Ireland, Stapleton, Pryor & Pascoe, P.C. JEFFREY M. BRENMAN
1675 Broadway 303-628-3684
Suite 2600
Denver, CO 80202
303-623-2700
August 3, 1998
VIA ELECTRONIC SUBMISSION
- -------------------------
Securities and Exchange Commission
Judiciary Plaza
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: U.S. Wireless Data, Inc.
Amendment No. 2 to Registration Statement on Form SB-2
SEC File No. 333-52625
Ladies & Gentlemen:
On behalf of U.S. Wireless Data, Inc. (the "Company"), we enclose, for filing,
via EDGAR, pursuant to the Securities Act of 1933, the Company's Amendment No. 2
to Registration Statement on Form SB-2, including exhibits. The filed copy is
marked to show changes from the filing on July 16, 1998, of Amendment No. 1 to
the Registration Statement.
Also enclosed is the Company's letter requesting acceleration of the
effectiveness date of the Registration Statement to 10:00 a.m. on Friday, August
7, 1998.
If, during the course of your review, additional information is needed, please
contact me at (303) 628-3684 or Mr. John G. Lewis, Esq. at (303) 628-3625.
Yours very truly,
Ireland, Stapleton, Pryor & Pascoe, P.C.
By: /s/ Jeffrey M. Brenman
----------------------
Jeffrey M. Brenman
Attachments
<PAGE>
U.S. Wireless Data, Inc.
August 3, 1998
BY ELECTRONIC TRANSMISSION
- --------------------------
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Re: U.S. Wireless Data, Inc.
Registration Statement on Form SB-2
File No. 333-52625
Ladies and Gentlemen:
In accordance with Rule 461 under the Securities Act of 1933, U.S Wireless Data,
Inc. hereby requests that the effective date of the above-captioned Registration
Statement be accelerated so that it shall become effective at 10:00 a.m. on
Friday, August 7, 1998 or as soon thereafter as possible.
Yours very truly,
U.S. WIRELESS DATA, INC.
By: /s/ Evon A. Kelly
--------------------------
Its: Chief Executive Officer
--------------------------
2200 Powell Street, Suite 450 Emeryville, California 94608-1809
(510) 596-2025 Fax(510) 596-2029
<PAGE>
As filed with the Securities and Exchange Commission on August 3, 1998
Registration No. 333-52625
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------------
AMENDMENT NO. 2 TO
FORM SB-2
REGISTRATION STATEMENT
Under
The Securities Act of 1933
-----------------------------
U.S. Wireless Data, Inc.
(Name of small business issuer in its charter)
-----------------------------
Colorado 334119 84-1178691
-------- ------ ----------
(State or other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or Classification Code Number) Identification Number)
organization)
2200 Powell Street, Suite 450
Emeryville, California 94608
(510) 596-2025
(Address and telephone number of principal executive offices)
----------------------------
Evon A. Kelly, Chief Executive Officer
U.S. Wireless Data, Inc.
2200 Powell Street, Suite 450
Emeryville, California 94608
(510) 596-2025
(Name, address and telephone number of agent for service)
Copies to:
John G. Lewis, Esq.
Jeffrey M. Brenman, Esq.
Ireland, Stapleton, Pryor & Pascoe, P.C.
1675 Broadway, 26th Floor
Denver, Colorado 80202
(303) 623-2700
-------------------------
Approximate date of commencement of proposed sale to public: As soon as
practicable after the effective date of this Registration Statement.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. |X|
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. |_|
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. |_|
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. |_|
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
=================================================================================================================================
Title of Each Class of Amount to be Proposed Maximum Offering Proposed Maximum Aggregate Amount of
Securities to be Registered Registered (1)(2) Price Per Share (3) Offering Price (2) Registration Fee
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Stock, no par 7,240,356
value per share shares $4.375 $31,676,558 $9,345*
=================================================================================================================================
<FN>
* The registration fee has been previously paid.
(1) A total of 7,240,356 shares of Common Stock are being registered for sale
solely on behalf of Selling Security Holders, as follows: (1) 956,250
shares estimated to be issuable upon conversion of 3,060,000 shares of the
Company's Series A Cumulative Convertible Preferred Stock (the "Series A
Preferred Stock") which has a stated value of $1.00 per share (the actual
number of shares of Common Stock issuable upon conversion of the Series A
Preferred Stock is not determinable as it is derived from a formula based
on a discount from the Market Price of the Common Stock (as defined) at the
time of conversion; the conversion price will never be greater than $6.00
per share of Common Stock (nor, for the first 270 days after December 10,
1997, less than $4.00 per share of Common Stock, unless the penalty
discount of 2% for each 30 day period (or any fractional part thereof)
becomes applicable by reason of the Company's failure to obtain
effectiveness of a registration statement covering the Common Stock
issuable upon conversion, by May 11, 1998) (as of the date of this filing,
the penalty provision has become applicable and the minimum conversion
price has been reduced to $3.76 per share); the number of shares being
registered for issuance upon conversion of the Series A Preferred Stock is
based on an assumed Market Price of $4.00 per share of Common Stock, which
was arbitrarily chosen solely for determining the number of shares to be
included in this Registration Statement); (2) 13,069 shares of Common Stock
previously issued as interest on the Company's 8% Adjustable Rate
Convertible Subordinated Debentures Due December 31, 1999 (all of which
were converted into 3,060,000 shares of Series A Preferred Stock as of
February 9, 1998) and as dividends on the Series A Preferred Stock through
March 31, 1998; (3) 60,991 shares of Common Stock estimated to be issuable
as dividends on the Series A Preferred Stock from April 1, 1998 through
December 31, 1999 (the actual number of shares of Common Stock issuable as
dividends on the Series A Preferred Stock is not determinable as it is
based on the Market Price of the Common Stock (as defined) at the time of a
dividend payment date; however, solely for purposes of determining the
number of shares of Common Stock to be included in this Registration
Statement, an assumed Market Price of $4.00 per share has been used for
such calculation); (4) 82,500 shares underlying Common Stock purchase
warrants initially issued to one of the underwriters of the Company's
initial public offering (the "Underwriter's Warrants"); (5) 518,796 shares
issued or issuable upon exercise of various presently outstanding Common
Stock purchase warrants (the "Common Stock Purchase Warrants"); (6) 300,000
shares of Common Stock issued by the Company to a consultant and an
affiliate of the consultant pursuant to a consulting agreement; (7) 608,750
shares of Common Stock issuable to a consultant of the Company or its
assignees (328,750 of such shares were issued upon conversion of a $150,000
convertible promissory note owed to the consultant and 280,000 shares have
been issued as a finder's fee to the consultant and its affiliated
assignees); and (8) 4,700,000 shares of Common Stock owned by two
significant shareholders of the Company.
(2) Pursuant to Rule 416 under the Securities Act of 1933, as amended, there
are included in this registration such additional number of shares of
Common Stock or such shares as may be issuable in lieu of such Common Stock
as may become issuable pursuant to anti-dilution provisions of the Series A
Preferred Stock and the Common Stock Purchase Warrants described in
footnote (1) above.
(3) The shares will be sold by the Selling Security Holders at prevailing
market prices at the time of sale. The registration fee has been estimated
pursuant to Rule 457(c) of the Securities Act of 1933, as amended, solely
for the purpose of calculating such fee. No implication should be taken
from the use of such price to estimate the registration fee being paid
hereunder that the shares of Common Stock offered hereby can or will be
sold at such prices.
</FN>
</TABLE>
----------------------------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
-ii-
<PAGE>
<TABLE>
<CAPTION>
Cross Reference Sheet for Prospectus Under Form SB-2
Form SB-2 Item No. and Caption Caption or Location in Prospectus
------------------------------ ---------------------------------
<S> <C>
1. Forepart of Registration Statement and Outside Cover Page; Cross Reference Sheet;
Front Cover of Prospectus Outside Front Cover Page of Prospectus
2. Inside Front and Outside Back Cover Pages Inside Front and Outside Back Cover Pages
of Prospectus of Prospectus
3. Summary Information, Risk Factors Prospectus Summary; Risk Factors
4. Use of Proceeds Use of Proceeds
5. Determination of Offering Price Cover Page; Selling Security Holders
6. Dilution Not Applicable
7. Selling Security-Holders Selling Security Holders
8. Plan of Distribution Outside Front Cover Page of Prospectus; Selling
Security Holders
9. Legal Proceedings Business
10. Directors, Executive Officers, Promoters Management
and Control Persons
11. Security Ownership of Certain Beneficial Owners Security Ownership of Principal Shareholders
and Management and Management
12. Description of Securities Description of Securities
13. Interest of Named Experts and Counsel Legal Matters; Experts
14. Disclosure of Commission Position on Commission Position on Indemnification for
Securities Act Liabilities Securities Act Liabilities and Related Matters
15. Organization within Last Five Years Not Applicable
16. Description of Business Prospectus Summary; Business
17. Management's Discussion and Analysis Management's Discussion and Analysis of Financial
or Plan of Operations Condition and Results of Operations
18. Description of Property Business - Properties
19. Certain Relationships and Related Transactions Certain Transactions
20. Market for Common Equity and Related Stockholder Matters Market for the Company's Common Stock and
Related Matters; Description of Securities
21. Executive Compensation Management - Executive Compensation
22. Financial Statements Financial Statements
23. Changes in and Disagreements with Accountants on Not Applicable
Accounting and Financial Disclosure
</TABLE>
-iii-
<PAGE>
SUBJECT TO COMPLETION, DATED AUGUST 3, 1998
********************************************************************************
Information contained herein is subject to completion or amendment. A
registration statement relating to these securities has been filed with the
Securities and Exchange Commission. These securities may not be sold nor may
offers to buy be accepted prior to the time the registration statement becomes
effective. This prospectus shall not constitute an offer to sell or the
solicitation of an offer to buy nor shall there be any sale of these securities
in any State in which such offer, solicitation or sale would be unlawful prior
to registration or qualification under the securities laws of any such State.
********************************************************************************
U.S. WIRELESS DATA, INC.
7,240,356 Shares of Common Stock
A total of 7,240,356 shares of the Common Stock (the "Shares"), no par
value per share (the "Common Stock") of U.S. Wireless Data, Inc. (the "Company"
or "USWD") are being offered by certain securityholders of the Company (the
"Selling Security Holders"), if at all, on a delayed basis. A detailed listing
and description of the Shares being offered hereby is set forth on the inside
cover page of this Prospectus.
The Shares offered by this Prospectus may be resold from time to time
by the Selling Security Holders in one or more transactions that may take place
on the over-the-counter market, including ordinary brokers' transactions,
privately negotiated transactions or through sales to one or more dealers for
resale of such securities as principals, at market prices prevailing at the time
of sale, at prices related to such prevailing market prices or at negotiated
prices. agreed upon by the individual Selling Security Holder at the time of
sale. Usual and customary or specifically negotiated brokerage fees or
commissions may be paid by the Selling Security Holders. No proceeds from sales
of the Shares will inure to the benefit of the Company. All costs relating to
the registration of the Shares, estimated to be approximately $140,000 will be
borne by the Company. See "Selling Security Holders" and "Description of
Securities."
The Selling Security Holders and intermediaries through whom such
securities are sold may be deemed "underwriters" within the meaning of the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
securities offered, and any profits realized or commissions received may be
deemed underwriting compensation. The Company has agreed to indemnify the
Selling Security Holders against certain liabilities, including liabilities
under the Act. See "Selling Security Holders" and "Commission Position on
Indemnification for Securities Act Liabilities and Related Matters."
The Company's Common Stock is presently traded on the OTC Electronic
Bulletin Board under the symbol "USWDA." There can be no assurance that a
substantial trading market for the Common Stock will be sustained in the future.
At March 31, 1998, the net tangible book value of the Company's Common Stock was
approximately $.002 per share. See "Market for the Company's Common Stock and
Related Matters," "Description of Securities" and "Risk Factors."
------------------------
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK.
SEE "RISK FACTORS" BEGINNING ON PAGE 9 OF THIS PROSPECTUS.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION
TO THE CONTRARY IS A CRIMINAL OFFENSE.
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD
BE UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER
THE SECURITIES LAWS OF ANY SUCH STATE.
------------------------
The date of this Prospectus is , 1998.
<PAGE>
[Inside front cover.]
The Shares offered by this Prospectus consist of the following:
956,250 Shares estimated to be issuable upon conversion of a total of 3,060,000
shares ($3,060,000 face value) of the Company's Series A Cumulative Convertible
Preferred Stock (the "Series A Preferred Stock") (the actual number of Shares
issuable upon conversion of the Series A Preferred Stock is not determinable
until such time as conversion is actually elected by the holder as the number of
Shares is determined based on the stated value of the shares of Series A
Preferred Stock being converted and the Market Price (as defined) of the Common
Stock at such time; the number of Shares being registered hereunder is estimated
based on a Market Price of $4.00 per Share; no implication should be drawn that
the fair value of the Shares is in any way related to such estimated Market
Price);
60,991 Shares estimated as issuable as dividends on the Series A Preferred Stock
from April 1, 1998 through December 31, 1999 (the actual number of such Shares
is not determinable as it is based on the Market Price (as defined) of the
Common Stock as of each dividend payment date; the number of Shares being
registered hereunder is estimated based on a Market Price of $4.00 per Share; no
implication should be drawn that the fair value of the Shares is in any way
related to such estimated Market Price);
13,069 Shares previously issued as interest on the Company's 8% Adjustable Rate
Convertible Subordinated Debentures Due December 31, 1999 (the "8% Convertible
Debentures"), all of which were converted to 3,060,000 shares of Series A
Preferred Stock as of February 9, 1998 and as dividends on the Series A
Preferred Stock through March 31, 1998;
82,500 Shares underlying Common Stock purchase warrants issued to one of the
underwriters of the Company's initial public offering, 16,500 of which have been
assigned to a principal of the firm (the "Underwriter's Warrants");
50,000 Shares underlying a Common Stock purchase warrant held by a former
director of the Company (the "Walter's Warrant");
50,000 Shares underlying a Common Stock purchase warrant (the "Finder's
Warrant") issued as part of a finder's fee to a registered broker-dealer in
conjunction with the private offering of the Company's 8% Convertible Debentures
in December, 1997;
18,796 Shares issued or issuable upon the exercise of Common Stock purchase
warrants held by former shareholders of a company which was acquired by USWD in
1994 (the "Direct Data Warrants");
328,750 Shares issued to a consultant of the Company, entrenet Group LLC, upon
conversion of principal and interest owing on a $150,000 convertible promissory
note due June 3, 1998, at a value of $.50 per share;
280,000 Shares owned by entrenet Group, LLC, which was issued as a finder's fee
in conjunction with a private offering completed by the Company in August, 1997;
4,700,000 Shares presently owned by two significant shareholder affiliates of
the Company (which cannot be sold prior to February 1, 1999);
400,000 Shares underlying Common Stock purchase warrants held by a significant
shareholder affiliate of the Company (which cannot be sold prior to February 1,
1999); and
300,000 Shares issued or issuable to a financial and shareholder relations firm
and an executive officer of that firm pursuant to a consulting agreement between
the Company and that firm (which cannot be sold prior to February 1, 1999).
-2-
<PAGE>
AVAILABLE INFORMATION
The Company has filed with the Securities and Exchange Commission (the
"Commission") a Registration Statement on Form SB-2 (together with all
amendments and exhibits thereto, the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act") with respect to the
shares of Common Stock offered by this Prospectus. This Prospectus does not
contain all the information set forth in the Registration Statement, part of
which has been omitted in accordance with the rules and regulations of the
Commission. For further information, reference is made to the Registration
Statement, including the exhibits filed as a part thereof and otherwise
incorporated therein. Statements made in this Prospectus as to the contents of
any document referred to are not necessarily complete, and in each instance
reference is made to the copy of such document filed as an exhibit to the
Registration Statement, and each such statement is qualified in all respects by
such reference.
The Company is a reporting company subject to the informational
requirements of the Securities Exchange Act of 1934, as amended (the "Exchange
Act"), and, in accordance therewith, files periodic reports and other
information with the Commission. The Registration Statement, including exhibits,
as well as such other reports, proxy statements and information filed by the
Company may be inspected, without charge, and copied at the public reference
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's regional offices located at 500
West Madison Street, Suite 1400, Chicago, Illinois 60661, and at 7 World Trade
Center, Suite 1300, New York, New York 10048. Reports, proxy and information
statements and other information filed electronically by the Company with the
Commission are available at the Commission's World Wide Web site at
http://www.sec.gov. Copies of such material may also be obtained from the Public
Reference Section of the Commission at 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates.
-3-
<PAGE>
- --------------------------------------------------------------------------------
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by and should be
read in conjunction with the more detailed information and financial statements
and notes thereto appearing elsewhere in this Prospectus. Unless the context
otherwise requires, references in this Prospectus to the "Company" or "USWD"
mean U.S. Wireless Data, Inc. U.S Wireless Data(R) is a registered trademark of
the Company. All other trade names and trademarks appearing in this Prospectus
are the property of their respective holders. Prospective investors in the
Common Stock should carefully consider the information set forth under the
heading "Risk Factors" prior to making an investment in the Common Stock offered
hereby.
This Prospectus contains certain statements of a forward-looking nature
relating to future events or the future financial performance of the Company.
Forward-looking statements are identifiable by the prefatory language "may,"
"will," "expects," "anticipates," "estimates," "hopes," "continues," "if," or
synonyms or variations of such terms or the negative of such terms. Prospective
investors are cautioned that such statements are only predictions and that
actual events or results may differ materially from those predicted in such
statements. In evaluating such statements, prospective investors should
specifically consider the various factors identified in this Prospectus,
including the matters set forth under the caption "Risk Factors," which could
cause actual results to differ materially from those indicated in such
forward-looking statements.
The Company
-----------
The Company's principal offices are located at 2200 Powell Street,
Suite 450, Emeryville, California 94608, and its telephone number is (510)
596-2025.
The Company 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. The Company's first product, known as
the POS-50(R), is the world's first integrated wireless credit card and check
authorization terminal using cellular communication technology. With over 4,000
POS-50(R) terminals in the marketplace, the Company is recognized as the leader
in providing wireless terminal transaction equipment for the mobile marketplace.
The POS-50(R) product accounted for most of the sales recorded in fiscal year
1997.
Over the past three years, USWD has focused its product development
effort on incorporating Cellular Digital Packet Data (CDPD) technology into its
product line. 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 the air-link 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, the Company's new line of CDPD- based terminals can 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 now offers two new CDPD products that reduce the current authorization
time for a credit or debit card transaction from approximately 15 seconds to 3
to 5 seconds.
The most significant USWD product is the TRANZ* Enabler which allows
current VeriFone TRANZ(R) 330 or TRANZ(R) 380 users to immediately convert their
terminals and printers from a land-line telephone dial-up mode to a high-speed
wireless mode of operation. By effecting this technological upgrade, the cost of
dedicated telephone lines is eliminated as are the delays created by busy
telephony networks during peak periods of authorization activity. Furthermore,
the efficiencies created by adopting the CDPD technology and USWD's alliance
with a major transaction processor have enabled U.S. Wireless Data to develop a
pricing schedule which lowers transaction and/or discount rates from those that
most retailers are currently paying to handle credit and debit card
transactions. The TRANZ Enabler is directed at the existing U.S. installed base
of more than 3.5 million TRANZ(R)330 and TRANZ(R)380 terminals.
*TRANZ is a registered trademark of Verifone, Inc.
- --------------------------------------------------------------------------------
-4-
<PAGE>
- --------------------------------------------------------------------------------
The second CDPD product created by the Company is the POS-500, a
self-contained card terminal and printer that provides the same mobility
features of the POS-50(R) product, but incorporates the processing benefits of
the TRANZ Enabler. The unit is geared for the user who either does not have a
dial-up terminal/printer in place or requires the advantages of the CDPD
technology in a mobile application.
In late 1996 - early 1997, the Company made a fundamental decision to
change the manner in which it generates revenue. If successfully implemented,
this decision will transform the Company from being a "box maker" and seller
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 furtherance of this process the
Company entered into a Member Service Provider ("MSP") agreement with NOVA
Information Systems ("NOVA"), the nation's 7th largest credit card transaction
processor, in January 1997. As a registered MSP of NOVA, the Company can enroll
merchants to process their credit and debit card transactions with NOVA. The
Company also 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, subject to final approval of each merchant by NBC. 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. These MSP agreements allow U.S. Wireless Data
to earn revenue on each card swipe and every dollar processed by merchants
enrolled by the Company. See "Business - Transaction Processing Agreements."
Another key element of USWD's strategic direction is to establish close
alliances with large communications carriers such as GTE, Bell Atlantic, AT&T
Wireless, Ameritech and others. The Company has to date entered into agreements
for CDPD airtime purchase by the Company with GTE Mobile Communications Service
Corporation, on its behalf and on behalf of GTE Mobilnet Incorporated, Contel
Cellular Inc. and their respective affiliates (collectively "GTE Wireless"),
Cellco Partnership, by its general partner Bell Atlantic/NYNEX Mobile, Inc.,
which does business as Bell Atlantic Mobile ("Bell Atlantic Mobile") and AT&T
Wireless Data, Inc., doing business as AT&T Wireless Services ("AT&T Wireless").
In addition to these CDPD service provider agreements, the Company has also
entered into joint marketing agreements with GTE Wireless (as of August 1,
1997), Bell Atlantic Mobile (as of March 23, 1998) and Ameritech Mobile
Communications, Inc. ("Ameritech") (as of July 16, 1998) to market the Company's
TRANZ Enabler and processing services through GTE Wireless, Bell Atlantic Mobile
and Ameritech's commercial and major account sales forces in all of those
companies' CDPD markets. The Company has established a sales and support
organization to provide local support for more than 300 GTE Wireless sales
representatives and is in the process of building a similar sales organization
to support approximately 300 Bell Atlantic Mobile sales representatives. The
Company may also need to add sales representatives to support the recently
executed Ameritech agreement. The Company has specific, significant commitments
under these CDPD airtime and joint marketing agreements, including minimum CDPD
airtime purchase obligations to GTE Wireless and AT&T Wireless, and staffing and
inventory delivery requirements to fulfill its obligations under the joint
marketing agreements with GTE Wireless, Bell Atlantic Mobile and Ameritech. See
"Business - Marketing and Distribution Arrangements for the Company's Products
and Related Services."
By leveraging the sales organizations of major CDPD providers, the
Company has the potential to reach a large number of merchants very quickly. The
Company hopes to execute similar joint marketing agreements with the other CDPD
service providers for which it currently has cellular service resale agreements.
- --------------------------------------------------------------------------------
-5-
<PAGE>
- --------------------------------------------------------------------------------
The Offering
------------
Securities Offered.............. 7,240,356 shares of Common Stock (the "Shares")
Selling Security Holders........ A total of 7,240,356 Shares are being offered
by Selling Security Holders as follows:
* 956,250 Shares estimated to be issuable upon conversion of a
total of 3,060,000 shares ($3,060,000 face value) of the
Company's Series A Cumulative Convertible Preferred Stock
(the "Series A Preferred Stock") (the actual number of
Shares issuable upon conversion of the Series A Preferred
Stock is not determinable until such time as conversion is
actually elected by the holder as the number of Shares is
determined based on the stated value of the shares of Series
A Preferred Stock being converted and the Market Price (as
defined) of the Common Stock at such time; the number of
Shares being registered hereunder was calculated based on a
Market Price of $4.00 per Share; no implication should be
drawn that the fair value of the Shares is in any way
related to such estimated Market Price);
* 60,991 Shares estimated as issuable as dividends on the
Series A Preferred Stock from April 1, 1998 through December
31, 1999 (the actual number of such Shares is not
determinable as it is also based on the Market Price (as
defined) of the Common Stock as of each dividend payment
date; the number of Shares being registered hereunder is
estimated based on a Market Price of $4.00 per Share; no
implication should be drawn that the fair value of such
Shares is in any way related to such estimated Market
Price);
* 13,069 Shares previously issued as interest on the Company's
8% Convertible Debentures, all of which Debentures were
converted to 3,060,000 shares of Series A Preferred Stock as
of February 9, 1998, and as dividends on the Series A
Preferred Stock through March 31, 1998;
* 82,500 Shares underlying Common Stock purchase warrants (the
"Underwriters' Warrants") issued to one of the underwriters
of the Company's initial public offering in December 1993,
16,500 of which have been assigned to a principal of the
firm, presently exercisable at $12.325 per Share;
* 50,000 Shares underlying a Common Stock purchase warrant
(the "Director's Warrant") held by a former director of the
Company, Mr. James Walters, exercisable at $4.00 per Share;
* 50,000 Shares underlying a Common Stock Purchase Warrant
(the "Finder's Warrant") held by a finder for the Company's
8% Convertible Debentures, exercisable at $6.525 per Share;
* 18,796 Shares issued or issuable upon exercise of Common
Stock purchase warrants held by former shareholders of a
company which was acquired by USWD in 1994 (the "Direct Data
Warrants"), exercisable at $2.625 per Share;
* 328,750 Shares issued to a consultant of the Company,
entrenet Group LLC, upon conversion of principal and
interest owing on a $150,000 convertible promissory note due
June 3, 1998, at a value of $.50 per share;
- --------------------------------------------------------------------------------
-6-
<PAGE>
- --------------------------------------------------------------------------------
* 280,000 Shares owned by entrenet Group LLC or its assignees
which were issued as a finder's fee owing to it in
connection with a private financing for the Company in
August 1997;
* 4,700,000 Shares owned by two significant shareholder
affiliates, Messrs. John M. Liviakis (3,825,000 shares) and
Robert B. Prag (875,000 shares), 3,500,000 of which were
acquired in August 1997 as part of a $500,000 private
offering by the Company, and 1,200,000 of which were
acquired by Mr. Liviakis upon exercise of Common Stock
purchase warrants also acquired in the August 1997 private
offering (which shares cannot be resold hereunder until
February 1, 1999);
* 400,000 Shares underlying Common Stock purchase warrants
owned by Mr. Prag which are exercisable at $.01 per share
which were issued in August 1997 (which shares cannot be
resold hereunder until February 1, 1999); and
* 300,000 shares issued or issuable pursuant to a consulting
agreement between the Company and Liviakis Financial
Communications, Inc. ("LFC") effective as of July 25, 1997
(the "LFC Consulting Agreement"); 225,000 of such Shares are
issuable to LFC and 75,000 Shares are issuable to Robert B.
Prag, an executive officer of LFC (which cannot be resold
hereunder until February 1, 1999).
See "Description of Securities," "Security Ownership of Principal
Shareholders and Management," "Certain Transactions" and "Selling
Security Holders."
Resale Restrictions of Certain
Selling Security Holders........
LFC and Messrs. Liviakis and Prag cannot sell any of the
Shares presently owned by them, or issuable to them upon the
exercise of, warrants or pursuant to the LFC Consulting
Agreement prior to February 1, 1999, even though such shares
are being registered for sale under the Registration
Statement of which this Prospectus is a part. See "Security
Ownership of Principal Shareholders and Management,"
"Certain Transactions" and "Selling Security Holders."
Use of Proceeds.... All proceeds from sales of the Shares will inure to the
benefit of the Selling Security Holders and not to the
Company. See "Use of Proceeds" and "Selling Security
Holders."
Trading ............The Company's Common Stock is traded in the over-the-counter
market and is quoted on the OTC Electronic Bulletin Board
under the symbol "USWDA." See "Market for the Company's
Common Stock and Related Matters."
Risk Factors........An investment in the Company's Common Stock involves a high
degree of risk. See "Risk Factors."
- --------------------------------------------------------------------------------
-7-
<PAGE>
- --------------------------------------------------------------------------------
Summary Financial Information
-----------------------------
The following summary financial information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Financial Statements and the Notes thereto,
included elsewhere in this Prospectus. The Statement of Operations data for the
two years ended June 30, 1997, and the balance sheet data at June 30, 1997, are
derived from, and should be read in conjunction with, the Company's Financial
Statements and the Notes thereto audited by PricewaterhouseCoopers LLP,
independent accountants, included elsewhere in this Prospectus. The statement of
operations data for the three and nine month periods ended March 31, 1997 and
1998, and the balance sheet data at March 31, 1998, have been derived from
unaudited interim financial statements and include, in the opinion of
management, all adjustments (consisting only of normal recurring adjustments)
necessary in order to make the financial statements not misleading. The
operating results for the three and nine months ended March 31, 1998, are not
necessarily indicative of the results to be expected for the full year or any
future period.
<TABLE>
<CAPTION>
Nine Months Three Months
Year Ended Ended Ended
June 30 March 31 (4) March 31 (4)
Statement of Operations Data: 1997 1996 1998 1997 1998 1997
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Revenues (1) $1,315,542 $1,582,553 $ 599,296 $1,046,359 $ 245,439 $ 243,446
Costs and expenses (1) 2,028,656 4,710,074 5,795,503 1,366,402 3,114,288 325,385
--------- --------- --------- --------- --------- -------
Loss from operations (1) (713,114) (3,127,521) (5,196,207) (320,043) (2,868,849) (81,939)
Other income, interest(expense)(1) (151,270) (37,442) (668,362) 6,776 (432,904) (1,112)
Loss from discontinued operations,
net of income tax benefit (5) - (309,206) - - - -
Extraordinary gain on restructuring
of payables and debt (5) - 3,431,823 - - - -
------------ --------- ------------- ------------ ------------- -------
Net loss $(864,384) $(42,346) $(5,864,569) $(313,267) $(3,301,753) $(83,051)
========== ========= ============ ========== ============ =========
Basic/diluted loss from continuing
operations per share (3) $(.17) $(.72) $(.67) $(.07) $(.36) $(.02)
Basic/diluted loss per share (3) $(.17) $(.01) $(.67) $(.07) $(.36) $(.02)
Weighted average number of
Common shares outstanding 4,986,767 4,418,618 8,753,321 4,814,900 9,280,963 4,983,852
- ----------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Balance Sheet Data: (4) June 30, 1997 March 31, 1998 (2)
------------- --------------
<S> <C> <C>
Cash and cash equivalents $ 6,083 $ 64,640
Working capital (deficit) (768,326) (677,059)
Total assets 501,280 2,341,932
Long-term liabilities 45,000 45,000
Total stockholders' equity (deficit) $(761,386) $ 15,792
==========================================================================================================
<FN>
(1) All amounts are from continuing operations.
(2) The balance sheet as of March 31, 1998, reflects the completion of a
private placement offering on December 10, 1997, in which the Company sold
$3,060,000 principal amount of 8% Convertible Debentures. After associated
fees and repayment of bridge loans incurred during the quarter, the Company
retained approximately $2,200,000 to apply to immediate working capital
needs and the national launch of its proprietary wireless transaction
processing solution. The convertible features of the 8% Convertible
Debentures 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
stockholders' 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 was
effected as of February 9, 1998.
(3) Basic/diluted loss from continuing operations per share is computed using
Statement of Financial Accounting Standards No. 128, "Earnings Per Share"
(SFAS 128). All periods prior to December 31, 1997, have been restated to
conform with SFAS 128. Company stock options and warrants have been
excluded from the computation of diluted loss from continuing operations
per share and net loss per common share as their effect is antidilutive for
the periods presented. Such stock options and warrants could potentially
dilute earnings or losses per share in the future.
(4) Refer to Management's Discussion and Analysis of Financial Condition and
Results of Operations, Financial Statements and Notes to Financial
Statements for a more complete explanation of accounting policies,
significant accounting entries and variance analysis.
(5) The 1996 loss from discontinued operations resulted from the dissolution of
Direct Data, Inc. in October 1995. The 1996 extraordinary gain is related
to the restructuring of $3.4 Million of debt and payables for Direct Data
and an inventory supplier. See Note 10 to the Financial Statements for the
Fiscal Year ended June 30, 1997 included in this Prospectus.
</FN>
</TABLE>
- --------------------------------------------------------------------------------
-8-
<PAGE>
RISK FACTORS
In addition to the other information contained in this Prospectus, the
following risk factors should be considered carefully before purchasing shares
of Common Stock.
Risks Involving the Company and Its Business
- --------------------------------------------
History of Losses; Going Concern Assumption
Through the end of the fiscal quarter ended March 31, 1998, and subsequent
thereto, the Company has continued to experience significant operating losses.
The Company's independent accountants have included a paragraph in their opinion
covering the Company's financial statements for the fiscal years ended June 30,
1996 and 1997 that states the uncertainty of the Company's ability to continue
as a going concern. In an attempt to continue as a going concern, the Company
has embarked upon a plan to transition to a recurring revenue stream, is working
on programs to increase revenue levels and product margins, and is seeking to
implement new marketing and distribution agreements. In furtherance of this
change in focus, over the last six months, the Company has strengthened its
management team, signed several significant distribution agreements which are
expected to build a recurring revenue base, expanded its sales force and
expanded its contract manufacturing relationships. However, current revenue
remains inadequate to fund the infrastructure growth, business transition and
current expenses. As a result, the Company is seeking additional debt or equity
financing; however, it is constrained to do so by its agreement with holders of
its Series A Preferred Stock until the registration statement of which this
Prospectus is a part is declared effective by the SEC. See "Description of
Securities - Preferred Stock - Series A Preferred Stock." No assurance can be
given that the Company will obtain sufficient revenues from operations or gain
access to the capital it needs in the short run to continue as a going concern.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations."
Slower Than Expected Development of Revenue from Relationship with GTE Wireless;
Greater Expenses than Anticipated
In order to fulfill its joint service and marketing obligations under its
agreements with GTE Wireless, Bell Atlantic Mobile and Ameritech, and to support
sales in selective AT&T and other markets, the Company has hired and trained a
sales and support staff that consisted of approximately 50 people as of May 30,
1998. However, product placements with merchants through the GTE Wireless
program have not developed as rapidly as anticipated, while costs to the Company
to fulfill its obligations under this and the other agreements have been quite
high. Consequently, the Company expended the proceeds from the $3,060,000
private offering of 8% Convertible Debentures which it completed in December
1997, over a shorter period than expected. Although the Company has been able to
meet its short term cash needs through the private sale of certain Common Stock
purchase options (the "Call Options") and has just recently completed a
$2,000,000 private offering of 6% Convertible Subordinated Debentures Due July
21, 2000 (the "6% Debentures"), these are only short-term solutions. The Company
has also recently entered into a revolving credit financing agreement with GTE
Leasing Corporation to finance inventory placed through the GTE program,
although due to technical and legal reasons, the Company has not yet been able
to draw on this financing and may not be able to do so. Despite the availability
of these short term sources of capital and the potential funding that might be
obtained from GTE Leasing, the Company will need additional financing over the
short term, and growth in cash flow and eventually, profitability to meet its
longer term needs. There can be no assurance that the Company will be successful
in obtaining the short term financing it requires or in meeting its longer term
goals even if it obtains immediate financing. If it fails to do so, there is
likely to be a serious impact upon the Company, its operating results and
financial condition, including its ability to continue as a going concern. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business - Marketing and Distribution Arrangements for the
Company's Products and Related Services."
-9-
<PAGE>
Need for Additional Financing
Although the Company completed a private offering of 8% Convertible
Debentures in December 1997 by which it raised net proceeds of approximately
$2,700,000, after commissions and expenses, has raised approximately $1,265,000
through the sale of call options on certain shares of its Common Stock, and has
recently raised net proceeds of approximately $1,810,000 from the private sale
of $2,000,000 of 6% Convertible Subordinated Debentures Due July 21, 2000, the
Company will require additional financing before it is able to achieve revenues
sufficient to support its cash needs. The Company has no commitments to obtain
any additional financing at this time and there can be no assurance that
additional financing can be obtained on favorable terms, if at all. The Company
agreed with the purchasers of its 8% Convertible Debentures that it would not
raise additional private capital prior to 150 days from December 10, 1997,
without first obtaining permission from all of those investors. After that time,
and until the shares of Common Stock underlying the Series A Preferred Stock
have been registered for public sale, the holders of the Series A Preferred
Stock have a first right of refusal on any private capital-raising transactions
that the Company embarks upon. In addition, the Company issued Common Stock and
stock purchase warrants at prices substantially less than the present market
price of the Common Stock which are being registered for resale hereunder. See
"Certain Transactions" and "Selling Security Holders." The possibility of sales
of the shares into the market under this registration statement and/or the
saleability of substantial numbers of shares of Common Stock which are, or will
shortly become, eligible for sale under Rule 144 of the Securities Act of 1933,
at any time could make it difficult for the Company to raise money through an
equity offering at a time when it needs to do so. The absence of financing if
and when it is needed by the Company could have a material adverse effect on the
Company's business, operating results and financial condition, including its
ability to continue as a going concern. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Risk Factors -
Risks Relating to the Company's Securities - Market Overhang; Registration
Rights; Possible Effect on Market for the Company's Common Stock."
Need for Third-Party Inventory Financing
The Company has recently entered into an agreement with GTE Leasing
Corporation to pay for the manufacture of TRANZ Enabler units to be deployed
under the GTE Wireless marketing agreement. The agreement grants GTE Leasing a
security interest in the units as well as certain rights to cash flow from the
processing revenue payable to the Company under its agreement with NOVA. It is
expected that repayment of the financing will be made from the recurring revenue
generated by units placed under the GTE Wireless marketing agreement. GTE
Leasing and GTE Wireless are requiring that the Company obtain the consent of
NOVA, the processing entity, and RegionsBank, NOVA's acquiring bank, to honor
the assignments if and when the Company defaults on payments due to GTE Leasing
and/or GTE Wireless. Although the Company is negotiating with the parties to
implement an acceptable consent, it may not be able to do so and would therefore
not be able to obtain inventory financing from GTE Leasing. If funding through
GTE Leasing becomes available, this source will provide the Company with needed
support only for units placed through the GTE Wireless marketing agreement.
Third party financing of all TRANZ Enabler units placed by the Company through
any source is a required element of the Company's business model. The Company
must therefore obtain such financing arrangements for units distributed through
other marketing channels, including the Bell Atlantic Mobile and Ameritech
marketing agreements. The inability to fund inventory needs from outside sources
could have a material adverse impact on the Company, its liquidity and results
of operations. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and "Business - Manufacturing and Deployment
Arrangements."
Ability to Execute Business Plan to Attain Profitable Operations
The Company has embarked upon a business plan which shifts the Company's
strategy from generating revenue from direct sales of its products (i.e., the
retail sale of a "box") on which it attempted to earn a margin,
-10-
<PAGE>
to generating recurring credit card processing revenue from each CDPD device it
or its agents place with a merchant. In order to convince merchants to open
accounts with the Company, its CDPD providers and its transaction processor, the
Company provides the TRANZ Enabler unit as part of the credit card processing
solution at no up-front cost to the merchant; rather, the cost of the unit is to
be recovered through the monthly revenues generated by the merchant's processing
activities. The Company is obligated to repair and/or replace the unit if it
fails under normal conditions. The merchant is obligated to return the unit to
the Company upon ceasing to subscribe to the Company's processing services. This
business plan means that the Company has
assumed the financial risk for the cost of the unit placed with the merchant,
even under those situations where a merchant dishonors its obligation to return
the unit at the required time. No assurance can be given that the Company will
be successful in placing a sufficient number of its products with merchants that
will generate enough revenue to meet the cash needs of the Company. The failure
to do so and/or a significant number of defaults by merchants in returning units
upon termination of their processing relationship with the Company is likely to
have a material adverse effect upon the Company, its operating results and
financial condition, including its ability to continue as a going concern. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business - Manufacturing and Deployment Arrangements."
Distribution Programs
In the fiscal year ended June 30, 1997, Cardservice International, Inc.
("CSI") accounted for over 50% of the Company's revenue, which resulted from
direct sales of POS-50 product to CSI. Although the Company has shifted its
focus away from strictly selling its product and is concentrating on trying to
develop a recurring revenue stream from product placements, the GTE Wireless
distribution program, as noted above, has not generated product placements at
the rate the Company had hoped for. At the same time, POS 50 product sales have
declined. While the Company hopes that the GTE Wireless, Bell Atlantic Mobile
and Ameritech relationships will develop as expected, and the Company hopes to
enter into distribution agreements with other significant partners, a failure to
generate product placements through GTE Wireless, Bell Atlantic Mobile,
Ameritech or other partners is likely to have a material adverse effect on the
Company, its operations and financial condition, including its ability to
continue as a going concern. See "Business - Marketing and Distribution
Arrangements for the Company's Products and Related Services" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
Potential Fluctuations in Operating Results
Because the Company generally ships its products on the basis of credit
card processing applications or purchase orders, incremental recurring revenue
and other component sales in any quarter are highly dependent on orders filled
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 could result in expense levels
that are inconsistent with actual revenue. 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. See "Business `-
Customers' and `- Manufacturing and Deployment Arrangements.'"
New Products and Rapid Technological Change
Assuming the Company is able to sufficiently penetrate the perceived market
for wireless credit card processing hardware and processing initially, the
Company's future success is likely to depend upon its ability to keep pace with
technological development and respond to evolving merchant demands. Failure by
the Company to anticipate or respond adequately to technological developments or
significant delays in product development could damage the Company's potential
position in the marketplace and could result in less revenue and/or an inability
to generate profits. There can be no assurance the Company will be successful in
hiring and training adequate product development personnel, if such persons are
needed to meet its needs or that it will have the
-11
<PAGE>
resources to do so. There can be no assurance the Company will be successful in
marketing its current CDPD products, in developing and/or marketing any new
products, or product enhancements, or will not experience significant delays in
such endeavors in the future. Any failure to successfully develop and market its
products and product enhancements could have a material adverse effect on the
Company's financial condition, business and operations. See "Business."
Dependence on a Single Product Type
All of the Company's revenue is derived from sales of its credit/debit card
transaction or CDPD 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, the introduction of new or
superior competing technologies or products and/or services that are available
on more favorable pricing terms than those being offered by the Company, and the
general condition of the economy. The Company's success will depend in part on
its ability to penetrate the market with its existing products and to respond
quickly to changes in merchant demand. No assurance can be given that it will be
able to do so. See "Business."
Dependence on Outside Parties for Advertising, Marketing and Distribution
Although the Company does market its products and services through its own
personnel, it has also entered into marketing and distribution agreements with
third parties, the most significant of which are the joint marketing agreements
with GTE Wireless, Bell Atlantic Mobile and Ameritech to market the Company's
CDPD Tranz Enabler product and processing services using GTE Wireless, Bell
Atlantic Mobile and Ameritech sales personnel. The Company also has other less
significant marketing agreements with third party marketing entities and it
hopes to enter into similar contractual arrangements with others to assist it in
marketing its products. This may result in a lack of control by the Company over
some or all of the material marketing and distribution aspects of its products,
although the Company does retain the ultimate right to reject any potential
customer presented to it by its third party marketing partners. There can be no
assurance that the Company will be able to adequately oversee the marketing
efforts of unrelated parties. Any significant problems with these third party
marketing and distribution channels could result in reduced market acceptance
and lack of product placements for the Company.
In addition, there can be no assurance the Company will be successful in
entering into marketing and related arrangements on terms acceptable to the
Company, or that any marketing efforts undertaken on behalf of the Company by
third parties will be as successful as needed to generate adequate revenue to
support the Company. The inability of the Company to place its products through
the efforts of its own marketing personnel or third parties would likely have a
material adverse impact on the ability of the Company to generate revenue and
attain profitable operations.
The Company has a limited marketing budget and resources. The Company's
present plans involve primarily the attempt to leverage its resources through
the entry of marketing and distribution agreements with third parties, rather
than a large-scale attempt to expand its in-house capabilities. The Company's
future growth and profitability is therefore expected to depend, in large part,
on the success of its third-party licensees, sub- licensees and distributors, if
any, and others who may participate in marketing efforts on behalf of the
Company. Success in marketing the Company's products will be substantially
dependent on educating the targeted markets as to the distinctive
characteristics and perceived benefits of the Company's products. No assurance
can be given that these efforts will be successful. See "Business - Marketing
and Distribution Arrangements for the Company's Products and Related Services."
-12
<PAGE>
CDPD Resale Agreements Containing Minimum Purchase Obligations
The Company has to date entered into three air-time CDPD service resale
agreements, two of which contain minimum purchase obligations which can be
characterized as "take or pay" provisions. The agreements with GTE Wireless and
AT&T Wireless contain provisions which require the Company to purchase minimum
amounts of airtime from each provider. In the case of the agreement with GTE
Wireless, such minimum purchase obligations escalates over the term of the GTE
Agreement from $20,000 during the first quarter commencing February 1, 1998 to
$2.75 Million by the eighth quarter. The provisions under the agreement with
AT&T are based on minimum numbers of activated IP addresses and the Company is
obligated to have 1,000 active addresses by one year from April 1, 1997, 3,000
active numbers within 18 months of April 1, 1997 and 4,500 active numbers within
three years of April 1, 1997. The Company is obligated to pay for the minimum
amount of service stated in the agreements even if it fails to place enough
service with merchants to meet the minimums. The Company has failed to meet its
minimum purchase obligations to GTE Wireless and although GTE Wireless has
acknowledged that its failure to perform certain of its obligations under the
agreement has contributed to this problem and has therefore not demanded payment
and has expressed a willingness to renegotiate these terms of the agreement, the
failure of the Company to meet these service minimums could have a serious
adverse effect upon the Company and its business. See "Business - Marketing and
Distribution Arrangements for the Company's Products and Related Services."
Obligations of the Company Under Joint Marketing Agreements
The Company has to date entered into joint marketing agreements with GTE
Wireless, Bell Atlantic Mobile and Ameritech. These agreements impose certain
obligations on the Company to place inventory and provide training and support
services and personnel to both the merchants who purchase the Company's services
and the GTE Wireless, Bell Atlantic Mobile and Ameritech sales representatives
who solicit the merchants. In addition to inventory placement and support
service requirements, these agreements require payments of one-time activation
fees to be paid to GTE Wireless, Bell Atlantic Mobile and Ameritech. The
obligations of the Company under these agreements could be burdensome and
difficult for the Company to meet, especially if it does not obtain the outside
financing it requires to supply its current cash requirements. See "Business -
Marketing and Distribution Arrangements for the Company's Products and Related
Services."
Security Interests in Company Assets
The Company has pledged certain of the Company's assets (including tangible
and intangible assets) to secure the Company's obligations under two separate
agreements. A security interest in certain assets (including certain inventory
and accounts receivable assets) has been granted to GTE Leasing Corporation to
secure the Company's obligations for inventory financing to be supplied by GTE
Leasing. See " Risk Factors - Risks Involving the Company and Its Business -
Need For Third Party Inventory Financing," "Management's Discussion and Analysis
of Financial Condition and Results of Operations Financial Condition, Capital
Resources and Liquidity - Agreement with GTE Leasing Corporation," and "Business
- - Manufacturing and Deployment Arrangements - Inventory Financing." In addition,
the Company has pledged all assets not pledged or to be pledged to secure
inventory financing and required to successfully implement any bridge financings
up to $2,000,000 to Houlihan, Lokey, Howard and Zukin Capital ("Houlihan Lokey")
to secure the Company's obligations under a finder's agreement that it entered
into with Houlihan Lokey as of June 19, 1998. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financial Condition,
Capital Resources and Liquidity - Current Financing Initiatives." The inability
of the Company to honor its obligations to any of these firms under any of these
agreements could result in the sale of Company assets to satisfy the
obligations. The sale of the underlying assets in satisfaction of either of
these security interests could have an adverse impact on the Company and its
business.
-13-
<PAGE>
Competition and Pricing Pressures
The markets for certain of the Company's products and services are highly
competitive, including pressure to maintain competitive pricing structures for
credit card processing services. In addition, the Company has identified several
potential competitors attempting to develop CDPD based terminals and solutions.
Companies with substantially greater financial, technical, marketing,
manufacturing, human resources, as well as name recognition, than the Company
may also enter the market. The Company believes that its ability to compete
depends on product design, quality and price, distribution and quality of
service. There can be no assurance that the Company will be able to compete
successfully with respect to these factors. See "Business Competition."
Dependence Upon Suppliers; Availability of Raw Materials
The Company currently depends upon third parties as the sole source of
supply for the components comprising its products as well as the manufacture of
completed products. The Company does not have long-term agreements with any of
its suppliers and has not been a major customer to any of its suppliers or
manufacturers and therefore may not be able to obtain inventory at a cost or on
the schedule which it requires. In addition, the Company's financial condition
could have an adverse effect on its ability to obtain components and or
manufacturing services on a credit basis. If manufacture of any of the Company's
products is interrupted for any extended period, or if the Company is not able
to purchase and deliver sufficient quantities of its products on a timely basis,
there is likely to be a material adverse effect on the Company's business,
financial condition and results of operations. See "Business - Manufacturing and
Deployment Arrangements."
Liability Insurance
The Company has liability insurance policies that provide coverage for
liability claims arising out of the products it sells and the services it
provides. The Company has not been the subject of any material liability claims;
however, there can be no assurance that the Company's liability insurance
policies will cover any such claims, or that such policies can be maintained at
an acceptable cost. Any liability of the Company which is not covered by such
policies, or is in excess of the limits of liability of such policies, could
have a material adverse effect on the financial condition and results of
operations of the Company.
Dependence on Key Personnel
The Company's future operating results depend in significant part upon the
continued contributions of its key senior management personnel, many of whom
would be difficult to replace. The Company's future operating results also
depend in significant part upon its ability to attract and retain qualified
personnel. Personnel that possess the requisite skills and experience to perform
certain technical functions for the Company have been in limited supply in the
past, and there can be no assurance that the Company will be successful in
attracting or retaining such personnel. The loss of key employees, the failure
of key employees to perform satisfactorily in their current position or the
Company's inability to attract and retain skilled employees as needed, could
materially and adversely affect the Company's business, operating results and
financial condition. The Company does not have employment agreements with its
management personnel. See "Management."
"Year 2000" Issues
The Company has not completed a comprehensive review of impact of the "Year
2000" issue on the Company's business. This issue concerns 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 engineering staff
has made a preliminary
-14-
<PAGE>
assessment of the Company's products and is not aware of any material
complications. In the first quarter of fiscal 1999, the Company expects to
confirm the impact, if any, on products it distributes, and complete an
assessment of external factors, including key vendors and licensed software for
internal business applications. The Company has therefore not yet determined
what impact, if any, the Year 2000 problem may have on its operational needs,
financial results or financial condition/liquidity.
Settlement of Claims by Certain Holders of Convertible Demand Notes
In early April 1998, the Company settled certain claims by purchasers of
$135,000 (out of a total of $185,000) of convertible demand notes which the
Company issued from April through June, 1997. By their terms, the notes became
convertible to Common Stock at $.35 per share (as to $75,000 of the notes) and
$.50 per share (as to $110,000 of the notes) on November 1, 1997. The essence of
the claims of the complaining noteholders was that the Company, through its
agents, "promised" that the Common Stock issuable upon conversion of the notes
was to be "freely tradeable." The documentation evidencing the notes did not
bear any language indicating the nature of the shares issuable upon conversion.
The holder of the remaining $50,000 note (which is convertible at $.50 per
share) has not asserted any claims against the Company in connection with his
purchase of the note. Without admitting liability, the Company settled the
complaining noteholders' claims by agreeing to issue 1.4 times the number of
shares originally issuable as principal and interest on the notes (plus an
additional 11,000 shares to one of the noteholders who purchased an aggregate of
$50,000 of the notes) and providing the noteholders with certain guarantees as
to the amount for which the shares can be resold (with the difference to be made
up by the Company) and a five-day "put" which allows the noteholders to require
the Company to repurchase any shares remaining unsold at the end of the period
ending one year after the shares become saleable under SEC Rule 144 for a
certain price, subject to certain conditions. The holder of the other $50,000 of
notes will be given the enhanced conversion rate but will not be offered the
guarantee or put. A total of 525,800 shares have been issued to these
noteholders upon conversion of their notes. Of that number, 360,800 of the
shares were given a $3.00 per share guarantee and put and 165,000 of the shares
were given a $4.29 per share guarantee and put. The Company also settled a claim
concerning an additional $16,825 promissory note that was issued to one of the
holders of the $135,000 of notes described above, by issuing 18,507 shares of
Common Stock; these shares were not given any guarantee or put. Finally, the
Company has issued 154,000 shares upon conversion of the remaining $50,000 note,
but did not give that noteholder the guarantee or put. The shares issued under
this settlement become saleable under SEC Rule 144 at various times (depending
on the issuance date of each note) commencing April 11, 1998 through July 2,
1998. As a result of this settlement, the issuance of "premium" shares has been
recorded as a litigation settlement expense and resulted in a charge to
operations of approximately $921,000 in the Company's fiscal 1998 third quarter
results. See "Risk Factors - Risks Relating to the Company's Securities - Market
Overhang; Registration Rights; Possible Effect on Market for the Company's
Common Stock," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business - Legal Proceedings - Settlement of Claims
of Certain Noteholders." The obligation of the Company to honor the guarantees
and put options given to the complaining noteholders could have a material
impact upon the Company, its financial condition and results of operation. See
"Management's Discussion of Financial Condition and Results of Operations" and
"Business - Legal Proceedings - Settlement of Claims of Certain Noteholders."
Continuing Default to Former Trade Creditor
The Company has a note payable to a former trade creditor which is in
default in the approximate amount of $388,000. The note is collateralized by
certain of the Company's inventory, and although the Company continues to
discuss options with the creditor regarding the possible restructuring or
mutually agreeable settlement of this note, no agreement has been reached. A
decision by this creditor to seek to recover the amount due on this note, or to
foreclose on the collateral, could have an adverse impact on the Company and its
business.
-15-
<PAGE>
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 by October 31, 1998.
Untimely Filing of 1996 Proxy Statement
The Company apparently inadvertently failed to file its 1996 Proxy
Statement with the Securities and Exchange Commission within 120 days of the end
of fiscal year 1996. Copies of the Proxy Statement were distributed to all
shareholders of the Company in conjunction with the Company's 1996 Annual
Shareholder Meeting held November 15, 1996, which involved only the election of
directors. The Company filed the 1996 Proxy Statement with the Commission as of
October 10, 1997. The Company is not certain what liability, if any, it might
have as a result of this untimely filing.
Risks Relating to the Company's Securities
- ------------------------------------------
Market Overhang; Registration Rights; Possible Effect on Market for the
Company's Common Stock
There are a total of 7,240,356 Shares owned or subject to warrants or other
rights to acquire Common Stock which the Company is registering for sale under
the Registration Statement of which this Prospectus is a part. Most of those
shares are issuable or were issued at prices which are less (and in some cases
substantially less) than the present market price for the Company's Common
Stock. There were also approximately 1,417,345 shares of Common Stock
outstanding that either are presently, or shortly will be, saleable under SEC
Rule 144 as of May 31, 1998, plus an additional 362,631 shares issuable pursuant
to the exercise of options granted under the Company's 1992 Stock Option Plan
which were vested as of May 31, 1998 or which will vest within 60 days of such
date, which are or will be saleable under an effective Form S-8 Registration
Statement covering a total of up to 880,000 option shares. The Company also
intends to file two additional S-8 Registration Statements as soon as
practicable to cover a total of 2,400,000 additional shares of Common Stock that
are either presently issuable under outstanding stock options or which may be
issued pursuant to options that have been or are authorized to be issued under
the Company's 1992 Stock Option Plan. The exercise prices of a significant
number of these options are substantially less than the present market price for
the Company's Common Stock. In June 1998, the Company agreed to issue 290,000
shares of restricted Common Stock to Liviakis Financial Communications, Inc.
("LFC") and Robert B. Prag, an officer of LFC, in connection with the entry of a
new consulting agreement with LFC. These shares carry registration rights,
although LFC and Mr. Prag have agreed not to sell the shares, even if
registered, before February 1, 1999. Finally, there are 472,935 additional
shares of Common Stock which have not been included in this Registration
Statement which are issuable upon the exercise of presently outstanding warrants
that can be exercised in the future, a substantial number of which have
registration rights. No assurance can be given that the market for the Company's
Common Stock will be robust enough to absorb all of the shares being offered by
Selling Security Holders under this Registration Statement or which may be
offered by shareholders under Rule 144 or the Company's S-8 Registration
Statements. If an oversupply of shares of Common Stock develops as a result of
the number of shares that shareholders may wish to sell into the market, it is
likely that the market price for the Common Stock will be depressed from its
present levels. See "Capitalization," "Business - Legal Proceedings,"
"Management - Executive Compensation," "Security Ownership of Principal
Shareholders and Management," "Certain Transactions," "Description of
Securities" and "Selling Security Holders."
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<PAGE>
Possible Limitations on Sales of Common Stock; Possible Application of Penny
Stock Rules
Regulations under the Securities Exchange Act of 1934 (the "1934 Act")
regulate the trading of "penny stocks" (the "Penny Stock Rules"), which are
generally defined as any security not listed on a national securities exchange
or NASDAQ, priced at less than $5.00 per share, and offered by an issuer with
limited net tangible assets and revenue. The Common Stock has recently been
trading in a range which would classify it as a penny stock and is therefore
subject to the Penny Stock Rules. Despite the fact that the stock price has
recently traded above $5.00 per share, the Company's stock has traded over the
last several years in a price range which makes it as a "penny stock." Under
these rules, broker-dealers must take certain steps prior to selling a "penny
stock" including (i) obtaining financial and investment information from the
investor, (ii) obtaining a written suitability questionnaire and purchase
agreement signed by the investor, (iii) providing the investor with a written
identification of the shares being offered and the quantity; (iv) providing the
customer with a written disclosure document containing SEC required disclosure
as to risks involving investments in penny stocks; (v) providing written
disclosure as to compensation of the broker and associated persons; and (vi)
providing customer's whose accounts contain penny stocks with certain required
disclosure on the account statements. If the Penny Stock Rules are not followed
by the broker-dealer in conjunction with sales of a penny stock, the investor
has no obligation to purchase the shares. Accordingly, the Penny Stock Rules may
make it more difficult for broker-dealers to sell the Company's Common Stock in
the secondary market and consequently may make it more difficult for a holder of
a penny stock to dispose of the shares as and when the holder might desire to do
so. In addition, the application of the Penny Stock Rules to the Common Stock
could also impair the Company's ability to raise additional capital through the
sale of Common Stock.
No Dividends
The Company has never paid cash or other dividends on its Common Stock. It
is the Company's intention to retain earnings, if any, to finance the operation
and expansion of its business, and therefore, it does not expect to pay any cash
dividends in the foreseeable future. In addition, the terms and conditions of
the presently outstanding Series A Preferred Stock will limit the Company's
ability to pay dividends on the Common Stock. See "Description of Securities -
Series A Preferred Stock - Dividends." No person seeking a dividend paying
security should invest in the Common Stock. See "Dividend Policy."
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, various warrants, a
convertible promissory note, and contract rights, including a substantial number
of such rights for which the Common Stock underlying those rights is being
registered for resale in the registration statement of which this Prospectus is
a part. 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 at prices which are less than the present market
price for the Common Stock. 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. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations," "Management - Executive
Compensation," "Certain Transactions," "Description of Securities," and "Selling
Security Holders."
-17-
<PAGE>
Offering to Benefit Certain Existing Shareholders and Other Persons Holding the
Company's Securities
This Offering will provide substantial benefits to existing shareholders of
the Company and other persons holding the Company's securities. No proceeds from
sales of the Shares being registered in this offering will inure to the benefit
of the Company. Rather this Offering is being effected by the Company in
satisfaction of its registration obligations to various purchasers of its
securities over the last several years. A substantial number of the Shares being
registered for sale hereunder were purchased or can be purchased at prices
substantially less than the present market price for the Common Stock. See
"Certain Transactions," "Description of Securities," and "Selling Security
Holders."
Potential Volatility of Market Price for Common Stock
The current market price for the Company's Common Stock does not appear to
bear any relationship to any established valuation criteria such as assets, book
value, or current earnings. The Company attributes the current market price of
the Company's Common Stock to anticipated benefits to the Company of its CDPD
products and distribution strategy. Market prices for securities of small-cap
emerging companies have historically been quite volatile. General economic,
industry and market conditions, as well as future announcements concerning the
Company or its competitors, including technological innovations or new products,
developments concerning proprietary rights, litigation involving the Company, or
other factors may have a significant impact on the market price of the Common
Stock. See "Market for the Company's Common Stock and Related Matters."
Discount To Conversion Price of Series A Preferred Stock for Failure to Obtain
Effectiveness of Registration Statement within Prescribed Period
In connection with the sale of the 8% Convertible Debentures which have now
been converted to 3,060,000 shares of Series A Preferred Stock, the Company
agreed to file a registration statement covering the shares issuable upon
conversion of the 8% Convertible Debentures and/or Series A Preferred Stock by
March 10, 1998 (90 days from December 10, 1997) and that if a registration
statement covering such shares was not effective with the SEC by May 11, 1998
(150 days from December 10, 1997), a penalty in the form of a discount to the
conversion price for the Series A Preferred Stock would become effective. The
pre-penalty conversion price (the "Conversion Price") applicable to the Series A
Preferred Stock is calculated based on a $1.00 stated value of the Series A
Preferred Stock and is the lesser of: (i) $6.00 per share of Common Stock; or
(ii) 80% of Market Price for the Common Stock (as defined). Until September 8,
1998, the Conversion Price is never to be less than $4.00 per share, less any
applicable penalty discount (the "Minimum Conversion Price"). The penalty
discount reduces the Conversion Price (including the Minimum Conversion Price)
by 2% of the pre- penalty Conversion Price for each 30 day period (or any part
thereof) after May 11, 1998, that the registration statement is not effective.
The Company did not file a registration statement by March 10, 1998, and did not
obtain its effectiveness by May 11, 1998, and it is therefore certain that the
penalty for failure to obtain effectiveness of the registration statement by May
11, 1998 will become effective. Assuming the discounted Conversion Price (based
on then current Market Price) is not greater than $6.00 per share of Common
Stock (in which case the maximum $6.00 Conversion Price would nonetheless
apply), the application of the discount will reduce the cost of acquiring Common
Stock to the holders of the Series A Preferred Stock. As of July 31, 1998, the
Minimum Conversion Price has been reduced to $3.76 per share by application of a
6% penalty discount to the original $4.00 per share Minimum Conversion Price.
See "Description of Securities - Series A Preferred Stock."
-18-
<PAGE>
Possible Loss of NOLs
The issuance or sale of additional Common Stock by the Company will have
the effect of reducing the ability of the Company to utilize its net operating
loss carryforwards ("NOLs") prior to expiration, which are substantial. Any
reduction or loss of the NOLs could have a material adverse effect upon the
Company's business, operating results and financial condition. However, the
overriding need for additional financing could cause the Company to carry out a
transaction which could result in the loss of its NOLs.
Compliance with Securities Laws
The Company has recently sold a substantial amount of its securities in
unregistered transactions that the Company believes qualify for registration
exemptions under state and federal securities laws. In the event any violation
of these laws occurred as to past sales of securities, the purchasers of such
securities may have the right to rescind the purchase and receive their money
back, with interest. Any attempt by a securityholder to assert a rescission
right could have a material adverse effect upon the financial condition and
results of operations of the Company, even if such person were not successful in
prosecuting such a claim. See "Business - Legal Proceedings" and "Certain
Transactions."
Anti-Takeover Considerations Including Authorization of Preferred Stock
Certain provisions of the Company's Articles of Incorporation may be deemed
to have anti-takeover effects and may discourage or make more difficult a
takeover attempt that a shareholder might consider in his, her or its best
interest. The Articles of Incorporation authorize a total of 15,000,000 shares
of no par value preferred stock (the Preferred Stock"), 4,000,000 of which are
designated as Series A Preferred Stock. The Board of Directors may issue shares
of previously undesignated preferred stock without shareholder approval upon
such terms as the Board of Directors may determine. The rights of the holders of
Common Stock will be subject to, and may be adversely affected by, the rights of
the holders of any preferred stock that may be issued in the future. The
issuance of preferred stock, while providing flexibility in connection with
possible acquisitions and other corporate purposes, could have the effect of
delaying or preventing a change in control of the Company without further action
by the shareholders. The Company has no present plans to issue any additional
shares of Preferred Stock beyond those already issued as Series A Preferred
Stock. See "Description of Securities `- Preferred Stock' and `- Certain Effects
of Authorized But Unissued Stock.'"
Under Section 7-106-205 of the Colorado Business Corporation Act, the Board
of Directors of a Colorado corporation may issue rights, options, warrants or
other convertible securities (hereafter "rights") entitling the holders of the
rights to purchase, receive or acquire shares or fractions of shares of the
corporation or assets or debts or other obligations of the corporation, upon
such terms as are determined by the Board of Directors. The Board is free to
structure the issuance or exercise of the rights in a manner which may exclude
"significant shareholders," as defined, from being entitled to receive such
rights or to exercise such rights or in a way which may effectively prevent a
takeover of the corporation by persons deemed hostile to management. Nothing
presently contained in the Articles of Incorporation of the Company prohibits
the Board from using these types of rights in this manner. See "Description of
Securities - Certain Anti-Takeover Provisions of Colorado Law."
In addition, because any takeover of the Company could result in the
inability of the Company to utilize its NOLs prior to expiration, potential
acquirors may be deterred from acquiring the Company. See "Risk Factors - Risks
Relating to the Offering and the Company's Securities - Possible Loss of NOLs."
-19-
<PAGE>
Maintenance of Effective Registration Statement
The Company has agreed with the holders of its Series A Preferred Stock to
maintain an effective registration statement under which they may sell the
Common Stock issuable upon conversion of, or as dividends on, the Series A
Preferred Stock, for at least 16 months from June 30, 1998. The Company is not
presently able to utilize registration on Form S-3, and in all likelihood will
not be able to do so for the foreseeable future. Consequently, the registrations
that the Company is obligated to keep effective for the holders of its Series A
Preferred Stock, or which it must undertake for other securityholders holding
demand registration rights, are likely to be quite expensive to the Company and
there can be no assurance that the Company will be able to maintain
effectiveness of such registration statements for such extended periods of time.
See "Description of Securities" and "Selling Security Holders."
Possible Future Application of California General Corporation Law to the Company
and Its Shareholders
Under Section 2115 of the California General Corporation Law, foreign
corporations that exceed an average of fifty percent for "the property factor,
the payroll factor and sales factor" for its latest full income year (as
computed under the same methods as are used in computing franchise tax payable
in California) and which have more than one-half of the corporation's
outstanding voting securities (as determined pursuant to Section 2115) held of
record by persons having addresses in California, become subject to certain
specified chapters and sections of the California General Corporation Law upon
the first day of the first income year of the corporation commencing on or after
the 135th day of the latest income year during which the above-described tests
have been met or during which a final order has been entered by a court of
competent jurisdiction declaring that those tests have been met. The Company
presently exceeds the shareholder address test and may exceed the other test as
of the 135th day of its fiscal year ending June 30, 1999, which would subject
the Company to certain provisions of California law as of July 1, 1999.
Application of certain aspects of the California General Corporation Law would
to the Company and its shareholders may give greater or lesser protection to
shareholders in certain instances than is available to shareholders under
Colorado law (the State in which the Company is incorporated). Compliance with
applicable provisions of California law may be more or less onerous to the
Company than compliance with analogous provisions of Colorado law. See
"Description of Securities - Possible Future Application of California Law to
the Company and Its Shareholders."
-20-
<PAGE>
USE OF PROCEEDS
The proceeds from this offering of Shares will inure solely to the benefit
of the Selling Security Holders. The Company will not receive any proceeds from
sales of the Shares being offered under this Prospectus. See "Risk Factors -
Risks relating to the Company's Securities - Offering to Benefit Certain
Existing Shareholders and Other Persons Holding the Company's Securities."
DIVIDEND POLICY
The Company has never declared or paid any cash dividends on its Common
Stock and does not anticipate paying any dividends on the Common Stock in the
foreseeable future. Any cash that might be available for payment of dividends
will be used to expand the Company's business.
In addition, the terms and conditions of the presently outstanding Series A
Preferred Stock will limit the Company's ability to pay dividends on the Common
Stock. See "Description of Securities - Series A Preferred Stock - Dividends."
-21-
<PAGE>
MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED MATTERS
The Company's 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. The Company's stock has historically been
thinly traded, although there has been substantial volume in the stock since
approximately August 1, 1997. Average trading volume over the three months ended
June 30, 1998 has been approximately 97,000 shares per day. 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 $2.375
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
Fiscal 1996 High Low
----------- ---- ---
Fourth Quarter 0.844 0.281
Third Quarter 1.063 0.109
Second Quarter 0.469 0.094
First Quarter 0.469 0.125
As of May 31, 1998, there were 182 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. As of May 31, 1998, a total of 4,458,272 shares were held by
depository companies in street name. On July 31, 1998, the last sale price of
the Common Stock was $3.625 as reported on the OTC Electronic Bulletin Board.
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.
-22-
<PAGE>
CAPITALIZATION
The following table sets forth the Company's capitalization at March
31, 1998.
<TABLE>
<CAPTION>
March 31, 1998
--------------
<S> <C>
Notes Payable ............................................................... 827,863
Long-term liabilities ....................................................... 45,000
Shareholders' equity:
Preferred Stock, no par value; 15,000,000 shares authorized; 4,000,000
shares designated as Series A Cumulative Convertible Redeemable
Preferred Stock; 3,060,000 shares issued and
outstanding at March 31, 1998 ...................................... 3,060,000
Common Stock, no par value; 12,000,000 shares authorized;
9,324,601 shares issued and outstanding at March 31, 1998 (1) ...... 9,324,601
Additional paid in capital ......................................... 10,456,612
Accumulated deficit ................................................ (22,825,421)
------------
Total shareholders' equity (deficit) ............................... 15,792
------------
Total capitalization ............................................... $ 888,655
============
<FN>
---------------
(1) Excludes a total of 4,963,244 shares of Common Stock as of March 31, 1998,
comprised of the following: (a) 719,653 shares issuable upon exercise of
outstanding stock options issued under the 1992 SOP at a weighted average
exercise price of $2.96 per share; (b) 600,000 shares underlying a
non-qualified stock option that was granted to the Company's CEO as of
August 4, 1997, which is exercisable at $1.00 per share; (c) 250,000 shares
issuable at $4.00 per share upon exercise of outstanding warrants owned by
two former officers of the Company; (d) 14,849 shares issuable at $2.624
per share upon exercise of outstanding warrants; (e) 165,000 shares
issuable upon exercise of the Underwriters' Warrants at a price of $12.325
per share; (f) 679,800 shares issuable upon conversion of principal and
interest on a total of $185,000 of convertible notes sold by the Company
from April - June of 1997; (g) 18,507 shares issuable upon conversion of
principal and interest on a $16,825 promissory note issued as of July 2,
1997; (h) 1,600,000 shares issuable to two significant shareholder
affiliates of the Company upon the exercise of warrants at $.01 per share,
which were issued as of August 6, 1997; (i) 225,000 shares issuable as of
March 31, 1998, pursuant to a consulting agreement with Liviakis Financial
Communications, Inc. ("LFC") entered into as of July 25, 1997; (j) 605,000
shares issuable to entrenet Group, LLC (325,000 shares issuable upon
conversion of principal and accrued interest on a $150,000 promissory note
at $.50 per share and 280,000 shares issuable as a finder's fee; (k) 75,000
shares issuable as a result of the exercise of a stock option by an
officer/director of the Company prior to March 31, 1998, for which a share
certificate had not been issued as of March 31, 1998; and (l) 10,435 shares
issuable upon exercise of a common stock purchase warrant at $5.75 per
share issued to entrenet as of March 12, 1998. See "Management - Stock
Option Plan," "Security Ownership of Principal Shareholders and
Management," "Certain Transactions" and "Description of Securities -
Warrants."
</FN>
</TABLE>
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<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
THE STATEMENTS IN THIS DISCUSSION CONTAIN BOTH HISTORICAL AND FORWARD-LOOKING
STATEMENTS. THE FORWARD-LOOKING STATEMENTS ARE BASED UPON CURRENT
EXPECTATIONS AND ACTUAL RESULTS COULD DIFFER MATERIALLY FROM THOSE
ANTICIPATED. FACTORS THAT MAY AFFECT SUCH FORWARD-LOOKING STATEMENTS
INCLUDE, AMONG OTHERS, THOSE SET FORTH UNDER THE CAPTION "RISK FACTORS."
Results of Operations
General Overview
U.S. Wireless Data, Inc. ("USWD" or the "Company") was incorporated on
July 30, 1991, and is in the business of designing, manufacturing and marketing
a line of wireless and portable credit card and check authorization terminals.
The Company completed an initial public offering in December of 1993, and in
1994, completed development of its initial product, negotiated agreements with
suppliers of components, developed a marketing strategy, and initiated sales of
the POS-50(R) portable credit card and check verification terminal. During
fiscal 1996, the Company continued to promote its product through Independent
Sales Organization (ISO) channels and began development on its new CDPD product
line. The Company continued its efforts on the POS- 50(R) and in the second half
of 1996, introduced two new CDPD-based products. The Company's largest customer
during fiscal 1996 and 1997 was Cardservice International, Inc., which purchased
POS-50(R) terminals.
As the Company entered fiscal year 1997, it continued to struggle with
profitability and liquidity. In October 1996, the Company closed its Boulder
office and consolidated operations in Colorado Springs, Colorado. A small
customer service and POS-50(R) deployment office was opened in Wheat Ridge,
Colorado. As part of the restructuring plan, Michael J. Brisnehan, its
president, principal executive officer and chief financial officer resigned and
Rod L. Stambaugh, chairman and former vice president of marketing and business
development was appointed president and chief executive officer. During fiscal
year 1997, head count was maintained at approximately 10 employees and ended
June 1997 at eight. During the first half of fiscal 1998, the Company
significantly increased personnel in response to the new distribution programs
described below. The Company had 50 employees by the end of December 1997 and 60
employees as of the end of June 1998.
A strategic decision was made to transition the Company from a "box
maker" to providing a credit/debit card processing solution to the marketplace.
In January 1997, the Company executed a Member Service Provider agreement with
NOVA Information Systems that establishes U.S. Wireless Data as a transaction
processing service provider to retail merchants. The NOVA arrangement also
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
communications carriers for direct distribution of products and services to the
merchant. In preparation for this effort, the Company signed CDPD airtime
agreements with AT&T Wireless Services, Bell Atlantic NYNEX Mobile and initiated
discussions with GTE Wireless regarding airtime purchases, joint marketing and
operating agreements. The Company was ultimately successful in entering into an
airtime agreement with GTE Wireless which contains joint marketing and operating
provisions. USWD has specific, significant commitments under these agreements
including both minimum purchase obligations and staffing requirements.
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 roll-out. In June 1997,
the Company engaged entrenet Group, LLC. ("entrenet"), a management consulting
-24-
<PAGE>
group, to assist with the development of a detailed marketing and business plan
and introduction of financing sources. The Agreement had a term of one year and
USWD agreed to pay entrenet $150,000 in the form of a convertible promissory
note, bearing interest at 10% per annum. Entrenet was also entitled to a
finder's fee for locating direct financing sources for the Company. 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. The Company also completed a private placement of
restricted securities, raising $500,000 in cash from two LFC affiliates, Messrs.
John M. Liviakis and Robert B. Prag, for 3,500,000 shares of Common Stock and
warrants to purchase an additional 1,600,000 shares, exercisable at $.01 per
share. This transaction entitled entrenet to a finder's fee under its consulting
agreement. For its fee, the Company ultimately agreed to issue entrenet 280,000
shares of Common Stock at such time as the shareholders approved an increase in
capital stock to at least 40,000,000 shares, which occurred as of February 6,
1998. The 280,000 shares were issued to entrenet and five members of entrenet as
of April 3, 1998.
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. The Company then actively
recruited and hired marketing and sales personnel to support deployment on a
nationwide basis under the joint marketing program with major wireless carriers.
The retention of these people is expected to bring the necessary expertise to
implement the Company's business plan; however, at least in the near term, it
has increased expense levels above revenue.
As noted above, 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 network. The agreement contains
certain significant operational and financial performance criteria (including
minimum airtime purchases) that must be met by the Company. Commencing in the
second quarter of fiscal 1998 and continuing through the present, USWD has made
significant investments to support a nationwide deployment of TRANZ Enablers to
merchants through GTE's national sales force. Under this deployment program, the
GTE 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 is based on the manufacturing cost of the
TRANZ Enabler being financed by a third party. Although the Company has 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 yet been able to draw funding under that agreement. The agreement has
not yet been implemented because GTE Leasing and GTE Wireless are now requiring
that the Company obtain the written consent of RegionsBank, NOVA's acquiring
bank, that it will honor the Company's revenue assignment to GTE Leasing and pay
over directly amounts owed to the Company to GTE Leasing and GTE Wireless if the
Company defaults on its obligations to pay GTE Leasing and/or GTE Wireless. The
Company is actively negotiating with all parties to obtain this consent and
expects that it will be able to do so; however, no assurance can be given that
this consent will be obtained thereby allowing the Company to draw funding under
its agreement with GTE Leasing. In addition, the Company has not entered into
any other agreements nor does it have any other arrangements to obtain
additional financing to fund inventory for placement with merchants.
Consequently, to date it 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. The monthly financing cost and
CDPD airtime expense are recorded as cost of sales against the monthly recurring
revenue. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Financial Condition, Capital Resources and Liquidity -
Agreement with GTE Leasing Corporation."
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<PAGE>
As required under the agreements with GTE Wireless, the Company has added
significant sales and support personnel and infrastructure to provide local
support for the GTE sales representatives. The initial placements of the TRANZ
Enabler units have not developed as rapidly as anticipated, and expenses to
support this program have far exceeded revenue generated by the Company from the
deployment of Tranz Enablers under it to date. It is hoped that recent actions
by GTE will favorably impact the program; however, there can be no assurance
that this will be the case.
As noted above, the Company also has a CDPD air time agreement with
AT&T Wireless and has selectively added sales personnel in markets served by
AT&T Wireless to deploy TRANZ Enabler units, although it does not presently have
a joint marketing agreement in place with AT&T Wireless.
In October 1997, the Company signed an agreement with GoldCan
Recycling, Inc. to provide wireless monitoring of its state-of-the-art automated
aluminum can redemption centers. This is the first application of USWD's TRANZ
Enabler technology outside the credit card/point-of-sale industry. USWD will
receive monthly equipment and wireless service fees on every TRANZ Enabler
placed by GoldCan. Although the Company has successfully tested application of
its technology for use in this application, to date, no placements of TRANZ
Enablers have been placed with Goldcan.
To meet its working capital needs, between October and December 1997,
the Company obtained bridge loans from Liviakis Financial Communications, Inc.
for $475,000 pending completion of a private placement offering which it was
conducting at the time. Following the closing of the offering in mid-December,
the notes were immediately repaid by the Company along with interest of nine
percent per annum.
On December 10, 1997 the Company closed a private placement offering of
$3,060,000 principal amount of 8% Convertible Debentures, which were converted
to 3,060,000 shares of Series A Preferred Stock as of February 9, 1998. After
associated fees and repayment of bridge loans incurred during the quarter, the
Company retained approximately $2,200,000 to apply to immediate working capital
needs and the national launch of its proprietary wireless transaction processing
solution.
During the second quarter of fiscal 1998, the Company completed the
relocation of its customer support, administrative and accounting functions to
the Emeryville, California headquarters. The lease on the Wheat Ridge, Colorado
office has terminated. Engineering functions will 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 will deploy, track and maintain 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.
In March 1998 the Company signed a joint sales and marketing agreement with
Bell Atlantic Mobile. Bell Atlantic Mobile is 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 anticipates adding
additional personnel to support these agreements. By leveraging the sales
organizations of the major CDPD providers, the Company has the potential to
quickly reach a large number of merchants. However, costs to the Company of
implementing the joint marketing and distribution agreements with GTE Wireless,
Bell Atlantic Mobile and Ameritech will exceed short-term revenue generated by
the programs.
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The Company also signed a merchant acquiring agreement with National
Bank of Commerce "NBC", in March 1998. NBC is the lead banking affiliate of
National Commerce Bancorporation. USWD expects the agreement to broaden its
ability to provide credit card processing services for merchants in the retail,
restaurant, and hotel/lodging industries.
As of March 12, 1998, the Company entered into an 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. 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 will receive 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 financings
of $2,000,000. In addition, 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 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, 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.
On June 26, 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 paid as of July 21, 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 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 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 of which this Prospectus forms a part. The
expenses of such registrations (other than selling expenses) are to be borne by
the Company. See "Certain Transactions - Transactions with RBB Bank
Aktiengesellschaft" and "Selling Security Holders."
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"). 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, issuable 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,
the Company also agreed to expand its Board of Directors to include two
additional outside directors which are acceptable to LFC. See "Business -
History of the Company - Recent Significant Securities Issuances," "Certain
Transactions - Transactions with Liviakis Financial Communications, Inc. ("LFC")
and Affiliates of LFC" and "Selling Security Holders."
On July 27, 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 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 will be approximately
$20,000. The Company used $251,537 of the proceeds from the offering to pay off
the $250,000 short term bridge loan from RBB Bank Aktiengesellschaft, which was
evidenced by a promissory note dated June 26, 1998, and will use the balance of
the proceeds as working capital and to repay existing obligations. RBB Bank
Aktiengesellschaft, the record holder of 1,600,000 shares of the Company's
Series A
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<PAGE>
Cumulative Convertible Redeemable Preferred Stock, purchased $1,000,000
of the 6% Debentures. See "Business - History of the Company - Recent
Significant Securities Issuances," "Certain Transactions `- Transactions with
RBB Bank Aktiengesellschaft,' `- Transactions with Liviakis Financial
Communications, Inc. ("LFC") and Affiliates of LFC,'" "Description of Securities
- - 6% Convertible Subordinated Debentures Due July 21, 2000" and "Selling
Security Holders."
Fiscal 1997 Compared to Fiscal 1996
Net sales of $1,315,542 for fiscal 1997 decreased from net sales of
$1,582,553 generated during fiscal 1996. Unit sales during both years were
approximately the same. The decrease in sales dollars is attributable to: a)
reductions in retail prices from one year to the next, and b) the product mix of
POS 50(R) versus POS 500 units.
Gross margins increased from a negative $1,303,879 in fiscal 1996 to a
positive $506,095 for fiscal 1997. This increase is attributable to a $1,525,000
write-down of inventories during fiscal 1996, resulting from declines in market
value of such inventories relative to cost, compared to the 1997 gross margin
which shows a significant increase due mainly to lower costs for the POS-50(R)
from a major supplier.
Selling, general and administrative expenses decreased from $1,365,235 in
fiscal 1996 to $812,687 in fiscal 1997. This decrease was due primarily to: a)
headcount reductions in sales, marketing and administration from 1996 staffing
levels reduced salary expense by approximately $182,000; b) legal expense
reductions in 1997 from the approximately $226,000 incurred in fiscal 1996
(related to class action lawsuits filed against the Company); and c) significant
reductions in bad debt expense, depreciation, royalty expense, relocation
expense, and rent expense.
Research and development expense decreased from $458,407 in fiscal 1996
to $406,522 in fiscal 1997 due to lower occupancy expense and reduced staffing
in the second half of 1997.
The 1996 loss from discontinued operations resulted from the dissolution of
Direct Data, Inc. in October 1995.
The 1996 extraordinary gain is related to the restructuring of $3.4
Million of debt and payables for Direct Data and an inventory supplier.
Three and Nine Month Periods Ended March 31, 1998 and 1997
Revenue of $245,439 for the third quarter of fiscal 1998 was up
slightly from revenue of $243,446 generated during the third fiscal quarter of
fiscal 1997 as the Company continued the shift from a per-unit sales approach to
a recurring revenue model. The Company was also able to resume shipment of
POS-50 units following a product shortage in the second quarter. For the
nine-month period, revenue of $599,296 decreased 43% from the prior period
amount of $1,046,359 due to the strategy shift described above. Product
placements of the TRANZ Enabler to merchants through the new distribution
program have not developed as rapidly as anticipated, consequently revenue has
been minimal, while at the same time; significant expenses have been incurred.
The Company hopes that the transition from a "voice" to "data" sales orientation
for the GTE sales personnel will be aided by several new operational initiatives
implemented in February 1998 by GTE Wireless. The Company also expects a
positive impact on product placement and revenue from the recently signed Bell
Atlantic joint sales and marketing agreement. However, for both programs,
expenses are likely to exceed revenues, at least over the near term. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Financial Condition, Capital Resources and Liquidity," below.
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<PAGE>
Gross margins in the third fiscal quarter of 1998 were $130,100
compared to $128,666 for the same period in fiscal 1997. As a percent of
revenue, gross margins in both periods were almost identical at 53%. For the
nine-month periods, gross margins decreased from $444,281 in fiscal 1997 to
$247,550 in the current period on the corresponding revenue decline. For the
current nine-month period, gross margin as a percent of revenue was down 1.2%
from the prior year's period due to the mix of product sales in the first two
quarters of the 1998 fiscal year.
Selling, general and administrative expense increased from $122,691 in the
third fiscal quarter of 1997 to $1,999,817 in the third fiscal quarter of 1998.
The current quarter contains several significant non-cash charges. These include
a $350,000 charge related to the revalued LFC consulting agreement and a
$156,000 charge related to the extension of a common stock warrant exercise
period which was expiring. For the nine-month periods, selling, general and
administrative expense increased from $463,009 in the prior year to $4,271,625
in the current year. Non-cash consulting fees related to business development of
approximately $1,121,000 are reflected in the fiscal 1998 nine month results,
and include the termination of the original entrenet and Woolley consulting
agreements entered into during fiscal year 1997, and amortization of the
Liviakis Financial Communications consulting services (see Note 5 to the
financial statements). The nine-month period was also impacted by the $156,000
charge related to the warrant extension.
The balance of the selling, general and administrative expense increased by
approximately $1,371,000 and $2,531,000 for the three month and nine month
periods, respectively. A significant portion of the increase in both the three
and nine month periods resulted from the aggressive addition of sales and
support personnel and infrastructure to provide local support for the GTE
nationwide deployment. Headcount increased from approximately 18 at the end of
September 1997, to approximately 50 employees as of December 31, 1997 and
approximately 60 at the end of March 1998. Expenditures include increased
compensation expense for new sales and sales management personnel, selective
additions to the management team, increased travel and communication expense
related to the new marketing program, and expenses related to the resolution of
several outstanding legal issues. The Company continues to hire sales and
support personnel to support the new marketing programs. At least in the near
term, operating expense will continue to increase ahead of revenue.
Research and development expenses decreased from $87,914 in the third
fiscal quarter of 1997 to $78,000 in the third quarter of 1998. This decrease
was due to lower engineering material purchases. The nine-month period expense
decreased from $301,315 in fiscal 1997 to $251,000 in fiscal 1998 due to one
vacancy in the department during a portion of the first two quarters of fiscal
1998 and due to lower occupancy costs.
The third quarter fiscal 1998 results also include a $921,000 charge
recorded in Operating Expense as a litigation settlement for the value of common
shares issued to a group of Certain Noteholders, in settlement of a dispute
regarding rights related to the conversion of the notes into shares of Common
Stock. Note 7 to the Financial Statements for the quarter ended March 31, 1998,
entitled "Settlement of Claims of Certain Noteholders," contains a complete
description of the settlement and its accounting treatment.
Interest expense includes a $397,000 and $622,000 non-cash charge to
interest expense in the three and nine month periods of fiscal 1998,
respectively, related to the private placement. 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 off of 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 was effected on February 9, 1998.
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<PAGE>
Financial Condition, Capital Resources and Liquidity
The Company continues to have significant problems 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 $22.8 million since inception to March
31, 1998. The Company's CDPD based products, the GTE, Bell Atlantic and
Ameritech joint marketing and distribution agreements, pending distribution
agreements (if realized) and the transition to a recurring revenue focus present
an opportunity for significant revenue growth, eventual profitability, and the
generation of positive cash flow from operations. At present, however,
development of the Company's infrastructure and expansion of the sales and
marketing organization requires immediate, additional financing. Proceeds from
the private placement offering which was completed in December 1997, have been
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.
Based on current staffing levels, the Company's expenditures are running at
a monthly rate of approximately $450,000. In order to meet its obligations under
its agreement with Bell Atlantic Mobile and Ameritech the Company will require
additional sales personnel for significant product to be placed under those
agreements. This will further increase the Company's expenditures over present
levels. Proceeds from the recent sale of 6% Debentures are expected to fund the
Company's cash needs only for approximately 60 days from August 1, 1998. As a
result, 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 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, there is no guarantee that this additional funding
will be accomplished or that it will occur in the required time frame. 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.
Inventory increased from $208,867 as June 30, 1997 to $879,952 at March 31,
1998. Approximately $359,000 of this increase was for TRANZ Enabler inventory,
with the remaining portion being for components needed to initiate new builds of
POS-50r and POS-500 units. This inventory was purchased directly by the Company.
The Company's business plan calls for all TRANZ Enablers to be financed through
third party financing sources. While the Company has entered into the agreement
with GTE Leasing (described below) to fund product placed through the GTE
Wireless agreement, it must obtain inventory financing from external sources for
other placements, and at present the Company has not yet obtained such
financing. As described in Note 6 to the March 31, 1998 financial statements,
merchants that subscribe to the Company's credit card processing service usually
receive a TRANZ Enabler unit which 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 Sales over a 48 month life. The net
value of this equipment was $383,100 as of March 31, 1998.
Sale of Call Options on Certain Shares of Common Stock
In order to satisfy a portion of its immediate short term capital
requirements, on March 12, 1998, the Company entered into an agreement with a
shareholder, Mr. Richard P. Draper, to allow the Company to assign 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 has the right to purchase at $.25 per share.
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
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<PAGE>
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").
Through June 30, 1998, the Company has 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 which owns 1,600,000 shares of the
Company's Series A Preferred Stock. See "Certain Transactions - Transactions
with RBB Bank Aktiengesellschaft" and "Selling Security Holders." 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 $1,265,000 from the sale of these Call Options
through June 30, 1998.
Agreement with GTE Leasing Corporation
In an attempt to finance a portion of its inventory requirements, the
Company engaged in discussions with GTE Leasing Corporation ("GTE Leasing") for
some time regarding a program to fund the manufacture of TRANZ Enabler units
which are deployed and to be deployed through the joint USWD and GTE Wireless
marketing agreement. On April 2, 1998 the Company entered into a Loan and
Security Agreement with GTE Leasing to fund the manufacture of TRANZ Enabler
units by Wellex which are or will be deployed through the GTE Wireless joint
marketing agreement. The agreement with GTE Leasing is in the form of a
revolving credit facility in the maximum amount of $1,200,000. GTE Leasing will
pay the Company a fixed amount for each TRANZ Enabler unit manufactured by
Wellex for placement under the GTE Wireless joint marketing agreement. At
approximately $400 per unit, the Company has the ability to finance up to 3,000
TRANZ Enabler units at any one time under this agreement. The Company expects
that repayment of the amounts financed under the credit facility will be made
from the recurring revenue generated by the units placed under the GTE Wireless
joint marketing agreement. However, the Company is primarily obligated to repay
all amounts owing under the credit facility, irrespective of whether processing
revenues are sufficient to pay such amounts. To secure payment under the
agreement the Company has granted GTE Leasing a security interest in the units
and the processing revenues from those units. The agreement with GTE Leasing is
terminable on certain defined events of default, including the failure to pay
any installment within ten days of its due date and for other events of default
which remain unremedied for ten days after notice is given to the Company by GTE
Leasing. The Company, GTE Leasing and NOVA Information Systems, Inc. ("NOVA")
also entered into a Notice, Consent and Agreement which acknowledges the
obligation of NOVA to pay GTE Leasing directly from amounts owed to the Company
by NOVA for amounts owing by the Company to GTE Leasing under the credit
facility. However, GTE Leasing and GTE Wireless are now requiring that the
Company obtain the consent of RegionsBank, the acquiring bank for NOVA, that it
will honor the Company's cash flow assignments and pay GTE Leasing and GTE
Wireless directly in the event of a default by the Company in the payment of its
obligations to GTE Leasing or GTE Wireless. The Company is presently negotiating
with all parties in an attempt to finalize this consent before it can begin to
draw funds under this agreement. No assurance can be given that this can be
accomplished so that the Company can obtain funding under the GTE Leasing
Agreement.
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<PAGE>
Private Offering of 6% Convertible Subordinated Debentures Due July 21, 2000
On July 27, 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 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 will be approximately
$20,000. The Company used $251,537 of the proceeds from the offering to pay off
the $250,000 short term bridge loan from RBB Bank Aktiengesellschaft, which was
evidenced by a promissory note dated June 26, 1998, and will use the balance of
the proceeds as working capital and to repay existing obligations. Management
estimates that the proceeds from this offering will satisfy its immediate
capital needs through approximately the end of September 1998.
Current Financing Initiatives
The Company has several initiatives which it is currently pursuing to raise
additional capital.
As of March 12, 1998, the Company entered into an agreement with entrenet
Group, LLC to assist the Company in raising additional capital. See the
discussion in this section above, under "Results of Operations - General
Overview" and "Certain Transactions - Transactions with entrenet Group, LLC."
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. See "Risk Factors - Risks Involving the
Company and Its Business - Security Interests in Company Assets."
Paragraph deleted here.
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Year 2000 Issues
The Company has not completed a comprehensive 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
engineering staff has made a preliminary assessment of USWD products and is not
aware of any material complications. In the first quarter of fiscal 1999, the
Company expects to confirm the impact, if any, on products it distributes, and
complete an assessment of external factors, including key vendors and licensed
software for internal business applications. The Company has therefore not yet
determined what impact, if any, the Year 2000 problem may have on its
operational needs, financial results or financial condition/liquidity.
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<PAGE>
BUSINESS
Company Overview
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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.
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 ("ISOs"),
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 4,000 POS-50(R) terminals in
the marketplace, the Company is recognized as the leader in providing wireless
terminal transaction equipment for the mobile marketplace. The POS-50(R) product
accounted for most of the sales recorded in fiscal year 1997.
Over the past two and a half years, USWD has 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 the air-link 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, the Company's new line
of CDPD-based terminals can 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 now offers two new CDPD 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.
The most significant new USWD product is the TRANZ* Enabler, which
allows current Verifone TRANZ(R) 330 or TRANZ(R) 380 users to immediately
convert their terminals and printers from a land-line telephone dial-up mode to
a high-speed wireless mode of operation. By effecting this technological
upgrade, the cost of dedicated telephone lines is eliminated as are the delays
created by busy telephony networks during peak periods of authorization
activity. Furthermore, the efficiencies created by adopting the CDPD technology
and USWD's alliance with a major transaction processor has enabled the Company
to develop a pricing schedule which lowers transaction and/or discount(s) rates
from what most retailers are currently paying to handle credit and debit card
transactions. The TRANZ Enabler was introduced in pilot mode in March of 1996
and is directed at the existing U.S. installed base of more than 3.5 million
TRANZ(R) 330 and TRANZ(R) 380 terminals.
*TRANZ is a registered trademark of Verifone, Inc.
The second CDPD product created by the Company is the POS-500, a
self-contained card terminal and printer that provides the same mobility
features of the POS-50(R) product and also incorporates the processing benefits
of the TRANZ Enabler. The unit is geared for the user who either does not have a
dial-up terminal/printer in place or requires the advantages of the CDPD
technology in a mobile application. This product was introduced in pilot mode in
January of 1996.
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In mid fiscal year 1997, the Company made a fundamental decision to
change the manner in which it generates revenue. If successfully implemented,
this decision will transform the Company from a "box maker" in 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 ("MSP") agreement with NOVA Information Systems ("NOVA"), the nation's
7th largest credit card transaction processor. The Company also 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,
subject to final approval of each merchant by NBC. Once a merchant is accepted
by the processing company 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. These MSP agreements allow U.S. Wireless Data
to earn revenue on each card swipe and every dollar processed by merchants
enrolled by the Company. See "Business - Transaction Processing Agreements,"
below.
The Company's strategy also involves the entry of CDPD cellular service
resale agreements with major CDPD service providers. To date, USWD has signed
agreements with GTE Mobile Communications Service Corporation and certain
related entities ("GTE Wireless"), AT&T Wireless Services (AT&T Wireless") and
Bell Atlantic Mobile. The net result of the NOVA and NBC MSP agreements, the
Company's new CDPD products, and becoming a national reseller of CDPD service
positions the Company to offer high performance transaction processing services
at competitive discount rates. These relationships are significant in USWD's
strategy of providing high performance, low cost transaction processing services
to the merchant base.
Another key element of USWD's strategic direction is to establish close
alliances with large communications carriers such as GTE, Bell Atlantic, AT&T
Wireless, Ameritech and others. The Company has to date entered into agreements
for CDPD airtime purchase by the Company with GTE Mobile Communications Service
Corporation, on its behalf and on behalf of GTE Mobilnet Incorporated, Contel
Cellular Inc. and their respective affiliates (collectively "GTE Wireless"),
Cellco Partnership, by its general partner Bell Atlantic/NYNEX Mobile, Inc.,
which does business as Bell Atlantic Mobile ("Bell Atlantic Mobile") and AT&T
Wireless Data, Inc., doing business as AT&T Wireless Services ("AT&T Wireless").
In addition to these CDPD service provider agreements, the Company has entered
into joint marketing agreements with GTE Wireless (as of August 1, 1997), Bell
Atlantic Mobile (as of March 23, 1998) and Ameritech Mobile Communications, Inc.
("Ameritech") to market the Company's TRANZ Enabler and processing services
through GTE Wireless, Bell Atlantic Mobile and Ameritech's commercial and major
account sales forces in all of those company's CDPD markets. The Company has
established a sales and support organization to provide local support for more
than 300 GTE Wireless and is in the process of building a similar sales
organization for approximately 300 Bell Atlantic Mobile sales representatives.
In addition, the Company is required to maintain at least one sale support
person in each of the seven Ameritech CDPD markets. The Company has specific,
significant commitments under these CDPD airtime and joint marketing agreements,
including minimum CDPD airtime purchase obligations to GTE Wireless and AT&T
Wireless, and staffing and inventory delivery requirements under the joint
marketing agreements with GTE Wireless, Bell Atlantic Mobile and Ameritech. See
"Business - Marketing and Distribution Arrangements for the Company's Products
and Related Services" below.
History of the Company
- ----------------------
As noted above, the Company was incorporated in July 1991. 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 1997 has been as a "box" maker and seller. It attempted to sell a
sufficient number of its cellular data processing products to earn a profit.
Unfortunately, it was never able to do so on
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that basis and in 1997 management made the fundamental shift described above to
transition the Company into a position where it can earn recurring revenue from
the data processing products it places with merchants.
Recent Significant Securities Issuances
Sale of 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 $921,000 in March 1998. The shares into which the Notes are
convertible become saleable under SEC Rule 144 commencing 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 in conversion of the Notes. See
"Business - Legal Proceedings - Settlement of Noteholder Claims."
Issuance of Securities as Consulting Fees
In late fiscal 1997, the Company was at a critical phase in terms of
its very survival. In order to attempt to reorganize its business and obtain
financing, the Company first entered into a consulting agreement with a business
consulting company called entrenet Group, LLC, of Santa Rosa, California,
pursuant to which entrenet assisted the Company in reorganizing its objectives
and preparing a new business plan. The Company paid entrenet for its services by
issuance of a $150,000 convertible promissory note due June 3, 1998. Entrenet
then introduced the Company to Liviakis Financial Communications, Inc. ("LFC")
and two of its affiliates, Messrs. John M. Liviakis and Robert B. Prag. The
Company retained LFC to serve as its investment relations counsel under a
consulting agreement effective as of July 25, 1997 (the "Original LFC
Agreement"). A cash consulting fee of $10,000 is payable to LFC under the
Original LFC Agreement and a total of 300,000 shares of Common Stock is issuable
pursuant to the Original LFC Agreement, 225,000 shares to LFC and 75,000 shares
to Mr. Prag. Through June 30, 1998, the Company has issued a total of 270,000
shares under the Original LFC Agreement, 75% to LFC and 25% to Mr. Prag. LFC is
also entitled to a finder's fee of 2.5% of the gross amount of any financing
that it introduces to the Company. See "Certain Transactions `- Transactions
with entrenet Group, LLC' and ` - Transactions with Liviakis Financial
Communications, Inc. ("LFC") and Affiliates if LFC.' and "Selling Security
Holders."
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, issuable 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 being included in the registration statement of which this
Prospectus is a part. The 290,000 shares issuable to LFC and Mr. Prag under the
New LFC Agreement carry registration rights that are essentially 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 will not be included
in the
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<PAGE>
registration statement of which this Prospectus is a part. 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 which are acceptable to
LFC. See "Certain Transactions - Transactions with Liviakis Financial
Communications, Inc. ("LFC") and Affiliates if LFC" and "Selling Security
Holders."
Issuance of Securities To Messrs. Liviakis and Prag. In addition,
Messrs. Liviakis and Prag agreed to personally invest $500,000 in the Company in
return for 3,500,000 shares of Common Stock and warrants to purchase an
additional 1,600,000 shares of Common Stock at $.01 per share. Under its
consulting agreement with entrenet, the Company had agreed to pay entrenet a
finder's fee for all financing located by entrenet. To honor that obligation,
the Company agreed to issue a total of 280,000 shares of Common Stock to
entrenet at such time as the shareholders of the Company approved an increase in
the number of authorized shares of Common Stock to no less than 40,000,000. That
approval occurred on February 6, 1998, and the Company issued the 280,000 shares
to entrenet and five assignee members of entrenet as of April 3, 1998. See
"Certain Transactions - Transactions with Liviakis Financial Communications,
Inc. ("LFC") and Affiliates of LFC" and "Selling Security Holders."
The Company agreed to register the shares owned by and issuable to
entrenet, LFC and Messrs. Liviakis and Prag and other than the 290,000 shares
issuable to LFC under the New LFC Agreement and the 10,435 shares issuable upon
exercise of a Common Stock Purchase Warrant issued to entrenet as of March 12,
1998, such shares are included in the registration statement of which this
Prospectus is a part. LFC and Messrs. Liviakis and Prag have agreed not to sell
any of their shares until at least February 1, 1999, even though some of their
shares are being registered under the Registration Statement of which this
Prospectus forms a part. See "Certain Transactions," "Security Ownership of
Principal Shareholders and Management" and "Selling Security Holders."
Private Offering of 8% Adjustable Rate Convertible Subordinated
Debentures Due December 31, 1999. To satisfy its short term needs for capital,
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 $2,700,300, after paying finder's
commissions of $290,700 and additional expenses of the offering, which
approximated $69,000. The Company is using 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 is no less
than $4.00 per share of Common Stock for 270 days from December 10, 1997 (the
"Minimum Conversion Price"). After that 270 day period, the Minimum Conversion
Price is no longer applicable. The Conversion Price (and the Minimum Conversion
Price) are 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 does 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
had not obtained effectiveness of such a registration and as of June 30, 1998, a
4% penalty was applicable to the Conversion and Minimum Conversion Prices. 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 is issuable as dividends on the Series A Preferred Stock)
is
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included in the shares offered for sale pursuant to the Registration
Statement of which this Prospectus is a part. See "Description of Securities
Series A Preferred Stock" and "Selling Security Holders."
Private Offering of 6% Convertible Subordinated Debentures Due July 21,
2000. On July 27, 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 will be
approximately $20,000. The Company used $251,537 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 dated June 26,
1998, and will use the balance of the proceeds as working capital and to repay
existing obligations. RBB Bank Aktiengesellschaft, the record holder 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 Charles
Securities, Inc. of Boca Raton, Florida, acted as the primary finder in the
transaction and the Company paid JW Charles 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. One percent of the cash finder's fee payable to JW Charles
($14,000) is to remain in escrow and will be refunded to the Company if the 6%
Debentures are redeemed within 60 days of the initial issuance date, which was
July 22, 1998. In addition, JW Charles is entitled to receive 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
agreed to pay 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 amounts 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 have rights,
including registration rights as to the underlying shares of Common Stock
issuable upon conversion, which are substantially similar to the Series A
Preferred Stock described above. See "Description of Securities `- 6%
Convertible Subordinated Debentures Due July 21, 2000,' `- Common Stock Purchase
Warrants - Common Stock Purchase Warrants Expiring July 21, 2001,'" `- Common
Stock Purchase Warrants - Finder's Warrants'" and "Certain Transactions `-
Transactions with RBB bank Aktiengesellschaft' and `- Transactions with Liviakis
Financial Communications, Inc. ("LFC") and Affiliates of LFC.'"
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 $1.31 Million obligation. Direct Data was
left with no assets, ceased operations, and was dissolved on October 19, 1995.
As a result of the surrender of Direct Data's assets in settlement of the $1.3
million obligation and the dissolution of Direct Data in fiscal 1996, the
Company recognized a gain on restructuring of payables and debt of $2,332,411.
Industry Overview
- -----------------
Credit and Debit Card Industry
Americans reached for their plastic credit and debit cards over 32
billion times to purchase over $800 billion in goods and services in 1995,
however, nearly 80% of all retail payments were non-electronic. Credit card and
debit card purchases are growing at a rate of 16% annually with volumes expected
to reach $1 Trillion in 1997. 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, charge, stored-value and
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debit cards, 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
acquirors, 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.
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 (ISOs) 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 transaction processors.
Check Payment Industry
Checks are still the American consumers second favorite way to pay for
purchases, behind cash. Americans wrote 60 billion checks last year. Of
approximately $3 trillion worth of retail purchases nationwide, almost $700
billion were paid by check, of which approximately $13 billion were returned
unpaid for insufficient funds or other reasons.
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Nationwide, 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.
The Company's Products
- ----------------------
The Company manufactures a line of wireless point-of-sale ("POS")
terminals and wireless enabling products that allow a merchant to safely accept
credit and debit cards virtually anywhere cellular and/or CDPD service is
available. The Company's products comply with the recent payment acceptance
guidelines and allow a merchant to qualify for the lowest discount rates when
processing credit and debit card transactions.
The Company's wireless terminal and enabling products also can be
applied to expand check verification services to mobile and fixed retail
merchants where phone lines are either not available or too slow and expensive,
and the risks of accepting checks are high.
In addition, the Company has successfully adapted its terminals to
provide data processing capabilities to a Texas based company which processes
club membership verifications for customers of establishments serving alcoholic
beverages and for a recycling container company which is using the terminals to
monitor its unmanned aluminum recycling containers. See "Business - Marketing
Arrangements for the Company's Products and Related Services."
Initial Product Line - The POS-50(R)
The Company's first product, known as the POS-50(R), is the first
fully-integrated, wireless portable credit/debit card authorization and check
verification terminal. It is packaged in a compact, lightweight design which
includes an ergonomic handle for maximum portability. The battery operated
POS-50(R) uses a proprietary printed circuit board module to integrate a 3-watt
cellular transceiver, credit card terminal, rechargeable battery and a printer.
The POS-50(R) has been in the U.S. market since January 1994, and addresses the
mobile retail sales and service marketplace. A merchant can utilize the
POS-50(R) to safely accept and process a credit or debit card transaction
anywhere cellular voice service is available. With the cellular handset, the
terminal can also be used as a cellular telephone. The POS-50(R) may be operated
in a vehicle, at a weekend craft show or similar temporary locations, can be
carried from site-to-site or can be used at a fixed location. When a phone line
is available, intelligent circuitry recognizes the connection to a phone line
and automatically transmits data by telephone line without using the cellular
transceiver, thereby reducing cellular charges.
New 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 3-5
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. The POS-500 has been deployed with a number of small to
medium sized retailers as well as some high profile customers such as Villanova
University, The Houston Astrodome and some of the AT&T Wireless retail stores.
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TRANZ Enabler - The TRANZ Enabler, which is described in detail above, 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 or 380
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 or 380 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. In addition to credit and debit
card transactions, the TRANZ Enabler has recently been successfully tested in an
Electronic Benefit Transfer (EBT) application, a College student card
application and a vending machine application.
The Company's new 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.
Lower 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 lower transaction fees and discount rates. Favorable buy
rates under the NOVA MSP agreement also contribute to the Company's ability to
offer competitive rates. Lower transaction fees and discount rates are a key
component in the merchant's decision making process when evaluating a
transaction processing relationship that can have a positive effect on a
merchant's bottom line.
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.
Controls Bad Debt. All of the Company's products allow a merchant to obtain
an on-line authorization and electronically capture each credit card
transaction. Once the customer's credit 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 credit 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 insufficient
checks 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.
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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 negative file 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
authorization 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 NOVA 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 20,000 cellular phones being sold each day, cellular
voice technology is rapidly becoming 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 with new
digital technology. The Company believes 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
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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.
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. However, the Company recommends
that at least one dial-up line be maintained as a back up in the event that a
CDPD network interruption occurs.
Digital Cellular. Present cellular networks consist of digital and
analog technology. There are two digital voice technologies competing for market
acceptance and dominance: Code Division Multiplexing Access (CDMA) and Time
Division Multiplexing Access (TDMA). Both digital voice technologies have the
ability to transmit data over their respective networks, but a data standard is
presently not established. The Company perceives these networks as suitable for
nationwide POS applications if the pricing structure is competitive with other
packet data networks.
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 ("PCS")
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. The Company will
continue to evaluate the benefits and customer opportunities regarding PCS based
products and services.
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. The
Company believes, however, that BMD is not the most effective technology for
widespread deployment due to its data pricing structure, building penetration
inefficiencies and other factors.
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 suitable for POS data traffic,
but it is anticipated that over the next two years 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 major cities including San Francisco, Seattle, and Washington D.C. Metrocom's
Ricochet network is a low power 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.
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Markets
Current market research indicates that there are over 4 million
stand-alone credit card terminals installed in the U.S. market. In 1996,
1,088,000 POS terminals were shipped in the U.S. market, a 36% increase over
1995. One contributing factor to this healthy increase is the growth of debit
card processing and 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. In addition to the increased demand for debit-ready terminals, other
market segments are emerging for POS terminal devices including Electronic
Benefit Transfer (EBT) transactions.
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
often wherever the customer is located, 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. A recent research report estimates that the total North American
wireless POS market size is in excess of 4 million units and will increase over
5% annually.
International Applications
The same research report referenced above estimates that the total
international wireless POS market size is in excess of 4 million units and will
increase over 5% annually. The Company believes that international markets,
particularly Latin America, where land-based telephone lines are not in place or
are unreliable, represent realistic market potential for the Company's POS-500
and TRANZ Enabler products. The Company is presently evaluating its
international strategy and will enter these markets if it can establish a
recurring revenue model that is consistent with its business plan.
Several 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 expects that it may be able to leverage
its current cellular alliances to assist it in entering international markets.
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.
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
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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.
Upon termination of the agreement (for any reason other than deregistration 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.
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 a variety of ISO's,
cellular companies 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 billion in credit and debit card transactions for approximately
90,000 merchants. POS-50(R) sales to CSI accounted for approximately 53% and 25%
of the Company's total revenue in fiscal 1997 and 1996, respectively, and
approximately 17% of the Company's revenue for the nine month period ended March
31, 1998. Sales through CSI are expected to diminish as a percent of total
revenue as the Company shifts from an emphasis on selling boxes to selling
processing services. See "Certain Transactions - Transactions with Cardservice
International, Inc."
In addition to CSI, the Company has entered into distribution agreements
with several other ISO's to sell and provide help desk services for their
POS-50(R) customers. ISO's usually use a commission-only sales force to call on
merchants to offer their credit card processing services and terminal equipment.
Presently, ISO's sell or lease nearly 80% of all stand-alone credit card
terminals used in the marketplace.
The Company also sells its POS-50(R) units directly to merchants with or
without credit card processing services. The pricing structure the Company
offers on the units is considerably more favorable when purchased with credit
card processing than without due to recurring revenue the Company expects from
transaction processing fees and discount rate margins.
TRANZ Enabler and POS-500 Sales and Marketing Plan
Starting in fiscal year 1998, the Company is continuing to implement a
new sales and marketing strategy for its CDPD-based products and bankcard
processing services. The Company has determined that it will only sell or
provide these products to merchants that sign up for bankcard processing
services with the
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Company. This approach is the fundamental basis of the
Company's current sales and marketing strategy. 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 intends to market its products and bankcard processing
services through joint marketing and operating agreements with its cellular
alliances and through its own direct sales organization. Presently, the Company
is focused on launching the TRANZ Enabler and its bankcard processing program
with NOVA through a joint marketing effort with GTE Wireless's commercial and
major account sales representatives. In furtherance of that roll-out, the
Company has established an extensive sales and service support staff. The
Company has also recently entered into a similar joint marketing agreement with
Bell Atlantic Mobile, along with a new merchant acquiring agreement with
National Bank of Commerce ("NBC"). The Company will concentrate on developing
distribution of its products with associated processing services in conjunction
with these (and perhaps other) CDPD carrier partners, and through its own direct
sales force to major accounts. CDPD carrier partners provide an opportunity to
leverage large sales organizations in the distribution of the Company's products
and services to a large number of merchants, although to date the Company has
signed only one agreement to jointly market its products and services with a
CDPD carrier.
In furtherance of this approach, 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 seeking to convert their land-line based dial-up phone service to CDPD
service while continuing to use their VeriFone TRANZ 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. The Company has implemented its obligations and has approximately 28
support personnel trained and available to provide the services required of the
Company under the agreement. The GTE Agreement also requires 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
escalates 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 will be February 1, 1998. However, the Company has failed to meet even
the renegotiated minimum purchase obligations to GTE Wireless to date, although
GTE Wireless has acknowledged that its failure to perform certain of its
obligations under the agreement has contributed to this problem and has
therefore not demanded payment and expressed a willingness to renegotiate these
terms of the agreement. To date, placements under the agreement have not
materialized as the Company had expected, although activity levels have just
recently begun to improve as quotas have been implemented on the GTE sales
representatives as part of their compensation plans and they have become more
familiar with the Company's wireless solution. The Company's expenses in
implementing this agreement have far exceeded the revenues generated under the
agreement to date. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Results of Operations" and "Risk Factors -
Risks Involving the Company and Its Business - CDPD Resale Containing Minimum
Purchase Obligations."
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Agreements with Bell Atlantic Mobile. The Company has entered into two
agreements with Cellco Partnership, doing business as Bell Atlantic Mobile. The
first, a CDPD airtime reseller agreement was entered into as of 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. Under the agreement,
the Company is required to provide Bell Atlantic Mobile and approved merchants
with the following significant products and services: all sales, marketing and
technical support necessary to enable Bell Atlantic Mobile to include the
Company's products in its proposals to merchants; reasonable sales training
material for each Bell Atlantic Mobile sales representative who will be
marketing to retail merchants; a minimum of one USWD representative residing in
the applicable Bell Atlantic Mobile region(s) to coordinate all USWD
responsibilities for the program; a fully operational demonstration unit for
each Bell Atlantic Mobile sales representative selling the Company's solutions;
a fully configured merchant system within a period of ten business days
following the approval of the merchant application by the credit card processor
used by the Company, with certain exceptions where the quantity of hardware is
greater than 25 units per occurrence; and terminal units installed in merchant
locations of the qualified and approved merchants within sixteen business days
from the time the completed application and applicable merchant application fees
are delivered to the USWD representative, with certain exceptions where
additional information or paperwork is required from the merchant. The Company
is also required to indemnify and hold Bell Atlantic Mobile harmless for any
claims liabilities, costs, fees, penalties or fines arising out of failure to
file reports or fulfill any registration or audit obligations or which might be
asserted in any actions by any person based upon a claim against Bell Atlantic
Mobile of violation of any rules, regulations, laws, ordinances or charters
related to banking or credit card processing. With certain exceptions, the
Company is obligated to use Bell Atlantic Mobile CDPD Service 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. Following a training phase,
placements of the Company's products in Bell Atlantic Mobile service areas
commenced in June 1998.
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 which had been agreed to in
principal several weeks earlier. 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 Company must maintain at least one service
support person in each Ameritech designated CDPD market. The Company is
obligated to train the Ameritech sales representatives and to provide
appropriate promotional materials, timely process merchant applications
submitted by Ameritech sales representatives, timely place the USWD Solution
with merchants whose applications have been approved by the Company and its
designated processing entity, train the merchants in the use of the USWD
Solution and provide support services to merchants enrolled to use the USWD
Solution. The Company is required to provide a TRANZ Enabler to the merchant at
no additional charge beyond the application fee, deploy a fully configured TRANZ
Enabler with the merchant within ten business days following approval of the
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application by the processing company (for merchants where the quantity of
hardware is 25 units or less) and to schedule timely deployment with merchants
who require greater than 25 units. USWD is to pay Ameritech a one time fee for
each IP address activated per merchant. The agreement has a term of two years
and renews automatically for an additional two years. The agreement may be
terminated by either party 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.
Other CDPD Cellular Service Resale Agreements. As described below, the
Company has entered into a resale agreement to resell CDPD service provided by
AT&T Wireless Data, Inc. ("AT&T Wireless"). The Company intends to use the CDPD
service it will purchase in combination with the provision of transaction
processing services to merchants who want to utilize the Company's products to
satisfy their hardware needs. The Company also intends to enter into a joint
marketing agreement with AT&T Wireless which is similar to the marketing
agreements it has entered into with GTE Wireless and Bell Atlantic Mobile,
although no assurance can be given that the Company will be successful in
entering into such an agreement with AT&T Wireless or others. See "Risk Factors
- - Risks Involving the Company and Its Business."
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 have 1,000 active
numbers by the one year anniversary of the agreement, 3,000 active numbers
within 18 months and 4,500 active numbers within three years of April 1, 1997.
Each active number carries a minimum charge of $4.50 per month to USWD. The
Company has been meeting its IP address targets under the agreement. A
significant number of units have been placed under the Unicard Agreement
described below, utilizing AT&T Wireless CDPD service.
Agreement with Unicard Systems, Inc. On September 18, 1997, the Company
entered into an agreement with Unicard Systems, Inc., of Dallas, Texas pursuant
to which the Company is developing terminal application software that will
perform both the Unicard enrollment process as well as deliver wireless credit
card transaction processing to Unicard's customers. Unicard Systems will become
a registered agent of the Company and has placed an initial order for 400 TRANZ
Enabler units. Unicard Systems is a Dallas based service provider to over 500
restaurants and nightclubs in Texas. Those merchants use Unicard's card to
verify the right of purchasers of alcoholic beverages in their establishments.
The agreement with Unicard demonstrates the flexibility of the Company's
products to be adapted to specific, dedicated applications beyond simple credit
and debit card processing services. Through the end of June 1998 Unicard has
taken delivery of approximately 400 TRANZ Enablers.
Agreement with GoldCan Recycling, Inc. As of September 29, 1997, the
Company entered into a letter of intent to supply GoldCan Recycling, Inc. with
TRANZ Enabler units for wireless monitoring of its state of the art automated
aluminum recycling/redemption centers. This is the first application of USWD's
TRANZ Enabler technology outside the credit card/point-of-sale industry. USWD
will receive a monthly equipment and wireless service fee on every TRANZ Enabler
placed by GoldCan. This agreement further demonstrates the potential of the
Company's technology for uses in nontraditional markets. Although the Company
has successfully tested its technology for use on this application, no purchase
order had been executed by GoldCan as of June 30, 1998, and no assurance can be
given that GoldCan will choose to proceed to implement the Company's wireless
solution.
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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 Freemont, California based
manufacturer, builds the TRANZ Enabler product line, and Finite Technologies, of
Pueblo, Colorado manufacturers the POS-500 CDPD-based terminal line.
The Company recently entered an agreement with Wellex Corporation which
includes specific build schedules and operating terms for the manufacture of the
TRANZ Enabler. The Company's engineering team develops a detailed manufacturing
manual for each of its product lines and manages the manufacturing process with
each respective manufacturer.
With the exception of certain claims which are presently being arbitrated
between the Company and Novatel, Inc. (formerly Novatel Communications, Ltd.),
the Company has not experienced any significant problems concerning its
manufacturing relationships, quality control, product returns or warranty
coverage. See "Business - Legal Proceedings - Dispute with Supplier."
Inventory Financing
The Company's business plan calls for third party financing of all
merchant placements of TRANZ Enablers. The Company does not presently have
adequate capital to fund inventory in the quantities that it expects will be
needed to supply demand if and when placements through, for example, GTE
Wireless or other wireless carriers begin to be significant. See "Risk Factors -
Risks Relating to the Company and Its Business" and "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Financial Condition,
Capital Resources and Liquidity."
Agreement with GTE Leasing Corporation. To finance a portion of its
inventory requirements the Company entered into a Loan and Security Agreement
with GTE Leasing Corporation as of April 2, 1998, to fund the manufacture of
TRANZ Enabler units by Wellex which are or will be deployed through the GTE
Wireless joint marketing agreement. The agreement with GTE Leasing is in the
form of a revolving credit facility in the maximum amount of $1,200,000. If the
agreement becomes operative, GTE Leasing will pay the Company a fixed amount for
each TRANZ Enabler unit manufactured by Wellex for placement under the GTE
Wireless joint marketing agreement. At approximately $400 per unit, the Company
has the ability to finance up to 3,000 TRANZ Enabler units at any one time under
this agreement. The Company expects that repayment of the amounts financed under
the credit facility will be made from the recurring revenue generated by the
units placed under the GTE Wireless joint marketing agreement. However, the
Company is primarily obligated to repay all amounts owing under the credit
facility, irrespective of whether processing revenues are sufficient to pay such
amounts. To secure payment under the agreement the Company has granted GTE
Leasing a security interest in the units and the processing revenues from those
units. The agreement is terminable on certain defined events of default,
including the failure to pay any installment within ten days of its due date and
for other events of default which remain unremedied for ten days after notice is
given to the Company by GTE Leasing. The Company also entered into a Notice,
Consent and Agreement between itself, NOVA Information Systems, Inc. ("NOVA")
and GTE Leasing which acknowledges the obligation of NOVA to pay GTE Leasing
directly from amounts owed to the Company by NOVA for amounts owing by the
Company to GTE Leasing under the credit facility. However, GTE Leasing and GTE
Wireless are now requiring that prior to allowing the Company to draw funding
under the agreement, the Company must obtain the written consent of RegionsBank,
NOVA's acquiring bank, that it will honor the Company's revenue assignment to
GTE Leasing and pay over directly amounts owed to the Company in the event the
Company defaults on its obligations to pay GTE Leasing and/or GTE Wireless. The
Company is actively negotiating with all parties to obtain this consent
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and expects that it will be able to do so; however, no assurance can be given
that this consent will be obtained thereby allowing the Company to draw funding
under its agreement with GTE Leasing.
Third-party financing of the TRANZ Enabler units is a required element
of the Company's business model and the Company will seek similar financing
arrangements for units distributed through other marketing channels. The
inability to fund inventory needs from outside sources could have a material
adverse impact on the Company. See "Risk Factors - Risks Relating to the Company
and Its Business" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations - Financial Condition, Capital Resources and
Liquidity."
Equipment Deployment and Servicing
Until recently, the Company was doing its own equipment deployment and
servicing. However, as of January 26, 1998, it 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 fixed 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 with service in
the industry and the Company hopes that this relationship will insure a high
level of satisfaction in the Company's customers.
Customers
- ---------
Cardservice International, Inc. ("CSI"), has been the Company's single
largest customer, with sales to CSI representing approximately 25% and 53% of
the Company's POS-50(R) revenues for the fiscal years ended June 30, 1996 and
1997, respectively, and approximately 17% of the Company's revenue for the nine
month periods ended March 31, 1998. It is, however, expected that CSI will
become a much less significant factor in revenue under the Company's new
business plan, although sales of POS-50(R) terminals may continue to be made to
CSI.
The Company's remaining revenue to date has been comprised primarily of
sales of its products to a variety of ISO's and direct sales to merchants.
As noted above, the Company has developed a new sales and marketing
plan for its CDPD based products. If successfully implemented, joint marketing
and distribution agreements with major cellular carriers will provide the
Company with a much broader reach to merchant end-users. No assurance can be
given, however, that the Company will be successful in implementing this
business strategy. See "Risk Factors - Risks Relating to the Company and Its
Business."
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.
-50-
<PAGE>
Trademarks
The Company's name and POS-50(R) are registered trademarks of the
Company. The Company identifies its mark in all its marketing material and
advertising campaigns. The Company may register future product related
trademarks as appropriate and resources are available to do so.
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. The Company may pursue additional intellectual property
protection on its hardware and software products as appropriate and it 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 several potential competitors attempting to
develop CDPD-based terminals and solutions. Hypercom, a Phoenix-based terminal
manufacturer, has publicly announced their CDPD-based terminal product. The
Company perceives this product as direct hardware competition to the POS-500.
With the fundamental decision to enter the recurring revenue business, the
Company believes that it may be able to develop supplier relationships with its
perceived competitors which will essentially minimize potential direct
competition. See "Risk Factors - Risks Relating to the Company and Its
Business."
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 an 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.
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.
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<PAGE>
Research and Development
- ------------------------
A substantial portion 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, ending June 30, 1996 and 1997, the Company expended $458,407
and $406,522 respectively, on research and product development activities.
During the first nine months of the fiscal 1998 year, the Company spent
approximately $251,000 on research and development.
The Company employs four people who are engaged in research and
development. Current efforts are focused on CDPD-based products and on POS-50(R)
enhancement, including bringing a new manufacturer on line, cost reduction,
product efficiency and reliability, customization and software development. The
Company expects to add personnel to its R&D staff as the financial condition of
the Company improves and/or development contracts are obtained. It is
anticipated that the Company will spend approximately $350,000 on research and
development during the current fiscal year, based on present staffing levels and
projects currently under way, including development activities related to a
hand-held transaction processing unit.
Employees
- ---------
As of August 31, 1996, the Company had reduced its staff to 11 full-time
employees including its officers, sales and marketing staff, product research
and development team, technical and customer support staff and administrative
staff. Due to continuing financial pressure, headcount remained at approximately
this level and was at 8 full-time employees at June 30, 1997 and 11 employees on
August 31, 1997.
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, 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. See "Management" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
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
- -------
The Company had a backlog of orders as of September 1997 of approximately
200 TRANZ Enablers units due primarily to the lead time required to ramp up
production from its third party suppliers and a lack of adequate capital to fund
inventory purchases from the Company. From December 1997 through January 1998,
the Company had a backlog of POS-50(R) units, again due to a lack of prior
capital and the lead time required by its third party manufacturers to commence
production once capital to fund the purchases became available. As of June 30,
1998 there is no order backlog due to product unavailability.
The Company's financial condition has precluded it from obtaining credit
from its manufacturers and adequate capital will be required to assure an
uninterrupted production of inventory as needed. The Company is
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<PAGE>
hopeful that it will be able to obtain adequate third party financing for its
TRANZ Enabler inventory needs. However, despite the agreement with GTE Leasing
(under which the Company has not yet been able to draw funding), no assurance
can be given that this will be the case. See "Risk Factors - Risks Relating to
the Company and Its Business" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition, Capital
Resources and Liquidity."
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.
Properties
- ----------
The Company now occupies approximately 4,500 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 leased this space in
September 1997, at an initial rate of $9,942 per month commencing October 1997,
and continuing for a term of 5 years. The monthly rent will progress to a rate
of $11,640 in year five.
On October 23, 1996, the Company closed its Boulder office and
consolidated operations in Colorado Springs, Colorado, where it presently leases
approximately 1,200 square feet of office and laboratory space pursuant to a
lease which extends through July of 1998. The rent for this space is $1,200 per
month.
A customer service and POS-50(R) deployment office was open in Wheat
Ridge, Colorado from November 1996 through December 1997. The Company maintained
this space until it relocated its principal operations to California.
Legal Proceedings
- -----------------
Securities Class Actions Settlements
In September of 1996, the Company agreed to terms to settle 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 in consolidated Case No. 94-Z-2258,
Appel, et al. v. Caldwell, et al. 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 to RAS Securities Corporation, H.J. Meyers & Co,
Inc., Sands & Co. Ltd. and R.J. Steichen & Co. a total of 600,000 shares of
Common Stock 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, although
a substantial number of the shares have been sold under Rule 144 as of June 30,
1998, and the Company does not anticipate that it will be called upon to
register the shares. See "Risk Factors - Risks
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<PAGE>
Relating to the Company's Securities - Market Overhang; Registration Rights;
Possible Effect on Market for the Company's Common Stock."
Further, on September 17, 1997 the Company agreed to entry of a consent
judgment against it and in favor of Don Walford, the sole shareholder of
underwriter Walford Securities, Inc., in the amount of $60,000, payable over a
three year period.
Settlement with Consultant
In July of 1997, the Company executed a two-year agreement effective as
of April 1, 1997 for consulting services previously provided and to be provided
by Mr. Gary Woolley. In addition to monthly cash compensation, Mr. Woolley
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 note. A dispute arose
between Mr. Woolley and the Company and the consulting agreement was terminated
by the Company as of the end of August 1997. Mr. Woolley and the Company have
now settled their dispute by the payment to Mr. Woolley of a total of $60,000
(including amounts previously paid to Mr. Woolley as a consulting fee prior to
termination) for all services rendered by Mr. Woolley to the Company. 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 Stock by election of Mr.
Woolley made on or before April 1, 1998. The shares were to be issued as
"restricted securities" as defined under Rule 144 under the Securities Act of
1933. Mr. Woolley elected to convert the note to shares of Common Stock as of
January 26, 1998. The shares became saleable under Rule 144 commencing on April
1, 1998.
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
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<PAGE>
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. See "Risk Factors - Risks
Relating to the Company's Securities Market Overhang; Registration Rights;
Possible Effect on Market for the Company's Common Stock."
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 will pay Novatel
$50,000 over the sixty day period commencing June 30, 1998.
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DOCUMENTS FILED AS EXHIBITS
References made in this Prospectus to material contracts, agreements or
other documents are summaries only and are qualified in their entirety by
reference to the complete copy of the document which is filed as an Exhibit to
the Registration Statement of which this Prospectus is a part. Copies of such
documents can be obtained from the United States Securities and Exchange
Commission or from the Company by a written request addressed to the attention
of the Corporate Secretary. See "Available Information."
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MANAGEMENT
Directors and Executive Officers
<TABLE>
<CAPTION>
The following table sets forth information with respect to the
directors and executive officers of the Company.
Directors
Name Age Principal Occupation Director Since
---- --- -------------------- --------------
<S> <C> <C> <C>
Evon A. Kelly 57 Chief Executive Officer August 1997
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 1, 1998
entrenet Group, LLC
Roger L. Peirce 56 Self Employed Business July 22, 1998
Consultant
</TABLE>
Business Experience of Directors
Evon A. Kelly. Until joining the Company in August of 1997, and since 1991,
Mr. Kelly was president of Kelly Learning Alliance, a consulting firm he
founded, which addresses areas in human resource development, organizational
development and sales dynamics. Kelly Learning Alliance clients have included
Motorola, Xerox Corp. and NEC Corp. From 1988 to 1991, Mr. Kelly was Senior Vice
President of sales and operations at Wilson Learning Corp., where he was
responsible for developing and implementing sales and marketing strategies. From
1986 to 1988, Mr. Kelly was a regional vice president of store operations for
Federated Department Stores Inc., where he supervised over 1,500 employees and
was responsible for profit and loss performance. From 1973 to 1983, Mr. Kelly
held several key positions with Xerox Corp., including manager of supply
business center where he directed a national sales force of 400. Mr. Kelly
received his bachelor's degree in liberal arts from Boston College.
Rod L. Stambaugh. Mr. Stambaugh served as Chief Executive Officer of the
Company from October 1996 until August 1997, 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 and has devoted his full business time to the Company
since August 1991. He co-founded U.S. Wireless, Inc., a nonaffiliated retail
cellular phone center, at which he worked full time from January 1990 through
July 1991. Mr. Stambaugh served on the Company's Board of Directors from July
1991 through
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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.
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 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 joined Xerox in 1971 as a sales representative and held
various positions in addition to those described above, including executive
assistant to the President, Chairman and CEO from 1985 through 1987, Vice
President, Marketing Operations for Xerox' United States Marketing Group from
1987 through 1989 and Vice President, North American Systems Sales for Xerox'
Integrated Systems Operations from 1989 through 1991. Mr. Barton holds a
Master's Degree in Business Management from Stanford University. Mr. Barton also
serves on the boards of Avon Products, Inc., a publicly traded company, 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., an energy
services company that merged with EUA-Cogenics, a subsidiary of Eastern Utility
Associates, a publicly traded utility company. From March, 1989 until October,
1992 he was Chairman and Chief Executive Officer of Clinical Diagnostics, Inc.,
a home health care product distributor that merged with Polymedica, a publicly
held medical product distribution company. Mr. Winter has served in numerous
executive management positions with other companies, including Vice President of
Sinco International Investments, Inc. from 1986 through July, 1992, Vice
Chairman of Genro Corporation, a holding company with interests in financial
services, hotels, computer services and real estate, from October, 1982 through
September, 1986. Mr. Winter has also consulted with and served on the boards of
directors of numerous technology and growth companies over the last ten years.
He has consulting experience in seven countries with the International Executive
Service Corps and the South-North Development Initiative. 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. He served as Chairman and President of Imperial Bank from 1979
until 1984. In his 25 years with Bank of America from 1947 until 1979, he served
in various capacities including head of the International Banking Division,
Senior Credit Officer and Vice Chairman. In the latter capacity, he was in
charge of the Bank's worldwide commercial banking business. Mr. Rice has also
served as a Director of Memorex Corporation, Fairchild Camera & Instrument Co.,
and the
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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 Transactions - Transactions with entrenet
Group, LLC."
Roger L. Peirce. On July 22, 1998, the Company appointed Roger L. Peirce to
serve as a director of the Company. 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. Since 1963 until joining VISA, Mr.
Peirce worked for IBM, where his final position was that of national account
manager for VISA. While at IBM, he managed all IBM resources for several large
development contracts to build VISA's global systems. Mr. Peirce attended San
Jose State University where he earned a B.A. in Mathematics in 1963.
Committees
The Company has an audit committee which consists of Messrs. Barton, Berger
and Winter. During the fiscal year ended June 30, 1997 and until February 6,
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 1997;
however, these issues were discussed by the full board. The Company does not
have standing nominating or compensation committees. The functions which these
committees would perform are performed by the Board as a whole.
The Company's Board of Directors met once during fiscal year 1997. All
directors attended the meeting. Board actions were conducted primarily through
consultation among management and directors followed by consent resolutions
adopted by all members of the Board of Directors.
Other Significant Executive Officers
Other significant executive officers of the Company who are not also
directors are:
<TABLE>
<CAPTION>
Name Age Position with the Company Officer Since
---- --- ------------------------- -------------
<S> <C> <C> <C>
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
</TABLE>
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
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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. Prior to 1985, Mr. Robichaud held several financial positions with Mohawk
Data Services Corp. since 1978. Mr. Robichaud received a bachelors degree in
economics from Fairfield University in 1976 and an 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. From 1984 to 1989, he held key sales
management positions at Xerox Corp. including Major Account Manager and Program
Sales Manager.
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. Prior to 1993, he served as
Manager of Corporate Compensation and Director of Human resources at Borden,
Inc., Manager of Compensation at Avon Products, Inc. and Manager of Employment
at Bristol Meyers. He holds a Bachelors Degree in Economics from Xavier
University.
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 year
ended June 30, 1997. Mr. Stambaugh, the Company's CEO at June 30, 1997, did not
serve as CEO for the Company during the fiscal years ended June 30, 1996 and
1995. No other executive office of the Company received total compensation
during the fiscal year ended June 30, 1997 in excess of $100,000.
<TABLE>
<CAPTION>
Summary Compensation Table
=============================================================================================================================
Annual Compensation Long Term Compensation
- -----------------------------------------------------------------------------------------------------------------------------
Other Restricted
Annual Stock Securities All Other
Name and Principal Fiscal Salary Bonus Compen- Awards Underlying Compensa-
Position Year ($) ($) sation ($) ($) Options (#) tion ($)
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Rod L. Stambaugh, 1997 $79,881 $-0- (2) $-0- -0- $-0-
Chief Executive
Officer(1)
=============================================================================================================================
<FN>
(1) Mr. Stambaugh commenced service as CEO as of October 23, 1996. Mr. Stambaugh succeeded Mr.
Michael Brisnehan, who resigned as CEO at that time.
(2) No amounts are shown under "Other" as the aggregate incremental cost to
the Company of personal benefits provided to the executive officer did
not exceed 10% of his annual salary and bonus during the year.
</FN>
</TABLE>
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<PAGE>
Option Grants in Fiscal Year Ending June 30, 1997
As reflected in the following table, no options were granted to the Named
Executive Officer during the fiscal year ended June 30, 1997. Also reported are
the values for "in-the-money" options, which represent the positive spread
between the exercise price of any existing stock options owned by the Named
Executive Officer and the year-end price of the Company's Common Stock.
<TABLE>
<CAPTION>
Aggregated Option Exercises in Last Fiscal Year
and FY-End Option Values
=========================================================================================================================
Value of
Number of Securities Unexercised In-the-
Shares Underlying Unexercised Money Options at
Acquired on Value Options at FY-End (#) FY-End ($)
Name Exercise (#) Realized ($) Vested/Unvested Vested/Unexercisable(1)
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Rod L. Stambaugh -0- $-0- 133,400/21,600 $20,010/$3,240
=========================================================================================================================
<FN>
(1) Based on the average traded price of the underlying shares of Common Stock of $.28 per share at June 30,
1997, less the per share exercise price of the options.
</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 20,000 stock options were granted to one
non-employee director during the fiscal year ended June 30, 1997, and an
additional 40,000 options are issuable to two non-employee directors for
services rendered during fiscal year 1997. 20,000 options have been or will be
issued to each non-employee director (presently four people) during fiscal year
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. 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.
Employment Agreements and Change In Control Provisions
Evon A. Kelly. The Company presently has an employment arrangement with
Evon A. Kelly, its current CEO, pursuant to which Mr. Kelly receives $150,000 in
cash compensation per year, plus up to $150,000 in additional bonus
compensation, with criteria to be reviewed by the Board of Directors. 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
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<PAGE>
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, although the Company has no present commitment to grant any
bonus or options to Mr. Stambaugh at this time. It is anticipated that Mr.
Stambaugh will be entitled to participate in any performance-based bonus plan
approved by the Board of Directors.
Other Executive Officers. The Company also has employment arrangements with
Robert E. Robichaud, Clyde F. Casciato and Raymond J. Mueller. 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. He 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. Mr. Casciato receives a salary of $80,000 per year, and may be
entitled to a bonus of $30,000 for fiscal year 1998, based on the Company's
performance. Mr. Mueller receives a salary of $100,000 per year and may be
entitled to a bonus of $25,000 for fiscal year 1998, based on the Company's
performance. Messrs. Casciato and Mueller have been granted stock options under
the Company's 1992 Stock Option Plan to purchase 50,000 shares of Common Stock,
exercisable at $3.53 per share (for Mr. Casciato's options) and $6.34 per share
(for Mr. Mueller's options). The options have the same vesting schedule as Mr.
Robichaud's options. Mr. Casciato's date of hire was August 25, 1997; Mr.
Mueller was hired on November 24, 1997. These executive officers may also be
granted up to an additional 50,000 options based on the attainment by the
Company of certain performance goals under the terms of the executive bonus plan
as finally approved by the Board of Directors. Pursuant to the Amended 1992
Stock Option Plan, all options granted to these individuals 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 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 number of shares underlying options
available to the Plan was increased to 2,680,000 from 880,000 on August 6, 1997,
by the Board of Directors. 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
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<PAGE>
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 the time of grant and 25% at each six month
anniversary thereafter. See also "Management - Director Compensation," above.
Information regarding presently outstanding options is set forth in the table
below. See "Options Presently Outstanding Under the Plan," 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 all of the 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 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.
-63-
<PAGE>
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.
Options Presently Outstanding Under the Plan
As of May 31, 1998 there were a total of 607,781 options outstanding under
the Plan, 330,531 of which were vested at that date. Of the total options
outstanding at May 31, 1998, 237,781 were held by directors (one of whom is also
an officer of the Company), 157,781 of which were vested, 150,000 were held by
other executive officers, 49,500 of which were vested, and 220,000 were held by
employees or consultants of the Company, 123,250 of which were vested. The
weighted average exercise price of all options outstanding under the Plan as of
May 31, 1998, was $3.38. No additional options have been issued by the Company
either under or outside the Plan from May 31, 1998 through the date of this
Prospectus. See also "Management - Executive Compensation - Stock Option Plan."
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<PAGE>
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 May
31, 1998, by (i) each Director and Director appointee, (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
May 31, 1998 upon the exercise of warrants, options or other rights exercisable
for, or convertible into, Common Stock. As of May 31, 1998, there were a total
of 12,039,665 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 450, Emeryville, CA
94608.
<TABLE>
<CAPTION>
Certain Holders of Common Stock
Shares of Common Stock
----------------------
Beneficially Owned (1)
----------------------
Number Percent
of of
Name of Beneficial Owner Shares Class
- ------------------------ ------ -----
<S> <C> <C>
Rod L. Stambaugh................................................. 432,500 (2) 3.5%
Evon A. Kelly.................................................... 258,000 (3) 2.1%
Richard S. Barton................................................ 5,000 (4) *
Caesar Berger.................................................... 10,000 (4) *
Chester N. Winter................................................ 90,281 (5) 0.7%
Alvin C. Rice.................................................... -0- 0%
Roger L. Peirce -0- 0%
John M. Liviakis................................................. 4,110,000 (6) 34.0%
2420 "K" Street, Suite 220
Sacramento, CA 95816
Robert B. Prag................................................... 1,560,000 (7) 12.5%
2420 "K" Street, Suite 220
Sacramento, CA 95816
Liviakis Group................................................... 5,385,000 (8) 43.1%
2420 "K" Street, Suite 220
Sacramento, CA 95816
entrenet Group, LLC.............................................. 619,185 (9) 5.1%
1304 Southpoint Boulevard, Suite 220
Petaluma, CA 94954
All directors and executive officers as a group (9 persons)...... 971,965 (10) 7.7%
- ------------------
<FN>
* Represents less than 1% of outstanding shares.
-65-
<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 May 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 75,000 shares underlying a total of 75,000 options previously
exercised by Mr. Stambaugh but for which a share certificate had not been
issued as of May 31, 1998 and 80,000 shares underlying 80,000 options
exercisable within 60 days of May 31, 1998.
(3) Includes shares underlying a total of 258,000 options exercisable within 60
days of May 31, 1998.
(4) Represents shares underlying options exercisable at May 31, 1998 or within
60 days of May 31, 1998.
(5) Includes shares underlying a total of 77,781 options exercisable within 60
days of May 31, 1998.
(6) The information shown is based upon Schedule 13D/A (Amendment No. 2) dated
November 26, 1997 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 3,825,000 shares of Common Stock owned
by Mr. Liviakis as an individual, plus 285,000 shares of Common Stock
issuable to LFC and Mr.Robert B. Prag (as described in footnote (7) to this
table) pursuant to a consulting agreement between the Company and LFC
effective as of July 25, 1997, under which the Company was obligated to
issue 255,000 of the shares as of May 31, 1998 and 30,000 additional shares
of Common Stock within 60 days of May 31, 1998. The number of shares shown
does not include a total of 290,000 shares of Common Stock issuable to LFC
(217,500 shares) and Mr. Prag (72,500 shares) pursuant to a consulting
agreement entered into between the Company and LFC as of June 30, 1998,
which is to become effective as of August 1, 1998. See "Certain
Transactions - Transactions with Liviakis Financial Communications, Inc."
and "Selling Security Holders."
(7) The information shown is based upon Schedule 13D/A (Amendment No. 2) dated
November 26, 1997 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
875,000 shares of Common Stock and 400,000 shares of Common Stock
underlying warrants owned by Mr. Prag as an individual, plus the full
285,000 shares of Common Stock issuable to LFC and Mr. Prag as described in
footnote (6) 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. The number of shares shown does
not include a total of 290,000 shares of Common Stock issuable to LFC
(217,500 shares) and Mr. Prag (72,500 shares) pursuant to a consulting
agreement entered into between the Company and LFC as of June 30, 1998,
which is to become effective as of August 1, 1998. See "Certain
Transactions - Transactions with Liviakis Financial Communications, Inc."
and "Selling Security Holders."
(8) The information shown is based upon Schedule 13D/A (Amendment No. 2) dated
November 26, 1997 filed on behalf of the Liviakis Group. The number of
shares shown includes all shares of Common Stock included in footnotes (6)
and (7) to this table as to which any person in the Liviakis Group
exercises sole or shared voting and disposition power, except that the
285,000 shares issuable to LFC under the consulting agreement are included
only once in the share number shown despite being included in both Messrs.
Liviakis' and Prag's share ownership figures. The number of shares shown
does not include a total of 290,000 shares of Common Stock issuable to LFC
(217,500 shares) and Mr. Prag (72,500 shares) pursuant to a consulting
agreement entered into between the Company and LFC as of June 30, 1998,
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<PAGE>
which is to become effective as of August 1, 1998. See "Certain
Transactions - Transactions with Liviakis Financial Communications, Inc."
and "Selling Security Holders."
(9) 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. See "Certain Transactions - Transactions with
entrenet Group, LLC" and "Selling Security Holders."
(10) Includes all shares underlying options and warrants as described in
footnotes (2) - (5) of this table, plus 58,500 shares underlying options
issued to three additional executive officers which are exercisable within
60 days of May 31, 1998. See "Management - Executive Compensation." The
number of shares also includes 117,684 shares that remained subject to a
shareholder voting agreement and a call option as of June 15, 1998. The
voting agreement and call option were granted to the Company by Mr. Richard
P. Draper, the owner of such shares, in October 1995. Under this agreement,
the Company was granted authority to vote such shares in its discretion and
to purchase such shares from Mr. Draper at $.25 per share until October 5,
1998. As of March 12, 1998, the Company entered into an agreement with Mr.
Draper pursuant to which it paid Mr. Draper's assignee $25,000 and released
its voting and call option rights as to 30,000 of the shares in return for
Mr. Draper's consent to allow the Company to assign its call option as to
the remaining 367,684 shares to a third party. As of June 30, 1998, the
Company had assigned options to purchase all 367,684 shares of Common Stock
under this agreement. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations - Financial Condition,
Capital Resources and Liquidity - Sale of Call Options as to Certain Shares
of Common Stock" and "Certain Transactions - Transactions with RBB Bank
Aktiengesellschaft."
</FN>
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Certain Holders of Series A Preferred Stock
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%
All directors and executive officers as a group (9 persons)............
-0- 0%
RBB Bank Aktiengesellschaft (2)........................................
Burgring 16
8010 Graz Austria 1,600,000 52.3%
The Endeavor Capital Fund..............................................
14/14 Divrei Chaim Street
Jerusalem 94479 Israel 1,000,000 32.7%
CNCA - SCT Brunoy......................................................
Sub A/C BGP
30 Rue des Vallies
91300 Brunoy France 200,000 6.5%
<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.
(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. See "Selling Security Holders."
</FN>
</TABLE>
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<PAGE>
CERTAIN TRANSACTIONS
Transactions with Cardservice International, Inc.
- -------------------------------------------------
Mr. Caesar Berger, a director of the Company, is also an officer of
Cardservice International, Inc. See "Management." CSI has been involved with the
Company in what is primarily a customer - vendor relationship, and CSI purchased
approximately $698,000 and $398,000 in product from the Company in the fiscal
years ended June 30, 1997, and 1996, 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.
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 is 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. 75% of the shares are issuable to LFC and 25% are
issuable to Mr. Robert B. Prag, an executive officer of LFC. The Company has
agreed to register the 300,000 shares of Common Stock issuable to LFC and Mr.
Prag and those shares are included in the registration statement of which this
Prospectus is a part. See "Selling Security Holders." 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 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 will pay LFC $50,000, as its finder's fee for locating JW
Charles Securities, Inc., the finder used by the Company in the offering of the
8% Convertible Debentures and the 6% Convertible Subordinated Debentures. See
"Business - History of the Company - Recent Significant Securities Issuances `-
Private Offering of 8% Adjustable Rate Convertible Subordinated Debentures Due
December 31, 1999' and `- Private Offering of 6% Convertible Subordinated
Debentures Due July 21, 2000.'"
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. See "Security Ownership of Principal Shareholders
and Management." The Common Stock issued (and issuable pursuant to
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the Consulting Agreement 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. The shares of Common Stock that
LFC and Messrs. Liviakis and Prag can acquire by exercise of the Liviakis
Warrants and under the consulting agreement are being included in the
registration statement of which this Prospectus is a part. However, in
connection with the purchase of the Company's 8% Convertible Debentures by the
investors in that offering, LFC and Messrs. Liviakis and Prag agreed that they
will not commence sales any of their shares in the Company prior to February 1,
1999. 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. See "Selling
Security Holders."
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. To properly ascribe a fair value to the 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 $1,390,000 and recorded as prepaid consulting services with a
corresponding increase in equity. 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, 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 have the right to approve
the nominations of up to two non-employee directors. They have approved the
appointment of Richard S. Barton as a director of the Company but have not
exercised their rights regarding another director as of the date of this
Prospectus.
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. See "Business - History of the Company - Recent Significant
Securities Issuances - Private Offering of 8% Adjustable Rate Convertible
Subordinated Debentures Due December 31, 1999."
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 being included in the Registration
Statement of which this Prospectus is a part. 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 will not
be included in the registration statement of which this Prospectus is a part.
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
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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
which are acceptable to LFC. See "Business - History of the Company - Recent
Significant Securities Issuances," "Security Ownership of Principal Shareholders
and Management" and "Selling Security Holders."
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. See "Security Ownership of Principal Shareholders and Management." 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 debenture 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 of which this
Prospectus is a part. See "Selling Security Holders."
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 will
receive 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 financings of $2,000,000. 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. See "Description of Securities - entrenet
Warrant." 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 (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
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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.
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.
- ------------------------------
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. See "Management." 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
- ---------------------------------------------
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. See
"Description of Securities - Company's Option To Purchase Certain Shares."
Through June 15, 1998, the Company sold and assigned the Call Option on 250,000
of such shares to RBB Bank Aktiengesellschaft, the agent which owns 1,600,000
shares of the Company's Series A Preferred Stock. See "Selling Security
Holders." 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 $997,402 from the sale of these Call
Options to RBB Bank.
On June 26, 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
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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 additional bridge financing. In conjunction with this loan,
the Company also issued a Common Stock purchase warrant 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 of which this
Prospectus forms a part. 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. See "Description of Securities `- RBB Bank Promissory Note' and `- RBB
Bank Common Stock Purchase Warrant.'"
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 on July 22, 1998. See "Description of Securities `-
6% Convertible Subordinated Debentures Due July 21, 2000 and `Common Stock
Purchase Warrants - Common Stock Purchase Warrants Expiring July 21, 2001.'"
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.
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DESCRIPTION OF SECURITIES
Authorized Capital
- ------------------
The authorized capital stock of the Company consists of 40,000,000 shares
of no par value common stock (the "Common Stock") and 15,000,000 shares of no
par value preferred stock (the "Preferred Stock"), 4,000,000 shares of which
have been designated as Series A Cumulative Convertible redeemable Preferred
Stock (the "Series A Preferred Stock"). Because only 3,060,000 of the 4,000,000
shares of Series A preferred Stock were sold are outstanding, the Board of
Directors will likely remove 940,000 shares of the Series A Preferred Stock from
the designation and reinstate it as authorized and available for redesignation
and issuance.
Common Stock
- ------------
The Common Stock has attributes typical of common stock. Each share has
one vote on all matters submitted to shareholders and is entitled to participate
pro rata in all distributions made on the Common Stock after payment of all
preferences on any other class having superior rights. Cumulative voting in the
election of directors is not allowed and the Common Stock is not entitled to any
preemptive rights to purchase or subscribe for any securities to be issued by
the Company.
Transfer Agent for Common Stock
- -------------------------------
The transfer agent and registrar for the Common Stock is American
Securities Transfer & Trust, Inc. ("AST"). AST's operations center address is
938 Quail Street, Suite 101, Lakewood, Colorado 80215-5340 and its telephone
number is (303) 234-5300.
Certain Effects Of Authorized But Unissued Stock
- ------------------------------------------------
As of June 30, 1998, there are 22,351,166 shares of Common Stock
(including the reservation of a total of 1,017,241 shares of Common Stock
estimated to be issuable upon conversion of, and as dividends on, 3,060,000
shares of Series A Preferred Stock, based on a projected market price of $4.00
per share for the Common Stock at the time of conversion and payment of
dividends) and 11,940,000 shares of Preferred Stock available for future
issuance without further shareholder approval (subject to reservation of any
additional shares of Common Stock as may be necessary to honor: conversion
rights of, or dividends payable on, the Series A Preferred Stock if the market
price of the underlying Common Stock is less than $4.00 per share; or
antidilution provisions of any outstanding options, warrants or other
convertible securities). These additional shares may be utilized for a variety
of corporate purposes including future private or public offerings to raise
additional capital, to pay Company debts or to facilitate corporate
acquisitions.
One of the effects of the existence of unissued and unreserved Common
Stock and Preferred Stock may be to enable the Board of Directors to issue
shares to persons friendly to current management which could render more
difficult or discourage an attempt to obtain control of the Company by means of
a merger, tender offer, proxy contest or otherwise, and thereby protect the
continuity of the Company's management. Such additional shares also could be
used to dilute the stock ownership of persons seeking to obtain control of the
Company.
With respect to authorized and unissued Preferred Stock, the Board of
Directors may determine the rights, preferences, privileges and restrictions of
the unissued Preferred Stock without any further action by shareholders. The
purpose of authorizing the Board of Directors to determine such rights and
preferences is to eliminate delays associated with a shareholder vote on
specific issuances. The Board of Directors may issue Preferred Stock with voting
and conversion rights which could adversely affect the voting power of the
holders of Common Stock, and which could, among other things, have the effect of
delaying, deferring or preventing a change in control of the Company. However,
any issuance of preferred stock with voting rights could have the
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effect of reducing the Company's ability to use it
NOLs prior to expiration. See "Risk Factors - Risks Relating to the Company's
Securities - Possible Loss of NOLs."
The Company does not currently have any plans to issue additional shares
of Common Stock or Preferred Stock other than shares of Common Stock which may
be issued as dividends on, or in conversion of, the Series A Preferred Stock,
and upon the exercise of options, warrants and other present commitments to
issue Common Stock which have been granted to date or which may be granted in
the future to the Company's employees, nonemployee directors and consultants.
Certain Anti-Takeover Provisions of Colorado Law
- ------------------------------------------------
Under Section 7-106-205 of the Colorado Business Corporation Act, the
Board of Directors of a Colorado corporation may issue rights, options, warrants
or other convertible securities (hereafter "rights") entitling the holders of
the rights to purchase, receive or acquire shares or fractions of shares of the
corporation or assets or debts or other obligations of the corporation, upon
such terms as are determined by the Board of Directors, but subject to the
fiduciary duties of directors to the shareholders of the corporation. In the
absence of fraud, the judgment of the Board of Directors in determining the
adequacy of the consideration received by the corporation for the rights is
conclusive. The Board of Directors is free to structure the issuance or exercise
of the rights in a manner which may exclude "significant shareholders" from
being entitled to receive such rights or to exercise such rights or in a way
which may impose conditions on the exercise of such rights which is different
for "significant shareholders" as compared to other shareholders. The statute
defines "significant shareholder" as being any person owning, or offering to
acquire, directly or indirectly, a number or percentage, as specified by the
Board of Directors, of the outstanding voting shares of the corporation, or any
transferee of such person. By structuring and issuing rights of this type, the
Board of Directors could effectively prevent a takeover of the corporation by
persons deemed hostile to management. Nothing presently contained in the
Articles of Incorporation of the Company prohibits the Board from using these
types of rights in this manner.
Preferred Stock
- ---------------
The Company is authorized to issue a total of 15,000,000 shares of no par
value preferred stock (the "Preferred Stock") which is commonly known as "blank
check" Preferred Stock. The term "blank check" Preferred Stock refers to stock
for which the designations, preferences, conversion rights, cumulative,
relative, participating, optional or other rights, including voting rights,
qualifications, limitations or restrictions thereof are determined by the board
of directors of a company. The Board of Directors may designate a series and
issue shares of Preferred Stock for a variety of corporate purposes including
future private or public offerings to raise additional capital, to pay Company
debts or to facilitate corporate acquisitions, conversions of convertible
securities, employee benefit plans, stock splits effected in the form of stock
dividends, and other general corporate purposes. This can be done without any
additional shareholder approval, except as might be required by applicable stock
exchange rules. The Company is not presently subject to any stock exchange rules
which would require the Board to secure shareholder approval for such an
issuance of Preferred Stock.
There are presently 4,000,000 shares of Preferred Stock which have been
designated as Series A Cumulative Convertible Redeemable Preferred Stock (the
"Series A Preferred Stock"). A total of 3,060,000 shares of Series A Preferred
Stock are issued and outstanding. Such shares were issued as of February 9,
1998, upon designation of the Series A Preferred Stock, in exchange for
$3,060,000 of the Company's 8% Convertible Debentures. The Board of Directors
will likely dedesignate the remaining 940,000 shares of Series A Preferred
Stock, and those 940,000 shares will return to the status of authorized and
unissued shares of Preferred Stock. See "Description of Securities - Series A
Preferred Stock," below.
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Description of "Blank Check" Preferred Stock, Including Anti-Takeover
Implications
The Board of Directors may authorize the issuance, at any time or from
time to time, of one or more series of Preferred Stock, and would at that time
determine all designations, relative rights, preferences, and limitations of
such stock including but not limited to the following: designation of series and
numbers of shares; dividend rights; rights upon liquidation or distribution of
assets of the Company; conversion or exchange rights; redemption provisions;
sinking fund provisions; and voting rights.
One of the primary purposes of authorizing directors to designate and
issue shares of Preferred Stock is to eliminate delays associated with a
shareholder vote on specific issuances. The Board of Directors may, however,
subject to their duties to existing shareholders, issue Preferred Stock with
voting and conversion rights which could adversely affect the voting power of
the holders of Common Stock, and which could, among other things, have the
effect of delaying, deferring or preventing a change in control of the Company.
The Board of Directors is required to make any determination to issue shares of
Preferred Stock based on its judgment as to the best interests of the
shareholders and the Company; however, the Board of Directors could issue shares
of Preferred Stock that could, depending on the terms of such series, make more
difficult an attempt to obtain control of the Company by merger, tender offer,
proxy contest or other means.
While the Company may consider effecting an equity offering of Preferred
Stock or otherwise issuing such stock in the future for purposes of raising
additional capital or for acquisitions, the Company, other than the Series A
Preferred Stock that was immediately designated upon authorization of Preferred
Stock by the Company's shareholders, has no agreements or understandings as of
the date hereof with any third party to effect any such offering or acquisition,
or to purchase any shares offered in connection therewith, or to vote any such
shares, and no assurances are given that any offering will in fact be effected
or that an acquisition pursuant to which such shares may be issued will be
proposed and consummated. Therefore, the terms of any Preferred Stock that might
be designated and issued in the future by the Board of Directors (other then the
Series A Preferred Stock described herein) cannot be stated or estimated with
respect to any or all of the securities authorized.
Series A Preferred Stock
- ------------------------
The Company's Articles of Incorporation were amended by director action as
of February 9, 1998, to designate 4,000,000 shares of Preferred Stock as Series
A Cumulative Convertible Redeemable Preferred Stock (the "Series A Preferred
Stock"), following shareholder authorization of up to 15,000,000 shares of
Preferred Stock on February 6, 1998.
$3,060,000 of the Company's 8% Convertible Debentures, which were sold as
of December 10, 1997, automatically converted into 3,060,000 shares of Series A
Preferred Stock upon the authorization of the Series A Preferred Stock by the
Company. At the time of the offering of the 8% debentures the Company was not
authorized to issue Preferred Stock; consequently, the Company elected to issue
the 8% Convertible Debentures, subject to the condition that upon approval of an
adequate number of shares of Preferred Stock by shareholders, the 8% Convertible
Debentures would automatically convert into shares of Series A Preferred Stock
at the rate of one share of Series A Preferred Stock for each dollar of 8%
Convertible Debentures owned by an investor at the time. The 8% Convertible
Debentures therefore had essentially identical terms as the Series A Preferred
Stock into which they converted, insofar as the right to receive interest
(dividends on the Series A Preferred Stock), conversion rights, registration
rights relating to shares of Common Stock issuable upon conversion or as
interest on the 8% Convertible Debentures, and the Company's redemption rights.
Therefore, no description of the 8% Convertible Debentures has been included in
this section as none of the 8% Convertible Debentures remains outstanding as of
the date of this Prospectus.
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The Series A Preferred Stock is convertible into shares of Common Stock at
the option of the holders and dividends on the Series A Preferred Stock are
payable in shares of Common Stock, as described below. The shares of Common
Stock issuable upon conversion of, and as dividends on, the Series A Preferred
Stock, are being registered in the registration statement of which this
Prospectus is a part. See "Selling Security Holders."
The Series A Preferred Stock has the following rights and preferences.
Face Value
For all calculations for which a value of the Series A Preferred Stock is
needed, such as dividend payments and conversion ratios, the Series A Preferred
Stock has a designated face value of $1.00 per share, which was the equivalent
purchase price of the Series A Preferred Stock.
Conversion into Common Stock
The Series A Preferred Stock is convertible at the option of the Holder
into shares of Common Stock effective upon the earlier of (i) a declaration of
effectiveness by the SEC of a registration statement covering the Common Stock
into which the Series A Preferred Stock is convertible or (ii) 150 days from
December 10, 1997. The Series A Preferred Stock will be convertible into Common
Stock based on the face value of the Preferred Stock being converted at a rate
(the "Conversion Price") 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 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.
Subject to certain penalties for failure to obtain effectiveness of a
registration statement covering the shares of Common Stock issuable upon
conversion of, and as dividends payable on, the Series A Preferred Stock, within
150 days of December 10, 1997 (which is May 11, 1998), the Conversion Price will
in no case be less than $4.00 per share of Common Stock for the first 270 days
following December 10, 1997 (the "Minimum Conversion Price"). After such 270 day
period, the Minimum Conversion Price is eliminated. If the Company has not
obtained effectiveness of a registration statement covering the shares of Common
Stock issuable upon conversion of, and as dividends payable on, the Series A
Preferred Stock by May 11, 1998, the Conversion Price (or Minimum Conversion
Price, if then in effect) for the Series A Preferred Stock is discounted by two
percent (2%) off the then-existing Conversion Prices. An additional two percent
discount applies for each thirty day period (or fraction of any thirty day
period) during which the registration statement is not effective after such
150th day and such discount will apply thereafter to determine the Conversion
Price or Minimum Conversion Price applicable to the Series A Preferred Stock. As
of the date of this Prospectus, a discount of an additional six percent (6%) is
applicable to the Conversion Prices; therefore the Conversion Price is presently
the lesser of $6.00 per share or 74% of the Market Price and the Minimum
Conversion Price is $3.76 per share. No fractional shares of Common Stock will
be issued upon conversion of the Series A Preferred Stock; rather, a holder
entitled to a fractional share may receive the next higher whole number of
shares of Series A Preferred Stock if the fractional share to which such Holder
is otherwise entitled is equal to 0.5 or greater, or the next lower number of
whole shares if the fractional share to which such Holder is otherwise entitled
is less than 0.5. Instead of applying the rounding formula, the Company, at its
election, may pay cash in lieu of any fractional share otherwise issuable upon
conversion of the Series A Preferred Stock. The Company is obligated to deliver
share certificates to the holders of the Series A Preferred Stock within eight
business days of the date it receives a properly submitted conversion notice and
is subject to an escalating penalty (based on the face amount of the Series A
Preferred Stock being converted) of for each day beyond such eight day period
that delivery of share certificates is late.
The shares of Common Stock into which the Series A Preferred Stock is
convertible and which are issuable as dividends on the Series A Preferred Stock
are hereafter referred to as the "D/PS Common Stock."
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Dividends
Holders of the Series A Preferred Stock are entitled to receive cumulative
quarterly dividends, when, as and if declared by the Board of Directors, out of
the funds of the Company legally available therefor, at the option of the
holder, initially at a per annum rate of 8% per share. The dividend rate will be
reduced to 4% per annum upon initial effectiveness of an SEC registration
statement covering the shares of Common Stock into which the Series A Preferred
Stock is convertible. Dividends are payable as of the record dates of March 31,
June 30, September 30 and December 31 of each year, commencing on the first such
date following the date of original issuance of the Series A Preferred Stock.
Dividends on the Series A Preferred Stock will be cumulative from the date of
original issuance, and will be payable to holders of record as they appear on
the stock books of the Company on such record dates. Payment dates shall be no
more than 15 days after the record dates. Any unpaid dividends will bear
interest at the same rate as the dividend rate then in effect for the Series A
Preferred Stock. The accrued interest on the 8% Convertible Debentures which
converted into shares of Series A Preferred Stock on February 9, 1998, is to be
paid at the same time as the next dividend on the Series A Preferred Stock.
Unless the full amount of cumulative dividends on the Series A Preferred
Stock have been paid or sufficient funds set aside therefor, dividends may not
be paid or declared and set aside for payment and other distribution may not be
made on the Common Stock or any other stock of the Company ranking junior to the
Series A Preferred Stock as to dividends.
Under Colorado law, dividends or distributions to shareholders may be made
only under certain circumstances. Dividends or distributions may not be paid in
cash or property of the Company if after giving effect to such distribution the
corporation (1) would not be able to pay its debts as they become due in the
ordinary course or (2) the corporation's total assets would be less than its
total liabilities plus the amount that would be needed, if the corporation were
to be dissolved at the time of the distribution, to satisfy the preferential
rights upon dissolution of shareholders whose preferential rights are superior
to those receiving the distribution. The Company's ability to pay dividends in
the future may therefore depend upon its financial results, liquidity and
financial condition.
Registration Rights of Holders of Series A Preferred Stock
The Company entered into an agreement with the purchasers of the Series A
Preferred Stock to file a registration statement with the SEC covering the D/PS
Common Stock within 90 days of December 10, 1997 (which was March 10, 1998). The
Company agreed to use its best efforts to obtain effectiveness of the
registration statement. If the Company was unable to do so within 150 days of
December 10, 1997 (which was May 11, 1998), the Conversion Price (or Minimum
Conversion Price, if then in effect) for the Series A Preferred Stock is
discounted by 2% off the then-existing Conversion Price for each thirty day
period (or fraction of any thirty day period) during which the registration
statement is not effective after such 150th day. This discount then applies
thereafter to determine the Conversion Price or Minimum Conversion Price
applicable to the Series A Preferred Stock. The Company did not file the
registration statement by March 10, 1998, nor obtain its effectiveness by May
11, 1998 and as a result, as of the date of this Prospectus, a discount of an
additional six percent (6%) is applicable to the Conversion Prices; therefore
the Conversion Price is presently the lesser of $6.00 per share or 74% of the
Market Price and the Minimum Conversion Price is $3.76 per share. The Company is
to use its best efforts to maintain effectiveness of the registration statement
for 16 months from June 30, 1998. All expenses of the registration are to be
borne by the Company, except for selling expenses, commissions or counsel fees
incurred by or on behalf of the holders of Series A Preferred Stock.
The Company has also granted the holders of the Series A Preferred Stock
the right to be included in an unlimited number of "piggyback registrations" if
and when the Company registers any securities for its own
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account or for any other selling security holders, subject to certain
limitations in the event that such a registration is for an underwritten
offering of securities.
The Company and the holders of the Series A Preferred Stock have also
agreed to indemnify each other for certain liabilities to which they may become
subject in connection with the sale of the shares of Common Stock under any
registrations. See "Commission Position on Indemnification for Securities Act
Liabilities."
Liquidation Rights
In the event of any voluntary or involuntary liquidation, dissolution or
winding up of the Company, before any distribution of assets is made to holders
of Common Stock or any other stock of the Company ranking junior to the shares
of Series A Preferred Stock upon liquidation, dissolution or winding up, the
holders of Series A Preferred Stock shall receive a liquidation preference of
$1.00 per share and shall be entitled to receive all accrued and unpaid
dividends through the date of distribution. If, upon such a voluntary or
involuntary liquidation, dissolution or winding up of the Company, the assets of
the Company are insufficient to pay in full the amounts described above as
payable with respect to the Series A Preferred Stock, the holders of the Series
A Preferred Stock will share ratably in any such distributions of assets of the
Company first in proportion to their respective liquidation preferences until
such preferences are paid in full, and then in proportion to their respective
amounts of accrued but unpaid dividends. After payment of any such liquidation
preference and accrued dividends, the shares of Series A Preferred Stock are not
entitled to any further participation in any distribution of assets by the
Company.
A consolidation or merger of the Company with or into any other
corporation will not be deemed to be a liquidation, dissolution or winding up of
the Company, provided it is approved by a majority of the Series A Preferred
Stock.
Optional Redemption
The Series A Preferred Stock is subject to redemption in whole or in part
at the election of the Company upon not less than 30 nor more than 60 days'
notice by mail, at any time up to 270 days following December 10, 1997 if,
during such period, the closing bid price of the Common Stock for at least 20
trading days in any consecutive 30 trading day period is less than $4.00 per
share. To redeem the Series A Preferred Stock, the Company must pay 118% of the
principal amount being redeemed, together with accrued but unpaid interest owing
to the date of redemption. If the 20 day period falls wholly within the last 60
days of the 270 day period, then the Company will have a full 60 days from the
end of the 270 day period within which to redeem the Series A Preferred Stock.
The Company may also 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 are to be
redeemed, the shares to be redeemed shall be pro rata among all shares
outstanding. On and after the date fixed for redemption, provided that the
redemption price (including any accrued and unpaid dividends to but excluding
the date fixed for redemption) has been duly paid or provided for, dividends
shall cease to accrue on the Series A Preferred Stock called for redemption,
such shares shall no longer be deemed to be outstanding and all rights of the
holders of such shares as shareholders of the Company shall cease, except the
right to receive the monies payable upon such redemption, without interest
thereon, upon surrender of the certificates evidencing such shares.
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Voting Rights
The holders of the Series A Preferred Stock will have no voting rights
except as described below or as required by law. In exercising any such vote,
each outstanding share of Series A Preferred Stock will be entitled to one vote,
excluding shares held by the Company or any affiliate of the Company, which
shares shall have no voting rights.
As long as any Series A Preferred Stock is outstanding, the Company may
not, without the affirmative vote or consent of the holders of at least 50%
(unless a higher percentage shall then be required by applicable law) of the
outstanding shares of Series A Preferred Stock amend or repeal any provision of
the Company's Articles of Incorporation (including the Designation) or Bylaws
which would have the effect of altering, changing or amending the preferences,
rights, privileges, or powers of, or the restrictions provided for the benefit
of, the Series A Preferred Stock.
Right of First Refusal on Subsequent Financings
The holders of the Series A Preferred Stock have a right of first refusal
to purchase any equity securities offered privately by the Company. This right
continues until the share of Common Stock underlying the Series A Preferred
Stock have been registered with the SEC for public sale.
Transfer Agent and Registrar for Series A Preferred Stock
The Company acts as transfer agent and registrar for the Series A Preferred
Stock, which is not publicly traded.
6% Convertible Subordinated Debentures Due July 21, 2000
- --------------------------------------------------------
The Company completed an offering of $2,000,000 principal amount of 6%
Convertible Subordinated Debentures due July 21, 2000 (the "6% Debentures") on
July 27, 1998.
The 6% Debentures are payable in full two years after the date of initial
issuance, which was July 22, 1998 (the "Initial Issuance Date"), if not
converted to Common Stock before that date. The 6% Debentures pay interest in
cash at the rate of six percent (6%) per annum, payable quarterly in arrears at
each of March 31, June 31, September 31 and December 31 (with the first interest
payment due on or before January 15, 1999 for the entire period from the date of
issuance of the 6% Debentures through December 31, 1998).
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 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
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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.
Registration Rights of the 6% Debentures
The Company has agreed that it will file to register the Common Stock
underlying the 6% Debentures with the SEC within 75 days of 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 must 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 150th 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 incurred in registering the shares for the holders of
the 6% Debentures.
Common Stock Purchase Warrants
- ------------------------------
The Company presently has the following common stock purchase warrants
outstanding:
Liviakis Warrants
In August 1997, for total consideration of $500,000, the Company sold
3,500,000 shares of Common Stock and warrants to two affiliates of Liviakis
Financial Communications, Inc., Messrs. John Liviakis and Robert Prag. The
warrants entitle the holders to purchase up to 1,600,000 shares of the Company's
Common Stock at $.01 per share commencing January 15, 1998 and through August 4,
2002. The warrant shares (as well as the 3,500,000 shares issued to Messrs.
Liviakis and Prag, the 300,000 shares issuable under the consulting agreement
effective as of July 25, 1997 between the Company and Liviakis Financial
Communications, Inc. and any other shares of Common Stock that Messrs. Liviakis
or Prag own or have the right to acquire) carry registration rights which
entitle the holders of a majority of the shares to have such shares included in
any appropriate registration statement filed by the Company under the Securities
Act of 1933 for three years from August 4, 1998 (the "piggyback rights") plus a
one time right to have any shares owned or acquirable by such majority holders
registered upon demand. The Company must keep the registration statement open
for two years at its expense. The Liviakis Warrants also contain certain
antidilution provisions which protect the holders against issuances of Common
Stock at prices less than current market. Messrs. Liviakis and Prag have waived
these antidilution rights as to issuances of Common Stock dividends upon the
shares of Series A Preferred Stock. On May 12, 1998, 1,200,000 shares of Common
Stock were issued to Mr.
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John Liviakis upon exercise of his Common Stock
purchase warrants. See "Security Ownership of Principal Shareholders and
Management," "Certain Transactions - Transactions with Liviakis Financial
Communications, Inc. ("LFC") and Affiliates of LFC" and "Risk Factors - Risks
Relating to the Offering and the Company's Securities - Offering to Benefit
Certain Existing Shareholders and Other Persons Holding the Company's
Securities" and "Selling Security Holders."
Underwriters' Warrants
In connection with its initial public offering which was completed in
December 1993, the Company issued warrants to the underwriters of that offering
exercisable to purchase up to 165,000 shares of Common Stock at $12.325 per
share, through December 1, 1998 (the "Underwriters' Warrants"). The shares
underlying the Underwriters Warrants (the "U/W Shares") have registration rights
exercisable through December 1, 1999, that require the Company to register the
stock for public resale, two times only, on demand of the holders of a majority
of the Underwriters' Warrants and/or the U/W Shares. The first registration is
at the expense of the Company, while the second is at the expense of the holders
of the Underwriter's Warrants or U/W Shares. In addition, an U/W Shares carry
rights to be included in an unlimited number of "piggyback registrations"
through December 1, 2000, subject to certain restrictions if the offering(s) are
underwritten and the underwriter objects to inclusion of the U/W Shares. Should
the Company refuse to register the U/W Shares on demand, or fail to file the
demand registration statement within 75 days after demand is made (90 days under
certain circumstances) the Company is obligated to buy back the U/W Shares at a
price equal to fair market value (as defined in the warrant agreement) less the
exercise price of the Underwriters' Warrants.
The Underwriters' Warrants also contain anti-dilution provisions to
protect the holders against dilution in the event the Company issues shares of
Common Stock at less than market value (as defined in the Underwriters' Warrant
Agreement). Adjustments will be required to be made to the exercise price and
number of shares issuable upon exercise of the Underwriters' Warrants each time
Common Stock is issued at a discount to market pursuant to conversion of the
Series A Preferred Stock.
Former Management Warrants
Prior to going public, the Company issued three warrants to purchase a
total of 250,000 shares of Common Stock. The warrants were issued to one former
officer/director (two, 50,000 share warrants) (the "Directors's Warrants") and
one former officer (one 150,000 share warrant) (the "Officer's Warrants"). All
of these warrants are exercisable at $4.00 per share. The Director's Warrants
were originally exercisable through April 12, 1998; however, the Company has
agreed to extend the expiration date of the Directors' Warrants until the
earlier of six months from the effective date of a registration statement
including the shares underlying the 50,000 shares warrant which has registration
rights or April 12, 1999. The Officer's Warrant expires in April 2003. The
Company is obligated to register 50,000 shares underlying one of the Director's
Warrants on demand of the holder two times only, with the first registration at
Company expense and the second registration at the expense of the warrant
holder. The Company received a demand for registration of the 50,000 shares in
November 1997 and is including the shares underlying that Directors' Warrant in
the Registration Statement of which this Prospectus is a part. The expenses of
this registration are being borne by the Company. See "Selling Security
Holders." The other 50,000 share Director's Warrant had registration rights
which were satisfied by the Company by inclusion of the underlying shares in the
Company's initial public offering registration and does not have any additional
registration rights. The 150,000 share Officer's Warrant does not have
registration rights.
Direct Data Warrants
The Company issued warrants to purchase a total 29,548 shares of Common
Stock to the former shareholders of Direct Data, Inc., exercisable at $2.625 per
share. Of those warrants, 8,947 have been
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exercised, 5,752 have expired, and the remaining 14,849 expire as of May 31,
1998. The shares underlying the warrants have demand registration rights
exercisable two times only, by which the holders can demand to have the
underlying shares registered, at the Company's expense. Should the Company
become eligible to use Form S-3, the holders have an unlimited number of demand
registrations available under a Form S-3 registration, provided the aggregate
dollar amount of securities being registered for the holders exceeds $500,000.
In addition, the holders of the warrants have an unlimited number of "piggyback"
rights to have the shares underlying the warrants included in any registration
undertaken by the Company, subject to certain limitations applicable to
underwritten offerings. The shares underlying the warrants are included in the
registration statement of which this Prospectus is a part. See "Selling Security
Holders."
Finder's Warrants
In connection with the private offering of 8% Convertible Debentures closed
on December 10, 1997, the Company issued a Common Stock purchase warrant to JW
Charles Securities, Inc., of Boca Raton, Florida ("JW Charles") as part of the
finder's fee paid to JW Charles for services rendered to the Company in
connection in the offering. The warrant is exercisable to purchase 50,000 shares
of Common Stock at $6.525 per share at any time commencing on December 10, 1997,
and continuing until December 9, 2000. The warrant also provides for cashless
exercise. The warrant also contains antidilution protection to protect the
holder against certain issuances of Common Stock or securities convertible or
exchangeable for Common Stock at less than market value (as defined in the
warrant), although the antidilution provisions do not apply to issuances of
shares of Common Stock upon conversion of Series A Preferred Stock, options or
warrants outstanding as of December 10, 1997 or any options issued or issuable
under the Company's 1992 Stock Option Plan. The holders of the warrant also have
registration rights entitling them to a one time demand registration at any time
during the exercise period at the expense of the Company (subject to certain
relief if financial statements are required to be included other than those
normally prepared by the Company in the course of its ordinary reporting
obligations under federal securities laws), plus an unlimited number of
"piggyback" registration rights which entitle the holders to have the underlying
shares included in any registration undertaken by the Company, subject to
certain limitations in the event of an underwritten offering or as required by
prior outstanding registration rights granted by the Company. The registration
rights terminate entirely at such time as the underlying shares may be sold
under SEC Rule 144 without any volume restrictions within 90 days of the date of
issuance of such shares. The 50,000 shares underlying the warrant are included
in the registration statement of which this Prospectus is a part. See "Selling
Security Holders."
In connection with the private offering of 6% Convertible Subordinated
Debentures Due July 21, 2000, which was completed on July 22, 1998, the Company
issued a Common Stock purchase warrant to JW Charles as part of the finder's fee
paid to JW Charles for services rendered to the Company in connection in the
offering. The warrant is exercisable to purchase 60,000 shares of Common Stock
at $4.50 per share at any time commencing on July 22, 1998, and continuing until
July 21, 2001. The warrant also provides for cashless exercise. The warrant also
contains antidilution protection to protect the holder against certain issuances
of Common Stock or securities convertible or exchangeable for Common Stock at
less than market value (as defined in the warrant), although the antidilution
provisions do not apply to issuances of shares of Common Stock upon conversion
of Series A Preferred Stock, the 6% Debentures, options or warrants outstanding
as of July 22, 1998, or any options issued or issuable under the Company's 1992
Stock Option Plan. The holders of the warrant also have registration rights
entitling them to have the underlying Common Stock registered at the same time
as the stock underlying the 6% Debentures, at the expense of the Company, plus
an unlimited number of "piggyback" registration rights which entitle the holders
to have the underlying shares included in any registration undertaken by the
Company, subject to certain limitations in the event of an underwritten offering
or as required by prior outstanding registration rights granted by the Company;
provided that such registration rights do not include the holders to have the
underlying shares registered in the registration statement of which this
Prospectus is a part. The registration rights terminate entirely at such time as
the
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underlying shares may be sold under SEC Rule 144 without any volume restrictions
within 90 days of the date of issuance of such shares.
entrenet Warrant
As of March 12, 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 as of March 11, 2003. 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 with expenses of such
registrations to be borne by the Company. The holders of the warrant have agreed
to waive their registration rights with respect to the inclusion of the shares
in the Registration Statement of which this Prospectus forms a part. See
"Certain Transactions - Transactions with entrenet Group, LLC."
RBB Bank Common Stock Purchase Warrant
As of June 26, 1998, the Company issued a Common Stock purchase 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 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 of which this Prospectus forms a part. The
expenses of such registrations are to be borne by the Company. See "RBB
Promissory Note," below in this section, "Certain Transactions - Transactions
with RBB Bank Aktiengesellschaft" and "Selling Security Holders."
Common Stock Purchase Warrants Expiring July 21, 2001
In conjunction with the issuance of the 6% Convertible Subordinated
Debentures Due July 21, 2000, the Company issued, on a pro rata basis, three
year, Common Stock purchase warrants to purchase 100,000 shares of Common Stock,
exercisable at $4.25 per share. The warrants provide for cashless exercise and
contain antidilution protection to protect the holders against certain issuances
of Common Stock or securities convertible or exchangeable for Common Stock at
less than market value (as defined in the warrant), although the antidilution
provisions do not apply to issuances of shares of Common Stock upon conversion
of the 6% Debentures, any Series A Preferred Stock owned by a holder of the
Warrants, options or warrants outstanding as of July 22, 1998, or any options
issued or issuable under the Company's 1992 Stock Option Plan. The holders of
the warrant also have registration rights entitling them to have the shares of
Common Stock underlying the warrants registered at the same time as the stock
underlying the 6% Debentures, at the expense of the Company, plus an unlimited
number of "piggyback" registration rights which entitle the holders to have the
underlying shares included in any registration undertaken by the Company,
subject to certain limitations in the event of an underwritten offering or as
required by prior outstanding registration rights granted by the Company;
provided that such registration rights do not include the holders to have the
underlying shares registered in the registration statement of which this
Prospectus is a part. The registration rights terminate entirely at such time as
the underlying shares may be sold under SEC Rule 144 without any volume
restrictions within 90 days of the date of issuance of such shares.
Convertible Demand Notes
- ------------------------
From April - June, 1997 the Company issued promissory notes in the total
principal amount of $185,000 (the "Demand Notes"). These notes bore simple
interest of 10% per annum and were convertible to Common
Stock of the Company commencing on November 1, 1997. Principal and accrued
interest owing on the notes
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was convertible at $.35 per share (as to $75,000 of the notes) and $.50 per
share (as to $110,000 of the notes). The notes were payable in the fourth
quarter of 1998, if not previously converted to Common Stock. The notes became
the subject of a dispute between the Company and holders of $135,000 of the
notes. In April 1998, the Company and the complaining noteholders settled the
dispute by the Company agreeing to issue 1.4 times the number of shares
originally issuable on conversion of the notes (plus an additional 11,000 shares
to one Noteholder who purchased $50,000 of the Demand Notes) and provide the
noteholders with a guarantee and "put" option as to any shares remaining unsold
at the end of the one year period commencing on the dates the shares issued on
conversion of the notes became saleable under SEC Rule 144. On July 2, 1997, the
Company 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. The Note was not paid when due; rather, the investor claims a
representative of the Company promised her that the note would be converted into
a Demand Note. 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. See "Business - Legal Proceedings - Settlement of Claims of
Certain Noteholders" and "Risk Factors - Risks Involving the Company and Its
Business - Settlement of Claims of Certain Holders of Convertible Demand Notes."
PARAGRAPH DELETED HERE
RBB Bank Promissory Note
On June 26, 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 repaid in full, with interest of $1,537, as of July 22, 1998. The note
evidenced a short-term bridge loan and was required to be paid 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 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 additional bridge financing needed by the Company. This right must be
exercised within one day of RBB Bank being notified of the terms of any such
additional bridge financing. See "RBB Bank Common Stock Purchase Warrant," above
in this section under "Certain Transactions - Transactions with RBB Bank
Aktiengesellschaft" and "Selling Security Holders."
Possible Future Application of California General
Corporation Law to the Company and Its Shareholders
- ---------------------------------------------------
Under Section 2115 of the California General Corporation Law, foreign
corporations that exceed an average of fifty percent for "the property factor,
the payroll factor and sales factor" for its latest full income year (as
computed under the same methods as are used in computing franchise tax payable
in California) and which have more than one-half of the corporation's
outstanding voting securities (as determined pursuant to Section 2115) held of
record by persons having addresses in California, become subject to certain
specified chapters and sections of the California General Corporation Law upon
the first day of the first income year of the corporation commencing on or after
the 135th day of the latest income year during which the above-described tests
have been met or during which a final order has been entered by a court of
competent jurisdiction declaring that those tests have been met. The Company
believes that it presently exceeds the shareholder address test and is likely to
have
exceeded the other test as of the 135th day of its fiscal year ending June 30,
1999. The Chapters and Sections of the California General Corporation Law that
apply to a foreign corporation that exceeds these thresholds are: Chapter 1
(general provisions and definitions), to the extent applicable to the following
provisions; Section 301 (annual election of directors); Section 303 (removal of
directors without cause); Section 304 (removal of directors by court
proceedings); Section 305, subdivision (c) (filling of director vacancies where
less than a majority in office elected by shareholders);Section 309 (directors'
standard of care); Section 316 (excluding paragraph (3) of subdivision (a) and
Paragraph (3) of subdivision (f))
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(liability of directors for unlawful distributions); Section 317
(indemnification of directors, officers, and others); Sections 500 to 505,
inclusive (limitations on corporation distributions in cash or property);
Section 506 (liability of shareholder who receives unlawful distribution);
Section 600, subdivisions (b) and (c) (requirement for annual shareholders'
meeting and remedy of same not timely held); Sections 708, subdivisions (a), (b)
and (c) (shareholders right to cumulate votes at any election of directors);
Section 702 (supermajority vote requirement); Section 1001, subdivision (d)
(limitations on sale of assets); Section 1101 (provisions following subdivision
(e)) (limitations on mergers); Chapter 12 (commencing after Section 1200)
(reorganizations); Chapter 13 (commencing after Section 1300) (dissenters'
rights); Sections 1500 and 1501 (records and reports); Section 1508 (action by
Attorney General); and Chapter 16 (commencing after Section 1600) (rights of
inspection). Application of these provisions of the California General
Corporation Law to the Company may give greater or lesser protection to
shareholders in certain instances than is available to shareholders under
Colorado law, the Company's State of incorporation. Compliance with these
provisions of California law may be more or less onerous to the Company than
compliance with analogous provisions of Colorado law.
-86-
<PAGE>
SELLING SECURITY HOLDERS
This Prospectus relates to the resale of up to 7,240,356 shares of the
Company's Common Stock by the Selling Security Holders named below. The shares
being offered by the Selling Security Holders were or will be acquired in
transactions as follows:
<TABLE>
<CAPTION>
==========================================================================================================================
Number of Shares
Name of Selling of Common Stock Transaction by which Shares Purchased or
Security Holder Owned or Purchasable by Selling Security Holder
Acquirable
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
RAS Securities 66,000 Shares Shares underlying Underwriters' Warrant issued as of
Corporation December 2, 1993, in connection with the Company's
Initial public offering, exercisable at $12.325 per share.
See "Description of Securities - Common Stock Purchase
Warrants - Underwriters' Warrants."
- --------------------------------------------------------------------------------------------------------------------------
Robert A. Schneider 16,500 Shares Shares underlying Underwriters' Warrant issued as of
December 2, 1993, in connection with the Company's
Initial public offering, exercisable at $12.325 per share, which
have been assigned to Mr. Schneider, a principal of RAS Securities
Corporation. See "Description of Securities - Common Stock Purchase
Warrants - Underwriters' Warrants."
- --------------------------------------------------------------------------------------------------------------------------
James B. Walters 50,000 Shares Shares underlying common stock purchase warrant issued
as of April 12, 1993, exercisable at $4.00 per share. See
"Description of Securities - Common Stock Purchase
Warrants - Director's Warrants."
- --------------------------------------------------------------------------------------------------------------------------
Former Shareholders 18,796 Shares Shares issued or issuable upon exercise of common stock
of Direct Data, Inc. purchase warrants issued as consideration in the
acquisition of Direct Data, Inc., as of September 29,
1994, exercisable at $2.625 per share. The warrants
and/or shares are owned by the following individuals in
the following amounts: Peter Roehl - 3,947 Shares; K.M.
Lawlis and M.W. Lawlis, as Trustees for the K.M. Lawlis
1990 Revocable Trust - 8,459 Shares; Henry Nichols -
warrants to purchase 3,759 Shares; and Alan B. Roberts
(a former director officer and Director of the Company) -
warrants to purchase 2,631 Shares. See "Description of
Securities - Common Stock Purchase Warrants - Direct Data
Warrants."
-87-
<PAGE>
==========================================================================================================================
Number of Shares
Name of Selling of Common Stock Transaction by which Shares Purchased or
Security Holder Owned or Purchasable by Selling Security Holder
Acquirable
- --------------------------------------------------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------
entrenet Group, LLC 608,750 Shares 328,750 Shares issued upon conversion of a $150,000
and Affiliates Convertible Promissory Note issued as consulting fees as
of June 3, 1997; 280,000 Shares issued in payment of a
finder's fee owing under the consulting agreement dated
June 3, 1997. 165,200 of the 280,000 finder's fee Shares
have been assigned to various members of entrenet,
consisting of five persons, as follows: Alternative
Technologies International, Inc. - 74,200 Shares; J.A.
Billington & Associates, Inc. - 49,000 Shares; KBK
Enterprises, Inc. - 14,000 Shares; Timothy Jaeger -
14,000 Shares; and Eugene McCord - 14,000 Shares. See
"Certain Transactions - Transactions with entrenet Group,
LLC."
- --------------------------------------------------------------------------------------------------------------------------
Liviakis Financial 225,000 Shares Shares issued or issuable under a Consulting Agreement
Communications, effective as of July 25, 1997 between the Company and
Inc. LFC; although the shares are being included in this
("LFC") registration statement, they cannot be sold before February 1,
1999. See "Certain Transactions - Transactions with
Liviakis Financial Communications, Inc. ("LFC") and
Affiliates of LFC."
- --------------------------------------------------------------------------------------------------------------------------
John M. Liviakis 3,825,000 Shares 3,825,000 Shares, of which 2,625,000 of the Shares
(together with 1,200,000 Common Stock purchase
warrants) were issued under a Subscription Agreement
dated as of August 4, 1997 for total consideration of
$375,000; 1,200,000 Shares were issued upon exercise of
the Common Stock purchase warrants for $.01 per share;
although the Shares are being included in this registration
statement, they cannot be sold before February 1, 1999.
See "Certain Transactions - Transactions with Liviakis
Financial Communications, Inc. ("LFC") and Affiliates of
LFC."
- --------------------------------------------------------------------------------------------------------------------------
Robert B. Prag Up to 1,350,000 875,000 Shares owned outright and 400,000 Shares
Shares underlying Common Stock purchase warrants exercisable
at $01 per share; the Shares and the warrants were issued
under a Subscription Agreement dated as of August 4,
1997 for total consideration of $125,000; and 75,000
Shares issued or issuable under a Consulting Agreement
between the Company and LFC effective as of July 25,
1997; although the shares are being
included in this registration statement,
they cannot be sold before February 1, 1999.
See "Certain Transactions -
Transactions with Liviakis Financial
Communications, Inc. ("LFC") and Affiliates of LFC."
-88-
<PAGE>
==========================================================================================================================
Number of Shares
Name of Selling of Common Stock Transaction by which Shares Purchased or
Security Holder Owned or Purchasable by Selling Security Holder
Acquirable
- --------------------------------------------------------------------------------------------------------------------------
Brefo S.A. Up to 16,836 Shares 15,625 Shares estimated to be issuable upon conversion of
50,000 shares of Series A Preferred Stock; 997 Shares of
Common Stock estimated to be issuable as dividends on
the 50,000 shares of Series A Preferred Stock from April
1, 1998 through December 31, 1999; and 214 Shares of
Common Stock previously issued as interest on $50,000 of
8% Convertible Debentures (prior to conversion into
shares of Series A Preferred Stock) and as dividends on
the shares of Series A Preferred Stock, through March 31,
1998. See Footnote (1) to this table, immediately
following. See also, "Description of Securities - Preferred
Stock - Series A Preferred Stock."
- --------------------------------------------------------------------------------------------------------------------------
CNCA - SCT Brunoy Up to 67,340 Shares 62,500 Shares estimated to be issuable upon conversion of
Sub A/C BGP 200,000 shares of Series A Preferred Stock; 3,986 Shares
of Common Stock estimated to be issuable as dividends on
the 200,000 shares of Series A Preferred Stock from April
1, 1998 through December 31, 1999; and 854 Shares of
Common Stock previously issued as interest on $200,000
of 8% Convertible Debentures (prior to conversion into
shares of Series A Preferred Stock) and as dividends on
the shares of Series A Preferred Stock, through March 31,
1998. See Footnote (1) to this table, immediately
following. See also, "Description of Securities -
Preferred Stock - Series A Preferred Stock."
- --------------------------------------------------------------------------------------------------------------------------
Inversiones Wella, Up to 16,836 Shares 15,625 Shares estimated to be issuable upon conversion of
S.A. 50,000 shares of Series A Preferred Stock; 997 Shares of
Common Stock estimated to be issuable as dividends on
the 50,000 shares of Series A Preferred Stock from April
1, 1998 through December 31, 1999; and 214 Shares of
Common Stock previously issued as interest on $50,000 of
8% Convertible Debentures (prior to conversion into
shares of Series A Preferred Stock) and as dividends on
the shares of Series A Preferred Stock, through March 31,
1998. See Footnote (1) to this table, immediately
following. See also, "Description of Securities - Preferred
Stock - Series A Preferred Stock."
-89-
<PAGE>
==========================================================================================================================
Number of Shares
Name of Selling of Common Stock Transaction by which Shares Purchased or
Security Holder Owned or Purchasable by Selling Security Holder
Acquirable
- --------------------------------------------------------------------------------------------------------------------------
The Endeavor Up to 336,702 Shares 312,500 Shares estimated to be issuable upon conversion
Capital Fund of 1,000,000 shares of Series A Preferred Stock; 19,932
Shares of Common Stock estimated to be issuable as
dividends on the 1,000,000 shares of Series A Preferred
Stock from April 1, 1998 through December 31, 1999;
and 4,270 Shares of Common Stock previously issued as
interest on $1,000,000 of 8% Convertible Debentures
(prior to conversion into shares of Series A Preferred
Stock) and as dividends on the shares of Series A
Preferred Stock, through March 31, 1998. See Footnote
(1) to this table, immediately following. See also,
"Description of Securities - Preferred Stock - Series A
Preferred Stock."
- --------------------------------------------------------------------------------------------------------------------------
RBB Bank Up to 538,723 Shares 500,000 Shares estimated to be issuable upon
conversion Aktiengesellschaft, as of 1,600,000 shares of Series A
Preferred Stock; 31,890 agent Shares of Common Stock estimated to be
issuable as dividends on the 1,600,000 shares of Series A Preferred
Stock from April 1, 1998 through December 31, 1999;
and 6,833 Shares of Common Stock previously issued as
interest on $1,600,000 of 8% Convertible Debentures
(prior to conversion into shares of Series A Preferred
Stock) and as dividends on the shares of Series A
Preferred Stock, through March 31, 1998. See Footnote
(1) to this table, immediately following. See also,
"Description of Securities - Preferred Stock - Series A
Preferred Stock."
- --------------------------------------------------------------------------------------------------------------------------
Reg-S Up to 33,670 Shares 31,250 Shares estimated to be issuable upon conversion of
Intercontinental 100,000 shares of Series A Preferred Stock; 1,993 Shares
Investment, Ltd. of Common Stock estimated to be issuable as dividends on
the 100,000 shares of Series A Preferred Stock from April
1, 1998 through December 31, 1999; and 427 Shares of
Common Stock previously issued as interest on $100,000
of 8% Convertible Debentures (prior to conversion into
shares of Series A Preferred Stock) and as dividends on
the shares of Series A Preferred Stock, through March 31,
1998. See Footnote (1) to this table, immediately
following. See also, "Description of Securities -
Preferred Stock - Series A Preferred Stock."
-90-
<PAGE>
==========================================================================================================================
Number of Shares
Name of Selling of Common Stock Transaction by which Shares Purchased or
Security Holder Owned or Purchasable by Selling Security Holder
Acquirable
- --------------------------------------------------------------------------------------------------------------------------
L. Gene Tanner Up to 20,203 Shares 18,750 Shares estimated to be issuable upon conversion of
60,000 shares of Series A Preferred Stock; 1,196 Shares
of Common Stock estimated to be issuable as dividends on
the 60,000 shares of Series A Preferred Stock from April
1, 1998 through December 31, 1999; and 257 Shares of
Common Stock previously issued as interest on $60,000 of
8% Convertible Debentures (prior to conversion into
shares of Series A Preferred Stock) and as dividends on
the shares of Series A Preferred Stock, through March 31,
1998. See Footnote (1) to this table, immediately
following. See also, "Description of Securities -
Preferred Stock - Series A Preferred Stock."
- --------------------------------------------------------------------------------------------------------------------------
JW Charles 50,000 Shares Shares underlying common stock purchase warrant issued
Securities, Inc. as of December 10, 1997, exercisable at $6.525 per share
as a portion of a finder's fee paid to JW Charles
Securities, Inc. in conjunction with the private offering of
the Company's 8% Convertible Debentures. See
"Description of Securities - Common Stock Purchase
Warrants - Finder's Warrant."
==========================================================================================================================
<FN>
- ------------------
(1) The number of Shares estimated to be issuable upon conversion of, and as
dividends on, the Series A Preferred Stock is based on a hypothetical
market price of $4.00 per share for the underlying Common Stock at the
time of conversion and at each dividend payment date. The choice of this
hypothetical market price is based on recent prices of the Company's
Common Stock and the "floor" price that is applicable to conversion of the
Series A Preferred Stock for 270 days from December 10, 1997. No
implication should be drawn from the use of this hypothetical market price
for this purpose as to what value the Company ascribes to its Common
Stock.
</FN>
</TABLE>
The shares of Common Stock offered by this Prospectus may be sold from
time to time by the Selling Security Holders or by pledgees, donees, transferees
or other successors in interest. Such sales may be made in the over-the-counter
market, or otherwise at prices and at terms then prevailing or at prices related
to the then current market price, or in negotiated transactions. The shares may
be sold by one or more of the following: (a) a block trade in which the broker
or dealer so engaged will attempt to sell the shares as agent but may position
and resell a portion of the block as principal to facilitate the transaction;
(b) purchases by a broker or dealer as principal and resale by such broker or
dealer for its account pursuant to this Prospectus; and (c) ordinary brokerage
transactions and transactions in which the broker solicits purchasers. In
effecting sales, brokers or dealers engaged by the Selling Security Holders may
arrange for other brokers or dealers to participate. Brokers or dealers will
receive commissions or discounts from the Selling Security Holders in amounts to
be negotiated immediately prior to the sale. Such brokers or dealers and any
other participating brokers or dealers may be deemed to be "underwriters" within
the meaning of the Act in connection with such sales. In addition, any
securities covered by this Prospectus which qualify for sale pursuant to Rule
144 may be sold under Rule 144 rather than pursuant to this Prospectus.
Upon the Company being notified by any of the Selling Security Holders
that any material arrangement has been entered into with a broker-dealer for the
sale of shares through a block trade, special offering, or
-91-
<PAGE>
secondary distribution or a purchase by a broker or dealer, a supplemental
prospectus will be filed, if required, pursuant to Rule 424(b) under the Act,
disclosing (i) the name of the participating broker-dealer(s), (ii) the number
of shares involved, (iii) the price at which such shares were sold, (iv) the
commissions paid or discounts or concessions allowed to such broker-dealer(s),
where applicable, (v) that such broker-dealer(s) did not conduct any
investigation to verify the information set out or incorporated by reference in
this Prospectus and (vi) other facts material to the transaction.
The following table sets forth the names and certain information
concerning the Selling Security Holders.
<TABLE>
<CAPTION>
================================================================================================================================
Number of Shares Number of
Owned or Shares Percentage of
Acquirable Prior Number of Owned After Class After
Selling Security Holder to Offering (1) Shares Offered Offering Offering
================================================================================================================================
<S> <C> <C> <C> <C>
RAS Securities Corporation 66,000 66,000 -0- -0-
================================================================================================================================
Robert A. Schneider 16,500 16,500 -0- -0-
================================================================================================================================
James B. Walters 100,000 (2) 50,000 50,000 *
================================================================================================================================
Peter Roehl 3,947 3,947 -0- -0-
================================================================================================================================
K.M. Lawlis and M.W. Lawlis, as Trustees 8,459 8,459 -0- -0-
for the K.M. Lawlis 1990 Revocable Trust
================================================================================================================================
Henry Nichols 3,759 3,759 -0- -0-
================================================================================================================================
Alan B. Roberts 2,631 2,631 -0- -0-
================================================================================================================================
entrenet Group, LLC 453,985 (3) 443,550 10,435 (3) *
================================================================================================================================
Alternative Technologies International, Inc. 74,200 74,200 -0- -0-
================================================================================================================================
J.A. Billington & Associates, Inc. 49,000 49,000 -0- -0-
================================================================================================================================
KBK Enterprises, Inc. 14,000 14,000 -0- -0-
================================================================================================================================
Timothy Jaeger 14,000 14,000 -0- -0-
================================================================================================================================
Eugene McCord 14,000 14,000 -0- -0-
================================================================================================================================
Liviakis Financial Communications, Inc. 442,500 (4)(5) 225,000 (6) 217,500 (5) *
================================================================================================================================
John M. Liviakis 3,825,000 (4) 3,825,000 (6) -0- -0-
================================================================================================================================
Robert B. Prag 1,422,500 (4)(7) 1,350,000 (6) 72,500 (7) -0-
================================================================================================================================
Brefo S.A. 16,836 16,836 -0- -0-
================================================================================================================================
CNCA - SCT Brunoy Sub A/C BGP 67,340 67,340 -0- -0-
================================================================================================================================
Inversiones Wella, S.A. 16,836 16,836 -0- -0-
================================================================================================================================
The Endeavor Capital Fund 336,702 336,702 -0- -0-
==============================================================================================================================
-92-
<PAGE>
================================================================================================================================
Number of Shares Number of
Owned or Shares Percentage of
Acquirable Prior Number of Owned After Class After
Selling Security Holder to Offering (1) Shares Offered Offering Offering
================================================================================================================================
RBB Bank Aktiengesellschaft 608,723(8) 538,723 70,000(8) *
================================================================================================================================
Reg-S Intercontinental Investment, Ltd. 33,670 33,670 -0- -0-
================================================================================================================================
L. Gene Tanner 20,203 20,203 -0- -0-
================================================================================================================================
J. W Charles Securities, Inc. 110,000(9) 50,000 60,000(9) *
================================================================================================================================
<FN>
- -------------------
* Less than 1%.
(1) Represents shares owned or acquirable as described in the table immediately
preceding this table and/or as described in the footnotes to this table.
(2) Represents 100,000 shares underlying an immediately exercisable common
stock purchase warrants exercisable at $4.00 per share.
(3) Includes 10,435 shares underlying an immediately exercisable common stock
purchase warrants exercisable at $5.75 per share. See "Certain Transactions
- Transactions with entrenet Group, LLC."
(4) Does not include shares that the Selling Security Holder may be deemed to
own indirectly as a "beneficial owner" as described in the section of this
Prospectus entitled "Security Ownership of Principal Shareholders and
Management." See "Certain Transactions - Transactions with Liviakis
Financial Communications, Inc. ("LFC") and Affiliates of LFC."
(5) Includes 217,500 shares issuable to LFC pursuant to a consulting agreement
entered into between LFC and the Company as of June 30, 1998, effective as
of August 1, 1998. See "Certain Transactions - Transactions with Liviakis
Financial Communications, Inc. ("LFC") and Affiliates of LFC."
(6) These shares are not saleable by the named Selling Security Holder until
February 1, 1999. See "Certain Transactions Transactions with Liviakis
Financial Communications, Inc. ("LFC") and Affiliates of LFC."
(7) Includes 72,500 shares issuable to Mr. Prag pursuant to a consulting
agreement entered into between LFC and the Company as of June 30, 1998,
effective as of August 1, 1998. See "Certain Transactions - Transactions
with Liviakis Financial Communications, Inc. ("LFC") and Affiliates of
LFC."
(8) Includes 70,000 shares underlying two Common Stock purchase warrants that
are presently exercisable. See "Certain Transactions - Transactions with
RBB Bank Aktiengesellschaft." Does not include any shares underlying
$1,000,000 of 6% Convertible Subordinated Debentures Due July 21, 2000,
presently owned by RBB Bank. See "Certain Transactions - Transactions with
RBB Bank Aktiengesellschaft" and "Description of Securities - `- 6%
Convertible Subordinated Debentures Due July 21, 2000' and `- Common Stock
Purchase Warrants - RBB Bank Common Stock Purchase Warrants' and `- Common
Stock Purchase Warrants - Common Stock Purchase Warrants Expiring July 21,
2001.'"
(9) Includes 60,000 shares of Common Stock underlying a Common Stock Purchase
Warrant exercisable to purchase 60,000 shares at $4.50 per share until July
21, 2001.
</FN>
</TABLE>
The Company has agreed to indemnify certain of the Selling Security
Holders against certain liabilities, including liabilities under the Securities
Act of 1933, as amended (the "Securities Act"), or contribute to payment that
the Selling Security Holders may be required to make in respect thereof. See
"Commission Position on Indemnification for Securities Act Liabilities."
-93-
<PAGE>
LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for
the Company by Ireland, Stapleton, Pryor & Pascoe, P.C., Denver, Colorado.
CHANGE IN ACCOUNTANTS
The Company has not changed accountants in the last two fiscal years.
COMMISSION POSITION ON INDEMNIFICATION FOR
SECURITIES ACT LIABILITIES AND RELATED MATTERS
Colorado Business Corporation Act Provisions and the Company's Articles of
Incorporation and Bylaws
Sections 7-109-102 through 7-109-110 of the Colorado Business Corporation
Act (the "CBCA") permit indemnification of directors, officers, employees,
fiduciaries and agents of corporations under certain conditions and subject to
certain limitations, including for liabilities to which such persons might
become subject under the Securities Act of 1933, as amended (the "Securities
Act").
The Company's Articles of Incorporation do not contain any provisions
which would limit the availability of such indemnification to the fullest extent
available under the above-referenced statute. The Company's amended Bylaws,
which parallel the CBCA sections referred to above, provide that the Company
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending, or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, and whether formal or
informal, by reason of the fact that he is or was a director, officer, employee,
fiduciary or agent of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, partner, trustee, employee, fiduciary or
agent of any foreign or domestic profit or nonprofit corporation or of any
partnership, joint venture, trust, profit or nonprofit unincorporated
association, limited liability company, or other enterprise or employee benefit
plan (a "Proper Person"). The Company is required to indemnify Proper Person(s)
against reasonably incurred expenses (including attorneys' fees), judgments,
penalties, fines (including any excise tax assessed with respect to an employee
benefit plan) and amounts paid in settlement reasonably incurred by him in
connection with such action, suit or proceeding if it is determined by a
majority of a quorum of the Board of Directors consisting of Directors who are
not parties to the proceeding, or, if a quorum of such Directors is not
available, a committee of the Board consisting of at least two Directors who are
not parties to the proceeding or, if a proper committee cannot be seated or a
majority of the Board or the committee desire, an independent counsel selected
by a majority of the full Board, or a vote of shareholders, that the proper
Person conducted himself or herself in good faith and that he or she reasonably
believed (i) in the case of conduct in his official capacity with the Company,
that his or her conduct was in the Company's best interests, or (ii) in all
other cases (except criminal cases), that his or her conduct was at least not
opposed to the Company's best interests, or (iii) in the case of any criminal
proceeding, that he or she had no reasonable cause to believe his or her conduct
was unlawful. A Proper Person will be deemed to be acting in his or her official
capacity while acting as a director, officer, employee or agent on behalf of the
Company and not while acting on the Company's behalf for some other entity. A
Proper Person may apply to the court conducting the proceeding or to another
court of competent jurisdiction for an order requiring the Company to indemnify
such person if the court determines that the person is entitled to
indemnification under Colorado law and has met the criteria set forth in the
Company's Bylaws.
No indemnification is available to a person with respect to any claim,
issue or matter in connection with a proceeding by or in the right of the
Company in which the person was adjudged liable to the Company or in connection
with any proceeding charging that the person derived an improper personal
benefit, whether or not involving action in an official capacity, in which he or
she was adjudged liable on the basis that he or she derived an improper personal
benefit. Further, indemnification in connection with a proceeding brought by or
in the right of the Company is limited to reasonable expenses, including
attorneys' fees, incurred in connection with the proceeding.
-94-
<PAGE>
To the extent that the provisions of a Colorado corporation's Articles of
Incorporation or Bylaws provide for indemnification to a greater extent than is
available under the CBCA, such provisions are void. The Company believes,
however, that the indemnification provisions contained in its Bylaws are no more
liberal than those set forth in the CBCA.
Indemnification of Selling Security Holders
The registration rights agreements entered into between the Company and
certain of the Selling Security Holders contain provisions providing for mutual
indemnification against certain liabilities, including liabilities which might
arise under the Securities Act. In general, the Company is required to indemnify
such persons, to the full extent permitted by law, 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 or any
prospectus or any omission or alleged omission to state therein a material fact
necessary to make the statements therein, 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 Selling Security Holder
furnished to the Company by the Selling Security Holder expressly for use in the
registration statement or prospectus. The Company, its officers, directors and
controlling persons is entitled to indemnification on a reciprocal basis for
information contained in the registration statement or any prospectus which was
provided to it for use therein by a Selling Security Holder.
Commission Position on Indemnification for Securities Act Liabilities
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
Company, the Company has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as expressed
in the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Company of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless in the
opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
EXPERTS
The financial statements of the Company as of June 30, 1997 and for each of
the two years in the period ended June 30, 1997 included in this Prospectus have
been so included in reliance on the report (which contains an explanatory
paragraph relating to the Company's ability to continue as a going concern as
described in Note 1 to the financial statements for the period ended June 30,
1997) of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
-95-
<PAGE>
<TABLE>
<CAPTION>
U.S. WIRELESS DATA, INC.
INDEX TO FINANCIAL STATEMENTS
Page
<S> <C>
Report of Independent Accountants.....................................................F-2
Balance Sheet - as of June 30, 1997...................................................F-3
Statement of Operations - for the fiscal years ended
June 30, 1997 and June 30, 1996..............................................F-4
Statement of Cash Flows - for the fiscal years ended
June 30, 1997 and June 30, 1996..............................................F-5
Statement of Changes in Stockholders' Equity (Deficit) - for the period from
July 1, 1995 through June 30, 1997...........................................F-6
Notes to Financial Statements.........................................................F-7
- -----------------------------------------------------------------------------------------
Unaudited Financial Statements - for the period ended March 31, 1998
Balance Sheets --
March 31, 1998; June 30, 1997...............................................F-16
Statements of Operations --
Three Months and Nine Months Ended March 31, 1998 and 1997..................F-17
Statements of Cash Flows --
Nine Months Ended March 31, 1998 and 1997...................................F-18
Notes to Financial Statements...............................................F-19
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
- ---------------------------------
To the Board of Directors and
Stockholders of U.S. Wireless Data, Inc.
In our opinion, the accompanying balance sheet and the related
statement of operations, of changes in stockholders' equity (deficit) and of
cash flows present fairly, in all material respects, the financial position of
U.S. Wireless Data, Inc. (the "Company") at June 30, 1997, and the results of
its operations and its cash flows for each of the two years in the period ended
June 30, 1997, 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
audits 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 significant recurring losses from
operations and has an accumulated deficit of $16,960,853 that raise substantial
doubt about the Company's ability to continue as a going concern. Management's
plans in regard to this matter are described in Note 1. Additionally, due to
matters concerning the Company's ability to continue as a going concern, there
is also significant uncertainty surrounding the net realizable value of the
Company's inventory balances at June 30, 1997 (see Note 2). The financial
statements do not include any adjustments that might result from the outcome of
these uncertainties.
PRICE WATERHOUSE LLP
Boulder, Colorado
October 13, 1997
F-2
<PAGE>
U.S. WIRELESS DATA, INC.
<TABLE>
<CAPTION>
BALANCE SHEET
As of June 30, 1997
ASSETS
<S> <C>
Current assets:
Cash and cash equivalents .................................... $ 6,083
Accounts receivable, net of allowance
for doubtful accounts of $15,903 ........................... 120,531
Inventory, net ............................................... 208,867
Other current assets ......................................... 113,859
------------
Total current assets .................................... 449,340
Property and equipment, net ..................................... 40,445
Other assets .................................................... 11,495
------------
Total assets .................................................... $ 501,280
============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable ............................................. $ 354,213
Accrued liabilities .......................................... 125,587
Notes payable ................................................ 737,866
------------
Total current liabilities ............................... 1,217,666
Long Term Debt .................................................. 45,000
------------
Total liabilities ............................................... 1,262,666
------------
Commitments and contingencies (Notes 9 and 11)
Stockholders' equity (deficit):
Common stock, no par value,
12,000,000 shares authorized,
5,613,952 shares issued and outstanding, stated value $1.00 5,613,952
Common stock subscribed ...................................... 0
Additional paid-in capital ................................... 10,613,465
Accumulated deficit .......................................... (16,960,853)
Notes Receivable from Shareholder ............................ (27,950)
------------
Total stockholders' equity (deficit) ............ (761,386)
------------
Total liabilities and stockholders' equity (deficit) ............ $ 501,280
============
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
U.S. WIRELESS DATA, INC.
STATEMENT OF OPERATIONS
Fiscal Year Ended
June 30, June 30,
1997 1996
---- ----
<S> <C> <C>
Revenue ................................................. $ 1,315,542 $ 1,582,553
Cost of goods sold ...................................... 809,447 2,886,432
----------- -----------
Gross margin (deficit) .................................. 506,095 (1,303,879)
----------- -----------
Operating Expenses:
Selling, general and administrative ................. 812,687 1,365,235
Research and development ............................ 406,522 458,407
----------- -----------
1,219,209 1,823,642
----------- -----------
Loss from operations .................................... (713,114) (3,127,521)
Interest income ......................................... 94 685
Interest expense ........................................ (32,637) (33,621)
Other income ............................................ 44,873 (4,506)
Litigation settlement ................................... (163,600) 0
-------- -----------
Loss from continuing operations ......................... (864,384) (3,164,963)
----------- -----------
Loss from discontinued operation ........................ 0 (309,206)
----------- -----------
Loss before extraordinary item .......................... (864,384) (3,474,169)
Extraordinary gains on restructuring of payables and debt 0 3,431,823
----------- -----------
Net loss ................................................ $ (864,384) $ (42,346)
=========== ===========
Earnings (loss) per share:
From continuing operations .......................... $ (.17) $ (.72)
From discontinued operation ......................... 0 (.07)
From restructuring of payables and debt ............. 0 .78
---------- -----------
Net loss per share .................................. $ (.17) $ (.01)
=========== ===========
Weighted average common shares outstanding .............. 4,986,767 4,418,618
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
U.S. WIRELESS DATA, INC.
<TABLE>
<CAPTION>
STATEMENT OF CASH FLOWS
Fiscal Year Ended
June 30, June 30,
1997 1996
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .................................................................... $ (864,384) $ (42,346)
Adjustments to reconcile net income to net cash used in operating activities:
Gain on restructuring of payables and debt ............................. -- (3,431,823)
Loss due to market decline of inventory ................................ -- 1,525,026
Depreciation and amortization .......................................... 56,958 107,525
Stock issued for services .............................................. -- 3,880
Lawsuit settlement ..................................................... 163,600 --
Consulting services .................................................... 50,000 --
Loss on disposal of asset .............................................. (441) --
Debt relieved by product sales ......................................... (32,400) --
Changes in assets and liabilities:
Accounts receivable .................................................... (78,768) 197,293
Inventory .............................................................. 412,369 1,702,058
Other current assets ................................................... 21,847 93,048
Accounts payable ....................................................... 136,581 (46,764)
Accrued liabilities .................................................... (102,010) (686,707)
----------- ---------
Net cash used in operating activities ....................................... (236,648) (578,810)
--
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and furniture ........................................ -- (3,000)
Proceeds from sale of equipment ............................................. 499 23,296
(Increase) decrease in other assets ......................................... 11,261 (565)
----------- -----------
Net cash provided by (used in) investing activities ...................... 11,760 19,731
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt .............................................. 185,000 292,678
Net proceeds from issuance of stock ......................................... 5,621 12,650
----------- -----------
Net cash provided by (used in) financing activities ...................... 190,621 305,328
(DECREASE) IN CASH ............................................................. (34,267) (253,751)
CASH, Beginning of period ...................................................... 40,350 294,101
----------- -----------
CASH, End of period ............................................................ $ 6,083 $ 40,350
=========== ===========
Supplemental disclosures of cash flow information:
Cash paid during the year for interest ...................................... $ 13,833 $ 33,621
=========== ===========
Supplemental schedule of non-cash investing and financing activities:
Debt relieved with sale of inventory ........................................ $ 32,400 $ --
=========== ===========
Inventory purchased with stock .............................................. $ -- $ 162,500
=========== ===========
Issuance of debt for services/lawsuit settlement ............................ $ 210,000 $ --
=========== ===========
Stock issued for services/lawsuit settlement ................................ $ 109,046 $ 3,880
=========== ===========
Note executed for stock issuance ............................................ $ 27,950 $ --
=========== ===========
Non cash extinguishment of debt and payables
Fair value of assets transferred ......................................... $ -- $ 1,031,868
Payables and debt extinguished ........................................... -- 4,463,691
----------- -----------
Gains on restructuring of payables and debt .............................. $ -- $ 3,431,823
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE>
U.S. WIRELESS DATA, INC.
<TABLE>
<CAPTION>
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY (DEFICIT)
COMMON COMMON NOTE
STOCK STOCK PAID IN RECEIVABLE ACCUM.
SHARES AMOUNT SUBSCRIBED CAPITAL SHAREHOLDER DEFICIT
------ ------ ---------- ------- ----------- -------
<S> <C> <C> <C> <C> <C> <C>
BALANCES, June 30, 1995 ............................ 4,390,910 $ 4,390,910 $ -- $ 11,514,859 $ -- $(16,054,123)
Shares issued for services at $.10 - .46 per share 18,123 18,123 (14,243)
Stock options exercised at $.215 per share ....... 9,300 9,300 (7,300)
Warrant exercised at $.10 per share .............. 100,000 100,000 (90,000)
Director stock option exercised at $.13 per share 5,000 5,000 (4,350)
Stock subscription ............................... 142,544 19,956
Net loss ......................................... (42,346)
------------------------------------------------------------------------------
BALANCES, June 30, 1996 ............................ 4,523,333 $ 4,523,333 $ 142,544 $ 11,418,922 $ -- $(16,096,469)
Shares issued for services at $.15 per share ..... 102,975 102,975 (87,529)
Stock issued in connection with class lawsuit .... 600,000 600,000 (506,400)
Stock options exercised at $.13-.215 per share ... 245,100 245,100 (211,530)
Stock subscription issued ........................ 142,544 142,544 (142,544)
Note receivable on stock option plan ............. (27,950)
Net loss ......................................... (864,384)
Rounding ......................................... 2
==============================================================================
BALANCES, June 30, 1997 ............................ 5,613,952 $ 5,613,952 $ -- $ 10,613,465 $(27,950) $(16,960,853)
==============================================================================
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<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") was incorporated in the State of
Colorado on July 30, 1991. It designs, develops and manufactures a wireless
credit card authorization and check verification terminal utilizing both
analog and digital cellular network architectures. The Company began
generating its first significant revenue from product sales in fiscal 1995.
Prior to fiscal 1995, the Company was in the development stage. The Company
is now in a transition from only a "box maker" orientation to also
providing products and services which generate recurring revenue. The
recurring revenue component is expected to become the dominant component of
the Company's business.
Financial Condition
The Company has incurred an accumulated deficit of approximately $17.0
million since inception and has incurred additional losses subsequent to
the year ended June 30, 1997. In order to continue as a going concern, the
Company has transitioned to a recurring revenue focus, is working on
programs to increase revenue levels and product margins; is negotiating new
distribution agreements and seeking additional debt or equity financing.
Subsequent to June 30, 1997, the Company has strengthened the management
team, signed several significant distribution agreements which are expected
to build a recurring revenue base, started the expansion of the sales force
and expanded its contract manufacturing relationships. The current sales
volume is inadequate to fund the infrastructure growth and business
transition. As a result, and as part of its continuing effort to find
working capital funding in order to continue operations, the Company has
entered into certain consulting agreements designed to facilitate financing
relationships with third parties. While management is confident it can
accomplish this objective, there is no guarantee that this additional
funding will occur in the required time frame.
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 and 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.
Inventories
Inventories are stated at the lower of cost or market, cost being
determined by the first-in, first-out method.
F-7
<PAGE>
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.
Revenue Recognition and Major Customers
Direct sales are recognized upon shipment of products to customers. The
Company also leases products to customers with an option to buy. The
leasing arrangements are accounted for as sales-type leases. During fiscal
1997, Cardservice International, Inc. ("CSI") accounted for 53% of revenue.
During fiscal 1996, two customers, CSI and Superior Bankcard Services,
accounted for 25% and 11% of revenue, respectively.
Research and Development Costs
Research and development costs are expensed as incurred.
Net Loss Per Share
Net loss per share is based on the weighted average number of shares of
common stock outstanding during each respective period. Shares issuable
upon the conversion of stock options and warrants were not included in the
calculation since their effect was anti-dilutive.
Fair Value of Financial Instruments
The carrying value of assets and liabilities reported on the balance sheet
is a reasonable estimate of their fair value.
Recent Pronouncements
In February, 1997 the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 128, "Earnings per
Share". SFAS No. 128, which is effective for periods ending after December
15, 1997, requires changes in the computation, presentation, and disclosure
of earnings per share. All prior period earnings per share data must be
restated to conform with the provisions of SFAS No. 128. The Company will
adopt SFAS No. 128 during the fourth quarter of fiscal 1998, but does not
expect the new accounting standard to have a material impact on the
Company's reported loss per share.
In June, 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income". SFAS No. 130, which is effective for all periods 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 with
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.
F-8
<PAGE>
Reclassifications
Certain reclassifications have been made in prior year to conform to current
year presentation.
NOTE 2. INVENTORY
<TABLE>
<CAPTION>
June 30,
1997
----
Inventory consists of:
<S> <C>
Raw material $ 111,299
Finished goods 208,095
Spare parts and accessories 1,895
Lower of cost or market reserve (112,422)
-------------------
$ 208,867
===================
</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,
1997, based on current selling prices.
NOTE 3. PROPERTY AND EQUIPMENT
<TABLE>
<CAPTION>
June 30,
1997
----
Property and equipment consists of:
<S> <C>
Equipment and furniture $ 295,020
Tooling 124,267
Less: accumulated depreciation and amortization (378,842)
---------------------
$ 40,445
======================
</TABLE>
NOTE 4. ACCRUED LIABILITIES
<TABLE>
<CAPTION>
June 30,
1997
----
Accrued liabilities consists of:
<S> <C>
Accrued wages/commissions 38,115
Relocation expense 30,300
Accrued revenue and royalty 44,888
Litigation Settlement 10,000
Other 2,284
---------------------
$ 125,587
=====================
</TABLE>
F-9
<PAGE>
NOTE 5. NOTES PAYABLE
<TABLE>
<CAPTION>
Notes payable consist of the following:
June 30,
1997
----
Current Portion:
<S> <C>
Note payable - supplier $ 387,866
Notes payable - investors 185,000
Note payable - entrenet 150,000
Note payable - lawsuit settlement 15,000
---------------------
$ 737,866
=====================
Long-term portion of Note payable
- lawsuit settlement $ 45,000
=====================
</TABLE>
Note Payable - Supplier
The note payable to a supplier is currently in default. The Company
continues to accrue monthly interest payments. As of October 13, 1997, the
supplier had not called the note. The note bears interest at 8% and is
fully collateralized with certain inventory. The Company is currently in
discussion with the vendor regarding payment of the note and the accrued
interest.
Notes Payable - Investors
During the fourth quarter of fiscal 1997, the Company executed demand notes
with certain investors. The notes bear interest at 10% annually and are
convertible to common stock on or after November 1, 1997 at a conversion
price of $.35 per share ($75,000 of Notes) and $.50 per share ($110,000 of
Notes) for any or all outstanding principal and accrued interest. If not
converted, the notes are due in the fourth quarter of fiscal 1998.
Note Payable - entrenet
During June 1997, the Company executed a convertible debenture in exchange
for consulting services to be rendered during fiscal 1997 and 1998 by
entrenet Group, LLC. The debenture bears interest at 10% annually and is
convertible to common stock at a conversion price of $0.50 per share. If
not converted, the debenture is due June 3, 1998.
Note Payable - Lawsuit Settlement
As part of the class action 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. See additional discussion of
the lawsuit settlement in Note 11. - Litigation.
NOTE 6. STOCKHOLDERS' EQUITY
Stock Options
In September 1992, the Company adopted an incentive stock option plan and a
non-qualified stock option plan covering 600,000 shares of the Common
Stock. In October 1994, the Shareholders approved an amendment to the stock
option plan increasing the number of available shares to 880,000. In
December 1995, the Shareholders approved an amendment to the stock option
plan making certain clarifications to the plan and providing for the annual
grant of an option for 20,000 shares to non-employee directors.
F-10
<PAGE>
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 option plan
generally must be exercised no later than 10 years from the date of grant.
The following table summarizes information about stock options
outstanding at June 30, 1997:
<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>
$0.00 - $0.13 8.4 $0.13 262,849 $0.13 233,449
$0.14 - $0.22 8.4 $0.21 166,800 $0.21 128,400
------- -------
429,649 361,849
========= =======
</TABLE>
Stock option transactions for the years ended June 30, 1997 and 1996 were as
follows:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------
Weighted Average
Number of Exercise Price
Shares Per Share
-------------------------------
<S> <C> <C>
Balance at June 30, 1995 462,500 $3.67
Granted 827,849 $0.16
Exercised ( 14,300) $0.19
Terminated (482,500) $3.65
-------
Balance at June 30, 1996 793,549 $0.16
Granted 20,000 $0.16
Exercised (245,100) $0.14
Terminated (138,800) $0.22
-------
Balance at June 30, 1997 429,649 $0.16
=======
Exercisable at June 30, 1997 361,849 $0.18
========
</TABLE>
Notes Receivable from Stockholder
In connection with the resignation of the Company's former CEO, the Company
received a promissory note during October 1996 to fund the exercise of the
former CEO's stock options pursuant to the Company's Stock Option Plan. The
note evidences a three-year non-recourse loan which accrues interest at 6%
per annum.
SFAS No. 123
The Company applies APB No. 25 in accounting for its Stock Option Plan, and
no compensation expense has been recognized in the financial statements as
all options had been granted at the fair market value of the
F-11
<PAGE>
underlying common stock. 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,
1997 1996
---------------------
<S> <C> <C>
Net loss As reported ($864,382) ($42,346)
Pro forma ( 876,142) ( 58,562)
Net loss per common share As reported $(0.17) $(0.01)
Pro forma $(0.18) $(0.01)
</TABLE>
In accordance with the guidance under SFAS No. 123, fair values are based
on minimum values. The weighted average fair value of option is estimated
as $0.03 and $0.05 for options granted during fiscal year 1997 and 1996,
respectively, using the Black-Scholes option-pricing model with the
following weighted-average assumptions used for grants during the years
ended June 30, 1997 and 1996: dividend yield of zero; expected volatility
of 162% and 101%, respectively; risk-free interest rate of 6.4% and 5.5%,
respectively; and an expected term of 3.5 years. The risk-free rates used
in the calculation represent the average U.S. Government Security interest
rates on the stock option grant date with maturities equal to the expected
term of the options granted. The effect of actual forfeitures is included
in the computation of compensation cost for options granted during each of
the respective years.
Stock Warrants
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 expire April 12, 1998; 150,000
expire May 1, 2003. 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. In October 1994, warrants for the purchase
of 5,000 shares of common stock were exercised and 5,752 warrants expired.
The remaining 18,796 warrants expire May 31, 1998.
In October 1995, as partial consideration for entering into a development
contract, the Company issued warrants to a customer to purchase 100,000
shares of common stock at $0.10 per share. This warrant was subsequently
exercised during fiscal year 1996.
NOTE 7. INCOME TAXES
At June 30, 1997, the Company had net operating loss carryforwards for
federal income tax purposes of approximately $11,700,000. 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.
F-12
<PAGE>
Deferred income taxes reflect the net tax effects of: (a) temporary
differences between the carrying amounts of assets and liabilities for
financial reporting purposes and the amounts used for income tax purposes,
and (b) 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,
1997 1996
---- ----
<S> <C> <C>
Deferred tax assets
Net operating loss carry-forwards $ 4,388,000 $ 3,880,000
Depreciation ( 3,000) ( 12,000)
Inventory reserves 31,000 195,000
Allowance for bad debts 6,000 35,000
Other 28,000 28,000
----------------- ------------------
$ 4,450,000 $ 4,126,000
Valuation allowance ( 4,450,000) ( 4,126,000)
----------------- ----------------
Net deferred tax asset $ -- $ --
===================== ================
</TABLE>
Deferred tax assets have been reduced to zero by a valuation allowance
based on current evidence which indicates that it is not considered more
likely than not that these benefits will be realized. During fiscal 1997,
the valuation allowance increased by $324,000 primarily due to additional
losses for which no tax benefit was recorded. During fiscal 1996, the
valuation allowance decreased by $1,090,000 primarily due to the
dissolution of Direct Data.
The difference between the zero provision for income taxes and the expected
amount determined by applying the federal statutory rate to the loss before
income taxes results primarily from a reduction of net operating loss
carryforwards due to an increase in the valuation allowance for the year
ended June 30, 1997 and due to the dissolution of Direct Data for the year
ended June 30, 1996.
NOTE 8. 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 1997.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases its office facilities under various operating lease
arrangements. Most of the leases contain certain provisions for rental
adjustments. In addition, the leases require the Company to pay property
taxes, insurance and normal maintenance costs. Future minimum rentals under
these arrangements are $18,105 in 1998. Rent expense was $73,550 during
fiscal 1997 and sublease income of $16,680 was received during fiscal 1997.
In September 1997, the Company executed a lease for office space in
Emeryville, California. Rental payments commence October 1, 1997 at an
initial rental rate of $9,942 per month for a term of 5 years. In year
five, the rental rate increases to $11,640 per month.
F-13
<PAGE>
NOTE 10. EXTRAORDINARY GAINS AND DISCONTINUED OPERATION
During the year ended June 30, 1996, the Company recognized $3.4 million in
gains related to the restructuring of debt and payables as follows:
<TABLE>
<S> <C>
Release of guarantee of bank debt by former officer of Direct Data $ 593,132
Release of liability for inventory by supplier 1,099,412
Liabilities of dissolved Direct Data subsidiary 1,739,279
-----------------
$ 3,431,823
=================
</TABLE>
The release of guarantee of bank debt by a former officer of Direct Data
("the Officer") occurred as a result of the September 1995 demand for
payment by a financial institution creditor of a $1.3 million loan made to
Direct Data. The loan was guaranteed by the Officer who paid the loan and
became a security holder of Direct Data's assets in early October 1995. The
Company was obligated to remove the Officer from his guarantee of the bank
loan, and in consideration for release of such liability, surrendered the
assets of Direct Data to the Officer on October 5, 1995. The excess
carrying value of the debt over the book value (which approximated fair
value) of the assets surrendered in satisfaction of the obligation was
$593,132. In connection with this transaction, the Officer granted the
Company an option to repurchase 397,684 shares of Company stock from the
Officer at a price of $.25 per share, as well as the right to vote such
shares.
During its fiscal year 1995, the Company entered an agreement with a
supplier, whereby the Company became liable for the purchase of certain raw
materials the supplier procured for manufacturing of Company products.
During 1996, the Company and the supplier agreed that the Company would
settle the liability of $1.4 million for consideration of approximately
$325,000, and that the Company or its designee would take possession of the
raw materials. Accordingly, the Company has recognized a gain of $1.1
million as a result of restructuring the liability during fiscal year 1996.
During October 1995, the Company dissolved Direct Data. Upon the
dissolution of Direct Data, approximately $1.7 million of unsecured trade
debt remained unpaid and the creditors were notified that Direct Data would
be unable to pay its remaining obligations. The Company believes it has no
liability for future claims arising from the unpaid obligations of Direct
Data; therefore, such unpaid obligations have been recognized by the
Company as a gain from restructuring of liabilities of the dissolved Direct
Data subsidiary during fiscal 1996.
Management believes Direct Data represented a separate and material line of
business from the Company. The pretax loss on disposal has been accounted
for as a loss from discontinued operations and prior years financial
statements have been reclassified to reflect the disposition. Revenue of
Direct Data for the year ended June 30, 1996 was $657,667.
NOTE 11. LITIGATION
In September of 1996, the Company agreed to terms to settle securities
fraud litigation, pending since 1994, which was brought in relation to the
Company's initial public offering of 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 in consolidated Case N0.
94-Z-2258, Appel, et al. v. Caldwell, et al. By its order approving the
settlement, the court certified a plaintiffs' settlement class and provided
the mechanism for payment of claims. The Company contributed directly or by
indemnification a total of $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
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
F-14
<PAGE>
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.
To resolve cross-claims asserted by underwriters in the litigation, U.S.
Wireless Data, Inc. agreed to transfer to RAS Securities Corporation, H.J.
Meyers & Co, Inc., Sands & Co. Ltd. and R.J. Steichen & Co. a total of
600,000 U.S. Wireless Data, Inc. common shares upon the effective date of
the Settlement Agreement. The Company has agreed to register such shares
upon demand not sooner than April 26, 1998. Further, on September 17, 1997
the Company agreed to entry of a consent judgment against it and in favor
of Don Walford, the sole shareholder of underwriter Walford Securities,
Inc., in the amount of $60,000, payable over a three year period.
The total charge recognized during fiscal 1997 consists of the following:
$93,600 for the value of the common shares issued based upon the fair
market value of the Company's common stock on the date the commitment of
such shares was made; $10,000 for actual cash to be paid by the Company
pursuant to the settlement with stockholders; and $60,000 for the note
payable executed with Don Walford as discussed above.
NOTE 12. RELATED PARTIES
A director of the Company is also an officer of the Company's largest
customer, Cardservice International, Inc. ("CSI"). Additionally, CSI owns
approximately 5% of the Company's outstanding common stock as of June 30,
1997. Sales to CSI approximated $698,000 and $398,000 in fiscal years 1997
and 1996, respectively.
During fiscal 1996, CSI advanced the Company $162,500 for the purchase of
raw materials in exchange for 142,544 shares of common stock issued
subsequent to June 30, 1996 at 150% of then current fair market value plus
registration rights after one year on all stock owned by CSI. This
transaction increased CSI's ownership to from 2% to 5%. Additionally, the
Company will make royalty payments to CSI on future sales of POS-50(R)
product built with the raw materials purchased using the amounts advanced
from CSI. As of June 30, 1997, no units were built using the raw materials
referred to above.
NOTE 13. SUBSEQUENT EVENTS
In August 1997, the Company received $500,000 for the issuance of 3.5
million unregistered shares of common stock and 1.6 million warrants to
purchase common stock at an exercise price of $0.01 per share to two
officers of Liviakis Financial Communications, Inc. ("Liviakis"). The
warrants are exercisable from January 15, 1998 through August 4, 2002.
Additionally, in July 1997, the Company executed a one year consulting
agreement with Liviakis for consulting services to be rendered during
fiscal 1998 and 1999. Fees related to the agreement are payable in cash of
$10,000 and stock, the issuance of 300,000 shares of common stock to occur
at various times during the consulting agreement, commencing November 15,
1997.
The Liviakis securities carry future registration rights, including a
one-time demand registration, with fees to be paid by the Company.
On August 4, 1997, the Company retained Evon A. Kelly as chief executive
officer. As part of Mr. Kelly's compensation package, the Board of
Directors issued 600,000 shares of non-qualified stock options exercisable
at $1.00 per share.
On September 4, 1997 and October 9, 1997, respectively, the Company
received notice that the federal and state courts dismissed all claims
against the Company related to the class action shareholder lawsuits filed
in 1994. See additional discussion in Note 11. - Litigation.
In September 1997, the Company entered into a lease agreement for office
space in California. See additional discussion in Note 9. - Commitments and
Contingencies.
F-15
<PAGE>
<TABLE>
<CAPTION>
U.S. WIRELESS DATA, INC.
BALANCE SHEET
(Unaudited)
March 31, 1998 June 30, 1997
-------------- -------------
ASSETS
Current Assets:
<S> <C> <C>
Cash .................................................... $ 64,640 $ 6,083
Accounts receivable, net of allowance for ............... 73,997 120,531
doubtful accounts of $48,215 at March 31, 1998;
$15,903 at June 30, 1997
Sales-type lease receivables ............................ 5,905 11,023
Inventory, net .......................................... 879,952 208,867
Other current assets
579,587 102,836
------------ ------------
Total current assets ........................... 1,604,081 449,340
Processing units - deployed ..................................... 383,100 --
Property and equipment, net ..................................... 287,080 40,445
Other assets
67,671 11,495
------------ ------------
Total assets .................................................... $ 2,341,932 $ 501,280
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable ........................................ $ 1,275,428 $ 354,213
Accrued liabilities ..................................... 177,849 125,587
Notes payable ........................................... 827,863 737,866
------------ ------------
Total current liabilities 2,281,140 1,217,666
------------ ------------
Long Term Debt .................................................. 45,000 45,000
------------ ------------
Total Liabilities
2,326,140 1,262,666
------------ ------------
Stockholders' Equity (Deficit):
Preferred Stock, 15,000,000 authorized, 3,060,000 Series A 3,060,000 --
Issued and outstanding
Common stock, no par value, 40,000,000 .................. 9,324,601 5,613,952
shares authorized; 9,324,601 and 5,613,952 shares
issued and outstanding at March 31, 1998
June 30, 1997, respectively
Additional paid-in capital .............................. 10,456,612 10,613,465
Accumulated deficit ..................................... (22,825,421) (16,960,853)
Notes Receivable from Shareholder -- (27,950)
------------ ------------
Total stockholders' equity (deficit)
15,792 (761,386)
------------ ------------
Total liabilities and stockholders' equity (deficit) $ 2,341,932 $ 501,280
============ ============
</TABLE>
Accompanying Notes are an integral part of the Financial Statements
F-16
<PAGE>
<TABLE>
<CAPTION>
U.S. WIRELESS DATA, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended Nine Months Ended
3/31/98 3/31/97 3/31/98 3/31/97
------- ------- ------- -------
<S> <C> <C> <C> <C>
Revenue .................................. $ 245,439 $ 243,446 $ 599,296 $ 1,046,359
Cost of goods sold ....................... 115,339 114,780 351,746 602,078
----------- ----------- -------------- -----------
Gross margin ............................. 130,100 128,666 247,550 444,281
----------- ----------- -------------- -----------
Operating Expenses:
Selling, general and administrative .. 1,999,817 122,691 4,271,625 463,009
Research and development ............. 78,000 87,914 251,000 301,315
Litigation settlement ................ 921,132 -- 921,132 --
----------- ----------- ----------- -----------
Total operating expense .............. 2,998,949 210,605 5,443,757 764,324
-------------- ----------- ----------- -----------
Loss from operations ..................... (2,868,849) (81,939) (5,196,207) (320,043)
Interest income 5,722 21 7,398 70
Interest expense ......................... (438,626) (8,045) (706,308) (24,688)
Other income ............................. 6,912 30,548 31,394
Net loss ................................. $(3,301,753) $ (83,051) (5,864,569) $ (313,267)
=========== =========== =========== ===========
Basic / Diluted Earnings (loss) per ...... $ (.36) $ (.02) $ (.67) $ (.07)
=========== ============ ========== ===========
Weighted average common shares outstanding 9,280,963 4,983,852 8,753,321 4,814,900
- - Basic/Diluted =========== =========== ========== ===========
</TABLE>
Accompanying Notes are an integral part of the Financial Statements
F-17
<PAGE>
<TABLE>
<CAPTION>
U.S. WIRELESS DATA, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
Nine Months Ended
March 31,1998 March 31, 1997
------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................. $(5,864,569) $ (313,267)
Depreciation and amortization ........................ 65,463 50,586
Non-cash consulting services and warrant extension ... 1,276,808 15,446
Non-cash interest expense - debentures ............... 637,172
Non-cash litigation expense .......................... 921,132
Changes in assets and liabilities:
(Increase) decrease in:
Accounts receivable ........................ 46,543 18,210
Inventory .................................. (671,085) 168,300
Processing units - deployed ................ (383,100) 0
Other current assets ....................... (152,411) 34,627
Increase (decrease) in:
Accounts payable ........................... 911,215 102,071
Accrued liabilities ........................ 52,262 (90,297)
Notes Payable .............................. 0 (22,800)
----------- -----------
Net cash used in operating activities ...... (3,160,570) (37,124)
CASH FLOWS FROM INVESTING ACTIVITIES:
(Purchase) of Property, plant, and equipment ......... (291,445) 500
(Increase) in other assets ........................... (56,176) 0
----------- -----------
Net cash used in investing activities ...... (347,621) 500
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock ...................... 585,010 27,950
Proceeds from sale of options to purchase common stock 191,700 0
Note receivable ...................................... 27,950 (27,950)
Net Proceeds from issuance of debt ................... 2,762,088 --
----------- -----------
Net cash provided by financing activities ... 3,566,748 0
INCREASE (DECREASE) IN CASH ............................... 58,557 (36,624)
CASH, Beginning of period ................................. 6,083 40,350
----------- -----------
CASH, End of period ....................................... $ 64,640 $ 3,726
=========== ===========
</TABLE>
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
Accompanying Notes are an integral part of the Financial Statements
F-18
<PAGE>
U.S. WIRELESS DATA, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 -- ACCOUNTING PRINCIPLES
The balance sheet as of March 31, 1998, as well as the statements of
operations for the three and nine months ended March 31, 1998 and March
31, 1997, and statement of cash flows for the nine months ended March 31,
1998 and March 31, 1997 have been prepared by the Company without an
audit. In the opinion of management, all adjustments, consisting only of
normal recurring adjustments necessary to present fairly the financial
position, results of operations, and cash flows at March 31, 1998 and for
all periods presented, have been made.
Certain information and footnote disclosures normally included in the
financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted. It is suggested that
these financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-KSB for
fiscal year ended June 30, 1997. The results of operations for interim
periods presented are not necessarily indicative of the operating results
for the full year.
Note 2 -- FINANCIAL CONDITION AND LIQUIDITY
The Company has incurred an accumulated deficit of approximately $22.8
million since inception, including a loss of $5.9 million during the first
nine months of fiscal year 1998. In order to attempt to continue as a
going concern, the Company has transitioned to a recurring revenue focus,
is working on programs to increase revenue levels and product margins, and
is negotiating new distribution agreements. In December 1997, the Company
closed a private placement offering of $3,060,000 of Convertible
Subordinated Debentures. After associated fees and repayment of bridge
loans incurred during the quarter ended December 31, 1997, the Company
retained approximately $2,200,000 to apply to immediate working capital
needs and the national launch of its proprietary wireless transaction
processing solution. The current sales volume is inadequate to fund the
infrastructure growth and business transition. As a result, the Company
anticipates the continued roll out of the GTE Wireless and Bell Atlantic
joint marketing and operating agreements and potential distribution
programs with other cellular carriers will require additional debt or
equity financing in the immediate future.
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.
Note 3 -- 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 common
share are computed by dividing the net loss by the weighted average number
of common shares outstanding at the end of the period. Diluted EPS
excludes exercisable stock options and warrants from the calculation since
their effect would be anti-dilutive. Such stock options and warrants could
potentially dilute earnings or losses per share in the future. EPS for the
three and nine month periods ended March 31, 1997 have been restated to
conform with SFAS No.128.
F-19
<PAGE>
Note 4 -- FINANCINGS
As the Company entered the first quarter of fiscal 1998, it faced the
need for increased liquidity to meet its obligations and fund a
significant rollout of the CDPD TRANZ Enabler product. In August 1997,
through an introduction by the entrenet Group, LLC. ("entrenet"), the
Company sold 3.5 million unregistered shares of common stock and 1.6
million warrants to purchase common stock at an exercise price of $0.01
per share to two officers of Liviakis Financial Communications, Inc.
("LFC") for $500,000 in cash. The warrants are exercisable from January
15, 1998 through August 4, 2002. The securities sold to the two officers
of LFC carry future registration rights, including a one-time demand
registration, with fees to be paid by the Company (see also Note 5,
below). In accordance with its agreement with entrenet, the Company
granted entrenet the right to receive 280,000 unregistered shares of the
Company's Common Stock as an 8% finder's fee for the direct source
financing. The stock was issued to entrenet following shareholder
approval for an increase in authorized Common Stock, which occurred on
February 6, 1998. The agreement provides entrenet with "piggyback
registration rights."
On December 10, 1997 the Company closed a private placement offering of
$3,060,000 principal amount of 8% Adjustable Rate Convertible
Subordinated Debentures. After associated fees and repayment of bridge
loans incurred during the quarter, the Company retained approximately
$2,200,000 to apply to immediate working capital needs and the national
launch of its proprietary wireless transaction processing solution. 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 off of fair market value. The value of the
in-the-money provision has been allocated to stockholder's equity
(deficit). 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 was effected as
of February 9, 1998. Non-cash interest expense of approximately $225,000
and $397,000 was recorded in the second and third fiscal quarters,
respectively. As the result of the approval by shareholders on February
6, 1998, the Company authorized 4,000,000 shares of no par value Series
"A" Cumulative Convertible Redeemable Preferred Stock (the "Preferred
Stock"), with a stated value of $1.00 per share. On that date, the
debentures automatically converted into 3,060,000 shares of Preferred
Stock. The Preferred Stock gives the holder the right to convert
principal into shares of Common Stock in the future at 80% of market
price, but not lower than $4 per share for the first 270 days, and no
higher than $6 per share. The security carries an 8% dividend rate, which
drops to a 4% dividend rate once the underlying shares of Common Stock
are registered with the Securities and Exchange Commission. The Company
is required to register the shares of Common Stock underlying the
securities sold in the offering, plus the shares of Common Stock issuable
as interest on the Debentures and dividends on the Preferred Stock.
In order to satisfy a portion of its immediate short term capital
requirements the Company entered into an agreement on March 12, 1998,
with a stockholder to allow the Company to assign to third parties,
options it has held since 1995, on 367,684 shares of the Company's Common
Stock owned by that stockholder, which the Company has the right to
purchase at $.25 per share. The Company anticipates that it will sell and
assign these options to accredited investors in blocks of no less than
50,000 shares between the present time and October 5, 1998, the date on
which its option expires. The amount of cash that may be provided to the
Company through this source is not readily determinable, as it will vary
depending on the market price of the Company's Common Stock at the time
the Company sells each option. Through March 31, 1998, the Company
assigned its Call Option on 50,000 shares owned by stockholder's
assignee, Tillicombe International, LDC, to RBB Bank Aktiengesellschaft,
the agent which owns 1,600,000 shares of the Company's Series A Preferred
Stock. During April 1998, additional options for 150,000 shares were
assigned. RBB Bank purchased the Call Options in four increments of
50,000 share options each, and has 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 must pay the acquisition
price for the Call Option to the Company, as well as the exercise price
to Tillicombe prior to taking delivery of the shares.
F-20
<PAGE>
Note 5 -- LIVIAKIS FINANCIAL COMMUNICATIONS INC. ("LFC") - CONSULTING
In July 1997, the Company retained LFC to advise and assist the Company
in matters concerning investor relations and corporate finance covering
the period from July 25, 1997 through July 31, 1998. As compensation for
these services, the Company will issue a total of 300,000 unregistered
restricted shares of its Common Stock and $10,000 in cash as consulting
fees. The issuance of the shares of Common Stock will occur at various
times during the Consulting Agreement. As of March 31, 1998, 225,000
shares were issuable to LFC per the Consulting Agreement. The shares also
have registration rights as described in Note 4, above. Pursuant to the
Consulting Agreement, the Company will also pay LFC a cash fee equal to
2.5% of the gross proceeds received as a finder's fee for any direct
financing located for the Company. LFC received $76,500 for a finder's
fee in December 1997, related to the private placement offering.
Since the LFC related financing transaction described in Note 4 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. To properly ascribe a fair
value to the 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 determined by the
valuation, the total of all shares issuable in the transactions, and the
cash proceeds received, the Consulting Agreement was valued at $1,400,000
and recorded as prepaid consulting services with a corresponding increase
in equity. 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. Through March 31, 1998, approximately
$960,000 has been expensed.
Note 6 - ACCOUNTING FOR 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
Sales over a 48 month life. The Company retains title to the TRANZ
Enabler units and earns usage income on the units while they are deployed
at the customer location.
7 -- LITIGATION
Securities Class Actions Settlements
In September of 1996, the Company agreed to terms to settle 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 in
consolidated Case No. 94-Z-2258, Appel, et al. v. Caldwell, et al. 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.
F-21
<PAGE>
To resolve cross-claims asserted by the underwriters in the litigation,
the Company agreed to issue to RAS Securities Corporation, H.J. Meyers &
Co, Inc., Sands & Co. Ltd. and R.J. Steichen & Co. a total of 600,000
shares of Common Stock upon the effective date of the Settlement
Agreement, which was April 25, 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, not sooner than April 26,
1998. Further, on September 17, 1997 the Company agreed to entry of a
consent judgment against it and in favor of Don Walford, the sole
shareholder of underwriter Walford Securities, Inc., in the amount of
$60,000, payable over a three year period. The total charge recognized
during fiscal 1997 consists of the following: $93,600 for the value of
the common shares issued based upon the fair market value of the
Company's Common Stock on the date the commitment of such shares was
made; $10,000 for actual cash to be paid by the Company pursuant to the
settlement with stockholders; and $60,000 for the note payable executed
with Don Walford as discussed above.
Settlement with Consultant
In July of 1997, the Company executed a two-year agreement effective as
of April 1, 1997 for consulting services previously provided and to be
provided by Mr. Gary Woolley. In addition to monthly cash compensation,
Mr. Woolley 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 Mr. Woolley and the
Company and the consulting agreement was terminated by the Company as of
the end of August 1997. Mr. Woolley and the Company settled their dispute
in January 1998, which resulted in a payment by the Company to Mr.
Woolley of a total of $60,000 (including amounts previously paid to Mr.
Woolley as a consulting fee prior to termination) for all services
rendered by Mr. Woolley to the Company. 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 Stock by election of
Mr. Woolley made on or before April 1, 1998. The shares are to be issued
as "restricted securities" as defined under Rule 144 under the Securities
Act of 1933. Mr. Woolley elected to convert the note to shares of Common
Stock as of January 26, 1998. The shares became saleable under Rule 144
commencing on April 1, 1998.
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.
During March 1998, the Company reached a settlement with the complaining
Noteholders' 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). As a
result of the settlement, the issuance of "premium" shares was recorded
in Operating Expense as a litigation settlement of approximately $921,000
in March 1998. The agreement also provides the Noteholders with certain
F-22
<PAGE>
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 issuable upon
conversion of the Demand Notes will be "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 or will be issued to the complaining
Noteholders upon conversion of their notes which will be subject to the
guarantee and put agreements. The holder of the other $50,000 Demand Note
will be given the enhanced conversion rate (of 1.4 times the number of
shares originally issuable) and will receive 154,000 shares upon conversion
of his Demand Note but will not be given 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 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.
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 issuable upon conversion
of this note are not entitled to the guarantee or put described above which
applies to the shares issuable upon conversion of the Demand Note purchased
by this investor.
Note 8 -- 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.
F-23
<PAGE>
No dealer, salesperson or other individual has been
authorized to give any information or to make any
representations other than those contained in this
Prospectus in connection with the offer made by this
Prospectus and, if given or made, such information or
representations must not be relied upon as having been
authorized by the Company or the Underwriters. This
Prospectus does not constitute an offer to sell or the
solicitation of an offer to buy any securities offered by
this Prospectus, nor does it constitute an offer to sell or
a solicitation of an offer to buy the Preferred Stock by any
person in any jurisdiction in which such an offer or
solicitation is not authorized, or in which the individual
making such offer or solicitation is not qualified to do so,
or to any individual to whom it is unlawful to make such an
offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any
circumstances, create any implication that the information
contained herein is correct as of any time subsequent to the
date hereof or that there has been no change in the affairs
of the Company since that date.
TABLE OF CONTENTS
Page
Available Information...................................... 3
Prospectus Summary......................................... 4
Risk Factors............................................... 9
Use of Proceeds........................................... 21
Dividend Policy........................................... 21
Market For the Company's Common Stock
and Related Matters..................................... 22
Capitalization............................................ 23
Management's Discussion and Analysis of
Financial Condition and Results of Operations .......... 24
Business.................................................. 34
Documents Filed as Exhibits............................... 56
Management................................................ 57
Security Ownership of Principal
Shareholders and Management............................. 65
Certain Transactions...................................... 69
Description of Securities................................. 74
Selling Security Holders.................................. 87
Legal Matters............................................. 94
Change in Accountants..................................... 94
Commission Position on Indemnification for
Securities Act Liabilities and Related Matters.......... 94
Experts................................................... 95
Index to Financial Statements............................ F-1
Until_______ , 1998 (25 days after the date of this
Prospectus), all dealers effecting transactions in this
Common Stock, whether or not participating in this
distribution, may be required to deliver a Prospectus. This
is in addition to the obligation of dealers to deliver a
Prospectus when acting as underwriters and with respect to
their unsold allotments or subscriptions.
7,240,356 Shares
U.S. WIRELESS DATA, INC.
Common Stock
[ ] 1998
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 24. Indemnification of Directors and Officers.
Sections 7-109-102 through 7-109-110 of the Colorado Business Corporation
Act (the "CBCA") permit indemnification of directors, officers, employees,
fiduciaries and agents of corporations under certain conditions and subject to
certain limitations, including for liabilities to which such persons might
become subject under the Securities Act of 1933, as amended (the "Securities
Act").
The Company's Articles of Incorporation do not contain any provisions which
would limit the availability of such indemnification to the fullest extent
available under the above-referenced statute. The Company's amended Bylaws,
which parallel the CBCA sections referred to above, provide that the Company
shall indemnify any person who was or is a party or is threatened to be made a
party to any threatened, pending, or completed action, suit or proceeding,
whether civil, criminal, administrative or investigative, and whether formal or
informal, by reason of the fact that he is or was a director, officer, employee,
fiduciary or agent of the Corporation, or is or was serving at the request of
the Corporation as a director, officer, partner, trustee, employee, fiduciary or
agent of any foreign or domestic profit or nonprofit corporation or of any
partnership, joint venture, trust, profit or nonprofit unincorporated
association, limited liability company, or other enterprise or employee benefit
plan (a "Proper Person"). The Company is required to indemnify Proper Person(s)
against reasonably incurred expenses (including attorneys' fees), judgments,
penalties, fines (including any excise tax assessed with respect to an employee
benefit plan) and amounts paid in settlement reasonably incurred by him in
connection with such action, suit or proceeding if it is determined by a
majority of a quorum of the Board of Directors consisting of Directors who are
not parties to the proceeding, or, if a quorum of such Directors is not
available, a committee of the Board consisting of at least two Directors who are
not parties to the proceeding or, if a proper committee cannot be seated or a
majority of the Board or the committee desire, an independent counsel selected
by a majority of the full Board, or a vote of shareholders, that the proper
Person conducted himself or herself in good faith and that he or she reasonably
believed (i) in the case of conduct in his official capacity with the Company,
that his or her conduct was in the Company's best interests, or (ii) in all
other cases (except criminal cases), that his or her conduct was at least not
opposed to the Company's best interests, or (iii) in the case of any criminal
proceeding, that he or she had no reasonable cause to believe his or her conduct
was unlawful. A Proper Person will be deemed to be acting in his or her official
capacity while acting as a director, officer, employee or agent on behalf of the
Company and not while acting on the Company's behalf for some other entity. A
Proper Person may apply to the court conducting the proceeding or to another
court of competent jurisdiction for an order requiring the Company to indemnify
such person if the court determines that the person is entitled to
indemnification under Colorado law and has met the criteria set forth in the
Company's Bylaws.
No indemnification is available to a person with respect to any
claim, issue or matter in connection with a proceeding by or in the right of the
Company in which the person was adjudged liable to the Company or in connection
with any proceeding charging that the person derived an improper personal
benefit, whether or not involving action in an official capacity, in which he or
she was adjudged liable on the basis that he or she derived an improper personal
benefit. Further, indemnification in connection with a proceeding brought by or
in the right of the Company is limited to reasonable expenses, including
attorneys' fees, incurred in connection with the proceeding.
To the extent that the provisions of a Colorado corporation's Articles of
Incorporation or Bylaws provide for indemnification to a greater extent than is
available under the CBCA, such provisions are void. The Company believes,
however, that the indemnification provisions contained in its Bylaws are no more
liberal than those set forth in the CBCA.
Item 25. Other Expenses of Issuance and Distribution.
The following table sets forth the costs and expenses, other than
underwriting discounts and commissions, payable by the Company in connection
with the sale of Preferred Stock being registered (all amounts are estimated
except the SEC Registration Fee).
SEC Registration Fee.............................................. $ 9,710
Blue Sky Qualification Fees and Expenses (including legal fees)... 15,000
Printing Expenses................................................. 5,000
Legal Fees and Expenses (other than blue sky)..................... 55,000
Accountant's Fees and Expenses.................................... 50,000
II-1
<PAGE>
Transfer Agent and Registrar Fees................................. 2,000
Miscellaneous Expenses............................................ 3,000
---------
Total estimated expenses..................................... $139,710
- -------------
Item 26. Recent Sales of Unregistered Securities.
Within the past three years, the Registrant has sold securities
pursuant to the following transactions, all of which were exempt from the
registration requirements of the Securities Act of 1933, as amended (the "Act").
From April 1, 1995 - June 30, 1996, the following unregistered securities were
sold:
August, 1995: 18,123 shares of Common Stock issued to a consultant for services
rendered, at $.10 - $.46 per share;
October 18, 1995: 100,000 share Common Stock Purchase Warrant exercisable at
$.10 per share in consideration for entry of a development agreement;
April 26, 1996: 100,000 shares of Common Stock issued upon exercise of Common
Stock Purchase Warrant issued as of October 18, 1995, at $.10 per share; and
June 20, 1996: Stock subscription received for 142,544 shares of Common Stock to
be issued to a significant customer of the Company in return for the customer's
purchase of certain inventory from a supplier of the Company; the shares were
valued at $.15 per share; the share certificates were issued as of July 1, 1996;
From July 1, 1996 - June 30, 1997, the following unregistered securities were
sold:
November 15, 1996: 102,975 shares of Common Stock issued for services rendered
by a Company attorney at $.15 per share;
April 1, 1997: $50,000 convertible promissory note was issued to Company
consultant as a signing bonus, convertible into common stock at $.40 per share;
April 27, 1997: 600,000 shares of Common Stock issued in settlement of class
action lawsuit; certificates were issued as of May 16, 1997;
April - June, 1997: $185,000 of convertible Demand Notes convertible were issued
for cash at face value into Common Stock commencing November 1, 1997 at prices
of $.35 per share ($75,000 of the Notes) and $.50 per share ($110,000 of the
Notes); and
June 3, 1997: Agreement entered obligating Company to issue a $150,000
"convertible subordinated debenture" to a consultant of the Company; the
"debenture" was not issued at the time the agreement was entered into; the right
to the "debenture" was exchanged for a "convertible subordinated promissory
note" which was delivered on or about November 1, 1997.
From July 1, 1997 - May 1, 1998, the following unregistered securities were
sold:
July 2, 1997: $16,825 promissory note was issued for cash of $16,000; the note
was converted into a convertible Demand Note (see April - June, 1997
transactions described above) on or about July 30, 1997;
August 6, 1997: 2,625,000 shares and 1,200,000 common stock purchase warrants
exercisable at $.01 per share from January 15, 1998 until August 4, 2002, to
John M. Liviakis for $375,000 in cash;
II-2
<PAGE>
875,000 shares and 400,000 common stock purchase warrants exercisable at $.01
per share from January 15, 1998 until August 4, 2002, to Robert B. Prag for
$125,000 in cash;
November 15, 1997 - present: 240,000 shares issued under a consulting agreement
with Liviakis Financial Communications, Inc. ("LFC"). 165,000 shares were issued
as of November 15, 1998 and 15,000 shares were issued each month thereafter on
the 15th of each month; 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;
December 10, 1997: $3,060,000 of 8% Adjustable Rate Convertible Subordinated
Debentures Due December 31, 1999 were issued for cash equal to face value; the
Company paid a finder's fee to J.W. Charles Securities, Inc. of Boca Raton,
Florida of $214,200, 7% of the gross offering proceeds, and issued a 50,000
share Common Stock Purchase Warrant exercisable at $6.525 per share, exercisable
through December 10, 2000. In addition, the Company paid a finder's fee to
Liviakis Financial Communications, Inc. of $76,500, or 2.5% of the gross
offering proceeds;
January 26, 1998: conversion of $50,000 promissory note issued to consultant was
converted (see April 1, 1997 transaction described above) to 75,000 shares of
common stock pursuant to agreement between the Company and a former consultant;
February 9, 1998: conversion of $3,060,000 face value of 8% Convertible
Debentures into 3,060,000 shares of Series A Preferred Stock (see December 10,
1997 transaction described above);
March 12, 1998: issuance of a $60,000 10% unsecured promissory note and 10,435
share Common Stock Purchase Warrant to a consultant of the Company for services
to be rendered over the six month period commencing March 12, 1998;
March 24 - June 15, 1998: sale of call options acquired by the Company in
October 1995, to purchase a total of 350,000 shares of Common Stock owned by an
unaffiliated third party, sold by the Company to two unaffiliated third parties
for total consideration of approximately $1,222,000 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; and
April 7 - June 15, 1998: 698,327 shares issued upon conversion of convertible
Demand Notes issued from April - July, 1997.
June 26, 1998: $250,000 Promissory Note and 20,000 Share Common Stock Purchase
Warrant for $250,000 in cash, issued to RBB Bank Aktiengesellschaft
From July 1, 1998 - August 3, 1998, the following unregistered securities were
sold:
July 22 - 27, 1998: $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 at $4.25 per share until July 21, 2001, for
$2,000,000 in cash, to RBB Bank Aktiengesellschaft ($1,000,000 of Debentures and
50,000 Warrants) and Cannell Capital Management ($1,000,000 of Debentures and
50,000 Warrants). The Company paid a finder's fee to JW Charles Securities, Inc.
of Boca Raton, Florida of $140,000 (7%) of the gross offering proceeds, and
issued a 60,000 share Common Stock Purchase Warrant exercisable at $4.50 per
share, exercisable through July 21, 2001. In addition, the Company paid a
finder's fee to Liviakis Financial Communications, Inc. of $50,000 (2.5% of the
gross offering proceeds).
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"). As to the issuance of the 8% Convertible Debentures and
the conversion of those Debentures into Series A Preferred Stock, the Company
also relied upon the exemption contained in Rule 506 of Regulation D promulgated
under 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
II-3
<PAGE>
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 (with the exception of the Demand Notes issued from
April - June, 1997) 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."
<PAGE>
Item 27. Exhibits.
<TABLE>
<CAPTION>
Exhibit
Number Description of Exhibits
<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 J.W. Charles Securities, Inc. (10)
4.8 # Common Stock Purchase Warrant dated March 12, 1998, issued to entrenet Group, LLC
4.9 # Promissory Note for $60,000 issued to entrenet Group, LLC, as of March 12, 1998
4.10 Specimen Common Stock Certificate
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
4.14 ## Promissory Note for $250,000 dated June 26, 1998, issued to RBB Bank Aktiengesellschaft
4.15 ## Common Stock Purchase Warrant dated June 26, 1998 issued to RBB Bank Aktiengesellschaft
4.16 ## Lock-up Letter Agreement between the Company and Liviakis Financial Communications, Inc., John M.
Liviakis and Robert B. Prag dated July 14, 1998
4.17 Debenture Agreement for 6% Convertible Subordinated Debentures Due July 21, 2000 (11)
4.18 Form of Common Stock Purchase Warrant issued to 6% Debenture Purchasers and JW Charles
Securities, Inc. as of July 21 - 27, 1998 (11)
II-4
<PAGE>
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 Charles Securities,
Inc. as of July 21 - 27, 1998 (11)
5.1 Form of Opinion of Ireland, Stapleton, Pryor & Pascoe, P.C. as to the legality of issuance of the Company's
Common Stock
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 Supply Agreement with Novatel Communications LTD. (3)
10.4 Release Agreement with Richard P. Draper (3)
<PAGE>
10.5 Copy of Amended 1992 Stock Option Plan (7)
10.6 Agreement for Manufacture and Purchase between USWD, Uniform Industrial Corp and
Cardservice International, Inc. (3)
10.7 AT&T CDPD Value Added Reseller Agreement dated April 30, 1997* (6)
10.8 Bell Atlantic AIRBRIDGE Packet Service Agreement dated August 12, 1997* (6)
10.9 Engagement Agreement between USWD and entrenet Group, LLC dated June 3, 1997 (6)
10.10 GTE Leasing Corporation Promissory Note dated August 6, 1997 (6)
10.11 GTE Mobilnet Communications Service and Equipment Agreement dated
August 1, 1997* (6)
10.12 Form of Demand Note issued to private investors during the fourth
quarter of fiscal year 1997 (6)
10.13 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 Robert B, Prag
and effective as of July 25, 1997 (6)
10.14 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)
10.15 Purchase Agreement with Unicard Systems, Inc. dated September 18, 1997* (6)
10.16 Purchase Agreement with Wellex Systems Manufacturing & Distribution Group dated August 7, 1997 (6)
10.17 Underwriting Agreement between the Company, RAS Securities Corp., Walford & Company, Incorporated
and Thomas James Associates, Inc. dated December 2, 1993 (2)
10.18 # Merchant Marketing and Services Agreement with National Bank of Commerce dated March 9, 1998*
10.19 # 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
10.20 # Form of Option Purchase and Assignment Agreement (relating to
assignment of call option on Tillicombe stock)
10.21 [There is no Exhibit 10.21.]
10.22 # Joint CDPD Sales and Marketing Agreement with Bell Atlantic Mobile
dated as of March 23, 1998*
II-5
<PAGE>
10.23 # Engagement Agreement between the Company and entrenet Group, LLC, dated
as of March 12, 1998
10.24 # Form of Settlement and Mutual Release Agreement between the Company and
the Delle Donne Noteholders entered into as of April 9, 1998
10.25 # Form of Settlement and Mutual Release Agreement between the Company and
certain Noteholders entered into as of April 7, 1998
10.26 ## Note and Warrant Purchase and Security Agreement dated June 25, 1998
between the Company and RBB Bank Aktiengesellschaft
10.27 ## Consulting Agreement between the Company and Liviakis Financial
Communications, Inc. dated June 29, 1998
10.28 Joint Marketing and Operating Agreement with Ameritech Mobile Communications, Inc. dated
July 16, 1998 (11)
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Ireland, Stapleton, Pryor & Pascoe, P.C. (see Exhibit 5.1)
23.3 Consent of Alvin C. Rice
23.4 Consent of Roger L. Peirce
25.1 # Power of Attorney
- -----------------
<FN>
# This Exhibit was filed with the initial filing of this Registration
Statement on May 14, 1998
## This Exhibit was filed with Amendment No. 1 to this Registration Statement
as of July 16, 1998.
* 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.
(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.
II-6
<PAGE>
(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.
</FN>
</TABLE>
Item 28. Undertakings.
The undersigned small business issuer hereby undertakes that:
A. It will:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which,
individually or together, represent a fundamental change in the information in
the registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any deviation
from the low or high end of the estimated maximum offering range may be
reflected in the form of prospectus filed with the Commission pursuant to Rule
424(b) if, in the aggregate, the changes in volume and price represent no more
than a 20% change in the maximum aggregate offering price set forth in the
"Calculation of Registration Fee" table in the effective registration statement;
and
(iii) Include any additional or changed material information on
the plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities as that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
B. If the issuer relies on Rule 430A under the Securities Act, it will:
(1) For determining any liability under the Securities Act the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the small business issuer pursuant to Rule 424(b)(1), or (4)
or 497(h) under the Securities Act as part of this registration statement as of
the time the Commission declared it effective.
(2) For determining any liability under the Securities Act, treat each
post-effective amendment that contains a form of prospectus as a new
registration statement relating for the securities offered in the registration
statement, and that offering of the securities at that time as the initial bona
fide offering of those securities.
II-7
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
the requirements of filing on Form SB-2 and authorized this Registration
Statement to be signed on its behalf by the undersigned, in Emeryville,
California on this 31st day of July, 1998.
U.S WIRELESS DATA, INC.
By: /s/ Evon A. Kelly
---------------------
Evon A. Kelly
Chief Executive Officer
In accordance with the requirements of the Securities Act of 1933,
this Registration Statement was signed by the following persons in the
capacities and on the dates stated.
Signatures Title Date
- ---------- ----- ----
/s/ Evon A. Kelly Chief Executive Officer July 31, 1998
- ----------------- & Director (Principal
Evon A. Kelly Executive Officer)
/s/ Rod L. Stambaugh President & Director July 31, 1998
- -------------------------
Rod L. Stambaugh
/s/ Robert E. Robichaud Chief Financial Officer, July 31, 1998
- ------------------------- Secretary & Treasurer
Robert E. Robichaud (Principal Financial and
Accounting Officer)
/s/ Richard S. Barton* Director July 31, 1998
- -------------------------
Richard S. Barton
Director
- -------------------------
Caesar Berger
/s/ Chester N. Winter* Director July 31, 1998
- -------------------------
Chester N. Winter
Director
- -------------------------
Alvin C. Rice
- ------------------------- Director
Roger L. Peirce
- -------------------------
* By Evon A. Kelly, as attorney-in-fact.
II-8
Exhibit 5.1
July 31, 1998
U.S. Wireless Data, Inc.
2200 Powell Street, Suite 450
Emeryville, CA 94608
Re: Registration Statement on Form SB-2 (SEC File No.333-52625)
Ladies and Gentlemen:
We have acted as counsel to U.S. Wireless Data, Inc., a Colorado corporation
(the "Company"), in connection with the preparation and filing of the
above-captioned Registration Statement on Form SB-2 (the "Registration
Statement") under the Securities Act of 1933, as amended (the "Securities Act"),
covering 7,240,356 shares of common stock (the "Common Stock"), no par value, of
the Company, including a total of 5,595,766 shares of Common Stock currently
issued and outstanding in the hands of the Selling Security Holders named in the
Registration Statement ( the "Selling Security Holder Shares"), 956,250 shares
of Common Stock estimated to be issuable upon conversion of 3,060,000 shares of
Series A Cumulative Convertible Preferred Stock (the "Series A Preferred
Stock"); 60,991 shares of Common Stock estimated to be issuable as dividends on
the Series A Preferred Stock through December 31, 1999; 597,349 shares of Common
Stock issuable upon exercise of the various Common Stock Purchase Warrants
described in the Registration Statement (the "Warrant Shares"); and 30,000
shares of Common Stock issuable pursuant to a consulting agreement (the "LFC
Shares").
As such counsel, we have examined such corporate records, certificates and other
documents and such questions of law as we have considered necessary or
appropriate for the purposes of this opinion. In rendering this opinion, we have
(a) assumed (i) the genuineness of all signatures on all documents examined by
us, (ii) the authenticity of all documents submitted to us as originals, and
(iii) the conformity to original documents of all documents submitted to us as
photostatic or conformed copies and the authenticity of the originals of such
copies; and (b) relied on, as to matters of fact, statements and certificates of
officers of the Company.
We are attorneys admitted to the Bar of the State of Colorado, and we express no
opinion as to the laws of any other jurisdiction other than the laws of the
United States of America and the Colorado Business Corporation Act.
Based upon the foregoing, we are of the opinion that:
. the Selling Security Holder Shares were legally issued and are fully paid
and non-assessable;
. When the Warrant Shares are duly issued, delivered and paid for as set
forth in the Registration Statement, such shares will be legally issued,
fully paid and non-assessable;
When the shares of Common Stock issuable upon conversion of, or as
dividends on, the Series A Prerferred Stock are duly issued and delivered
as described in the Registration Statement, such shares will be legally
issued, fully paid and non-assessable; and
When the LFC Shares are duly issued and delivered , such shares will be
legally issued, fully paid and non-assessable.
We consent to the filing of this opinion as an exhibit to the Registration
Statement and to the use of our name under the heading "Legal Matters" in the
Prospectus. In giving such consent we do not thereby concede that we are within
the category of persons whose consent is required under Section 7 of the
Securities Act or the rules and regulations promulgated thereunder.
Very truly yours,
IRELAND, STAPLETON, PRYOR & PASCOE, P.C.
By: /s/ John G. Lewis
---------------------------------
John G. Lewis, Vice President
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of Amendment
No. 2 to this Registration Statement on Form SB-2 of our report dated October
13, 1997 relating to the financial statements of U.S. Wireless Data, Inc., which
appears in such Prospectus. We also consent to the references to us under the
headings "Experts" and "Summary Financial Information" in such Prospectus.
However, it should be noted that PricewaterhouseCoopers LLP has not prepared or
certified such "Summary Financial Information."
/s/ PricewaterhouseCoopers LLP
PRICEWATERHOUSECOOPERS LLP
Broomfield, Colorado
July 31, 1998
CONSENT TO INCLUSION OF INFORMATION IN REGISTRATION STATEMENT
TO BE FILED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
The undersigned, Alvin C. Rice, hereby acknowledges that he has agreed
to become a member of the Board of Directors of U.S. Wireless Data, Inc. (the
"Company") as of June 1, 1998, and hereby consents to inclusion of information
to such effect in a Registration Statement on Form SB-2 to be filed by the
Company on or about May 1, 1998 with the United States Securities & Exchange
Commission under the Securities Act of 1933, as amended (the "Act"), under the
captions "Management," "Security Ownership of Principal Shareholders and
Management" and "Certain Transactions," as may be required under the Act, and to
the filing of this Consent as an Exhibit to the Registration Statement.
/s/ Alvin C. Rice
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[Signature]
The foregoing was subscribed and sworn to before me, Kelly A. Corey
a notary public of the State of California, by Alvin C. Rice, on May 4, 1998.
My commission expires: March 9, 2002
/s/ Kelly A. Corey
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[Signature]
Address:
1304 Southpoint Blvd., #220
Petaluma, CA 94954
May 4, 1998
[Date]
EXHIBIT 23.4
CONSENT TO INCLUSION OF INFORMATION IN REGISTRATION STATEMENT
TO BE FILED UNDER THE SECURITIES ACT OF 1933, AS AMENDED
The undersigned, Roger L. Peirce, hereby acknowledges that he has
become a member of the Board of Directors of U.S. Wireless Data, Inc. (the
"Company") as of July 22, 1998, and hereby consents to inclusion of information
to such effect in Amendment No. 2 to a Registration Statement on Form SB-2 (SEC
File No. 333-52625) to be filed by the Company on or about August 3, 1998 with
the United States Securities & Exchange Commission under the Securities Act of
1933, as amended (the "Act"), under the captions "Management" and "Security
Ownership of Principal Shareholders and Management" as may be required under the
Act, and to the filing of this Consent as an Exhibit to the Registration
Statement.
/s/ Roger L. Peirce
-------------------
Roger L. Peirce
July 30, 1998
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Date
