SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-QSB
[X] Quarterly Report under Section 13 or Section 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended September 30, 1998.
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[ ] Transition Report under Section 13 or 15(d) of the Securities Exchange
Act of 1934 for the transition period from ______ to ______.
Commission File No.: 0-22848
U.S. Wireless Data, Inc.
(Exact name of registrant as specified in its charter)
Colorado 84-1178691
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(State of incorporation) (IRS Employer Identification No.)
2200 Powell Street, Suite 800
Emeryville, California 94608
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(Address of principal executive offices, including zip code)
(510) 596-2025
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(Registrant's Telephone Number, including area code)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past ninety days.
Yes _X_ No ___
As of December 30, 1998 there were outstanding 13,586,124 shares of the
Registrant's Common Stock (no par value per share).
Transitional Small Business Disclosure Format
Yes ___ No _X_
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U.S. WIRELESS DATA, INC.
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION Page
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Item 1. Financial Statements (Unaudited)
Balance Sheets --
September 30, 1998, and June 30, 1998................3
Statements of Operations --
Three Months Ended September 30, 1998 and 1997.......4
Statements of Cash Flows --
Three Months Ended September 30, 1998 and 1997.......5
Notes to Financial Statements...............................6-9
Item 2. Management's Discussion and Analysis........................10-16
PART II OTHER INFORMATION
Item 1. Legal Proceedings ..........................................17
Item 2. Changes in Securities.......................................17
Item 3. Defaults Upon Senior Securities.............................18
Item 6. Exhibits and Reports on Form 8-K............................19
2
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U.S. WIRELESS DATA, INC.
<TABLE>
<CAPTION>
BALANCE SHEET
(Unaudited)
September 30, 1998 June 30, 1998
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<S> <C> <C>
ASSETS
Current Assets:
Cash $ 331,000 $ 4,000
Accounts receivable, net of allowance for doubtful ........... 147,000 55,000
accounts of $28,000 at September 30, 1998;
$22,000 at June 30, 1998
Inventory, net ............................................... 404,000 480,000
Other current assets
891,000 187,000
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Total current assets .................................... 1,773,000 726,000
Processing units - deployed .......................................... 561,000 517,000
Property and equipment, net .......................................... 238,000 253,000
Other assets ............................................ 357,000 69,000
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Total assets ......................................................... $ 2,929,000 $ 1,565,000
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable
$ 1,169,000 $ 1,506,000
Accrued liabilities .......................................... 1,628,000 1,735,000
Borrowings, current portion
1,452,000 452,000
------------ ------------
Total current liabilities ............................... 4,249,000 3,693,000
Borrowings, long-term portion ........................................ 1,476,000 45,000
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Total liabilities ....................................... 5,725,000 3,738,000
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Redeemable common stock .............................................. 232,000 372,000
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Stockholders' deficit:
Preferred Stock, at $1.00 stated value, 15,000,000 authorized, 1,342,000 3,060,000
1,341,667 and 3,060,000 Series A issued and outstanding at
September 30, 1998 and June 30, 1998, respectively
Common stock, at $1.00 stated value, 40,000,000 .............. 13,445,000 12,195,000
shares authorized; 13,444,713 and 12,195,358 shares
issued and outstanding at September 30, 1998 and
June 30, 1998, respectively
Additional paid-in capital ................................... 12,135,000 10,222,000
Accumulated deficit .......................................... (29,950,000) (28,022,000)
------------ ------------
Total stockholders' deficit ............................. (3,028,000) (2,545,000)
------------ ------------
Total liabilities and stockholders' deficit ............. $ 2,929,000 $ 1,565,000
============ ============
</TABLE>
Accompanying notes are an integral part of the financial statements
3
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U.S. WIRELESS DATA, INC.
<TABLE>
<CAPTION>
STATEMENTS OF OPERATIONS
(Unaudited)
For the three months ended September 30,
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1998 1997
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<S> <C> <C>
Net revenues:
Product sales ........................................ $ 166,000 $ 256,000
Services ............................................. 195,000 14,000
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361,000 270,000
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Cost of revenues: ........................................ 108,000 174,000
Product sales ........................................ 159,000 2,000
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Services ............................................. 267,000 176,000
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Gross margin ............................................. 94,000 94,000
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Operating expenses:
Selling, general and administrative .................. 1,686,000 1,288,000
Research and development ............................. 80,000 95,000
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Total operating expense ........................... 1,766,000 1,383,000
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Loss from operations ..................................... (1,672,000) (1,289,000)
Interest income .......................................... 5,000 --
Interest expense ......................................... (116,000) (24,000)
Other income ............................................. 190,000 --
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Net loss ................................................. $ (1,593,000) $ (1,313,000)
============ ============
Basic and diluted loss per share: ........................ $ (0.15) $ (0.17)
============ ============
Weighted average common shares outstanding - basic/diluted $ 12,491,000 $ 7,770,000
============ ============
</TABLE>
Accompanying notes are an integral part of the financial statements
4
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U.S. WIRELESS DATA, INC.
<TABLE>
<CAPTION>
STATEMENTS OF CASH FLOWS
(Unaudited)
For the three months ended September 30,
----------------------------------------
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ............................................. $(1,593,000) $(1,313,000)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization .................... 71,000 5,000
Non-cash consulting services and warrant extension 609,000 855,000
Non-cash interest expense - debentures ........... 97,000 --
Non-cash variable option / compensation expense . (170,000) --
Debt forgiveness ................................. (192,000) --
Changes in current assets and liabilities:
Accounts receivable ........................... (92,000) (88,000)
Inventory ..................................... 26,000 (15,000)
Other current assets .......................... 12,000 (17,000)
Accounts payable .............................. (417,000) 89,000
Accrued liabilities ........................... (20,000) 27,000
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Net cash used in operating activities ......... (1,669,000) (457,000)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant, and equipment ....... (7,000) --
Processing units - deployed ...................... (81,000) --
(Increase) in other assets
10,000 (11,000)
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Net cash used in investing activities ......... (78,000) (11,000)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of stock .................. 26,000 514,000
Issuance of note receivable ...................... 1,300,000 --
Principal payment on borrowings .................. (58,000) --
Net proceeds from issuance of debt ............... 1,806,000 16,000
Redemption of preferred stock .................... (1,000,000) --
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Net cash provided by financing activities ..... 2,074,000 530,000
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Net increase in cash ..................................... 327,000 62,000
Cash at beginning of period .............................. 4,000 6,000
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Cash at end of period .................................... $ 331,000 $ 68,000
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</TABLE>
Accompanying notes are an integral part of the financial statements
5
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U.S. WIRELESS DATA, INC.
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
Note 1 -- ACCOUNTING PRINCIPLES
The balance sheet as of September 30, 1998, and June 30, 1998,as well
as the statements of operations for the three months ended September 30,
1998 and September 30, 1997, and statement of cash flows for the three
months ended September 30, 1998 and September 30, 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 September 30, 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 are read in conjunction with the financial
statements and notes thereto included in the Company's Form 10-KSB for
fiscal year ended June 30, 1998. 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 continues to have difficulties due to its financial
condition and lack of liquidity. The Company has accumulated a deficit of
approximately $30 million since inception, including a loss of $1.6
million during the first quarter of fiscal year 1999, and has limited
financial reserves. At present, development of the Company's products and
services requires immediate and significant additional financing.
Due to the change in its distribution strategy to channel product sales
and service offerings through existing merchant acquirers, the Company has
been able to make significant reductions in its direct sales force and
reduce its cash requirements. However, execution of the Company's business
plan is dependent on a significant debt or equity-financing event in the
immediate future. The Company continues to work both directly and through
its consultants to secure such financing which is required to fund
operations while a significant recurring revenue stream is developed.
There can be no assurance that the Company will be successful with efforts
to raise additional capital. The inability of the Company to secure
additional financing in the near term could adversely impact the Company's
financial position, including its ability to continue as a going concern.
The accompanying consolidated financial statements do not include any
adjustments relating to the recoverability and classification of recorded
assets and liabilities that might be necessary should the Company be
unable to continue as a going concern.
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. In the
first quarter of fiscal 1999, the net loss available to common
shareholders equals the net loss less $335,000 of preferred stock
dividends and redemption premium charged to retained earnings.
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Note 4 -- FINANCINGS
As the Company entered the first quarter of fiscal 1999, it continued
to face the need for increased liquidity to meet its obligations. In July
1998, the Company completed a private offering of $2,000,000 of 6%
convertible subordinated debentures due July 21, 2000 and 100,000 Common
Stock Purchase Warrants exercisable at $4.25 per share until July 21,
2001. The shares of Common Stock underlying the 6% Debentures and
Warrants carry registration rights. The net proceeds to the Company from
the offering were approximately $1.8 million. The Company used
approximately $252,000 of the proceeds from the offering to pay off a
$250,000 short term bridge loan from one of the investors, which was
evidenced by a promissory note executed July 1998, and the balance of the
proceeds was used for working capital. In consideration of the bridge
loan, the investor received a warrant to purchase 20,000 shares of Common
Stock at $4.375 per share, exercisable through September 9, 2001. The
warrant contains anti-dilution provisions and "piggyback" registration
rights applicable to the Common Stock issuable upon exercise of the
warrant. A holder of the Company's Series A Preferred Stock purchased
$1,000,000 of the Debentures.
In August 1998, the Company obtained effectiveness of a registration
statement on Form SB-2 (SEC File No. 333-52625) under which it registered
a total of 7,240,356 shares of Common Stock, for resale by certain
security holders of the Company (the "August SB-2"). After the August
SB-2 was declared effective by the SEC, the National Association of
Securities Dealers, Inc. ("NASD") determined that it would undertake a
detailed review of the registration statement. Pending the completion of
the NASD review, the Company suspended the sale of shares under the
registration statement through NASD member firms. Approximately 250,000
of the registered shares were sold under that registration statement
before the Company suspended sales under it. During the NASD's review,
the Company further determined that the Prospectus contained in the
August SB-2 was no longer current and that a "post-effective amendment"
would be required to be filed and declared effective by the SEC before
additional sales can be made under the August SB-2.
On September 22, 1998, the Company entered into an agreement with
Liviakis Financial Communications, Inc., a significant shareholder of the
Company, for a $1,300,000 debt financing. The note payable is due
February 1, 1999, bears interest at 8% per year, and is secured by
substantially all available assets of the Company. The Company used
$1,000,000 of the proceeds to redeem $833,000 of the approximate $2.3
million balance of its Series A Convertible Preferred Stock. The Company
paid 120% of face value for the redemption. The security holders
participating in this redemption also agreed to a gated conversion
schedule over the following three months. The participating investors,
representing approximately 1,342,000 shares of the remaining Series A
Preferred agreed to hold their Series A Preferred shares until at least
October 15, 1998 at which time one-third of the Series A Preferred shares
may be converted to common stock on each of October 15, November 15, and
December 15 of 1999, respectively. As an incentive to these investors,
the Company has agreed to issue Common Stock purchase warrants
exercisable to purchase that number of shares of Common Stock equal to
five percent of the number of shares of Series A Preferred Stock held by
the participating investor at the end of each period. As of December 31,
1998, the Company is obligated to issue warrants for 78,089 shares
exercisable at $2.40 per share through October 15, 2001, 67,084 shares
exercisable at $3.36 per share through November 15, 2001, and 67,084
shares exercisable through December 15, 2001. By October 31, 1998, the
Company was to file a registration statement for the shares underlying
the Warrants as well as additional shares issuable upon conversion of the
Series A Preferred Stock, beyond those included in the original SB-2
Registration Statement, due to a decline in the stock price. Penalties
similar to those contained in the original Designation of Series A
Preferred Stock apply if the Company is late in getting the shares
registered. The Company intends to file a registration statement as soon
as practicable.
As noted above, the Company also has a pending commitment to file a
registration statement, which was due October 7, 1998, covering the
shares of Common Stock issuable upon conversion of the 6% Debentures. In
the event the registration is not effective with the SEC within 120
calendar days of the Initial Issuance Date (which was July 21, 1998), the
Company is required to pay a cash penalty of two percent (2%) of the face
amount of the 6% Debentures and thereafter an amount equal to three
percent (3%) of the face amount for every thirty calendar days (or any
fraction thereof) until the registration is effective. If the Company
does not obtain effectiveness of a registration statement by January 18,
1999, the holders have the right to require the Company to redeem the 6%
Debentures at 120% of face value plus accrued and unpaid interest and
penalties to the date of redemption. The Company intends to file a
7
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registration statement covering the Common Stock issuable upon conversion
of the 6% Debentures as soon as practicable, and will include in that
registration statement a sufficient number of shares to cover the
additional warrants issued since January 1998 and the 290,000 shares
issued to Liviakis Financial Communications, Inc., an affiliate of the
Company, which have registration rights. See Note 5, below.
Note 5 -- LIVIAKIS FINANCIAL COMMUNICATIONS INC. ("LFC") - CONSULTING
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 of June 1997. For services to be
rendered under the New LFC Agreement, LFC received 290,000 shares of
Common Stock, issued as a signing bonus upon execution of the New LFC
Agreement. The consulting agreement was valued as $1,078,438 of prepaid
consulting services based on the share price on the date of the agreement
less a 15% discount, attributable to the fact that the shares were
restricted and subject to a "lock-up" provision as described below. The
consulting services will be expensed over the term of the agreement. The
Common Stock issued to LFC under the new Consulting Agreement carries
certain registration rights. In conjunction with the entry of the New LFC
Agreement, LFC agreed to a further lock-up of all shares owned by LFC and
its affiliates, pursuant to which they will not be able to sell such
shares before February 1, 1999, even though certain of those shares were
included in the Company's Registration Statement on From SB-2, which
became effective August 7, 1998.
Note 6 -- LITIGATION
Settlement of Claims of Certain Noteholders
In April 1998, the Company entered into an agreement with certain
Noteholders under which the Company issued shares of Common Stock in
settlement of the dispute. Terms of the settlement entitled the
Noteholders to certain guarantee or put provisions related to the shares.
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 the shares that are still entitled to the
guarantee) 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 became 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 during which
the former Noteholders may "put" any shares remaining unsold by them at
the time back to the Company. Upon exercise of the put, the Company must
either (1) purchase the shares for the put price of $3.00 per share, 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. The
shares originally issued upon conversion of the notes and the additional
shares resulting from the settlement are reflected as Redeemable Common
Stock. The originally issued shares are reflected at their conversion
value adjusted for the value attributable to the guarantee and "put"
provisions. In the event redemption of such shares becomes probable and
the actual redemption amount is in excess of the carrying amount, such
excess amount will be recorded as litigation settlement expense. The
additional shares are reflected at their redemption value. As of
September 30, 1998, approximately 128,000 shares subject to the guarantee
and "put" provision, with a carrying value of $232,000, remained
outstanding and have a maximum redemption value of approximately $384,000
prior to any reduction for amounts the holder may receive upon the sale
of such shares.
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Note 7 -- RECENT ACCOUNTING PRONOUNCEMENTS
In June 1998, the FASB issued Statement of Financial Accounting
Standards No. 133, "Accounting for Derivative Instruments and Hedging
Activities" (FAS 133). The new standard requires companies to record
derivatives on the balance sheet as assets or liabilities, measured at
fair value. Gains or losses resulting from changes in the values of these
derivatives will be reported in the statement of operations or as a
deferred item, depending on the use of the derivatives and whether they
qualify for hedge accounting. The key criterion for hedge accounting is
that the derivative must be highly effective in achieving offsetting
changes in fair value or cash flows of the hedged items during the term
of the hedge. The Company plans to adopt FAS 133 in the first quarter of
fiscal 2000 and has not yet determined the effect, if any, of adopting
the new standard.
Note 8 -- SUBSEQUENT EVENTS
On October 1, 1998, the Company and CSI entered into a non-binding
Letter of Intent to form a non-exclusive strategic partnership. CSI may
also make an equity investment of $1,000,000 in the Company through a
direct purchase of restricted shares of common stock. In a related
transaction, an officer and a shareholder of CSI, may make a separate
investment of $1,000,000 in the company through direct purchase of
restricted shares. The Letter of Intent provides that the shares are to
be issued at a discount of 10% from the average three-day closing price
($3.208) prior to the date of entry of the Letter of Intent, assuming the
purchase agreements are completed in a timely manner. However, the
Company expects that the purchase price will be adjusted to correspond to
the price the Company may place additional shares in a contemplated
financing.
On October 28, 1998, the Company borrowed $500,000 from the CEO and 50%
owner of Cardservice International, Inc. The note bears interest at 8%
per annum and is payable in full on the earlier of the receipt by the
Company of proceeds from the sale of the Company's Common Stock to this
individual or March 1, 1999. In consideration for the loan, the Company
also agreed to issue a Common Stock Purchase Warrant exercisable to
purchase 25,000 shares of Common Stock at $3.038 per share through
October 27, 2001.
During the second fiscal quarter of 1999, the Company received two
bridge loans from Liviakis Financial Communications, Inc. (LFC) totaling
$300,000 in the form of 8% Notes Payable due February 1, 1999. In
January, the Company received a $100,000 bridge loan in the form of a 8%
Note Payable, due March 1, 1999. LFC and the principals of LFC have also
agreed to extend their "lock-up" of Company shares held, through the end
of calendar year 1999.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FORWARD-LOOKING STATEMENTS
- --------------------------
The Company may, in discussions of its future plans, objectives and
expected performance in periodic reports filed by the Company with the
Securities and Exchange Commission (or documents incorporated by
reference therein) and in written and oral presentations made by the
Company, include projections or other forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933 or Section 21E
of the Securities Exchange Act of 1934, as amended. Such projections and
forward-looking statements are based on assumptions, which the Company
believes are reasonable but are, by their nature, inherently uncertain.
In all cases, results could differ materially from those projected. Some
of the important factors that could cause actual results to differ from
any such projections or other forward-looking statements are detailed
below, and in other reports filed by the Company under the Securities
Exchange Act of 1934, including the Company's Annual Report on Form
10-KSB for the fiscal year ended June 30, 1998 and the Report on Form 8-K
filed on August 11, 1998, Reporting an Event of August 3, 1998. The Form
8-K incorporates the Company's Registration Statement on Form SB-2 (SEC
File No. 333-52625).
History of Losses and Potential Fluctuations in Operating Results:
Throughout the Company's history including the first quarter of the
fiscal year ending September 30, 1998, the Company has continued to
experience significant operating losses. In addition, because the Company
generally ships its products on the basis of credit card processing
applications or purchase orders, increments to recurring revenue and
other component sales in any quarter are highly dependent on orders
shipped in that quarter and, accordingly, may fluctuate materially from
quarter to quarter. The Company's operating expense levels are based on
the Company's internal forecasts for future demand and not on firm
customer orders. Failure by the Company to achieve these internal
forecasts could result in expense levels that are inconsistent with
actual revenues. The Company's results may also be affected by
fluctuating demand for the Company's products and by increases in the
costs of components acquired from the Company's vendors.
Requirement for Additional Capital: At present, the development of
the Company's infrastructure, product development initiatives, and
transition to the new distribution program requires additional financing.
Proceeds from recently completed private placement offerings have allowed
the Company to continue operations; however, execution of the Company's
business plan is dependent on a more significant debt or equity financing
event. The Company continues to work both directly and through its
consultants to secure additional debt or equity financing which is
required to fund operations while a significant recurring revenue stream
is built. 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 failure of the Company to obtain additional
financing could have a material adverse impact on the Company, including
its ability to continue as a going concern.
Distribution Program: The Company has recently executed a Letter of
Intent with Cardservice International which outlines CSI's intent to
produce its LinkPoint(TM) processing terminals using the Company's
proprietary Wireless Express Payment ServiceSM (WEPSSM). Lipman USA Inc.
has also announced the availability of its NURIT 2090 terminal using
WEPSSM. The Company anticipates that CSI and Lipman will promote these
products within their own markets using their respective distribution
channels. CSI is also expected to promote the wireless products to other
ventures of First Data Merchant Services. The Company also has joint
marketing and distribution agreements in place with GTE Wireless, Bell
Atlantic Mobile, and Ameritech. These and anticipated additional
distribution programs are expected to have a material impact on the
Company's future revenue stream. While the Company anticipates it will
execute a definitive agreement with CSI and sign distribution agreements
with other significant partners, the failure to successfully complete the
agreements and execute the specified programs through any of these
distributors could have a material adverse effect on the Company.
The Company's Dependence on a Single Type of Product and Technological
Change: All of the Company's revenue is derived from sales of its credit
card transaction services and 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, or the introduction of new or superior competing technologies.
The Company's success will depend in part on its ability to respond
quickly to technological changes through the development and improvement
of its products.
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Competition by Existing Competitors and Potential New Entrants into the
Market: The Company has identified several potential competitors
attempting to develop CDPD based terminals and solutions. In addition,
companies with substantially greater financial, technical, marketing,
manufacturing and human resources, as well as name recognition, than the
Company may also enter the market.
CDPD Resale Agreements Containing Minimum Purchase Obligations: The
Company has to date entered into four CDPD service resale agreements, one
of which contains minimum obligations which can be characterized as "take
or pay" provisions. The agreement with AT&T Wireless Data, Inc. contains
such provisions. The Company is obligated to pay for the minimum amount
of service stated in the agreement even if it fails to place enough
service with merchants to meet the minimums. The failure of the Company
to meet these service minimums could have an adverse financial impact
upon the Company.
Status of Federal Corporate Tax Filings: The Company has not completed
federal income tax filings for fiscal years 1996 and 1997. While it is
unlikely that the Company will owe any taxes due to the sustained losses
during the periods, the Company may be subject to penalties for the
delinquency. The Company intends to take the steps required to complete
the tax filings as soon as practicable.
Dilutive and Other Possible Adverse Effects of Outstanding Options,
Warrants and Other Rights to Acquire Common Stock: The Company has a
substantial number of outstanding rights to acquire Common Stock in the
form of the Series A Preferred Stock, the 6% Convertible Subordinated
Debentures, various warrants, options, and contract rights. A substantial
number of these rights, plus additional rights in the form of options
that have been or may be granted to the Company's officers, directors,
employees or consultants under the Company's 1992 Stock Option Plan or
otherwise, are exercisable 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.
Current Status of Registration Statements: The Company was obligated to
file a registration statement with the Securities and Exchange Commission
by October 7, 1998, covering the shares of Common Stock issuable upon
conversion of the 6% Debentures which the Company sold in July 1998. In
September 1998, the Company redeemed a total of 833,000 shares of its
Series A Preferred Stock. In conjunction with that redemption, the
Company also agreed to issue warrants exercisable to purchase a total of
212,257 shares of Common Stock to the holders of the remaining shares of
Series A Preferred Stock. The redemption agreement includes provisions
that obligated the Company to file a registration statement by October
31, 1998, covering any additional shares issuable upon conversion of the
Series A Preferred Stock. A registration statement to cover these shares
has not been filed as of the date of filing of this Report. See
"Securities Issuances to Fund Operations" and "Private Offering of 6%
Convertible Subordinated Debentures due July 21, 2000" sections of
Results of Operations.
RESULTS OF OPERATIONS
---------------------
U.S. Wireless Data, Inc.(the "Company" or "USWD") was incorporated in the
State of Colorado on July 30, 1991. The Company is in the business of
providing products and services to enable the use of wireless technology
for electronic payment and other transactions.
Over the past two and a half years, USWD has focused its product
development effort on incorporating Cellular Digital Packet Data (CDPD)
technology into its product line. Because of the high speed nature of CDPD
technology, and the ability to bypass the public switched telephone
network, the Company's new line of CDPD-based terminals have significant
performance and communication cost advantages when compared with the
traditional dial-up terminals currently being sold in the U.S. market
today.
In fiscal year 1998, to broaden distribution of the TRANZ Enabler CDPD
based product, the Company entered into agreements with large
telecommunications carriers for direct distribution of products and
services to merchants. The Company signed joint marketing and operating
agreements with Bell Atlantic Mobile, Ameritech Mobile Communications,
Inc., and GTE Wireless. The agreements contain certain significant
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operational and financial performance criteria that the company is required
to meet. Commencing in the second quarter of fiscal 1998 and continuing
into the first quarter of fiscal 1999, USWD made significant investments to
support a nationwide deployment of TRANZ Enablers to merchants through
GTE's and other telecommunications carriers' national sales forces. Under
these deployment programs, the carrier's sales representative introduces
USWD's credit card processing solution and TRANZ Enabler to the end user
merchant. Upon execution of a credit card processing agreement, a TRANZ
Enabler unit(s) was 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.
Market Penetration through Telecommunications Carriers and Revisions to
Business Plan
-------------------------------------------------------------------------
Placements of TRANZ Enabler units pursuant to the Company's agreements
with telecommunications carriers did not develop as rapidly as anticipated
and have not reached anticipated (and necessary) levels to pay for the
infrastructure to support the programs. Costs to the Company of
implementing the joint marketing and distribution agreements with GTE
Wireless, Bell Atlantic Mobile and Ameritech have exceeded revenue
generated by the programs since they began. The GTE Agreement also required
the Company to generate minimum CDPD service billings to GTE Wireless from
merchants signed up for GTE Wireless's CDPD service through the Company.
GTE Wireless agreed to adjust the commencement date for these obligations
so that the start date for the first quarter was February 1, 1998. Actual
placements did not allow the Company to meet the renegotiated minimum
purchase obligations. To remedy this minimum purchase requirement, the
Company and GTE amended the agreement on September 9, 1998 which removed
any minimum purchase requirement and established new IP address pricing for
merchants acquired under the agreement.
Because revenue has not developed as hoped, and expenditures have been
outstripping the Company's ability to support its business plan, management
began to reexamine the Company' s business plan in the fourth quarter of
fiscal 1998 and came to the conclusion that the Company could not continue
to function at its current expenditure levels.
During the first quarter of fiscal 1999, Roger Peirce, previous Vice
President of Operations for Visa and most recently the President of First
Data Merchant Services joined the USWD Board of Directors. While
acclimating to USWD's business plan and strategy, Mr. Peirce was asked by
the Board of Directors to take a more active role in the Company. On August
21, 1998 Mr. Peirce became the Chief Executive Officer of the Company. Mr.
Peirce is also a nonvoting member of the Board of Directors of Cardservice
International. Inc. ("CSI"), a related party. Mr. Peirce replaced Evon A.
Kelly as the Company's CEO and Rod Stambaugh as Chairman. Mr. Kelly
resigned as an officer and director of the Company, but remains as an
employee of the Company under a one-year employment agreement. Mr.
Stambaugh remains as President and a director of the Company.
Mr. Peirce identified several areas in the Company's distribution and
operational strategy that required redirection. Beginning the last week of
August 1998, several changes in the Company's strategy were implemented.
The fundamental change in the strategy involves positioning the Company as
an enabler of wireless products and services to the marketplace and not as
a competitor to the current incumbents. This repositioning of the Company
in the marketplace encompasses the discontinuation of soliciting and owning
merchant contracts for providing bankcard-processing services. The
Company's approach to the market in fiscal 1998 effectively positioned
itself as a direct competitor to the major merchant acquirers. The
Company's new strategy involves an end-to-end systems approach to enabling
the marketplace. The Company is enabling the marketplace with a new service
offering - Wireless Express Payment ServiceSM (WEPSSM). WEPSSM includes an
expanding set of wireless terminal devices that incorporate the Company's
proprietary CDPD modem, a web-based IP address provisioning and terminal
activation process that includes real time remote diagnostic capabilities,
the CDPD network service, and server technology that delivers wireless
transactions to the current front end card processors. The Company is
targeting the top 30 merchant acquirers and card processors for this
service. The initial response for WEPSSM from the targeted prospects has
been very positive.
In furtherance of this new strategy, on October 1, 1998, the Company and
CSI entered into a non-binding Letter of Intent to form a non-exclusive
strategic partnership to jointly exploit payment system opportunities using
wireless technologies. Upon entry of a final agreement, CSI will produce
its LinkPoint(TM) processing terminals using the Company's proprietary
Wireless Express Payment ServiceSM. CSI will promote these products within
its own markets using its approximately 2,200-person sales force. In
addition, CSI is to
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promote the wireless products to other ventures of First Data Merchant
Services, the fifty-percent owner of CSI. Pursuant to the non-binding
Letter of Intent, CSI also agreed to consider making an equity investment
of $1,000,000 in the Company through a direct purchase of restricted shares
of common stock and Chuck Burtzloff, the chief executive officer and 50
percent owner of CSI, has agreed to consider making a separate investment
of $1,000,000 in the Company through direct purchase of restricted shares.
The Company intends to coordinate the timing and terms of these investments
with a future private offering of equity.
Securities Issuances to Fund Operations
---------------------------------------
To fund its operating requirements, the Company has had to rely primarily
on the issuance of debt or equity securities over a significant part of the
last two fiscal years. In August 1998, the Company obtained effectiveness
of a registration statement on Form SB-2 (SEC File No. 333-52625) under
which it registered a total of 7,240,356 shares of Common Stock, for resale
by certain security holders of the Company (the "August SB-2"). The August
SB-2 was filed to honor the registration rights of the holders of the
Company's Series A Preferred Stock and one previously issued 50,000 share
Warrant. After the August SB-2 was declared effective by the SEC, the
National Association of Securities Dealers, Inc. ("NASD") determined that
it would undertake a detailed review of the registration statement. Pending
the completion of the NASD review, the Company suspended the sale of shares
under the registration statement through NASD member firms. Approximately
250,000 of the registered shares were sold under that registration
statement before the Company suspended sales under it. During the NASD's
review, the Company further determined that the Prospectus contained in the
August SB-2 was no longer current and that a "post-effective amendment"
would be required to be filed and declared effective by the SEC before
additional sales can be made under the August SB-2.
In September 1998, the Company negotiated a partial redemption of its
outstanding Series A Preferred Stock with several of the security holders.
The Company borrowed $1,300,000 from Liviakis Financial Communications,
Inc. and used $1 million of that money to redeem $833,000 face value of the
Series A Preferred Stock. The Company paid 120% of face value for the
redemption. The note payable to LFC is due February 1, 1999 and bears
interest at 8% per year. The security holders participating in this
redemption also agreed to a gated conversion schedule over the following
three months. The participating investors, representing approximately
1,342,000 shares of the remaining Series A Preferred agreed to hold their
Series A Preferred shares until at least October 15, 1998. Following
October 15, 1998, one-third of the Series A Preferred shares may be
converted to common stock on each of October 15, November 15, and December
15 of 1998, respectively. As an incentive to these investors, the Company
agreed to issue Common Stock purchase warrants exercisable to purchase that
number of shares of Common Stock equal to five percent of the number of
shares of Series A Preferred Stock held by the participating investor at
the end of each period. The warrants are to be exercisable for three year
terms, at a per share price equal to 110% of the average of the closing bid
price over the five days prior to the effective date of each warrant. The
Company has also agreed to increase the dividend rate from 4% to 8% on the
balance of the unconverted Series A Preferred Stock balance and to register
with the SEC for public resale a sufficient number of shares of Common
Stock to cover all conversions of the Series A Preferred stock plus the
shares of Common Stock underlying the warrants. The registration statement
was to be filed by October 31, 1998, and penalties similar to those
contained in the original Designation of Series A Preferred Stock apply if
the Company is late in getting the shares registered. As of the date of
this Report, the Company has not yet filed this registration statement.
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 were
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 one of the
participating investors, which was evidenced by a promissory note dated
June 26, 1998, and used the balance of the proceeds as working capital and
to repay existing obligations. The purchaser of 1,600,000 shares of the
Company's Series A Cumulative Convertible Redeemable Preferred Stock,
purchased $1,000,000 of the 6% Debentures. JW Genesis Securities, Inc. of
Boca Raton, Florida, acted as the primary finder in the transaction and the
Company paid JW Genesis a
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finder's fee equal to seven percent (7%) of the amount raised from the sale
of the 6% Debentures, which amounted to $140,000. In addition, JW Genesis
received a three-year, 60,000 share Common Stock purchase warrant
exercisable at $4.50 per share. The shares underlying the Warrant are
entitled to piggyback registration rights, with the registration expenses
to be paid by the Company. The Company also paid a finder's fee to Liviakis
Financial Communications, Inc. ("LFC") in the amount of 2.5% of the amount
raised on the sale of the 6% Debentures, which 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 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 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.
Any 6% Debentures that have not been converted to Common Stock as of the
maturity date, or upon a merger, consolidation or other sale of the Company
or its assets in which the Company is not the surviving entity, are to
either be converted into Common Stock at the conversion price then in
effect or, at the option of the holders, must be redeemed by the Company.
The Company committed to file a registration statement covering the
shares of Common Stock underlying the 6% Debentures by October 7, 1998
(which it did not). Since the registration was not effective with the SEC
within 120 calendar days of the Initial Issuance Date, the Company became
obligated to pay a cash penalty of two percent (2%) of the face amount of
the 6% Debentures and thereafter an amount equal to three percent (3%) of
the face amount for every thirty calendar days (or any fraction thereof)
until the registration is effective. Because the Company failed to obtain
effectiveness of a registration statement by January 18, 1999, the holders
have the right to require the Company to redeem the 6% Debentures at 120%
of face value plus accrued and unpaid interest and penalties to the date of
redemption. The Company intends to file a registration statement covering
the Common Stock issuable upon conversion of the 6% Debentures as soon as
practicable, and will include in that registration statement a sufficient
number of shares to cover the additional warrants issued since January 1998
and the 290,000 shares issued to an affiliate of the Company which have
registration rights. The Company may also include additional shares of
Common Stock to cover the conversion of shares of Series A Preferred Stock
for which a sufficient number of shares were not included in the August
SB-2 owing to a decline in the Market Price for the Common Stock subsequent
to the time the August SB-2 was filed. The Company is in discussion with
various holders of the Series A Preferred Stock and the 6% Debentures
regarding a possible restructuring or redemption of these securities.
Current Financing Initiatives
-----------------------------
The Company has several initiatives that it is currently pursuing to
raise additional capital. On October 1, 1998, the Company entered into a
non-binding Letter of Intent with Cardservice International, Inc. to form a
non-exclusive strategic partnership involving joint- product and
distribution initiatives. The Letter of Intent also includes a provision
pursuant to which a $2,000,000 direct equity investment in USWD by CSI and
its chief executive officer may be made if the terms of a definitive
agreement can be reached. The parties are working on the completion of
definitive agreements.
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The Company is also exploring similar initiatives with several other
potential strategic partners as well as continuing efforts to raise capital
from other debt or equity sources.
Year 2000 Issues
----------------
The Company has completed a review of the impact of the Year 2000 issue on
the Company's business. This issue concerns the potential problems and
liabilities faced by all users and persons dependent on computers that
might result from software or system failure or malfunctions if the systems
fail to properly recognize the date change between 1999 and 2000. The
Company's internal business systems have been evaluated, and with the
exception of the accounting system, are Year 2000 compatible. The Company
intends to replace the accounting software during fiscal year 1999. The
cost of conversion is not expected to be material. The engineering staff
has made an assessment of USWD products and is not aware of any
complications regarding the products the Company delivers to the end users.
The Company is reliant on the electronic payments infrastructure utilized
by credit card processors, banks and financial institutions within the
United States, and could be subject to unresolved issues which impact this
infrastructure. The Company could be adversely, materially affected, both
operationally and financially, to the extent third parties with which it
interfaces, either directly or indirectly, have not properly addressed
their Year 2000 issues.
Fiscal 1999 Compared to Fiscal 1998
Net Revenue
-----------
Revenue of $361,000 for the first quarter of fiscal 1999 increased 33%
from revenue of $270,000 generated during the first quarter of fiscal 1998
as the Company continued the shift from a per-unit sales approach to a
recurring revenue model. Product sales of POS-50, POS-500 and other
equipment sales decreased by approximately $90,000 while service revenue,
which includes application fees, transaction processing, and repair revenue
increased by approximately $181,000. In the latter part of the first
quarter of fiscal 1999, the Company embarked on a significant shift in its
product and distribution strategy. This involves the integration of the
Company's WEPSSM modem and server technology into the product offerings of
other terminal manufactures and development of distribution agreements with
the major merchant card acquirers and card processors. The Company
anticipates that this transition will take several months as new products,
services and distribution capabilities are introduced to the market.
Gross Profit
------------
Gross profit of $94,000 in the first quarter of fiscal 1999 was even with
the prior year's quarter, although the profit margin decreased as a percent
of revenue to 26% in the current quarter from 35% in the prior quarter.
This was attributable to a shift in revenue from a higher margin product
component to a lower margin services component. The Company expects the
margin relationships to switch as the new business model is implemented.
The Services cost structure in the first quarter reflects the dynamics of
the previous business model which includes ongoing TRANZ Enabler
amortization for processing units deployed. Efforts are also underway to
eliminate underutilized CDPD addresses from the CDPD carrying cost. The new
WEPSTM Service is expected to improve the margin relationships as it
becomes a more predominate component of the Services offering.
Operating Expenses
------------------
Selling, general and administrative expense increased from $1,288,000 in
the first quarter of fiscal 1997 to $1,686,000 in the first quarter of
fiscal 1998. Of the approximate $400,000 net increase, the significant
increase in Company headcount from 18 at September 1997 to 53 in September
1998, increased salary, commission and benefit expense by $672,000,
including severance expense of approximately $100,000. This was partially
offset by a quarterly adjustment for a variable stock option resulting in a
$266,000 non-cash credit to reflect the change in the carrying value of the
option due to the change in the Company's stock price during the quarter.
Non-cash consulting expense, including a charge resulting from a warrant
extension in the prior year's first
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quarter, decreased by $246,000 in the current quarter. Other operating
expenses increased by $233,000 due primarily to increased travel, rent, and
communication expense related to the increase in headcount, particularly in
the sales organization, and increase in professional services expense.
Research and development expenses decreased slightly from $95,000 in the
first fiscal quarter of 1998 to $80,000 in the first quarter of 1999. This
decrease was due to a reduction in materials expense.
Interest Expense and Other Income
---------------------------------
Interest expense of $116,000 in the current quarter included a $97,000
non-cash charge related to the July Convertible Debenture financing. 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.
Other income of $190,000 resulted from the successful restructuring of a
note payable to a former terminal equipment supplier. This note had
previously been reported in a default status.
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 $30 million since
inception to September 30, 1998, with a working capital deficit of
approximately $2,476,000 at September 30, 1998, versus a deficit of
$2,967,000 in the prior year. The Company has several immediate financial
obligations in the form of notes payables, commitments on the 6%
Convertible Debentures, and several key vendor payables. The Company
believes that it will be able to restructure these commitments as necessary
while it completes an anticipated financing event designed to satisfy its
obligations and fund the business plan, although no assurance can be given
that this will be the case.
With the implementation of the new distribution strategy adopted in the
latter part of the first quarter of fiscal 1999 (see "Market Penetration
through Telecommunication Carriers and Revisions to Business Plan," above),
the Company has taken steps to reduce spending. With the new focus on
distribution through large merchant acquirers, the Company has reduced
headcount from 60 at June 30, 1998, to 39 as of October 31, 1998, with most
of the reduction occurring in the direct sales force. With the appointment
of Roger Peirce as CEO, the Company has been able to avail itself of the
services of several key senior level personnel, engaged under consulting
contracts with remuneration in the form of options rather than cash. Based
on current staffing levels, the Company's expenditures are running at a
monthly rate of approximately $325,000 versus $450,000 per month in the
fourth quarter of fiscal 1998. However, execution of the Company's current
business plan is dependent on a significant debt or equity financing event
in the immediate future. The Company continues to work both directly and
through its consultants in an effort to secure additional debt or equity
financing which is required to fund operations while a significant
recurring revenue stream is built. While management is confident it can
accomplish this objective, the inability of the Company to secure
additional financing in the near term could adversely impact the Company's
financial position, including its ability to continue as a going concern.
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PART II
ITEM 1 - LITIGATION
Settlement of Claims of Certain Noteholders
In April 1998, the Company entered into a settlement agreement with certain
Noteholders under which the Company issued shares of Common Stock in
settlement of the dispute. Terms of the settlement entitled the Noteholders
to certain guarantee or put provisions. 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 the
shares that are still entitled to the guarantee) 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
became 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 during which the former Noteholders may "put" any shares
remaining unsold by them at the time back to the Company. Upon exercise of
the put, the Company must either (1) purchase the shares for the put price
of $3.00 per share, 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.
The shares originally issued upon conversion of the notes and the
additional shares resulting from the settlement are reflected as Redeemable
Common Stock. The originally issued shares are reflected at their
conversion value adjusted for the value attributable to the guarantee and
"put" provisions. In the event redemption of such shares becomes probable
and the actual redemption amount is in excess of the carrying amount, such
excess amount will be recorded as litigation settlement expense. The
additional shares are reflected at their redemption value. As of September
30, 1998, approximately 128,000 shares subject to the guarantee and "put"
provision, with a carrying value of $232,000 remained outstanding and have
a maximum redemption value of approximately $384,000 prior to any reduction
for amounts the holder may receive upon the sale of such shares.
ITEM 2 - CHANGES IN SECURITIES
Recent Issuances of Unregistered Securities:
During the fiscal quarter ended September 30, 1998, the Company sold the
following securities without registering the securities under the
Securities Act of 1933, as amended (the "Act").
July 21, 1998: $2,000,000 of 6% Convertible Debentures due July 21, 2000.
The Convertible Debentures are convertible into shares of Common Stock at
the lesser of 80% of the closing bid price over the last five trading days
prior to conversion, or $4.25 per share. The Debenture Agreement is filed
as Exhibit 4.17 to the Company's Annual Report on Form 10-KSB for the
fiscal year ended June 30, 1998. Amounts payable to holders of the 6%
Debentures will diminish amounts payable to holders of the Company's Common
Stock as dividends or upon liquidation;
July 21, 1998: 20,000 Common Stock purchase warrants issued to RBB Bank,
exercisable at $4.375 through July 21, 2001;
July 21, 1998: 60,000 Common Stock purchase warrants issued to JW Genesis
Securities, Inc. exercisable at $4.50 through July 21, 2001;
July 21, 1998: 100,000 Common Stock purchase warrants issued to the
purchasers of the 6% Convertible Debentures, exercisable at $4.25 through
July 21, 2001;
September 3 - 9, 1998: 300,000 non-qualified Common Stock purchase options,
with strike prices between $2.38 and $2.72, issued to three consultants for
management services in lieu of salary;
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September 8, 1998: 290,000 shares of Common Stock issued to Liviakis
Financial Communications, Inc., an affiliate of the Company, as
consideration for a new consulting agreement entered into as of June 30,
1998;
September 11, 1998: 8,333 Common Stock purchase warrants issued to entrenet
Group, LLC, exercisable at $2.40 through September 11,
2003.
The Company relied upon the registration exemption contained in Section
4(2) of the Securities Act of 1933 for these transactions. None of the
transactions involved a public offering. Representations were received from
the purchasers of the securities to the effect that the purchasers were
taking for investment purposes only and not with a view to distribution;
"restricted securities" legends were or will be imprinted on all stock
certificates; and stop-transfer instructions were lodged with the Company's
transfer agent as to all shares of common stock issued in the transactions.
ITEM 3 - DEFAULTS UPON SENIOR SECURITIES
6% Convertible Subordinated Debentures Due July 21, 2000
Pursuant to the Debenture Agreement relating to the Company's 6%
Convertible Subordinated Debentures due July 21, 2000, the Company
committed to file a registration statement with the Securities and Exchange
Commission by October 7, 1998, covering the shares of Common Stock issuable
upon conversion of the 6% Debentures which the Company sold in July 1998.
That registration statement has not been filed as of the date of filing of
this Report. The security required effective registration of the underlying
shares within 120 days of July 21, 1998, with the following cash penalties
for failure to obtain effectiveness by that time: 2% of the face amount of
the Debentures at 120 days; and 3% of the face amount of the Debentures for
each additional 30 day period (or any part of any 30-day period) during
which the registration statement remains ineffective. The holders also have
the right to require the Company to redeem the Debentures for 120% of face
value plus accrued interest if the shares were not registered by January
17, 1999. The initial interest payment through December 31, 1998, of
approximately $55,000, was due and payable by January 15, 1999. The Company
has not made the penalty or interest payments as of the date of filing this
Report, and does not presently have the resources to do so. The holders
also have the right to accelerate the payment of all amounts due and owing
under the Debentures if an "Event of Default" (as defined in the Debenture
Agreement) is not cured within 45 days of its occurrence. Failure to pay
the penalties and/or interest within the periods required by the Debenture
Agreement may constitute "Events of Default."
Series A Preferred Stock
In September 1998, the Company redeemed a total of 833,000 shares of
its Series A Preferred Stock. In conjunction with that redemption, the
Company also agreed to issue warrants exercisable to purchase a total of
212,257 shares of Common Stock to the holders of the remaining shares of
Series A Preferred Stock. The redemption agreement includes provisions that
obligated the Company to file a registration statement by October 31, 1998,
covering any additional shares issuable upon conversion of the Series A
Preferred Stock (beyond those included in the original SB-2 Registration
Statement that was declared effective as of August 7, 1998, which, because
of a declining stock price, included an insufficient number of shares to
cover conversion of all of the outstanding shares of Series A Preferred
Stock), plus the shares issuable upon exercise of the warrants. The Company
has not filed this registration statement as of the date of filing of this
report, and penalties similar to those contained in the original
Designation of Series A Preferred Stock apply if the Company is "late" in
getting the shares registered.
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ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K
a) Exhibits required by Item 601 of Regulation S-B
4.1 Non-Qualified Stock Option issued to Roger Peirce effective
November 23, 1998 (1)
10.1 Extension of Promissory Notes issued to Liviakis Financial
Communications, Inc., dated January 1, 1999
10.2 Lock-up Agreement between the Company and Liviakis Financial
Communications, Inc. dated January 1, 1999
10.3 Extension of Promissory Note issued to R. Chuck Burtzloff, dated
January 1, 1999
27 Financial Data Schedule
___________________________
(1) This exhibit constitutes a "Management Contract, Compensatory
Plan or Arrangement" required to be filed as an Exhibit to this
Report.
b) Reports on Form 8-K
On July 31, 1998, the Company filed a report on Form 8-K reporting an event of
July 16, 1998. The report contained disclosures under Item 5 - Other Events,
relating to the filing of Amendment No. 1 to its Registration Statement on Form
SB-2 (SEC File No. 333-52625) with the United States Securities and Exchange
Commission. The number of shares being registered was decreased from 7,324,106
included in the initial filing to 7,240,356 shares of Common Stock. None of the
Shares are being sold by the company and the Company will not receive any
proceeds from sales of the shares.
On August 11, 1998, the Company filed a report on Form 8-K reporting an event of
August 3, 1998. The report contained disclosures under Item 5 - Other Events,
relating to the filing of Amendment No. 2 to its Registration Statement on Form
SB-2 (SEC File No. 333-52625) with the United States Securities and Exchange
Commission.
On September 14, 1998, the Company filed a report on Form 8-K reporting an event
of August 21, 1998. The report contained disclosures under Item 5 - Other
Events, relating to changes in management. On August 21, 1998, Mr. Roger Peirce
became the Chief Executive Officer and Chairman of the Board of the Company, and
on September 1, 1998, Charles T. Russell became a member of the Company's Board
of Directors.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
U.S. WIRELESS DATA, INC.
Registrant
Date: January 28, 1999 By: /s/ Roger Peirce
--------------------------- --------------------------
Chief Executive Officer
January 28, 1999 By: /s/ Robert E. Robichaud
--------------------------- --------------------------
Chief Financial Officer
EXHIBIT 4.1
THIS OPTION AND THE STOCK ISSUABLE UPON THE EXERCISE HEREOF HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), AND CAN BE
TRANSFERRED ONLY IN COMPLIANCE WITH THE ACT AND APPLICABLE STATE SECURITIES
LAWS. THIS OPTION AND SUCH SHARES MAY NOT BE SOLD, TRANSFERRED OR ASSIGNED IN
THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT, UNLESS, IN THE OPINION OF
COUNSEL FOR THE COMPANY OR COUNSEL FOR THE REGISTERED HOLDER (WHICH SHALL BE IN
FORM AND FROM SUCH COUNSEL AS SHALL BE REASONABLY SATISFACTORY TO THE COMPANY),
SUCH REGISTRATION IS NOT THEN REQUIRED. NO REGISTRATION RIGHTS HAVE BEEN GRANTED
WITH RESPECT TO THIS OPTION AS OF ITS ORIGINAL DATE OF ISSUANCE.
U.S. WIRELESS DATA, INC.
NONQUALIFIED STOCK OPTION CERTIFICATE
U.S. Wireless Data, Inc., a Colorado corporation ("Company"), for good
and valuable consideration, including the incentive to the Optionee to remain as
an employee of the Company as a result of ownership or increased ownership of
the Company's no par value common stock ("Common Stock"), the receipt and
sufficiency of which consideration hereby is acknowledged, irrevocably grants to
the Optionee the option ("Option") to purchase the following number of shares of
Common Stock:
Optionee Number of Shares
-------- ----------------
Roger L. Peirce 1,260,984
The effective date of this grant is November 23, 1998 ("Date of Grant") and is
subject to the following terms and conditions:
1. EXERCISE PRICE. The purchase price ("Exercise Price") for shares of
Common Stock purchasable pursuant to this Option shall be Two and 563/1000
Dollars ($2.563) per share, which shall be paid in full in cash at the time of
exercise; provided, however, that the Board of Directors of the Company may in
its sole discretion permit payment to be made with shares of the Company's
Common Stock owned by Optionee or shares purchasable by Optionee pursuant to
exercise of this Option in such a manner that Optionee shall not have to
surrender any cash to exercise this Option (a "Cashless Exercise"). The Exercise
Price represents the fair market price of the Company's Common Stock as of the
date this Option is granted. Optionee shall have no rights with respect to
dividends or have any other rights
<PAGE>
as a shareholder with respect to shares subject to this Option until Optionee
has given written notice of the exercise of the Option and has paid in full for
such shares.
2. TIME OF EXERCISE. This Option may be exercised as to all or any
portion of the total shares covered by this Option immediately on the Date of
Grant, and shall expire on the later of September 1, 2002, or one year after
cessation of the Executive's relationship with the Company in any capacity,
including service provided to the Company as an employee, officer, director or
consultant. The period of time during which the Option may be exercised is
referred to herein as the "Option Period."
3. COMPANY'S REPURCHASE RIGHTS. The shares purchased upon exercise of
this Option shall be subject to the right of the Company to repurchase such
shares at the same price paid for them by the Optionee; provided that the
Company's repurchase rights shall terminate incrementally in 48 equal monthly
installments commencing on the date of grant of this Option, irrespective of the
date of actual exercise of the Option. The repurchase rights of the Company
shall terminate completely (thereby vesting Optionee's rights in and to 100% of
the shares) in the event of a change in control of the Company, which shall be
defined for purposes hereof as: (1) a transaction involving the sale or transfer
(in one or more related transactions) of a sufficient quantity of the voting
securities of the Company such that upon completion of the transaction(s), the
holders of such securities have the right to elect a majority of the Board of
Directors of the Company; (2) a merger, acquisition or other reorganization of
the Company by another entity (other than a parent or subsidiary of the Company)
in which the Company is not the surviving entity; or (3) the sale of all or
substantially all assets of the Company other than in the ordinary course of
business.
4. NUMBER OF SHARES PURCHASABLE AT ANY ONE TIME. This Option may be
exercised only for at least 100 shares of Common Stock or a multiple thereof or
for the full number of shares for which the Option is then exercisable.
5. DEATH OF OPTIONEE. If Optionee dies during Optionee's employment
with the Company, this Option shall be exercisable only as to that portion
exercisable as of the date of death and within one year after Optionee's death,
or the last day of the Option Period, whichever is earlier, by the personal
representative or administrator of Optionee's estate, or by any trustee, heir,
legatee or beneficiary to whom Optionee's rights under this Option shall pass by
will or the laws of descent and distribution to the extent that Optionee was
entitled to exercise this Option at the time of Optionee's death.
6. RETIREMENT OF OPTIONEE. If Optionee's employment with the Company
terminates by reason of retirement, the Option shall be exercisable within the
one year period following Optionee's retirement as described above, but not
later than the last day of the Option Period, and then only to the extent to
which the Option was exercisable at the time of such termination of employment
by retirement. However, if Optionee dies within three months after termination
by retirement, the Option, to the extent it was exercisable at the time of
Optionee's death, shall thereafter be exercisable for one year after the date of
Optionee's death, but not later than the last day of the Option Period.
-2-
<PAGE>
7. DISABILITY OF OPTIONEE. If Optionee becomes permanently and totally
disabled, and at the time of such disability Optionee is entitled to exercise
one or more installments under this Option, Optionee shall have the right to
exercise this Option within one year after such disability provided Optionee
exercises this Option within the Option Period and then only to the extent to
which this Option was exercisable at the time of such disability. For purposes
of this Section 7 an Optionee shall be considered to be totally and permanently
disabled if a qualified medical physician approved by the Company certifies to
the Company that such Optionee is unable to be gainfully employed by the Company
by reason of a diagnosed and determinable physical or mental impairment which
can be expected to result in death or has lasted and can be expected to last for
a continuous period of not less than 12 months.
8. NONTRANSFERABILITY OF OPTION. This Option may not be transferred by
Optionee otherwise than by will or the laws of descent and distribution. During
Optionee's lifetime, this Option shall be exercisable only by Optionee.
9. LEAVE OF ABSENCE. For purposes of this Option, (i) a leave of
absence, duly authorized in writing by the Company, for military service or
sickness, or for any other purpose approved by the Company, if the period of
such leave does not exceed 90 days, and (ii) a leave of absence in excess of 90
days, duly authorized in writing by the Company, provided Optionee's right to
reemployment is guaranteed either by statute or by contract, shall not be deemed
a termination of employment.
10. CHANGES IN CAPITAL; CERTAIN REORGANIZATIONS. If the outstanding
Common Stock of the Company which is subject to this Option shall at any time be
changed or exchanged by declaration of a stock dividend, split-up, subdivision
or combination of shares, recapitalization, merger, consolidation or other
corporate reorganization in which the Company is the surviving corporation, the
number of and kind of shares subject to the Option and the Option Price shall be
appropriately and equitably adjusted so as to maintain the proportionate number
of shares without changing the aggregate option price. In the event of a
dissolution or liquidation of the Company, or a merger, consolidation, sale of
all or substantially all of its assets, or other corporate reorganization in
which the Company is not the surviving corporation, or in which the Company is
the surviving corporation but holders of Common Stock receive securities of
another corporation, this Option shall terminate as of the effective date of
such event, provided that immediately prior to such event, Optionee shall have
the right to exercise this Option as to all shares underlying this Option,
irrespective of the number of Options actually vested at the time.
11. MANNER OF EXERCISE.
(a) This Option may be exercised in whole or in part at any
time and from time to time within the Option Period, subject to the terms and
conditions contained herein, by the delivery of written notice of exercise to
the Chief Financial Officer of the Company, as required by subsection (c) of
this Section 11, accompanied by: (i) full payment, in cash or certified or bank
check, payable to the Company, or, (ii) if permitted by the Company's Board of
Directors, shares of the Company's Common Stock having a fair market value equal
to the
-3-
<PAGE>
aggregate exercise price for the number of shares purchased. This Option may
also be exercised by "cashless exercise," as described below.
(b) Certificates for the shares of Common Stock purchased upon
exercise of this Option shall be delivered by the Company to the Purchaser
within five (5) business days after the Exercise Date. However, if the Purchaser
has elected to make a "cashless exercise," the Company shall deliver
certificates for the number of shares that results from subtracting, from the
total number of shares otherwise deliverable upon exercise, the number of shares
whose value, calculated using the Market Price, is equal to the value of the
payment otherwise required for exercise by Paragraph (a)(iv) of this Subsection
2.2. For purposes of this section, "Market Price" means the average of the
closing prices of sales on the principal domestic securities exchange on which
such security may at the time be listed, or, if there have been no sales on any
such exchange on any day, the average of the highest bid and lowest asked prices
on all such exchanges at the end of such day, or, if on any day such security is
not so listed, the average of the bid and asked prices quoted on Nasdaq as of
the close of trading in New York City on such day, in each such case averaged
over a period of five (5) consecutive days consisting of the business day
immediately preceding the day as of which Market Price is being determined and
the four (4) consecutive business days prior to such day; provided that if such
security is listed on any principal domestic securities exchange or quoted on
Nasdaq, the terms "business day" and "business days" means a day or days, as
applicable, on which such exchange or Nasdaq is open for trading or quotation,
as the case may be, notwithstanding whether any quotation is available on any
particular business day and, if not, then the Market Price shall be determined
based upon those remaining days during the aforesaid 5-day period for which
quotations are available. If the shares are not so listed or traded on any
principal domestic securities exchange or quoted on Nasdaq, the Market Price
shall be the fair value thereof, as determined in good faith by the Board of
Directors of the Company.
(c) The notice of exercise (i) shall state the election to
exercise the Option, (ii) shall state the number of shares in respect to which
the Option is being exercised, (iii) shall state Optionee's address, (iv) shall
state Optionee's social security number, (v) shall contain such representations
and agreements concerning Optionee's investment intent with respect to such
shares of Common Stock as shall be satisfactory to the Company's counsel, and
(vi) shall be signed by Optionee. As a further condition to the exercise of this
Option, the Company may require Optionee to make any representation and warranty
to the Company as may be required by any applicable law or regulation.
(d) Unless this Option has expired or all of the purchase
rights represented hereby have been exercised, the Company shall, in addition to
certificates for Common Stock issued upon exercise of this Option, prepare upon
exercise of this Option, a new Option representing the rights formerly
represented by this Option that have not expired or been exercised. The Company
shall, within five (5) business days after the Exercise Date, deliver such new
Option to the Optionee designated for delivery in the Exercise Agreement.
12. AMENDMENT AND ADMINISTRATION. The Board of Directors shall have the
authority to interpret the Plan this Option, and generally to conduct and
administer the
-4-
<PAGE>
exercise of this Option and to make all determinations in connection herewith
which may be necessary or advisable, and all such actions of the Board shall be
final and conclusive for all purposes and binding upon Optionee.
13 MISCELLANEOUS. This Option shall inure to the benefit of and be
binding upon each successor of the Company. All obligations imposed upon and all
rights granted to the Optionee and all rights reserved by the Company under this
Option shall be binding upon and inure to the benefit of Optionee, Optionee's
heirs, personal representatives, administrators and successors. Unless the
context requires otherwise, words denoting the singular may be construed as
denoting the plural, and words of the plural may be construed as denoting the
singular and words of one gender my be construed as denoting such other gender
as is appropriate.
IN WITNESS WHEREOF, this Option has been issued by the Company
effective as of the Date of Grant, which is November 23, 1998.
U.S. WIRELESS DATA, INC. Accepted by Optionee:
a Colorado corporation
By /s/ Rod L. Stambaugh /s/ Roger L. Peirce
-------------------- -------------------
Rod L. Stambaugh Roger L. Peirce
President
Attest:
By /s/ Robert E. Robichaud
-----------------------
Robert E. Robichaud
Secretary
-5-
EXHIBIT 10.1
U.S. WIRELESS DATA, Inc.
NOTE PAYABLE EXTENTION
This agreement is entered into and agreed upon as of January 1, 1999 between
U.S. Wireless Data, Inc. ("USWD"), and John Liviakis of Liviakis Financial
Communications, Inc.
WHEREAS, John Liviakis has provided provide bridge financing to USWD under Notes
Payable of $1,300,000 dated September 22, 1998, $150,000 dated November 27,
1998, and $150,000 dated December 14, 1998.
THEREFORE, John Liviakis agrees to:
1) Extend the due date of the three Notes Payable to February 1, 1999.
2) All other terms of the Notes Payable remain in effect as specified in
each of the Note Payable agreements.
U.S. Wireless Data, Inc. Liviakis Financial Communications, Inc.
/s/ Robert E. Robichaud /s/ John Liviakis
- ----------------------- -----------------
By Robert E. Robichaud By John Liviakis
Chief Financial Officer President
EXHIBIT 10.2
December 23, 1998
Mr. Roger Peirce
U.S. Wireless Data, Inc.
2200 Powell Street, Suite 800
Emeryville, CA 94608-1876
Dear Roger:
This letter will serve as confirmation that U.S. Wireless Data shares
issued and held in the name of Liviakis Financial Communications, Inc., John M.
Liviakis, and Robert B. Prag will be under "lock up" until December 31, 1999
Sincerely,
/s/ John M. Liviakis /s/ Robert B. Prag
- ------------------------ ------------------
John M. Liviakis Robert B. Prag
President Sr. Vice President
EXHIBIT 10.3
U.S. WIRELESS DATA, Inc.
NOTE PAYABLE EXTENTION
This agreement is entered into and agreed upon as of January 1, 1999 between
U.S. Wireless Data, Inc. ("USWD"), and Chuck Burtzloff.
WHEREAS, Chuck Burtzloff has provided provide bridge financing to USWD under a
Notes Payable for $500,000 dated October 28, 1998.
THEREFORE, Chuck Burtzloff agrees to:
1) Extend the due date of the Note Payable to March 1, 1999.
2) All other terms of the Note Payable remain in effect as specified in
the Note Payable agreement.
U.S. Wireless Data, Inc.
/s/ Robert E. Robichaud /s/ Chuck Burtzloff
- ------------------------- ---------------------
By Robert E. Robichaud By Chuck Burtzloff
Chief Financial Officer
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<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1998
<PERIOD-END> SEP-30-1998
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<CASH> 331,000
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0
1,342,000
<COMMON> 13,445,000
<OTHER-SE> (17,815,000)
<TOTAL-LIABILITY-AND-EQUITY> 2,929,000
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