and marketing program with respect to the Wireless Express Payment
ServiceSM model now being implemented. The Company expects to amend the
agreement to be consistent with this new product and service offering.
Agreement with Ameritech Mobile Communications, Inc. On July 16, 1998,
the Company and Ameritech Mobile Communications, Inc. ("Ameritech") executed an
exclusive Joint Marketing and Operating Agreement. Pursuant to the agreement,
Ameritech has agreed to use its good faith efforts to market exclusively the
Company's TRANZ Enablers and credit card processing services, together with an
Ameritech CDPD IP address (the "USWD Solution") in Ameritech CDPD markets in
Chicago and Springfield, Illinois, St. Louis, Missouri, Cincinnati, Dayton and
Columbus, Ohio and Detroit, Michigan to merchants who currently use VeriFone
TRANZ 330, 380 or 460 credit card authorization terminals. The Company is
obligated to use Ameritech CDPD service exclusively in all of the designated
Ameritech CDPD markets, except for unsolicited orders for the Company's products
or services from a merchant or another CDPD service provider. The agreement has
a term of two years and renews automatically for an additional two years. Either
party may terminate the agreement at any time upon 90 days written notice to the
other party. There are no minimum CDPD airtime purchase obligations to the
Company under the agreement.
Since this agreement is the latest to be formalized, sales results have
been minimal due to the front end training and operational requirements. In
addition, the Company will discuss with Ameritech management all amendments
necessary to implement the Wireless Express Payment ServiceSM offering.
Agreement with AT&T Wireless. The Company entered into an agreement with
AT&T Wireless as of April 30, 1997 to sell AT&T Wireless' CDPD communications
service for a term of three years, with automatic renewals of additional one
year terms if either party fails to give 90 days prior notice of termination at
the end of term. The Company is obligated to maintain a minimum number of active
CDPD addresses with AT&T Wireless over the term of the agreement, or pay AT&T
Wireless for such addresses even if the Company has not resold the numbers to
merchants. The Company is obligated to maintain a minimum number of active CDPD
addresses over the term of the agreement, or pay such addresses even if the
Company has not resold the numbers to merchants. Based on the agreement of April
1, 1997, the Company is obligated to have minimum monthly CDPD billings of
$4,500 by the one-year anniversary of the agreement, $13,500 within 18 months
and $20,250 within two years. The Company and AT&T Wireless management have
engaged in recent discussions regarding Wireless Express Payment ServiceTM and
are in the process of defining new pricing arrangements and marketing strategies
that would compliment this new service.
Manufacturing and Deployment Arrangements
- -----------------------------------------
Third Party Manufacturing Relationships
The Company utilizes high quality, third party manufacturers to build its
products. Uniform Industrial Corporation manufactures the Company's POS-50(R)
product. Wellex Corporation, a Fremont, California based manufacturer, builds
the TRANZ Enabler product line. Finite Technologies of Pueblo, Colorado
manufacturers the POS-500 CDPD-based terminal, and Z-Com manufactures the
USWD500 CDPD modem that will be integrated into various terminal platforms as
well as all of the Company's CDPD product lines.
Inventory Financing
The Company's prior business model was based on the manufacturing cost of
the TRANZ Enabler being financed by a third party. Although the Company entered
into an agreement with GTE Leasing Corporation as of April 2, 1998 to finance
product to be placed under the joint marketing agreement with GTE Wireless, it
has not been able to draw funding under that agreement. The agreement was not
implemented because the various
12
<PAGE>
partners could not agree on the assignment of revenue stream to specific
participants in the event the Company defaults on its obligation to pay GTE
leasing and/or GTE wireless. Consequently, to date, the Company has had to rely
primarily on its working capital to procure product to be placed with merchants
and will need to continue to do so until it can obtain financing form other
sources. Due to the change in the Company's business model described above, the
Company will now sell the TRANZ Enabler through its distribution channels,
thereby eliminating the ongoing need for long-term equipment financing. The
monthly equipment depreciation and CDPD airtime expense are recorded as cost of
sales against the monthly recurring revenue.
Equipment Deployment and Servicing
The Company outsources its deployment services to a third party that
specializes in credit card terminal deployment and management services. In
January 1998, the Company entered into an agreement with TASQ Technology, Inc.,
of Rocklin, California ("TASQ"), to provide equipment repair, deployment, call
tag management, encryption services, inventory management services, product
sales (including equipment, accessories and supplies), leasing, rentals,
customer support and other related services on an as-requested basis to
merchants using the Company's wireless solutions. Under this agreement, the
Company pays TASQ fees for the various products provided and services rendered
by TASQ to the Company's customers, on a 30-day billed basis. TASQ charges
inventory storage and handling fees for equipment, accessories and supplies
purchased from persons other than TASQ. The agreement is for an initial term of
twelve months from January 26, 1998, and renews for successive terms of the same
duration unless either party provides written notice of termination at least 3
months prior to the end of a term.
The Company believes that this relationship will ultimately result in
savings to the Company over what it would cost to provide these services by its
own personnel. In addition, TASQ has a reputation for highly efficient, quality
service in the industry and the Company hopes that this relationship will insure
a high level of satisfaction in the Company's customers.
Customers
- ---------
With respect to POS-50(R) sales, Cardservice International continues to be
the Company's single largest customer. Cardservice International is a large
merchant acquirer with over 2,200 sales representatives, and distributes the
POS-50 product through its sales channels.
During fiscal 1998, sales of the Company's CDPD-based products and
recurring revenue earned from credit card processing services represent the
largest source of revenue. The TRANZ Enabler and POS-500 products were sold or
deployed to merchants through the distribution organizations of the respective
CDPD carriers and the Company's own direct sales force.
Patents, Trademarks and Other Proprietary Protection
- ----------------------------------------------------
Patents
The Company was granted a design patent on certain aspects of the POS-50(R)
product in June 1994. The Company expects to file additional patents as it
determines appropriate.
Trademarks
The Company's name and POS-50(R) are registered trademarks of the Company.
The Company identifies its mark in all it's marketing material and advertising
campaigns. The Company has recently filed for a trademark on "Wireless Express
Payment ServiceSM".
Other Proprietary Protection
Proprietary technology involved in the primary components of the Company's
products, including the cellular and CDPD transceiver and printer, is owned or
licensed by the respective component supplier. The Company does claim
proprietary rights with respect to the integration and use in the Company's
products. The Company also claims proprietary rights on certain aspects of its
application software as it relates to CDPD point-of-sale functionality and
diagnostic features.
13
<PAGE>
The Company owns at least 50% of the intellectual property in its USWD500
CDPD modem. In addition, the Company has exclusive worldwide rights for the use
of the USWD500 modem in the electronic payments industry.
The Company is developing proprietary web-based proprietary server
software, which performs various functions related to the Wireless Express
Payment ServiceSM. The Company intends to seek intellectual property protection
on this software and its functional operation characteristics.
The Company may pursue additional intellectual property protection on its
hardware and software products as appropriate and resources are available.
Competition
- -----------
Currently, the Company believes it has no direct POS-50(R) competitor that
is manufacturing an integrated, battery powered circuit-switched cellular-based
terminal and printer product. However, the company has identified several
non-integrated cellular based solutions that compete with the POS-50(R), but are
not as elegant or functional. These non-integrated solutions range from a few
hundred dollars to a few thousand dollars depending upon the distribution
channels and the type and number of components.
The Company has identified a limited number of hardware competitors that
have or are attempting development of CDPD-based terminals. Hypercom, a
Phoenix-based terminal manufacturer, is currently marketing a CDPD-based
terminal product. The Company perceives this product as direct hardware
competition to the POS-500; however, the Company intends to encourage Hypercom
and all of the major terminal manufacturers to integrate the USWD500 CDPD modem
in a rich set of terminal devices. This strategy is being implemented in order
to increase market awareness and overall demand for wireless terminal devices
that can compliment the Company's Wireless Express Payment ServiceSM.
The Company perceives the current transport providers of dial-up
transaction services as potential competitors. One company, for example, is
offering wireless transport services to several of the card processors. The
Company believes, however, that it can favorably compete by providing a
technologically superior service with proprietary protocols and value added
wireless services.
In summary, the Company currently has no one single competitor that
provides the end-to-end systems approach to the wireless transaction processing
industry. The Company does expect competition to appear if it is able to
demonstrate its ability to build market share and acceptance.
Government Regulation
- ---------------------
The POS-50(R), POS-500 and TRANZ Enabler use cellular RF channels in the
800-900 megahertz bandwidth and are subject to regulation by the FCC for both
cellular transmission and unintentional interference radiation. The products
incorporate either a circuit-switched cellular or CDPD transceiver manufactured
by suppliers that comply with the appropriate FCC requirements and have been
issued a FCC identification number.
The Company has received confirmation from the FCC that the POS-50(R)
terminal product does not require FCC approval for sales of the terminal in the
U.S. marketplace.
The POS-50(R), POS-500 and TRANZ Enabler have passed all known UL and CSA
requirements in testing conducted at an independent certified test site.
The USWD500 modem has passed all known FCC requirements and has been
granted a grantee code and is currently waiting the final FCC ID number, which
is expected to be issued in the next few weeks.
Most foreign countries accept United States federal regulatory approval for
purposes of permitting commercial sales of electronic products; however,
specific regulatory approval of the product may be required in some countries
and could become an obstacle to sales of the product in such areas.
14
<PAGE>
Research and Development
- ------------------------
Substantial portions of the Company's early activities were involved in the
engineering and development of the initial POS-50(R) terminal product. The
Company completed development of POS-50(R) in early 1993. During the last two
fiscal years efforts have been directed almost exclusively on CDPD based
products. In fiscal 1998 and 1997, the Company spent approximately $295,000 and
$407,000 respectively, on research and product development activities.
The Company currently employs four people who are engaged in research and
development. Current efforts are focused on developing new CDPD-based products,
product integration with strategic partners, cost reduction, product efficiency
and reliability, customization and software development. The Company expects to
add personnel to its R&D staff over the next few months to facilitate new
product and application software development, including the development of new
server technology. It is anticipated that the Company will spend approximately
$350,000 on research and development during fiscal 1999, based on present
staffing levels and projects currently under way.
Employees
- ---------
In fiscal year 1997, the Company's headcount levels were maintained between
eight and eleven full time employee. During the first quarter of fiscal 1998,
the company added several key management positions and has aggressively built a
national sales and marketing organization to fulfill its obligations under the
GTE Wireless Joint Marketing and Operating Agreement. This agreement requires a
specific ratio of Company support personnel within each GTE Wireless CDPD
marketing region. From September through early November 1997, the Company added
approximately 43 sales and sales support personnel. The Company has also
expanded its operations, human resources and administrative staff and as of June
30, 1998 had approximately 60 employees, including five executive officers. With
the implementation of the new distribution strategy adopted in the latter part
of the first quarter of fiscal 1999 (see above), the Company has taken steps to
reduce spending. With the new focus on distribution through large merchant
acquirers, the Company has reduced headcount from 60 at June 30, 1998, to 39 as
of October 30,1998, with most of the reduction occurring in the direct sales
force.
Seasonal Variations of Business
- -------------------------------
The Company's merchant acquiring and transaction processing business is
relatively immune to seasonal variations, although the Company expects that
transaction processing revenue will reflect seasonal variations paralleling
consumer spending patterns, generally increasing somewhat during the Christmas
holiday season. However, the placement of point-of-sale terminals can be
expected to be slower during that season as well, due to the reluctance of
merchants to change processors during premier shopping seasons.
Backlog
- -------
As of June 30, 1998, there was no order backlog due to product
unavailability.
The Company's financial condition has limited it from obtaining traditional
credit from its manufacturers and adequate capital will be required to assure an
uninterrupted production of inventory as needed. The Company is hopeful that it
will be able to obtain adequate financing for its inventory needs. However, no
assurance can be given that this will be the case.
Impact of Environmental Laws
- ----------------------------
The Company does not believe that it is substantially affected by
environmental laws and does not expect any material impact as a result of such
laws.
Direct Data Acquisition and Dissolution
- ---------------------------------------
During fiscal 1995, the Company acquired all of the outstanding shares of
Direct Data, Inc., a distributor of POS-related products. The acquisition did
not create the synergies that were hoped for and in fiscal 1996, the Direct Data
assets were surrendered to Direct Data's secured creditor in lieu of the
creditor's foreclosure on a past due $1.3 million obligation. Direct Data was
dissolved on October 19, 1995.
15
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTIES
The Company now occupies approximately 5,000 square feet of office and
general-purpose space in a building in Emeryville, California, a suburb adjacent
to Oakland and San Francisco, California. The Company executed a five-year lease
term in this space in September 1997, which serves as its corporate headquarters
at an initial rate of approximately $10,000 per month commencing October 1997,
and subsequently raised due to relocation to Suite #800 at approximately $11,000
per month. Engineering functions remain at the Company's Palmer Lake, Colorado
facility.
ITEM 3. LEGAL PROCEDINGS
Settlement of Claims of Certain Noteholders
From April through June 1997 the Company issued a total of $185,000 of
Demand Notes payable in full on or before April 11, 1998 (the "Demand Notes").
The principal and accrued interest on the Demand Notes became convertible into
shares of the Company's Common Stock as of November 1, 1997 at prices of $.35
per share (as to $75,000 of the Demand Notes) and $.50 per share (as to $110,000
of the Demand Notes). Commencing on November 3, 1997, the Company began
receiving conversion demands from the Noteholders and as of November 14, 1997,
holders of $135,000 of the Demand Notes had demanded conversion of their Demand
Notes into Common Stock and were insisting that the Company issue "free-trading"
shares to them. The Noteholders claimed that their right to free-trading stock
arose out of certain oral representations made at the time of issuance of the
Demand Notes, the fact that no "restricted securities" legends were imprinted on
the documents evidencing the Demand Notes and no other written advice as to the
"restricted" nature of the shares underlying the Demand Notes was given to them
at the time. The complaining Noteholders were asserting damages based on a
market price for the Company's Common Stock in the $8.00 per share range as of
the November 1, 1997 time period. The holder of the remaining $50,000 Demand
Note (which is convertible at $.50 per share) has not asserted any claims
against the Company in connection with his purchase of the Demand Note.
Rather than incur the expense and risks of litigation, the Company has
settled the complaining Noteholders' claims by agreeing to issue 1.4 times the
number of shares originally issuable as principal and interest on the Demand
Notes purchased by the complaining Noteholders (plus an additional 11,000 shares
to one Noteholder who purchased $50,000 of the Demand Notes), and providing the
Noteholders with certain guarantees as to the amount for which the shares can be
resold and a "put" which allows the Noteholders to require the Company to
repurchase any restricted shares remaining unsold at the end of the one year
period after the shares become saleable under SEC Rule 144. The shares issued
upon conversion of the Demand Notes are "restricted securities" as defined under
SEC Rule 144, but will become saleable pursuant to Rule 144 one year from the
date the converted Demand Note was purchased by the Noteholder. A total of
525,800 shares have been issued to the complaining Noteholders upon conversion
of their Demand Notes which are subject to the guarantee and put agreements. The
holder of the other $50,000 Demand Note has been given the enhanced conversion
rate (of 1.4 times the number of shares originally issuable) and received
154,000 shares upon conversion of his Demand Note; the shares are not entitled
to the guarantee or put.
The guarantee provision of the settlement agreements allow the former
Noteholders to recover the difference between the guarantee price (which is
$3.00 per share as to 360,800 of the shares and $4.29 per share as to the
remaining 165,000 shares issued upon conversion of the Demand Notes) and the
gross amount the Noteholder receives upon a sale of the shares. The guarantee is
operative at any time during the one year period commencing on the date the
shares become saleable under SEC Rule 144. The Company is obligated to pay the
amount due within thirty days of receiving a demand, accompanied by
documentation confirming the sale. Through June 30, 1998, no claims have been
submitted to the Company under the guarantee provision of the settlement
agreements. Under the "put" provision of the settlement agreement, the former
Noteholders will have a five day period commencing on the date one year from the
date the shares become saleable under SEC Rule 144 (or the first business day
thereafter if such day is a day on which the stock markets are closed) during
which the former Noteholders may "put" any restricted shares remaining unsold by
them at the time back to the Company. Upon exercise of the put, the Company
which must either (1) purchase the shares for the put price (which is $3.00 per
share for 360,800 of the shares and $4.29 per share for 165,000 of the shares)
or (2) require the shareholder to sell the shares into the market, with the
Company making up the difference between the put price and the gross amount
received by the shareholder upon such sale, within 15 days after receipt of
written notice and documentation confirming the sale.
16
<PAGE>
On July 2, 1997, the Company also issued a promissory note in the amount of
$16,825 to one of the investors who purchased the Demand Notes. This note was
due and payable in full as of July 30, 1997 and bore interest at a default rate
of 18% per annum if not paid when due. In return for the investor's agreement
not to require the Company to pay the note when it came due, the investor claims
that a representative of the Company promised that the Company would treat the
note the same as the other Demand Notes and convert it to Common Stock on the
same terms. At the same time as it settled the claims of this investor arising
out of the Demand Notes, the Company agreed to convert all amounts owing as
principal and interest by it under this note to a total of 18,507 shares of
Common Stock. The shares issued upon conversion of this note are not entitled to
the guarantee or put described above.
Dispute with Supplier
In April of 1995, the Company entered into an agreement with Novatel
Communications Ltd. (now called Novatel, Inc.) to supply it with modems for its
CDPD products. Novatel Inc. asserted a claim against the Company for payment for
product it tendered to the Company under that agreement. The claim was asserted
in October 1996 for $59,632. Although the Company has accrued a liability in the
amount of this claim, it asserted that Novatel delivered defective product,
which has caused damages to the Company in excess of the amount being claimed by
Novatel. The Company therefore disputed the claim. The Company and Novatel
agreed to arbitrate the dispute under an arbitration provision of the agreement;
however, prior to commencing arbitration, the Company and Novatel agreed to
settle the dispute. The Company has paid Novatel $50,000 over the sixty day
period commencing June 30, 1998.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of the Company's shareholders during the
fourth quarter of the Company's fiscal year ended June 30, 1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information.
The Company's no par value Common Stock is traded in the
over-the-counter market and quoted on the OTC Electronic Bulletin Board under
the symbol "USWDA." The following table sets forth, for the fiscal quarters
indicated, the range of high and low prices for the Common Stock. These
quotations have been obtained from the OTC Electronic Bulletin Board and reflect
inter-dealer prices (in dollars), without any retail mark-up, mark-down or
commissions, and may not necessarily represent actual transactions.
Fiscal 1998 High Low
----------- ---- ---
Fourth Quarter $5.310 $2.625
Third Quarter 7.625 5.000
Second Quarter 8.750 4.500
First Quarter 6.875 0.281
Fiscal 1997 High Low
----------- ---- ---
Fourth Quarter 0.625 0.218
Third Quarter 0.281 0.125
Second Quarter 0.375 0.156
First Quarter 0.406 0.125
There is no public trading market for the Company's Series A Preferred
Stock or any other securities of the Company other than the Common Stock.
17
<PAGE>
(b) Holders.
As of June 30, 1998, there were 180 holders of record of the Common
Stock. There were also an undetermined number of holders who hold their stock in
nominee or "street" name, although at December 15, 1997, in conjunction with the
record date for its 1997 Annual Shareholder Meeting held February 6, 1998 the
Company determined that there were approximately 2,557 beneficial holders of its
Common Stock.
(c) Dividends.
The Company has not declared cash dividends on its Common Stock since
its inception and the Company does not anticipate paying any cash dividends in
the foreseeable future.
(d) Recent Sales of Unregistered Securities.
During the fiscal quarter ended June 30, 1998, the Company sold or
issued the following equity securities without registering the securities under
the Securities Act of 1933, as amended (the "Act").
April 3-June 30, 1998:
- ------------------------
270,000 shares issued under a consulting agreement with Liviakis Financial
Communications, Inc. ("LFC"). 240,000 shares were issued as of April 3, 1998 and
30,000 shares were issued on June 30, 1998; pursuant to the agreement, 75% of
the shares were issued to LFC and 25% of the shares have been issued to Robert
B. Prag, an executive officer of LFC;
March 24-June 30, 1998:
- ------------------------
sale of call options acquired by the Company in October 1995, to purchase a
total of 367,684 shares of Common Stock owned by an unaffiliated third party,
sold by the Company to three unaffiliated third parties for total consideration
of approximately $1,240,000 in cash;
April 6, 1998:
- ----------------
280,000 shares issued to a consultant and its affiliated assignees as a finder's
fee for locating the Liviakis investors for the Company;
May 12, 1998:
- ---------------
1,200,000 shares issued upon exercise of a common stock purchase warrant by an
affiliated shareholder at $.01 per share; the warrant was issued as of August 6,
1997;
May 20, 1998:
- --------------
328,750 shares issued upon conversion of principal and interest on a $150,000
promissory note issued June 3, 1997, due June 3, 1998;
April 7 - June 15, 1998:
- --------------------------
698,327 shares issued upon conversion of convertible Demand Notes issued from
April - July, 1997;
As to each of the foregoing transactions, the Company relied upon the
registration exemption contained in Section 4(2) of the Securities Act of 1933,
as amended (the "Act"). The transactions did not involve a public offering of
securities; the Company received investment representations from each purchaser
to the effect that such purchaser was taking for investment only and not with a
view to distribution of the securities; the Company had reason to believe that
each purchaser had such knowledge and experience, either alone or through a
purchaser representative not affiliated with the Company, that such purchaser
was capable of evaluating the merits and risks of an investment in the Company;
each purchaser, either in his or her capacity as an investor or an employee or
consultant to the Company, had access to adequate information concerning the
Company and its business; all certificates representing the securities were
imprinted with customary "restricted securities" legends, and instructions were
lodged with the Company's transfer agent with respect to all shares of Common
Stock issued in the transactions as "restricted securities."
18
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
Overview - Implementation of New Business Plan - Fiscal 1997 and 1998
- ---------------------------------------------------------------------
U.S. Wireless Data, Inc. (the "Company" or "USWD") was incorporated in
the State of Colorado on July 30, 1991. The Company is in the business of
providing products and services to enable the use of wireless technology for
electronic payment and other transactions.
Over the past two and a half years, USWD focused its product
development efforts on incorporating Cellular Digital Packet Data (CDPD)
technology into its product line. Because of the high speed nature of CDPD
technology, and the ability to bypass the public switched telephone network, the
Company's new line of CDPD-based terminals have significant performance and
communication cost advantages when compared with the traditional dial-up
terminals currently being sold in the U.S. market.
In mid fiscal year 1997, the Company made a fundamental decision to
change the manner in which it generates revenue. The objective was to transform
the Company from being solely a "box maker," from which it earned one time
wholesale margins from the sale of its products, to earning recurring revenue by
providing wireless credit card and debit card processing services to retail
merchants. In January 1997, the Company executed a Member Service Provider
agreement with NOVA Information Systems that established the Company as a
transaction processing service provider to retail merchants. The NOVA
arrangement allows the Company to generate a recurring revenue stream from each
installation instead of the previous per unit sales approach.
Another key piece of the strategic direction was to significantly
broaden distribution of the TRANZ Enabler CDPD based product by developing
distribution agreements with large telecommunications carriers for direct
distribution of products and services to merchants. In preparation for this
effort, the Company signed CDPD airtime agreements with AT&T Wireless Services,
Bell Atlantic Mobile and initiated discussions with GTE Wireless regarding
airtime purchases, joint marketing and operating agreements. As described
further below, the Company was ultimately successful in entering into an
agreement with GTE Wireless, which contains joint marketing and operating
provisions. This was followed by similar agreements with Bell Atlantic Mobil and
Ameritech.
In the fourth quarter of fiscal 1997, it was clear that the Company had
a very significant market opportunity but had extremely limited financial and
human resources to apply to an aggressive CDPD product rollout. In June 1997,
the Company engaged entrenet Group, LLC ("entrenet"), a management consulting
group, to assist with the development of a detailed marketing and business plan
and introduction of financing sources. For a description of the terms of the
agreement, see "Item 12 - Certain Relationships and Related Transactions."
In July 1997, through an introduction by entrenet, the Company retained
Liviakis Financial Communications, Inc. (LFC) to advise and assist the Company
in matters concerning investor relations, corporate finance and strategic
management planning. For a description of the terms of the agreement, see "Item
12 - Certain Relationships and Related Transactions."
Following the Liviakis investment, the Company undertook a focused
effort to strengthen and broaden its management team. In early August 1997, the
Company retained Evon A. Kelly as its chief executive officer. Also in August,
the Company hired a vice president of sales, vice president of major accounts,
and in September added a chief financial officer.
A key element of USWD's strategic change in direction was the
establishment of close alliances with large telecommunications carriers through
joint distribution programs. By leveraging the sales organizations of the major
CDPD providers, the Company could potentially gain ready access to large numbers
of merchants who would be interested in purchasing the Company's product/service
packages. In furtherance of this approach, in August 1997, USWD and GTE Wireless
entered into a joint marketing and operating agreement to distribute USWD's
proprietary TRANZ Enabler credit card processing system using GTE's CDPD sales
network. The agreement contains certain significant operational and financial
performance criteria (including minimum airtime purchases and staffing
requirements) that the Company was required to meet. The Company then actively
recruited and hired marketing and sales personnel to support nationwide
deployment under the joint marketing
19
<PAGE>
program with GTE. The minimum airtime purchase requirements were removed by GTE
in September 1998. See "Market Penetration through Telecommunications Carriers
and Revisions to Business Plan," below in this section.
In March 1998 the Company signed a Joint Sales and Marketing Agreement
with Bell Atlantic Mobile, the largest wireless service provider on the East
Coast and the second largest in the United States. In July 1998, the Company
signed a Joint Marketing and Operating Agreement with Ameritech Mobile
Communications, Inc. ("Ameritech"), another large provider of cellular phone and
data services. The agreements are similar in structure to the GTE Wireless
agreement described above, and the Company added additional personnel to support
these agreements.
Commencing in the second quarter of fiscal 1998 and continuing into the
first quarter of fiscal year 1999, USWD made significant investments to support
a nationwide deployment of TRANZ Enablers to merchants through GTE's and other
telecommunication carrier's national sales forces. Under these deployment
programs, the carrier's sales representative introduces USWD's credit card
processing solution and TRANZ Enabler to the end user merchant. Upon execution
of a credit card processing agreement, a TRANZ Enabler unit(s) is/(are) provided
to the merchant by USWD. The Company retains a portion of the monthly credit
card fees based on the dollar volume and number of transactions processed
through the TRANZ Enabler.
The Company's business model was based on the manufacturing cost of the
TRANZ Enabler being financed by a third party. Although the Company entered into
an agreement with GTE Leasing Corporation as of April 2, 1998 to finance product
to be placed under the joint marketing agreement with GTE Wireless, it has not
been able to draw funding under that agreement. The agreement was not
implemented because the various partners could not agree on the assignment of
revenue stream to specific participants in the event the Company defaults on its
obligation to pay GTE leasing and/or GTE wireless. Consequently, to date the
Company has had to rely primarily on its working capital to procure product to
be placed with merchants. Due to a change in the Company's business model
described below, the Company now intends to sell the TRANZ Enabler through its
distribution channels, thereby eliminating the ongoing need for long-term
equipment financing. On those units for which the Company retains title, the
monthly equipment depreciation expense is recorded as cost of sales against the
monthly recurring revenue. CDPD airtime expense is also recorded as cost of
sales against the monthly recurring revenue.
During the second quarter of fiscal 1998, the Company completed the
relocation of its customer support, administrative and accounting functions to
new offices in Emeryville, California, which serves as the Company's corporate
headquarters. The lease on the Wheat Ridge, Colorado office terminated.
Engineering functions remain at the Company's Palmer Lake, Colorado facility.
Through the second quarter of fiscal 1998, the Company conducted its own
equipment deployment and servicing functions. In late January 1998, USWD entered
into an agreement with TASQ Technology, Inc. of Rocklin, CA, to provide these
services. TASQ deploys, tracks and maintains all TRANZ Enablers placed with
merchants acquired by the Company. In addition, TASQ will provide these same
functions for peripheral equipment sold by the Company. The Company believes
that this relationship will ultimately result in savings to the Company over
what it would cost to provide these services internally.
The Company signed a merchant acquiring agreement with National Bank of
Commerce "NBC", in March 1998. NBC is the lead banking affiliate of National
Commerce Bancorporation. The agreement broadens the Company's ability to provide
credit card processing services for merchants in the retail, restaurant, and
hotel/lodging industries. Concurrent with this agreement, the Company began
using Maverick International Processing Services, Inc, for processing a majority
of new CDPD merchant placements.
Market Penetration through Telecommunications Carriers and Revisions to Business
Plan
- --------------------------------------------------------------------------------
Placements of TRANZ Enabler units pursuant to the Company's agreements with
telecommunications carriers did not develop as rapidly as anticipated and have
not reached anticipated (and necessary) levels to pay for the infrastructure to
support the programs. Costs to the Company of implementing the joint marketing
and distribution agreements with GTE Wireless, Bell Atlantic Mobile and
Ameritech have exceeded revenue generated by the programs since they began. The
GTE Agreement also required the Company to generate minimum CDPD service
billings to GTE Wireless from merchants signed up for GTE Wireless's CDPD
service through the Company. GTE Wireless agreed to adjust the commencement date
for these obligations so that the start date for the first quarter was February
1, 1998. Actual placements did not allow the Company to meet the
20
<PAGE>
renegotiated minimum purchase obligations. To remedy this minimum purchase
requirement, the Company and GTE amended the agreement on September 9, 1998
which removed any minimum purchase requirement and established new IP address
pricing for merchants acquired under the agreement.
Because revenue has not developed as hoped, and expenditures have been
outstripping the Company's ability to support its business plan, management
began to reexamine the Company's business plan in the fourth quarter of fiscal
1998 and came to the conclusion that the Company could not continue to function
at its current expenditure levels.
In July of 1998, Roger Peirce, previous Chief Operating Officer for Visa
and most recently Group President of First Data Merchant Services joined the
USWD Board of Directors and in August 1998, became the Company's Chief Executive
Officer. Mr. Peirce identified several areas in the Company's distribution and
operational strategy that required immediate redirection. Beginning the last
week of August 1998, several changes in the Company's strategy were implemented.
The fundamental change in the strategy involves positioning the Company as an
enabler of wireless products and services to the marketplace and not as a
competitor to the current incumbents. This repositioning of the Company in the
marketplace encompasses the discontinuation of soliciting and owning merchant
contracts for providing bankcard-processing services, an approach that
effectively positioned the Company as a direct competitor to the major merchant
acquirers. The Company's new strategy involves an end-to-end systems approach to
enabling the marketplace. The Company is enabling the marketplace with a new
service offering - Wireless Express Payment ServiceSM (WEPS). WEPS includes an
expandable set of wireless terminal devices that incorporate the Company's
proprietary CDPD modem, a web-based IP address provisioning and terminal
activation process that includes real time remote diagnostic capabilities, the
CDPD network service, and server technology that delivers wireless transactions
to the current front end card processors. The Company is targeting the top 30
merchant acquirers and card processors for this service. The initial response
for WEPS from the targeted prospects has been very positive.
In furtherance of this new strategy, on September 30, 1998, the Company
and Cardservices International, Inc. entered into a non-binding Letter of Intent
to form a non-exclusive strategic partnership to jointly exploit payment system
opportunities using wireless technologies. Upon entry of a final agreement, CSI
will produce its LinkPoint(TM) processing terminals using the Company's
proprietary Wireless Express Payment Service. CSI will promote these products
within its own markets using its approximately 2,200-person sales force. In
addition, CSI is to promote the wireless products to other ventures of First
Data Merchant Services, the fifty-percent owner of CSI. Pursuant to the
non-binding letter of intent, CSI also agreed to consider making an equity
investment of $1,000,000 in the Company through a direct purchase of restricted
shares of common stock. The shares are to be issued at $2.72 per share, which is
a 10% discount from market price for the average of the closing prices for three
days prior to September 25,1998. Closing of these transactions is subject to
various contingencies and finalization of definitive agreements. Also, in
October 1998, the Company borrowed $500,000 from the Chief Executive Officer and
50% owner of CSI.
Entry of Renewed or New Consulting Relationships to Obtain Additional Financing
- -------------------------------------------------------------------------------
In connection with attempts to raise additional capital, the Company
entered into new or renewed consulting or finder's agreements, as follows:
As of March 12, 1998, the Company entered into a new agreement with
entrenet Group, LLC ("entrenet") to provide business and financial consulting
services to the Company and to assist the Company in locating additional
financing. For the description of the terms of the agreement, see "Item 12 -
Certain Relationships and Related Transactions." The term of the agreement is
for six months from March 12, 1998 and renews for additional six-month terms
unless at least 60 days notice is given to terminate the agreement prior to the
end of a term. For its advisory services under the agreement, the Company agreed
to pay entrenet a fee of $60,000, payable in the form of a promissory note
bearing 10% interest, due on or before the earlier of March 11, 1999, or the
receipt by the Company of aggregate gross proceeds from financing of $2,000,000.
This note was paid in July 1998. In addition, at the time of entry of the
Consulting Agreement, entrenet received a Common Stock Purchase Warrant to
purchase 10,435 shares at $5.75 per share, exercisable until March 11, 2003.
Upon the consummation of any financing transaction entered into by the Company
during the term of the agreement (with the exception of financing from certain
identified, excluded sources) or for two years after termination with respect to
any financing obtained from a source introduced to the Company by entrenet, or
if entrenet assists the Company in locating an executive-level candidate who is
hired by the Company, entrenet is entitled to a finder's fee under the
agreement. This Consulting Agreement was terminated in September 1998. The
Company agreed
21
<PAGE>
to pay remaining fees to entrenet of $20,000 and has issued a Common Stock
Purchase Warrant for 8,333 shares exercisable at $2.40 per share until September
11, 2003.
As of June 19, 1998, the Company entered into an agreement with the Los
Angeles based investment banking firm of Houlihan, Lokey, Howard and Zukin
Capital ("Houlihan Lokey") whereby Houlihan Lokey is to act as the Company's
exclusive agent for purposes of structuring mergers (excluding acquisitions by
the Company), sale of assets or similar transactions involving a portion or
substantially all of the business, assets or stock of the Company (which are
defined in the agreement as a "Transaction"). The agreement is terminable at any
time by either party, but unless terminated early, runs for a basic term of
twelve months, with automatic one month extensions thereafter, unless either
party gives seven days' prior written notice of termination. Under the
agreement, the Company is obligated to pay a cash retainer fee to Houlihan Lokey
of $30,000, payable $5,000 a month for six months, reimburse Houlihan Lokey for
reasonable out-of-pocket expenses and pay a "contingent fee" equal to three
percent (3%) of the "Aggregate Gross Consideration" received by the Company in
connection with a Transaction. "Aggregate Gross Consideration" is defined as the
sum of the fair market values of any consideration received by the Company
and/or its creditors or shareholders, whether in cash, securities or other
intangibles, subject to adjustments to reflect the fair market value of any
liabilities assumed or assets retained. Customary valuation methodology is to be
used to value the consideration received by the Company in a Transaction. The
Company is also required to pay Houlihan Lokey a "break-up fee" of $100,000
(reduced by the aggregate amount of retainer fees previously paid) in the event
that a Transaction that has been publicly announced, or an agreement in
principal for a Transaction has been reached, is rescinded, invalidated or
otherwise canceled. Houlihan Lokey is also entitled to its contingent fee and/or
break-up fee, as the case may be, under various circumstances, in the event a
Transaction occurs or is broken during the twelve month period following
termination of the agreement. The Company has secured its obligations to
Houlihan Lokey under the agreement with all of the Company's assets, excluding
TRANZ Enabler assets and/or portions of monthly credit card processing revenue
related to the repayment of equipment financing. The security interest granted
to Houlihan Lokey is also subject to change to allow the Company to successfully
complete a bridge financing of up to $2,000,000. The Company has also agreed to
indemnify Houlihan Lokey for certain liabilities, including potential
liabilities arising under the federal securities laws. In late August 1998, the
Company notified Houlihan Lokey to suspend their active efforts pending
discussions the Company initiated with several potential strategic partners
involving joint operational initiatives and/or direct investments in USWD by the
potential partners.
On June 30, 1998, the Company and Liviakis Financial Communications, Inc.
("LFC") agreed to extend their consulting relationship through the entry of a
new consulting agreement covering the period from August 1, 1998 through March
15, 1999 (the "New LFC Agreement"). In conjunction with the entry of the new LFC
Agreement, the principles of LFC agreed to a "lock-up" of their Company stock
until February 1, 1999. For the description of the terms of the agreement see
"Item 12 - Certain Relationships and Related Transactions."
Securities Issuances to Fund Operations
- ---------------------------------------
To fund its operating requirements, the Company has had to rely primarily
on the issuance of debt or equity securities over a significant part of the last
two fiscal years. In addition to the issuances of securities to entrenet, LFC
and Messrs. Liviakis and Prag described above, from April 1997 through the
present, the Company has issued the securities described in the section of this
Item 6 entitled "Financial Condition, Capital Resources and Liquidity-Recent
Significant Securities Issuances."
Fiscal 1998 Compared to Fiscal 1997
- -----------------------------------
Net Revenue
- -----------
Net revenue of $909,000 for fiscal 1998 decreased from revenue of
$1,315,000 generated during fiscal 1997. The decrease in revenue was caused by
the Company's shift from a per-unit sales approach to a recurring revenue model.
Product sales of POS-50, POS-500 and other equipment sales decreased by
approximately $638,000 while service revenue, which includes application fees,
transaction processing, and repair revenue increased by approximately $232,000.
Product placements of the TRANZ Enabler to merchants through the new
distribution program have not developed as rapidly as anticipated. The Company
is currently implementing a strategic shift intended to increase the growth of
both one-time and recurring revenue.
22
<PAGE>
Gross Profit
- ------------
Gross profit in fiscal 1998 was negligible at $1,000, compared to
$506,000 in the prior year. The 1998 product cost of goods includes several one
time inventory adjustments totaling approximately $227,000 including a
write-down of POS-50 raw materials inventory of approximately $170,000. Gross
profit on service revenue was $137,000 compared to $22,000 in the prior fiscal
year, due a to shift in business strategy to establish a recurring revenue base.
Operating Expenses
- ------------------
Selling, general and administrative expense increased from $813,000 in
fiscal 1997 to $8,408,000 in fiscal 1998. Of the approximate $7,600,000
increase, approximately $4 million was related to several significant non-cash
charges, including approximately $2,262,000 expensed for the Liviakis Financial
Communications consulting services and $472,000 for other consulting services,
and approximately $1,327,000 of non-cash compensation expense was recorded for
the change in stock price related to a variable stock option grant.
The balance of the selling, general and administrative expense increase
of approximately $3,600,000 during fiscal 1998 resulted from the aggressive
addition of sales and support personnel and infrastructure to provide local
support for the GTE nationwide deployment and similar distribution agreements
entered into with Bell Atlantic and Ameritech. Headcount increased from
approximately 18 at the end of September 1997, to approximately 50 employees as
of December 31, 1997 and approximately 63 at the end of March 1998. Expenditures
include increased compensation expense for new sales and sales management
personnel, selective additions to the management team and increased travel and
communication expense related to the new marketing program. The Company
continued to hire sales and support personnel to support the new marketing
programs through the end of 1998 fiscal year. The expense trend was reversed in
the first quarter of fiscal 1999 with headcount reductions related to the
revised distribution approach. In addition, expenses increased in fiscal 1998
due to increased audit fees and legal expenses related to the resolution of
several outstanding legal issues and the registration expenses for the Company's
registration statement under Form SB-2.
Research and development expenses decreased from $406,000 in fiscal
1997 to $295,000 in fiscal 1998. This decrease was due to lower engineering
material purchases, one vacancy in the department during the first half of
fiscal 1998, and lower occupancy costs.
Litigation settlement in 1998 relates to a $1,353,000 charge for the
valuation of common shares issued to a group of Noteholders, in settlement of a
dispute regarding rights related to the conversion of the notes into shares of
Common Stock. The 1997 litigation settlement expense reflects the settlement of
the law suit regarding the Company's initial public offering in December 1993.
The expense consists of $94,000 for the value of the Common Stock issued based
upon the fair market value of the Company's common stock on the date the
commitment of such shares were made, $10,000 for cash paid by the company
pursuant to the settlement with stockholders, and $60,000 for a note payable to
one underwriter of the transaction. See "Item 3 - Legal Proceedings."
Interest Expense and Other Expense
- -----------------------------------
Interest expense includes a $697,000 non-cash charge in fiscal 1998
related to the private placement financing in December 1997. The convertible
features of the debenture include an "in-the-money" convertible option that
allows the holder to obtain shares of Common Stock at a discount from fair
market value. The value of the in-the-money provision has been allocated to
stockholder equity. The difference between the realized value and face value of
the debt was recognized as non-cash interest expense between the date of issue
and date of conversion into preferred stock which occurred on February 9, 1998.
Other expense for fiscal 1998 included a $156,000 charge related to the
extension of a common stock warrant exercise period which was expiring.
FINANCIAL CONDITION, CAPITAL RESOURCES AND LIQUIDITY
- ----------------------------------------------------
The Company continues to have significant difficulties due to its financial
condition and lack of liquidity. While management is optimistic with its medium
and long-term opportunities, the Company is constrained by its immediate
financial condition and requirement for increased liquidity. The Company has
accumulated a deficit of approximately $28 million since inception to June 30,
1998, with a working capital deficit of approximately $3million at June 30,
1998, versus a deficit of $769,000 at the end of the prior year. The increased
working capital deficit is directly related working capital utilized to fund
operating losses including purchases of TRANZ Enabler inventory and the
significant increase in the Company's headcount and infrastructure implemented
during fiscal 1998. The deficit was also affected by a $1.3 million non-cash
accrual related to a variable stock option.
23
<PAGE>
The Company believes its CDPD based products, joint marketing and
distribution agreements with CDPD carriers, pending distribution agreements with
merchant acquirers, and building a recurring revenue stream present an
opportunity for significant revenue growth, eventual profitability, and the
generation of positive cash flow from operations. At present, development of the
Company's products and services requires immediate, additional financing.
Proceeds from the private placement offering, which was completed in December
1997, were used primarily to complete the launch of the joint marketing program
with GTE Wireless, build the related corporate infrastructure and make selective
inventory purchases. Cash raised through recent private securities offerings has
been and will be used primarily for working capital and to pay certain accounts
payable.
With the implementation of the new distribution strategy adopted in the
latter part of the first quarter of fiscal 1999 (see "Market Penetration through
Telecommunication Carriers and Revisions to Business Plan," above), the Company
has taken steps to reduce spending. With the new focus on distribution through
large merchant acquirers, the Company has reduced headcount from 60 at June 30,
1998, to 39 as of October 30, 1998, with most of the reduction occurring in the
direct sales force. With the appointment of Roger Peirce as CEO, the Company has
been able to avail itself of the services of several key senior level personnel,
engaged under consulting contracts with remuneration in the form of stock
options rather than cash. Based on current staffing levels, the Company's
operating expenditures are running at a monthly rate of approximately $350,000
versus $450,000 per month in the fourth quarter of fiscal 1998. However,
execution of the Company's current business plan is dependent on a significant
debt or equity financing event in the immediate future. The Company continues to
work both directly and through its consultants to secure additional debt or
equity financing which is required to fund operations while a significant
recurring revenue stream is built. While management is confident it can
accomplish this objective, the inability of the Company to secure additional
financing in the near term could adversely impact the Company's financial
position, including its ability to continue as a going concern.
Recent Significant Securities Issuances
- ---------------------------------------
To meet its capital requirements, the Company has issued securities during
fiscal 1997 and through the present, as follows:
Demand Notes
- ------------
From April through June 1997 the Company issued a total of $185,000 of
Demand Notes payable in full on or before April 11, 1998 (the "Notes"). The
principal and accrued interest on the Notes became convertible into shares of
the Company's Common Stock as of November 1, 1997 at prices of $.35 per share
(as to $75,000 of the Notes) and $.50 per share (as to $110,000 of the Notes).
Commencing on November 3, 1997, the Company began receiving conversion demands
from certain of the Noteholders and as of November 14, 1997, holders of $135,000
of the Notes had demanded conversion of their Notes into Common Stock, at the
same time insisting that the Company issue "free-trading" shares to them. The
Company settled the claims of these Noteholders in April 1998 by agreeing to
issue 1.4 times the total number of shares originally issuable pursuant to the
terms of the Notes and providing the Noteholders with certain guarantees and a
"put option" which allows the Noteholders to require the Company to repurchase
the shares under certain limited circumstances. As a result of the settlement,
the issuance of "premium shares" was recorded in Operating Expense as a
litigation settlement of approximately $1,353,000 in 1998. The shares into which
the Notes are convertible become salable under SEC Rule 144 commenced in the
Spring of 1998, one year from the dates on which the Notes were issued. The
Company has issued a total of 698,307 shares of Common Stock through conversion
of the Notes.
24
<PAGE>
Private Offering of 8% Adjustable Rate Convertible
Subordinated Debentures Due December 31, 1999
- --------------------------------------------------
The Company closed a private offering of $3,060,000 principal amount of 8%
Adjustable Rate Convertible Subordinated Debentures Due December 31, 1999 (the
"8% Convertible Debentures") on December 10, 1997. The net proceeds to the
Company from the offering were approximately $2,600,000. The Company used the
proceeds from the offering primarily as working capital to fund the national
launch of its proprietary wireless transactions processing solutions and to
repay existing obligations. The 8% Convertible Debentures converted to 3,060,000
shares of Series A Preferred Stock as of February 9, 1998. The Series A
Preferred Stock is further convertible at the option of the holder into shares
of Common Stock effective upon the earlier of (i) a declaration of effectiveness
by the Securities and Exchange Commission (the "SEC") of a registration
statement covering the shares of Common Stock into which the Series A Preferred
Stock are convertible (the "Common Stock Registration Statement") or (ii) 150
days from December 10, 1997. Based on a face value of $1.00 per share of Series
A Preferred Stock, the rate at which the Series A Preferred Stock is convertible
into Common Stock (the "Conversion Price") is equal to the lesser of (i) $6.00
per share of Common Stock or (ii) 80% of the average of the closing bid price of
the Common Stock over the five trading days prior to conversion. The Conversion
Price was no less than $4.00 per share of Common Stock for 270 days from
December 10, 1997 (the "Minimum Conversion Price"). However, after that 270-day
period (which has elapsed), the Minimum Conversion Price is no longer
applicable. The Conversion Price (and the Minimum Conversion Price) were to be
reduced by 2% per month for every 30 days (or any part of any 30 day period)
commencing on May 11, 1998, that the Company did not have an effective
registration statement on file with the SEC covering the sale of the shares of
Common Stock issuable on conversion of the Series A Preferred Stock. The Company
did not obtain effectiveness of the registration statement (which it originally
filed on May 14, 1998) until August 7, 1998, thereby incurring a 6% penalty
applicable to the Conversion and Minimum Conversion Prices. The Series A
Preferred Stock is therefore convertible at 75% of the Market Price (as defined)
of the Common Stock. The Common Stock into which the Series A Preferred Stock is
convertible (together with shares of Common Stock that were issued as interest
on the 8% Convertible Debentures and which are issuable as dividends on the
Series A Preferred Stock) is included in the shares offered for sale pursuant to
the Registration Statement on Form SB-2 (SEC No. 333-52625) which became
effective August 7, 1998.
In September 1998, the Company negotiated a partial redemption of the
outstanding Series A Preferred Stock with several of the security holders. The
Company borrowed $1,300,000 from Liviakis Financial Communications, Inc. and
used $1 million of that money to redeem $833,000 face value of the Series A
Preferred Stock. Substantially all available tangible and intangible assets of
the Company secure the note. The Company paid 120% of face value for the
redemption. The note payable is due January 1, 1999 and bears interest at 8% per
year. See "Certain Relationships and Related Transactions - Transactions with
Liviakis Financial Communications, Inc." The security holders participating in
this redemption also agreed to a gated conversion schedule over the following
three months. The participating investors, representing approximately 1,342,000
shares of the remaining Series A Preferred agreed to hold their Series A
Preferred shares until at least October 15, 1998. Following October 15, 1998,
one-third of the Series A Preferred shares may be converted to common stock on
each of October 15, November 15, and December 15 of 1998, respectively. As an
incentive to these investors, the Company has agreed to issue Common Stock
purchase warrants exercisable to purchase that number of shares of Common Stock
equal to five percent of the number of shares of Series A Preferred Stock held
by the participating investor at the end of each period, exercisable at 110% of
the prior five-day average bid price for three years from the date of issuance.
The Company also increased the dividend rate from four to eight percent on the
balance of the Preferred Stock held.
Sale of Call Options on Certain Shares of Common Stock
- ------------------------------------------------------
Mr. Draper was the principal shareholder of a company called Direct Data,
Inc., which the Company acquired in 1994. In conjunction with the acquisition of
Direct Data, Mr. Draper was issued a total of 397,684 shares of the Company's
Common Stock. The acquisition did not create the synergies that were hoped for
and in October 1995, the Direct Data assets were surrendered to Mr. Draper, as
Direct Data's secured creditor, in lieu of the creditor's foreclosure on a past
due $1.31 Million obligation. Direct Data was left with no assets, ceased
operations, and was dissolved on October 19, 1995. In conjunction with that
transaction, Mr. Draper entered into an agreement with the Company effective
until October 5, 1998, pursuant to which he granted the Company the right to
vote his 397,684 shares in its discretion and to purchase those shares for $.25
per share (the "Call Option"). In order to satisfy a portion of its immediate
short term capital requirements, on March 12, 1998, the Company entered into an
agreement to allow the Company to assign
25
<PAGE>
to third parties, options it has held since 1995, on 367,684 shares of the
Company's Common Stock owned by Mr. Draper's assignee, Tillicombe International
LDC ("Tillicombe"), which the Company had the right to purchase at $.25 per
share. Mr. Draper retained the remaining 30,000 shares.
As of June 30, 1998, the Company assigned its Call Option on all 367,784 of
the shares owned by Tillicombe. RBB Bank Aktiengesellschaft purchased 250,000
options, Kennedy Capital Management, Inc. purchased 100,000 options and the
remaining 17,684 options were purchased by another individual investor. RBB Bank
Aktiengesellschaft is the agent that purchased 1,600,000 shares of the Company's
Series A Preferred Stock in December 1997 and $1,000,000 of 6% debentures in
July 1998. RBB Bank purchased the Call Option in five increments of 50,000 share
options each, and paid the Company 85% of the average last sale price of the
underlying shares over the five days prior to the date of acquiring the Call
Option, less the Call Option exercise price of $25 per share. Kennedy Capital
Management, Inc. purchased the Call Option on the 100,000 options it acquired at
a price of $2.25 per share as of June 10, 1998. In each transaction, the option
purchaser was required to pay the acquisition price for the Call Option, as well
as the exercise price to Tillicombe prior to taking delivery of the shares. The
Company raised a total of approximately $1,244,000 net of expenses from the sale
of these Call Options through June 30, 1998.
$250,000 Loan from RBB Bank Aktiengesellschaft
- ----------------------------------------------
Effective July 1998, the Company borrowed $250,000 from RBB Bank
Aktiengesellschaft, under a promissory note which was payable in full on or
before September 9, 1998. The note was repaid in July 1998, from proceeds
obtained from the sale of $2,000,000 of 6% Convertible Subordinated Debentures
due July 21, 2000. In conjunction with this loan, the Company issued a Common
Stock purchase warrants to RBB Bank Aktiengesellschaft to purchase 20,000 shares
of Common Stock at $4.375 per share, exercisable through September 9, 2001. The
warrant has antidilution provisions that protect the holders against dilution in
the event of certain transactions. The warrant also has "piggyback" registration
rights entitling the holders to have the underlying shares registered in any
registration done by the Company, other than registrations on ineligible forms.
The expenses of such registrations (other than selling expenses) are to be borne
by the Company.
Private Offering of 6% Convertible Subordinated Debentures due July 21, 2000.
- -----------------------------------------------------------------------------
In July 1998, the Company completed a private offering of $2,000,000
principal amount of 6% Convertible Subordinated Debentures due July 21, 2000
(the "6% Debentures") and Common Stock Purchase Warrants Exercisable to Purchase
100,000 shares of Common Stock exercisable at $4.25 per share until July 21,
2001 (the "Warrants"). The net proceeds to the Company from the offering were
approximately $1,810,000, after paying finder's fees of $190,000, but before
paying additional expenses of the offering, which the Company estimates to be
approximately $20,000. The Company used approximately $252,000 of the proceeds
from the offering to pay off a $250,000 short term bridge loan from RBB Bank
Aktiengesellschaft, which was evidenced by a promissory note executed July 1998,
and used the balance of the proceeds as working capital and to repay existing
obligations. RBB Bank Aktiengesellschaft, the purchaser of 1,600,000 shares of
the Company's Series A Cumulative Convertible Redeemable Preferred Stock,
purchased $1,000,000 of the 6% Debentures. JW Genesis Securities, Inc. of Boca
Raton, Florida, acted as the primary finder in the transaction and the Company
paid JW Genesis a finder's fee equal to seven percent (7%) of the amount raised
from the sale of the 6% Debentures, which amounted to $140,000. In addition, JW
Genesis received a three-year, 60,000 share Common Stock purchase warrant
exercisable at $4.50 per share. The shares underlying the Warrant are entitled
to piggyback registration rights, with the registration expenses to be paid by
the Company. The Company also paid a finder's fee to Liviakis Financial
Communications, Inc. ("LFC") in the amount of 2.5% of the amount raised on the
sale of the 6% Debentures, which amounted to $50,000, under the consulting
relationship between the Company and LFC. Messrs. John M. Liviakis and Robert B.
Prag, who are affiliates of LFC, are significant shareholders of the Company.
The 6% Debentures are convertible into shares of Common Stock at the
option of the holders at the lesser of: 80% of the average closing bid price of
the Common Stock over the five trading days prior to conversion; or $4.25 per
share (the "Fixed Conversion Price"). Fifty percent of the 6% Debentures held by
any holder become convertible on the earlier of effective registration of the
underlying shares with the SEC or 120 days after the Initial Issuance Date. The
remaining 50% of the 6% Debentures become convertible 150 days after the Initial
Issuance Date. Subject to certain adjustments described below, the 6% Debentures
cannot be converted below a "floor" price, which is $2.125 per share. The floor
is eliminated 180 days after the Initial Issuance Date. If the Company issues
any other security convertible into shares of Common Stock within 180 days of
the Initial Issuance Date with a floor price less than that of the 6%
Debentures, the Debenture floor price
26
<PAGE>
is reduced to that lesser amount. Any conversion restrictions (both time and
price) are eliminated upon the announcement of a consolidation, merger or other
business combination of the Company in which the Company is not the surviving
entity.
Once the underlying Common Stock has been registered with the SEC for
at least 90 days and the Common Stock has traded at or above $8.50 for at least
20 consecutive trading days (based on the average closing bid price over such
period), the Company can require conversion of the 6% Debentures, subject to
certain restrictions if the stock is suspended from trading or the registration
of the underlying Common Stock is suspended.
The Company may redeem the 6% Debentures at any time from the Initial
Issuance Date to 120 days thereafter if the Common Stock is trading above the
floor price, on the following basis: to day 60 at 105% of face value plus
accrued interest; from day 61 to day 90 at 112.5% of face value plus accrued
interest; and from day 91 to day 120 at 120% of face value plus accrued
interest. At the time of any such redemption, the Company must also issue
additional Common Stock purchase warrants for 50,000 shares of Common Stock per
$1,000,000 of redeemed 6% Debentures, exercisable for three years at the closing
bid price on the day prior to redemption.
Any 6% Debentures that have not been converted to Common Stock as of
the maturity date, or upon a merger, consolidation or other sale of the Company
or its assets in which the Company is not the surviving entity, are to either be
converted into Common Stock at the conversion price then in effect or, at the
option of the holders, must be redeemed by the Company.
The Company agreed to file a registration statement with the SEC to
register the Common Stock underlying the 6% Debentures within 75 days of July
22, 1998, (the "Initial Issuance Date"), and that it will respond to initial SEC
comments within 15 days of receipt and any subsequent SEC comments within 10
days of receipt. In the event the registration is not effective with the SEC
within 120 calendar days of the Initial Issuance Date, the Company is required
to pay a cash penalty of two percent (2%) of the face amount of the 6%
Debentures and thereafter an amount equal to three percent (3%) of the face
amount for every thirty calendar days (or any fraction thereof) until the
registration is effective. In the event the registration is not effective by the
180th day after the Initial Issuance Date, the Company can be required by the
holders to redeem the 6% Debentures at 120% of face value, plus accrued interest
to the date of redemption. The Company is obligated to pay all registration
expenses (but not selling expenses) incurred in registering the shares for the
holders of the 6% Debentures.
OMRON - Note Restructuring
- ---------------------------
During August 1998, the Company and the supplier reached an agreement to
cure the default with a restructuring of the terms of the note. The new terms
include a reduction in the price per unit as well as the number of units under
the contract. The agreement also reduced the principal balance under the note to
$120,000 plus interest of $47,000. The Company has agreed to a payment schedule
that will repay the balance due by February 1999. See "Note 5. Borrowings - Note
Payable-Supplier-OMRON."
$500,000 Loan - October 1998
- ----------------------------
On October 28, 1998 the Company borrowed $500,000 from Chuck Burtzloff, the
CEO and 50% owner of Cardservice International, Inc. The note bears interest at
8% per annum and is payable in full on the earlier of the receipt by the Company
of proceeds from a sale of the Company's Common Stock to Mr. Burtzloff (as
discussed below under "Current Financing Initiatives") or January 1, 1999. In
consideration for the loan, the Company also agreed to issue Mr. Burtzloff a
Common Stock Purchase Warrant exercisable to purchase 25,000 shares of Common
Stock at $3.038 per share through October 27, 2001. See also, "Item 12 -
"Certain Relationships and Related Transactions - Transactions with Cardservice
International, Inc."
27
<PAGE>
Current Financing Initiatives
- -----------------------------
The Company has several initiatives that it is currently pursuing to raise
additional capital. On September 30, 1998, the Company entered into a
non-binding letter of intent with Cardservice International, Inc. to form a
non-exclusive strategic partnership involving joint product and distribution
initiatives. The letter of intent also includes a provision pursuant to which a
$1,000,000 direct equity investment in USWD by CSI may be made if the terms of a
definitive agreement can be reached. The parties are working on the completion
of definitive agreements.
The Company is also exploring similar initiatives with several other
potential strategic partners as well as continuing efforts to raise capital from
other debt or equity sources.
Year 2000 Issues
- ----------------
The Company has completed a review of the impact of the Year 2000 issue on
the Company's business. This issue concerns the potential problems and
liabilities faced by all users and persons dependent on computers that might
result from software or system failure or malfunctions if the systems fail to
properly recognize the date change between 1999 and 2000. The Company's internal
business systems have been evaluated, and with the exception of the accounting
system, are Year 2000 compatible. The Company intends to replace the accounting
software during fiscal year 1999. The cost of conversion is not expected to be
material. The engineering staff has made an assessment of USWD products and is
not aware of any complications regarding the products the Company delivers to
the end users. While there can be no assurance that unforeseen problems will not
be encountered, the Company expects that all projects will be completed in a
timely manner. While the Company believes that its key suppliers for credit card
transaction processing are taking reasonable steps to address Year 2000
compliance, the Company is reliant on the electronic payments infrastructure
utilized by credit card processors, banks and financial institutions within the
United States. The Company could be subject to unresolved issues, which impact
this infrastructure. The Company could be adversely, materially affected, both
operationally and financially, to the extent third parties with which it
interfaces, either directly or indirectly, has not properly addressed their Year
2000 issues.
Forward-Looking Statements
- --------------------------
The Company may, in discussions of its future plans, objectives and
expected performance in periodic reports filed by the Company with the
Securities and Exchange Commission (or documents incorporated by reference
therein) and in written and oral presentations made by the Company, include
projections or other forward-looking statements within the meaning of Section
27A of the Securities Act of 1933 or Section 12E of the Securities Act of 1934,
as amended. Such projections and forward-looking statements are based on
assumptions, which the Company believes are reasonable, but are by their nature
inherently uncertain. In all cases, results could differ materially from those
projected. Some of the important factors that could cause actual results to
differ from any such projections or other forward-looking statements are
detailed below, and in other reports filed by the Company under the Securities
Exchange Act of 1934, including the Report on Form 8-K filed on August 11, 1998,
Reporting an Event of August 3, 1998, which, incorporates the Company's
Registration Statement on Form SB-2 (SEC File No. 333-52625).
History of Losses and Potential Fluctuations in Operating Results:
Throughout the Company's history, including the fiscal year ending June 30,
1998, the Company had experienced significant operating losses. It has continued
to incur operating losses subsequent to June 30, 1998,and through the present.
In addition, because the Company generally ships its products on the basis of
credit card processing applications or purchase orders, increments to recurring
revenue and other component sales in any quarter are highly dependent on orders
shipped in that quarter and, accordingly, may fluctuate materially from quarter
to quarter. The Company's operating expense levels are based on the Company's
internal forecasts for future demand and not on firm customer orders. Failure by
the Company to achieve these internal forecasts has and could continue to result
in expense levels that are inconsistent with actual revenues. The Company's
results may also be affected by fluctuating demand for the Company's products
and by increases in the costs of components acquired from the Company's vendors.
Requirement for Additional Capital: At present, the development of the
Company's infrastructure, product development initiatives, and transition to the
new distribution program requires additional financing. Proceeds from recently
completed private placement offerings have provided the Company with the ability
to launch joint marketing and distribution programs with the wireless carriers;
however, execution of the
28
<PAGE>
Company's business plan is dependent on a more significant debt or equity
financing event. The Company continues to work both directly and through its
consultants to secure additional debt or equity financing which is required to
fund operations while a significant recurring revenue stream is built. There is
no guarantee that this additional funding will occur in the required time frame.
The failure of the Company to obtain additional financing could have a material
adverse impact on the Company, including its ability to continue as a going
concern.
Distribution Program: The Company has recently executed a letter of
intent with Cardservice International which outlines CSI's intent to produce its
LinkPoint(TM) processing terminals using the Company's proprietary Wireless
Express Payment Service. The Company anticipates that CSI will promote these
products within its own markets using it's sales force, and also promote the
wireless products to other ventures of First Data Merchant Services. The Company
also has joint marketing and distribution agreements in place with GTE Wireless,
Bell Atlantic Mobile, and Ameritech. These and anticipated additional
distribution programs are expected to have a material impact on the Company's
future revenue stream. While the Company anticipates it will execute a
definitive agreement with CSI and sign distribution agreements with other
significant partners, the failure to successfully complete the agreements and
execute the specified programs through any of these distributors could have a
material adverse effect on the Company.
The Company's Dependence on a Single Type of Product and Technological
Change: All of the Company's revenue is derived from sales of its credit card
transaction services and enabling products. Demand for these products could be
affected by numerous factors outside the Company's control, including, among
others, market acceptance by prospective customers, or the introduction of new
or superior competing technologies. The Company's success will depend in part on
its ability to respond quickly to technological changes through the development
and improvement of its products.
Competition by Existing Competitors and Potential New Entrants into the
Market: The Company has identified several potential competitors attempting to
develop CDPD based terminals and solutions. In addition, companies with
substantially greater financial, technical, marketing, manufacturing and human
resources, as well as name recognition, than the Company may also enter the
market.
CDPD Resale Agreements Containing Minimum Purchase Obligations: The
Company has to date entered into four CDPD service resale agreements, one of
which contains minimum obligations which can be characterized as "take or pay"
provisions. The agreement with AT&T Wireless Data, Inc. contains such
provisions. The Company is obligated to pay for the minimum amount of service
stated in the agreement even if it fails to place enough service with merchants
to meet the minimums. The failure of the Company to meet these service minimums
could have an adverse financial impact upon the Company.
Status of Federal Corporate Tax Filings: The Company has not completed
federal income tax filings for fiscal years 1996 and 1997. While it is unlikely
that the Company will owe any taxes due to the sustained losses during the
periods, the Company may be subject to penalties for the delinquency. The
Company intends to take the steps required to complete the tax filings as soon
as practicable.
Dilutive and Other Possible Adverse Effects of Outstanding Options,
Warrants and Other Rights to Acquire Common Stock: The Company has a substantial
number of outstanding rights to acquire Common Stock in the form of the Series A
Preferred Stock, the 6% Convertible Subordinated Debentures, various warrants,
and contract rights. A substantial number of these rights, plus additional
rights in the form of options that have been or may be granted to the Company's
officers, directors, employees or consultants under the Company's 1992 Stock
Option Plan or otherwise, are exercisable or convertible at prices which are
less than the present market price for the Common Stock or at a discount to the
market price as of the time of conversion. Under the terms of such rights, the
holders thereof are given an opportunity to profit from a rise in the market
price of the Common Stock with a resulting dilution in the interests of other
shareholders. The terms on which the Company may obtain additional financing may
be adversely affected by the existence of such rights. For example, the holders
of these rights could exercise them at a time when the Company was attempting to
obtain additional capital through a new offering of securities on terms more
favorable than those provided by the rights.
29
<PAGE>
ITEM 7: FINANCIAL STATEMENTS Page
Report of Independent Accountants.......................................... 31
Balance Sheet as of
June 30, 1998 and 1997.................................................... 32
Statement of Operations for the fiscal year ended
June 30, 1998 and 1997..................................................... 33
Statement of Changes in Stockholders' Deficit for the fiscal year ended
June 30, 1998 and 1997..................................................... 34
Statement of Cash Flows for the fiscal year ended
June 30, 1998 and 1997..................................................... 35
Notes to Financial Statements.............................................. 36
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
(Not Applicable)
30
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of U.S. Wireless Data, Inc.
In our opinion, the accompanying balance sheets and the related
statements of operations, of changes in stockholders' deficit and of cash flows
present fairly, in all material respects, the financial position of U.S.
Wireless Data, Inc. at June 30, 1998 and 1997, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
The accompanying financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raise substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
PricewaterhouseCoopers LLP
San Jose, California
November 6, 1998
31
<PAGE>
U.S. WIRELESS DATA, INC.
<TABLE>
<CAPTION>
BALANCE SHEETS
June 30,
1998 1997
---- ----
<S> <C> <C>
ASSETS
- ------
Current assets:
Cash ......................................................... $ 4,000 $ 6,000
Accounts receivable, net of allowance for
doubtful accounts of $22,000 (1998); and $16,000 (1997) .... 55,000 131,000
Inventory .................................................... 480,000 209,000
Other current assets ......................................... 187,000 103,000
------------ ------------
Total current assets .................................... 726,000 449,000
Processing units - deployed, net .................................. 517,000 --
Property and equipment, net ....................................... 253,000 41,000
Other assets ...................................................... 69,000 11,000
------------ ------------
Total assets ............................................ $ 1,565,000 $ 501,000
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
- -------------------------------------
Current liabilities:
Accounts payable ............................................. $ 1,506,000 $ 354,000
Accrued liabilities .......................................... 1,735,000 126,000
Borrowings, current portion .................................. 452,000 738,000
------------ ------------
Total current liabilities ............................... 3,693,000 1,218,000
Borrowings, long-term portion ..................................... 45,000 45,000
------------ ------------
Total liabilities ....................................... 3,738,000 1,263,000
------------ ------------
Redeemable common stock and warrants (Notes 12, 13) ............... 372,000 --
------------ ------------
Commitments and contingencies (Notes 11,12,13 and 14)
Stockholders' deficit:
Preferred stock, at $1.00 stated value,15,000,000 authorized,
3,060,000 (1998) Series A issued and outstanding .......... 3,060,000 --
Common stock, at $1.00 stated value, 40,000,000 shares
authorized 12,195,358 (1998) and 5,613,952
(1997) shares issued and outstanding ...................... 12,195,000 5,614,000
Additional paid-in capital .................................. 10,222,000 10,613,000
Accumulated deficit ......................................... (28,022,000) (16,961,000)
Notes receivable from stockholder ........................... -- (28,000)
- ------------------------------------------------------------------- ------------ ------------
Total stockholders' deficit ............................. (2,545,000) (762,000)
------------ ------------
Total liabilities and stockholders' deficit ............. $ 1,565,000 $ 501,000
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
32
<PAGE>
U.S. WIRELESS DATA, INC.
<TABLE>
<CAPTION>
STATEMENT OF OPERATIONS
For the year ended June 30,
1998 1997
<S> <C> <C>
Net revenues:
Product sales ............................. $ 650,000 $ 1,288,000
Services .................................. 259,000 27,000
------------ ------------
909,000 1,315,000
------------ ------------
Cost of revenues:
Product sales ............................. 786,000 804,000
Services .................................. 122,000 5,000
------------ ------------
908,000 809,000
------------ ------------
Gross profit .......................... 1,000 506,000
------------ ------------
Operating expenses:
Selling, general and administrative ....... 8,408,000 813,000
Research and development .................. 295,000 406,000
Litigation settlement ..................... 1,353,000 164,000
------------ ------------
10,056,000 1,383,000
------------ ------------
Loss from operations .................. (10,055,000) (877,000)
Interest expense ............................... (778,000) (32,000)
Other income(expense) .......................... (167,000) 45,000
------------ ------------
Net loss ....................................... $(11,000,000) $ (864,000)
============ ============
Basic and diluted net loss per share: .......... $ (1.18) $ (0.17)
============ ============
Weighted average common shares outstanding-
basic and diluted ........................... 9,368,926 4,986,767
============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
33
<PAGE>
U.S. WIRELESS DATA, INC.
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN STOCKHOLDERS' DEFICIT
Series A Common
Preferred Stock Common Stock Stock
Shares Amount Shares Amount Subscribed
------ ------ ------ ------ ----------
<S> <C> <C> <C> <C> <C>
Balance at June 30, 1996 ......................... -- $ -- 4,523,333 $ 4,523,000 $ 143,000
Issuance of common stock for services ............ -- -- 102,975 103,000 --
Issuance of common stock for litigation settlement -- -- 600,000 600,000 --
Exercise of stock options ........................ -- -- 245,100 245,000 --
Stock subscription issued ........................ -- -- 142,544 143,000 (143,000)
Note receivable on stock option plan ............. -- -- -- -- --
Net loss ......................................... -- -- -- -- --
-------------------------------------------------------------------------
Balance at June 30, 1997 ......................... -- $ -- 5,613,952 5,614,000 --
Issuance of common stock for cash ................ -- -- 1,428,571 1,428,000 --
Issuance of common stock for services ............ -- -- 2,621,429 2,621,000 --
Issuance of common stock for litigation settlement
and related note conversion .................... -- -- 679,800 680,000 --
Reclassification of redeemable common stock
and warrants ................................... -- -- (128,307) (128,000) --
Exercise of stock options ........................ -- -- 340,640 341,000 --
Exercise of stock warrants ....................... -- -- 1,203,947 1,204,000 --
Issuance of common stock for conversion of
notes payable .................................. -- -- 422,257 422,000 --
Issuance of common stock for interest on debenture -- -- 13,069 13,000 --
Sale of common stock repurchase right ............ -- -- -- -- --
Issuance of convertible debentures ............... -- -- -- -- --
Issuance of warrants for services ................ -- -- -- -- --
Issuance of Series A preferred stock ............. 3,060,000 3,060,000 -- -- --
Payment of notes receivable ...................... -- -- -- -- --
Net loss ......................................... -- -- -- -- --
Preferred stock dividend ......................... -- -- -- -- --
Balance at June 30, 1998 ......................... 3,060,000 $ 3,060,000 12,195,358 $ 12,195,000 $ --
============ ============ ============ ============ ============
Additional Note
Paid in Receivable Accumulated
Capital Stockholder Deficit Total
------- ----------- ----------- -----
<S> <C> <C> <C> <C>
Balance at June 30, 1996 ......................... $ 11,419,000 -- $(16,097,000) $ (12,000)
Issuance of common stock for services ............ (88,000) -- -- 15,000
Issuance of common stock for litigation settlement
and related note conversion .................... (506,000) -- -- 94,000
Exercise of stock options ........................ (212,000) -- -- 33,000
Stock subscription issued ........................ -- -- -- --
Note receivable on stock option plan ............. -- $ (28,000) -- (28,000)
Net loss ......................................... -- -- (864,000) (864,000)
------------------------------------------------------------
Balance at June 30, 1997 ......................... 10,613,000 (28,000) (16,961,000) (762,000)
Issuance of common stock for cash ................ (929,000) -- -- 499,000
Issuance of common stock for services ............ (810,000) -- -- 1,811,000
Issuance of common stock for litigation settlement 875,000 -- -- 1,555,000
Reclassification of redeemable common stock
and warrants ................................... (244,000) -- -- (372,000)
Exercise of stock options ........................ (167,000) -- -- 174,000
Exercise of stock warrants ....................... (1,190,000) -- -- 14,000
Issuance of common stock for conversion of
notes payable .................................. (186,000) -- -- 236,000
Issuance of common stock for interest on debenture 62,000 -- -- 75,000
Sale of common stock repurchase right ............ 1,240,000 -- -- 1,240,000
Issuance of convertible debentures ............... 622,000 -- -- 622,000
Issuance of warrants for services ................ 753,000 -- -- 753,000
Issuance of Series A preferred stock ............. (417,000) -- -- 2,643,000
Payment of notes receivable ...................... -- 28,000 -- 28,000
Net loss ......................................... -- -- (11,000,000) (11,000,000)
Preferred stock dividend ......................... -- -- (61,000) (61,000)
------------------------------------------------------------
Balance at June 30, 1998 ......................... $ 10,222,000 $ -- $(28,022,000) $ (2,545,000)
============ ============ ============ ============
</TABLE>
The accompanying notes are an integral part of the financial statements
34
<PAGE>
U.S. WIRELESS DATA, INC.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
For the year ended June 30,
1998 1997
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................. $(11,000,000) $ (864,000)
Adjustments to reconcile net loss to net cash used in
Operating activities:
Depreciation and amortization ..................... 111,000 57,000
Non-cash consulting and other expense ............. 2,734,000 50,000
Non-cash compensation - stock option .............. 1,327,000 --
Non-cash interest expense ......................... 654,000 --
Non-cash litigation expense ....................... 1,353,000 164,000
Debt forgiveness .................................. -- (33,000)
Changes in current assets and liabilities:
Accounts receivable ............................ 77,000 (79,000)
Inventory ...................................... (271,000) 412,000
Other current assets ........................... (85,000) 22,000
Accounts payable ............................... 1,153,000 136,000
Accrued liabilities ............................ 281,000 (102,000)
------------ ------------
Net cash used in operating activities .......... (3,666,000) (237,000)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ................ (256,000) --
Processing units - deployed ....................... (564,000) --
(Increase)decrease in other assets ................ (58,000) 12,000
------------ ------------
Net cash used in investing activities .......... (878,000) 12,000
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock ................... 664,000 185,000
Proceeds from sale of common stock repurchase right 1,240,000 6,000
Payment of note receivable from stockholder ....... 28,000 --
Payment of note payable ........................... (13,000) --
Net proceeds from issuance of debt ................ 2,623,000 --
------------ ------------
Net cash provided by financing activities ...... 4,542,000 191,000
------------ ------------
Net decrease in cash ..................................... (2,000) (34,000)
Cash at beginning of period .............................. 6,000 40,000
------------ ------------
Cash at end of period .................................... $ 4,000 $ 6,000
============ ============
<FN>
Supplemental disclosure of non-cash financing and investing:
1. Conversion of $50,000 notes payable to 75,000 shares of common stock.
2. Conversion of $3,060,000 convertible debentures to 3,060,000 shares of preferred stock.
3. Conversion of $202,000 note payable to 496,221 shares of common stock.
4. Conversion of $164,000 note payable to 328,750 shares of common stock.
</FN>
</TABLE>
The accompanying notes are an integral part of the financial statements
35
<PAGE>
U.S. WIRELESS DATA, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1. OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Operations
U.S. Wireless Data, Inc. (the "Company" or "USWD") was incorporated in
the state of Colorado on July 30, 1991. The Company is in the business of
providing products and services to enable the use of wireless technology for
electronic payment and other transactions. The Company began generating its
first revenue from product sales in fiscal 1995. The Company is now in a
transition from being solely an equipment manufacturer to also providing
products and services that generates recurring revenue. In the future, and
assuming the Company is able to continue as a going concern, the recurring
revenue component is expected to become a significant component of the Company's
business.
Financial Condition
The Company continues to have difficulties due to its financial
condition and lack of liquidity. The Company has accumulated a deficit of
approximately $28 million at June 30, 1998 and has limited financial resources.
At present, development of the Company's products and services requires
immediate and significant additional financing. Proceeds from the private
placement offering, which was completed in December 1997, were used primarily to
complete the launch of the joint marketing program with GTE Wireless, to build
the related corporate infrastructure and to make selective inventory purchases.
Cash raised through recent private securities offerings has been and will be
used primarily for working capital and to pay certain preexisting liabilities.
Due to the change in its distribution strategy to channel product sales and
service offerings through existing merchant acquirers, the Company has been able
to make significant reductions in its direct sales force and reduce its cash
requirements. However, execution of the Company's business plan is dependent on
a significant debt or equity-financing event in the immediate future. The
Company continues to work both directly and through its consultants to secure
such financing which is required to fund operations while a significant
recurring revenue stream is developed. There can be no assurance that the
Company will be successful with efforts to raise additional capital. The
inability of the Company to secure additional financing in the near term could
adversely impact the Company's financial position, including its ability to
continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded assets
and liabilities that might be necessary should the Company be unable to continue
as a going concern.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from the estimates used.
Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents. Cash
equivalents are carried at cost, which approximates fair value.
36
<PAGE>
Inventory
Inventory is stated at the lower of cost or market, cost being
determined by the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost. The Company uses the
straight-line method of depreciation based on the estimated useful lives of the
assets (generally three to seven years). Maintenance and repairs are charged to
operations as incurred.
Processing Units Deployed
Merchants that subscribe to the Company's credit card processing
service usually receive a TRANZ Enabler unit that provides the wireless
communications and processing functionality. As these units are deployed at a
customer location, the asset value is transferred from inventory to "Processing
units - deployed" and depreciated via a charge to Cost of Revenue over its
estimated useful life of 48 months. The company retains title to the TRANZ
Enabler units and earns usage income on the units while they are deployed at the
customer location.
Impairment of Long-lived Assets
The Company evaluates the recoverability of its long-lived assets and
recognizes an impairment in the event the net book value of such assets exceeds
the future undiscounted cash flow attributable to such assets.
Revenue Recognition and Major Customers
Revenue is classified as either Product Sales or Services . Product
Sales result from the sale of the Company's electronic payment terminals and
related peripheral products to resellers or end-user merchants. Product Sales
are recognized upon shipment of products to customers. Services result primarily
from the Company's participation in the ongoing transaction processing revenue
stream generated by the merchant's credit card processing agreement. One-time
application fees are also included in this category. Services are recorded in
the period services are provided. During fiscal 1997, Cardservice International,
Inc. ("CSI") accounted for 53% of revenue. During fiscal 1998, CSI accounted for
20% of revenues.
Research and Development Costs
Research and development costs are expensed as incurred.
Income Taxes
The Company accounts for income taxes under the liability method, which
requires recognition of deferred taxes and liabilities for the income tax
consequences of temporary differences between the tax basis of assets and
liabilities and their reported amounts.
Net Loss Per Share
Earnings (loss) per common share (EPS) is computed using Statement of
Financial Accounting Standard (SFAS) No. 128, "Earnings per Share". SFAS No. 128
establishes standards for the computation, presentation, and disclosure of
earnings per share. Basic and diluted net loss per share is computed by dividing
the net loss available to common stockholders by the weighted average number of
common shares outstanding at the end of the period. Diluted EPS excludes
exercise of stock options and warrants and the conversion of convertible
securities from the calculation since their effect would be anti-dilutive. Such
shares could potentially dilute earnings per share in the future. EPS for the
year ended June 30, 1997 has been restated to conform with SFAS No.128. In
fiscal 1998, the net loss available to common stockholders equals the net loss
less the $61,000 preferred stock dividend issuable at year end.
37
<PAGE>
Fair Value of Financial Instruments
The carrying value of the Company's financial instruments including
accounts receivable, accounts payable, accrued liabilities and debt approximate
their fair values due to their relatively short maturities.
Stock-based Compensation
The Company accounts for stock-based employee compensation arrangements
in accordance with the provisions of APB No. 25, "Accounting for Stock Issued to
Employees," and complies with disclosure provisions of SFAS No. 123, "Accounting
for Stock Based Compensation."
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130, which is effective for fiscal years beginning after
December 15, 1997, establishes standards for reporting and displaying
comprehensive income and its components with the same prominence as other
financial statements. All prior periods must be restated to conform to the
provisions of SFAS No. 130. The Company will adopt SFAS No. 130 during the first
quarter of fiscal 1999, but does not expect the new accounting standard to have
a material impact on the Company's reported financial results.
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 131, which is effective for
fiscal years beginning after December 15, 1997, establishes new disclosure
requirements for operating segments, including products, services, geographic
areas, and major customers. The Company will adopt SFAS No. 131 for the 1999
fiscal year. The Company does not expect the new accounting standard to have a
material impact on the Company's reported financial results.
Reclassifications
Certain reclassifications have been made to prior year financial
statements to conform to current year presentation.
38
<PAGE>
NOTE 2. INVENTORY
<TABLE>
<CAPTION>
June 30,
1998 1997
---- ----
<S> <C> <C>
Inventory consists of:
Raw material ............................................. $ 153,000 $ 111,000
Finished goods ........................................... 556,000 208,000
Spare parts and accessories .............................. 8,000 2,000
Lower of cost or market reserve .......................... (237,000) (112,000)
--------- ---------
$ 480,000 $ 209,000
========= =========
</TABLE>
The Company has established a reserve against finished goods and raw
materials to reflect the estimated net realizable value of the inventory as of
June 30, 1998, based on current selling prices.
NOTE 3. PROCESSING UNITS DEPLOYED AND PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
June 30,
1998 1997
---- ----
<S> <C> <C>
Processing units deployed consists of:
Processing units deployed ....................... $ 564,000 --
Less: accumulated depreciation .................. (47,000) --
--------- ---------
$ 517,000 --
========= =========
Property and equipment consists of:
Equipment and furniture .......................... $ 523,000 $ 295,000
Tooling .......................................... 124,000 124,000
Demo equipment ................................... 28,000 --
Less: accumulated depreciation and amortization . (422,000) (378,000)
--------- ---------
$ 253,000 $ 41,000
========= =========
</TABLE>
NOTE 4. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
June 30,
1998 1997
---- ----
<S> <C> <C>
Accrued liabilities consists of:
Accrued compensation ........................... $ 224,000 $ 69,000
Accrued compensation-stock option............... 1,327,000 --
Accrued professional fees ...................... 112,000 --
Other .......................................... 72,000 57,000
--------- ---------
$1,735,000 $ 126,000
========== =========
</TABLE>
NOTE 5. BORROWINGS
<TABLE>
<CAPTION>
Borrowing consist of the following:
Current portion:
June 30,
1998 1997
---- ----
<S> <C> <C>
Note payable - supplier - OMRON .................. $ 375,000 $ 388,000
Note payable - investors ......................... -- 185,000
Note payable - entrenet .......................... 62,000 150,000
Note payable - lawsuit settlement ................ 15,000 15,000
--------- ---------
$ 452,000 $ 738,000
========= =========
Long-term portion - lawsuit settlement ............. $ 45,000 $ 45,000
</TABLE>
39
<PAGE>
Note Payable - Supplier - OMRON
The note payable to a supplier was in default at June 30,
1998. The Company continued to accrue monthly interest payments. As of
June 30, 1998, the supplier had not called the note. During August
1998, the Company and the supplier reached an agreement to cure the
default with a restructuring of the terms of the note. The new terms
include a reduction in the price per unit as well as the number of
units under contract. The agreement also reduced the principal balance
under the note to $120,000 plus interest of $47,000. The Company has
agreed to a payment schedule that will repay the balance due by
February 1999.
Note Payable - entrenet
On March 12, 1998, the Company entered into an agreement with
entrenet to provide business and financial consulting services to the
Company and to assist the Company in locating additional financing. The
term of the agreement is for six months and renews for additional
six-month terms unless at least 60 days notice is given to terminate
the agreement prior to the end of a term. For its advisory services
under this agreement, entrenet earned a fee of $60,000 which is payable
by a promissory note plus interest at 10% per year. The Company paid
this in full in July 1998.
Note Payable - Lawsuit Settlement
As part of a lawsuit settlement, the Company executed a note
payable in September 1997 which is due in installments as follows:
$5,000 due March 17, 1998; $10,000 due September 17, 1998; $20,000 due
September 17, 1999; and $25,000 due September 17, 2000. The first two
installments, due in March 1998 and September 1998, were paid during
the first quarter of fiscal 1999. See additional discussion of the
lawsuit settlement in " Note 12. Litigation."
Convertible Debenture
In December 1997, the Company closed a private placement of
$3,060,000 principal amount of 8% Convertible Debentures. Net proceeds
approximated $2.6 million. Interest on the debentures was settled with
13,000 shares of common stock valued at $75,000. The debentures
included an "in the money" convertible option valued at $622,000 on
date of issuance, which allowed the holder to convert preferred shares
to common shares at a discount from fair market value. The debentures
were converted to 3,060,000 of Series A Preferred Stock in February
1998. Non-cash interest expense of approximately $622,000 was
recognized in fiscal 1998 related to this debenture.
See Notes 12 and 13 for additional borrowings.
NOTE 6. PREFERRED STOCK
The Company has authorized 15,000,000 shares of no par value preferred
stock, of which 4,000,000 shares have been designated as Series A Cumulative
Convertible Redeemable Preferred Stock ("the Series A Preferred Stock") with a
stated value of $1.00 per share. On February 9, 1998, the Company issued
3,060,000 shares of its Series A Preferred Stock in exchange for all $3,060,000
of the Company's 8% Convertible Debentures.
Conversion
Each share of Series A Preferred Stock is convertible at the election
of the holder into common stock based on the face value of the Series A
Preferred Stock being converted, at a rate equal to the lesser of $6.00 per
share or 75% of the average of the closing bid price of the common stock as
reported on the OTC Electronic Bulletin Board or, if available, the closing bid
price as quoted on NASDAQ or any other national securities exchange upon which
the common stock is then listed, over the five trading days prior to conversion.
A minimum conversion price of $3.76 per share was in effect from the issuance
date through September 6, 1998.
40
<PAGE>
Dividends
Holders of Series A Preferred Stock are entitled to receive cumulative
quarterly dividends upon declaration by the Board of Directors at an annual rate
of 8% per share which was reduced to 4% per share on August 7, 1998, the
effective date of the SEC registration statement covering the common stock
reserved for conversion. The Company can pay the dividends in shares of common
stock, the number of shares issuable being determined by dividing the amount of
the dividend by the same formula as applies to conversions. Unless the full
amount of cumulative dividends have been paid or sufficient funds set aside,
dividends may not be paid or declared on the common stock or any other stock
ranking junior to the Series A Preferred Stock. Additionally, under Colorado
law, certain conditions must be met prior to dividend distributions of cash or
property. As a result, the Company's ability to pay cash or property (but not
stock) dividends in the future depends upon its financial results, liquidity and
financial condition.
Voting
Generally, the Series A Preferred Stock is not entitled to vote on
matters submitted to shareholders except as specifically authorized under
Colorado law.
Liquidation
In the event of a liquidation or sale of the Company, the Series A
Preferred Stockholders are entitled to a per share distribution in preference to
common shareholders or any stock of the company ranking junior to the Series A
Preferred Stock of $1.00 plus any accrued but unpaid dividends. If the amount
available in liquidation is insufficient to pay the full amount, the Series A
Preferred Stockholders will ratably share any distribution first in proportion
to their respective liquidation preferences and then in proportion to their
respective amounts of accrued but unpaid dividends. A consolidation or merger of
the Company will not be deemed to be a liquidation provided it is approved by a
majority of the Series A Preferred Stock.
Optional Redemption
The Company may redeem any Series A Preferred Stock outstanding after
36 months from December 10, 1997 by payment of $1.00 per share plus all accrued
and unpaid dividends to the date of redemption. If fewer than all of the shares
of Series A Preferred Stock were to be redeemed, the redemption will be pro rata
among all shares outstanding.
See "Note 14. Subsequent Events" for a description of a partial
redemption and modification of the conversion terms for a portion of the Series
A Preferred Stockholders.
NOTE 7. STOCK OPTIONS
Stock Option Plan
In September 1992, the Company adopted an incentive stock option plan
and a non-qualified stock option plan, which, as amended, provides for the
issuance of 2,680,000 shares of Common Stock under the Plan.
Stock options have been granted under the option plan at the fair
market value of the common stock on the date of grant and generally vest over a
period of between two and four years. Options granted under the Plan generally
must be exercised no later than 10 years from the date of grant.
41
<PAGE>
The following table summarizes information about stock options outstanding at
June 30, 1998:
<TABLE>
<CAPTION>
Outstanding Options Outstanding Vested Options
-------------------------------------------- --------------------------
Average Weighted Weighted
Remaining Average Average
Range of Contractual Exercise Number Exercise Number
Exercise Price Life Price Outstanding Price Outstanding
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$0.00 - $0.13 7.5 $0.13 172,281 $0.13 172,281
$0.14 - $0.22 7.3 $0.22 70,000 $0.22 68,750
$0.23 - $4.13 9.3 $3.80 120,000 $3.73 38,500
$4.14 - $6.34 9.5 $5.99 145,000 $6.00 36,050
$6.35 - $8.41 9.3 $7.70 100,000 $7.70 33,650
------- -------
607,281 349,231
======= =======
</TABLE>
Stock option transactions for the years ended June 30, 1997 and 1998
were are follows:
<TABLE>
<CAPTION>
Options Outstanding
----------------------------------
Weighted Average
Number of Exercise Price
Shares Per Share
----------------------------------
<S> <C> <C>
Balance at June 30, 1996 793,549 $0.16
Granted 20,000 $0.16
Exercised (245,100) $0.14
Cancelled (138,800) $0.22
-------
Balance at June 30, 1997 429,649 $0.16
Granted 608,000 $4.30
Exercised (340,640) $0.48
Cancelled (89,728) $4.32
--------
Balance at June 30, 1998 607,281 $3.51
=======
Exercisable at June 30, 1998 349,231 $1.88
=======
</TABLE>
Fair value disclosures
Had compensation expense for the Company's Plan been determined based
on the fair value of the options at the grant dates for awards under the Plan
consistent with the method of accounting prescribed by SFAS No. 123, the
Company's net loss and loss per share would have been increased to the proforma
amounts indicated below:
<TABLE>
<CAPTION>
June 30,
1998 1997
------------------------------
<S> <C> <C>
Net loss available to Common Stockholders As reported ($11,061,000) ($864,000)
Pro forma ( 11,567,000) ( 876,000)
Basic and diluted loss per share As reported $(1.18) $(0.17)
Pro forma $(1.24) $(0.18)
</TABLE>
The weighted average fair value of options granted during the year
ended June 30, 1998 and 1997 under the Company's stock option plan was $3.22
and $.03 per option, respectively. In determining the minimum fair value of
each option, the Company used Black-Scholes option-pricing model as prescribed
by SFAS No. 123 using the following assumptions: dividend yield of zero;
expected volatility of 90% for 1998 and 162% for 1997; risk-free interest rate
of 5.6% and 6.4%, respectively; and an average expected option life of 3.5
years.
Other Stock Options
In addition to the options granted under the plan, on August 4, 1997,
the Company granted to an employee 600,000 options to purchase common stock at
an exercised price of $1.00 per share. The options vest ten percent on date of
grant and three percent per month thereafter. At June 30, 1998, all options
remained unexercised. On November 21, 1997, the Company agreed to pay to the
employee any additional income taxes which the employee may incur as a result
of the options being non-qualified stock options as compared to incentive
stock options. Due to this agreement, the stock options are being accounted
for as variable stock options which results in recognition of compensation
expense based on the fair market value of the common stock at the end
of each reporting period. Compensation expense relating to these options
approximated $1,300,000 for the year ended June 30, 1998.
42
<PAGE>
NOTE 8. STOCK WARRANTS AND CALL OPTION
In fiscal 1993, the Company issued warrants to one officer and one
director of the Company to purchase an aggregate of 250,000 shares of common
stock at $4.00 per share. As of June 30, 1997, all of these warrants were
fully vested and had the following terms: 100,000 originally set to expire
April 12, 1998 have been extended to February 7, 1999; 150,000 expire May 1,
2003. The Company recorded a charge of $156,000 in connection with the
extension of these warrants.
In connection with the Company's December 1993 initial public offering,
the Company issued warrants to the underwriters to purchase 165,000 shares of
the Company's common stock at $12.33 per share, which were fully vested at the
date of issuance. Such warrants expire on December 2, 1998.
In fiscal 1994, in conjunction with the acquisition of Direct Data, the
Company issued warrants to four former shareholders of Direct Data to purchase
29,548 shares of common stock at $2.625 per share, which were fully vested at
the date of issuance. Of those warrants, 8,947 have been exercised, 5,752 have
expired, and the remaining 14,849 expire as of May 31, 1999.
In August 1997, for total consideration of $500,000, the Company sold
3,500,000 shares of Common Stock and 1,600,000 warrants to Liviakis Financial
Communications, Inc. and its affiliates. The warrants entitle the holders to
purchase up to 1,600,000 shares of the Company's Common Stock at $.01 per
share during the period from January 15, 1998 and through August 4, 2002. The
warrant shares carry certain registration rights and antidilution provisions.
On May 12, 1998, 1,200,000 shares of Common Stock were issued upon exercise of
the warrants. See Note 13.
In connection with the private offering of 8% Convertible Debentures in
December 1997, the Company issued a warrant as part of the finder's fee
payment related to the offering. The warrant entitles the holder to purchase
50,000 shares of Common Stock at $6.525 per share during the period from
December 10, 1997, through December 9, 2000. The warrant also provides for
cashless exercise. The warrant contains antidilution protection and
"piggyback" registration rights applicable to the common stock issuable upon
exercise of the warrant. As of June 30, 1998 no warrants were exercised.
In March 1998, the Company issued a warrant to entrenet Group, LLC to
purchase 10,435 shares of Common Stock at $5.75 per share as a consulting fee.
The warrant expires on March 11, 2003. The warrant has antidilution provisions
and "piggyback" registration rights applicable to the common stock issuable
upon exercise of the warrant. In September 1998, the Company issued an
additional warrants to purchase 8,333 shares of common stock at $2.40 per
share exercisable through September 2003 upon termination of this agreement.
The Company obtained a call option on 397,684 shares of its common
stock in fiscal 1996 in connection with the surrendering of the assets to the
seller of a previously acquired company. The call option allowed the Company to
purchase the shares at $.25 per share through October 5, 1998. In March 1998,
the Company entered into an agreement with the shareholder to assign the options
to third parties. As of June 30, 1998, the Company sold the call options for net
proceeds of approximately $1.2 million.
43
<PAGE>
NOTE 9. INCOME TAXES
At June 30, 1998 and 1997, the Company had net operating loss
carryforwards for federal and state income tax purposes of approximately $21
million and $12 million, respectively. Annual utilization of the loss
carryforwards is subject to significant limitations due to changes in the
Company's ownership, which could result in little or no benefit being derived
from these carryforwards. Future changes in ownership could further reduce the
annual availability of these benefits. If unused, the carryforwards will
expire beginning in 2008.
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, and operating
loss and tax credit carryforwards. The tax effects of significant items
comprising the Company's deferred taxes are as follows:
<TABLE>
<CAPTION>
June 30,
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets
Net operating loss carry-forwards ........ $ 8,125,000 $ 4,388,000
Depreciation ............................. 4,000 (3,000)
Inventory reserves ....................... 47,000 31,000
Allowance for bad debts .................. (8,000) 6,000
Other .................................... 60,000 28,000
----------- -----------
$ 8,228,000 $ 4,450,000
Valuation allowance ...................... (8,228,000) (4,450,000)
----------- -----------
Net deferred tax asset ....................... $ -- $ --
=========== ===========
</TABLE>
The Company has recorded a full valuation allowance on its net deferred
tax assets based on current evidence which indicates that it is not considered
more likely than not that these benefits will be realized. The valuation
allowance increased during fiscal 1998 and 1997 by $3,778,000 and $324,000
respectively, due to additional losses for which no tax benefits were recorded.
The Company has not completed federal income tax filings for fiscal
years 1996 and 1997 and intends to take the steps required to complete the tax
filings as soon as practicable.
NOTE 10. EMPLOYEE BENEFIT PLAN
In April 1994, the Company established a qualified Section 401(K)
Savings Plan. The Plan allows eligible employees to contribute up to 15% of
their salaries on a pre-tax basis. The Company did not make any contributions to
the Plan during fiscal year 1998 or 1997.
NOTE 11. COMMITMENTS AND CONTINGENCIES
The Company leases its office facilities under two operating lease
arrangements, wherein product development is located in Colorado under a month
to month lease at $1,400 per month. In September 1997, the Company executed a
five-year lease term for its primary office space in Emeryville, California.
Rental payments commenced October 1, 1997 at the initial rental rate of $9,942
per month and are currently at $11,126 per month following a recent move within
the facility. The leases contain certain provisions for rental adjustments. In
addition, the leases require the Company to pay property taxes, insurance and
normal maintenance costs. Rent expenses were $119,000 and $74,000 during fiscal
years 1998 and 1997. Future minimum lease commitments (including twelve months
of rent for the Colorado facility lease for fiscal year 1999 only) are $146,000
in fiscal 1999, $137,000 in 2000, $143,000 in 2001, $148,000 in 2002, and
$38,000 in 2003.
44
<PAGE>
Through June 30 1998, the Company has entered into four agreements,
which include various marketing, distribution and CDPD service purchase terms.
The agreement with AT&T Wireless includes purchase obligations for a term of
three years, with automatic renewals of additional one-year terms if either
party fails to give 90 days prior notice of termination at the end of term. The
Company is obligated to maintain a minimum number of active CDPD addresses over
the term of the agreement, or pay such addresses even if the Company has not
resold the numbers to merchants. Based on the agreement of April 1, 1997, the
Company is obligated to have minimum monthly CDPD billings of $4,500 beginning
with the one-year anniversary of the agreement, $13,500 within 18 months and
$20,250 within two years. The Company is currently in discussion with the
carrier regarding modifications to the agreement to accommodate the Company's
new distribution approach. The GTE Wireless minimum CDPD levels were eliminated
with a contract amendment in September 1998. See "Note 14. Subsequent Events."
As of June 19, 1998, the Company entered into an agreement with an
investment banking firm to act as the Company's exclusive agent for purposes of
structuring mergers, sale of assets or similar transactions involving a portion
or substantially all of the business, assets or stock of the Company. Under the
agreement, the Company is obligated to pay a cash retainer fee of $30,000
payable $5,000 a month for six months, reimburse reasonable out-of-pocket
expenses and pay a "contingent fee" equal to three percent of the aggregate
gross consideration received by the Company in connection with a transaction.
The Company has secured its obligation under this agreement with substantially
all assets of the Company.
Under one of the Company's transaction processing agreements, the
Company is required to pay 50 percent of the amounts due to the processor from
the merchant which remain unpaid for 60 days.
The Company agreed to file a registration statement with the SEC to
register the Common Stock underlying the 6% Debentures within 75 days of July
22, 1998, (the "Initial Issuance Date"), and that it will respond to initial SEC
comments within 15 days of receipt and any subsequent SEC comments within 10
days of receipt. In the event the registration is not effective with the SEC
within 120 calendar days of the Initial Issuance Date, the Company is required
to pay a cash penalty of two percent (2%) of the face amount of the 6%
Debentures and thereafter an amount equal to three percent (3%) of the face
amount for every thirty calendar days (or any fraction thereof) until the
registration is effective. In the event the registration is not effective by the
180th day after the Initial Issuance Date, the Company can be required by the
holders to redeem the 6% Debentures at 120% of face value, plus accrued interest
to the date of redemption. The Company is obligated to pay all registration
expenses (but not selling expenses) incurred in registering the shares for the
holders of the 6% Debentures. See "Note 14. Subsequent Events."
See Notes 12, 13, and 14 for additional commitments and contingencies.
45
<PAGE>
NOTE 12. LITIGATION
Securities Class Actions Settlements
In September 1996, the Company agreed to terms in settlement of securities
fraud litigation, pending since 1994, which was brought in connection with the
Company's initial public offering in December 1993. The parties' agreement (the
"Settlement Agreement") was filed in the United States District Court for the
District of Colorado on January 15, 1997. By its order approving the settlement,
the court certified a plaintiffs' settlement class and provided the mechanism
for payment of claims. The Company contributed $10,000 to the total settlement
fund of $2,150,000. The remaining portion of the settlement was contributed by
certain underwriters of the Company's initial public offering and its former
securities counsel. No objections to the Settlement Agreement were made. No
potential class member opted-out of the settlement and all are bound by the
release granted the Company. All claims against the Company in those
consolidated cases were dismissed by final federal court order on September 4,
1997. No appeal was filed. Similar state court claims were dismissed by Colorado
district court order dated October 9, 1997, and no appeals have been filed in
that case.
To resolve cross-claims asserted by the underwriters in the litigation, the
Company agreed to issue a total of 600,000 shares of Common Stock valued at
approximately $94,000 upon the effective date of the Settlement Agreement, which
was April 26, 1997. The shares issued under this settlement become saleable
under SEC Rule 144 commencing on April 26, 1998. The Company has agreed to
register such shares upon demand of holders of not less than 25% of the shares,
however, a substantial number of the shares have been sold under Rule 144 as of
June 30, 1998
Further, on September 17, 1997, the Company agreed to entry of a consent
judgment against it and in favor the sole shareholder of an underwriter, in the
amount of $60,000 payable over a three year period.
Settlement with Consultant
In July 1997, the Company executed a two-year agreement effective as of
April 1, 1997 for consulting services. In addition to monthly cash compensation,
the consultant received a $50,000 two-year convertible note with 10% interest
per annum. The note was convertible into Common Stock at $.40 per share, for a
total of 125,000 shares issuable upon conversion of the principal amount of the
note. A dispute arose between the consultant and the Company and the consulting
agreement was terminated by the Company as of the end of August 1997. The
Company settled the dispute in January 1998, which resulted in a $60,000 payment
(including amounts previously paid to the consult prior to termination) for all
services rendered. As part of the settlement, an adjustment to the conversion
terms of the promissory note was made reflecting that all principal and accrued
interest on the note could be converted to 75,000 shares of the Company's Common
on or before April 1, 1998. The note was converted and the shares were issued as
"restricted securities" as defined under Rule 144 under the Securities Act of
1933, as of January 26, 1998. The shares became saleable under Rule 144
commencing on April 1, 1998.
46
<PAGE>
Settlement of Claims of Certain Noteholders
From April through June 1997, the Company issued a total of $185,000 of
Demand Notes payable in full on or before April 11, 1998 (the "Demand Notes").
The principal and accrued interest on the Demand Notes became convertible into
shares of the Company's Common Stock as of November 1, 1997 at prices of $.35
per share (as to $75,000 of the Demand Notes) and $.50 per share (as to $110,000
of the Demand Notes). Commencing on November 3, 1997, the Company began
receiving conversion demands from the Noteholders and as of November 14, 1997,
holders of $135,000 of the Demand Notes had demanded conversion of their Demand
Notes into "free trading" Common Stock. The Noteholders claimed that their right
to free-trading stock arose out of certain oral representations made at the time
of issuance of the Demand Notes, the fact that no "restricted securities"
legends were imprinted on the documents evidencing the Demand Notes and no other
written advice as to the "restricted" nature of the shares underlying the Demand
Notes was given to them at the time. The complaining Noteholders were asserting
damages based on a market price for the Company's Common Stock in the $8.00 per
share range as of the November 1, 1997 time period. The holder of the remaining
$50,000 Demand Note (which was convertible at $.50 per share) did not assert any
claims against the Company in connection with his purchase of the Demand Note.
Rather than incur the expense and risks of litigation, the Company settled
the complaining Noteholders' claims by issuing 1.4 times the number of shares
originally issuable as principal and interest on the Demand Notes purchased by
the complaining Noteholders (plus an additional 11,000 shares to one Noteholder
who purchased $50,000 of the Demand Notes), and providing the Noteholders with
certain guarantees as to the amount for which the shares can be resold and a
"put" which allows the Noteholders to require the Company to repurchase any
restricted shares remaining unsold at the end of the one year period after the
shares become saleable under SEC Rule 144, as described in detail below. The
shares issued upon conversion of the Demand Notes are "restricted securities" as
defined under SEC Rule 144, but will become saleable pursuant to Rule 144 one
year from the date the converted Demand Note was purchased by the Noteholder. A
total of 525,800 shares have been issued to the complaining Noteholders upon
conversion of their Demand Notes which will be subject to the guarantee and put
agreements. The holder of the other $50,000 Demand Note has been given the
enhanced conversion rate (of 1.4 times the number of shares originally issuable)
and received 154,000 shares upon conversion of his Demand Note; the shares are
not entitled to the guarantee or put.
The guarantee provision of the settlement agreement allows the former
Noteholders to recover the difference between the guarantee price (which is
$3.00 per share as to 360,800 of the shares and $4.29 per share as to the
remaining 165,000 shares issuable upon conversion of the Demand Notes) and the
gross amount the Noteholder receives upon a sale of the shares. The guarantee is
operative at any time during the one year period commencing on the date the
shares become saleable under SEC Rule 144. The Company is obligated to pay the
amount due within thirty days of receiving a demand, accompanied by
documentation confirming the sale. Under the "put" provision of the settlement
agreement, the former Noteholders will have a five day period commencing on the
date one year from the date the shares become saleable under SEC Rule 144 (or
the first business day thereafter if such day is a day on which the stock
markets are closed) during which the former Noteholders may "put" any restricted
shares remaining unsold by them at the time back to the Company. Upon exercise
of the put, the Company must either (1) purchase the shares for the put price
(which is $3.00 per share for 360,800 of the shares and $4.29 per share for
165,000 of the shares) or (2) require the shareholder to sell the shares into
the market, with the Company making up the difference between the put price and
the gross amount received by the shareholder upon such sale, within 15 days
after receipt of written notice and documentation confirming the sale.
As a result of the above settlement, the Company recorded approximately
$1,353,000 as litigation settlement expense in fiscal 1998. The shares
originally issuable upon conversion of the notes and the additional shares
resulting from the settlement are subject to the guarantee and "put" provisions
and are reflected as Redeemable Common Stock. The originally issuable shares are
reflected at their conversion value adjusted for the value attributable to the
guarantee and "put" provisions. In the event redemption of such shares becomes
probable and the actual redemption amount is in excess of the carrying amount,
such excess amount will be recorded as litigation settlement expense. The
additional shares are reflected at their redemption value. As of June 30, 1998,
approximately 128,000 shares subject to the guarantee and "put", with a carrying
value of $232,000 remained outstanding and have a maximum
47
<PAGE>
redemption value of approximately $384,000 prior to any reduction for amounts
the holder may receive upon the sale of such shares.
On July 2, 1997, the Company also issued a promissory note in the amount of
$16,825 to one of the investors who purchased the Demand Notes. This note was
due and payable in full as of July 30, 1997 and bore interest at a default rate
of 18% per annum if not paid when due. In return for the investor's agreement
not to require the Company to pay the note when it came due, the investor claims
that a representative of the Company promised that the Company would treat the
note the same as the other Demand Notes and convert it to Common Stock on the
same terms. In conjunction with the Demand Note settlement with this investor,
the Company agreed to convert all amounts owing as principal and interest by it
under this note to a total of 18,507 shares of Common Stock. The shares issued
upon conversion of this note are not entitled to the guarantee or put described
above.
Dispute with Supplier
In April of 1995, the Company entered into an agreement with a supplier
to supply modems for CDPD products. In October 1996, the supplier asserted a
claim for payment of product sold under that agreement in the amount of
approximately $60,000. The Company asserted the supplier delivered defective
product, which caused damages to the Company in excess of the amount being
claimed. The Company agreed to settle the dispute by paying $50,000 over the
sixty-day period commencing June 30, 1998.
NOTE 13. RELATED PARTIES
Transactions with Cardservice International, Inc.
A director of the Company is also an officer of the Company's largest
customer, Cardservice International, Inc. ("CSI"). Another officer and director
of the Company is a "nonvoting" director of CSI. Sales to CSI approximated
$178,000 and $698,000 in fiscal 1998 and 1997, respectively.
During fiscal 1996, CSI purchased $162,500 of raw materials on behalf
of the Company in exchange for 142,544 shares of common stock issued subsequent
to June 30, 1996 at 150% of the then current fair market value plus registration
rights after one year on all stock owned by CSI. This transaction increased
CSI's ownership in the Company from 2% to 5%. At June 30, 1998, CSI had
completely divested its stock interest in the Company. Additionally, the Company
provides sales rebates to CSI on POS-50(R) units sold by CSI to end users of
product built with the raw materials purchased using the amounts advanced from
CSI. As of June 30, 1998, a total of $64,000 was paid under the agreement.
Transactions with Liviakis Financial Communications, Inc.
In July of 1997, the Company entered into a Consulting Agreement with
Liviakis Financial Communications, Inc. and its affiliates ("LFC") pursuant to
which LFC provides the Company with financial and business consulting and public
and investor relations services. The Company was obligated to pay Liviakis
consulting fees of $10,000 in cash and 300,000 shares of its Common Stock over
the one-year term of the Consulting Agreement. Pursuant to the Consulting
Agreement, the Company must also pay LFC cash equal to 2.5% of the gross
proceeds received in any direct financing located for the Company by LFC.
The Company also sold a total of 3,500,000 shares of Common Stock and
warrants to purchase up to an additional 1,600,000 shares of Common Stock
exercisable at $.01 per share to two LFC affiliates in August 1997 for $500,000
in cash. Pursuant to this transaction, LFC and these affiliates became
significant shareholders of the Company. The Common Stock issued (and issuable
pursuant to the Consulting Agreement and upon exercise of the warrants) to LFC
and its affiliates carries certain registration rights. The warrants provide
that if for any reason the Company does not issue shares upon exercise, the
Company is required to repurchase the warrants for the difference between the
$.01 exercise price and the then-current market price of the common stock.
Since the LFC related financing transaction and the LFC Consulting
Agreement were entered into by the Company at approximately the same time, the
Company has treated these transactions as one transaction for accounting
purposes. Based on the fair market value of the Common Stock as determined by an
independent valuation, the initial 3,500,000 shares of Common Stock and warrants
for 1,600,000 shares of Common Stock issued in the transactions, net of cash
proceeds received, were valued at approximately $1,285,000 and recorded as
prepaid consulting services. The consulting services are amortized on a
straight-line basis over the term of the Consulting Agreement commencing with
the July 25, 1997 effective date of the agreement. The warrants are classified
as redeemable securities as a result of the repurchase provisions described
above. The 300,000 shares which are issuable over the term of the contract are
being valued as such shares vest, and resulted in an additional $1,085,000 in
consulting expenses during fiscal 1998.
In connection with the closing of the sale of $3,060,000 of 8%
Convertible Debentures, the Company paid LFC $76,500 in December 1997. In
conjunction with the July 1998 closing of the sale of $2,000,000 of 6%
Convertible Subordinated Debentures Due July 21, 2000, LFC earned $50,000, as
its finder's fee. See "Note 14. Subsequent Events."
Pursuant to the agreements, LFC and/or its affiliates were granted the
right to appoint certain officers and directors of the Company.
Between October 14 and November 30, 1997, the Company received several
bridge loans from LFC in the total amount of $475,000. The Company was obligated
to pay LFC interest on the amount borrowed at the rate of 9% per annum. The
Company paid LFC the amount due on these loans, with interest at the stated
rate, from the proceeds of the sale of the 8% Convertible Debentures sold on
December 10, 1997.
On June 30, 1998, the Company and LFC agreed to extend their consulting
relationship through the entry of a new consulting agreement covering the period
from August 1, 1998 through March 15, 1999 (the "New LFC Agreement"). The terms
of the New LFC Agreement are substantially the same as the original LFC
Agreement. For services to be rendered under the New LFC Agreement, LFC is to
receive 290,000 shares of Common Stock, issuable as a signing bonus upon
execution of the New LFC Agreement. The Common Stock issuable to LFC under the
new Consulting Agreement carries certain registration rights. In conjunction
with the entry of the New LFC Agreement LFC agreed to a further lock-up of all
shares, owned by LFC and its affiliates, pursuant to which they will not be able
to sell such shares before February 1, 1999, even though certain of those shares
were included in the Registration Statement which became effective August 7,
1998.
Transactions with entrenet Group, LLC
In June 1997, the Company entered into a consulting agreement with
entrenet Group, LLC ("entrenet"), for purposes of assisting the Company in
strategic planning, the creation of a detailed business and marketing plan and
in locating financing sources. For its services, the Company issued a $150,000
convertible promissory note to entrenet, with interest payable at 10% per annum,
due in full on or before June 2, 1998. At entrenet's election, the principal and
interest converted into 328,750 shares of Common Stock of the Company during the
year ended June 30, 1998, at $.50 per share. In addition, the Company was
obligated to pay entrenet a finder's fee of 8% for any direct financing it
located for the Company, payable in Company securities identical to what for
that $500,000 financing. During 1998, the Company and entrenet were in
discussions over the interpretation of the provisions specifying the
consideration payable to entrenet as its finder's fee for locating LFC. The
matter was resolved in November 1997, whereby the Company agreed to issue
entrenet a total of 280,000 shares of its Common Stock issuable to it under the
note and as payment of the finder's fee. Those shares were issued in April 1998
and included in the Registration Statement, which became effective August 7,
1998.
As of March 12, 1998, the Company entered into an agreement with
entrenet to provide business and financial consulting services to the Company
and to assist the Company in locating additional financing. The term of the
agreement is for six months from March 12, 1998 and renews for additional
six-month terms unless at least 60 days notice is given to terminate the
agreement prior to the end of a term. For its advisory services under the
agreement, entrenet earned a fee of $60,000 plus interest that was paid in July
1998. In addition, entrenet received a Common Stock Purchase Warrant to purchase
10,435 shares at $5.75 per share, exercisable until March 11, 2003. The shares
issuable pursuant to the warrant carry certain piggyback registration rights.
Upon the consummation of any financing transaction entered into by the Company
during the term of the agreement (with the exception of financings from certain
identified, excluded sources) or for two years after termination with respect to
any financing obtained from a source introduced to the Company by entrenet,
entrenet is entitled to receive cash compensation as follows: for debt
financings, 2% of the total amount of the financing, payable in cash or in the
form of a 10% note due in one year; for equity financings, 7% of the total gross
financing proceeds
49
<PAGE>
(payable in cash), unless there is a licensed investment banker entitled to
receive compensation as a result of the transaction, in which case the amount
payable to entrenet is reduced to 2 1/2% of the gross proceeds (payable in
cash), plus a five year Common Stock purchase warrant which entitles entrenet to
purchase that number of shares of Common Stock equal in value (as determined by
a defined fair market price) to the full amount of compensation payable to
entrenet in cash, at a per share exercise price equal to the then current market
value of the Common Stock (as defined); for mergers and acquisitions, 5% of the
total consideration paid or received in the transaction (payable in cash),
unless there is a licensed investment banker entitled to receive compensation as
a result of the transaction, in which case the amount payable to entrenet is
reduced to 3% (payable in cash) of such consideration, plus a five year Common
Stock purchase warrant which entitles entrenet to purchase that number of shares
of Common Stock equal in value (as determined by a defined fair market price) to
the full amount of compensation payable to entrenet in cash, at a per share
exercise price equal to the then current market value of the Common Stock (as
defined). If entrenet assists the Company in locating an executive-level
candidate who is hired by the Company, entrenet is entitled to receive a fee
equal to 30% (payable in cash) of the candidate's total first year compensation.
The Consulting Agreement was terminated in September 1998. The Company agreed to
pay the remaining fees to entrenet of $20,000 and has agreed to issue a Common
Stock Purchase Warrant for 8,333 shares exercisable at $2.40 per share until
September 11, 2003. The shares issuable on exercise of this warrant carry
certain registration rights.
Transactions with ADATOM, Inc.
During fiscal 1998, the Company purchased furniture and equipment in
the approximate amount of $200,000 through a company owned by a director of the
Company.
NOTE 14. SUBSEQUENT EVENTS
In July 1998, the Company issued a warrant to RBB Bank Aktiengesellschaft
to purchase 20,000 shares of Common Stock at $4.375 per share, exercisable
through September 9, 2001. The warrant was issued in consideration for RBB
Bank's $250,000 loan to the Company. The warrant contains antidilution
provisions and "piggyback" registration rights applicable to the common stock
issuable upon exercise of the warrant.
On July 27, 1998, the Company completed a private offering of $2,000,000 of
6% convertible subordinated debentures due July 21, 2000 and Common Stock
Purchase Warrants exercisable to purchase 100,000 shares of common stock
exercisable at $4.50 per share until July 21, 2001. The net proceeds to the
Company from the offering were approximately $1.8 million. In addition, the
company issued three year, 60,000 Common Stock purchase warrants exercisable at
$4.50 per share as part of the finders's fee on this transaction. The Company
used approximately $250,000 of the proceeds to pay existing notes payable and
used the balance of the proceeds as working capital. A holder of the Series A
Preferred Stock purchased $1,000,000 of the Debentures. The Company has agreed
to register the shares of Common Stock issuable upon conversion of the
debentures and exercise of the warrants with the SEC. Failure of the Company to
obtain an effective registration of the shares by November 19, 1998, entitles
the holders to a cash penalty of 2% of the face amount of the debentures. Each
further 30-day delay (or any part of a 30-day delay) incurs a 3% cash penalty.
Failure to have the shares registered by January 18, 1999, entitles the holders
to require the Company to redeem the debentures at 120% of face value, plus
accrued interest to the date of redemption. All costs of the registration (other
than selling costs) are to be borne by the Company. The debentures include an
"in the money" conversion feature which allows the holder to convert to common
stock at an initial discount of 20%, as defined. The Company has also agreed to
increase the discount rate by 2% if the Company is unable to obtain an effective
registration statement on such shares within 120 days from the issue date and an
additional 3% for every 30-day period thereafter until the registration
statement is effective. In the event the registration statement is not effective
within 180 days, the holders can require redemption by the Company at an amount
equal to 120% of the face value, plus accrued interest. The value of the "in the
money" conversion feature will be recognized as interest expense in fiscal 1999.
On August 7, 1998, the Company registered 7,240,356 shares of Common
Stock for sale solely by certain security holders. This offering resulted in no
proceeds to the Company. All costs relating to the registration, estimated to be
approximately $140,000, were borne by the Company.
50
<PAGE>
On August 21, the Company granted options to its new Chief Executive
Officer to purchase 1,000,000 shares of the Company's Common Stock at $3.438 per
share, the estimated fair market value at date of grant. In November 1998, the
Company and Mr. Peirce agreed to cancel the original 1,000,000 share option and
the Company granted Mr. Peirce an option to purchase 1,300,000 shares of the
Company's Common Stock, exercisable at $2.563 per share, the estimated fair
market value at date of grant, for ten years from November 23, 1998.
On September 9, 1998, the Company amended its GTE Wireless CDPD
agreement to removed any minimum service billings and established new IP address
pricing for merchants acquired under the agreement.
On September 22, 1998, the Company borrowed $1,300,000 from Liviakis
Financial Communications, Inc. through a note payable, which is due January 1,
1999, and bears interest at 8% per year. The Company used $1 million of the
proceeds to redeem $833,000 of its Series A Convertible Preferred Stock.
Substantially all available tangible and intangible assets of the Company secure
the note. The Company paid 120% of face value for the redemption. The security
holders participating in this redemption also agreed to a specified conversion
schedule over the following three months. The participating investors,
representing approximately 1,342,000 shares of the remaining Series A Preferred
Stock have agreed to hold their Series A Preferred shares until at least October
15, 1998. Following October 15, 1998, one-third of the Series A Preferred shares
may be converted to Common Stock on each of October 15, November 15, and
December 15 of 1999, respectively. As an incentive to these investors, the
Company has agreed to issue Common Stock purchase warrants exercisable to
purchase that number of shares of Common Stock equal to five percent of the
number of shares of Series A Preferred Stock held by the participating investor
at the end of each period, exercisable at 110% of the five-day average bid price
prior to the date of issuance for three years from the date of issuance. The
Company also increased the dividend rate from four to eight percent on the
balance of the Preferred Stock held. The amounts paid in excess of the face
value of the preferred shares redeemed and the fair value of the warrants issued
to the investors reduces earnings available to common shareholders.
On September 30, 1998, the Company and CSI entered into a non-binding
Letter of Intent to form a non-exclusive strategic partnership. CSI may also
make an equity investment of $1,000,000 in the Company through a direct purchase
of restricted shares of common stock. In a related transaction, an officer and
shareholder of CSI, may make a separate investment of $1,000,000 in the Company
through direct purchase of restricted shares. The shares are to be issued at a
discount of 10% from the average three-day closing price ($3.208) prior to the
date of entry of the Letter of Intent, assuming the purchase agreements are
completed in a timely manner.
On October 28, 1998, the Company borrowed $500,000 from the CEO and 50%
owner of Cardservice International, Inc. The note bears interest at 8% per annum
and is payable in full on the earlier of the receipt by the Company of proceeds
from the sale of the Company's Common Stock to this individual or January 1,
1999. In consideration for the loan, the Company also agreed to issue a Common
Stock Purchase Warrant exercisable to purchase 25,000 shares of Common Stock at
$3.038 per share through October 27, 2001.
NOTE 15. UNAUDITED RESTATED QUARTERLY FINANCIAL INFORMATION
As discussed in Note 8, the Company granted an option to purchase
600,000 shares of common stock and subsequently agreed to pay to the employee
any additional income taxes which the employee may incur as a result of the
option being a non-qualified stock option as compared to an incentive stock
option. Due to this agreement, the stock options, which the Company had
previously accounted for based on the fair value as of the grant date, are being
accounted for as variable options resulting in an additional $1,327,000 of
non-cash compensation expense in fiscal 1998. The Company's previously reported
balance sheet and statement of operations are being restated to reflect this
accounting.
As discussed in Note 12, the Company settled claims of certain
noteholders regarding the tradability of shares to be issued upon conversion of
their notes. The settlement included the issuance of additional shares as well
as a guarantee and put feature. The Company is restating its previously reported
quarterly statements of operations to increase the initial value used to account
for the settlement to include the value of the guarantee and put feature
estimated to be approximately $430,000. In addition, the Company is also
restating its previously reported interim balance sheets to reflect the
settlement as an accrued expense in the amount of $1,353,000 as of March 31,
1998 instead of equity as previously reported.
As discussed in Note 13, the Company entered into certain financing and
consulting transactions with LFC that included the issuance of common stock. The
Company valued the shares as of the date of the agreement although such shares
were issued throughout its term as services were being performed. The Company is
restating its previously reported quarterly statements of operations to record
an additional $847,000 of consulting expense during fiscal 1998 based on the
value of the common stock at the dates of issuance. The Company also issued
1,600,000 warrants to LFC in connection with this transaction. The warrants
provide that if for any reason the Company does not issue shares upon exercise,
the Company is required to repurchase the warrants for the difference between
the $.01 exercise price and the then-current market price of the common stock.
As such, the warrants should be classified as redeemable securities. The
Company's previously reported interim balance sheets are also being restated to
properly reflect this transaction.
51
<PAGE>
<TABLE>
<CAPTION>
Unaudited quarterly financial information is presented below.
For the quarter ended
September 30, December 31, March 31, June 30,
1997 1997 1998 1998
(restated) (restated) (restated)
<S> <C> <C> <C> <C>
Statement of operation data:
Revenues .............................................. $ 270,000 $ 116,000 $ 252,000 $ 271,000
Cost of revenues ...................................... 176,000 61,000 115,000 556,000
------------ ------------ ------------ ------------
Gross profit (loss) ................................... 94,000 55,000 137,000 (285,000)
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and administrative ................... 1,288,000 2,853,000 2,518,000 1,748,000
Research and development .............................. 95,000 78,000 78,000 44,000
Litigation expense .................................... -- -- 1,353,000 --
Total operating expenses .............................. 1,383,000 2,931,000 3,949,000 1,792,000
------------ ------------ ------------ ------------
Loss from operations .................................. (1,289,000) (2,876,000) (3,812,000) (2,077,000)
Other expense, net (24,000) (245,000) (604,000) (73,000)
------------ ------------ ------------ ------------
Net loss .............................................. $ (1,313,000) $ (3,121,000) $ (4,416,000) $ (2,150,000)
============ ============ ============ ============
Basic and diluted loss per share ...................... $ (.17) $ (.34) $ (.48) $ (.20)
============ ============ ============ ============
Weighted average common shares ........................ 7,770,000 9,209,000 9,281,000 11,243,000
outstanding basic and diluted ....................... ============ ============ ============ ============
Balance sheet data:
Current assets ........................................ $ 1,663,000 $ 3,078,000 $ 1,596,000 $ 726,000
Total assets .......................................... 1,720,000 3,654,000 2,334,000 1,565,000
Current liabilities ................................... 1,961,000 3,661,000 6,284,000 3,693,000
Total liabilities ..................................... 2,006,000 6,369,000 6,329,000 3,738,000
Redeemable common stock and warrants .................. 560,000 560,000 560,000 372,000
Stockholders' (deficit) equity ........................ (846,000) (3,275,000) (4,555,000) (2,545,000)
Reconciliation of previously reported amounts:
September 30, December 31, March 31,
Net loss: ............................................. 1997 1997 1998
As reported ........................................... $ (806,000) $ (1,757,000) $ (3,302,000)
Adjustment ............................................ (507,000) (1,364,000) (1,114,000)
------------ ------------ ------------
As restated ........................................... $ (1,313,000) $ (3,121,000) $ (4,416,000)
============ ============ ============
Basic and diluted net loss per share:
As reported ........................................... $ (.10) $ (.19) $ (.36)
Adjustment (.07) (.15) (.12)
------------ ------------ ------------
As restated ........................................... $ (.17) $ (.34) $ (.48)
============ ============ ============
Stockholders' (deficit) equity:
As reported $ 327,000 $ (737,000) $ 16,000
Adjustment (1,173,000) (2,538,000) (4,571,000)
------------ ------------ ------------
As restated ........................................... $ (846,000) $ (3,275,000) $ (4,555,000)
============ ============ ============
</TABLE>
52
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS; COMPLIANCE
WITH SECTION 16(a) OF THE EXCHANGE ACT.
Directors and Executive Officers
The following table sets forth information with respect to the directors and
executive officers of the Company.
<TABLE>
<CAPTION>
Name Age Principal Occupation Director Since
- ---- --- -------------------- --------------
<S> <C> <C> <C>
Roger Peirce 57 Chief Executive Officer July 1998
and Chairman of the Board
of the Company
Rod L. Stambaugh 38 President of the Company August 1991
Richard S. Barton 49 CEO and President of December 1997
ADATOM, Inc.
Caesar Berger 51 Vice President - Cardservice December 1995
International, Inc.
Chester N. Winter 67 General Partner of Colorado February 1994
Incubator Fund, L.P.
Alvin C. Rice 74 Senior Associate - June 1998
entrenet Group, LLC
Charles T. Russell 68 Business Consultant September 1998
</TABLE>
Information on each of the Company's Executive Officers and Directors is set
forth below:
Roger L. Peirce. On August 21, 1998, Mr. Peirce became the Chief Executive
Officer and Chairman of the Board of the Company. Mr. Peirce joined the Company
as a director as of July 22, 1998. Mr. Peirce has been in the credit card and
electronic commerce industry for 17 years. He was with First Data Corporation
("FDC"), the largest credit card processing company in the United States, from
January, 1994 until June, 1998, where he served most recently as president of
FDC's Merchant Services Organization. Prior to joining FDC, Mr. Peirce spent 13
years at VISA, commencing in 1981 as manager of software development. He worked
at VISA in various capacities and in 1989, became its Chief Operating Officer.
In 1991, Mr. Peirce moved from VISA USA to VISA International and thereafter
served on all five VISA Regional Boards. Mr. Peirce is a non-voting member of
the Board of Directors of Cardservice International, Inc. See "Certain
Relationships and Related Transactions-Transactions with Cardservice
International, Inc." Mr. Peirce attended San Jose State University where he
earned a B.A. in Mathematics.
Evon A. Kelly. Mr. Kelly was Chief Executive Officer of the Company from
August 1997 to August 1998. He resigned as an officer and director of the
Company effective as of August 21, 1998, but remains an employee of the Company
under a one year employment agreement at his former rate of compensation.
Rod L. Stambaugh. Mr. Stambaugh served as Chief Executive Officer of the
Company from October 1996 until August 1997, and became President when Mr. Kelly
joined the Company. He was Vice President in charge of marketing and business
development for the Company from 1991 through October 1996. Mr. Stambaugh was
also the Corporate Secretary from September 1995 until October 1996. Mr.
Stambaugh is one of the founders of the Company. Mr. Stambaugh served on the
Company's Board of Directors from July 1991 through October 1994, rejoining the
Board as Chairman in July 1995. Mr. Stambaugh graduated from Baker University in
1982 with a B.S. degree in Psychology, and a minor in Business Administration.
53
<PAGE>
Richard S. Barton. Mr. Barton is Chairman, Chief Executive Officer and
President of ADATOM, Inc., a California corporation which markets and sells
retail and shopping solutions, including electronic catalogues and stores. See
"Certain Relationships and Related Transactions - Transactions with ADATOM,
Inc." He completed a Sloan Fellowship at Stanford University in Palo Alto,
California from September 1995 through September 1996. From October 1993 through
August 1995, Mr. Barton was a corporate vice president and president of Xerox'
United States Customer Operations. From 1991 until October 1993 Mr. Barton was
President of Xerox Canada, Inc. Mr. Barton holds a Master's degree in Business
Management from Stanford University. Mr. Barton also serves on the boards of
Avon Products, Inc., and the United States Chamber of Commerce.
Caesar Berger. Mr. Berger is a senior Vice President of Cardservice
International, Inc. where he is responsible for the Technology Group. Mr. Berger
joined Cardservice International in August of 1994. Prior to that, Mr. Berger
served for more than ten years as President, and was the founder of, Computer
Based Controls, Inc., a wholly owned subsidiary of Electronic Clearing House
Inc. Mr. Berger was a principal on the American Express Money Order project,
which resulted in the deployment of over 17,000 of the Money Order dispensers
operating today in over 10,000 retail locations nationwide. Mr. Berger graduated
in 1970 from Lvov Polytech Institute with the equivalent of an M.S. degree in
Electronics and Computer Science.
Chester N. Winter. Mr. Winter is a general partner of Colorado Incubator
Fund, L.P., a venture capital fund which invests in early stage high technology
enterprises including software, materials, medical and bio-technology; a
position he has held since 1991. Since March 1993 he has also been Vice
President of Paradigm Partners, LLC, a consulting company. From February 1994
until September 1995 he served as Chairman of Highland Energy, Inc., a
subsidiary of Eastern Utility Associates. He holds B.A. and M.S. degrees in
Economics from the University of Colorado and has completed the Owner/President
Management Program at Harvard University Graduate School of Business.
Alvin C. Rice. Mr. Rice is currently affiliated with entrenet Group, LLC,
as a senior associate. He has been with entrenet since January 1998. He became a
director of the Company on June 1, 1998. His career in banking, investment
banking and commercial business management has spanned over 40 years. He served
as Chairman of California Bancorp Systems, Inc. from January 1994 until December
1997 and as Chairman of the First National Bank of Marin from 1989 until
December 1993. Mr. Rice has also served as a Director of Memorex Corporation,
Fairchild Camera & Instrument Co., and the Montreal Trust Company. He is a cum
laude graduate Phi Beta Kappa graduate of Stanford University from which he
received a B.A. degree. He attended the Graduate School of Banking at the
University of Wisconsin and Harvard's Advanced Management Program. See "Certain
Relationships and Related Transactions - Transactions with entrenet Group, LLC."
Charles T. Russell. Mr. Russell had a distinguished 26-year career in the
credit card and electronic commerce industry when he retired as CEO & President
of VISA International in 1994, a post he held for 10 years. He joined VISA in
January 1971 as vice president for operations, following that as senior vice
president, executive vice president and president and COO of VISA U.S.A. He is
currently on the Board of First Data Corporation, InfiCorp, CyberCash, Inc.,
E-Funds Corporation and Janol Hydro Co. Mr. Russell earned his Bachelor's degree
in Business Administration, cum laude, from the University of Pittsburgh, and a
Graduate degree from the Stonier Graduate School of Banking at Rutgers.
Board of Directors and Committees
The Company has an audit committee, which consists of Messrs. Barton,
Berger and Winter. Until the fiscal year ended June 30, 1998, the audit
committee consisted of Messrs. Berger and Alan Roberts, a former director of the
Company. The audit committee recommends engagement of the Company's independent
accountants, approves services performed by such accountants, and reviews and
evaluates the Company's accounting system of internal controls. The audit
committee did not meet during fiscal year 1998; however, these issues were
discussed by the full board. The Company does not have standing nominating or
compensation committees. The Board as a whole performs the functions that these
committees would perform.
During fiscal year 1998, the Board of Directors held nine meetings and
acted ten times by consent without a meeting. All directors attended more than
75% of the aggregate number of meetings of the Board.
54
<PAGE>
Other Significant Executive Officers
Other significant executive officers of the Company that are not also
directors are:
Name Age Position with the Company Officer Since
---- --- ------------------------- -------------
Robert E. Robichaud 45 Chief Financial and Accounting September 1997
Officer, Treasurer and
Assistant Secretary
Clyde F. Casciato 43 Vice President, Sales August 1997 *
Raymond J. Mueller 57 Vice President, Operations December 1997 *
- ------------------------
* Mr. Casciato left the Company on October 6, 1998.
Mr. Mueller left the Company on September 15, 1998.
Business Experience of Significant Executive Officers
Robert E. Robichaud. Since 1985 Mr. Robichaud has held several key
financial management positions at Triad Systems Corp. including Director of
Financial Planning and Analysis and most recently, Director of Finance. Triad
Systems is a provider of software, hardware and information management solutions
which recorded 1997 revenues in excess of $175 million. Triad Systems was a
NASDAQ listed company and was acquired by Cooperative Computing Inc. on February
27, 1997. Mr. Robichaud received a Bachelors Degree in Economics from Fairfield
University in 1976 and M.B.A. from Rutgers Graduate School of Business in 1978.
Clyde F. Casciato. Since 1989, Mr. Casciato has held several management
positions at AT&T Wireless Services, the wireless business unit of AT&T Corp.,
including Director of Sales and Marketing, District Manager - Major/National
Accounts and most recently, Western U.S. Regional Sales/Distribution Manager -
Wireless Data. Mr. Casciato played a key role in helping to establish AT&T
Wireless Services as the market leader in the emerging wireless data (packet and
circuit switched) business segment.
Raymond J. Mueller. Mr. Mueller served as Director of Sales and Marketing
for Nicor, Inc., a pneumatic tool company, from 1995 until joining the Company.
From 1993 until joining the Company, Mr. Mueller was an independent consultant
in the areas of strategic planning, team building, decision making and
compensation matters. Prior to that, he was Director of Sales and Marketing for
Wilson Learning Corp. from 1989 through 1993. He holds a Bachelors Degree in
Economics from Xavier University.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires the
Company's officers, directors, and persons owning more than ten percent of a
registered class of the Company's equity securities ("ten percent shareholders")
to file reports of ownership and changes of ownership with the Securities and
Exchange Commission ("SEC"). Officers, directors, and ten-percent shareholders
are required by SEC regulations to furnish the Company with copies of all
Section 16(a) reports they file with the SEC.
To the Company's knowledge, based solely on its review of the copies of
such reports and amendments thereto furnished to the Company, and written
representations that no other reports were required, the Company believes that
during the Company's fiscal year ended June 30,1998, all Section 16(a) filing
requirements applicable to the Company's officers, directors, and ten percent
shareholders were met.
55
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
Executive Compensation
The following table shows all the compensation paid by the Company to its
Chief Executive Officer (the "Named Executive Officer") during the fiscal years
ended June 30, 1997 and 1998. Mr. Stambaugh, the Company's CEO at June 30, 1997,
did not serve as CEO for the Company during the fiscal year ended June 30, 1996.
Summary Compensation Table
<TABLE>
<CAPTION>
====================================================================================================================
Annual Compensation Long Term Compensation
====================================================================================================================
Name and Principal Fiscal Salary Bonus Other Restricted Securities All Other
Position Year ($) ($) Annual Stock Underlying Compensa-
Compen- Awards Options (#) tion ($)
sation ($) ($) (3)
====================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C>
Rod L. Stambaugh, 1998 $113,333 $34,750 (2) $-0- -0- $-0-
President (1)
1997 $ 79,881 $-0- (2) $-0- -0- $-0-
Evon A. Kelly, 1998 $131,250 $-0- (2) $-0- 600,000 $-0-
Chief Executive Officer
Robert E. Robichaud, 1998 $101,756 $10,417 (2) $-0- 50,000 $-0-
Chief Financial and
Accounting Officer (1)
====================================================================================================================
<FN>
(1) Mr. Stambaugh served as CEO from October 1996 until August 1997 when
Mr. Kelly commenced service as CEO. Mr. Robichaud commenced service as
of September 1997. The bonus amounts include $25,000 for Mr. Stambaugh
and $10,000 for Mr. Robichaud which were accrued but not paid.
(2) No amounts are shown under "Other", as the aggregate incremental cost
to the Company of personal benefits provided to the executive officer
did not exceed 10% of his annual salary and bonus during the year.
(3) All options were granted under the 1992 Stock Option Plan, except
those issued to Mr. Kelly, which are outside the Plan.
</FN>
</TABLE>
Option Grants in Fiscal Year Ending June 30, 1998
As reflected in the following table, reported are the values for
"in-the-money" options, which represent the positive spread between the exercise
price of any existing stock options owned by the Named Executive Officer and the
year-end price of the Company's Common Stock.
56
<PAGE>
Aggregated Option Exercises in Last Fiscal Year
and Fiscal Year-End Option Values
<TABLE>
<CAPTION>
====================================================================================================================
Name Shares Value Number of Securities Value of
Acquired on Realized ($) Underlying Unexercised Unexercised In-the-
Exercise (#) (1) Options at FY-End (#) Money Options at
Vested/Unvested FY-End ($)
Vested/Unexercisable(2)
====================================================================================================================
<S> <C> <C> <C> <C>
Rod L. Stambaugh 150,000 $672,750 5,000/0 $22,800/$0
Evon A. Kelly 240,000/252,000(3) 885,600/929,880
Robert E. Robichaud 18,500/31,500 13,690/23,310
====================================================================================================================
<FN>
(1) Market value on the average traded price of the underlying shares of
Company's Common Stock on the date of exercise less the exercise price.
(2) Represents the difference between $4.69, the average market price of the
Company's Common Stock at fiscal year end, and the exercise price.
(3) Per employment agreement, only 492,000 of the 600,000 shares granted are
eligible for exercise.
</FN>
</TABLE>
Director Compensation
Directors who are not employees of the Company receive an annual stock
option to purchase 20,000 shares of the Company's Common Stock. The grant is
made pursuant to the Company's 1992 Stock Option Plan as of each director's
anniversary date, with an exercise price equal to the market value of the
underlying stock as of the date of grant. Options vest 25% on each six-month
anniversary following the date of grant. This is the only arrangement for
compensation of directors. A total of 80,000 stock options were granted to four
non-employee directors during the fiscal year ended June 30, 1998.
Proposed Executive Bonus Plan
Management of the Company is in the process of formulating a
performance-based bonus plan for the Company's executive officers and key
personnel, which may include provisions for cash bonus compensation as well as
stock based compensation under the Company's 1992 Stock Option Plan or
otherwise. Other than certain contingent bonus compensation that has been
offered to certain executive officers of the Company as described below, and
which is subject to adoption of criteria by the Board of Directors, the Board
has not yet approved the parameters of such a bonus plan.
57
<PAGE>
Employment Agreements and Change In Control Provisions
Roger Peirce. The Company has an employment agreement with Roger
Peirce, its current CEO and Chairman of the Board. Mr. Peirce will receive a
salary of $75,000 per year plus reimbursement of certain customary business
expenses. On August 21, the Company granted options to its new Chief Executive
Officer to purchase 1,000,000 shares of the Company's Common Stock at $3.438 per
share, the estimated fair market value at date of grant. In November 1998, the
Company and Mr. Peirce agreed to cancel the original 1,000,000 share option and
the Company granted Mr. Peirce an option to purchase 1,300,000 shares of the
Company's Common Stock, exercisable at $2.563 per share, the estimated fair
market value of the grant, for ten years from November 23, 1998. The Company
will issue options to purchase 39,016 shares as incentive stock options under
the Company's 1992 Stock Option Plan ("the Plan") and those options will be
subject to all of the terms and conditions of incentive stock options issued
under the Plan. The balance of the options will be issued outside the Plan as
"non-qualified options" and will have the same exercise terms as the incentive
options issued under the Plan but will expire on the earlier of September 1,
2002 or one year from the date Mr. Peirce ceases to serve the Company in any
capacity, including as an employee, officer, director or consultant. All of the
options vest immediately upon issuance but are subject to the Company's right to
repurchase the shares at the price Mr. Peirce paid for them. The Company's right
to repurchase the shares expires over a 48 month period at the rate of 2.08% of
the shares per month. The repurchase rights of the Company terminate completely
(thereby vesting Mr. Peirce's right in and to 100% of the shares) in the event
of a change in control of the Company. Mr. Peirce has also been granted the
option to purchase up to 200,000 shares of Common Stock owned by Mr. John M.
Liviakis, a significant shareholder of the Company. Those options are subject to
the same terms and conditions as the non-qualified stock options issued by the
Company as of August 21, 1998.
Evon A. Kelly. The Company presently has an employment agreement with Evon
A. Kelly, its former CEO, pursuant to which Mr. Kelly receives $150,000 in cash
compensation per year. Mr. Kelly has also been granted a non-qualified stock
option to purchase up to 600,000 shares of the Company's Common Stock at $1.00
per share, exercisable as to 10% as of the date of grant (August 4, 1997) and
vesting at the rate of 3% per month thereafter so long as Mr. Kelly remains in
the employ of the Company. All options must be exercised within 10 years of the
date of grant. All options immediately vest and become exercisable upon a change
in control of the Company. The Company has agreed to indemnify Mr. Kelly for a
portion of the tax liability differential between non-qualified stock option and
incentive stock option tax treatment, when and if he should exercise his options
and dispose of the shares. The Company has also agreed to register the shares
underlying Mr. Kelly's option with the SEC on a Form S-8 registration statement
as soon as practicable.
Rod L. Stambaugh. The Company has an arrangement under which it pays Rod L.
Stambaugh, its President, $130,000 per year. Mr. Stambaugh may also be granted
bonus compensation and/or stock options as approved by the Board of Directors
from time to time. It is anticipated that Mr. Stambaugh will be entitled to
participate in any performance-based bonus plan approved by the Board of
Directors. In November 1998, Mr. Stambaugh was granted options to purchase
100,000 shares of the Company's Common Stock at $2.563 per share, with a
four-year vesting schedule of 25% per year.
Other Executive Officers. The Company also has an employment arrangement
with Robert E. Robichaud. Mr. Robichaud receives a salary of $125,000 per year
and may be entitled to a performance bonus of up to $25,000 for fiscal year
1998, based on the performance of the Company. Mr. Robichaud is entitled to
severance of one year's salary if he is terminated without cause. Mr. Robichaud
was granted options to purchase up to 50,000 shares of Common Stock at $3.95 per
share under the Company's 1992 Stock Option Plan, with a vesting schedule of 10%
as of his date of hire (September 5, 1997) and 3% per month thereafter. In
November 1998, Mr. Robichaud was granted options to purchase 50,000 shares of
the Company's Common Stock at $2.563 per share, with a four-year vesting
schedule of 25% per year. Pursuant to the Amended 1992 Stock Option Plan, all
options granted to employees immediately vest and become exercisable upon a
merger, acquisition, sale of all assets or other change in control of the
Company.
Stock Option Plan
General. The Company's Amended 1992 Stock Option Plan (the "Plan") was
adopted for the purpose of granting employees, directors and consultants of the
Company options to purchase Common Stock so that they may have the opportunity
to participate in the growth of the Company and to provide these people with an
increased incentive to promote the interests of the Company.
Administration of the Plan. The Plan is administered by at least two
disinterested members of the Board of Directors (the "Board") or the Board
itself. The Board may from time to time adopt rules and regulations, as it
58
<PAGE>
deems advisable for the administration of the Plan, and may alter, amend or
rescind any such rules and regulations in its discretion. The Board has the
power to interpret, amend or discontinue the Plan.
Grant of Options. Options may be granted under the Plan for a total of
2,680,000 shares of Common Stock. The Board of Directors increased the number of
shares underlying options available to the Plan to 2,680,000 from 880,000 on
August 6, 1997. This amendment was approved by shareholders at the Annual
Meeting of Shareholders held February 6, 1998. Additional grants of options may
be made only to employees, directors and consultants of the Company and any
parent or subsidiary. The Board determines the terms of options granted under
the Plan, including the type of option (which can be an incentive stock option
within the meaning of Section 422 of the Internal Revenue Code of 1986, as
amended (the "Code"), or a non-qualified stock option), the exercise price, the
number of shares subject to the option, and the exercisability thereof. The
Board also determines, at the time of grant, the period during which the option
will be exercisable, subject to the limitations of the Plan. Unless otherwise
provided at the time of grant, options to employees vest 10% at the time of
grant and 3% per month thereafter. An option to purchase 20,000 shares at fair
market value is automatically issued under the Plan to each non-employee
director as of the director's anniversary date. Options granted to non-employee
directors' vest 25% at each six-month anniversary thereafter. Information
regarding presently outstanding options is set forth below.
Terms and Conditions of Options. The Board may impose on an option any
additional terms and conditions which it deems advisable and which are not
inconsistent with the Plan. The exercise price of any stock option granted under
the Plan must not be less than 100% of the fair market value of a share of
Common Stock on the date of grant, except that as to an optionee who at the time
an incentive stock option is granted owns stock possessing more than 10% of the
total combined voting power of all classes of stock of the Company, the exercise
price of such incentive stock option must be at least equal to 110% of the fair
market value of the shares as of the date prior to the date of the grant. In
addition, no incentive stock option can be granted to any employee where the
aggregate fair market value of the shares (determined at the date of such option
grant) for which such incentive stock options are exercisable for the first time
in any calendar year exceeds $100,000. In connection with a merger, sale of all
of the Company's assets, or other transaction which results in the replacement
of the Company's Common Stock with the stock of another corporation, all granted
options (including unvested options) become exercisable immediately prior to the
consummation of the transaction, unless other provisions are made with respect
to those options.
Exercise of Options. An optionee may exercise less than the entire vested
portion of an option, in which case such unexercised, vested portion shall
continue to remain exercisable, subject to the terms of the Plan, until the
option terminates. Vested options must be exercised within three months of an
optionee's termination of employment with the Company.
Federal Income Tax Consequences.
--------------------------------
Incentive Stock Options. The Company anticipates that all options granted
under the Plan and treated by the Company as "incentive stock options," that is,
a stock option described in Section 422 of the Code, will have the following
anticipated (but not guaranteed) federal income tax consequences, among others:
the optionee will recognize no income at the time of grant; upon exercise of the
incentive stock option, no income will result to any party; if there is no
disposition of the shares until a date that is both (i) two years from the grant
of an incentive stock option and (ii) one year from its exercise, no amount will
be ordinary income and, upon disposition in a taxable transaction, the employee
will receive long-term capital gain or loss treatment equal to the difference
between the amount realized and the option price; any gain realized upon a
disposition other than as set forth above may result in ordinary income tax
treatment to the optionee; generally, the Company receives no deduction in
connection with the transaction; and, certain optionees may incur alternative
minimum tax treatment under the Code upon exercise of an incentive stock option.
Non-qualified Stock Options. The Company anticipates that all non-qualified
stock options granted under the Plan will have the following anticipated (but
not guaranteed) federal income tax consequences, among others: the optionee will
recognize no income at the time of grant; upon exercise of the non-qualified
stock option, the individual to whom the option is granted should be deemed to
receive ordinary income at the time of exercise equal to the excess, if any, of
the fair market value of the acquired shares at such time over the option price
for
59
<PAGE>
such shares; if the shares acquired upon the exercise of a non-qualified stock
option are disposed of in a taxable transaction, the individual disposing of
such shares will have a realized and recognized capital gain or loss equal to
the difference, if any, between the amount realized and the adjusted basis of
such shares to the holder; such gain or loss will be long-term or short-term
depending on whether or not such shares are held for longer than six months;
and, the adjusted basis usually (but not always) will include the option price
plus any ordinary income described above with respect to such shares.
Form S-8 Registration of Shares of Common Stock
- -----------------------------------------------
Issuable Pursuant to Options Under the Plan
- -------------------------------------------
The Company registered 880,000 shares of Common Stock underlying options
issuable under the Plan with the United States Securities and Exchange
Commission (the "SEC") under a Form S-8 Registration Statement that was
effective as of September 1995. The Company intends to file another registration
statement on Form S-8 in the near future to register the additional shares
issuable pursuant to the exercise of options that have been or may be issued
under the Plan. In addition, the Company intends to register on Form S-8 the
shares underlining option grants issued outside the Plan for approximately
1,300,000 shares of Common Stock for Mr. Roger Peirce and 492,000 shares of
Common Stock for Mr. Evon Kelly.
Options Presently Outstanding Under the Plan
As of August 31, 1998 there were a total of 636,867 options outstanding
under the Plan, 340,317 of which were vested at that date. Of the total options
outstanding at August 31, 1998, 226,867 were held by directors (two of whom are
also officers of the Company), 155,617 of which were vested, 100,000 were held
by other executive officers, 43,000 of which were vested, and 310,000 were held
by employees or consultants of the Company, 141,700 of which were vested. The
weighted average exercise price of all options outstanding under the Plan as of
August 31, 1998, was $3.88.
60
<PAGE>
ITEM 11. SECURITY OWNERSHIP OF PRINCIPAL SHAREHOLDERS AND MANAGEMENT
The following tables set forth certain information regarding the beneficial
ownership of the Company's Common Stock and Series A Preferred Stock as of
August 31, 1998, by (i) each Director, (ii) the Named Executive Officer and the
current Chief Executive Officer, (iii) all persons, including groups, known to
the Company to own beneficially more than five percent (5%) of the outstanding
Common Stock of the Company, and (iv) all executive officers and directors as a
group. A person (or group) is deemed to be a beneficial owner of Common Stock
that can be acquired by such person or group within 60 days from August 31, 1998
upon the exercise of warrants, options or other rights exercisable for, or
convertible into, Common Stock. As of August 31, 1998, there were a total of
12,361,548 shares of Common Stock and 3,060,000 shares of Series A Preferred
Stock outstanding.
Except as otherwise indicated, the address of each of the following persons
is c/o U.S. Wireless Data, Inc., 2200 Powell Street, Suite 800, Emeryville, CA
94608.
Certain Holders of Common Stock
<TABLE>
<CAPTION>
Shares of Common Stock
----------------------
Beneficially Owned (1)
----------------------
Number Percent
of of
Name of Beneficial Owner Shares Class
- ------------------------ ------ -----
<S> <C> <C>
Roger L. Peirce................................................. 1,200,000 (2) 8.18%
Rod L. Stambaugh................................................ 357,500 (3) 2.7%
Evon A. Kelly................................................... 312,000 (4) 2.3%
Richard S. Barton............................................... 5,000 (5) *
Caesar Berger................................................... 8,750 (6) *
Chester N. Winter............................................... 100,281 (7) 0.7%
Alvin C. Rice................................................... -0- 0%
Charles T. Russell.............................................. -0- 0%
Robert E. Robichaud............................................. 24,500(8) *
John M. Liviakis................................................ 4,445,000 (9) 32.9%
2420 "K" Street, Suite 220
Sacramento, CA 95816
Robert B. Prag.................................................. 1,865,000 (10) 13.8%
2420 "K" Street, Suite 220
Sacramento, CA 95816
Liviakis Group.................................................. 5,720,000 (11) 42.4%
2420 "K" Street, Suite 220
Sacramento, CA 95816
entrenet Group, LLC............................................. 627,518 (12) 4.6%
1304 Southpoint Boulevard, Suite 220
Petaluma, CA 94954
RBB Bank Aktiengesellschaft..................................... 1,327,196 (13) 9.7%
Burgring 16,
8010 Graz, Austria
All directors and executive officers as a group (11 persons).... 2,169,562 (14) 14.2%
- ------------------
<FN>
* Represents less than 1% of outstanding shares.
61
<PAGE>
(1) Except as specifically indicated in the footnotes to this table, the
persons named in this table have sole voting and investment power with
respect to all shares of Common Stock shown as beneficially owned by them,
subject to community property laws where applicable. Beneficial ownership
is determined in accordance with the rules of the United States Securities
and Exchange Commission. In computing the number of shares beneficially
owned by a person and the percentage ownership of that person, shares of
Common Stock subject to options, warrants or rights held by that person
that are currently exercisable or exercisable, convertible or issuable
within 60 days of August. 31, 1998, are deemed outstanding. Such shares,
however, are not deemed outstanding for the purpose of computing the
percentage ownership of any other person.
(2) Includes 29,086 shares, underlying an "incentive stock option" and 970,914
shares, underlying an "non-qualified option" which Mr. Peirce has the right
to acquire within 60 days of August 31, 1998. Also includes, 200,000
shares, which Mr. Peirce has the right to acquire within 60 days of August
31, 1998, under a stock option issued by Mr. John M. Laviakis, a
significant shareholder of the Company. Those options are subject to the
same terms and conditions as the non-qualified stock options issued by the
Company.
(3) Includes 5,000 shares, which Mr. Stambaugh has the right to acquire within
60 days of August. 31, 1998, through the exercise of stock options.
(4) Includes 312,000 shares, which Mr. Kelly has the right to acquire within 60
days of August. 31, 1998, through the exercise of stock options.
(5) Includes 5,000 shares, which Mr. Barton has the right to acquire within 60
days of August. 31, 1998, through the exercise of stock options.
(6) Includes 8,750 shares, which Mr. Berger has the right to acquire within 60
days of August. 31, 1998, through the exercise of stock options.
(7) Includes 87,781 shares, which Mr. Winter has the right to acquire within 60
days of August. 31, 1998, through the exercise of stock options.
(8) Includes 24,500 shares, which Mr. Robichaud has the right to acquire within
60 days of August. 31, 1998, through the exercise of stock options.
(9) The information shown is based upon Schedule 13D (Amendment No. 4) dated
September 24, 1998 filed on behalf of Liviakis Financial Communications,
Inc. ("LFC"), John M. Liviakis, Renee A. Liviakis and Robert B. Prag
(collectively the "Liviakis Group") and information known to the Company
based on its consulting agreement with LFC and the number of shares
issuable to LFC under that agreement. John M. and Renee A. Liviakis are the
owners of LFC and Robert B. Prag is an executive officer of LFC. The number
of shares shown includes a total of 3,855,000 shares of Common Stock owned
by Mr. Liviakis as an individual, plus 590,000 shares of Common Stock
issued and/or issuable to LFC and Mr. Robert B. Prag (as described in
footnote (10) to this table) pursuant to two consulting agreements between
the Company and LFC effective as of July 25, 1997 and August 1,1998. Under
the July 1997 agreement, the Company issued 300,000 shares as of August 31,
1998 (225,000 shares to LFC and 75,000 shares to Mr. Prag). Under the
August 1998 agreement, the Company was obligated to issue 290,000 shares as
of August 31, 1998 (217,500 shares issuable to LFC and 75,500 shares
issuable to Mr. Prag). See "Certain Relationships and Related Transactions
- Transactions with Liviakis Financial Communications, Inc."
(10) The information shown is based upon Schedule 13D (Amendment No. 4) dated
September 24, 1998 filed on behalf of the Liviakis Group and information
known to the Company based on its consulting agreement with LFC and the
number of shares issuable to LFC under that agreement. Robert B. Prag is an
executive officer of LFC. The number of shares shown includes a total of
1,275,000 shares of Common Stock owned by Mr. Prag as an individual, plus
the full 590,000 shares of Common Stock issued and/or issuable to LFC and
Mr. Prag as described in footnote (9) to this table which are reported in
the Schedule 13D/A as being subject to shared voting and dispositive power
between John M. and Renee A. Liviakis, Robert B. Prag and LFC. See "Certain
Relationships and Related Transactions - Transactions with Liviakis
Financial Communications, Inc."
(11) The information shown is based upon Schedule 13D (Amendment No.4) dated
September 24, 1998 filed on behalf of the Liviakis Group. The number of
shares shown includes all shares of Common Stock included in footnotes (9)
and (10) to this table as to which any person in the Liviakis Group
exercises sole or shared voting and disposition power, except that the
590,000 shares issuable to the Liviakis Group under the consulting
agreements are included only once in the share number shown despite being
included in both Messrs. Liviakis' and Prag's share ownership figures. See
"Certain Relationships and Related Transactions - Transactions with
Liviakis Financial Communications, Inc
62
<PAGE>
(12) Includes 328,750 shares, which were issued upon conversion of a convertible
promissory note issued as a consulting fee to entrenet as of May 20, 1998.
Also includes 280,000 shares which were issued to entrenet (or its
designated assignees) as a finder's fee (which became payable as of August
6, 1997). 165,200 of these 280,000 shares have been assigned to certain
individual members of entrenet; the shares were issued as of April 3, 1998.
Also includes 10,435 shares of Common Stock underlying a Common Stock
Purchase Warrant issued to entrenet as of March 12, 1998, which is
presently exercisable. Also includes 8,333 shares of Common Stock
underlying a Common Stock Purchase Warrant issued to entrenet as an
advisory fee as of September 12, 1998. See "Certain Relationships and
Related Transactions - Transactions with entrenet Group, LLC."
(13) Includes 792,080 shares issuable upon conversion of 1,600,000 of the
Company's Series A Preferred Stock, and 465,116 shares of Common Stock
issuable upon the conversion of $1,000,000 of the Company's 6% Convertible
Debentures due July 21, 2000, based on the applicable discounts to market
price as of the end of August 1998. Also includes 50,000 shares of Common
Stock underlying a Common Stock Purchase Warrant issued to RBB Bank in
conjunction with the purchase of the 6% Convertible Debentures. Also
includes 20,000 shares of Common Stock underlying a Common Stock Purchase
Warrant issued as interest on bridge loan, which is presently exercisable.
See "Certain Relationships and Related Transactions - Transactions with RBB
Bank Aktiengesellschaft."
(14) Includes all shares underlying options and warrants as described in
footnotes (2) - (8) of this table, plus 58,500 shares underlying options
issued to three additional executive officers which are exercisable within
60 days of August 31, 1998
</FN>
</TABLE>
63
<PAGE>
Certain Holders of Series A Preferred Stock
<TABLE>
<CAPTION>
Shares of Series A Preferred
----------------------------
Stock Beneficially Owned (1)
----------------------------
Number Percent
of of
Name of Beneficial Owner Shares Class
- ------------------------ ------ -----
<S> <C> <C>
Rod L. Stambaugh................................................. -0- 0%
Evon A. Kelly.................................................... -0- 0%
Richard S. Barton................................................ -0- 0%
Caesar Berger.................................................... -0- 0%
Chester N. Winter................................................ -0- 0%
Alvin C. Rice.................................................... -0- 0%
Roger L. Peirce ................................................. -0- 0%
Charles P. Russell .............................................. -0- 0%
All directors and executive officers as a group (9 persons)...... -0- 0%
RBB Bank Aktiengesellschaft (2).................................. 1,600,000 52.3%
Burgring 16
8010 Graz Austria
The Endeavor Capital Fund........................................ 1,000,000 32.7%
14/14 Divrei Chaim Street
Jerusalem 94479 Israel
CNCA - SCT Brunoy................................................ 200,000 6.5%
Sub A/C BGP
30 Rue des Vallies
91300 Brunoy France
- ------------------
<FN>
(1) To the Company's knowledge, except as otherwise indicated in the footnotes
to this table, all persons named in this table have sole voting and
investment power with respect to all shares of Series A Preferred Stock
shown as beneficially owned by them, subject to community property laws
where applicable. Beneficial ownership is determined in accordance with the
rules of the United States Securities and Exchange Commission. There are no
shares of Series A Preferred Stock, which are subject to options, warrants
or rights held by any person. The Series A Preferred Stock is not publicly
traded or registered under the Securities Exchange Act of 1934. It does not
generally have voting rights except as specifically provided under Colorado
law.
(2) RBB Bank Aktiengesellschaft is the record owner of the shares. RBB holds
the shares as agent for 30 individuals who share voting and investment
power over the shares. The Company has been advised that no single
individual in the group owns 5% or more of the shares of Series A Preferred
Stock.
</FN>
</TABLE>
64
<PAGE>
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Transactions with Cardservice International, Inc.
Mr. Caesar Berger, a director of the Company, is also an officer of
Cardservice International, Inc. ("CSI"). Mr. Roger Peirce, the Company's CEO and
Chairman, is a non-voting member of the Board of Directors of CSI. CSI has been
involved with the Company in what is primarily a customer - vendor relationship,
and CSI purchased approximately $178,000 and $698,000 in product from the
Company in the fiscal years ended June 30, 1998, and 1997, respectively. In
fiscal 1996, CSI advanced the Company $162,500 for the purchase of raw materials
in exchange for 142,544 shares of Common Stock, plus the royalty right described
in the following paragraph. The Company valued the shares at 150% of the then
current market price for purposes of the transaction. CSI was granted
registration rights on the underlying shares. In 1995, CSI was granted warrants
exercisable for 100,000 shares of Common Stock at $.10 per share, which it
exercised as of April 26, 1996. Rather than exercise its registration rights,
CSI has sold shares from time to time under SEC Rule 144 and as of January 31,
1998, CSI had sold all of the shares of Common Stock it acquired through
exercise of the warrants and as partial consideration for the loan.
In conjunction with the $162,500 loan, the Company obligated itself to pay
royalties to CSI on future non-CSI sales of POS-50(R) product built with the
inventory purchased by CSI, in the amount of $150 per unit on the first 1,000
units and $100 per unit on any additional units. The Company accrued total
royalties to CSI of $56,750 since the inception of this agreement and through
the nine months ended March 31, 1998, all of which have been paid.
Management of the Company believes that the transactions with CSI
described above were on terms at least as favorable as could have been obtained
from unaffiliated parties and all transactions with CSI were ratified by at
least two independent directors.
On September 30, 1998, the Company entered into a non-binding letter of
intent with Cardservice International, Inc. to form a non-exclusive strategic
partnership involving joint product and distribution initiatives. The Letter of
intent also includes a provision pursuant to which a $1,000,000 direct equity
investment in USWD by CSI may be made if the terms of a definitive agreement can
be reached.
On October 28, 1998 the Company borrowed $500,000 from Chuck Burtzloff,
the CEO and 50% owner of Cardservice International, Inc. The note bears interest
at 8% per annum and is payable in full on the earlier of the receipt by the
Company of proceeds from a sale of the Company's Common Stock to Mr. Burtzloff
(as discussed below under "Current Financing Initiatives") or January 1, 1999.
In consideration for the loan, the Company also agreed to issue Mr. Burtzloff a
Common Stock Purchase Warrant exercisable to purchase 25,000 shares of Common
Stock at $3.038 per share through October 27, 2001.
Transactions with Liviakis Financial Communications, Inc. ("LFC") and Affiliates
of LFC
In July of 1997, the Company entered into a Consulting Agreement with
Liviakis Financial Communications, Inc. ("LFC") pursuant to which LFC provides
the Company with financial and business consulting and public and investor
relations services. The Company paid Liviakis consulting fees of $10,000 in cash
and has issued 300,000 shares of its Common Stock over the one-year term of the
Consulting Agreement. 75% of the shares were issued to LFC and 25% to Mr. Robert
B. Prag, an executive officer of LFC. The Company registered the 300,000 shares
of Common Stock issuable to LFC and Mr. Prag in the Registration Statement
declared effective as of August 7, 1998. Pursuant to the Consulting Agreement,
the Company must also pay LFC cash equal to 2.5% of the gross proceeds received
in any direct financing located for the Company by LFC. In connection with the
closing of the sale of $3,060,000 of 8% Convertible Debentures as of December
10, 1998, the Company paid LFC $76,500, and in conjunction with the closing of
the sale of the $2,000,000 of 6% Convertible Subordinated Debentures Due July
21, 2000, the Company paid LFC $50,000, as its finder's fee for locating JW
Genesis Securities, Inc., the finder used by the Company in the offering of the
8% Convertible Debentures and the 6% Convertible Subordinated Debentures.
65
<PAGE>
The Company also sold a total of 3,500,000 shares of Common Stock and
warrants to purchase up to an additional 1,600,000 shares of Common Stock
exercisable at $.01 per share (the "Liviakis Warrants") to two affiliates of
LFC, Messrs. John Liviakis and Robert B. Prag, in August 1997, for $500,000 in
cash. Pursuant to this transaction, Messrs. Liviakis and Prag became significant
shareholders of the Company. The Common Stock issued (and issuable pursuant to
the Consulting Agreements and upon exercise of the Liviakis Warrants) to LFC and
Messrs. Liviakis and Prag carries registration rights (which include the right
to register any other shares of the Company which they may possess at the time
of any registration in which they have a right to include shares), including a
one-time demand registration right and unlimited "piggyback" registrations, with
the costs thereof to be borne by the Company. The registration rights expire at
the earlier of three years from August 4, 1997 or at such time as all shares may
be sold without restriction under SEC Rule 144. On May 12, 1998, 1,200,000
shares of Common Stock were issued to Mr. John Liviakis upon exercise of his
Common Stock purchase warrants. On September 18, 1998, 400,000 shares of Common
Stock were issued to Mr. Prag on exercise of his warrants. The shares of Common
Stock that LFC and Messrs. Liviakis and Prag acquired by exercise of the
Liviakis Warrants and under the July 1997 consulting agreement are included in
the Registration Statement, which became effective as of August 7, 1998.
However, LFC and Messrs. Liviakis and Prag have agreed that they will not
commence sales any of their shares in the Company prior to February 1, 1999.
Since the LFC related financing transaction and the July 1997 LFC
Consulting Agreement were entered into by the Company at approximately the same
time, the Company has treated these transactions as one transaction for
accounting purposes. To properly ascribe a fair value to the July 1997
Consulting Agreement, the Company obtained an independent valuation of the
Company's share price from an accredited valuation firm. Based on the fair
market value of the Common Stock as determined by the valuation, the total of
all shares issuable in the transactions, and the cash proceeds received, the
Consulting Agreement was valued at $2,418,000, of which $2,272,000 was expensed
in fiscal 1998. The consulting services will be amortized on a straight-line
basis over the term of the Consulting Agreement (one year) as an element of
operating expense, within selling, general and administrative expense in the
statement of operations, commencing with the July 25, 1997 effective date of the
agreement.
Pursuant to the agreement by which they purchased the Company's
securities, in August 1997, Messrs. Liviakis and Prag were granted the right to
approve the appointment of a Chief Executive Officer, Chief Financial Officer
and Vice President of Sales, which they have done. They also were given the
right to approve the nominations of up to two non-employee directors. They
approved the appointment of Richard S. Barton as a director of the Company. See,
also, the paragraph below regarding the entry of the "New LFC Agreement.
Between October 14 and November 30, 1997, the Company received several
bridge loans from LFC in the total amount of $475,000. The Company was obligated
to pay LFC interest on the amount borrowed at the rate of 9% per annum. The
Company paid LFC the amount due on these loans, with interest at the stated
rate, from the proceeds of the sale of the 8% Convertible Debentures sold on
December 10, 1997.
On June 30, 1998, the Company and LFC agreed to extend their consulting
relationship through the entry of a new consulting agreement covering the period
from August 1, 1998 through March 15, 1999 (the "New LFC Agreement"). The terms
of the New LFC Agreement are substantially the same as the original LFC
Agreement. For services to be rendered under the New LFC Agreement, LFC and Mr.
Prag are to receive 290,000 shares of Common Stock which are issuable as a
signing bonus upon execution of the New LFC Agreement, 75% to LFC and 25% to Mr.
Prag. In conjunction with the entry of the New LFC Agreement LFC and Messrs.
Liviakis and Prag agreed to a further lock-up of their Company shares, pursuant
to which they will not be able to sell their Company shares before February 1,
1999, even though certain of those shares are included in the Registration
Statement, which was effective as of August 7, 1998. The 290,000 shares issuable
to LFC and Mr. Prag under the New LFC Agreement carry registration rights that
are identical to those covering the prior shares issued or issuable to them
under their original subscription agreements and the Original LFC Agreement,
although they have agreed that the shares issuable under the New LFC Agreement
were not to be included in the Registration Statement, which was declared
effective as of August 7, 1998. The Company will bear the expenses of
registering the shares. LFC is entitled to a finder's fee of 2.5% of the gross
proceeds of any financing that it introduces to the Company. In addition, the
Company has agreed to expand its Board of Directors to include two additional
outside directors who are acceptable to LFC. The appointment of Messrs. Peirce
and Russell was approved by LFC.
66
<PAGE>
In September 1998, the Company negotiated a partial redemption of the
outstanding Series A Preferred Stock with several of the security holders. The
Company borrowed $1,300,000 from Liviakis Financial Communications, Inc. and
used $1million of that money to redeem $833,000 face value of the Series A
Preferred Stock. All tangible and intangible assets of the Company with three
exceptions secure the note. The Company paid 120% of face value for the
redemption. The note payable to LFC is due January 1, 1999 and bears interest at
8% per year. The note is secured by all available assets of the Company.
Management of the Company believes that the transactions with LFC and its
affiliates described above were on terms at least as favorable as could have
been obtained from unaffiliated parties and all transactions with LFC and
Messrs. Liviakis and Prag have been ratified by at least two independent
directors.
Transactions with entrenet Group, LLC
In June 1997, the Company entered into a consulting agreement with
entrenet Group, LLC ("entrenet"), for purposes of assisting the Company in
strategic planning, the creation of a detailed business and marketing plan and
in locating financing sources. For its services, the Company issued a $150,000
convertible promissory note to entrenet, with interest payable at 10% per annum,
due in full on or before June 2, 1998. Principal and interest are convertible
into Common Stock of the Company over the year ending June 2, 1998, at $.50 per
share. In addition, the Company was obligated to pay entrenet a finder's fee of
8% for any direct financing it located for the Company, payable in Company
securities identical to what was sold by the Company in any such financing.
Entrenet located LFC and was therefore entitled to a finder's fee for that
$500,000 financing. A difference then developed between the Company and entrenet
over interpretation of the provisions specifying the consideration payable to
entrenet as its finder's fee for locating LFC. The matter was finally resolved
by the Company and entrenet agreeing that the Company would issue entrenet a
total of 280,000 shares of its Common Stock at such time as the Company obtained
shareholder approval for an increase in authorized Common Stock to no less than
40,000,000 shares. This occurred on February 6, 1998. The Company also granted
entrenet "piggyback registration rights" covering all shares of Common Stock
issuable to it under the promissory note and as payment of the finder's fee,
which entitle entrenet to have their shares included in any registration filed
by the Company. Those shares are included in the Registration Statement, which
was effective as of August 7, 1998.
As of March 12, 1998, the Company entered into an agreement with entrenet
to provide business and financial consulting services to the Company and to
assist the Company in locating additional financing. The term of the agreement
is for six months from March 12, 1998 and renews for additional six-month terms
unless at least 60 days notice is given to terminate the agreement prior to the
end of a term. For its advisory services under the agreement, entrenet received
a fee of $60,000, payable in the form of a promissory note bearing 10% interest,
due on or before the earlier of March 11, 1999, or the receipt by the Company of
aggregate gross proceeds from financing of $2,000,000. The Company paid this
note in full from proceeds of the sale of its 6% Convertible Debentures in July
1998. In addition, entrenet received a Common Stock Purchase Warrant to purchase
10,435 shares at $5.75 per share, exercisable until March 11, 2003. The shares
issuable pursuant to the warrant carry piggyback registration rights that
entitle entrenet to have the shares registered at any time the Company effects a
registration of its securities under the Securities Act of 1933, as amended,
subject to exclusion for registrations on ineligible forms. Upon the
consummation of any financing transaction entered into by the Company during the
term of the agreement (with the exception of financing from certain identified,
excluded sources) or for two years after termination with respect to any
financing obtained from a source introduced to the Company by entrenet, entrenet
is entitled to receive cash compensation as follows: for debt financings, 2% of
the total amount of the financing, payable in cash or in the form of a 10% note
due in one year; for equity financings, 7% of the total gross financing proceeds
(payable in cash), unless there is a licensed investment banker entitled to
receive compensation as a result of the transaction, in which case the amount
payable to entrenet is reduced to 2 1/2% of the gross proceeds (payable in
cash), plus a five year Common Stock purchase warrant which entitles entrenet to
purchase that number of shares of Common Stock equal in value (as determined by
a defined fair market price) to the full amount of compensation payable to
entrenet in cash, at a per share exercise price equal to the then current market
value of the Common Stock (as defined); for mergers and acquisitions, 5% of the
total consideration paid or received in the transaction (payable in cash),
unless there is a licensed investment banker entitled to receive compensation as
a result of the transaction, in which case the amount payable to entrenet is
reduced to 3%
67
<PAGE>
(payable in cash) of such consideration, plus a five year Common Stock purchase
warrant which entitles entrenet to purchase that number of shares of Common
Stock equal in value (as determined by a defined fair market price) to the full
amount of compensation payable to entrenet in cash, at a per share exercise
price equal to the then current market value of the Common Stock (as defined).
If entrenet assists the Company in locating an executive-level candidate who is
hired by the Company, entrenet is entitled to receive a fee equal to 30%
(payable in cash) of the candidate's total first year compensation. The Company
terminated this agreement as of September 1998, and agreed to pay entrenet
remaining fees of $20,000 and has agreed to issue a Common Stock Purchase
Warrant for 8,333 shares exercisable at $2.40 per share, through September 11,
2003.
Management of the Company believes that the transactions with entrenet
described above were on terms at least as favorable as could have been obtained
from unaffiliated parties and all transactions with entrenet have been ratified
by at least two independent directors.
Transactions with ADATOM, Inc.
In fiscal 1998, the Company purchased office furniture and computer
equipment in the approximate amount of $200,000 through ADATOM, Inc., a company
owned by Richard S. Barton, who is a director of the Company. Mr. Barton also
serves as an executive officer of ADATOM. ADATOM is in the business of selling
such furniture and equipment and the Company offered to purchase through ADATOM
if it was able to meet quotes obtained by the Company from competing independent
suppliers of the same furniture and equipment. ADATOM was able to meet such
quotes. Management of the Company believes that the terms upon which it has
purchased items from ADATOM are at least as favorable as it could have obtained
from independent, unaffiliated parties. The Company may make additional
purchases from ADATOM in the future, subject to the same conditions.
Transactions with RBB Bank Aktiengesellschaft
RBB Bank Aktiengesellschaft owns, as agent, shares of the Company's Series
A Preferred Stock, $1,000,000 of its 6% Convertible Debentures and warrants to
purchase 70,000 shares of Common Stock.
As of March 12, 1998, the Company entered into an agreement with Mr.
Richard P. Draper, and his assignee of 397,684 shares of Common Stock,
Tillicombe International, LDC ("Tillicombe") by which Mr. Draper and Tillicombe
agreed to allow the Company to assign its rights in a call option which the
Company had on those shares (the "Call Option") to a third party in return for
payment to Tillicombe of $25,000 and the release of the Company's voting and
rights in the Call Option as to 30,000 of those shares. The Company thereby
acquired the right to assign the Call Option as to 367,684 of Tillicombe's
shares. The Company acquired the Call Option in October 1995, in conjunction
with the dissolution of a subsidiary, Direct Data, Inc., which the Company had
acquired in 1994, in which Mr. Draper was a principal shareholder. Through June
15, 1998, the Company sold and assigned the Call Option on 250,000 of such
shares to RBB Bank. RBB Bank purchased the Call Option in five increments of
50,000 share options each, and paid the Company 85% of the average last sale
price of the underlying shares over the five days prior to the date of acquiring
each Call Option, less the Call Option exercise price of $.25 per share. In each
transaction, RBB Bank paid the acquisition price for the Call Option, as well as
the exercise price to Tillicombe prior to taking delivery of the shares. The
Company realized a total of approximately $997,000 from the sale of these Call
Options to RBB Bank.
Effective July 1, 1998, the Company issued a $250,000 promissory note to
RBB Bank Aktiengesellschaft which was payable in full on or before September 9,
1998. The loan was intended as a short-term bridge loan and was required to be
repaid from the proceeds of any aggregate equity placements done by the Company
which amount to at least $1,000,000 (from which aggregate proceeds any
additional bridge financings received between the date of the note and such
equity financings are excluded). The note was secured by certain assets of the
Company, including all accounts receivable (excluding certain receivables
pledged or which may be pledged in connection with inventory financing), all
inventory (excluding Tranz Enablers securing amounts owing to inventory
financiers, and certain specified inventory previously pledged to Omron
Systems), all fixed assets and all deposit accounts and intangible assets of the
Company. In connection with the issuance of the Note, the Company also granted
RBB Bank a right of first refusal to fund any such additional bridge financings
needed by the Company. This right must be exercised within one day of RBB Bank
being notified of the terms of any such
68
<PAGE>
additional bridge financing. In conjunction with this loan, the Company also
issued a Common Stock purchase warrants to RBB Bank to purchase 20,000 shares of
Common Stock at $4.375 per share, exercisable through September 9, 2001. The
warrant has antidilution provisions that protect the holders against dilution in
the event of certain transactions. The warrant also has "piggyback" registration
rights entitling the holders to have the underlying shares registered in any
registration done by the Company, other than registrations on ineligible forms
and the Registration Statement which was effective as of August 7, 1998. The
expenses of such registrations (other than selling expenses) are to be borne by
the Company. This loan was repaid from the proceeds of the sale of the Company's
6% Convertible Subordinated Debentures Due July 21, 2000.
As of July 10, 1998, the Company reached agreement with RBB Bank for its
participation in the purchase of $1,000,000 minimum and up to $4,000,000 maximum
of 6% convertible debentures of the Company, payable in full two years after
issuance, if not converted to Common Stock before that date. On July 22, 1998,
RBB Bank purchased $1,000,000 of the Company's 6% Convertible Subordinated
Debentures Due July 21, 2000, together with Common Stock Purchase Warrants
exercisable to purchase 50,000 shares at $4.50 per share through July 21, 2001.
Part of the proceeds obtained from this sale was used to pay for the $250,000
loan borrowed from RBB Bank Aktiengesellschaft in July 1, 1998. See
"Management's Discussion of Financial Condition and Results of Operations -
Financial Condition, Capital Resources and Liquidity - $250,000 Loan from RBB
Bank Aktiengesellschaft"
Management believes that the transactions with RBB Bank described above
were on terms at least as favorable as could have been obtained from
unaffiliated parties and all transactions with RBB Bank have been ratified by at
least two independent directors.
69
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
---------
The following Exhibits are filed as a part of this report:
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibit
------ ----------------------
<S> <C>
3.1 Amended Articles of Incorporation (8)
3.2 Amended Bylaws (3)
4.1 Representative's Warrant Agreement dated as of December 2, 1993 (5)
4.2 Common Stock Purchase Warrant issued to James B. Walters on or about April 12, 1993 (5)
4.3 Common Stock Purchase Warrant issued to Kenneth DeJohn on or about May 1, 1993 (5)
4.4 Consulting Agreement dated August 15, 1992, as amended April 12, 1993, with James B. Walters (1)
4.5 Form of Common Stock Purchase Warrants issued to John Liviakis and Robert Prag as of August 4,
1997 (This exhibit is included in Exhibit 10.13)
4.6 Designation of Series A Preferred Stock (this exhibit is included in Exhibit 3.1)
4.7 Common Stock Purchase Warrant dated December 10, 1997 issued to JW Genesis Securities, Inc. (10)
4.8 Common Stock Purchase Warrant dated March 12, 1998, issued to entrenet Group, LLC (12)
4.9 Promissory Note for $60,000 issued to entrenet Group, LLC, as of March 12, 1998 (12)
4.10 Specimen Common Stock Certificate (14)
4.11 Form of Registration Rights Agreement - Issued to Series A Preferred Stockholders as of December
10, 1997 (10)
4.12 Form of Subscription Agreement - Entered into with Series A Preferred Stockholders as of
December 10, 1997 (10)
4.13 Agreement to Amend Stock Purchase Warrants effective April 1, 1998 with James Walters (13)
4.14 Promissory Note for $250,000 dated June 26, 1998, issued to RBB Bank Aktiengesellschaft (13)
4.15 Common Stock Purchase Warrant dated June 26, 1998 issued to RBB Bank Aktiengesellschaft (13)
4.16 Lock-up Letter Agreement between the Company and Liviakis Financial Communications, Inc., John
M. Liviakis and Robert B. Prag dated June 30, 1998 (13)
4.17 Debenture Agreement for 6% Convertible Subordinated Debentures Due July 21, 2000 (11)
70
<PAGE>
4.18 Form of Common Stock Purchase Warrant issued to 6% Debenture Purchasers and JW Genesis
Securities, Inc. as of July 21 - 27, 1998 (11)
4.19 Form of Registration Rights Agreement for 6% Convertible Subordinated Debentures Due July 21,
2000 and Common Stock Purchase Warrants issued to 6% Debenture Purchasers and JW Genesis
Securities, Inc. as of July 21 - 27, 1998 (11)
4.20 Modification Agreement with Certain Holders of Series A Preferred Stock Effective as of
September 17, 1998
4.21 Form of Common Stock Purchase Warrant to be issued to Certain Holders of Series A Preferred
Stock participating in the modifications to the terms of the Series A Preferred Stock (which was
effective as of September 17, 1998)
4.22 Form of Common Stock Purchase Warrant issued to Cardservice International, Inc. in conjunction
with the $500,000 loan made to the Company as of November 1, 1998
4.23 Non-Qualified Common Stock Option issued to Evon A. Kelly effective as of August 4, 1997 (15)
4.24 Non-Qualified Common Stock Option issued to Roger L. Peirce effective as of August 22, 1998 (15)
10.1 License and Volume Purchase Agreement with OMRON Systems of America with Solectron Addendum (1)
10.2 Promissory Note with OMRON Systems, Inc. (3)
10.3 Release Agreement with Richard P. Draper (3)
10.4 1992 Stock Option Plan, as amended (7) (15)
10.5 Agreement for Manufacture and Purchase between USWD, Uniform Industrial Corp and Cardservice
International, Inc. (3)
10.6 AT&T CDPD Value Added Reseller Agreement dated April 30, 1997* (6)
10.7 Bell Atlantic AIRBRIDGE Packet Service Agreement dated August 12, 1997* (6)
10.8 Engagement Agreement between USWD and entrenet Group, LLC dated June 3, 1997 (6)
10.9 GTE Leasing Corporation Promissory Note dated August 6, 1997 (6)
10.10 GTE Mobilnet Communications Service and Equipment Agreement dated
August 1, 1997* (6)
10.11 Form of Demand Note issued to private investors during the fourth
quarter of fiscal year 1997 (6)
10.12 Liviakis Financial Communications, Inc. Consulting Agreement and forms of Subscription Agreements for the
purchase of U.S. Wireless Data, Inc. Common Stock and Warrants from John M. Liviakis and Robert
B. Prag and effective as of July 25, 1997 (6)
10.13 Member Service Provider Sales and Service Credit Card Processing Agreement between U.S. Wireless Data,
Inc. and NOVA Information Systems, Inc. dated January 1, 1997* (6)
10.14 Purchase Agreement with Unicard Systems, Inc. dated September 18, 1997* (6)
71
<PAGE>
10.15 Purchase Agreement with Wellex Systems Manufacturing & Distribution Group dated August 7, 1997 (6)
10.16 Underwriting Agreement between the Company, RAS Securities Corp., Walford & Company, Incorporated and
Thomas James Associates, Inc. dated December 2, 1993 (2)
10.17 Merchant Marketing and Services Agreement with National Bank of
Commerce dated March 9, 1998* (12)
10.18 Assignment Agreement (with Escrow Provisions) with Richard P.
Draper, Tillicombe International LDC and Ireland, Stapleton,
Pryor & Pascoe, P.C., as escrow agent, dated March 12, 1998
(12)
10.19 Form of Option Purchase and Assignment Agreement (relating to
assignment of call option on Tillicombe stock) (12)
10.20 Joint CDPD Sales and Marketing Agreement with Bell Atlantic Mobile dated as of March 23, 1998*
(12)
10.21 Engagement Agreement between the Company and entrenet Group, LLC, dated
as of March 12, 1998 (12)
10.22 Form of Settlement and Mutual Release Agreement between the
Company and the Delle Donne Noteholders entered into as of
April 9, 1998 (12)
10.23 Form of Settlement and Mutual Release Agreement between the
Company and certain Noteholders entered into as of April 7,
1998 (12)
10.24 Note and Warrant Purchase and Security Agreement dated June 25, 1998 between the Company and RBB
Bank Aktiengesellschaft (13)
10.25 Consulting Agreement between the Company and Liviakis Financial Communications, Inc. dated June
30, 1998 (13)
10.26 Joint Marketing and Operating Agreement with Ameritech Mobile Communications, Inc. dated July 16, 1998 (11)
10.27 Amendment to Promissory Note with OMRON Systems, Inc. effective as of August 27, 1998
10.28 Amendment dated September 9, 1998 to GTE Mobilnet Communications Service and Equipment Agreement dated
August 1, 1997
10.29 Promissory Note ($1,300,000) issued to Liviakis Financial Communications, Inc. dated September 22, 1998
10.30 Promissory Note ($500,000) issued to Chuck Burtzloff, Inc. dated October 28, 1998
10.31 Employment Agreement between the Company and Evon A. Kelly dated August 21, 1998 (15)
10.32 Employment Agreement between the Company and Roger L. Peirce dated August 17, 1998 (15)
10.33 Offer Letter - Robichaud, dated August 21, 1997 (15)
10.34 Offer Letter - Mueller, dated November 24, 1997 (15)
72
<PAGE>
23.1 Consent of PricewaterhouseCoopers LLP
27.1 Financial Data Schedule
99.1 Letter of Intent with Cardservice International, Inc. dated September 30, 1998
99.2 Secretary's Certificate Re: Kelly Tax Indemnification Agree't
- -----------------
<FN>
* Confidential treatment for certain portions of this document has been
requested by the Company pursuant to Commission Rule 24b-2 promulgated
under of the Securities Exchange Act of 1934 and/or Rule 406
promulgated under the Securities Act of 1933, as identified on the
first page of the document, and at the specific item in the document
for which such treatment has been requested. The omitted material has
been filed separately with the Commission pursuant to Rules 24b-2
and/or 406.
(1) Incorporated by reference from the like-named exhibit filed with the
Company's Registration Statement on Form SB-2, effective on or about
December 2, 1993 (SEC File No. 33-69776).
(2) Incorporated by reference from the like-named exhibit filed with
Amendment No. 5 to the Company's Registration Statement on Form SB-2,
SEC File No. 33-69776-D (filed on December 2, 1993).
(3) Incorporated by reference from the like-named exhibit filed with the
Company's Annual Report on Form 10-KSB for the Fiscal Year Ended June
30, 1995, filed on October 13, 1996 (SEC Control No. 95201388).
(4) Incorporated by reference from the like-named exhibit filed with the
Company's Annual Report on Form 10-KSB for the Fiscal Year Ended June
30, 1996, filed on October 21, 1996 (SEC Control No. 96645557).
(5) Incorporated by reference from the like-named exhibit filed with the
Company's Annual Report on Form 10-KSB/A (Amendment No. 2) for the
Fiscal Year Ended June 30, 1997, filed on January 2, 1998.
(6) Incorporated by reference from the like-named exhibit filed with the
Company's Annual Report on Form 10-KSB/A (Amendment No. 3) for the
Fiscal Year Ended June 30, 1997, filed on February 25, 1998.
(7) Incorporated by reference from the like-named exhibit filed as Exhibit
C to the Company's Definitive Revised Proxy Statement for the 1997
Annual Meeting of Shareholders held on February 6, 1998, filed on
January 14, 1998.
(8) Incorporated by reference from the like-named exhibit filed with the
Company's Quarterly Report on Form 10-QSB for the fiscal quarter ended
December 31, 1997, filed on February 23, 1998.
(9) Incorporated by reference from the like-named exhibit filed with the
Company's Quarterly Report on Form 10-QSB/A (1st Amendment) for the
fiscal quarter ended December 31, 1997, filed on March 18, 1998.
(10) Incorporated by reference from the like-named exhibit filed with the
Company's Current Report on Form 8-K Reporting an Event of November 14,
1997 (earliest event reported), filed on December 17, 1997.
(11) Incorporated by reference from the like-named exhibit filed with the
Company's Current Report on Form 8-K Reporting an Event of July 16,
1998 (earliest event reported), filed on July 31, 1998.
(12) Incorporated by reference from the like-named exhibit filed with the
Company's Registration Statement on Form SB-2 (SEC File No. 333-52625)
as of May 14, 1998.
(13) Incorporated by reference from the like-named exhibit filed with
Amendment No. 1 to the Company's Registration Statement on Form SB-2
(SEC File No. 333-52625) as of as of July 16, 1998.
(14) Incorporated by reference from the like-named exhibit filed with
Amendment No. 2 to the Company's Registration Statement on Form SB-2
(SEC File No. 333-52625) as of as of August 3, 1998.
73
<PAGE>
(15) This exhibit constitutes a "Management Contract, Compensatory Plan or
Arrangement" required to be filed as an Exhibit to this Report.
(b) Reports on Form 8-K.
--------------------
During the fiscal quarter ended June 30, 1998, the Company filed the
following Current Reports on Form 8K:
(1) Current Report reporting an Event of May 14, 1998 (earliest event
reported), which contained information under Item 5, "Other Events,"
reporting the filing of the Company's Registration Statement on Form
SB-2 (SEC File No. 333-52625). The Form 8-K included a copy of the Form
SB-2 Registration Statement as an exhibit, including the financial
statements filed as part of the Form SB-2.
</FN>
</TABLE>
74
<PAGE>
SIGNATURES
In accordance with Section 13 or 15 of the Exchange Act, the Registrant
caused this Report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: December 17, 1998
U.S WIRELESS DATA, INC.
By: /s/ Roger L. Peirce
---------------------
Roger L. Peirce
Chief Executive Officer
In accordance with the requirements of the Securities Exchange Act
of 1934, this Report has been signed below by the following persons in the
capacities and on the dates indicated.
Signatures Title Date
- ---------- ----- ----
/s/ Roger L. Peirce Chief Executive Officer December 17, 1998
- ------------------- & Director (Principal
Roger L. Peirce Executive Officer)
/s/ Rod L. Stambaugh President & Director December 17, 1998
- --------------------
Rod L. Stambaugh
/s/Robert E. Robichaud Chief Financial Officer, December 17, 1998
- ---------------------- Secretary & Treasurer
Robert E. Robichaud (Principal Financial and
Accounting Officer)
/s/Richard S. Barton Director December 17, 1998
- --------------------
Richard S. Barton
/s/Caesar Berger Director December 17, 1998
- ----------------
Caesar Berger
/s/Alvin C. Rice Director December 17, 1998
- ----------------
Alvin C. Rice
/s/Charles T. Russell Director December 17, 1998
- ---------------------
Charles T. Russell
/s/Chester N. Winter Director December 17, 1998
- --------------------
Chester N. Winter
EXHIBIT 4.20
Dear Investors
Here is the final proposal, which we would like to conclude today 9/17/98:
1) Redeem $ 833,000 of the Preferred at 120% (payment via wire on or before
9/24).
2) All additional discount/percentages are capped at today's discount of 20%
plus 6% of the 80%
3) Revise coupon dividend from 4% to 8% on unconverted amount.
4) No more conversions in Sept. Convert 1/3 after October 15, November 15,
December 15 (limited to available shares until registered)
5) 5% warrant coverage for the first 30 days (through October 15) exercisable
at $2.40 (9/16 closing bid at $2.25) 110% of the prior 5 day closing bid
price of the date of this agreement.
6) 5% warrant coverage for the next two 30 day periods (Nov 15 and Dec 15) on
the amount that is not converted at end of each period. Exercise Price of
warrant will be 110% of the prior 5 day closing bid price for Nov 15, 1998
and December 15, 1998, respectively.
7) USWD to file the remaining shares (including warrant shares) for
registration by October 31,1998, with penalties similar to current deal if
late on effectiveness.
8) No restrictions if stock price > $4.50
9) USWD raises an aggregate of $2 million by 10/30/98 or the restrictions are
lifted.
10) Upon effectiveness of the next SB2, all restrictions are lifted.
Investor agrees to the following:
a. USWD has the right to register other shares on the next registration
statement including the shares outlined above.
b. Investor agrees upon receipt of this and any future redemption notice, no
conversions will be honored thereafter on such redeemed notice and USWD
agrees to provide cash within 5 business days.
c. Allow for elimination of pro-rata distribution if certain investors pass on
redemption. In this case, the redemption amount will be distributed
pro-rata on the participating investors.
Accepted by: _________________________________
Please email response to "[email protected]" and "[email protected]"
EXHIBIT 4.21
THIS WARRANT AND THE STOCK ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND CAN BE
TRANSFERRED ONLY IN COMPLIANCE WITH THE ACT AND APPLICABLE STATE SECURITIES
LAWS. THIS WARRANT AND SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT, UNLESS, IN THE OPINION OF
COUNSEL FOR THE COMPANY OR COUNSEL FOR THE REGISTERED HOLDER (WHICH SHALL BE IN
FORM AND FROM SUCH COUNSEL AS SHALL BE REASONABLY SATISFACTORY TO THE COMPANY),
SUCH REGISTRATION IS NOT THEN REQUIRED.
U.S. Wireless Data, Inc.
2200 Powell Street, Suite 800
Emeryville, California 94608
COMMON STOCK PURCHASE WARRANT
Warrant No. ___________ Right to Purchase _____________
shares of No Par Value Common
Stock (subject to adjustment)
Date of Issuance: As of _______________, 199__
Expiration Date: On or before _____________, 200__
THIS CERTIFIES THAT, for value received,
_____________________________________________ ("Purchaser"),
or permitted transferees in accordance with Section 12 hereof, or its registered
assigns (the "Registered Holder" or "Registered Holders"), is entitled to
purchase from U.S. Wireless Data, Inc., a Colorado corporation (the "Company"),
the number of shares of common stock, no par value per share (the "Common
Stock"), of the Company set forth above, subject to adjustment pursuant to
Section 4 hereof, at the price of ______________________ ($_________) per share
of Common Stock, subject to adjustment pursuant to Section 3 hereof (the
"Exercise Price"). These purchase rights are granted pursuant to that certain
Agreement dated as of _______________________, 1998, between the Company and
Purchaser (the "Purchase Agreement"), subject to the following provisions:
<PAGE>
SECTION 1
CERTAIN DEFINITIONS
As used in this Warrant, the following terms have the meanings set
forth below:
"Agreement" is the Series A Preferred Stock Modification Agreement
dated as of September 17, 1998, between the Company and Purchaser.
"Agreement Date" means the date of the Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, no par value per share
"Common Stock Deemed Outstanding" means the number of shares of Common
Stock actually outstanding at such time, plus the number of shares of Common
Stock deemed to be outstanding at any given time pursuant to Section 3 of this
Warrant.
"Convertible Securities" or "Convertible Security" means any rights or
options which are exercisable to purchase, or convertible into, Common Stock or
any stock or other securities convertible into or exchangeable for Common Stock.
"Date of Issuance" is the date set forth on the front page of this
Warrant, and the terms "date hereof," "date of this Warrant," and similar
expressions shall be deemed to refer to the Date of Issuance.
"Exercise Period" means the period of time commencing at 12:01 A.M.,
Eastern Time, on the Date of Issuance and ending at 5:00 P.M., Eastern Time, on
the Expiration Date, as set forth on the front page of this Warrant.
"Fair Value" means a value determined in good faith by the Board of
Directors of the Company. Anytime a Fair Value is required to be determined for
purposes of this Warrant, a certificate executed by an appropriate officer of
the Company shall be prepared and delivered to the Registered Holder to reflect
the action taken by the Board of Directors to determine such Fair Value.
"Market Price" means, as to any security immediately transferable
without restriction, the average of the closing prices of such security's sales
on the principal domestic securities exchange on which such security may at the
time be listed, or, if there have been no sales on any such exchange on any day,
the average of the highest bid and lowest asked prices on all such exchanges at
the end of such day, or, if on any day such security is not so listed, the
average of the bid and asked prices quoted on Nasdaq as of the close of trading
in New York City on such day, in each such case averaged over a period of five
(5) consecutive days
-2-
<PAGE>
consisting of the business day immediately preceding the day as of which Market
Price is being determined and the four (4) consecutive business days prior to
such day; provided that if such security is listed on any principal domestic
securities exchange or quoted on Nasdaq, the terms "business day" and "business
days" means a day or days, as applicable, on which such exchange or Nasdaq is
open for trading or quotation, as the case may be, notwithstanding whether any
quotation is available on any particular business day and, if not, then the
Market Price shall be determined based upon those remaining days during the
aforesaid 5-day period for which quotations are available. If any security is
not immediately transferable without restriction, or is not listed on any
principal domestic securities exchange or quoted on Nasdaq, the Market Price
shall be the Fair Value thereof.
"Nasdaq" means the National Market System or the Small Cap Market of
the Nasdaq Stock Market, or the OTC Electronic Bulletin Board, or any successor
interdealer quotation systems having substantially the same listing criteria
that may in the future be used generally by members of the National Association
of Securities Dealers, Inc. for over-the-counter transactions in securities.
"Person" means an individual, a partnership, a corporation, a trust, a
joint venture, an unincorporated organization, a government and any department
and agency thereof.
"Series A Preferred Stock" means that Series A Cumulative Convertible
Redeemable Preferred Stock of the Company which is outstanding on the Date of
Issuance.
"Six Percent Convertible Debentures" means the Company's 6% Convertible
Subordinated Debentures Due July 21, 2000, originally issued effective as of
July 22, 1998.
"Stock" means shares of the Company's Common Stock authorized but
unissued as of the Date of Issuance, issued or issuable upon exercise of this
Warrant; provided that if there is a change such that the securities issued or
issuable upon exercise of this Warrant are issued by an entity other than the
Company, or there is a change in the class of securities so issuable, then the
term "Stock" shall mean shares of any security issued or issuable upon exercise
of the Warrant if such security is issuable in shares, or shall mean units of
any such security issued or issuable, if such security is not issuable in
shares.
"Warrant" and "Warrants" means this Warrant and all warrants issued or
issuable in exchange or substitution for this Warrant pursuant to the terms
hereof.
SECTION 2
EXERCISE OF WARRANT
2.1 Exercise Period. The Registered Holder may exercise this Warrant, in
whole or in part, at any time and from time to time, during the Exercise Period,
and the
-3-
<PAGE>
exercise hereof may be for such whole number of Stock as the Registered Holder
may, in its sole discretion, decide.
2.2 Exercise Procedure.
(a) This Warrant shall be deemed to have been exercised at such time
as the Company has received all of the following items (the "Exercise
Date"):
(i) A completed Exercise Agreement, as described below, executed
by the Person exercising all or part of the purchase rights
represented by this Warrant (the "Purchaser");
(ii) This Warrant (subject to delivery by the Company of a new
Warrant with respect to any unexercised portion, as provided in
Paragraph (b) of Subsection 2.2);
(iii) If this Warrant is not registered in the name of the
Purchaser, an Assignment or Assignments substantially in the form set
forth as Exhibit II hereto, evidencing the assignment of this Warrant
to the Purchaser; and
(iv) If the Purchaser has elected not to make a Cashless Exercise
as provided in Paragraph (b) of this Subsection 2.2, a certified or
bank check or other certified funds payable to the Company in an
amount equal to the product of the Exercise Price multiplied by the
number of Stock being purchased upon such exercise.
(b) Certificates for Stock purchased upon exercise of this Warrant
shall be delivered by the Company to the Purchaser within five (5) business
days after the Exercise Date. However, if the Purchaser has elected to make
a "Cashless Exercise" as herein described, the Company shall deliver
certificates for the number of shares that results from subtracting, from
the total number of Stock otherwise deliverable upon exercise, the number
of Stock whose value, calculated using the Market Price, is equal to the
value of the payment otherwise required for exercise by Paragraph (a)(iv)
of this Subsection 2.2. Unless this Warrant has expired or all of the
purchase rights represented hereby have been exercised, the Company shall,
in addition to certificates for Stock, prepare upon exercise of this
Warrant, a new Warrant representing the rights formerly represented by this
Warrant that have not expired or been exercised. The Company shall, within
five (5) business days after the Exercise Date, deliver such new Warrant to
the Persons designated for delivery in the Exercise Agreement.
(c) Except as otherwise required or permitted by the exercise of this
Warrant under the provisions of Paragraph (b) of this Subsection 2.2, the
Stock issuable upon the exercise of this Warrant shall be deemed to have
been issued to the Purchaser on the
-4-
<PAGE>
Exercise Date, and the Purchaser shall be deemed for all purposes to have
become the record holder of such Stock on the Exercise Date.
(d) The issuance of certificates for Stock upon exercise of this
Warrant shall be made without charge to the Registered Holder or the
Purchaser for any issuance tax in respect thereof or any other cost
incurred by the Company in connection with such exercise and the related
issuance of Stock.
(e) The Company shall not close its books for the transfer of this
Warrant or of any Stock in any manner that interferes with the timely
exercise of this Warrant. The Company shall from time to time take all such
action as may be necessary to assure that the par value per share of the
unissued Stock is at all times equal to or less than the Exercise Price
then in effect.
2.3 Exercise Agreement. The Exercise Agreement shall be substantially in
the form set forth as Exhibit I hereto, except that if Stock is not to be issued
in the name of the Registered Holder of this Warrant, the Exercise Agreement
shall also state the name of the Persons to whom Stock is to be issued, and if
the number of Stock purchased does not include all of such Stock purchasable
hereunder, it shall also state the name of the Persons to whom new Warrants for
the unexercised portion of the rights hereunder are to be delivered. Any
transfer of Stock to a person other than a prior Registered Holder shall occur
only in compliance with the provisions regarding transfer contained in Section
12 of this Warrant.
2.4 Fractional Portions of Stock. If a fractional portion of Stock would be
issuable upon exercise of the rights represented by this Warrant, the Company
shall, within three (3) business days after the Exercise Date, deliver to the
Purchaser a check payable to the Purchaser, in lieu of such fractional portion
of Stock, in an amount equal to the Market Price of such fractional portion of
Stock as of the close of business on the Exercise Date.
SECTION 3
EXERCISE PRICE
3.1 General.
(a) The initial Exercise Price of this Warrant is set forth on the
front page of this Warrant. In order to prevent dilution of the rights
granted under this Warrant under the circumstances set forth herein, the
Exercise Price shall be subject to adjustment from time to time pursuant to
this Section 3.
(b) If and whenever the Company issues or sells, or in accordance with
Subsection 3.3 is deemed to have issued or sold, any shares of its Common
Stock for a consideration per share less than the Market Price in effect
immediately prior to the time of such issuance or sale (except as otherwise
provided by Subsection 3.2), then immediately
-5-
<PAGE>
upon each such issuance or sale, the Exercise Price shall be reduced to a
price determined by multiplying the Exercise Price in effect immediately
prior to the issuance or sale by a fraction, the numerator of which shall
be the sum of (i) the number of shares of Common Stock actually outstanding
prior to the issuance or sale, and (ii) the number of shares of Common
Stock that the minimum aggregate amount receivable by the Company upon such
issuance or sale on that occasion would purchase at the initial Exercise
Price, and the denominator of which shall be the number of shares of Common
Stock actually outstanding and Common Stock Deemed Outstanding under
Subsection 3.3 immediately after such issuance or sale.
3.2 No Adjustments in Certain Cases. No adjustment to the Exercise Price
under Paragraph (b) of Subsection 3.1 or under Subsection 3.3, or to the number
of shares issuable upon exercise of this Warrant under Section 4 shall be made:
(a) for the existence of, and any exercise, conversion or issuance of,
any Common Stock or other security of the Company under (i) the Warrants;
(ii) any option, warrant, or other right to purchase Common Stock that is
outstanding on the Agreement Date, (iii) any option issued under the
Company's 1992 Stock Option Plan, as in effect on the Agreement Date, (iv)
any option or contract right issued as compensation to an officer,
director, employee or consultant of the Company, whether or not issued
pursuant to the 1992 Stock Option Plan; (v) the Series A Preferred Stock
and the issuance of Common Stock as dividends or upon conversion of, the
Series A Preferred Stock; (vi) the Six Percent Convertible Debentures and
the issuance of Common Stock as interest on, or upon conversion of, the Six
Percent Convertible Debentures; or (vii) upon the issuance of Common Stock
or other Convertible Securities as a result of the exercise or conversion
of any option or warrant or other right of the Holder to acquire Common
Stock of Convertible Securities of the Company, whether outstanding as of
the Agreement Date or issued at any time subsequent to the Agreement date.
(b) upon the issuance of Common Stock upon exercise or conversion of
any option, warrant or other right or Convertible Securities for which
adjustments have previously been made upon issuance of such option,
warrant, right or Convertible Securities.
3.3 Effect on Exercise Price of Certain Events. For purposes of determining
the adjusted Exercise Price under Subsection 3.1 above, the following provisions
shall be applicable:
(a) Issuance of Rights and Options. If the Company in any manner
grants any rights or options to subscribe for or to purchase Common Stock
or any stock or other securities convertible into or exchangeable for
Common Stock (such rights or options being herein called "Options" and such
convertible or exchangeable stock or securities being herein called
"Convertible Securities") and the price per share for which Common Stock is
issuable upon the exercise of such Options or upon conversion or exchange
of such Convertible
-6-
<PAGE>
Securities is less than the Market Price in effect immediately prior to the
time of the granting of such Options, then the total maximum number of
shares of Common Stock issuable upon the exercise of such Options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities shall be deemed to be outstanding and to have been issued and
sold by the Company for such price per share. For purposes of this
paragraph, the "price per share for which Common Stock is issuable upon
exercise of such Options or upon conversion or exchange of such Convertible
Securities" shall be determined by dividing (i) the total amount, if any,
received by the Company as consideration for the granting of such Options
plus the minimum aggregate amount of additional consideration payable to
the Company upon exercise of all such Options plus, in the case of Options
that relate to the Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the
conversion or exchange of such Convertible Securities, by (ii) the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options and upon the conversion or exchange of all Convertible Securities
issuable upon the exercise of such Options.
(b) Issuance of Convertible Securities. If the Company in any manner
issues or sells any Convertible Securities, and the price per share for
which Common Stock is issuable upon conversion or exchange or such
Convertible Securities is less than the Market Price in effect immediately
prior to the time of such issuance or sale, then the maximum number of
shares of Common Stock issuable upon conversion or exchange of all such
Convertible Securities shall be deemed to be outstanding and to have been
issued and sold by the Company for such price per share. For purposes of
this paragraph, the "price per share for which Common Stock is issuable
upon such conversion or exchange" shall be determined by dividing (i) the
total amount received by the Company as consideration for the issuance or
sale of such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the
conversion or exchange thereof, by (ii) the total maximum number of shares
of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities.
(c) Change in Option Price and Conversion Rate. If any change shall
occur in the price per share provided for in any of the options, rights or
warrants referred to in Paragraph (a) of this Subsection 3.3, or in the
price per share at which the Convertible Securities referred to in
Paragraph (b) of this Subsection 3.3 are convertible or exchangeable, such
options, rights or warrants or conversion or exchange rights, as the case
may be, shall be deemed to have expired or terminated on the date when such
price change became effective in respect of shares not theretofore issued
pursuant to the exercise or conversion or exchange thereof, and the Company
shall be deemed to have issued upon such date new options, rights or
warrants or Convertible Securities at the new price in respect of the
number of shares issuable upon the exercise of such options, rights or
warrants or the conversion or exchange of such Convertible Securities.
-7-
<PAGE>
(d) Calculation of Consideration Received. If any Common Stock,
Options, or Convertible Securities are issued or sold or deemed to have
been issued or sold or consideration that includes unrestricted cash, then
the amount of cash consideration actually received by the Company shall be
deemed to be the full monetary value of the unrestricted cash portion
thereof. If any Common Stock, Options or Convertible Securities are issued
or sold or deemed to have been issued or sold for a consideration part or
all of which is other than unrestricted cash, then the amount of the
consideration other than unrestricted cash received by the Company shall be
deemed to be the Fair Value of such consideration.
(e) Integrated Transactions. If any Option is issued in connection
with the issuance or sale of other securities of the Company, together
compromising one integrated transaction in which no specific consideration
is allocated to such Option by the parties thereto, the Option shall be
deemed to have been issued without consideration.
(f) Treasury Shares. The number of shares of Common Stock Deemed
Outstanding at any given time shall not include shares owned or held by or
for the account of the Company, and the disposition of any shares so owned
or held shall be considered an issuance or sale of Common Stock.
(g) Readjustment Upon Expiration of Options or Convertible Securities.
Upon the expiration of any of the options, warrants or rights referred to
in Paragraph (a) of this Subsection 3.3, or the Convertible Securities
referred to in Paragraph (b) of this Subsection 3.3, if such options,
warrants, rights or Convertible Securities shall not have been exercised,
converted or exchanged, as the case may be, the Exercise Price, to the
extent that Warrants have not been exercised, shall, upon such expiration,
be readjusted and shall thereafter be set (A) if any of such options,
warrants or rights have been exercised or such Convertible Securities have
been converted or exchanged, as the case may be, at a level at which the
Exercise Price would have been if originally adjusted on the basis of (i)
the fact that the only shares of Common Stock so issued were the shares of
Common Stock, if any, actually issued or sold upon the exercise of such
options, warrants or rights or the conversion or exchange of such
Convertible Securities and (ii) such shares of Common Stock, if any, were
issued or sold for the consideration actually received by the Company for
the issuance, sale or grant of all such options, warrants, rights or
Convertible Securities, whether or not exercised, plus the consideration
actually received by the Company upon the exercise, conversion or exchange
of such options, warrants, rights or Convertible Securities, or (B) if none
of such options, warrants or rights have been exercised or such Convertible
Securities have been converted or exchanged, as the case may be, at a level
at which the Exercise Price would have been if such original adjustment had
not been required; provided, however, that no such readjustment shall have
the effect of increasing the Exercise Price in effect immediately prior to
such readjustment by a proportion greater than the aggregate proportional
adjustment originally made upon the issue, sale or grant of such options,
warrants, rights, or Convertible Securities.
-8-
<PAGE>
3.4 Subdivision and Combination of Common Stock; Stock Dividends. If the
Company shall at any time after the date hereof (a) issue any shares of Common
Stock or Convertible Securities, or any rights to purchase Common Stock or
Convertible Securities as a dividend upon Common Stock, (b) issue any shares of
Common Stock in subdivision of outstanding shares of Common Stock by
reclassification, stock split or otherwise, or (c) combine outstanding shares of
Common Stock by reclassification, reverse stock split or otherwise, then the
Exercise Price that would apply if purchase rights hereunder were being
exercised immediately prior to such action by the Company shall be adjusted by
multiplying it by a fraction, the numerator of which shall be the number of
shares of Common Stock Deemed Outstanding immediately prior to such dividend,
subdivision or combination and the denominator of which shall be the number of
shares of Common Stock Deemed Outstanding immediately after such dividend,
subdivision or combination.
3.5 Certain Dividends and Distributions. If the Company shall declare a
dividend or distribution upon the Common Stock payable otherwise than out of
earnings or earned surplus and otherwise than in Common Stock, Options or
Convertible Securities, the Exercise Price shall be reduced by an amount equal,
in the case of a dividend or distribution in cash, to the amount thereof payable
per share of the Common Stock or, in the case of any other dividend or
distribution, to the Fair Value of such dividend or distribution per share of
Common Stock. For purposes of the foregoing, a dividend or distribution other
than in cash shall be considered payable out of earnings or earned surplus only
to the extent that such earnings or earned surplus are charged an amount equal
to the Fair Value of such dividend or distribution. Such reductions shall take
effect as of the date on which a record is taken for the purpose of such divided
or distribution, or, if a record is not taken, the date as of which the holders
of Common Stock of record entitled to such dividend or distribution are to be
determined. The adjustment called for by this Subsection 3.5 shall not apply to
dividends payable on the preferred stock issuable upon conversion of the
Debentures.
3.6 Manner of Calculating Adjustments; No De Minimis Adjustments. The
calculation of each adjustment of the Exercise Price shall be made accurate to
the nearest ten- thousandth. No adjustment of the Exercise Price shall be made
if the amount of such adjustment would be less than one cent per share. In such
case any adjustment that otherwise would be required to be made shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment that, together with any adjustment or adjustments so carried forward,
shall amount to not less than one cent per share.
SECTION 4
ADJUSTMENT OF NUMBER OF STOCK ISSUABLE UPON EXERCISE
Upon each reduction of the Exercise Price pursuant to Section 3 hereof,
the Registered Holder shall thereafter (until another such reduction) be
entitled to purchase, at the Exercise Price in effect on the date purchase
rights under this Warrant are exercised, the number of Stock, calculated to the
nearest whole number of Stock, determined by (a)
-9-
<PAGE>
multiplying the number of Stock purchasable hereunder immediately prior to the
reduction of the Exercise Price by the Exercise Price in effect immediately
prior to such reduction, and (b) dividing the product so obtained by the
Exercise Price in effect on the date of such exercise.
SECTION 5
EFFECT OF REORGANIZATION, RECLASSIFICATION,
CONSOLIDATION, MERGER, SALE OR OTHER DISPOSITION
If at any time while this Warrant is outstanding there shall be any
reorganization or reclassification of the capital stock of the Company (other
than a subdivision or combination of shares provided for in Subsection 3.4
hereof), any consideration or merger of the Company with another corporation
(other than a consolidation or merger in which the Company is the surviving
entity and which does not result in any change in the Common Stock), or any sale
or other disposition by the Company of all or substantially all of its assets to
any other corporation, then the Registered Holder shall thereafter upon exercise
of this Warrant be entitled to receive the Stock and other securities and
property of the Company, or of the successor corporation resulting from
consolidation or merger, as the case may be, to which Purchasers of Stock would
have been entitled upon such reorganization, reclas- sification of capital
stock, consolidation, merger, sale or other disposition if this Warrant has been
exercised immediately prior to such reorganization, reclassification,
consolidation, merger, sale or other disposition. In any such case, appropriate
adjustment (as determined in good faith by the Board of Directors of the
Company) shall be made in the application of the provisions set forth in this
Warrant with respect to the rights and interests thereafter of the Registered
Holder to the end that the provisions set forth in this Warrant shall thereafter
be applicable, as near as reasonably may be, in relation to any Stock or other
securities or property thereafter deliverable upon the exercise hereof as if
this Warrant had been exercised immediately prior to such reorganization,
reclassification of capital stock, consolidation, merger, sale or other
disposition and the Registered Holder hereof had carried out the terms of the
exchange as provided for by such reorganization, reclassification of capital
stock, consolidation, merger, sale or other disposition. If in any such
reorganization, reclassification of capital stock, consolidation, merger, sale
or other disposition, additional shares of Common Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for or of a
security of the Company other than Common Stock deliverable from exercise of
this Warrant, any such issue shall be treated as an issue of Common Stock
covered by the provisions of Section 3, with the amount of the consideration
received upon the issue thereof being determined under Paragraph (e) of
Subsection 3.3. The Company shall not effect any such reorganization,
reclassification of capital stock, consolidation, merger, sale or other
disposition unless, upon or prior to the consummation thereof, the successor
corporation shall assume by written instrument the obligation to deliver to the
Registered Holder such shares of stock or other securities, cash or property as
such Registered Holder shall be entitled to purchase in accordance with this
Warrant's provisions.
-10-
<PAGE>
SECTION 6
NOTICE OF ADJUSTMENT
Immediately upon any adjustment of the Exercise Price, the Company
shall send written notice thereof to all Registered Holders, stating the
adjusted Exercise Price and the number of Stock purchasable upon exercise of
this Warrant and setting forth in reasonable detail the method of calculation
for such adjustment. When possible, such notice shall be given in advance and
included as part of any notice required to be given pursuant to Section 7 below.
SECTION 7
PRIOR NOTICE OF CERTAIN EVENTS
If at any time:
(a) The Company shall pay any dividend payable in stock upon
its Common Stock or make any distribution (other than cash dividends) to the
holders of its Common Stock of record;
(b) The Company shall offer for subscription pro rata to the
holders of its Common Stock of record any additional shares of stock of any
class or any other rights;
(c) There shall be any reorganization or reclassification of
the capital stock of the Company, any consolidation or merger of the Company
with another corporation, or a sale or other disposition of all or substantially
all its assets;
(d) There shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company; or
(e) The Company shall file any registration statement
pursuant to the Securities Act of 1933, as amended (the "Act"),
then, in each such case, and to the extent that the Company can reasonably do
so, the Company shall give prior written notice of the date on which (i) the
books of the Company shall close or a record shall be taken for such stock
dividend, distribution, subscription or other rights or (ii) such
reorganization, reclassification, consolidation, merger, sale or other
disposition, dissolution, liquidation, winding up or filing of a registration
statement shall take place, as the case may be. A copy of each such notice shall
be sent simultaneously to each transfer agent of the Company's Common Stock.
Such notice shall also specify the date as of which the holders of Common Stock
of record shall participate in said dividend, distribution, subscription,
registration or other rights or shall be entitled to exchange their Common Stock
for securities or other property deliverable upon such reclassification,
consolidation, merger, sale or other disposition, dissolution, liquidation,
winding up or filing,
-11-
<PAGE>
as the case may be, and in any case contemplated by Paragraph (d) of Subsection
3.3, shall include the Company's calculation of the Fair Value of the
consideration whose Fair Value requires determination. Such written notice shall
be given at least thirty (30) days prior to the record date or the effective or
filing date, whichever is earlier, of the subject action or other event. The
failure by the Company to give any such notice shall not serve to invalidate any
action otherwise validly taken by the Company.
SECTION 8
RESERVATION OF COMMON STOCK
The Company shall at all times thereafter reserve and keep available
for issuance upon the exercise of the Warrants such number of its authorized but
unissued shares of Common Stock as will be sufficient to permit the exercise in
full of all outstanding Warrants, and upon such issuance such shares of Common
Stock will be validly issued, fully paid and nonassessable.
SECTION 9
NO SHAREHOLDER RIGHTS OR OBLIGATION
This Warrant shall not entitle the Registered Holder to any voting
rights or other rights as a shareholder of the Company. No provision of this
Warrant, in the absence of affirmative action by the Registered Holder to
purchase Stock, and no enumeration in this Warrant of the rights or privileges
of the Registered Holder, shall give rise to any obligation of such Registered
Holder for the payment of the Exercise Price of Stock acquirable by exercise
hereof (in absence of such actual exercise) or as a shareholder of the Company.
SECTION 10
EXCHANGEABLE FOR DIFFERENT DENOMINATIONS
This Warrant is exchangeable, upon the surrender hereof by the
Registered Holder at the principal office of the Company, for new Warrants of
like tenor representing in the aggregate the purchase rights hereunder, as set
forth on the front page hereof, and each of such new Warrants will represent
such portion of such rights as is designated by the Registered Holder at the
time of such surrender. The date the Company initially issued this Warrant,
which is set forth on the front page hereof, shall be deemed to be the "Date of
Issuance" of this Warrant and any Warrant exchanged or substituted therefore,
regardless of the dates on which new Warrants representing the unexpired and
unexercised rights formerly represented by this Warrant are issued.
-12-
<PAGE>
SECTION 11
TRANSFERABILITY
Subject only to the transfer conditions referred to in this Section 11,
this Warrant and all rights hereunder are transferable, in whole or in part,
without restriction and without charge to the Registered Holder, upon surrender
of this Warrant with a properly executed Assignment (substantially in the form
of Exhibit II hereto) at the principal office of the Company. This Warrant and
the Stock issued upon exercise hereof may not be offered, sold or transferred
except in compliance with the Act and any applicable state securities laws, and
then only against receipt of an agreement of the Person to whom such offer or
sale is made to comply with the provisions of this Section 11 with respect to
any resale or other disposition of such securities; provided, that no such
agreement shall be required from any Person purchasing this Warrant or any Stock
pursuant to a registration statement effective under the Act. The Registered
Holder agrees that, prior to the disposition of any Stock purchased on the
exercise hereof under circumstances that might require registration of such
Stock under the Act, or any similar statute then in effect, the Registered
Holder shall give written notice to the Company, expressing its intention as to
such disposition. Within three (3) business days after receiving such notice,
the Company shall present a copy thereof to its securities counsel. If, in the
opinion of such counsel, which shall be rendered within five (5) business days
after receiving such notice, or in the opinion of the Registered Holder's own
counsel (which shall be in form and from such counsel as shall be reasonably
satisfactory to the Company), the proposed disposition does not require
registration of such Stock under the Act, or any similar statute then in effect,
the Company shall, within two (2) business days of the rendering of such
opinion, notify the Registered Holder of such opinion, whereupon the Registered
Holder shall be entitled to dispose of such Stock in accordance with the terms
of the notice delivered by the Registered Holder to the Company. The above
agreement by the Registered Holder shall not be deemed to limit or restrict in
any respect the exercise of rights set forth in Section 12 hereof.
SECTION 12
REGISTRATION RIGHTS
12.1 "Piggyback" Rights. If at any time during the Exercise Period, the
Company shall prepare and file a registration statement under the Act, with
respect to a public offering of equity or debt securities of the Company,
whether by the Company or by other Persons, then the Company shall include in
any such registration statement or any post-effective amendment to such
registration statement, such information as may be required to permit a public
offering of Stock held by any Registered Holders requesting inclusion of their
Stock; provided that where such offering is to be an underwritten offering, and
in the opinion of the Company's managing underwriter the inclusion of the Stock
requested to be registered, when added to the other securities being registered,
would exceed the maximum amount of the company's securities that can be marketed
without otherwise materially and adversely affecting the entire offering, then
the Company may exclude from such offering a portion of
-13-
<PAGE>
the Stock requested to be so registered, so that the total number of securities
to be registered is within the maximum number of shares that, in the opinion of
the managing underwriter, may be marketed without otherwise materially and
adversely affecting the entire offering. In the event there are previously
issued securities other than the Stock that are proposed to be registered in the
registration pursuant to registration rights that were granted prior to the
rights granted hereunder (the "Prior Rights"), then, the rights granted under
this Subsection 12.2 shall be subject to all such Prior Rights, and the Stock
may be excluded from such registration to the extent that the Prior Rights
require; provided, however, that the entire amount of any other securities
without Prior Rights shall be excluded from such registration before the
exclusion of any portion of the Stock for which registration was requested by a
Registered Holder. Each Registered Holder of Warrant Securities for whose
account any Stock may be included in a post-effective amendment or registration
statement shall have the unrestricted right to withhold Stock from inclusion in
the underwritten offering, without regard to whether registration was requested.
The Company shall bear all fees and expenses incurred by it in connection with
the preparation and filing of such post-effective amendment or new registration
statement. In the event of such a proposed registration, the Company shall
furnish the then Registered Holders of Warrant Securities with not less than
thirty (30) days' written notice prior to the proposed date of filing of such
post-effective amendment or new registration statement. Such notice shall
continue to be given by the Company to Registered Holders of Warrant Securities,
with respect to subsequent registration statements or post-effective amendments
filed by the Company, until such time as all of the Stock may be sold without
restriction under the Act and applicable state securities laws and regulations,
and the Registered Holders have received an opinion from counsel for the Company
(in such form and from counsel reasonably satisfactory to the Registered
Holders) that all of the Stock is so saleable under SEC Rule 144 or otherwise
within the immediate 90-day period commencing on the date a sale is requested.
The Registered Holders of Warrant Securities shall exercise the rights provided
for in this Subsection 12.2 by giving written notice to the Company, within
twenty (20) days of receipt of the Company's notice of its intention to file a
post-effective amendment or new registration statement.
12.2 Use of Prospectus. The Registered Holder, upon receipt of notice
from the Company of the occurrence of an event which requires a post-effective
amendment to a registration statement or an amendment or a supplement to the
prospectus included therein, shall promptly discontinue the sale of his Stock
until it has received copies of a supplemented or amended prospectus from the
Company, and until such receipt, the running of any minimum period of
effectiveness required by Subsection 12.1 shall be tolled.
12.3 Failure to Supply Information. Registered Holders requesting
inclusion of Stock in any registration statement filed by the Company shall, at
such Holder's cost and expense, cooperate fully and promptly with the Company
and its counsel in supplying such information concerning the Registered Holder
and such Holder's plan of distribution as may reasonably be required to effect
such registration. Any Registered Holder who fails to so cooperate and to timely
supply information to the Company that is required to obtain
-14-
<PAGE>
effectiveness of a registration statement shall have such Registered Holder's
Stock excluded from the registration statement without liability on the part of
the Company for any such failure to include the such Registered Holder's Stock
in the Registration Statement.
12.4 Withdrawal of Stock from Registration. Any Registered Holder who
withdraws such Holder's Stock from any registration statement commenced pursuant
to Subsection 12.1 hereof, at such Holder's request, shall be deemed to have
received full benefit of a completed registration under Subsection 12.1 hereof.
12.5 Exclusion of Stock from Certain Registrations. Notwithstanding
anything to the contrary contained herein, the registration rights granted to
the Holders hereunder shall not be available to allow inclusion of the Stock in
the Registration Statement first filed by the Company with the Commission as of
May 14, 1998 (SEC File No. 333-52625) or any post-effective amendment thereto,
unless the Holder has first obtained the written consent of all persons holding
Series A Preferred Stock to include the Stock in such registration. Holder
understands and agrees that the Company has no obligation to assist Holder in
obtaining such consent and that any holder of such Series A Preferred Stock may
refuse such consent in such holder's sole discretion.
SECTION 13
INDEMNIFICATION
(a) By the Company. The Company shall indemnify, to the full
extent permitted by law, the Registered Holder, its directors and officers (if
applicable) and each person, if any, who controls the Registered Holder within
the meaning of Section 15 of the Act, against any losses, claims, damages,
liabilities and expenses resulting from any untrue or alleged untrue statement
of a material fact contained in any registration statement, prospectus or
preliminary prospectus or any omission or alleged omission to state therein a
material fact necessary to make the statements therein (in the case of the
prospectus or any preliminary prospectus, in light of the circumstances under
which they were made) not misleading, except insofar as the same are caused by
or contained in any information with respect to the Registered Holder furnished
in writing to the Company by the Registered Holder expressly for use therein.
(b) By the Registered Holder. In connection with any
registration statement in which the Registered Holder is participating, the
Registered Holder shall indemnify, to the full extent permitted by law, the
Company, its directors and officers and each person who controls the Company
(within the meaning of Section 15 of the Act) against any losses, claims,
damages, liabilities and expenses resulting from any untrue or alleged untrue
statement of a material fact contained in any registration statement, prospectus
or preliminary prospectus or any omission or alleged omission to state therein a
material fact necessary to make the statements therein (in the case of the
prospectus or any preliminary prospectus, in light of the circumstances under
which they were made) not misleading, but
-15-
<PAGE>
only insofar as the same are caused by or contained in any information with
respect to the Registered Holder furnished in writing to the Company by the
Registered Holder expressly for use therein.
(c) Indemnification Procedures. Any person who is entitled
to indemnification under this Section 13 shall (i) give prompt written notice to
the indemnifying party of any claim with respect to which it seeks
indemnification and (ii) permit such indemnifying party to assume the defense of
such claim with counsel reasonably satisfactory to the indemnified party.
Whether or not such defense is assumed by the indemnifying party, the
indemnifying party shall not be subject to any liability for any settlement made
without its consent. No indemnifying party shall consent to entry of any
judgment or enter into any settlement which does not include as an unconditional
term thereof the giving by the claimant or plaintiff to such indemnified party
of a release from all liability in respect of such claim or litigation. An
indemnifying party who is not entitled to, or elects not to, assume the defense
of a claim shall not be obligated to pay the fees and expenses of more than one
counsel for all parties indemnified by such indemnifying party with respect to
such claim, unless in the reasonable judgment of any indemnified party a
conflict of interest may exist between such indemnified party and other
indemnified parties with respect to such claim, in which event the indemnifying
party shall be obligated to pay the fees and expenses of such additional counsel
or counsels.
(d) Contribution. If for any reason an indemnification
provision of this Section 13 is held by a court of competent jurisdiction to be
unavailable to an indemnified party with respect to any loss, claim, damage,
liability or expense referred to therein, then the indemnifying party, in lieu
of indemnifying each indemnified party thereunder, shall contribute to the
amount paid or payable by the indemnified party as a result of any such loss,
claim, damage, liability or expense in such proportion as is applicable to
reflect not only the relative benefits received by the indemnified party and the
indemnifying party, but also the relative fault of the indemnified party and
indemnifying party, as well as any other relevant equitable considerations. The
relative fault of the indemnifying party and of the indemnified party shall be
determined by reference to, among other things, whether any untrue or alleged
untrue statement of a material fact or omission to state material fact relates
to information supplied by the indemnifying party or by the indemnified party
and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission.
(e) Actions by Registered Holder. The Registered Holder
shall, at his cost and expense, complete, execute and deliver all
questionnaires, powers of attorney, undertakings and other documents and
instruments, and take all such other actions, as are from time to time
reasonably requested by the Company.
(f) Survival. The rights and obligations set forth in this
Section 13 shall survive the exercise and surrender of this Warrant.
-16-
<PAGE>
SECTION 14
MISCELLANEOUS
14.1 Original Issue Taxes. The Company shall pay all United States,
state and local (but not foreign) original issue taxes, if any, upon the
issuance of this Warrant or the Stock deliverable upon exercise hereof.
14.2 Amendment and Waiver. Except as otherwise provided herein, the
provisions of the Warrants may be amended, and the Company make take any action
herein prohibited or omit to perform any act herein required to be performed by
it, only if the Company has obtained the written consent of the Registered
Holders of Warrants representing at least fifty percent (50%) of the Stock
obtainable upon the exercise of the Warrants outstanding at the time of such
consent.
14.3 Notices. Any notices required to be sent to a Registered Holder
shall be delivered to the address of such Registered Holder shown on the books
of the Company. All notices referred to herein shall be delivered in person or
sent by registered or certified mail, postage prepaid, and shall be deemed to
have been given when so delivered in person, or on the third business day
following the date so sent by mail. Whether or not Purchaser or an affiliate
thereof shall then be a Registered Holder, a copy of any notice sent to any
Registered Holder shall be sent to in the manner provided above, at the
following addresses:
===========================
===========================
Attn: ____________________
Any notices required to be sent to the Company shall be sent by the
same means as notices to be sent to the Registered Holders, at the following
address:
U.S. Wireless Data, Inc.
2200 Powell Street
Suite 800
Emeryville, California 94608
Attention: Chief Financial Officer
14.4 Attorney's Fees; Costs. In any litigation between the Company and
Registered Holders or former Registered Holders, including actions for
enforcement or interpretation, arising out of this Warrant, the prevailing party
shall be entitled to recover reasonable attorney's fees, costs and expenses.
-17-
<PAGE>
14.5 Descriptive Headings; Governing Law. The descriptive headings of
the sections, subsections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. The construction,
validity and interpretation of this Warrant shall be governed by the laws of the
State of Colorado, without giving effect to choice of law or conflict of laws
principals, and the venue shall be Denver, Colorado.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
and attested by its duly authorized officers under its corporate seal.
U.S. WIRELESS DATA, INC.,
a Colorado corporation
By: ____________________________
Roger L. Peirce
Chief Executive Officer
[Corporate Seal]
Attest:
_______________________________
Robert E. Robichaud
Corporate Secretary
-18-
<PAGE>
EXHIBIT I
EXERCISE AGREEMENT
To: Dated:
THE UNDERSIGNED Registered Holder, pursuant to the provisions set forth
by the within Warrant, hereby subscribes for and purchases _________________
shares of Stock covered by such Warrant and herewith elects to make:
( ) a Cashless Exercise at the Exercise Price provided by such Warrant.
( ) full cash payment of $ ______________ for such shares at the Exercise
Price provided by such Warrant.
__________________________________
(Signature)
__________________________________
(Print or type name)
__________________________________
__________________________________
(Address)
NOTICE: The signature on this Exercise Agreement must correspond with
the name as written upon the face of the within Warrant, or upon the Assignment
thereof if applicable, in every particular, without alteration, enlargement, or
any change whatsoever, and must be Medallion guaranteed by a bank (other than a
savings bank), or by a firm having membership on a registered national
securities exchange.
SIGNATURE GUARANTEE
Authorized Signature:__________________________________________________
Name of Bank or Firm: _________________________________________________
Dated: ________________________________________________________________
<PAGE>
EXHIBIT II
ASSIGNMENT
FOR VALUE RECEIVED, _______________________ , the undersigned Registered
Holder hereby sells, assigns, and transfers all the rights of the undersigned
under the within Warrant No. ___________ with respect to the number of
Securities covered thereby set forth below, unto the Assignee identified below,
and does hereby irrevocably constitute and appoint ____________________________
____________________________________________________ to effect such transfer of
rights on the books of the Company, with full power of substitution:
No. of Shares
Name of Assignee Address of Assignee of Stock No. of Warrants
- ---------------- ------------------- -------- ---------------
Dated: ___________________________________
(Signature of Registered Holder)
___________________________________
(Print or type name)
NOTICE: The signature on this Assignment must correspond with the name
as written upon the face of the within Warrant, in every particular, without
alteration, enlargement, or any change whatsoever, and must be Medallion
guaranteed by a bank (other than a savings bank), or by a firm having membership
on a registered national securities.
SIGNATURE GUARANTEE
Authorized Signature:__________________________________________________
Name of Bank or Firm: _________________________________________________
Dated: ________________________________________________________________
EXHIBIT 4.22
THIS WARRANT AND THE STOCK ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND CAN BE
TRANSFERRED ONLY IN COMPLIANCE WITH THE ACT AND APPLICABLE STATE SECURITIES
LAWS. THIS WARRANT AND SUCH SECURITIES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED
IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT, UNLESS, IN THE OPINION OF
COUNSEL FOR THE COMPANY OR COUNSEL FOR THE REGISTERED HOLDER (WHICH SHALL BE IN
FORM AND FROM SUCH COUNSEL AS SHALL BE REASONABLY SATISFACTORY TO THE COMPANY),
SUCH REGISTRATION IS NOT THEN REQUIRED.
U.S. Wireless Data, Inc.
2200 Powell Street, Suite 800
Emeryville, California 94608
COMMON STOCK PURCHASE WARRANT
Warrant No. ___________ Right to Purchase 25,000 shares of
the No Par Value Common Stock
of the Company (subject to
adjustment)
Date of Issuance: As of October 28, 1998
Expiration Date: On or before October 27, 2001
THIS CERTIFIES THAT, for value received,
Chuck Burtzloff ("Purchaser"),
or permitted transferees in accordance with Section 12 hereof, or its registered
assigns (the "Registered Holder" or "Registered Holders"), is entitled to
purchase from U.S. Wireless Data, Inc., a Colorado corporation (the "Company"),
the number of shares of common stock, no par value per share (the "Common
Stock"), of the Company set forth above, subject to adjustment pursuant to
Section 4 hereof, at the price of Three and 38/1000 Dollars ($3.038) per share
of Common Stock, subject to adjustment pursuant to Section 3 hereof (the
"Exercise Price"). These purchase rights are granted pursuant to a Note Payable
dated as of October 28, 1998, between the Company and Purchaser (the "Purchase
Agreement"), subject to the following provisions:
<PAGE>
SECTION 1
CERTAIN DEFINITIONS
As used in this Warrant, the following terms have the meanings set
forth below:
"Agreement" is the Note Payable dated as of October 28, 1998, between
the Company and Purchaser.
"Agreement Date" means the date of the Agreement.
"Commission" means the Securities and Exchange Commission.
"Common Stock" means the Company's Common Stock, no par value per share
"Common Stock Deemed Outstanding" means the number of shares of Common
Stock actually outstanding at such time, plus the number of shares of Common
Stock deemed to be outstanding at any given time pursuant to Section 3 of this
Warrant.
"Convertible Securities" or "Convertible Security" means any rights or
options which are exercisable to purchase, or convertible into, Common Stock or
any stock or other securities convertible into or exchangeable for Common Stock.
"Date of Issuance" is the date set forth on the front page of this
Warrant, and the terms "date hereof," "date of this Warrant," and similar
expressions shall be deemed to refer to the Date of Issuance.
"Exercise Period" means the period of time commencing at 12:01 A.M.,
Eastern Time, on the Date of Issuance and ending at 5:00 P.M., Eastern Time, on
the Expiration Date, as set forth on the front page of this Warrant.
"Fair Value" means a value determined in good faith by the Board of
Directors of the Company. Anytime a Fair Value is required to be determined for
purposes of this Warrant, a certificate executed by an appropriate officer of
the Company shall be prepared and delivered to the Registered Holder to reflect
the action taken by the Board of Directors to determine such Fair Value.
"Market Price" means, as to any security immediately transferable
without restriction, the average of the closing prices of such security's sales
on the principal domestic securities exchange on which such security may at the
time be listed, or, if there have been no sales on any such exchange on any day,
the average of the highest bid and lowest asked prices on all such exchanges at
the end of such day, or, if on any day such security is not so listed, the
average of the bid and asked prices quoted on Nasdaq as of the close of trading
in New York City on such day, in each such case averaged over a period of five
(5) consecutive days
-2-
<PAGE>
consisting of the business day immediately preceding the day as of which Market
Price is being determined and the four (4) consecutive business days prior to
such day; provided that if such security is listed on any principal domestic
securities exchange or quoted on Nasdaq, the terms "business day" and "business
days" means a day or days, as applicable, on which such exchange or Nasdaq is
open for trading or quotation, as the case may be, notwithstanding whether any
quotation is available on any particular business day and, if not, then the
Market Price shall be determined based upon those remaining days during the
aforesaid 5-day period for which quotations are available. If any security is
not immediately transferable without restriction, or is not listed on any
principal domestic securities exchange or quoted on Nasdaq, the Market Price
shall be the Fair Value thereof.
"Nasdaq" means the National Market System or the Small Cap Market of
the Nasdaq Stock Market, or the OTC Electronic Bulletin Board, or any successor
interdealer quotation systems having substantially the same listing criteria
that may in the future be used generally by members of the National Association
of Securities Dealers, Inc. for over-the-counter transactions in securities.
"Person" means an individual, a partnership, a corporation, a trust, a
joint venture, an unincorporated organization, a government and any department
and agency thereof.
"Series A Preferred Stock" means that Series A Cumulative Convertible
Redeemable Preferred Stock of the Company which is outstanding on the Date of
Issuance.
"Six Percent Convertible Debentures" means the Company's 6% Convertible
Subordinated Debentures Due July 21, 2000, originally issued effective as of
July 22, 1998.
"Stock" means shares of the Company's Common Stock authorized but
unissued as of the Date of Issuance, issued or issuable upon exercise of this
Warrant; provided that if there is a change such that the securities issued or
issuable upon exercise of this Warrant are issued by an entity other than the
Company, or there is a change in the class of securities so issuable, then the
term "Stock" shall mean shares of any security issued or issuable upon exercise
of the Warrant if such security is issuable in shares, or shall mean units of
any such security issued or issuable, if such security is not issuable in
shares.
"Warrant" and "Warrants" means this Warrant and all warrants issued or
issuable in exchange or substitution for this Warrant pursuant to the terms
hereof.
SECTION 2
EXERCISE OF WARRANT
2.1 Exercise Period. The Registered Holder may exercise this Warrant, in
whole or in part, at any time and from time to time, during the Exercise Period,
and the
-3-
<PAGE>
exercise hereof may be for such whole number of Stock as the Registered Holder
may, in its sole discretion, decide.
2.2 Exercise Procedure.
(a) This Warrant shall be deemed to have been exercised at such time
as the Company has received all of the following items (the "Exercise
Date"):
(i) A completed Exercise Agreement, as described below, executed
by the Person exercising all or part of the purchase rights
represented by this Warrant (the "Purchaser");
(ii) This Warrant (subject to delivery by the Company of a new
Warrant with respect to any unexercised portion, as provided in
Paragraph (b) of Subsection 2.2);
(iii) If this Warrant is not registered in the name of the
Purchaser, an Assignment or Assignments substantially in the form set
forth as Exhibit II hereto, evidencing the assignment of this Warrant
to the Purchaser; and
(iv) If the Purchaser has elected not to make a Cashless Exercise
as provided in Paragraph (b) of this Subsection 2.2, a certified or
bank check or other certified funds payable to the Company in an
amount equal to the product of the Exercise Price multiplied by the
number of Stock being purchased upon such exercise.
(b) Certificates for Stock purchased upon exercise of this Warrant
shall be delivered by the Company to the Purchaser within five (5) business
days after the Exercise Date. However, if the Purchaser has elected to make
a "Cashless Exercise" as herein described, the Company shall deliver
certificates for the number of shares that results from subtracting, from
the total number of Stock otherwise deliverable upon exercise, the number
of Stock whose value, calculated using the Market Price, is equal to the
value of the payment otherwise required for exercise by Paragraph (a)(iv)
of this Subsection 2.2. Unless this Warrant has expired or all of the
purchase rights represented hereby have been exercised, the Company shall,
in addition to certificates for Stock, prepare upon exercise of this
Warrant, a new Warrant representing the rights formerly represented by this
Warrant that have not expired or been exercised. The Company shall, within
five (5) business days after the Exercise Date, deliver such new Warrant to
the Persons designated for delivery in the Exercise Agreement.
(c) Except as otherwise required or permitted by the exercise of this
Warrant under the provisions of Paragraph (b) of this Subsection 2.2, the
Stock issuable upon the exercise of this Warrant shall be deemed to have
been issued to the Purchaser on the
-4-
<PAGE>
Exercise Date, and the Purchaser shall be deemed for all purposes to have
become the record holder of such Stock on the Exercise Date.
(d) The issuance of certificates for Stock upon exercise of this
Warrant shall be made without charge to the Registered Holder or the
Purchaser for any issuance tax in respect thereof or any other cost
incurred by the Company in connection with such exercise and the related
issuance of Stock.
(e) The Company shall not close its books for the transfer of this
Warrant or of any Stock in any manner that interferes with the timely
exercise of this Warrant. The Company shall from time to time take all such
action as may be necessary to assure that the par value per share of the
unissued Stock is at all times equal to or less than the Exercise Price
then in effect.
2.3 Exercise Agreement. The Exercise Agreement shall be substantially in
the form set forth as Exhibit I hereto, except that if Stock is not to be issued
in the name of the Registered Holder of this Warrant, the Exercise Agreement
shall also state the name of the Persons to whom Stock is to be issued, and if
the number of Stock purchased does not include all of such Stock purchasable
hereunder, it shall also state the name of the Persons to whom new Warrants for
the unexercised portion of the rights hereunder are to be delivered. Any
transfer of Stock to a person other than a prior Registered Holder shall occur
only in compliance with the provisions regarding transfer contained in Section
12 of this Warrant.
2.4 Fractional Portions of Stock. If a fractional portion of Stock would be
issuable upon exercise of the rights represented by this Warrant, the Company
shall, within three (3) business days after the Exercise Date, deliver to the
Purchaser a check payable to the Purchaser, in lieu of such fractional portion
of Stock, in an amount equal to the Market Price of such fractional portion of
Stock as of the close of business on the Exercise Date.
SECTION 3
EXERCISE PRICE
3.1 General.
(a) The initial Exercise Price of this Warrant is set forth on the
front page of this Warrant. In order to prevent dilution of the rights
granted under this Warrant under the circumstances set forth herein, the
Exercise Price shall be subject to adjustment from time to time pursuant to
this Section 3.
(b) If and whenever the Company issues or sells, or in accordance with
Subsection 3.3 is deemed to have issued or sold, any shares of its Common
Stock for a consideration per share less than the Market Price in effect
immediately prior to the time of such issuance or sale (except as otherwise
provided by Subsection 3.2), then immediately
-5-
<PAGE>
upon each such issuance or sale, the Exercise Price shall be reduced to a
price determined by multiplying the Exercise Price in effect immediately
prior to the issuance or sale by a fraction, the numerator of which shall
be the sum of (i) the number of shares of Common Stock actually outstanding
prior to the issuance or sale, and (ii) the number of shares of Common
Stock that the minimum aggregate amount receivable by the Company upon such
issuance or sale on that occasion would purchase at the initial Exercise
Price, and the denominator of which shall be the number of shares of Common
Stock actually outstanding and Common Stock Deemed Outstanding under
Subsection 3.3 immediately after such issuance or sale.
3.2 No Adjustments in Certain Cases. No adjustment to the Exercise Price
under Paragraph (b) of Subsection 3.1 or under Subsection 3.3, or to the number
of shares issuable upon exercise of this Warrant under Section 4 shall be made:
(a) for the existence of, and any exercise, conversion or issuance of,
any Common Stock or other security of the Company under (i) the Warrants;
(ii) any option, warrant, or other right to purchase Common Stock that is
outstanding on the Agreement Date, (iii) any option issued under the
Company's 1992 Stock Option Plan, as in effect on the Agreement Date, (iv)
any option or contract right issued as compensation to an officer,
director, employee or consultant of the Company, whether or not issued
pursuant to the 1992 Stock Option Plan; (v) the Series A Preferred Stock
and the issuance of Common Stock as dividends or upon conversion of, the
Series A Preferred Stock; (vi) the Six Percent Convertible Debentures and
the issuance of Common Stock as interest on, or upon conversion of, the Six
Percent Convertible Debentures; or (vii) upon the issuance of Common Stock
or other Convertible Securities as a result of the exercise or conversion
of any option or warrant or other right of the Holder to acquire Common
Stock of Convertible Securities of the Company, whether outstanding as of
the Agreement Date or issued at any time subsequent to the Agreement date.
(b) upon the issuance of Common Stock upon exercise or conversion of
any option, warrant or other right or Convertible Securities for which
adjustments have previously been made upon issuance of such option,
warrant, right or Convertible Securities.
3.3 Effect on Exercise Price of Certain Events. For purposes of determining
the adjusted Exercise Price under Subsection 3.1 above, the following provisions
shall be applicable:
(a) Issuance of Rights and Options. If the Company in any manner
grants any rights or options to subscribe for or to purchase Common Stock
or any stock or other securities convertible into or exchangeable for
Common Stock (such rights or options being herein called "Options" and such
convertible or exchangeable stock or securities being herein called
"Convertible Securities") and the price per share for which Common Stock is
issuable upon the exercise of such Options or upon conversion or exchange
of such Convertible
-6-
<PAGE>
Securities is less than the Market Price in effect immediately prior to the
time of the granting of such Options, then the total maximum number of
shares of Common Stock issuable upon the exercise of such Options or upon
conversion or exchange of the total maximum amount of such Convertible
Securities shall be deemed to be outstanding and to have been issued and
sold by the Company for such price per share. For purposes of this
paragraph, the "price per share for which Common Stock is issuable upon
exercise of such Options or upon conversion or exchange of such Convertible
Securities" shall be determined by dividing (i) the total amount, if any,
received by the Company as consideration for the granting of such Options
plus the minimum aggregate amount of additional consideration payable to
the Company upon exercise of all such Options plus, in the case of Options
that relate to the Convertible Securities, the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the
conversion or exchange of such Convertible Securities, by (ii) the total
maximum number of shares of Common Stock issuable upon the exercise of such
Options and upon the conversion or exchange of all Convertible Securities
issuable upon the exercise of such Options.
(b) Issuance of Convertible Securities. If the Company in any manner
issues or sells any Convertible Securities, and the price per share for
which Common Stock is issuable upon conversion or exchange or such
Convertible Securities is less than the Market Price in effect immediately
prior to the time of such issuance or sale, then the maximum number of
shares of Common Stock issuable upon conversion or exchange of all such
Convertible Securities shall be deemed to be outstanding and to have been
issued and sold by the Company for such price per share. For purposes of
this paragraph, the "price per share for which Common Stock is issuable
upon such conversion or exchange" shall be determined by dividing (i) the
total amount received by the Company as consideration for the issuance or
sale of such Convertible Securities, plus the minimum aggregate amount of
additional consideration, if any, payable to the Company upon the
conversion or exchange thereof, by (ii) the total maximum number of shares
of Common Stock issuable upon the conversion or exchange of all such
Convertible Securities.
(c) Change in Option Price and Conversion Rate. If any change shall
occur in the price per share provided for in any of the options, rights or
warrants referred to in Paragraph (a) of this Subsection 3.3, or in the
price per share at which the Convertible Securities referred to in
Paragraph (b) of this Subsection 3.3 are convertible or exchangeable, such
options, rights or warrants or conversion or exchange rights, as the case
may be, shall be deemed to have expired or terminated on the date when such
price change became effective in respect of shares not theretofore issued
pursuant to the exercise or conversion or exchange thereof, and the Company
shall be deemed to have issued upon such date new options, rights or
warrants or Convertible Securities at the new price in respect of the
number of shares issuable upon the exercise of such options, rights or
warrants or the conversion or exchange of such Convertible Securities.
-7-
<PAGE>
(d) Calculation of Consideration Received. If any Common Stock,
Options, or Convertible Securities are issued or sold or deemed to have
been issued or sold or consideration that includes unrestricted cash, then
the amount of cash consideration actually received by the Company shall be
deemed to be the full monetary value of the unrestricted cash portion
thereof. If any Common Stock, Options or Convertible Securities are issued
or sold or deemed to have been issued or sold for a consideration part or
all of which is other than unrestricted cash, then the amount of the
consideration other than unrestricted cash received by the Company shall be
deemed to be the Fair Value of such consideration.
(e) Integrated Transactions. If any Option is issued in connection
with the issuance or sale of other securities of the Company, together
compromising one integrated transaction in which no specific consideration
is allocated to such Option by the parties thereto, the Option shall be
deemed to have been issued without consideration.
(f) Treasury Shares. The number of shares of Common Stock Deemed
Outstanding at any given time shall not include shares owned or held by or
for the account of the Company, and the disposition of any shares so owned
or held shall be considered an issuance or sale of Common Stock.
(g) Readjustment Upon Expiration of Options or Convertible Securities.
Upon the expiration of any of the options, warrants or rights referred to
in Paragraph (a) of this Subsection 3.3, or the Convertible Securities
referred to in Paragraph (b) of this Subsection 3.3, if such options,
warrants, rights or Convertible Securities shall not have been exercised,
converted or exchanged, as the case may be, the Exercise Price, to the
extent that Warrants have not been exercised, shall, upon such expiration,
be readjusted and shall thereafter be set (A) if any of such options,
warrants or rights have been exercised or such Convertible Securities have
been converted or exchanged, as the case may be, at a level at which the
Exercise Price would have been if originally adjusted on the basis of (i)
the fact that the only shares of Common Stock so issued were the shares of
Common Stock, if any, actually issued or sold upon the exercise of such
options, warrants or rights or the conversion or exchange of such
Convertible Securities and (ii) such shares of Common Stock, if any, were
issued or sold for the consideration actually received by the Company for
the issuance, sale or grant of all such options, warrants, rights or
Convertible Securities, whether or not exercised, plus the consideration
actually received by the Company upon the exercise, conversion or exchange
of such options, warrants, rights or Convertible Securities, or (B) if none
of such options, warrants or rights have been exercised or such Convertible
Securities have been converted or exchanged, as the case may be, at a level
at which the Exercise Price would have been if such original adjustment had
not been required; provided, however, that no such readjustment shall have
the effect of increasing the Exercise Price in effect immediately prior to
such readjustment by a proportion greater than the aggregate proportional
adjustment originally made upon the issue, sale or grant of such options,
warrants, rights, or Convertible Securities.
-8-
<PAGE>
3.4 Subdivision and Combination of Common Stock; Stock Dividends. If the
Company shall at any time after the date hereof (a) issue any shares of Common
Stock or Convertible Securities, or any rights to purchase Common Stock or
Convertible Securities as a dividend upon Common Stock, (b) issue any shares of
Common Stock in subdivision of outstanding shares of Common Stock by
reclassification, stock split or otherwise, or (c) combine outstanding shares of
Common Stock by reclassification, reverse stock split or otherwise, then the
Exercise Price that would apply if purchase rights hereunder were being
exercised immediately prior to such action by the Company shall be adjusted by
multiplying it by a fraction, the numerator of which shall be the number of
shares of Common Stock Deemed Outstanding immediately prior to such dividend,
subdivision or combination and the denominator of which shall be the number of
shares of Common Stock Deemed Outstanding immediately after such dividend,
subdivision or combination.
3.5 Certain Dividends and Distributions. If the Company shall declare a
dividend or distribution upon the Common Stock payable otherwise than out of
earnings or earned surplus and otherwise than in Common Stock, Options or
Convertible Securities, the Exercise Price shall be reduced by an amount equal,
in the case of a dividend or distribution in cash, to the amount thereof payable
per share of the Common Stock or, in the case of any other dividend or
distribution, to the Fair Value of such dividend or distribution per share of
Common Stock. For purposes of the foregoing, a dividend or distribution other
than in cash shall be considered payable out of earnings or earned surplus only
to the extent that such earnings or earned surplus are charged an amount equal
to the Fair Value of such dividend or distribution. Such reductions shall take
effect as of the date on which a record is taken for the purpose of such divided
or distribution, or, if a record is not taken, the date as of which the holders
of Common Stock of record entitled to such dividend or distribution are to be
determined. The adjustment called for by this Subsection 3.5 shall not apply to
dividends payable on the preferred stock issuable upon conversion of the
Debentures.
3.6 Manner of Calculating Adjustments; No De Minimis Adjustments. The
calculation of each adjustment of the Exercise Price shall be made accurate to
the nearest ten- thousandth. No adjustment of the Exercise Price shall be made
if the amount of such adjustment would be less than one cent per share. In such
case any adjustment that otherwise would be required to be made shall be carried
forward and shall be made at the time and together with the next subsequent
adjustment that, together with any adjustment or adjustments so carried forward,
shall amount to not less than one cent per share.
SECTION 4
ADJUSTMENT OF NUMBER OF STOCK ISSUABLE UPON EXERCISE
Upon each reduction of the Exercise Price pursuant to Section 3 hereof, the
Registered Holder shall thereafter (until another such reduction) be entitled to
purchase, at the Exercise Price in effect on the date purchase rights under this
Warrant are exercised, the number of Stock, calculated to the nearest whole
number of Stock, determined by (a)
-9-
<PAGE>
multiplying the number of Stock purchasable hereunder immediately prior to the
reduction of the Exercise Price by the Exercise Price in effect immediately
prior to such reduction, and (b) dividing the product so obtained by the
Exercise Price in effect on the date of such exercise.
SECTION 5
EFFECT OF REORGANIZATION, RECLASSIFICATION,
CONSOLIDATION, MERGER, SALE OR OTHER DISPOSITION
If at any time while this Warrant is outstanding there shall be any
reorganization or reclassification of the capital stock of the Company (other
than a subdivision or combination of shares provided for in Subsection 3.4
hereof), any consideration or merger of the Company with another corporation
(other than a consolidation or merger in which the Company is the surviving
entity and which does not result in any change in the Common Stock), or any sale
or other disposition by the Company of all or substantially all of its assets to
any other corporation, then the Registered Holder shall thereafter upon exercise
of this Warrant be entitled to receive the Stock and other securities and
property of the Company, or of the successor corporation resulting from
consolidation or merger, as the case may be, to which Purchasers of Stock would
have been entitled upon such reorganization, reclas- sification of capital
stock, consolidation, merger, sale or other disposition if this Warrant has been
exercised immediately prior to such reorganization, reclassification,
consolidation, merger, sale or other disposition. In any such case, appropriate
adjustment (as determined in good faith by the Board of Directors of the
Company) shall be made in the application of the provisions set forth in this
Warrant with respect to the rights and interests thereafter of the Registered
Holder to the end that the provisions set forth in this Warrant shall thereafter
be applicable, as near as reasonably may be, in relation to any Stock or other
securities or property thereafter deliverable upon the exercise hereof as if
this Warrant had been exercised immediately prior to such reorganization,
reclassification of capital stock, consolidation, merger, sale or other
disposition and the Registered Holder hereof had carried out the terms of the
exchange as provided for by such reorganization, reclassification of capital
stock, consolidation, merger, sale or other disposition. If in any such
reorganization, reclassification of capital stock, consolidation, merger, sale
or other disposition, additional shares of Common Stock shall be issued in
exchange, conversion, substitution or payment, in whole or in part, for or of a
security of the Company other than Common Stock deliverable from exercise of
this Warrant, any such issue shall be treated as an issue of Common Stock
covered by the provisions of Section 3, with the amount of the consideration
received upon the issue thereof being determined under Paragraph (e) of
Subsection 3.3. The Company shall not effect any such reorganization,
reclassification of capital stock, consolidation, merger, sale or other
disposition unless, upon or prior to the consummation thereof, the successor
corporation shall assume by written instrument the obligation to deliver to the
Registered Holder such shares of stock or other securities, cash or property as
such Registered Holder shall be entitled to purchase in accordance with this
Warrant's provisions.
-10-
<PAGE>
SECTION 6
NOTICE OF ADJUSTMENT
Immediately upon any adjustment of the Exercise Price, the Company
shall send written notice thereof to all Registered Holders, stating the
adjusted Exercise Price and the number of Stock purchasable upon exercise of
this Warrant and setting forth in reasonable detail the method of calculation
for such adjustment. When possible, such notice shall be given in advance and
included as part of any notice required to be given pursuant to Section 7 below.
SECTION 7
PRIOR NOTICE OF CERTAIN EVENTS
If at any time:
(a) The Company shall pay any dividend payable in stock upon
its Common Stock or make any distribution (other than cash dividends) to the
holders of its Common Stock of record;
(b) The Company shall offer for subscription pro rata to the
holders of its Common Stock of record any additional shares of stock of any
class or any other rights;
(c) There shall be any reorganization or reclassification of
the capital stock of the Company, any consolidation or merger of the Company
with another corporation, or a sale or other disposition of all or substantially
all its assets; or
(d) There shall be a voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, in each such case, and to the extent that the Company can reasonably do
so, the Company shall give prior written notice of the date on which (i) the
books of the Company shall close or a record shall be taken for such stock
dividend, distribution, subscription or other rights or (ii) such
reorganization, reclassification, consolidation, merger, sale or other
disposition, dissolution, liquidation, winding up or filing of a registration
statement shall take place, as the case may be. A copy of each such notice shall
be sent simultaneously to each transfer agent of the Company's Common Stock.
Such notice shall also specify the date as of which the holders of Common Stock
of record shall participate in said dividend, distribution, subscription,
registration or other rights or shall be entitled to exchange their Common Stock
for securities or other property deliverable upon such reclassification,
consolidation, merger, sale or other disposition, dissolution, liquidation,
winding up or filing, as the case may be, and in any case contemplated by
Paragraph (d) of Subsection 3.3, shall include the Company's calculation of the
Fair Value of the consideration whose Fair Value requires determination. Such
written notice shall be given at least thirty (30) days prior to
-11-
<PAGE>
the record date or the effective or filing date, whichever is earlier, of the
subject action or other event. The failure by the Company to give any such
notice shall not serve to invalidate any action otherwise validly taken by the
Company.
SECTION 8
RESERVATION OF COMMON STOCK
The Company shall at all times thereafter reserve and keep available
for issuance upon the exercise of the Warrants such number of its authorized but
unissued shares of Common Stock as will be sufficient to permit the exercise in
full of all outstanding Warrants, and upon such issuance such shares of Common
Stock will be validly issued, fully paid and nonassessable.
SECTION 9
NO SHAREHOLDER RIGHTS OR OBLIGATION
This Warrant shall not entitle the Registered Holder to any voting
rights or other rights as a shareholder of the Company. No provision of this
Warrant, in the absence of affirmative action by the Registered Holder to
purchase Stock, and no enumeration in this Warrant of the rights or privileges
of the Registered Holder, shall give rise to any obligation of such Registered
Holder for the payment of the Exercise Price of Stock acquirable by exercise
hereof (in absence of such actual exercise) or as a shareholder of the Company.
SECTION 10
EXCHANGEABLE FOR DIFFERENT DENOMINATIONS
This Warrant is exchangeable, upon the surrender hereof by the
Registered Holder at the principal office of the Company, for new Warrants of
like tenor representing in the aggregate the purchase rights hereunder, as set
forth on the front page hereof, and each of such new Warrants will represent
such portion of such rights as is designated by the Registered Holder at the
time of such surrender. The date the Company initially issued this Warrant,
which is set forth on the front page hereof, shall be deemed to be the "Date of
Issuance" of this Warrant and any Warrant exchanged or substituted therefore,
regardless of the dates on which new Warrants representing the unexpired and
unexercised rights formerly represented by this Warrant are issued.
SECTION 11
TRANSFERABILITY
Subject only to the transfer conditions referred to in this Section 11,
this Warrant and all rights hereunder are transferable, in whole or in part,
without restriction and without charge to the Registered Holder, upon surrender
of this Warrant with a properly executed Assignment (substantially in the form
of Exhibit II hereto) at the principal office of the
-12-
<PAGE>
Company. This Warrant and the Stock issued upon exercise hereof may not be
offered, sold or transferred except in compliance with the Act and any
applicable state securities laws, and then only against receipt of an agreement
of the Person to whom such offer or sale is made to comply with the provisions
of this Section 11 with respect to any resale or other disposition of such
securities; provided, that no such agreement shall be required from any Person
purchasing this Warrant or any Stock pursuant to a registration statement
effective under the Act. The Registered Holder agrees that, prior to the
disposition of any Stock purchased on the exercise hereof under circumstances
that might require registration of such Stock under the Act, or any similar
statute then in effect, the Registered Holder shall give written notice to the
Company, expressing its intention as to such disposition. Within three (3)
business days after receiving such notice, the Company shall present a copy
thereof to its securities counsel. If, in the opinion of such counsel, which
shall be rendered within five (5) business days after receiving such notice, or
in the opinion of the Registered Holder's own counsel (which shall be in form
and from such counsel as shall be reasonably satisfactory to the Company), the
proposed disposition does not require registration of such Stock under the Act,
or any similar statute then in effect, the Company shall, within two (2)
business days of the rendering of such opinion, notify the Registered Holder of
such opinion, whereupon the Registered Holder shall be entitled to dispose of
such Stock in accordance with the terms of the notice delivered by the
Registered Holder to the Company. The above agreement by the Registered Holder
shall not be deemed to limit or restrict in any respect the exercise of rights
set forth in Section 12 hereof.
SECTION 12
NO REGISTRATION RIGHTS
Neither this Warrant nor the shares of Common Stock issuable upon
exercise of this Warrant (the "Shares") are granted with any rights to have such
securities registered under the Securities Act of 1933 (the "Act") or any state
or foreign securities laws. Purchaser understands and agrees that the most
likely method of disposing of the Shares will be pursuant to Rule 144
promulgated by the United States Securities and Exchange Commission under the
Act, and that certain conditions must be met, and the requirements of Rule 144
followed (including a holding period for the Shares of at least one year from
the date of purchase), in order for Rule 144 to be available for sales of the
Shares. The Company has given Purchaser no assurances, undertakings or
guarantees as to the availability of Rule 144 (or any other method) for sales of
the Shares. If Rule 144 or some other disposition method permitted under the Act
and relevant state securities laws are not available to permit sales of the
Shares, then the Shares may be totally illiquid and Purchaser may not be able to
dispose of the Shares when desired, if at all. Purchaser understands and agrees
to assume this risk.
-13-
<PAGE>
SECTION 13
MISCELLANEOUS
14.1 Original Issue Taxes. The Company shall pay all United States,
state and local (but not foreign) original issue taxes, if any, upon the
issuance of this Warrant or the Stock deliverable upon exercise hereof.
14.2 Amendment and Waiver. Except as otherwise provided herein, the
provisions of the Warrants may be amended, and the Company make take any action
herein prohibited or omit to perform any act herein required to be performed by
it, only if the Company has obtained the written consent of the Registered
Holders of Warrants representing at least fifty percent (50%) of the Stock
obtainable upon the exercise of the Warrants outstanding at the time of such
consent.
14.3 Notices. Any notices required to be sent to a Registered Holder
shall be delivered to the address of such Registered Holder shown on the books
of the Company. All notices referred to herein shall be delivered in person or
sent by registered or certified mail, postage prepaid, and shall be deemed to
have been given when so delivered in person, or on the third business day
following the date so sent by mail. Whether or not Purchaser or an affiliate
thereof shall then be a Registered Holder, a copy of any notice sent to any
Registered Holder shall be sent to in the manner provided above, at the
following addresses:
===========================
===========================
Attn: ____________________
Any notices required to be sent to the Company shall be sent by the
same means as notices to be sent to the Registered Holders, at the following
address:
U.S. Wireless Data, Inc.
2200 Powell Street
Suite 800
Emeryville, California 94608
Attention: Chief Financial Officer
14.4 Attorney's Fees; Costs. In any litigation between the Company and
Registered Holders or former Registered Holders, including actions for
enforcement or interpretation, arising out of this Warrant, the prevailing party
shall be entitled to recover reasonable attorney's fees, costs and expenses.
-14-
<PAGE>
14.5 Descriptive Headings; Governing Law. The descriptive headings of
the sections, subsections and paragraphs of this Warrant are inserted for
convenience only and do not constitute a part of this Warrant. The construction,
validity and interpretation of this Warrant shall be governed by the laws of the
State of Colorado, without giving effect to choice of law or conflict of laws
principals, and the venue shall be Denver, Colorado.
IN WITNESS WHEREOF, the Company has caused this Warrant to be executed
and attested by its duly authorized officers under its corporate seal.
U.S. WIRELESS DATA, INC.,
a Colorado corporation
By: __________________________
Roger L. Peirce
Chief Executive Officer
[Corporate Seal]
Attest:
Robert E. Robichaud
Corporate Secretary
WARR\102665.1\7964.0200
-15-
<PAGE>
EXHIBIT I
EXERCISE AGREEMENT
To: Dated:
THE UNDERSIGNED Registered Holder, pursuant to the provisions set forth
by the within Warrant, hereby subscribes for and purchases _________________
shares of Stock covered by such Warrant and herewith elects to make:
( ) a Cashless Exercise at the Exercise Price provided by such Warrant.
( ) full cash payment of $ _______________ for such shares at the Exercise
Price provided by such Warrant.
______________________________
(Signature)
______________________________
(Print or type name)
______________________________
______________________________
(Address)
NOTICE: The signature on this Exercise Agreement must correspond with
the name as written upon the face of the within Warrant, or upon the Assignment
thereof if applicable, in every particular, without alteration, enlargement, or
any change whatsoever, and must be Medallion guaranteed by a bank (other than a
savings bank), or by a firm having membership on a registered national
securities exchange.
SIGNATURE GUARANTEE
Authorized Signature:__________________________________________________
Name of Bank or Firm: _________________________________________________
Dated: ________________________________________________________________
<PAGE>
EXHIBIT II
ASSIGNMENT
FOR VALUE RECEIVED, ________________________ , the undersigned Registered
Holder hereby sells, assigns, and transfers all the rights of the undersigned
under the within Warrant No. ___________ with respect to the number of
Securities covered thereby set forth below, unto the Assignee identified below,
and does hereby irrevocably constitute and appoint _____________________________
__________________________________________________ to effect such transfer of
rights on the books of the Company, with full power of substitution:
No. of Shares
Name of Assignee Address of Assignee of Stock No. of Warrants
- ---------------- ------------------- -------- ---------------
Dated: ___________________________________
(Signature of Registered Holder)
___________________________________
(Print or type name)
NOTICE: The signature on this Assignment must correspond with the name
as written upon the face of the within Warrant, in every particular, without
alteration, enlargement, or any change whatsoever, and must be Medallion
guaranteed by a bank (other than a savings bank), or by a firm having membership
on a registered national securities.
SIGNATURE GUARANTEE
Authorized Signature:__________________________________________________
Name of Bank or Firm: _________________________________________________
Dated: ________________________________________________________________
U.S. WIRELESS DATA, INC.
NONQUALIFIED STOCK OPTION CERTIFICATE
U.S. Wireless Data, Inc., a Colorado corporation ("Company"), for good
and valuable consideration, including the incentive to the Optionee to remain as
an employee of the Company as a result of ownership or increased ownership of
the Company's no par value common stock ("Common Stock"), the receipt and
sufficiency of which consideration hereby is acknowledged, irrevocably grants to
the Optionee the option ("Option") to purchase the following number of shares of
Common Stock:
Optionee Number of Shares
-------- ----------------
Evon A. Kelly 600,000
The effective date of this grant is August 4, 1997 ("Date of Grant") and is
subject to the following terms and conditions:
1. Exercise Price. The purchase price ("Exercise Price") for shares of
Common Stock purchased pursuant to this Option shall be One Dollar ($1.00) per
share, which shall be paid in full in cash at the time of exercise, provided
that the Board of Directors of the Company may in its sole discretion permit
payment to be made with shares of the Company's Common Stock owned by Optionee.
The Exercise Price represents the closing price of the Company's Common Stock as
of the date this Option is granted. Optionee shall have no rights with respect
to dividends or have any other rights as a shareholder with respect to shares
subject to this Option until Optionee has given written notice of the exercise
of the Option and has paid in full for such shares.
2. Time of Exercise. This Option may be exercised as to ten percent
(10%) of the total shares covered by this Option on the Date of Grant, and 3%
per month thereafter, until fully vested, so long as the Optionee remains
employed by the Company. This Option shall terminate 10 years from the Date of
Grant of this Option, or three months after the termination of employment with
the Company, whichever is shorter. The period of time during which the Option
may be exercised is referred to herein as the "Option Period."
3. Number of Shares. This Option shall be exercised only for 100 shares
of Common Stock or a multiple thereof or for the full number of shares for which
the Option is then exercisable.
4. Death of Optionee. If Optionee dies during Optionee's employment by
the Company, this Option shall be exercisable only as to that portion
exercisable as of the date of death and within one year after Optionee's death
or the last day of the Option Period, whichever is earlier, by the personal
representative or administrator of Optionee's estate, or by any trustee, heir,
legatee or beneficiary to whom Optionee's rights under this Option shall
<PAGE>
pass by will or the laws of descent and distribution to the extent that Optionee
was entitled to exercise this Option at the time of Optionee's death.
5. Retirement of Optionee. If Optionee's employment with the Company
terminates by reason of retirement, the Option shall be exercisable only within
three months after the date of such retirement but not later than the last day
of the Option Period and then only to the extent to which the Option was
exercisable at the time of such termination of employment by retirement.
However, if Optionee dies within three months after termination by retirement,
the Option, to the extent it was exercisable at the time of Optionee's death,
shall thereafter be exercisable for one year after the date of Optionee's death,
but not later than the last day of the Option Period.
6. Disability of Optionee. If Optionee becomes permanently and totally
disabled, and at the time of such disability Optionee is entitled to exercise
one or more installments under this Option, Optionee shall have the right to
exercise this Option within one year after such disability provided Optionee
exercises this Option within the Option Period and then only to the extent to
which this Option was exercisable at the time of such disability. For purposes
of this Section 6 an Optionee shall be considered to be totally and permanently
disabled if a qualified medical physician approved by the Company certifies to
the Company that such Optionee is unable to be gainfully employed by the Company
by reason of a diagnosed and determinable physical or mental impairment which
can be expected to result in death or has lasted and can be expected to last for
a continuous period of not less than 12 months.
7. Termination of Employment. If Optionee's employment is terminated
for any reason other than death, disability or retirement, any option which was
exercisable at the time of termination shall terminate three months after the
date upon which Optionee's employment terminates.
8. Nontransferability of Option. This Option may not be transferred by
Optionee otherwise than by will or the laws of descent and distribution. During
Optionee's lifetime, this Option shall be exercisable only by Optionee.
9. Leave of Absence. For purposes of this Option, (i) a leave of
absence, duly authorized in writing by the Company, for military service or
sickness, or for any other purpose approved by the Company, if the period of
such leave does not exceed 90 days, and (ii) a leave of absence in excess of 90
days, duly authorized in writing by the Company, provided Optionee's right to
reemployment is guaranteed either by statute or by contract, shall not be deemed
a termination of employment.
10. Changes in Capital; Certain Reorganizations. If the outstanding
Common Stock of the Company which is subject to this Option shall at any time be
changed or exchanged by declaration of a stock dividend, split-up, subdivision
or combination of shares, recapitalization, merger, consolidation or other
corporate reorganization in which the Company is the surviving corporation, the
number of and kind of shares subject to the Option and the Option Price shall be
appropriately and equitably adjusted so as to maintain the proportionate number
of shares without changing the aggregate option price. In the event of a
dissolution or liquidation of the Company, or a merger, consolidation, sale of
all or substantially all of its
-2-
<PAGE>
assets, or other corporate reorganization in which the Company is not the
surviving corporation, or in which the Company is the surviving corporation but
holders of Common Stock receive securities of another corporation, this Option
shall terminate as of the effective date of such event, provided that
immediately prior to such event, Optionee shall have the right to exercise this
Option as to all shares underlying this Option, irrespective of the number of
Options actually vested at the time.
11. Manner of Exercise. Subject to the terms and conditions contained
herein this Option may be exercised in whole or in part at any time and from
time to time within the Option Period by the delivery of written notice to any
officer or director of the Company other than Optionee, together with full
payment, in cash or with the Company's Common Stock having a fair market value
equal to the aggregate exercise price for the number of shares purchased. The
notice (i) shall state the election to exercise the Option, (ii) shall state the
number of shares in respect to which the Option is being exercised, (iii) shall
state Optionee's address, (iv) shall state Optionee's social security number,
(v) shall contain such representations and agreements concerning Optionee's
investment intent with respect to such shares of Common Stock as shall be
satisfactory to the Company's counsel, and (vi) shall be signed by Optionee. As
a further condition to the exercise of this Option, the Company may require
Optionee to make any representation and warranty to the Company as may be
required by any applicable law or regulation.
12. Amendment and Administration. The Board of Directors shall have the
authority to interpret the Plan this Option, and generally to conduct and
administer the exercise of this Option and to make all determinations in
connection herewith which may be necessary or advisable, and all such actions of
the Board shall be final and conclusive for all purposes and binding upon
Optionee.
13. Miscellaneous. This Option shall inure to the benefit of and be
binding upon each successor of the Company. All obligations imposed upon and all
rights granted to the Optionee and all rights reserved by the Company under this
Option shall be binding upon and inure to the benefit of Optionee, Optionee's
heirs, personal representatives, administrators and successors. Unless the
context requires otherwise, words denoting the singular may be construed as
denoting the plural, and words of the plural may be construed as denoting the
singular and words of one gender my be construed as denoting such other gender
as is appropriate.
<PAGE>
Date of Grant: August 4, 1997
U.S. WIRELESS DATA, INC. Accepted by Optionee:
a Colorado corporation
By /s/ Rod L. Stambaugh /s/ Evon A. Kelly
-------------------- -----------------
Rod L. Stambaugh Evon A. Kelly
President
-3-
EXHIBIT 4.24
THIS OPTION AND THE STOCK ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND CAN BE
TRANSFERRED ONLY IN COMPLIANCE WITH THE ACT AND APPLICABLE STATE SECURITIES
LAWS. THIS OPTION AND SUCH SHARES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT, UNLESS, IN THE OPINION OF
COUNSEL FOR THE COMPANY OR COUNSEL FOR THE REGISTERED HOLDER (WHICH SHALL BE IN
FORM AND FROM SUCH COUNSEL AS SHALL BE REASONABLY SATISFACTORY TO THE COMPANY),
SUCH REGISTRATION IS NOT THEN REQUIRED. NO REGISTRATION RIGHTS HAVE BEEN GRANTED
WITH RESPECT TO THIS OPTION AS OF ITS ORIGINAL DATE OF ISSUANCE.
U.S. WIRELESS DATA, INC.
NONQUALIFIED STOCK OPTION CERTIFICATE
U.S. Wireless Data, Inc., a Colorado corporation ("Company"), for good
and valuable consideration, including the incentive to the Optionee to remain as
an employee of the Company as a result of ownership or increased ownership of
the Company's no par value common stock ("Common Stock"), the receipt and
sufficiency of which consideration hereby is acknowledged, irrevocably grants to
the Optionee the option ("Option") to purchase the following number of shares of
Common Stock:
Optionee Number of Shares
-------- ----------------
Roger L. Peirce 970,914
The effective date of this grant is August 22, 1998 ("Date of Grant") and is
subject to the following terms and conditions:
1. EXERCISE PRICE. The purchase price ("Exercise Price") for shares of
Common Stock purchasable pursuant to this Option shall be Three and 438/1000
Dollars ($3.438) per share, which shall be paid in full in cash at the time of
exercise; provided, however, that the Board of Directors of the Company may in
its sole discretion permit payment to be made with shares of the Company's
Common Stock owned by Optionee or shares purchasable by Optionee pursuant to
exercise of this Option in such a manner that Optionee shall not have to
surrender any cash to exercise this Option (a "Cashless Exercise"). The Exercise
Price represents the fair market price of the Company's Common Stock as of the
date this Option is granted. Optionee shall have no rights with respect to
dividends or have any other rights
<PAGE>
as a shareholder with respect to shares subject to this Option until Optionee
has given written notice of the exercise of the Option and has paid in full for
such shares.
2. TIME OF EXERCISE. This Option may be exercised as to all or any
portion of the total shares covered by this Option immediately on the Date of
Grant, and shall expire on the later of September 1, 2002, or one year after
cessation of the Executive's relationship with the Company in any capacity,
including service provided to the Company as an employee, officer, director or
consultant. The period of time during which the Option may be exercised is
referred to herein as the "Option Period."
3. COMPANY'S REPURCHASE RIGHTS. The shares purchased upon exercise of
this Option shall be subject to the right of the Company to repurchase such
shares at the same price paid for them by the Optionee; provided that the
Company's repurchase rights shall terminate incrementally in 48 equal monthly
installments commencing on the date of grant of this Option, irrespective of the
date of actual exercise of the Option. The repurchase rights of the Company
shall terminate completely (thereby vesting Optionee's rights in and to 100% of
the shares) in the event of a change in control of the Company, which shall be
defined for purposes hereof as: (1) a transaction involving the sale or transfer
(in one or more related transactions) of a sufficient quantity of the voting
securities of the Company such that upon completion of the transaction(s), the
holders of such securities have the right to elect a majority of the Board of
Directors of the Company; (2) a merger, acquisition or other reorganization of
the Company by another entity (other than a parent or subsidiary of the Company)
in which the Company is not the surviving entity; or (3) the sale of all or
substantially all assets of the Company other than in the ordinary course of
business.
4. NUMBER OF SHARES PURCHASABLE AT ANY ONE TIME. This Option may be
exercised only for at least 100 shares of Common Stock or a multiple thereof or
for the full number of shares for which the Option is then exercisable.
5. DEATH OF OPTIONEE. If Optionee dies during Optionee's employment
with the Company, this Option shall be exercisable only as to that portion
exercisable as of the date of death and within one year after Optionee's death,
or the last day of the Option Period, whichever is earlier, by the personal
representative or administrator of Optionee's estate, or by any trustee, heir,
legatee or beneficiary to whom Optionee's rights under this Option shall pass by
will or the laws of descent and distribution to the extent that Optionee was
entitled to exercise this Option at the time of Optionee's death.
6. RETIREMENT OF OPTIONEE. If Optionee's employment with the Company
terminates by reason of retirement, the Option shall be exercisable within the
one year period following Optionee's retirement as described above, but not
later than the last day of the Option Period, and then only to the extent to
which the Option was exercisable at the time of such termination of employment
by retirement. However, if Optionee dies within three months after termination
by retirement, the Option, to the extent it was exercisable at the time of
Optionee's death, shall thereafter be exercisable for one year after the date of
Optionee's death, but not later than the last day of the Option Period.
-2-
<PAGE>
7. DISABILITY OF OPTIONEE. If Optionee becomes permanently and totally
disabled, and at the time of such disability Optionee is entitled to exercise
one or more installments under this Option, Optionee shall have the right to
exercise this Option within one year after such disability provided Optionee
exercises this Option within the Option Period and then only to the extent to
which this Option was exercisable at the time of such disability. For purposes
of this Section 7 an Optionee shall be considered to be totally and permanently
disabled if a qualified medical physician approved by the Company certifies to
the Company that such Optionee is unable to be gainfully employed by the Company
by reason of a diagnosed and determinable physical or mental impairment which
can be expected to result in death or has lasted and can be expected to last for
a continuous period of not less than 12 months.
8. NONTRANSFERABILITY OF OPTION. This Option may not be transferred by
Optionee otherwise than by will or the laws of descent and distribution. During
Optionee's lifetime, this Option shall be exercisable only by Optionee.
9. LEAVE OF ABSENCE. For purposes of this Option, (i) a leave of
absence, duly authorized in writing by the Company, for military service or
sickness, or for any other purpose approved by the Company, if the period of
such leave does not exceed 90 days, and (ii) a leave of absence in excess of 90
days, duly authorized in writing by the Company, provided Optionee's right to
reemployment is guaranteed either by statute or by contract, shall not be deemed
a termination of employment.
10. CHANGES IN CAPITAL; CERTAIN REORGANIZATIONS. If the outstanding
Common Stock of the Company which is subject to this Option shall at any time be
changed or exchanged by declaration of a stock dividend, split-up, subdivision
or combination of shares, recapitalization, merger, consolidation or other
corporate reorganization in which the Company is the surviving corporation, the
number of and kind of shares subject to the Option and the Option Price shall be
appropriately and equitably adjusted so as to maintain the proportionate number
of shares without changing the aggregate option price. In the event of a
dissolution or liquidation of the Company, or a merger, consolidation, sale of
all or substantially all of its assets, or other corporate reorganization in
which the Company is not the surviving corporation, or in which the Company is
the surviving corporation but holders of Common Stock receive securities of
another corporation, this Option shall terminate as of the effective date of
such event, provided that immediately prior to such event, Optionee shall have
the right to exercise this Option as to all shares underlying this Option,
irrespective of the number of Options actually vested at the time.
11. MANNER OF EXERCISE.
(a) This Option may be exercised in whole or in part at any
time and from time to time within the Option Period, subject to the terms and
conditions contained herein, by the delivery of written notice of exercise to
the Chief Financial Officer of the Company, as required by subsection (c) of
this Section 11, accompanied by: (i) full payment, in cash or certified or bank
check, payable to the Company, or, (ii) if permitted by the Company's Board of
Directors, shares of the Company's Common Stock having a fair market value equal
to the
-3-
<PAGE>
aggregate exercise price for the number of shares purchased. This Option may
also be exercised by "cashless exercise," as described below.
(b) Certificates for the shares of Common Stock purchased upon
exercise of this Option shall be delivered by the Company to the Purchaser
within five (5) business days after the Exercise Date. However, if the Purchaser
has elected to make a "cashless exercise," the Company shall deliver
certificates for the number of shares that results from subtracting, from the
total number of shares otherwise deliverable upon exercise, the number of shares
whose value, calculated using the Market Price, is equal to the value of the
payment otherwise required for exercise by Paragraph (a)(iv) of this Subsection
2.2. For purposes of this section, "Market Price" means the average of the
closing prices of sales on the principal domestic securities exchange on which
such security may at the time be listed, or, if there have been no sales on any
such exchange on any day, the average of the highest bid and lowest asked prices
on all such exchanges at the end of such day, or, if on any day such security is
not so listed, the average of the bid and asked prices quoted on Nasdaq as of
the close of trading in New York City on such day, in each such case averaged
over a period of five (5) consecutive days consisting of the business day
immediately preceding the day as of which Market Price is being determined and
the four (4) consecutive business days prior to such day; provided that if such
security is listed on any principal domestic securities exchange or quoted on
Nasdaq, the terms "business day" and "business days" means a day or days, as
applicable, on which such exchange or Nasdaq is open for trading or quotation,
as the case may be, notwithstanding whether any quotation is available on any
particular business day and, if not, then the Market Price shall be determined
based upon those remaining days during the aforesaid 5-day period for which
quotations are available. If the shares are not so listed or traded on any
principal domestic securities exchange or quoted on Nasdaq, the Market Price
shall be the fair value thereof, as determined in good faith by the Board of
Directors of the Company.
(c) The notice of exercise (i) shall state the election to
exercise the Option, (ii) shall state the number of shares in respect to which
the Option is being exercised, (iii) shall state Optionee's address, (iv) shall
state Optionee's social security number, (v) shall contain such representations
and agreements concerning Optionee's investment intent with respect to such
shares of Common Stock as shall be satisfactory to the Company's counsel, and
(vi) shall be signed by Optionee. As a further condition to the exercise of this
Option, the Company may require Optionee to make any representation and warranty
to the Company as may be required by any applicable law or regulation.
(d) Unless this Option has expired or all of the purchase
rights represented hereby have been exercised, the Company shall, in addition to
certificates for Common Stock issued upon exercise of this Option, prepare upon
exercise of this Option, a new Option representing the rights formerly
represented by this Option that have not expired or been exercised. The Company
shall, within five (5) business days after the Exercise Date, deliver such new
Option to the Optionee designated for delivery in the Exercise Agreement.
12. AMENDMENT AND ADMINISTRATION. The Board of Directors shall have the
authority to interpret the Plan this Option, and generally to conduct and
administer the
-4-
<PAGE>
exercise of this Option and to make all determinations in connection herewith
which may be necessary or advisable, and all such actions of the Board shall be
final and conclusive for all purposes and binding upon Optionee.
13 MISCELLANEOUS. This Option shall inure to the benefit of and be
binding upon each successor of the Company. All obligations imposed upon and all
rights granted to the Optionee and all rights reserved by the Company under this
Option shall be binding upon and inure to the benefit of Optionee, Optionee's
heirs, personal representatives, administrators and successors. Unless the
context requires otherwise, words denoting the singular may be construed as
denoting the plural, and words of the plural may be construed as denoting the
singular and words of one gender my be construed as denoting such other gender
as is appropriate.
IN WITNESS WHEREOF, this Option has been issued by the Company
effective as of the Date of Grant, which is August 22, 1998.
U.S. WIRELESS DATA, INC. Accepted by Optionee:
a Colorado corporation
By /s/ Rod L. Stambaugh /s/ Roger L. Peirce
-------------------- -------------------
Rod L. Stambaugh Roger L. Peirce
President
Attest:
By /s/ Robert E. Robichaud
-----------------------
Robert E. Robichaud
Secretary
-5-
EXHIBIT 10.27
OMRON SYSTEMS, INC.
55 E. Commerce Drive
Schaumburg, IL 60178
Phone 847-843-0515
Fax 847-843-7686 [Revised]
August 27, 1998
Mr. Raymond Mueller
U.S. Wireless Data, Inc.
2200 Powell St., Suite 450
Emeryville, CA 94608-1809
Dear Mr. Mueller:
Per our phone conversation yesterday, here's a recap of the counter-proposal
that we discussed and agreed to in restructuring the payment terms of the
Installment Note of March 27, 1995 for the principal amount of $472,800.00.
First, we agree to reduce the per unit price of the EXP's to $100.00.
Second, we would like to retain 200 units for our own use, thereby leaving 1200
units to be shipped to you and consequently reducing your principal balance to
$120,000.00.
Your initial payment of $15,000 would be due August 28, 1998 via wire transfer.
We request that all subsequent payments be also made by wire transfer.
We agree to a 155 unit drawdown per month, starting in September 1, 1998. The
payment would be $15,500.00 plus freight. This 155 unit monthly drawdown would
continue until you receive your additional funding of $2 million, at which time
you would increase your drawdown of EXP's to 240 units. You expect to receive
this funding by the end of October, 1998. Starting in November, 1998, the units
shipped each month would be increased to 240, with the monthly payment being
increased to $24,000 plus freight. We will advise you what the freight charge
will be. The payments and inventory drawdown will start September 1, 1998 and
continue through February 1, 1999. Payments would be due the first day of each
month. The EXP's will be shipped after receipt of the payments.
The $47,000 interest payment would be due November 1, 1998 based on your
expectation of receiving the $2 million funding. Your payment on November 1
would be $71,000.00 plus freight ($24,000 + $47,000 + freight).
I have attached a revised payment schedule to reflect the above.
<PAGE>
Our banking information is as follows:
Bank of Tokyo-Mitsubishi, Ltd.
Chicago, IL 60606
Account #0508661848
Routing #071002341
Please review the above and confirm your acceptance by signing the bottom of
this letter.
The original copy of this letter will be sent via Epress Mail. Please sign it,
retain a copy for yourself, and send the original back to me. I'm also faxing a
copy to you. Please sign it and fax it back to me.
Thanks for your cooperation in resolving this issue with us.
Sincerely,
/s/ John T. Sosnowy
- -------------------
John T. Sosnowy
Credit Manager
cc: Jun Utsumi, President
Yoshio Hirooka, Secretary/Treasurer
Mike Cavanaugh, Senior Vice-President
AGREED as of the date thereof:
US WIRELESS DATA, INC.
By: /s/ Raymond J. Mueller
----------------------
Name: Raymond J. Mueller
Title: V.P. Operations
<PAGE>
<TABLE>
<CAPTION>
Payment Schedule
Payment Withdrawal Initial Monthly Interest Payment
Date Units Payment Payment Payment Total
<S> <C> <C> <C> <C> <C>
08/28/98 0 15,000.00 15,000.00
09/01/98 155 15,500.00 15,500.00 + Freight
10/01/98 155 15,500.00 15,500.00 + Freight
11/01/98 240 24,000.00 47,000.00 71,000.00 + Freight
12/01/98 240 24,000.00 24,000.00 + Freight
01/01/99 240 24,000.00 24,000.00 + Freight
02/01/99 170 2,000.00 2,000.00 + Freight
TOTAL 1,200 15,000.00 105,000.00 47,000.00 167,000.00 + Freight
</TABLE>
All of payment should be made by wire transfer on the payment date.
Page 1 of 1
EXHIBIT 10.28
AMENDMENT TO
CDPD SERVICE AND EQUIPMENT AGREEMENT
This Amendment to CDPD Service and Equipment Agreement (this
"Amendment"), dated this 9th day of September, 1998 and effective as of August
18, 1998 (the "Effective Date"), amends that certain CDPD Service and Equipment
Agreement (the "Agreement") between GTE Mobile Communications Service
Corporation ("GTEMC") and U.S. Wireless Data, Inc. ("Customer") dated August 1,
1997.
GTEMC and Customer hereby agree as follows:
1. Substitution of Party. GTE Mobile Communications Service Corporation
assigned its interest in the Agreement to GTE Wireless Incorporated
("GTEW"), an affiliate of GTEMC, as of January 1, 1998. Pursuant to
Section 10F of the Agreement, this assignment did not require
Customer's consent. Accordingly, GTEW has assumed all rights and
responsibilities of GTEMC under the Agreement and has been substituted
for GTEMC therein, and GTEMC no longer has any interest in the
Agreement. In the Agreement, the term "GTEMC" in every instance means
GTEW.
2. Exhibit B. Exhibit B is hereby amended by removing Sections 2, 3 and 4
thereof in their entirety. The pricing in Section 1 is hereby deleted
in its entirety and replaced with the pricing set forth in Section 4
(the "Alternate Rate Plan"). The Alternate Rate Plan provides for an
activation fee of $15.00, a monthly minimum of $9.00, 75 included
kilobytes and a $.09 charge for kilobytes in excess of the included
kilobytes.
3. Conversion of Existing NEIs. The parties agree that all of Customer's
NEIs currently existing on the MERCHT rate plan will be converted to
the Alternate Rate Plan as of the Effective Date. Further, the parties
agree that all NEIs added after the Effective Date will be billed
according to the Alternate Rate Plan.
4. Exhibit C. Section 4 of Exhibit C is hereby amended by removing the
second paragraph of such section in its entirety.
5. Reaffirmation of Other Terms and Conditions. All terms and conditions
not expressly amended hereby remain unchanged and in full force and
effect, and the parties ratify and reaffirm such terms as if they were
set forth in full herein.
<PAGE>
This 9th day of September, 1998.
GTE WIRELESS INCORPORATED U.S. WIRELESS DATA, INC.
By: /s/ Byron W. Smith By: /s/ Rod Stambaugh
- ------------------------------- --------------------
Print Name: Byron W. Smith Print Name: Rod Stambaugh
Title: Vice President - Sales Title: President
By: /s/ Catherine H. La Fiandra
---------------------------
Print Name: Catherine H. La Fiandra
Title: Asst. Secretary
-2-
EXHIBIT 10.29
U.S. WIRELESS DATA, Inc.
This agreement is entered into on this day of September 22, 1998 between U.S.
Wireless Data, Inc. ("USWD"), and John Liviakis of Liviakis Financial
Communications, Inc.
WHEREAS, John Liviakis will provide bridge financing of $1,300,000 to USWD on
September 22, 1998.
THEREFORE, USWD agrees to:
1) Reimburse John Liviakis within 5 business days following the
receipt of proceeds from a financing event. The note is due in
full no later than January 1, 1999.
2) Upon repayment of the note, USWD will pay interest on this note
at eight percent (8%) per annum.
3) The balance of the note will be secured by all tangible and
intangible assets of the Company with the following exceptions.
The Company is considering financing the TRANZ Enabler units,
which are and will continue to be deployed with merchants. The
TRANZ Enabler asset and/or portion of the monthly transaction
revenue related to the repayment of the equipment financing may
be excluded from the security interest described above.
The Company granted Houlihan Lokey Howard & Zukin Capital a
secured position as detailed in the agreement of June 19, 1998.
The Company is in the process of negotiating bridge financing and
reserves the right to modify the terms of the security interest
described above if required to allow for a successful funding of
such bridge.
4) There are no fees, warrants or conversion rights associated with
this note.
This Note is executed and agreed upon on September 22, 1998.
U.S. Wireless Data, Inc. Liviakis Financial Communications, Inc.
/s/ Robert E. Robichaud /s/ John Liviakis
- ---------------------------- ----------------------
By Robert E. Robichaud By John Liviakis
Chief Financial Officer President
EXHIBIT 10.30
U.S. WIRELESS DATA, Inc.
NOTE PAYABLE
This agreement is entered into on this day of October 28, 1998 between U.S.
Wireless Data, Inc. ("USWD"), and Chuck Burtzloff.
WHEREAS, Chuck Burtzloff will provide bridge financing of $500,000 to USWD on
October 28, 1998.
THEREFORE, USWD agrees to:
1) Reimburse Chuck Burtzloff upon the closing of the Common Stock
Purchase Agreement between Chuck Burtzloff and USWD. In any case,
the note is due in full no later than January 1, 1999.
2) Upon repayment of the note, USWD will pay interest on this note
at eight percent (8%) per annum.
3) There are no fees, or conversion rights associated with this
note.
4) In further consideration of this transaction, USWD will issue a
Common Stock Purchase Warrant for twenty-five-thousand (25,000)
shares of the Company's Common Stock at a price equal 90% of the
closing price on the trading day preceding this agreement. The
warrant will have a term of three years.
5) The investor (Chuck Burtzloff) understands that this Note, the
Warrant, and Common Stock issuable upon exercise of the Warrant
are characterized as "restricted securities" under federal and
state securities laws as defined in SEC Rule 144 promulgated
under the Securities Act of 1933, as presently in effect, (the
Act). The investor is familiar with SEC Rule 144, as presently in
effect, and understands and agrees to comply with the resale
limitation imposed under the Act and applicable securities law.
This Note is executed and agreed upon on October 28, 1998.
U.S. Wireless Data, Inc.
/s/ Robert E. Robichaud /s/ Chuck Burtzloff
- ----------------------- -------------------
By Robert E. Robichaud By Chuck Burtzloff
Chief Financial Officer
EMPLOYMENT AGREEMENT
This Employment Agreement is effective as of August 21, 1998, by and
between Evon A. Kelly ("Employee"), and U.S. Wireless Data, Inc., a Colorado
corporation ("USWD").
WHEREAS, Employee has agreed to resign as Chief Executive Officer and
as a Director of USWD effective upon execution of this Agreement; and
WHEREAS, Employee and USWD have agreed that Employee shall continue to
provide services to USWD pursuant to the terms of this Agreement;
NOW, THEREFORE, in consideration of the premises and mutual promises
and agreements hereinafter set forth, the parties agree as follows:
1. Services.
1.1 Services. Employee will perform, for and on behalf of USWD
(or any subsidiary or third party designated by USWD), those services identified
and agreed upon from time to time by Employee and USWD, including, but not
limited to, transition assistance, public relations and assistance with such
matters as may be assigned to him from time to time. Employee shall perform such
services to the best of his ability and shall be responsible to the Chief
Executive Officer of USWD.
1.2 Availability. Employee shall make himself available to
USWD for services to be rendered hereunder on a"full-time" basis, subject to
vacation and leave policies as are applicable to other executive level
management employees of USWD. USWD acknowledges that Employee will be
establishing a consulting business at the same time as he serves as an Employee
of USWD under this Agreement. USWD agrees that so long as such consulting
business does not violate any of the other terms or conditions of this
Agreement, such action by Employee shall not be deemed to violate this
Agreement.
2. Compensation and Benefits.
2.1 Fees. In consideration for the services performed by
Employee hereunder, USWD shall pay Employee an annualized salary of One Hundred
and Fifty Thousand Dollars ($150,000), to be paid twice monthly, at USWD's
regular pay dates.
2.2 Benefits. Employee shall be entitled to the benefits
generally available to other executive level management Employees of USWD,
including the benefits set forth on Exhibit A attached hereto, as the same may
be modified for all executive level USWD employees from time to time.
<PAGE>
3. Term. The term of this Agreement shall commence on the date hereof
and continue for one year (the "Period of Employment"), unless sooner terminated
pursuant to the provisions of Section 6 below.
4. New Business Ideas. Employee agrees to disclose promptly to USWD the
full details of any and all business ideas ("Subject Ideas"), which are
conceived by Employee during the term of this Agreement and which relate to the
wireless credit and/or debit card transaction processing business of USWD.
Employee agrees to assign to USWD, without further consideration, his entire
right, title and interest in and to each and every Subject Idea described above,
which shall be the sole and exclusive property of USWD and that, if protectable
by copyright, they are "works made for hire," as that term is defined in the
United States Copyright Act (17 USCA, Section 101).
5. Confidential Information.
5.1 Employee acknowledges that prior to and during the term of
this Agreement, Employee has had, and may have access to, confidential
information with respect to the business of USWD and its affiliates and that
during the term of this Agreement and for two years thereafter, he will hold all
confidential information in confidence and not disclose or use it except to the
extent necessary to carry out his responsibilities under this Agreement.
5.2 All copies of confidential information in his possession
or control shall be returned promptly to USWD upon USWD's request.
5.3 Confidential information shall not include information
which: (1) is developed by Employee outside the scope of this Agreement and
independent of USWD's confidential information; (2) is or becomes public
knowledge without breach of this Agreement, or (3) is disclosed to Employee by a
third party without violation of any obligation of non-disclosure.
6. Termination. This Agreement, together with the employment
relationship and the Period of Employment, shall terminate under certain
circumstances as follows. The termination of the employment relationship and the
Period of Employment shall not terminate the obligation of the parties to comply
with those terms of this Agreement intended to extend beyond the termination of
the Period of Employment, including without limitation, those obligations with
respect to confidentiality and non-competition.
6.1 Death. This Agreement and the Period of Employment shall
automatically terminate upon the death of the Employee.
6.2 Disability. This Agreement and the Period of Employment
shall automatically terminate in the event of the Disability of the Employee and
Employee is entitled to draw benefits under the Company's short-term disability
policy, subject to any
-2-
<PAGE>
limitations imposed by applicable law. "Disability" shall have the meaning given
to such term in the Employer's short-term disability insurance policy as in
effect from time to time.
6.3 Cause. This Agreement and the Period of Employment shall
terminate at the option of the Employer immediately upon delivery by Employer of
written notice to Employee that:
(a) Employee has acted or failed to act in such a
fashion as to constitute dishonesty, fraud, or other serious misconduct
deemed by Employer to have a material adverse effect upon the operation
of the Employer's business, or
(b) Employee has failed to successfully or
adequately perform his or her work obligations as the same have been
delegated to him or her, or
(c) Employee accepts full-time employment with
another employer or assumes obligations under any other job that
require Employee's full time commitment to such obligations or job.
This Agreement may not be terminated except as provided in this Section
6. In the event of any termination pursuant to paragraphs 6.1, 6.2 or 6.3 above,
Employee shall be entitled to receive his salary and/or other compensation
through the effective date of termination, but shall not be entitled to any
severance or other compensation following the effective date of termination. In
the event of termination pursuant to paragraphs 6.1 or 6.2 above, the Employee
shall be entitled to any benefits payable under any health, welfare or insurance
plan maintained by the Employer which covers such event.
7. Non-Competition.
7.1 Employee agrees that he possesses, by virtue of his
employment with USWD and the continuing relationship with USWD, knowledge,
skills and reputation in the industry in which USWD operates which are of
material importance to USWD and which are special, unique and extraordinary.
Employee acknowledges that the loss of his services, or the use of his services
by a competitor, may cause irreparable harm to USWD. Therefore, Employee agrees
that during the period commencing with the date hereof and ending one year after
his employment with USWD is terminated (the "Restricted Period") (voluntarily or
involuntarily) he will not knowingly, directly or indirectly, as a principal,
officer, director, shareholder (other than as a holder of 2% or less of a
publicly traded corporation's capital stock), partner, employee, consultant, or
in any other capacity whatsoever, engage in, be or become associated with, or
advise or assist any business, firm, partnership, individual, corporation, or
any other entity which is engaged in the business of creating, marketing,
selling, leasing or placing products or services which are competitive with the
business of USWD at the time Employee's relationship with USWD is terminated.
During the Restricted
-3-
<PAGE>
Period, Employee will not solicit any employee of USWD to leave the employ of
USWD or solicit the business of any client or customer of USWD (other than on
behalf of USWD).
7.2 It is agreed that Employee's services are unique, and that
any breach or threatened breach by Employee of any provision of this Section may
not be remedied solely by damages. Accordingly, in the event of a breach or
threatened breach by Employee of any of the provisions of this Section 7, USWD
shall be entitled to injunctive relief, restraining Employee and any business,
firm, partnership, individual, corporation, or entity participating in such
breach or attempted breach, from engaging in any activity which would constitute
a breach of this Section 7. Nothing herein, however, shall be construed as
prohibiting USWD from pursuing any other remedies available at law or in equity
for such breach or threatened breach, including the recovery of damages.
8. Stock Options. Employee is the holder of a non-qualified stock
option issued by USWD as of August 4, 1998, which is exercisable to purchase up
to a total of 600,000 shares of USWD's no par value common stock at $1.00 per
share through August 4, 2007, subject to vesting and termination as provided
therein (the "Stock Option"). A copy of the Stock Option Agreement is attached
hereto as Exhibit 2. Employee and USWD have also entered into an understanding
(as stated in the minutes of a meeting of the Board of Directors of USWD of
November 21, 1997) by which Employee is to be reimbursed by USWD for the
difference, if any, in tax consequences to him that arise as a result of the
Stock Option having been issued as a non-qualified option, as opposed to an
incentive stock option. Employee shall remain the owner and beneficiary of the
Stock Option, which shall continue in full force and effect through the Period
of Employment, subject to the same terms as existed prior to entry of this
Agreement; provided, however, that with respect to the accelerated vesting
provisions of the Stock Option upon the occurrence of "Certain Reorganizations"
of the Company, as described in Section 10 of the Stock Option Agreement, if
this Agreement is in effect at the time of any such reorganization, the number
of options that shall immediately vest upon any such reorganization shall be
limited to the number of options that would be vested as of the date one year
from the effective date of this Agreement.
9. Cooperation. Employee acknowledges that as Chief Executive Officer
and a director of USWD he had certain duties and obligations to USWD. Employee
agrees to take such actions, including the signing of formal USWD documents such
as reports, minutes and the like, as are reasonable and necessary and pertinent
to the time during which he served as Chief Executive Officer and a director of
USWD, to assist USWD in an orderly transition from his status as Chief Executive
Officer and a director of USWD.
10. Publicity. Except as may be otherwise required by law, Employee
shall have the right to review and approve any public announcements or
statements made by USWD or any person acting on USWD's behalf, which mention or
refer to Employee or his relationship with USWD.
-4-
<PAGE>
11. Arbitration; Legal Fees. Any dispute or controversy arising under
or in connection with this Agreement shall be settled exclusively by arbitration
in San Francisco, California, in accordance with the rules of the American
Arbitration Association then in effect. Such arbitration shall be presided over
by a single arbitrator if the parties agree on such person within fifteen (15)
days of the date of a written demand for arbitration by either party. If the
parties cannot so agree on a single arbitrator, then such arbitration shall be
before a three member panel and each party shall appoint one arbitrator within
thirty (30) days of the initial date of demand by either party. The two
arbitrators so appointed shall appoint the third arbitrator within 45 days of
the date of the initial demand for arbitration by either party. The arbitration
shall occur within 120 days of the initial demand for arbitration by either
party. Discovery shall be available in any such arbitration to the extent
necessary to prevent any party from being prejudiced by a lack of discovery.
Judgment may be entered on the arbitrator's award in any court having
jurisdiction. The prevailing party in any such arbitration shall be entitled to
recover all reasonable legal fees and costs and other fees and expenses incurred
in respect of any dispute or controversy, which fees and costs may be included
in the award rendered by the panel in the proceeding. Notwithstanding this
provision, the parties agree that any action required as a result of the breach
or threatened breach of any term of this Agreement which may result in
irreparable injury to a party and which would therefore be appropriate for
injunctive relief may be brought in the court and location described in
paragraph 11.4 of this Agreement.
12. Miscellaneous.
12.1 Assignment. USWD may assign this Agreement or any of its
rights hereunder to any affiliate of USWD or to any successor to USWD who
assumes the business of USWD through merger, purchase of assets or any other
transaction. The duties and obligations of Employee hereunder are unique and
Employee shall therefore not be entitled to assign his duties and obligations
under this Agreement to any other person.
12.2 Entire Agreement and Amendment. This Agreement (together
with its attachments) constitutes the entire agreement between USWD and Employee
and any verbal or written communication between the parties prior to the
adoption of this Agreement shall be deemed merged herein and of no further force
and effect. This Agreement may only be altered or amended by a writing signed by
the Employee and an authorized officer of USWD.
12.3 Waiver. Neither the delay or failure by USWD or Employee
to exercise any right under this Agreement, nor partial or single exercise of
any such right, shall constitute a waiver of that or any other right.
12.4 Governing Law and Venue. This Agreement is entered into
in Emeryville, California, and as such it shall be interpreted and enforced
under the laws of the State of California applicable to contracts made to be
performed entirely within California.
-5-
<PAGE>
In the event that any one or more provision in this Agreement shall, for any
reason, held to be invalid, illegal, or unenforceable in any respect, such
invalidity, illegality, or unenforceability shall not affect any other provision
of this Agreement, but this Agreement shall be construed as if such provision
had never been contained herein. Unless submitted to arbitration pursuant to
Section 11 of this Agreement, the proper venue for any legal action as to the
interpretation or enforcement of this Agreement shall be a court of appropriate
jurisdiction located in the San Francisco Bay area of California.
12.5 Interpretation. In the event that any one or more
provisions of this Agreement shall, for any reason, held to be invalid, illegal,
or unenforceable in any respect, such invalidity, illegality, or
unenforceability shall not affect any other provision of this Agreement, but
this Agreement shall be construed as if such provision had never been contained
herein. If any provision in this Agreement shall be held to be excessively broad
as to duration, activity or subject in any jurisdiction, it shall be construed
by limiting and reducing the provision which is deemed excessively broad. A
limitation or reduction in the application of any provision in one jurisdiction
shall not affect the application of the same provision in any other
jurisdiction.
12.6 Notices. Any notice required or permitted by this
Agreement shall be effective when received, and shall be sufficient if in
writing and personally delivered (including by express courier) or sent by
certified mail with return receipt to the address set forth at the end of this
Agreement or at such other address as may by notice be specified by one party to
the other.
12.7 Counterparts. This Agreement may be executed in
counterparts, each of which shall be deemed an original, but all of which shall
together constitute one and the same Agreement.
12.8 Headings. The headings used for the sections, paragraphs
and subparagraphs of this Agreement are for convenience are not a substantive
part of this Agreement. The headings shall not be used to interpret or construe
any of the substantive terms of this Agreement.
12.9 Review and Construction. Each of the parties to this
Agreement has had the opportunity to have this Agreement reviewed by counsel of
their own choosing. Neither this Agreement nor any provision of this Agreement
shall be construed or interpreted "against" any party as a result of such
party's having "drafted" the Agreement or any provision of this Agreement.
-6-
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement
as of the date first written above.
U.S. WIRELESS DATA, INC.
By: /s/ Rod L. Stambaugh
------------------------
Name: Rod L. Stambaugh
Title: President
EMPLOYEE
/s/ Evon A. Kelly
-----------------
Evon A. Kelly
-7-
<PAGE>
EXHIBIT 1
BENEFITS PACKAGE DESCRIPTION
<PAGE>
EXHIBIT 2
STOCK OPTION AGREEMENT
EXHIBIT 10.32
EMPLOYMENT AGREEMENT
THIS AGREEMENT is entered into as of August 19, 1998, by and
between ROGER PEIRCE (the "Executive") and U.S. WIRELESS DATA, INC., a Colorado
corporation (the "Company").
1. Duties and Scope of Employment.
(a) Position. For the term of his employment under
this Agreement ("Employment"), the Company agrees to employ the Executive in the
position of Chairman and Chief Executive Officer. The Executive shall report to
the Company's Board of Directors.
(b) Obligations to the Company. During the term
of his Employment, the Executive shall devote his full business efforts and time
to the Company. During the term of his Employment, without the prior written
approval of a member of the Company's Board, the Executive shall not render
services in any capacity to any other person or entity and shall not act as a
sole proprietor or partner of any other person or entity or as a shareholder
owning more than five percent of the stock of any other corporation, except that
it is acknowledged that Executive is and may remain on the board of directors of
and perform limited services for Global Reach Internet Communications and Card
Service International. The Executive shall comply with the Company's policies
and rules, as they may be in effect from time to time during the term of his
Employment.
(c) No Conflicting Obligations. The Executive
represents and warrants to the Company that he is under no obligations or
commitments, whether contractual or otherwise, that are inconsistent with his
obligations under this Agreement. The Executive represents and warrants that he
will not use or disclose, in connection with his employment by the Company, any
trade secrets or other proprietary information or intellectual property in which
the Executive or any other person has any right, title or interest and that his
employment by the Company as contemplated by this Agreement will not infringe or
violate the rights of any other person.
(d) Commencement Date. The Executive shall commence
full-time Employment as soon as reasonably practicable and in no event later
than August 13, 1998.
<PAGE>
2. Cash and Incentive Compensation.
(a) Salary. The Company shall pay the Executive
as compensation for his services a base salary at a gross annual rate of not
less than $75,000. Such salary shall be payable in accordance with the Company's
standard payroll procedures.
(b) Stock Options. The Company shall grant the
Executive a stock option covering 1,000,000 shares of the Company's Common
Stock. Such option shall be granted effective on the date that the Executive
commences employment. The option shall be an incentive stock option to the
maximum extent permissible under the Federal tax laws. The exercise price of
such option shall be equal to the fair market value of such stock on the date of
grant. The term of such option shall be 10 years. However, the option shall
expire on the later of September 1, 2002 or one year after cessation of service
in the event of the termination of Executive's service, which shall be defined
for purposes of the option as Employment, service as a consultant or service as
a Board member. Such option shall be immediately exercisable, but the purchased
shares shall be subject to repurchase by the Company at the exercise price in
the event that the Executive's Employment terminates before he vests in the
shares. The Executive shall vest in the option shares in 48 equal monthly
installments measured from commencement of employment. The option shares shall
become fully vested in the event of a change in control involving the Company.
The grant of such option shall be subject to the other terms and conditions set
forth in the U.S. Wireless Data Corporation 1992 Stock Option Plan and in the
Company's standard form of stock option agreement. /s/ See Note Below RP
3. Vacation and Executive Benefits. During the term of his
Employment, the Executive shall be eligible for paid vacations in accordance
with the Company's standard policy for similarly situated employees, as it may
be amended from time to time. During the term of his Employment, the Executive
shall be eligible to participate in any employee benefit plans maintained by the
Company for similarly situated employees, subject in each case to the generally
applicable terms and conditions of the plan in question and to the
determinations of any person or committee administering such plan.
4. Business Expenses; Indemnification.
(a) During the term of his Employment, Executive
shall be authorized to incur necessary and reasonable travel, entertainment and
other business expenses in connection with his duties hereunder. The Company
shall reimburse the Executive for such expenses upon presentation of an itemized
account and appropriate supporting documentation, all in accordance with the
Company's generally applicable policies.
(b) The Company shall indemnify Executive to the
fullest extent permitted by the Colorado corporation law from claims against him
in his capacity as an
<PAGE>
officer and employee of the Company and, to the extent he is serving as such, as
a Director of the Company. Such indemnification shall include, among other
terms, the advancement, as incurred, of costs and legal fees of defending
against any such claims. The Company and Executive shall enter into a mutually
agreeable form of indemnification agreement pursuant to which Executive is to be
indemnified at least to the extent provided in this paragraph 4(b). The Company
shall use its best efforts to obtain and maintain a policy of liability
insurance insuring Executive against personal liability from claims against him
in his capacity as an officer or Director of the Company.
5. Term of Employment.
(a) Basic Rule. The Company agrees to continue
the Executive's Employment, and the Executive agrees to remain in Employment
with the Company, from the commencement date set forth in Section 1(d) until the
date when the Executive's Employment terminates pursuant to Subsection (b) or
(c) below. The Executive's Employment with the Company shall be "at will." Any
contrary representations that may have been made to the Executive shall be
superseded by this Agreement. This Agreement shall constitute the full and
complete agreement between the Executive and the Company on the "at will" nature
of the Executive's Employment, which may only be changed in an express written
agreement signed by the Executive and a duly authorized officer of the Company.
(b) Termination. The Company may terminate the
Executive's Employment at any time and for any reason (or no reason), and with
or without Cause, by giving the Executive notice in writing. The Executive may
terminate his Employment by giving the Company 14 days' advance notice in
writing. The Executive's Employment shall terminate automatically in the event
of his death.
(c) Permanent Disability. The Company may
terminate the Executive's active Employment due to Permanent Disability by
giving the Executive 30 days' advance notice in writing. For all purposes under
this Agreement, "Permanent Disability" shall mean that the Executive, at the
time notice is given, has failed to perform his duties under this Agreement for
a period of not less than 180 consecutive days as the result of his incapacity
due to physical or mental injury, disability or illness. In the event that the
Executive satisfactorily resumes the performance of substantially all of his
duties hereunder before the termination of his active Employment under this
Subsection (c) becomes effective, the notice of termination shall automatically
be deemed to have been revoked.
<PAGE>
(d) Rights Upon Termination. Except as expressly
provided in Section 6, upon the termination of the Executive's Employment
pursuant to this Section 5, the Executive shall only be entitled to the
compensation, benefits and reimbursements described in Sections 2, 3 and 4 for
the period preceding the effective date of the termination. The payments under
this Agreement shall fully discharge all responsibilities of the Company to the
Executive.
(e) Termination of Agreement. This Agreement
shall terminate when all obligations of the parties hereunder have been
satisfied. The termination of this Agreement shall not limit or otherwise affect
any of the Executive's obligations under Section 7.
6. Termination Benefits.
(a) General Release. Any other provision of
this Agreement notwithstanding, Subsections (b) and (c) below shall not apply
unless the Executive (i) has executed a general release (in a form prescribed by
the Company) of all known and unknown claims that he may then have against the
Company or persons affiliated with the Company and (ii) has agreed not to
prosecute any legal action or other proceeding based upon any of such claims.
(b) Severance Pay. If, during the term of this
Agreement, the Company terminates the Executive's Employment for any reason
other than Cause or Permanent Disability, then the Executive shall vest in an
additional 12/48 of the option shares granted under paragraph 2(b).
(c) Definition of "Cause." For all purposes under
this Agreement, "Cause" shall
mean:
(i) Unauthorized use or disclosure
of the confidential information or trade secrets of the Company;
(ii) Any breach of the Proprietary
Information and Inventions Agreement between the Executive and
the Company or any other agreement between the Executive and the
Company;
(iii) Conviction of, or a plea of "guilty"
or "no contest" to, a felony under the laws of the United States
or any state thereof;
(iv) Threats or acts of violence directed at
any present, former or prospective employee, independent
contractor, vendor, customer or business partner of the Company;
<PAGE>
(v) Misappropriation of the assets of
the Company or other acts of dishonesty; or
(vi) Misconduct or gross negligence in the
performance of duties assigned to the Executive under this
Agreement.
The foregoing shall not be deemed an exclusive list of all acts or omissions
that the Company may consider as grounds for the termination of the Executive's
Employment.
7. Non-Solicitation and Non-Disclosure.
(a) Non-Solicitation. During the period commenc-
ing on the date of this Agreement and continuing until the second anniversary of
the date when the Executive's Employment terminated for any reason, the
Executive shall not directly or indirectly, personally or through others,
solicit or attempt to solicit (on the Executive's own behalf or on behalf of any
other person or entity) either (i) the employment of any employee of the Company
or any of the Company's affiliates or (ii) the business of any customer of the
Company or any of the Company's affiliates with whom the Executive had contact
during his Employment.
(b) Non-Disclosure. The Executive has entered
into a Proprietary Information and Inventions Agreement with the Company, which
is incorporated herein by reference. Notwithstanding anything else in this
Agreement or in any other agreement such as (but not limited to) an inventions
or proprietary rights agreement that Executive may sign or be required to sign
pursuant to his employment with Company, anything created by Executive prior to
or during his employment that relates to [electronic payments] is not within the
scope of this Agreement.
8. Successors.
(a) Company's Successors. This Agreement shall
be binding upon any successor (whether direct or indirect and whether by
purchase, lease, merger, consolidation, liquidation or otherwise) to all or
substantially all of the Company's business and/or assets. For all purposes
under this Agreement, the term "Company" shall include any successor to the
Company's business and/or assets which becomes bound by this Agreement.
(b) Executive's Successors. This Agreement and
all rights of the Executive hereunder shall inure to the benefit of, and be
enforceable by, the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
<PAGE>
9. Miscellaneous Provisions.
(a) Notice. Notices and all other communications
contemplated by this Agreement shall be in writing and shall be deemed to have
been duly given when personally delivered or when mailed by U.S. registered
mail, return receipt requested and postage prepaid. In the case of the
Executive, mailed notices shall be addressed to him at the home address which he
most recently communicated to the Company in writing. In the case of the
Company, mailed notices shall be addressed to its corporate headquarters, and
all notices shall be directed to the attention of its Secretary.
(b) Modifications and Waivers. No provision of
this Agreement shall be modified, waived or discharged unless the modification,
waiver or discharge is agreed to in writing and signed by the Executive and by
an authorized officer of the Company (other than the Executive). No waiver by
either party of any breach of, or of compliance with, any condition or provision
of this Agreement by the other party shall be considered a waiver of any other
condition or provision or of the same condition or provision at another time.
(c) Whole Agreement. No other agreements, rep-
resentations or understandings (whether oral or written and whether express or
implied) which are not expressly set forth in this Agreement have been made or
entered into by either party with respect to the subject matter hereof. This
Agreement and the Proprietary Information and Inventions Agreement contain the
entire understanding of the parties with respect to the subject matter hereof.
(d) Withholding Taxes. All payments made under
this Agreement shall be subject to reduction to reflect taxes or other charges
required to be withheld by law.
(e) Choice of Law. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of California (except their provisions governing the choice of law).
(f) Severability. The invalidity or unenforce-
ability of any provision or provisions of this Agreement shall not affect the
validity or enforceability of any other provision hereof, which shall remain in
full force and effect.
<PAGE>
(g) No Assignment. This Agreement and all rights
and obligations of the Executive hereunder are personal to the Executive and may
not be transferred or assigned by the Executive at any time. The Company may
assign its rights under this Agreement to any entity that assumes the Company's
obligations hereunder in connection with any sale or transfer of all or a
substantial portion of the Company's assets to such entity.
(h) Counterparts. This Agreement may be executed
in two or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, each of the parties has executed this
Agreement, in the case of the Company by its duly authorized officer, as of the
day and year first above written.
/s/ Roger L. Peirce
------------------------
ROGER L. PEIRCE
U.S. WIRELESS DATA, INC.
By /s/ Rod Stambuagh
------------------------
Rod Stambaugh
Title: President
/s/ Subject to revision of Paragraph 2(b) to conform to
- -------------------------------------------------------
ISO and non-qualified stock option rules. RP
- --------------------------------------------
EXHIBIT 10.34
U.S. WIRELESS DATA
August 21, 1997
Mr. Robert Robichaud
4632 Ross Gate Way
Pleasanton, CA 94566
Dear Robert:
Pursuant to our discussions, this letter is the formal offer of employment which
I am delighted to extend to you. The following outlines the specifics of the
offer for your consideration:
Position: Chief Financial Officer
Reports to: Chief Executive Officer
Start Date: September 5, 1997
Compensation: Base Salary of $125,000.00 annually, with $25,000.00 in bonus
on achievement of agreed upon performance goals.
Stock Options: 50,000 qualified stock option shares with a vesting
schedule of 10% at grant date, plus 3% per month thereafter.
The exercise price will be the average trading price of the
stock on the day of the grant. Additional stock options, up to
50,000 will be made available to you based on specific
performance criteria, which will be developed within 90 days
of your employment.
Benefits: You will be eligible for all U.S. Wireless Data benefits
according to existing eligibility requirements.
Severance: Should U.S. Wireless Data Inc. terminate your employment
without cause, your base salary will be continued for a
period of one year beyond your termination date.
Robert, I look forward to working with you. Please indicate your acceptance of
this offer by signing and dating below.
Best Regards, Accepted this 21 day of August 1997
Evon A. Kelly
By:/s/ Robert E. Robichaud
--------------------------
Chief Executive Officer
EXHIBIT 10.35
U.S. WIRELESS DATA Inc.
Delivering the New Standard in Transaction Processing
November 24, 1997
Raymond J. Mueller
3130 Butler Bay drive, N
Windermere, Florida 34786
Dear Ray:
Pursuant to our discussions, this letter is the formal offer of employment which
I am delighted to extend to you. The following outlines the specifics of the
offer for your consideration:
Position: Vice President, Operations
Reports to: Chief Executive Officer
Start Date: November 24, 1997
Compensation: Base Salary of $100,000.00 annually with $25,000 in bonus on
achievement of agreed upon performance goals.
Stock Options: 50,000 Qualified Stock option shares with a vesting schedule of
10% at grant date, plus 3% per month thereafter. The exercise price will be the
average trading price of the stock on the day of the grant. Additional stock
options, up to 50,000 will be made available to you based upon specific
performance criteria, which will be developed within 90 days of your employment.
Benefits: You will be eligible for all U.S. Wireless Data benefits according to
existing eligibility requirements.
Severance: Should U.S. Wireless Data, Inc. terminates your employment without
cause, your base salary will be continued for a period of one (1) year beyond
your termination date.
Ray, I look forward to working with you. Please indicate your acceptance of this
offer by signing and dating below
Best regards,
Evon A. Kelly
Accepted this 24th day of November, 1997 By:/s/ Raymond J. Mueller
-------------------------
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 (No. 33-96946) of U.S. Wireless Data, Inc. of our report
dated November 6, 1998 appearing on page 31 of the Annual Report on Form 10-KSB.
PricewaterhouseCoopers LLP
San Jose, California
December 16, 1998
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<CURRENCY> U.S.
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> JUN-30-1998
<PERIOD-START> JUL-01-1997
<PERIOD-END> JUN-30-1998
<EXCHANGE-RATE> 1
<CASH> 4,000
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> (22,000)
<INVENTORY> 480,000
<CURRENT-ASSETS> 187,000
<PP&E> 1,239,000
<DEPRECIATION> (469,000)
<TOTAL-ASSETS> 1,565,000
<CURRENT-LIABILITIES> 3,693,000
<BONDS> 0
0
3,060,000
<COMMON> 12,195,000
<OTHER-SE> (17,660,000)
<TOTAL-LIABILITY-AND-EQUITY> 1,565,000
<SALES> 0
<TOTAL-REVENUES> 909,000
<CGS> 908,000
<TOTAL-COSTS> 10,964,000
<OTHER-EXPENSES> 167,000
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 778,000
<INCOME-PRETAX> (11,000,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (11,000,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (11,000,000)
<EPS-PRIMARY> (1.18)
<EPS-DILUTED> (1.18)
</TABLE>
LETTER OF INTENT
Cardservice International, Inc. (CSI) and U.S. Wireless Data, Inc. (USWD) intend
to form a non-exclusive strategic partnership for the purpose of jointly
exploiting payment system opportunities using wireless technologies. This
document outlines the terms of the planned partnership agreement and constitutes
a non-binding Letter of Intent (LOI).
1. CSI will purchase $1,000,000 of USWD restricted stock through a private
placement. Shares of this stock will be priced at 3.0208 less 10 percent.
This price is based on the average market closing price for the three days
prior to Friday, September 25, 1998. The price is contingent on issuing a
joint announcement on Wednesday, September 30, 1998, and the completion of
a definitive agreement by October 31, 1998.
2. USWD and CCSI will simultaneously issue a press release regarding our
agreement to become strategic partners based on this LOI.
3. CSI agrees to promote the joint products and services within its own
markets and within other FDC organizations.
4. USWD agrees to aggressively promote joint products and services, such as
LinkPoint terminals, with other acquirers, and to enable referrals
originating from USWD's carrrier relationships (e.g., GTE). Historically,
carrier referrals have generated a large number of merchant contracts
without normal levels of selling expense.
5. CSI agrees to produce LinkPoint terminals using USWD's Wireless Express
Payment Service. Payment for the Wireless Express Payment Service includes
monthly service fees, one-time set-up fees, and transaction fees along the
lines previously discussed.
6. USWD agrees to give CSI "most favored" pricing with respect to the Wireless
Express Payment Service. CSI agrees give USWD "most favored" pricing for
its LinkPoint terminals.
7. In the definitive agreements, USWD will provide CSI with sufficient
protection provisions with respect to insuring that processing services
provided by USWD and its vendors to the strategic partnership will continue
without interruption. As such, USWD contemplates addressing the following
issues: 1) conveying intellectual property rights to CSI for the purposes
of manufacturing CDPD modems and wireless terminals: 2) assumption of USWD
communication contracts and facilities by CSI; 3) failure of USWD to meet
its financial obligations; and 4) the assignability of USWD's agreements
with certain telecommunication carriers to CSI.
8. USWD will present a plan, acceptable to CSI, for dealing with the convertible
preferred shares.
9. USWD and CSI will use best efforts to finalize and implement a definitive
agreement.
U.S. WIRELESS DATA Inc. Cardservice International, Inc.
By: By:
/s/ Roger L. Peirce /s/ Chuck Burtzloff
- ------------------- -------------------
Chairman and CEO President and CEO
Dated: September 30, 1998 Dated: September 30, 1998
EXHIBIT 99.2
U.S WIRELESS DATA, INC.
SECRETARY'S CERTIFICATE
Resolutions of the Board of Directors
Adopted as of November 21, 1997
The undersigned, Robert E. Robichaud, as the duly appointed Secretary
of U.S. Wireless Data, Inc., a Colorado corporation (the "Corporation"), hereby
certifies that the following resolutions were validly adopted at a duly convened
meeting of the Board of Directors of the Corporation held on November 21, 1998,
and that the resolutions have not been modified, amended or rescinded and remain
in full force and effect as of the date of this Certificate.
RESOLVED, that the Company enter into an agreement with its
Chief Executive Officer, Evon Kelly, to provide Mr. Kelly with
a right of indemnification for any excess tax liability he
incurs as a result of the grant to him of non-qualified
options to purchase up to 600,000 shares of the Company's
Common Stock at $1.00 per share as of August 6, 1997, over
what his tax liability would have been if he had instead
received qualified options at that time;
FURTHER RESOLVED, that the President of the Company is hereby
authorized to execute such an agreement on behalf of the
Company on substantially the terms and conditions described
above, in such form as the President shall approve by his
signature thereon; and
FURTHER RESOLVED, that the appropriate officers of the Company
are hereby authorized and directed to take such further
actions and execute such documents as are reasonable,
necessary and appropriate to carry out the intent of the Board
of Directors as expressed in the foregoing resolutions.
IN WITNESS WHEREOF, I have signed this Certificate as Secretary of the
Corporation this 23rd day of November, 1998.
/s/ Robert E. Robichaud
---------------------------
Robert E. Robichaud,
Secretary
BOD: 11/21/97